UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20222023
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission File Number: 001-40955
Aris Water Solutions, Inc.
(Exact name of registrant as specified in its charter)
| |
Delaware | 87-1022110 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Houston, Texas | 77024 |
(Address of principal executive offices) | (Zip Code) |
| |
281(832)-501-3070304-7003
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | |
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $0.01 par value per share | ARIS | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
Large accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | ||
|
| Smaller reporting company | ☐ |
| | Emerging growth company | ☒ |
If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 8, 2022,October 31, 2023, the registrant had 26,514,06330,148,929 shares of Class A common stock, $0.01 par value per share, and 30,811,32227,543,565 shares of Class B common stock, $0.01 par value per share, outstanding.
TABLE OF CONTENTS
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Condensed Consolidated Statements of Stockholders’ | 8 | ||
Notes to Unaudited Condensed Consolidated Financial Statements | 9 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
Introductory Note Regarding Definitions
The registrant, Aris Water Solutions, Inc. (“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 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 the “Company,” “we,” “our,” and “us” or similar terms refer to (i) Solaris LLC and its consolidated subsidiaries before the completion of the Offering and (ii) Aris Inc. and its consolidated subsidiaries as of the completion of the Offering and thereafter.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10‑Q (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, 20212022 (our “2021“2022 Annual Report”) and found elsewhere in this Quarterly Report, including, but not limited to, the following:
● | the impact of the |
● | the impacts of cost inflation on our operating |
● | 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 |
● | our reliance on a limited number of customers and a particular region for substantially all of our revenues; |
● | the level of capital spending and development by oil and gas companies, including potential reductions in capital expenditures by oil and gas producers in response to commodity price volatility and/or reduced demand; |
● | our ability to renew or replace expiring contracts on acceptable terms; |
● | 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; |
3
● | our ability to retain key management and employees and to hire and retain skilled labor; |
● | our health, safety and environmental performance; |
3
● | the impact of competition on our operations; |
● | the degree to which our 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; |
● | changes in global political or economic conditions, both generally, and in the specific markets we serve, such as an economic slowdown or recession, concern over a potential recession, or increased uncertainty regarding the economic outlook; |
● | physical, electronic and cybersecurity breaches; and |
● | the other risks described in our |
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 20212022 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, are expressly qualified in their entirety by this cautionary statement. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.
4
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Aris Water Solutions, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
| | | | | | | | | | | | |
(in thousands, except for share and per share amounts) |
| September 30, | | December 31, |
| September 30, | December 31, | |||||
|
| 2022 | | 2021 |
| 2023 | 2022 | |||||
Assets |
| | |
| | |
| | |
| | |
Cash | | $ | 25,180 | | $ | 60,055 | | $ | 24,184 | | $ | 1,122 |
Accounts Receivable, Net | | | 76,273 | | | 41,973 | | | 57,820 | | | 81,683 |
Accounts Receivable from Affiliate | | | 25,772 | | | 20,191 | | | 23,296 | | | 46,029 |
Other Receivables | | | 6,287 | | | 4,126 | | | 18,077 | | | 4,354 |
Prepaids and Deposits | | | 1,828 | | | 6,043 | | | 2,241 | | | 5,805 |
Total Current Assets | | | 135,340 | | | 132,388 | | | 125,618 | | | 138,993 |
Fixed Assets | | | | | | | | | | | | |
Property, Plant and Equipment | | | 881,003 | | | 700,756 | | | 1,021,516 | | | 907,784 |
Accumulated Depreciation | | | (81,019) | | | (67,749) | | | (112,151) | | | (88,681) |
Total Property, Plant and Equipment, Net | | | 799,984 | | | 633,007 | | | 909,365 | | | 819,103 |
Intangible Assets, Net | | | 277,379 | | | 304,930 | | | 241,550 | | | 269,845 |
Goodwill | | | 34,585 | | | 34,585 | | | 34,585 | | | 34,585 |
Deferred Income Tax Assets, Net | | | 24,377 | | | 19,933 | | | 25,783 | | | 30,424 |
Right-of-Use Assets | | | 7,635 | | | — | | | 16,760 | | | 9,135 |
Other Assets | | | 1,422 | | | 1,850 | | | 853 | | | 1,281 |
Total Assets | | $ | 1,280,722 | | $ | 1,126,693 | | $ | 1,354,514 | | $ | 1,303,366 |
Liabilities and Stockholders' Equity | | | | | | | | | | | | |
Accounts Payable | | $ | 35,823 | | $ | 7,082 | | $ | 30,974 | | $ | 22,982 |
Payables to Affiliate | | | 2,412 | | | 1,499 | | | 1,177 | | | 3,021 |
Accrued and Other Current Liabilities | | | 85,089 | | | 40,464 | | | 81,189 | | | 65,411 |
Total Current Liabilities | | | 123,324 | | | 49,045 | | | 113,340 | | | 91,414 |
Long-Term Debt, Net of Debt Issuance Costs | | | 393,453 | | | 392,051 | | | 429,324 | | | 428,921 |
Asset Retirement Obligation | | | 8,148 | | | 6,158 | | | 18,136 | | | 17,543 |
Tax Receivable Agreement Liability | | | 80,009 | | | 75,564 | | | 98,164 | | | 97,980 |
Other Long-Term Liabilities | | | 8,966 | | | 1,336 | | | 16,756 | | | 10,421 |
Total Liabilities | | | 613,900 | | | 524,154 | | | 675,720 | | | 646,279 |
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) | ||||||
Preferred Stock $0.01 par value, 50,000,000 authorized. None issued or outstanding as of September 30, 2023 and December 31, 2022 | | | — | | | — | ||||||
Class A Common Stock $0.01 par value, 600,000,000 authorized, 30,334,399 issued and 30,023,826 outstanding as of September 30, 2023; 30,115,979 issued and 29,919,217 outstanding as of December 31, 2022 | | | 303 | | | 300 | ||||||
Class B Common Stock $0.01 par value, 180,000,000 authorized, 27,543,565 issued and outstanding as of September 30, 2023; 27,575,519 issued and outstanding as of December 31, 2022 | | | 275 | | | 276 | ||||||
Treasury Stock (at Cost), 310,573 shares as of September 30, 2023; 196,762 shares as of December 31, 2022 | | | (4,259) | | | (2,891) | ||||||
Additional Paid-in-Capital | | | 282,917 | | | 212,926 | | | 325,655 | | | 319,545 |
Accumulated Deficit | | | (7,094) | | | (457) | | | (2,683) | | | (7,722) |
Total Stockholders' Equity Attributable to Aris Water Solutions, Inc. | | | 276,257 | | | 212,869 | | | 319,291 | | | 309,508 |
Noncontrolling Interests | | | 390,565 | | | 389,670 | ||||||
Noncontrolling Interest | | | 359,503 | | | 347,579 | ||||||
Total Stockholders' Equity | | | 666,822 | | | 602,539 | | | 678,794 | | | 657,087 |
Total Liabilities and Stockholders' Equity | | $ | 1,280,722 | | $ | 1,126,693 | | $ | 1,354,514 | | $ | 1,303,366 |
The accompanying notes are an integral part of these condensed consolidated financial statements
5
Aris Water Solutions, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
(in thousands, except for share and per share amounts) | | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Revenue | | | | | | | | | | | | | | | | | | | | | | | | |
Produced Water Handling | | $ | 39,674 | | $ | 24,639 | | $ | 110,299 | | $ | 71,368 | | $ | 47,574 | | $ | 39,674 | | $ | 143,390 | | $ | 110,299 |
Produced Water Handling — Affiliates | | | 24,796 | | | 23,135 | | | 69,084 | | | 62,216 | ||||||||||||
Produced Water Handling — Affiliate | | | 28,036 | | | 24,796 | | | 74,357 | | | 69,084 | ||||||||||||
Water Solutions | | | 20,392 | | | 7,666 | | | 46,744 | | | 11,824 | | | 20,370 | | | 20,392 | | | 49,180 | | | 46,744 |
Water Solutions — Affiliates | | | 5,668 | | | 4,059 | | | 11,640 | | | 16,864 | ||||||||||||
Water Solutions — Affiliate | | | 3,048 | | | 5,668 | | | 19,195 | | | 11,640 | ||||||||||||
Other Revenue | | | 246 | | | — | | | 364 | | | — | | | 761 | | | 246 | | | 1,871 | | | 364 |
Total Revenue | | | 90,776 | | | 59,499 | | | 238,131 | | | 162,272 | | | 99,789 | | | 90,776 | | | 287,993 | | | 238,131 |
Cost of Revenue | | | | | | | | | | | | | | | | | | | | | | | | |
Direct Operating Costs | | | 43,885 | | | 23,497 | | | 101,337 | | | 66,703 | | | 44,687 | | | 43,885 | | | 132,978 | | | 101,337 |
Depreciation, Amortization and Accretion | | | 16,942 | | | 15,378 | | | 49,724 | | | 45,550 | | | 19,445 | | | 16,942 | | | 57,137 | | | 49,724 |
Total Cost of Revenue | | | 60,827 | | | 38,875 | | | 151,061 | | | 112,253 | | | 64,132 | | | 60,827 | | | 190,115 | | | 151,061 |
Operating Costs and Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Abandoned Well Costs | | | 9,222 | | | 27,402 | | | 14,637 | | | 27,402 | | | 1,214 | | | 9,222 | | | 1,214 | | | 14,637 |
General and Administrative | | | 11,482 | | | 5,228 | | | 33,860 | | | 15,240 | | | 13,526 | | | 11,052 | | | 38,007 | | | 33,330 |
Impairment of Long-Lived Assets | | | — | | | — | | | 15,597 | | | — | | | — | | | — | | | — | | | 15,597 |
Loss on Asset Disposal and Other | | | 239 | | | 940 | | | 1,816 | | | 2,590 | ||||||||||||
Research and Development Expense | | | 809 | | | 430 | | | 1,867 | | | 530 | ||||||||||||
Other Operating (Income) Expense | | | (2,121) | | | 239 | | | (2,096) | | | 1,816 | ||||||||||||
Total Operating Expenses | | | 20,943 | | | 33,570 | | | 65,910 | | | 45,232 | | | 13,428 | | | 20,943 | | | 38,992 | | | 65,910 |
Operating Income (Loss) | | | 9,006 | | | (12,946) | | | 21,160 | | | 4,787 | ||||||||||||
Operating Income | | | 22,229 | | | 9,006 | | | 58,886 | | | 21,160 | ||||||||||||
Other Expense | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Expense, Net | | | 6,763 | | | 7,880 | | | 21,863 | | | 17,855 | | | 7,955 | | | 6,763 | | | 23,587 | | | 21,863 |
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) | | | 14,274 | | | 2,243 | | | 35,299 | | | (703) |
Income Tax Expense (Benefit) | | | 287 | | | (83) | | | (81) | | | (81) | | | 2,032 | | | 287 | | | 4,918 | | | (81) |
Net Income (Loss) | | | 1,956 | | | (20,743) | | | (622) | | | (13,367) | | | 12,242 | | | 1,956 | | | 30,381 | | | (622) |
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) | | | | | | 6,829 | | | 1,257 | | | 16,892 | | | (493) |
Net Income (Loss) Attributable to Aris Water Solutions, Inc. | | $ | 699 | | | | | $ | (129) | | | | | $ | 5,413 | | $ | 699 | | $ | 13,489 | | $ | (129) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net Income (Loss) Per Share of Class A Common Stock | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.02 | | | | | $ | (0.03) | | | | | $ | 0.17 | | $ | 0.02 | | $ | 0.42 | | $ | (0.03) |
Diluted | | $ | 0.02 | | | | | $ | (0.03) | | | | | $ | 0.17 | | $ | 0.02 | | $ | 0.42 | | $ | (0.03) |
Weighted Average Shares of Class A Common Stock Outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | 24,499,953 | | | | 22,779,077 | | | | | | 30,050,560 | | | 24,499,953 | | | 30,007,433 | | | 22,779,077 | ||||
Diluted | 24,546,632 | | | | 22,779,077 | | | | | | 30,050,560 | | | 24,546,632 | | | 30,007,433 | | | 22,779,077 |
The accompanying notes are an integral part of these condensed consolidated financial statements
6
Aris Water Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
| | | | | | | | | | | | |
(in thousands) | | Nine Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
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) | | | — | ||||||
Net Income (Loss) | | $ | 30,381 | | $ | (622) | ||||||
Adjustments to reconcile Net Income (Loss) to Net Cash provided by Operating Activities: | | | | | | | ||||||
Deferred Income Tax Expense (Benefit) | | | 4,773 | | | (96) | ||||||
Depreciation, Amortization and Accretion | | | 49,724 | | | 45,550 | | | 57,137 | | | 49,724 |
Stock-Based Compensation | | | 9,134 | | | — | | | 8,945 | | | 9,134 |
Impairment of Long-Lived Assets | | | 15,597 | | | — | | | — | | | 15,597 |
Abandoned Well Costs | | | 14,637 | | | 27,402 | | | 1,214 | | | 14,637 |
Loss on Disposal of Asset, Net | | | 481 | | | 225 | ||||||
Abandoned Projects | | | 66 | | | 2,035 | ||||||
(Gain) Loss on Disposal of Assets, Net | | | (2,574) | | | 481 | ||||||
Amortization of Debt Issuance Costs, Net | | | 1,563 | | | 1,320 | | | 1,580 | | | 1,563 |
Loss on Debt Modification | | | — | | | 380 | ||||||
Other | | | 311 | | | 216 | | | (345) | | | 377 |
Changes in Operating Assets and Liabilities: | | | | | | | | | | | | |
Accounts Receivable | | | (33,683) | | | (11,231) | | | 22,594 | | | (33,683) |
Accounts Receivable from Affiliate | | | (5,581) | | | (10,046) | | | 22,771 | | | (5,581) |
Other Receivables | | | (2,139) | | | 231 | | | (13,359) | | | (2,139) |
Prepaids, Deposits and Other Current Assets | | | 4,215 | | | 2,516 | ||||||
Prepaids and Deposits | | | 3,564 | | | 4,215 | ||||||
Accounts Payable | | | 3,233 | | | (3,284) | | | (155) | | | 3,233 |
Payables to Affiliate | | | 913 | | | (715) | | | (1,844) | | | 913 |
Deferred Revenue | | | 14 | | | (46) | ||||||
Accrued Liabilities and Other | | | 19,418 | | | 16,000 | | | 17,843 | | | 19,432 |
Net Cash Provided by Operating Activities | | | 77,185 | | | 57,186 | | | 152,525 | | | 77,185 |
| | | | | | | | | | | | |
Cash Flow from Investing Activities | | | | | | | | | | | | |
Property, Plant and Equipment Expenditures | | | (96,991) | | | (62,728) | | | (131,874) | | | (96,991) |
Cash Paid for Acquisitions | | | (3,353) | | | — | ||||||
Proceeds from the Sale of Property, Plant and Equipment | | | 7,441 | | | — | ||||||
Cash Paid for Asset Acquisitions | | | — | | | (3,353) | ||||||
Proceeds from Sale of Property, Plant and Equipment | | | 20,119 | | | 7,441 | ||||||
Net Cash Used in Investing Activities | | | (92,903) | | | (62,728) | | | (111,755) | | | (92,903) |
| | | | | | | | | | | | |
Cash Flow from Financing Activities | | | | | | | | | | | | |
Dividends and Distributions Paid | | | (19,157) | | | — | | | (16,083) | | | (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) | ||||||
Repurchase of Shares | | | (625) | | | — | ||||||
Repayment of Credit Facility | | | — | | | (297,000) | | | (51,000) | | | — |
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 | ||||||
Proceeds from Credit Facility | | | 50,000 | | | — | ||||||
Net Cash Used in Financing Activities | | | (17,708) | | | (19,157) | ||||||
| | | | | | | | | | | | |
Net (Decrease) Increase in Cash | | | (34,875) | | | 11,457 | ||||||
Net Increase (Decrease) in Cash | | | 23,062 | | | (34,875) | ||||||
Cash, Beginning of Period | | | 60,055 | | | 24,932 | | | 1,122 | | | 60,055 |
Cash, End of Period | | $ | 25,180 | | $ | 36,389 | | $ | 24,184 | | $ | 25,180 |
| | | | | | | ||||||
Supplementary Cash Flow Data |
| | | | ||||||||
Cash Paid for Interest | | $ | 18,230 | | $ | 15,250 |
The accompanying notes are an integral part of these condensed consolidated financial statements
7
Aris Water Solutions, Inc.
Condensed Consolidated Statements of Stockholders’/Members’ Equity
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| | | |
| | Three and Nine Months | |
| | 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three and Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||
(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, 2023 | | $ | 300 | | 30,115,979 | | $ | 276 | | 27,575,519 | | $ | 319,545 | | $ | (2,891) | | 196,762 | | $ | (7,722) | | $ | 347,579 | | $ | 657,087 |
Redemption of Class B Shares for Class A Shares | | | - | | 20,953 | | | - | | (20,953) | | | 267 | | | - | | - | | | - | | | (267) | | | - |
Stock-based Compensation Expense | | | 2 | | 175,717 | | | - | | - | | | 2,383 | | | - | | - | | | - | | | 83 | | | 2,468 |
Increase in TRA Liability Related to Share Redemption | | | - | | - | | | - | | - | | | (110) | | | - | | - | | | - | | | - | | | (110) |
Deferred Tax Assets Acquired | | | - | | - | | | - | | - | | | 82 | | | - | | - | | | - | | | - | | | 82 |
Dividends and Distributions ($0.09 per share or unit) | | | - | | - | | | - | | - | | | - | | | - | | - | | | (2,826) | | | (2,588) | | | (5,414) |
Purchase of Treasury Stock | | | - | | - | | | - | | - | | | - | | | (599) | | 42,293 | | | - | | | - | | | (599) |
Net Income | | | - | | - | | | - | | - | | | - | | | - | | - | | | 3,378 | | | 4,330 | | | 7,708 |
Balance at March 31, 2023 | | $ | 302 | | 30,312,649 | | $ | 276 | | 27,554,566 | | $ | 322,167 | | $ | (3,490) | | 239,055 | | $ | (7,170) | | $ | 349,137 | | $ | 661,222 |
Redemption of Class B Shares for Class A Shares | | | - | | 524 | | | - | | (524) | | | 7 | | | - | | - | | | - | | | (7) | | | - |
Stock-based Compensation Expense | | | - | | - | | | - | | - | | | 1,626 | | | - | | - | | | - | | | 1,491 | | | 3,117 |
Increase in TRA Liability Related to Share Redemption | | | - | | - | | | - | | - | | | (3) | | | - | | - | | | - | | | - | | | (3) |
Deferred Tax Assets Acquired | | | - | | - | | | - | | - | | | 2 | | | - | | - | | | - | | | - | | | 2 |
Dividends and Distributions ($0.09 per share or unit) | | | - | | - | | | - | | - | | | - | | | - | | - | | | (2,819) | | | (2,584) | | | (5,403) |
Net Income | | | - | | - | | | - | | - | | | - | | | - | | - | | | 4,698 | | | 5,733 | | | 10,431 |
Balance at June 30, 2023 | | $ | 302 | | 30,313,173 | | $ | 276 | | 27,554,042 | | $ | 323,799 | | $ | (3,490) | | 239,055 | | $ | (5,291) | | $ | 353,770 | | $ | 669,366 |
Redemption of Class B Shares for Class A Shares | | | 1 | | 10,477 | | | (1) | | (10,477) | | | 136 | | | - | | - | | | - | | | (136) | | | - |
Stock-based Compensation Expense | | | - | | 10,749 | | | - | | - | | | 1,816 | | | - | | - | | | - | | | 1,544 | | | 3,360 |
Increase in TRA Liability Related to Share Redemption | | | - | | - | | | - | | - | | | (71) | | | - | | - | | | - | | | - | | | (71) |
Deferred Tax Assets Acquired | | | - | | - | | | - | | - | | | 48 | | | - | | - | | | - | | | - | | | 48 |
Dividends and Distributions ($0.09 per share or unit) | | | - | | - | | | - | | - | | | - | | | - | | - | | | (2,805) | | | (2,577) | | | (5,382) |
Purchase of Treasury Stock | | | - | | - | | | - | | - | | | (73) | | | (769) | | 71,518 | | | - | | | 73 | | | (769) |
Net Income | | | - | | - | | | - | | - | | | - | | | - | | - | | | 5,413 | | | 6,829 | | | 12,242 |
Balance at September 30, 2023 | | $ | 303 | | 30,334,399 | | $ | 275 | | 27,543,565 | | $ | 325,655 | | $ | (4,259) | | 310,573 | | $ | (2,683) | | $ | 359,503 | | $ | 678,794 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 or unit) | | | - | | - | | | - | | - | | | - | | | - | | - | | | (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 or unit) | | | - | | - | | | - | | - | | | - | | | - | | - | | | (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 |
The accompanying notes are an integral part of these condensed consolidated financial statements
8
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”,“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 asare 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 theseThese unaudited 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, 2021.2022.
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
9
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.LLC.
9
Noncontrolling InterestsInterest
As of September 30, 2022,2023, we own approximately 46%52% of Solaris LLC. Our consolidated financial statements include a noncontrolling interestsinterest representing the percentage of Solaris LLC units not held by us.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 of 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, goodwill impairment testing, 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.
Reclassification of Prior Year Presentation
Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
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, 20212022 for the discussion of our significant accounting policies. Other than the updates noted below in Recently Adopted Accounting Pronouncements, thereThere were no significant updates or revisions to our accounting policies during the nine months ended September 30, 2022.2023.
Goodwill
All of our goodwill is assigned to a single reporting unit. We perform our annual goodwill impairment test during the fourth quarter of our fiscal year, and more frequently if impairment indicators exist.
During the quarter ended March 31, 2023, we conducted a quantitative interim test of goodwill due to a decline in the price of our Class A common stock during the period. As a result of our interim test, no goodwill impairment was identified. The fair value of our reporting unit exceeded the carrying value by more than 10%. We concluded there were no new impairment triggering events as of and for the three and nine months ended September 30, 2023. As such, there was no goodwill impairment as of September 30, 2023.
Some of the inherent estimates and assumptions used in determining the fair value of our reporting unit are outside the control of management, including interest rates, cost of capital, tax rates, market multiples and credit ratings. While we believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting unit, it is possible a material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, it could result in a material impairment of our goodwill.
10
Fair Value Information
The fair value of our 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. The fair value of our Credit Facility (as defined below) approximates carrying value as the debt bears interest at a variable rate which is reflective of current rates otherwise available to us. Management has designated this measurement as Level 3. Fair value information regarding our debt is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | September 30, 2022 | | December 31, 2021 | | September 30, 2023 | | December 31, 2022 | ||||||||||||||||
| | Carrying | | Fair | | Carrying | | Fair | | Carrying | | Fair | | Carrying | | Fair | ||||||||
|
| Amount |
| Value |
| Amount |
| Value |
| Amount |
| Value |
| Amount |
| Value | ||||||||
Senior Sustainability-Linked Notes | | $ | 400,000 | | $ | 377,076 | | $ | 400,000 | | $ | 424,000 | | $ | 400,000 | | $ | 387,308 | | $ | 400,000 | | $ | 398,828 |
Credit Facility | | $ | 34,000 | | $ | 34,000 | | $ | 35,000 | | $ | 35,000 |
The carrying values of our other financial instruments, consisting of cash, accounts receivable and accounts payable, approximate their fair values due to the short maturity of such instruments.instruments.
Intangible Assets
Intangible assets are net of accumulated amortization of $87.7$125.1 million and $60.1$96.8 million at September 30, 20222023 and December 31, 2021, respectively.2022, respectively.
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Related Parties
We 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, 20222023 and December 31, 2021,2022, we had accounts receivable from ConocoPhillips of $25.8$23.3 million and $20.2$46.0 million, respectively, that were recorded in accounts receivable from affiliate. As of September 30, 2022affiliate, and December 31, 2021, we had payables to ConocoPhillips of $2.4$1.1 million and $1.5$3.0 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 | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Revenues from ConocoPhillips | | $ | 30,464 | | $ | 27,194 | | $ | 80,724 | | $ | 79,080 | | $ | 31,084 | | $ | 30,464 | | $ | 93,552 | | $ | 80,724 |
Operating Expenses Reimbursed to ConocoPhillips | | | 403 | | | 191 | | | 1,163 | | | 919 | | | (1,160) | | | 403 | | | (1,177) | | | 1,163 |
Operating expenses reimbursed to ConocoPhillips are related to ConocoPhillips’ costs for operating certain assetsincurred on our behalf between closing and the transfer of the acquired assets and other ongoing operating expenses.
Recently Adopted Accounting PronouncementsCollaborative Agreements
Leases. Effective January 1,In November 2022, we adoptedannounced that we had entered into a strategic agreement (the “Beneficial Reuse Strategic Agreement”) with Chevron U.S.A. Inc. and ConocoPhillips to develop and pilot technologies and processes to treat produced water for potential beneficial reuse opportunities. In January 2023, Exxon Mobil Corporation (together with the Company, Chevron U.S.A. Inc. and ConocoPhillips, the “alliance members”) joined the Beneficial Reuse Strategic Agreement.
The Company reviewed the Beneficial Reuse Strategic Agreement and determined that it should be accounted for as a collaborative arrangement pursuant to Accounting Standards UpdateCodification 808, “Collaborative Arrangements” (“ASU”ASC 808”) No. 2016-02: Leases, as the arrangement involves a joint operating activity pursuant to which the Company is an active participant and its subsequent amendments (collectively, “ASC Topic 842”). ASC Topic 842 supersedes prior accounting guidance for leasesis exposed to significant risks and requires, among other things, lessees to recognize substantially all right-of-use (“ROU”) assets and lease liabilitiesrewards dependent 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 effects of applying the new lease standard. This transition election permits entities to change the date of initial application to the beginningcommercial success of the year of adoptionactivity. ASC 808 describes arrangements within its scope and to 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:
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.considerations
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Lease Term ─ Leasessurrounding presentation and disclosure, with an initial termrecognition matters subjected to other authoritative guidance, in certain cases by analogy. The Company has concluded that ASC 730, “Research and Development,” should be applied to the Beneficial Reuse Strategic Agreement.
The Company accounts for reimbursements of 12 monthsresearch and development costs under the Beneficial Reuse Strategic Agreement as contra-expenses in the period such expenses are incurred. This reflects the joint risk sharing nature of these activities within the collaborative arrangement. The Company classifies payments owed or less are notreceivables recorded as “Accrued and Other Current Liabilities” or “Other Receivables,” respectively, on the Company’s condensed consolidated balance sheetsheet.
For the three and we recognize lease expensenine months ended September 30, 2023, the Company incurred $1.8 million and $3.9 million, respectively, in total research and development expenses relating to the Beneficial Reuse Strategic Agreement, which was offset by $1.4 million and $2.9 million, respectively, in amounts due from the other alliance members for reimbursement of these leasesshared costs. As of September 30, 2023, the Company recorded $1.5 million due from the other alliance members for reimbursement of shared costs in “Other Receivables” on a straight-line basis over the lease term. Most leases include oneCompany’s condensed consolidated balance sheet.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) interest rate or more optionsanother reference rate expected to renew,be discontinued because of reference rate reform. This guidance was to be effective prospectively upon issuance through December 31, 2022 and applied from the beginning of an interim period that included the issuance date of this ASU. However, in December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” which deferred the sunset date from December 31, 2022 to December 31, 2024. All other provisions of ASU 2020-04 were unchanged. In May 2023, the Credit Agreement (as defined below) was amended to, among other things, transition the loans under the Credit Facility to be made at the Secured Overnight Financing Rate (“SOFR”) instead of LIBOR. The Company adopted this accounting pronouncement with renewal termsthe execution of the First Amendment to the Second Amended and Restated Credit Agreement in May 2023. See Note 6. Long-Term Debt for further discussion of the Company's accounting for its outstanding debt, credit facility and related issuance costs. This guidance provides an optional practical expedient that can extend the lease term from one monthallows qualifying modifications 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 generallybe accounted for as a single lease component. For these leases, lease payments include all fixed payments stated withindebt modification rather than be analyzed under existing guidance to determine if the contract. For real estate lease agreements,modification should be accounted for as a debt extinguishment. In adopting this accounting standard, 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 326have elected to apply this optional expedient. Adopting this accounting standard did not have a material impact on ourthe Company's condensed consolidated financial statements.statements and related disclosures.
12
3.Additional Financial Statement Information
Balance Sheet
Other balance sheet information is as follows:
| | | | | | | | | | | | |
(in thousands) |
| September 30, | | December 31, |
| September 30, | December 31, | |||||
|
| 2022 | | 2021 |
| 2023 | 2022 | |||||
Other Receivables | | | | | | | | | | | | |
Insurance and Third Party Receivables for Remediation Expenses | | $ | 4,578 | | $ | 3,099 | | $ | 7,323 | | $ | 3,600 |
Reimbursable Research and Development Receivable | | | 1,466 | | | — | ||||||
Property Insurance Receivable | | | 6,000 | | | — | ||||||
Reimbursable Projects and Other | | | 1,709 | | | 1,027 | | | 3,288 | | | 754 |
Total Other Receivables | | $ | 6,287 | | $ | 4,126 | | $ | 18,077 | | $ | 4,354 |
| | | | | | | | | | | | |
Prepaids and Deposits | | | | | | | | | | | | |
Prepaid Insurance and Other | | $ | 1,787 | | $ | 5,953 | | $ | 2,208 | | $ | 5,744 |
Deposits | | | 41 | | | 90 | | | 33 | | | 61 |
Total Prepaids and Deposits | | $ | 1,828 | | $ | 6,043 | | $ | 2,241 | | $ | 5,805 |
| | | | | | | | | | | | |
Accrued and Other Current Liabilities | | | | | | | | | | | | |
Accrued Operating Expense | | $ | 27,085 | | $ | 17,774 | | $ | 35,858 | | $ | 28,877 |
Accrued Capital Costs | | | 30,680 | | | 4,603 | | | 12,767 | | | 16,161 |
Accrued Interest | | | 15,250 | | | 7,625 | | | 15,330 | | | 8,262 |
Accrued Compensation | | | 4,878 | | | 4,551 | | | 9,032 | | | 4,809 |
Dividends and Distributions Payable | | | 44 | | | 3,847 | ||||||
Lease Liabilities | | | 1,025 | | | — | | | 1,504 | | | 1,176 |
Asset Retirement Obligation | | | 1,156 | | | 2,242 | ||||||
Other | | | 6,127 | | | 2,064 | | | 5,542 | | | 3,884 |
Total Accrued and Other Current Liabilities | | $ | 85,089 | | $ | 40,464 | | $ | 81,189 | | $ | 65,411 |
| | | | | | | ||||||
Other Long-Term Liabilities | | | | | | | ||||||
Noncurrent Lease Liabilities | | $ | 14,543 | | $ | 7,719 | ||||||
Contingent Consideration Liability | | | 2,213 | | | 2,702 | ||||||
Total Other Long-Term Liabilities | | $ | 16,756 | | $ | 10,421 |
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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 |
| | | | | | | | | | | | |
(in thousands) | | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Depreciation, Amortization and Accretion Expense | | | | | | | | | | | | |
Depreciation - Property, Plant and Equipment | | $ | 9,749 | | $ | 7,658 | | $ | 27,946 | | $ | 21,755 |
Amortization - Intangible Assets | | | 9,392 | | | 9,183 | | | 28,295 | | | 27,551 |
Accretion of Asset Retirement Obligations | | | 304 | | | 101 | | | 896 | | | 418 |
Total Depreciation, Amortization and Accretion Expense | | $ | 19,445 | | $ | 16,942 | | $ | 57,137 | | $ | 49,724 |
| | | | | | | | | | | | |
Other Operating (Income) Expense | | | | | | | | | | | | |
(Gain) Loss on Disposal of Assets, Net | | $ | (2,631) | | $ | (97) | | $ | (2,574) | | $ | 481 |
Transaction Costs | | | 528 | | | 336 | | | 673 | | | 1,269 |
Other | | | (18) | | | — | | | (195) | | | 66 |
Other Operating (Income) Expense | | $ | (2,121) | | $ | 239 | | $ | (2,096) | | $ | 1,816 |
| | | | | | | | | | | | |
Interest Expense | | | | | | | | | | | | |
Interest on Debt Instruments | | $ | 8,373 | | $ | 7,759 | | $ | 25,477 | | $ | 23,365 |
Amortization of Debt Issuance Costs | | | 612 | | | 610 | | | 1,830 | | | 1,830 |
Total Interest Expense | | | 8,985 | | | 8,369 | | | 27,307 | | | 25,195 |
Less: Amounts Capitalized | | | (1,030) | | | (1,606) | | | (3,720) | | | (3,332) |
Interest Expense, Net | | $ | 7,955 | | $ | 6,763 | | $ | 23,587 | | $ | 21,863 |
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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, | |||||
|
| 2022 | | 2021 |
| 2023 | 2022 | |||||
Wells, Facilities, Water Ponds, and Related Equipment | | $ | 407,608 | | $ | 329,935 | ||||||
Wells, Facilities, Water Ponds and Related Equipment | | $ | 528,103 | | $ | 437,894 | ||||||
Pipelines | | | 340,817 | | | 327,140 | | | 413,092 | | | 363,577 |
Land | | | 2,063 | | | 2,063 | ||||||
Vehicles, Equipment, Computers and Office Furniture | | | 18,196 | | | 17,359 | | | 24,091 | | | 20,219 |
Assets Subject to Depreciation | | | 768,684 | | | 676,497 | | | 965,286 | | | 821,690 |
Land | | | 463 | | | 463 | ||||||
Projects and Construction in Progress | | | 112,319 | | | 24,259 | | | 55,767 | | | 85,631 |
Total Property, Plant and Equipment | | | 881,003 | | | 700,756 | | | 1,021,516 | | | 907,784 |
Accumulated Depreciation | | | (81,019) | | | (67,749) | | | (112,151) | | | (88,681) |
Total Property, Plant and Equipment, Net | | $ | 799,984 | | $ | 633,007 | | $ | 909,365 | | $ | 819,103 |
14Accrued PP&E additions totaled $31.2 million and $26.4 million at September 30, 2023 and December 31, 2022, respectively.
Asset Exchanges
No asset exchanges were completed during the nine months ended September 30, 2023.
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 and Asset Impairment
During the second quarter of 2023, management entered into a non-binding letter of intent with a third party to sell certain of our assets. These assets met the criteria for classification as assets held for sale as of June 30, 2023, and we closed the sale of these assets during the third quarter of 2023. We received cash consideration of $20.1 million and recorded a gain of $2.6 million, which is included in “Other Operating (Income) Expense” in the condensed consolidated statements of operations for the three and nine months ended September 30, 2023.
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 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,During the three months ended September 30, 2023, management determined that two previously acquired saltwater disposal wells (“SWD wells”) werea stand-alone produced water handling facility was no longer economically beneficial to the operations of the Company due to required workover costs and determined that the SWD wells should be shut-in and taken out of service. Accordingly, we removed the costcosts and the associated accumulated depreciation and recognized a $1.2 million 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 a SWD well that was under construction in Texas. The well had encountered technical difficulties during the drilling phase and progress on the well was stopped. Management’s evaluation of the well determined that abandoning the asset was the 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 abandoned well costs in the condensed consolidated statements of 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. Theasset. This charge is reflectedincluded in abandoned well costs
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“Abandoned Well Costs” in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022.2023.
During the firstthird quarter of 2022, a stand-alone produced water handling facility was taken out of service, and $9.2 million in abandoned well costs are included in the condensed consolidated statements of operations for the three months ended September 30, 2022. Total abandonment expense of $14.6 million was recorded during the nine months ended September 30, 2022 and included the facility discussed above, as well as additional abandonment expense related to two previously acquired facilities that were no longer economically beneficial to the operations of 2021, we re-enteredthe Company and the abandonment of a 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 was unable to remain in service in its current condition, and we recognized abandoned well cost of $27.4.under construction.
Delaware Energy Asset Acquisition
On August 1, 2022, we acquired from Delaware Energy, LLC (“Delaware Energy”) certain saltwater gathering and disposalproduced water handling facilities disposal wells and other related assets and rights in Lea County and Eddy County, New Mexico. In connection with the closing and as consideration for the assets, 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 contingent consideration using a discounted cash flow model based on estimated royalty
15
payments to be made over a five-year contractual period. Allocation of the purchase price to the acquired assets was based on relative fair values.
The following table sets forth our purchase price allocation.allocation as of December 31, 2022:
| | | |
(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 |
| | | |
(in thousands, except share and per share amounts) | | | |
Equity Consideration | | | |
Number of Class A Shares Issued (1) | | | 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 (2) | | | 3,899 |
Total Fair Value of Consideration | | $ | 75,122 |
| | | |
Purchase Price Allocation | | | |
Produced Water Handling Facilities | | $ | 72,736 |
Gathering Systems and Pipelines | | | 2,716 |
Total Fair Value of Property Acquired | | | 75,452 |
Less: ARO Liabilities Assumed | | | (330) |
Total Purchase Price Allocation | | $ | 75,122 |
(1) | A portion of these shares are held in escrow and are released pursuant to the terms and conditions of the asset purchase agreement with Delaware Energy. During the three months ended September 30, 2023, 68,918 of these shares were released and returned to the Company for the reimbursement of certain post-acquisition workover costs. See Note 9. Stockholders’ Equity for further details. |
(2) | As of September 30, 2023 and December 31, 2022, liabilities for contingent consideration of |
Contemporaneously with the issuance of suchthe 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.
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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 IPOour initial public offering (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, 2022.2023.
The TRA liability totaled $80.0$98.2 million at September 30, 2022.2023. The liability increased $6.0$0.2 million during the nine months ended September 30, 20222023 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, 2022,2023, 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$220.9 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
16
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, 2022,2023, we estimated the liability associated with this lump-sum payment (or “early termination payment”) would be approximately $171.5$132.5 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.
6.Long-Term Debt
Our long-term debt consists of the following:
| | | | | | |
(in thousands) |
| September 30, | | December 31, | ||
|
| 2022 | | 2021 | ||
7.625% Senior Sustainability-Linked Notes | | $ | 400,000 | | $ | 400,000 |
Revolving Credit Facility | | | — | | | — |
Total Long-Term Debt | | | 400,000 | | | 400,000 |
Less: Unamortized Debt Issuance Costs | | | (6,547) | | | (7,949) |
Total Long-Term Debt, Net of Debt Issuance Costs | | $ | 393,453 | | $ | 392,051 |
| | | | | | |
(in thousands) |
| September 30, | December 31, | |||
|
| 2023 | 2022 | |||
7.625% Senior Sustainability-Linked Notes | | $ | 400,000 | | $ | 400,000 |
Credit Facility (1) | | | 34,000 | | | 35,000 |
Total Long-Term Debt | | | 434,000 | | | 435,000 |
Less: Unamortized Debt Issuance Costs | | | (4,676) | | | (6,079) |
Total Long-Term Debt, Net of Debt Issuance Costs | | $ | 429,324 | | $ | 428,921 |
(1) | Credit Facility borrowings bore weighted average interest rates of 8.246% and 6.967% at September 30, 2023 and December 31, 2022, respectively. |
Senior Sustainability-Linked Notes
Our 7.625% Senior Sustainability-Linked Notes (the “Notes”) are due April 1, 2026. The Notes are unsecured and effectively subordinated to the Credit Facility to the extent of the value of the collateral securing the Credit Facility (see below). The Notes are guaranteed on a senior unsecured basis by our 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, 2023through March 31, 2025 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. 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.
Certain of these redemption prices are subject to increase ifDuring 2023, we fail to satisfynotified the trustee for the Notes that, for the year ended December 31, 2022, we had satisfied the Sustainability Performance Target (as defined in the indenture governing the NotesNotes) in accordance with the requirements and referred to herein as “SPT”) and provide noticeprocedures of such satisfaction to the trustee. From and including the interest period ending on October 1, 2023,indenture. As a result, the interest rate on the Notes will be increased by 25 basis points to 7.875% per annum unless we notify the trusteeremain 7.625% 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 satisfactionremainder of the SPT has been confirmed in accordance with customary procedures.term of the Notes.
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Credit Facility
OurPrior to the October amendment (discussed further below), our amended and restated credit agreement provides(as it may be amended and/or restated from time to time, the “Credit Agreement”) provided for, among other things, (i) commitments of $200.0 million, (ii) a maturity date of April 1, 2025, (iii) loans made under our 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) aan accordion feature permitting the Company to seek an increase of the Credit Facility of up to $75.0 million, incremental revolvingsubject to certain conditions, (v) a leverage ratio covenant comprising a maximum total funded debt to EBITDA ratio, net of $40.0 million of unrestricted cash and cash equivalents if the facility which will be onis drawn, and net of all unrestricted cash and cash equivalents if the same terms asfacility is undrawn, (vi) a leverage ratio covenant test level of 4.50 to 1.00 and (vii) a secured leverage covenant of 2.50 to 1.00.
In May 2023, the Credit Agreement was amended to, among other things, transition the loans under the Credit Facility to be made at SOFR instead of LIBOR and to allow financial reporting to be satisfied based on delivery of the consolidated financial statements of Aris Water Solutions, Inc., so long as it remains a passive holding company, instead of Solaris Midstream Holdings, LLC.
Following the May 2023 amendments, and prior to the October 2023 amendments, the Credit Facility provided for, at our option:
i. | Base rate borrowings bearing interest at the highest of (a) the prime rate, (b) the federal funds effective rate plus 0.50% and (c) Term SOFR for an interest period of one month plus 1.00%; plus a margin ranging from 175 basis points to 275 basis points, depending upon our leverage ratio; or |
ii. | SOFR borrowings bearing interest at Term SOFR plus SOFR Adjustment of 0.10% plus a margin ranging from 275 basis points to 375 basis points, depending upon our leverage ratio. |
In addition, the Credit Facility provided for commitment fee rates ranging from 37.5 basis points to 50.0 basis points, depending upon our leverage ratio.
As of September 30, 2023, we had $150 thousand in letters of credit outstanding and $165.9 million in revolving commitments available.
In October 2023, the Credit Agreement was amended and restated to provide for, among other things, (i) commitments of $350.0 million, (ii) a maturity date of October 12, 2027, with a springing maturity of 91 days ahead of the Notes’ due date of April 1, 2026 in the event the Notes are voluntarily redeemed, repurchased, refinanced or otherwise retired in full prior to such springing maturity date, (iii) 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) an accordion feature permitting the Company to seek an increase of the Credit Facility of up to $150.0 million, subject to certain conditions, (v) a leverage ratio covenant which 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, (vi) a leverage ratio covenant test level which is currently 4.50 to 1.00 and (vii) a secured leverage covenant of 2.50 to 1.00.
As of September 30, 2022 and December 31, 2021, we had no outstanding borrowings under theThe Credit Facility $0.15 million in letters of credit outstanding and $199.85 million in revolving commitments available.provides for, at our option:
17
i. | Base rate borrowings that bear interest at the highest of (a) the prime rate, (b) the federal funds effective rate plus 0.50% and (c) Term SOFR for an interest period of one month plus 1.00%; plus a margin that ranges from 175 basis points to 275 basis points, depending upon our leverage ratio; or |
ii. | SOFR borrowings that bear interest at Term SOFR plus SOFR Adjustment of 0.10% plus a margin that ranges from 275 basis points to 375 basis points, depending upon our leverage ratio. |
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, 2022,2023, we were in compliance with all covenants contained in the Credit Facility.
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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 | | | September 30, |
| December 31, | ||||
| Classification | | 2023 | | 2022 | |||||||
Assets | | | | | | | | | | | | |
Right-of-Use Assets | Consolidated Balance Sheet | | $ | 7,635 | Right-of-Use Assets | | $ | 16,760 | | $ | 9,135 | |
| | | | | | |||||||
Liabilities | | | | | | | | | | | | |
Current Lease Liabilities | Accrued and Other Current Liabilities | | $ | 1,025 | Accrued and Other Current Liabilities | | $ | 1,504 | | $ | 1,176 | |
Noncurrent Lease Liabilities | Other Long-Term Liabilities | | | 6,202 | Other Long-Term Liabilities | | | 14,543 | | | 7,719 |
The increase in our Right-of-Use Assets and related lease liabilities from December 31, 2022 is primarily related to our new corporate office space operating lease, which commenced during the three months ended September 30, 2023. The new office lease resulted in the recognition of a Right-of-Use Asset of $7.7 million, a Current Lease Liability of $0.3 million and a Noncurrent Lease Liability of $6.4 million, which are included in the consolidated balance sheet as of September 30, 2023.
Statement of Operations Information
The following table provides the components of lease cost, excluding lease cost related to short-term leases:
| | | | | | | | | | | | ||||||||
(in thousands) | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | | | | | | | | September 30, | | September 30, | ||||||||
| | | | Three Months Ended | | Nine Months Ended | | 2023 |
| 2022 | | | 2023 |
| 2022 | ||||
| | | | September 30, | | September 30, | |||||||||||||
(in thousands) | | |
| 2022 |
| 2022 | |||||||||||||
Direct Operating Costs | | | | $ | 244 | | $ | 690 | $ | 324 | | $ | 244 | | $ | 927 | | $ | 690 |
General and Administrative | | | | | 166 | | | 498 | | 230 | | | 166 | | | 627 | | | 498 |
Total Lease Cost | | | | $ | 410 | | $ | 1,188 | $ | 554 | | $ | 410 | | $ | 1,554 | | $ | 1,188 |
Short-Term Leases
Our short-term lease cost, which consisted primarily of field equipment rentals, totaled $5.3 million and $3.9 million for the three months ended September 30, 2023 and 2022, respectively, and $12.6 million and $7.7 million for the three and nine months ended September 30, 2022.2023 and 2022, respectively.
Cash Flow Information
The following table summarizes supplemental cash flow information related to leases:
| | | | |||||
| | Nine Months Ended | ||||||
| | September 30, | | | | | | |
(in thousands) |
| 2022 | Nine Months Ended September 30, | |||||
| | 2023 |
| | 2022 | |||
Cash Paid for Amounts Included in Lease Liabilities | | $ | 969 | $ | 1,051 | | $ | 969 |
Right-of-Use Assets Obtained in Exchange for Operating Lease Liabilities, net | | | 723 | |||||
Right-of-Use Assets Obtained in Exchange for Operating Lease Liabilities, Net | | 9,462 | | | 723 |
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Lease Terms and Discount Rates
The following table provides lease terms and discount rates related to leases:
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|
|
|
|
| |
|
|
|
|
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|
|
|
|
| | | | | | | |
| | | | |
| | |
| | September 30, 2023 | | December 31, 2022 | |||
Weighted Average Remaining Lease Term (Years) | | | 7.8 | | | 6.6 | |
Weighted Average Discount Rate | | | 6.17% | | | 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 |
2023:
| | | | |
(in thousands) | | | | |
Remainder of 2023 | | | $ | 462 |
2024 | | | | 2,315 |
2025 | | | | 2,072 |
2026 | | | | 1,814 |
2027 | | | | 2,954 |
Thereafter | | | | 11,186 |
Total Lease Payments | | | | 20,803 |
Less: Interest | | | | (4,756) |
Present Value of Lease Liabilities | | | $ | 16,047 |
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 income (loss) income in our historical financial statements does not reflect the tax expense (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
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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$2.0 million and $(0.1)$0.3 million for the three and nine months ended September 30, 2023 and 2022, respectively, substantially all of which was deferred.
We recorded income tax expense (benefit) of $4.9 million and $(0.1) million for the nine months ended September 30, 2023 and 2022, respectively, substantially all of which was deferred.
Effective Tax Rate
We record our income tax expense (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, 2023 and 2022 was 11%.13.9% and 11.5%, respectively. The difference between the federal statutory rate and our estimated annual ETR is primarily 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-notmore-
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likely-than-not criteria of being realized. The balance of our deferred income tax assets, net increased $4.4decreased $4.6 million during the nine months ended September 30, 2022.2023.
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 subjectIts federal and state returns remain open to tax examinationsexamination for tax years prior to 2018 for federal income taxes and prior to 2017 for state income taxes.through 2022.
9.Stockholders’/Members’ Equity
Redemptions
During the nine months ended September 30, 2023, 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:
● | 20,953 shares were redeemed on March 1, 2023; |
● | 524 shares were redeemed on June 1, 2023; and |
● | 10,477 shares were redeemed on September 1, 2023. |
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; |
● | 107,914 shares were redeemed on June 1, 2022; and |
● | 648,781 shares were redeemed on September 1, 2022. |
Dividends and Distributions
On February 25, 2022,March 3, 2023, May 6, 2022,8, 2023 and August 3, 2022,2, 2023, we announced that our Board of Directors had declared quarterly dividends of $0.09 per share for the first, second and third quarters of 2022,2023, respectively, on our Class A common stock. In conjunction with the dividend payments, a distribution of $0.09 per unit was paid to unit holders of Solaris LLC for each of the first, second and third quarters of 2022.2023, subject to the same payment and record dates.
On November 4, 2022,October 31, 2023, our Board of Directors declared a quarterly dividend of $0.09 per share for the fourth quarter of 20222023 on our Class A common stock. The dividend will be paid on November 30, 2022,December 21, 2023, to holders of record of our Class A common stock as of the close of business on November 17, 2022.December 7, 2023. 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.
2021
Treasury Stock
In connection with the assets acquired from Delaware Energy, as discussed above, certain shares of our Class A common stock issued to the seller are held in escrow and can be released to the Company under certain conditions, including for the reimbursement of certain post-acquisition workover costs pursuant to the terms of the asset purchase agreement. During the three months ended September 30, 2023, 68,918 of these escrow shares were released and returned to the Company for reimbursement of such workover costs and are included in treasury stock at a value of $0.7 million, which was their fair market value at the date of receipt. The receipt of these shares was recorded as a non-cash treasury stock transaction, with an allocation of the difference between the contractually ascribed value of the shares per the asset purchase agreement and the cost of the shares at the date of receipt recorded against the workover costs in the amount of $0.5 million.
10.Commitments and Contingencies
In the normal course of business, we are subject 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.
Other CommitmentsDelivery Commitment
In the first quarter of 2023, we entered into an agreement with an unaffiliated water disposal company to dispose of a minimum volume of produced water over a term of seven years, for a total financial commitment of approximately $28.0 million, undiscounted. The agreement requires us to make payments for any shortfall in delivering an annual minimum volume under the commitment as well as a cumulative minimum volume over the duration of the term of the commitment. The minimum volume commitment is contingent on several performance factors to be achieved by the unaffiliated water disposal company throughout the term of the contract, which, if not achieved, would provide us with the option of cancelling the contract and discharging the remaining minimum volume commitment. We began delivering produced water under this agreement in June 2023.
Purchase Obligations
In the normal course of business, we enter into short-term purchase obligations for products and services, primarily related to purchases of pipe, pumps and other components. As of September 30, 2022,2023, we havehad purchase obligations and commitments of approximately $39.7$31.5 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, 2022,2023, we recognized $0.9$1.1 million and $1.9$4.0 million of expense, respectively, related to environmental matters that were recorded in Direct Operating Cost.direct operating cost. For the three and nine months ended September 30, 2021,2022, the expense related to environmental matters was $0.5$0.9 million for both periods.and $1.9 million, respectively. We also have insurance proceeds receivable of $4.6$7.3 million at September 30, 2022 that2023, which we believe are probable to collect and are reasonably estimable. Although we believe these estimates are reasonable, actual results could differ from these estimates.
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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 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”(“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.
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The following table sets forth the computation of basic and diluted net income (loss) per share attributable to our Class A common stock:
| | | | | | | | | | | | ||||||
(in thousands, except for share and per share amounts) | Three Months Ended | | Nine Months Ended | ||||||||||||||
| | | | | | | September 30, | | September 30, | ||||||||
| | Three Months Ended | Nine Months Ended | | 2023 | | | 2022 | | | 2023 | | | 2022 | |||
| | 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) | $ | 12,242 | | $ | 1,956 | | $ | 30,381 | | $ | (622) |
Less: Net Income (Loss) Attributable to Noncontrolling Interest | | | 1,257 | | | (493) | | 6,829 | | | 1,257 | | | 16,892 | | | (493) |
Net Income (Loss) Attributable to Aris Water Solutions, Inc. | | | 699 | | | (129) | | 5,413 | | | 699 | | | 13,489 | | | (129) |
Dividends for Participating Securities (1) | | | (179) | | | (539) | |||||||||||
Participating Basic Earnings (1) | | (344) | | | (179) | | | (835) | | | (539) | ||||||
Basic Net Income (Loss) Attributable to Aris Water Solutions, Inc. | | $ | 520 | | $ | (668) | $ | 5,069 | | $ | 520 | | $ | 12,654 | | $ | (668) |
Reallocation of Participating Net Income (Loss) | | | - | | | - | | - | | | - | | | - | | | - |
Diluted Net Income (Loss) Attributable to Aris Water Solutions, Inc. | | $ | 520 | | $ | (668) | $ | 5,069 | | $ | 520 | | $ | 12,654 | | $ | (668) |
| | | | | | | | | | | | | | | | | |
Basic Weighted Average Outstanding Shares | | | 24,499,953 | | | 22,779,077 | |||||||||||
Basic Weighted Average Shares Outstanding | | 30,050,560 | | | 24,499,953 | | | 30,007,433 | | | 22,779,077 | ||||||
Dilutive Performance-Based Stock Units | | | 46,679 | | | - | | - | | | 46,679 | | | - | | | - |
Dilutive Weighted Average Outstanding Shares | | | 24,546,632 | | | 22,779,077 | |||||||||||
Dilutive Weighted Average Shares Outstanding | | 30,050,560 | | | 24,546,632 | | | 30,007,433 | | | 22,779,077 | ||||||
| | | | | | | | | | | | | | | | | |
Basic Net Income (Loss) Per Share of Class A Common Stock | | $ | 0.02 | | $ | (0.03) | $ | 0.17 | | $ | 0.02 | | $ | 0.42 | | $ | (0.03) |
Diluted Net Income (Loss) Per Share of Class A Common Stock | | $ | 0.02 | | $ | (0.03) | $ | 0.17 | | $ | 0.02 | | $ | 0.42 | | $ | (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. |
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 one-for-one basis. A total of 31,248,54427,550,626 weighted average shares and 27,557,774 weighted average shares of Class B common stock outstanding for the three and nine months ended September 30, 2023, respectively, were determined to be antidilutive and were excluded from the computation of diluted earnings (loss) per share of Class A common stock. In addition, all PSUs were determined to be antidilutive for each 2023 period and were excluded from the computation of diluted earnings (loss) per share for those periods.
A total of 31,248,544 weighted average shares and 31,481,479 weighted average shares of Class B common stock outstanding for the three and nine months ended September 30, 2022, respectively, were determined to be antidilutive and were excluded from the computation of diluted earnings (loss) per share of Class A common stock. In addition, 19,086 and all PSUs were determined to be antidilutive for the three and nine months ended September 30, 2022, respectively, and have beenwere excluded from the computation of diluted earnings (loss) per share for those periods.
12.Stock-Based Compensation
Our 2021 Equity Incentive Plan (the “2021 Plan”) allows for the grant of, among other types of awards, stock options; restricted stock; RSUs; and PSUs.
Restricted Stock and Restricted Stock Units
RSU activity during the period was 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 |
2223
Restricted Stock and Restricted Stock Units
RSU activity during the period was as follows:
| | | | | |
|
| RSUs |
| Weighted-Average Grant Date Fair Value | |
Outstanding at December 31, 2022 | | 1,317,072 | | $ | 13.78 |
Granted | | 1,120,528 | | | 10.26 |
Forfeited | | (166,996) | | | 11.86 |
Vested | | (223,640) | | | 15.17 |
Outstanding at September 30, 2023 | | 2,046,964 | | $ | 11.86 |
The RSUs granted during the nine months ended September 30, 20222023 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 (iii) one-third at the third anniversary of the award date. As of September 30, 2022,2023, approximately $17.8 $16.9 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 1.1 years.
Performance-Based Restricted Stock Units
DuringPSU activity during the nine months ended September 30, 2022, weperiod was as follows:
| | | | | |
|
| PSUs |
| Weighted-Average Grant Date Fair Value | |
Outstanding at December 31, 2022 | | 144,526 | | $ | 25.36 |
Granted | | 358,551 | | | 8.44 |
Forfeited | | (45,363) | | | 16.11 |
Outstanding at September 30, 2023 | | 457,714 | | $ | 13.02 |
The PSUs granted in 2023 were granted 167,228 PSUs, with a weighted average grant date fair value of $25.36, to management under the 2021 Plan. ThePlan and have the following performance criteria for the PSUs are split as follows:criteria:
● | 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 payout of the PSUs occur when the related service condition is completed, which is approximately three years after the grant date regardless of the duration of the stipulated performance period. The PSUs can be paid out in either Class A common stock or cash, at our election. As of September 30, 2022,2023, approximately $3.2 $3.6 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 2.0 years.
The grant date fair value was determined using the Monte Carlo simulation method and is expensed ratably over the service 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 term commensurate with the expected life of the grant.
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We used the following assumptions to estimate the fair value of PSUs granted during the nine months ended September 30, 2022:2023:
| | | | |
| | Assumptions | ||
Risk-free Interest Rate | |
| 4.32% | |
Volatility Range | |
|
PSU activity during the period was as follows:
| | | | | |
|
| 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.
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Item 2. 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, 2022,2023, included elsewhere in this report, as well as our 2022 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. 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.
Our Predecessor and Aris Inc.
Aris Inc. was incorporated on May 26, 2021 and does not have historical financial operating results prior to the closing date of its IPO. For purposes of this Quarterly Report, our accounting predecessor is Solaris LLC. The financial data discussed below reflect the historical results of operations and financial position of Solaris LLC, our predecessor for accounting purposes, prior to the date of our IPO closing on October 26, 2021. See Item 1. Financial Statements ─ Note 1. Organization and Background of Business.
Business Overview
We are a leading, growth-oriented environmental infrastructure and solutions company that directly helps our customers reduce their water and carbon footprints. We deliver full-cycle water handling and recycling solutions that increase the sustainability of energy company operations. Our integrated pipelines and related infrastructure create long-term value by delivering high-capacity, comprehensive produced water management, recycling and supply solutions to operators in the core areas of the Permian Basin.
Third Quarter 20222023 Results
Significant financial and operating highlights for the three months ended September 30, 20222023 include:
● | Total water volumes handled or sold of |
● | Recycled produced water volumes sold of |
● | Total revenue of |
● | Net income of |
● | Adjusted EBITDA (non-GAAP financial measure) of |
● | Closed on the sale of certain assets for a gain of $2.6 million |
● | Abandoned well costs of $1.2 million as compared with $9.2 million for the third quarter of 2022 |
● | Dividend paid on our Class A common stock for the third quarter of |
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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.
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Beneficial Reuse Strategic Agreement
In January 2023, Exxon Mobil Corporation (“ExxonMobil”) joined our strategic agreement (the “Beneficial Reuse Strategic Agreement”) with Chevron U.S.A. Inc. (“Chevron U.S.A.”) and ConocoPhillips to develop and pilot technologies and processes to treat produced water for potential beneficial reuse opportunities. Our goal under the Beneficial Reuse Strategic Agreement is to develop cost effective and scalable methods of treating produced water to create a potential water source for industrial, commercial and non-consumptive agricultural purposes. Aris is leading the engineering, construction and execution of the testing protocols and pilot projects, while leveraging the combined technical expertise of Chevron U.S.A., ConocoPhillips and ExxonMobil. The treated water will then be reused in a variety of ongoing research projects, including non-consumptive agriculture, low emission hydrogen production and the direct air capture of atmospheric carbon dioxide. Aris, Chevron U.S.A., ConocoPhillips and ExxonMobil are working with appropriate regulators, with a goal to complete testing and performance evaluation of pilot technologies in the first half of 2024. For the three and nine months ended September 30, 2023, we incurred $1.8 million and $3.9 million, respectively, in total research and development expenses relating to the Beneficial Reuse Strategic Agreement, which was offset by $1.4 million and $2.9 million, respectively, in amounts due from the other alliance members for reimbursement of these shared costs. As of September 30, 2023, the Company recorded $1.5 million due from the other alliance members for reimbursement of shared costs in “Other Receivables” on the Company’s condensed consolidated balance sheet.
General Trends and Outlook
Market Dynamics
The currentongoing Russia-Ukraine conflict between Russiahas had, and Ukraine is havingthe ongoing Israel-Hamas conflict may also have, significant global economic implications and may result in higher inflation, weaker real GDP growthimpacts on financial markets and disruption to global financial markets.the energy industry. The extent of these impacts will depend on the lengthseverity and duration of the conflictthese conflicts and whether the conflict spreads beyond Ukraine’s borders.conflicts spread to other countries or regions.
In addition, there are particular impacts on commodity prices due toare being impacted by multiple factors such as supply disruptions which are resulting in significantly higherand current recessionary concerns. During the three months ended September 30, 2023, the average 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 months ended September 30, 2022, the average WTI spot price was $93.06$82.25 as compared with $70.58$93.06 for the three months ended September 30, 2021.2022. During the nine months ended September 30, 2022,2023, the average WTI spot price was $98.96$77.27 as compared with $65.05$98.96 for the nine months ended September 30, 2021.2022.
The continuing impact on commodityCommodity prices will also continue to 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,In April and July 2023, OPEC+ announced that it would reducefurther oil production by 2 million barrels per day,output reductions, which are expected to continue through the largest cut since April 2020. The reduction is equivalentend of 2024, and has led to approximately 2% of global demand.increased prices during the three months ended September 30, 2023.
We believe there are several industry trends that continue to provide meaningful support for future growth. Our key customers’ capital allocation to the Permian Basin and New Mexico in particular remains consistent and significant, including on acreage where the water sourcing and production is dedicated to us. Additionally, operators continuePermian Basin oil and associated water production growth continues to average longer horizontal lateral lengths which corresponds to increased water sourcing and produced water handling volumes.outpace production growth in other parts of the United States.
Many industry trends such as simultaneous multi-well operations and reuse applications of produced water, particularly in the areas of the Permian Basin where we operate, are improving efficiencies and returns and
25
provide us with significant opportunities for both our Produced Water Handling and Water Solutions businesses.
27
Cost Inflation
DuringSince 2021, the U.S. began experiencinghas experienced increased wage and price inflation, as evidenced by increases in the Consumer Price Index (“CPI”), and. Although the annualcurrent rate of consumer 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.eased, core inflation remains high. 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 combat inflationary pressures, such as by continuing to adjust interest rates.
During the second and third quarters of 2022,nine months ended September 30, 2023, as compared with the prior year period, our revenue growth was partially offset by higher than anticipated cost inflation.inflationary pressure on costs. Our long-term, fee-based produced water handling contracts are generally subject to annual CPI 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 charge 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 continue to experience negative impacts to our operating margins.
Seismicity
InWe operate wells located in Seismic Response Areas in New Mexico we operate one well located within the Hat Mesa Seismic Response Area (“SRA”). As there hasand Texas, two of which have 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 shallow 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.
curtailed. Due to the integrated nature of our pipeline network and our system-wide redundancy, we have been able to comply withadapt to regulator responses to seismic activity, while continuing to provide service to our customers without significantmaterial disruption in our operations. In addition, although we cannot anticipate with any certainty future regulatory actions and the effect such actions could have on our business, our compliance with state regulator seismic response actions to date 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.
26
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 three-month periods indicated:ended September 30, 2023 and 2022:
| | | | | | | | | | | | |
(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
| | | | | | | | | | | | | |
(in thousands) | | Three Months Ended September 30, | | | |
| | | | ||||
|
| 2023 |
| 2022 |
| 2023 vs. 2022 | |||||||
Revenue |
| |
|
| |
|
| |
|
| |
| |
Produced Water Handling | | $ | 47,574 | | $ | 39,674 | | $ | 7,900 | | | 20 | % |
Produced Water Handling—Affiliates | |
| 28,036 | | | 24,796 | | | 3,240 | | | 13 | % |
Water Solutions | |
| 20,370 | | | 20,392 | | | (22) | | | - | % |
Water Solutions—Affiliates | |
| 3,048 | | | 5,668 | | | (2,620) | | | (46) | % |
Other Revenue | | | 761 | | | 246 | | | 515 | | | 209 | % |
Total Revenue | |
| 99,789 | | | 90,776 | | | 9,013 | | | 10 | % |
Cost of Revenue | |
| | | | | | | | | | | |
Direct Operating Costs | |
| 44,687 | | | 43,885 | | | 802 | | | 2 | % |
Depreciation, Amortization and Accretion | |
| 19,445 | | | 16,942 | | | 2,503 | | | 15 | % |
Total Cost of Revenue | |
| 64,132 | | | 60,827 | | | 3,305 | | | 5 | % |
Operating Costs and Expenses | |
| | | | | | | | | | | |
Abandoned Well Costs | | | 1,214 | | | 9,222 | | | (8,008) | | | (87) | % |
General and Administrative | |
| 13,526 | | | 11,052 | | | 2,474 | | | 22 | % |
Research and Development Expense | | | 809 | | | 430 | | | 379 | | | 88 | % |
Other Operating (Income) Expense | |
| (2,121) | | | 239 | | | (2,360) | | | (987) | % |
Total Operating Expenses | |
| 13,428 | | | 20,943 | | | (7,515) | | | (36) | % |
Operating Income | |
| 22,229 | | | 9,006 | | | 13,223 | | | 147 | % |
Interest Expense, Net | |
| 7,955 | | | 6,763 | | | 1,192 | | | 18 | % |
Income Before Income Taxes | |
| 14,274 | | | 2,243 | | | 12,031 | | | 536 | % |
Income Tax Expense | |
| 2,032 | | | 287 | | | 1,745 | | | 608 | % |
Net Income | | $ | 12,242 | | $ | 1,956 | | $ | 10,286 | | | 526 | % |
N/M Not Meaningful | | | | | | | | | | | | | |
2728
Results of operations were as follows for the nine-month periods indicated:ended September 30, 2023 and 2022:
| | | | | | | | | | | | |
(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
| | | | | | | | | | | | | |
(in thousands) | | Nine Months Ended September 30, | | | |
| | | | ||||
|
| 2023 |
| 2022 |
| 2023 vs. 2022 | |||||||
Revenue |
| |
|
| |
|
| |
|
| |
| |
Produced Water Handling | | $ | 143,390 | | $ | 110,299 | | $ | 33,091 | | | 30 | % |
Produced Water Handling—Affiliate | |
| 74,357 | | | 69,084 | | | 5,273 | | | 8 | % |
Water Solutions | |
| 49,180 | | | 46,744 | | | 2,436 | | | 5 | % |
Water Solutions—Affiliate | |
| 19,195 | | | 11,640 | | | 7,555 | | | 65 | % |
Other Revenue | | | 1,871 | | | 364 | | | 1,507 | | | 414 | % |
Total Revenue | |
| 287,993 | | | 238,131 | | | 49,862 | | | 21 | % |
Cost of Revenue | |
| | | | | | | | | | | |
Direct Operating Costs | |
| 132,978 | | | 101,337 | | | 31,641 | | | 31 | % |
Depreciation, Amortization and Accretion | |
| 57,137 | | | 49,724 | | | 7,413 | | | 15 | % |
Total Cost of Revenue | |
| 190,115 | | | 151,061 | | | 39,054 | | | 26 | % |
Operating Costs and Expenses | |
| | | | | | | | | | | |
Abandoned Well Costs | | | 1,214 | | | 14,637 | | | (13,423) | | | (92) | % |
General and Administrative | |
| 38,007 | | | 33,330 | | | 4,677 | | | 14 | % |
Impairment of Long-Lived Assets | | | — | | | 15,597 | | | (15,597) | | | N/M | % |
Research and Development Expense | | | 1,867 | | | 530 | | | 1,337 | | | 252 | % |
Other Operating (Income) Expense | |
| (2,096) | | | 1,816 | | | (3,912) | | | (215) | % |
Total Operating Expenses | |
| 38,992 | | | 65,910 | | | (26,918) | | | (41) | % |
Operating Income | |
| 58,886 | | | 21,160 | | | 37,726 | | | 178 | % |
Interest Expense, Net | |
| 23,587 | | | 21,863 | | | 1,724 | | | 8 | % |
Income (Loss) Before Income Taxes | |
| 35,299 | | | (703) | | | 36,002 | | | (5,121) | % |
Income Tax Expense (Benefit) | |
| 4,918 | | | (81) | | | 4,999 | | | (6,172) | % |
Net Income (Loss) | | $ | 30,381 | | $ | (622) | | $ | 31,003 | | | (4,984) | % |
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
29
Our volumes were as follows for the three-month periods:periods ended September 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | Three Months Ended | | | | | | | |||||||||
| | September 30, | | | | | | September 30, | | | | | | | |||||||||
|
| 2022 |
| 2021 | | 2022 vs. 2021 |
| 2023 |
| 2022 | | | 2023 vs. 2022 | ||||||||||
Thousand barrels water per day | | | | | | | | | | | |||||||||||||
(thousands of barrels of water per day) | | | | | | | | | | | | | |||||||||||
Produced Water Handling Volumes | | | 905 | | | 708 | | 197 | | 28% | | | 1,056 | | | 905 | | | 151 | | 17 | % | |
Water Solutions Volumes: | | | | | | | | | | | |||||||||||||
Water Solutions Volumes | | | | | | | | | | | | | |||||||||||
Recycled Produced Water Volumes Sold | | | 345 | | | 130 | | 215 | | 165% | | | 339 | | | 345 | | | (6) | | (2) | % | |
Groundwater Volumes Sold | | | 166 | | | 82 | | 84 | | 102% | | | 121 | | | 166 | | | (45) | | (27) | % | |
Groundwater Volumes Transferred | | | — | | | 41 | | (41) | | (100)% | |||||||||||||
Total Water Solutions Volumes | | | 511 | | | 253 | | 258 | | 102% | | | 460 | | | 511 | | | (51) | | (10) | % | |
Total Volumes | | | 1,416 | | | 961 | | 455 | | 47% | | | 1,516 | | | 1,416 | | | 100 | | 7 | % | |
| | | | | | | | | | | | | | | | | | | | | | | |
Per Barrel Operating Metrics (1) | | | | | | | | | | | | | | | | | | | | | | | |
Produced Water Handling Revenue/Barrel | | $ | 0.77 | | $ | 0.73 | | $ | 0.04 | | 5% | | $ | 0.78 | | $ | 0.77 | | $ | 0.01 | | 1 | % |
Water Solutions Revenue/Barrel | | $ | 0.55 | | $ | 0.50 | | $ | 0.05 | | 10% | | $ | 0.55 | | $ | 0.55 | | $ | - | | - | % |
Revenue/Barrel of Total Volumes | | $ | 0.69 | | $ | 0.67 | | $ | 0.02 | | 3% | | $ | 0.71 | | $ | 0.69 | | $ | 0.02 | | 3 | % |
Direct Operating Costs/Barrel | | $ | 0.34 | | $ | 0.27 | | $ | 0.07 | | 26% | | $ | 0.32 | | $ | 0.34 | | $ | (0.02) | | (6) | % |
Gross Margin/Barrel | | $ | 0.26 | | $ | 0.23 | | $ | 0.03 | | 13 | % | |||||||||||
Adjusted Operating Margin/Barrel (2) | | $ | 0.36 | | $ | 0.41 | | $ | (0.05) | | (12)% | | $ | 0.40 | | $ | 0.36 | | $ | 0.04 | | 11 | % |
(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. |
28
VolumesOur volumes were as follows for the nine-month periods:periods ended September 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | | | Nine Months Ended | | | | | | | |||||||||
| | September 30, | | | | | | September 30, | | | | | | | |||||||||
|
| 2022 |
| 2021 | | 2022 vs. 2021 |
| 2023 |
| 2022 | | | 2023 vs. 2022 | ||||||||||
Thousand barrels water per day | | | | | | | | | | | |||||||||||||
(thousands of barrels of water per day) | | | | | | | | | | | | | |||||||||||
Produced Water Handling Volumes | | | 850 | | | 692 | | 158 | | 23% | | | 1,024 | | | 850 | | | 174 | | 20 | % | |
Water Solutions Volumes: | | | | | | | | | | | |||||||||||||
Water Solutions Volumes | | | | | | | | | | | | | |||||||||||
Recycled Produced Water Volumes Sold | | | 306 | | | 102 | | 204 | | 200% | | | 298 | | | 306 | | | (8) | | (3) | % | |
Groundwater Volumes Sold | | | 112 | | | 61 | | 51 | | 84% | | | 141 | | | 112 | | | 29 | | 26 | % | |
Groundwater Volumes Transferred | | | 8 | | | 42 | | (34) | | (81)% | | | — | | | 8 | | | (8) | | N/M | % | |
Total Water Solutions Volumes | | | 426 | | | 205 | | 221 | | 108% | | | 439 | | | 426 | | | 13 | | 3 | % | |
Total Volumes | | | 1,276 | | | 897 | | 379 | | 42% | |||||||||||||
Total Water Volumes | | | 1,463 | | | 1,276 | | | 187 | | 15 | % | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Per Barrel Operating Metrics | | | | | | | | | | | | | | | | | | | | | | | |
Produced Water Handling Revenue/Barrel | | $ | 0.77 | | $ | 0.71 | | $ | 0.06 | | 8% | | $ | 0.78 | | $ | 0.77 | | $ | 0.01 | | 1 | % |
Water Solutions Revenue/Barrel | | $ | 0.50 | | $ | 0.51 | | $ | (0.01) | | (2)% | | $ | 0.57 | | $ | 0.50 | | $ | 0.07 | | 14 | % |
Revenue/Barrel of Total Volumes | | $ | 0.68 | | $ | 0.66 | | $ | 0.02 | | 3% | | $ | 0.72 | | $ | 0.68 | | $ | 0.04 | | 6 | % |
Direct Operating Costs/Barrel | | $ | 0.29 | | $ | 0.27 | | $ | 0.02 | | 7% | | $ | 0.33 | | $ | 0.29 | | $ | 0.04 | | 14 | % |
Adjusted Operating Margin/Barrel (2) | | $ | 0.39 | | $ | 0.41 | | $ | (0.02) | | (5)% | ||||||||||||
Gross Margin/Barrel | | $ | 0.24 | | $ | 0.25 | | $ | (0.01) | | (4) | % | |||||||||||
Adjusted Operating Margin/Barrel (3) | | $ | 0.39 | | $ | 0.39 | | $ | - | | - | % |
(1) | The groundwater transfer assets were sold in the first quarter of 2022. |
(2) | Per barrel operating metrics are calculated independently. Therefore, the sum of individual amounts may not equal the total presented. |
See Non-GAAP Financial Measures below. |
2930
Our skim oil volumes recovered were as follows for the three-month periods ended September 30, 2023 and 2022:
| | | | | | | | | | | | |
| | Three Months Ended | | | | | | | ||||
| | September 30, | | | | | | | ||||
|
| 2023 |
| 2022 | | | 2023 vs. 2022 | |||||
Skim Oil Volumes (bpd) | | | 1,125 | | | 889 | | | 236 | | 27 | % |
Skim Oil Volumes/Produced Water Handling Volumes | | | 0.11% | | | 0.10% | | | 0.01% | | 10 | % |
Skim Oil Sales Revenue/Barrel of Skim Oil (1) | | $ | 74.70 | | $ | 85.36 | | $ | (10.66) | | (12) | % |
(1) | Skim oil price received from the purchaser is net of certain customary deductions. |
Our skim oil volumes recovered were as follows for the nine-month periods ended September 30, 2023 and 2022:
| | | | | | | | | | | | |
| | Nine Months Ended | | | | | | | ||||
| | September 30, | | | | | | | ||||
|
| 2023 |
| 2022 | | | 2023 vs. 2022 | |||||
Skim Oil Volumes (bpd) | | | 1,171 | | | 797 | | | 374 | | 47 | % |
Skim Oil Volumes/Produced Water Handling Volumes | | | 0.11% | | | 0.09% | | | 0.02% | | 22 | % |
Skim Oil Sales Revenue/Barrel of Skim Oil (1) | | $ | 69.61 | | $ | 88.71 | | $ | (19.10) | | (22) | % |
(1) | Skim oil price received from the purchaser is net of certain customary deductions. |
Revenues
An analysis of revenues is as follows:
Produced Water Handling Revenues
Total produced water handling revenues and produced water handling revenues per barrel arewere as follows:follows for the periods indicated:
| | | | | | | | | | | | |
| | | 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 |
| | | | | | | | | | | | |
| | | Three Months Ended | Nine Months Ended | ||||||||
(in thousands, except per unit amounts) | | | September 30, | | September 30, | |||||||
| | | 2023 |
| 2022 | | 2023 | | | 2022 | ||
Produced Water Handling Fees | | $ | 67,879 | | $ | 57,486 | | $ | 195,493 | | $ | 160,083 |
Skim Oil Sales Revenue | | | 7,731 | | | 6,984 | | | 22,254 | | | 19,300 |
Total Produced Water Handling Revenue | | $ | 75,610 | | $ | 64,470 | | $ | 217,747 | | $ | 179,383 |
| | | | | | | | | | | | |
Produced Water Handling Fees/Bbl | | $ | 0.70 | | $ | 0.69 | | $ | 0.70 | | $ | 0.69 |
Skim Oil Sales Revenue/Bbl | | | 0.08 | | | 0.08 | | | 0.08 | | | 0.08 |
Total Produced Water Handling Revenue/Bbl | | $ | 0.78 | | $ | 0.77 | | $ | 0.78 | | $ | 0.77 |
Produced water handling revenues for the three months ended September 30, 20222023 as compared with the three months ended September 30, 20212022 increased primarily due to an increase of $9.7 million due to a 151 kbwpd volume increase driven by activity associated with our long-term acreage dedication agreements.
Produced water handling revenues for the nine months ended September 30, 2023 as compared with the nine months ended September 30, 2022 increased primarily due to:
● | an increase of |
● | an increase of |
31
Water Solutions Revenue
Produced water handlingWater solutions revenues for the three months ended September 30, 2023 as compared with the three months ended September 30, 2022 decreased primarily due to a decrease of $2.6 million primarily due to a 51 kbwpd volume decrease in recycled and groundwater volumes sold.
Water solutions revenues for the nine months ended September 30, 20222023 as compared with the nine months ended September 30, 20212022 increased primarily due to:
● | an increase of |
● | an increase of |
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:
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:
30
Expenses
An analysis of expenses is as follows:
Direct Operating Costs
Direct operating costs for the three months ended September 30, 2023 as compared with the three months ended September, 2022 increased primarily due to higher volumes for produced water handling, as well as higher landowner royalties paid on increased skim oil revenue. On a per barrel basis, direct operating costs were lower for the three months ended September 30, 2023 as compared with the three months ended September 30, 20212022 due to higher volumes of produced water received and reduced rental equipment and diesel fuel costs at recycling facilities.
Direct operating costs for the nine months ended September 30, 2023 as compared with the nine months ended September 30, 2022 increased due to higher volumes for both produced water handling and water solutions, as well as higher landowner royalties paid on increased skim oil revenue, cost inflation in labor chemical treatment, rental equipmentexpenses and fuel expenses.increased filtration and waste disposal costs. On a per barrel basis, 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, 20222023 as compared with the nine months ended September 30, 2021 increased2022 due to higher volumes, offset by the absence of temporary power generation expenses. On a per barrel basis, direct operating costs increased due to highercost inflation in 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.and increased filtration and waste disposal costs at recycling facilities.
Depreciation, Amortization and Accretion Expenses
Depreciation, amortization and accretion expense for the three and nine months ended September 30, 20222023 as compared with the three and nine months ended September 30, 20212022 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 stand-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 Company, as well as the abandonment of a well under construction. See Item 1. Financial Statements ─ Note 4. Property, Plant and Equipment.
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General and Administrative Expenses
General and administrative (“G&A”) expenses for the three and nine months ended September 30, 20222023 as compared with the three and nine months ended September 30, 20212022 increased primarily due to increasedincreased compensation and benefits expenses travel,associated with higher headcount and insurance costs correspondinghigher professional fees associated with an enterprise resource platform implementation and contracted accounting and tax services. G&A expenses for the increased head count required for our larger asset footprint, as well as incremental expenses that we now incur related to our becoming a public company.three and nine months ended September 30, 2023 included stock-based compensation expense of $3.1 million and $8.4 million, respectively. 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 pre-tax impairment expense. See Item 1. Financial Statements ─ Note 4. Property, Plant and Equipment.
Loss on Asset DisposalResearch and OtherDevelopment Expense
Loss on asset disposalResearch and other representsdevelopment expenses for the three and nine months ended September 30, 2023 increased as compared to the respective 2022 periods primarily due to our Beneficial Reuse Strategic Agreement entered into in the fourth quarter of 2022, as described above. The three and nine months ended September 30, 2023 included $0.4 million and $1.0 million of research and development expense, respectively, related to the Company’s share of expense associated with the Beneficial Reuse Strategic Agreement.
Other Operating Expense
Other operating expense includes net gains and losses on asset sales, transaction costs and other expenses related to, the abandonment, disposal or exchange of assets.expenses. See Item 1. Financial Statements ─ Note 4. Property, Plant and Equipment.3. Additional Financial Statement Information.
Interest Expense, Net
Components of interest expense, net are as follows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
(in thousands) | | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
| | 2022 |
| 2021 | | | 2022 | | | 2021 | | 2023 |
| 2022 | | | 2023 | | | 2022 | ||||
Interest on Debt Instruments | | $ | 7,759 | | $ | 8,034 | | $ | 23,365 | | $ | 18,402 | | $ | 8,373 | | $ | 7,759 | | $ | 25,477 | | $ | 23,365 |
Amortization of Debt Issuance Costs | | | 610 | | | 611 | | | 1,830 | | | 1,434 | | | 612 | | | 610 | | | 1,830 | | | 1,830 |
Total Interest Expense | | | 8,369 | | | 8,645 | | | 25,195 | | | 19,836 | | | 8,985 | | | 8,369 | | | 27,307 | | | 25,195 |
Less: Amounts Capitalized | | | (1,606) | | | (765) | | | (3,332) | | | (1,981) | | | (1,030) | | | (1,606) | | | (3,720) | | | (3,332) |
Interest Expense, Net | | $ | 6,763 | | $ | 7,880 | | $ | 21,863 | | $ | 17,855 | | $ | 7,955 | | $ | 6,763 | | $ | 23,587 | | $ | 21,863 |
Interest expense, net for the three months ended September 30, 2022 decreased2023 as compared with the three months ended September, 2022 increased due to borrowings under our revolving credit facility (the “Credit Facility”). The average outstanding debt balance for the three months ended September 30, 2021 as a result of a higher amount capitalized.2023 was $439 million compared with $400 million for the three months ended September 30, 2022.
Interest expense, net for the nine months ended September 30, 20222023 as compared with the nine months ended September 30, 20212022 increased due to Credit Facility borrowings and was partially offset by an increase in capitalized interest related primarily to an increase in the total debt outstanding and an increase in the interest rate related to our debt instruments, as the Credit Facility was repaid with proceeds from the Notes issuance on April 1, 2021.assets under construction. The average outstanding debt balance for the nine months ended September 30, 20222023 was $400$444 million compared with $366$400 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 a higher average interest rate and an increase in the amount of assets under construction.2022.
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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 as a 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; transaction costs; research and development expense; loss on debt modification;modification; stock-based compensation expense; non-recurring litigation and settlement expenses; and other non-recurring or unusual expenses or charges (including(such as temporary power costs, discussed above)litigation expenses and severance costs), less any gains on sale of assets. For the fourth quarter of 2022, we began including research and development expense in our calculation of Adjusted EBITDA due to our new beneficial reuse pilot projects, which are discreet, non-revenue initiatives.
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.accretion. 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.
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 recycled 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.
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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, | ||||||||
|
| 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 |
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
(in thousands) | | September 30, | | September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Net Income (Loss) | | $ | 12,242 | | $ | 1,956 | | $ | 30,381 | | $ | (622) |
Interest Expense, Net | | | 7,955 | | | 6,763 | | | 23,587 | | | 21,863 |
Income Tax Expense (Benefit) | | | 2,032 | | | 287 | | | 4,918 | | | (81) |
Depreciation, Amortization and Accretion | | | 19,445 | | | 16,942 | | | 57,137 | | | 49,724 |
Abandoned Well Costs | | | 1,214 | | | 9,222 | | | 1,214 | | | 14,637 |
Impairment of Long-Lived Assets | | | — | | | — | | | — | | | 15,597 |
Stock-Based Compensation | | | 3,360 | | | 3,595 | | | 8,945 | | | 9,134 |
(Gain) Loss on Disposal of Assets, Net | | | (2,631) | | | (97) | | | (2,574) | | | 481 |
Transaction Costs | | | 528 | | | 336 | | | 673 | | | 1,269 |
Research and Development Expense | | | 809 | | | 430 | | | 1,867 | | | 530 |
Other | | | (18) | | | (105) | | | (484) | | | (139) |
Adjusted EBITDA | | $ | 44,936 | | $ | 39,329 | | $ | 125,664 | | $ | 112,393 |
| | | | | | | | | | | | |
Total Revenue | | $ | 99,789 | | $ | 90,776 | | $ | 287,993 | | $ | 238,131 |
Cost of Revenue | | | (64,132) | | | (60,827) | | | (190,115) | | | (151,061) |
Gross Margin | | | 35,657 | | | 29,949 | | | 97,878 | | | 87,070 |
Depreciation, Amortization and Accretion | | | 19,445 | | | 16,942 | | | 57,137 | | | 49,724 |
Adjusted Operating Margin | | $ | 55,102 | | $ | 46,891 | | $ | 155,015 | | $ | 136,794 |
Total Volumes (Thousands of BBLs) | | | 139,429 | | | 130,267 | | | 399,525 | | | 348,315 |
Adjusted Operating Margin/BBL | | $ | 0.40 | | $ | 0.36 | | $ | 0.39 | | $ | 0.39 |
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)Board of Directors).
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. We believe that our cash flows, undrawn Credit Facility and leverage profile provide us with the financial flexibility to fund attractive growth opportunities in the future.
As of September 30, 2022,2023, we had a cash balance of $25.2$24.2 million and working capital, defined as current assets less current liabilities, of $12.0$12.3 million. We had $400.0$400.0 million face value of Notes outstanding and $34.0 million outstanding under our Credit Facility, with $199.85$165.9 million of availability under the Credit Facility. As of September 30, 2022,2023, we were in compliance with all the covenants under our Credit Facility and the indenture governing the Notes. In October 2023, we amended and restated the Credit Agreement which provides for, among other things, commitments of $350.0 million and a maturity date of October 12, 2027. See Item 1. Financial Statements ─ Note 6. Long-Term Debt for descriptions of the Credit Facility and Notes.Debt.
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
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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, 2022,2, 2023, we made an interest payment of $15.3 million on the Notes.
As of November 10, 2022,October 31, 2023, we had an outstanding balance of $35.0$49 million on our Credit Facility at ana weighted average interest rate of 6.97%8.276%. The borrowings are primarily being used to fund our capital program.
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During the first quarter of 2023, we entered into an agreement with an unaffiliated water disposal company to dispose of a minimum volume of produced water over a term of seven years, for a total financial commitment of approximately $28.0 million, undiscounted. We began delivering produced water under this agreement in June 2023. As of September 30, 2023, we had short-term purchase obligations for products and services of approximately $31.5 million due in the next twelve months. See Item 1. Financial Statements ─ Note 10. Commitments and Contingencies.
Dividends and Distributions
On February 25, 2022,March 3, 2023, May 6, 2022,8, 2023 and August 3, 2022,2, 2023, we announced that our Board of Directors had declared quarterly dividends of $0.09 per share for the first, second and third quarters of 2023, respectively, on our Class A common stock of $0.09 per share for first, second, and third quarter 2022, respectively.stock. In conjunction with the dividend payments, distributionsa distribution of $0.09 per unit per quarter werewas paid to unit holders of Solaris LLC. Dividends were also paid on unvested sharesLLC for each of restricted stockthe first, second and RSUs. Dividends accrue on PSUsthird quarters of 2023, subject to the same payment 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.record dates.
On November 4, 2022,October 31, 2023, our Board of Directors declared a quarterly dividend of $0.09 per share for the fourth quarter of 2023 on our Class A common stock for the fourth quarter of 2022 of $0.09 per share.stock. The dividend will be paid on November 30, 2022,December 21, 2023, to holders of record of our Class A common stock as of the close of business on November 17, 2022.December 7, 2023. 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 Flows from Operating Activities
For the nine months ended September 30, 2022, Net Cash Provided2023, net cash provided by Operating Activitiesoperating activities totaled $77.2$152.5 million as compared with $57.2$77.2 million for the nine months ended September 30, 2021.2022. The net increase is primarily due to the $75.9$49.9 million increase in total revenues offset by increases in direct operating costs and general and administrative expenses. Net Cash Providedcash provided by Operating Activitiesoperating activities also included reductionsa net increase (decrease) of $13.6$51.4 million and $6.6($13.6) million for the nine months ended September 30, 20222023 and 2021,2022, respectively, associated with changes in working capital items. Changes in working capital items adjust for the timing of receipts and payment of actual cash. The reductionsincrease in cash provided from changes in working capital are generally linkedin 2023 was primarily due to increases in accountslower receivable from increased revenues, particularly in our water sourcing services, and overall slower payment by customers as they manage their working capital in a rising cost environment.balances associated with improved collections timing.
Cash Flows from Investing Activities
For the nine months ended September 30, 2022, Net Cash Used2023, net cash used in Investing Activitiesinvesting activities totaled $92.9$111.8 million as compared with $62.7$92.9 million for the nine months ended September 30, 2021.2022. Expenditures for property, plant and equipment were higher in 2022$131.9 million for the nine months ended September 30, 2023, as compared with 2021$97.0 million for the nine months ended September 30, 2022 primarily due primarily to increased capital activity to support our growing operations, including the recently signedour long-term full-cycle water management agreement we entered into in May 2022 with Chevron.Chevron U.S.A. Net cash provided by investing activities for the nine months ended September 30, 2023 included $20.1 million in cash proceeds related to an asset sale, as compared with $7.4 million in cash proceeds from the sale of property, plant and equipment during the nine months ended September 30, 2022. The nine months ended September 30, 2022 also included $3.4 million cash paid for the assets acquired from ConocoPhillips.
Cash Flows from Financing Activities
For the nine months ended September 30, 2022, Net Cash Used2023, net cash used in Financing Activities totaled $19.2financing activities consisted of $1.0 million as compared with Net Cash Provided by Financing Activities of $17.0net Credit Facility repayments, $16.1 million fordividends and distributions paid and $0.6 million treasury stock repurchases related to tax withholding on stock awards that vested. For the nine months ended September 30, 2021. Cash2022, net cash used in financing activities for the first nine monthstotaled $19.2 million which consisted of 2022 related to dividends and distributions paid. Cash provided by financing activities for the first nine months of 2021 included the issuance of our $400.0 million aggregate principal amount of Notes on April 1, 2021, with net proceeds of $390.6 million used to pay down the outstanding Credit Facility balance of $297.0 million and redeem Redeemable Preferred Units for $74.4 million.
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Capital Requirements
For the year of 2022,We expect our estimate of capital expenditures will be between approximately $160.0 million to $170.0 million for 2023, which is between $140.0based on our currently contracted customers’ latest outlooks on our dedicated acreage. Factors that could result in an increase in our capital expenditures include an increase in expected drilling activity due to the sale or exchange of dedicated acreage to customers with more active drilling practices and $150.0 million. Our capital expenditure forecast supports the full-cycle water management agreement with Chevron signedother changes in May 2022 as well as incremental projected growth from our other long-term contracted customers.drilling programs. 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.Facility.
Critical Accounting Estimate ─ Goodwill
As further described in Critical Accounting Policies and Estimates – Impairment of Goodwill included in our 2022 Annual Report, we assess goodwill for impairment annually as of the fourth quarter of our fiscal year and more frequently when circumstances warrant. During the quarter ended March 31, 2023, we conducted a quantitative interim test of goodwill due to a decline in the price of our Class A common stock during the period. Based on the interim assessment, we determined no impairment was necessary as the fair value of our reporting unit exceeded its carrying value. We concluded there were no new impairment triggering events as of and for the three and nine months ended September 30, 2023. As such, there was no goodwill impairment as of September 30, 2023.
Our impairment analysis contains inherent estimates and assumptions, many of which are outside the control of management including interest rates, cost of capital, tax rates, market multiples and credit ratings, which could positively or negatively impact the anticipated future economic and operating conditions. The assumptions and estimates used in determining fair value require considerable judgement, and these assumptions can change in future periods as a result of overall economic conditions, including the impacts of inflationary pressures, increased interest and discount rates and global supply chain constraints, among others. As a result, there can be no assurance that estimates and assumptions made for the purpose of assessing impairment will prove to be an accurate prediction of the future. Potential circumstances that could have a negative effect on the fair value of our reporting unit include, but are not limited to, lower than forecasted revenue growth rates, higher operating or capital costs, lower operating margins, changes in discount rates and changes in income tax rates. A reduction in the estimated fair value of the reporting unit could trigger an impairment in the future. We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of our goodwill. A goodwill impairment would have no effect on our liquidity or capital resources. However, it could result in a material non-cash charge and could materially adversely affect our financial results in the period recognized.
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$1.235 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.
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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 20212022 Annual Report.
Commodity Price Risk
The market for our services is 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 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. As of November 10, 2022,September 30, 2023, we had an$34.0 million of outstanding balance of $35.0 million onborrowings under our Credit Facility at a weighted-average interest rate of 6.97%8.246%.
The outstanding borrowings under our Credit Facility generally bear a rate of interest (after giving effect to the amendment to our amended and restated credit agreement discussed below) at the Secured Overnight Financing Rate (“SOFR”) plus 0.1% plus an alternative base rate spread and are therefore susceptible to interest rate fluctuations. A hypothetical one percentage point increase in interest rates on the borrowings outstanding under our Credit Facility at September 30, 2023 would increase annual interest expense by approximately $0.3 million. In anticipation of the phase-out of LIBOR as a reference rate, our amended and restated credit agreement was amended to, among other things, transition the loans under the Credit Facility to be made at Term SOFR instead of LIBOR in May 2023. We cannot predict the consequences of the replacement of LIBOR on financial markets generally or on our business, financial condition or results of operations specifically, and our transition to successor rates could cause the amount of interest payable on our long-term debt to be different or higher than expected.
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Item 4. Controls and Procedures
In accordance with 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) and 15d-15(e) under the Exchange Act) as of September 30, 2022.2023. 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 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 on the evaluation of our disclosure controls and procedures as of September 30, 2022,2023, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
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Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting identified in the evaluation for the quarter ended September 30 2022,, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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
There have been no material changes or updates to our risk factors that were previously disclosed in Part I, Item 1A of our 20212022 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)None.The following table summarizes the repurchases of our common stock occurring in the third quarter of 2023.
(b)None.
(c)None.
| | | | | | | | | |
Period | | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | Total Number of | Approximate Dollar |
| | | | | | | | | |
7/1/2023 - 7/31/2023 | | | - | | $ | - | | - | - |
8/1/2023 - 8/31/2023 (1) | | | 68,918 | | | 18.42 | | - | - |
9/1/2023 - 9/30/2023 (2) | | | 2,600 | | | 10.24 | | - | - |
Total | | | 71,518 | | $ | 18.12 | | - | - |
(1) | Represents shares of our Class A common stock released from escrow for the non-cash reimbursement of certain post-acquisition workover costs pursuant to the Delaware Energy asset purchase agreement. The price shown reflects the price of such shares under the terms of the asset purchase agreement. The cost at the date of receipt of such shares by the Company was $10.78. |
(2) | Represents shares of our Class A common stock received by us from employees for the payment of withholding taxes due on shares of common stock issued under our 2021 Equity Incentive Plan. |
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
39
37
Regulation S-K).
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 | | |
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|
3.2 | | |
10.1 | | |
| | |
31.1* | | |
| | |
31.2* | | |
| | |
32.1** | | |
| | |
32.2** | | |
| | |
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.
3840
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.
| | |
November | Aris Water Solutions, Inc. | |
| | |
| By: | /s/ Amanda M. Brock |
| | Amanda M. Brock |
| | President and Chief Executive Officer |
| | |
| | /s/ Stephan E. Tompsett |
| | Stephan E. Tompsett R. Schroer |
| | Chief Financial Officer |
| | |
| | /s/ |
| |
|
| | Chief Accounting Officer |
3941