Exhibit 99.12
Pearlsnap Midstream, LLC
Condensed Financial Statements
March 31, 2023 and 2022
Pearlsnap Midstream, LLC
Index
March 31, 2023 and 2022
Page(s) | ||||
Condensed Financial Statements | ||||
Balance Sheets | 3 | |||
Statements of Operations | 4 | |||
Statements of Changes in Members’ Equity | 5 | |||
Statements of Cash Flows | 6 | |||
Notes to Condensed Financial Statements | 7–9 |
Pearlsnap Midstream, LLC
Condensed Balance Sheets
March 31, 2023 and December 31, 2022
(in thousands of dollars) | March 31, 2023 | December 31, 2022 | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 901 | $ | 342 | ||||
Accounts receivable | 1,223 | 1,430 | ||||||
Related party receivable | 5,780 | 45 | ||||||
Prepaids | 8 | 30 | ||||||
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Total current assets | 7,912 | 1,847 | ||||||
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Fixed Assets | ||||||||
Land | 3,526 | 3,526 | ||||||
Construction in progress | 4,232 | 3,757 | ||||||
Property, plant and equipment | 37,814 | 38,039 | ||||||
Less: Accumulated depreciation | (3,883 | ) | (3,584 | ) | ||||
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Property, plant and equipment, net | 38,163 | 38,212 | ||||||
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Total assets | $ | 49,601 | $ | 43,585 | ||||
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Liabilities and Members’ Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 844 | $ | 1,169 | ||||
Related party payable | 3,598 | 3,000 | ||||||
Accrued expenses | 1,352 | 1,194 | ||||||
Income taxes payable | 7 | 7 | ||||||
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Total current liabilities | 5,801 | 5,370 | ||||||
Asset retirement obligation | 429 | 420 | ||||||
Deferred state income taxes | 354 | 298 | ||||||
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Total liabilities | 6,584 | 6,088 | ||||||
Commitments and contingencies (Note 6) | ||||||||
Members’ equity | 43,017 | 37,497 | ||||||
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Total liabilities and members’ equity | $ | 49,601 | $ | 43,585 | ||||
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The accompanying notes are an integral part of these condensed financial statements.
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Pearlsnap Midstream, LLC
Condensed Statements of Operations
Three Months Ended March 31, 2023 and 2022
Three Months Ended | ||||||||
(in thousands of dollars) | March 31, | |||||||
2023 | 2022 | |||||||
Revenues | ||||||||
Produced water handling | $ | 351 | $ | 92 | ||||
Produced water handling—related parties | 4,690 | 1,485 | ||||||
Water solutions | — | 188 | ||||||
Water solutions—related parties | 2,916 | 1,885 | ||||||
Other | 206 | — | ||||||
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Total revenues | 8,163 | 3,650 | ||||||
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Operating expenses | ||||||||
Direct operating costs | 1,720 | 2,192 | ||||||
Depreciation | 300 | 301 | ||||||
Accretion of asset retirement obligations | 9 | 8 | ||||||
General and administrative | 558 | 233 | ||||||
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Total operating expenses | 2,587 | 2,734 | ||||||
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Net income before income tax | 5,576 | 916 | ||||||
Deferred income tax expense | 56 | 100 | ||||||
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Net income | $ | 5,520 | $ | 816 | ||||
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The accompanying notes are an integral part of these condensed financial statements.
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Pearlsnap Midstream, LLC
Condensed Statement of Changes in Members’ Equity
Three Months Ended March 31, 2023 and 2022
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands of dollars) | 2023 | 2022 | ||||||
Members’ Equity, beginning of period | $ | 37,497 | $ | 37,167 | ||||
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Capital contributions | — | 7,460 | ||||||
Net income | 5,520 | 816 | ||||||
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Members’ Equity, end of period | $ | 43,017 | $ | 45,443 | ||||
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The accompanying notes are an integral part of these condensed financial statements.
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Pearlsnap Midstream, LLC
Condensed Statements of Cash Flows
Three Months Ended March 31, 2023 and 2022
Three Months Ended March 31, | ||||||||
(in thousands of dollars) | 2023 | 2022 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 5,520 | $ | 816 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Depreciation | 300 | 301 | ||||||
Accretion of asset retirement obligations | 9 | 8 | ||||||
Change in assets and liabilities | ||||||||
Accounts receivable | 207 | 2 | ||||||
Related party receivable | (5,735 | ) | (3,450 | ) | ||||
Prepaid expenses | 22 | — | ||||||
Accounts payable | 18 | (256 | ) | |||||
Related party payable | 598 | 756 | ||||||
Accrued expenses | 341 | (323 | ) | |||||
Deferred income tax | 56 | 100 | ||||||
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Net cash used in operating activities | 1,336 | (2,046 | ) | |||||
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Cash flows from investing activities | ||||||||
Property, plant and equipment expenditures | (777 | ) | (4,954 | ) | ||||
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Net cash used in investing activities | �� | (777 | ) | (4,954 | ) | |||
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Cash flows from financing activities | ||||||||
Proceeds received from capital contributions | — | 7,460 | ||||||
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Net cash provided by financing activities | — | 7,460 | ||||||
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Net decrease in cash and cash equivalents | 559 | 460 | ||||||
Cash and cash equivalents | ||||||||
Beginning of period | 342 | 72 | ||||||
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End of period | $ | 901 | $ | 532 | ||||
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Supplemental disclosure of non-cash transactions: | ||||||||
Change in accrued capital expenditures | $ | (526 | ) | $ | (12 | ) |
The accompanying notes are an integral part of these condensed financial statements.
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Pearlsnap Midstream, LLC
Notes to Condensed Financial Statements
March 31, 2023 and 2022
1. | Organization and Operations of the Company |
Pearlsnap Midstream, LLC was organized as a Texas limited liability company (“LLC”) on April 4, 2018, to operate as a midstream services business providing fresh water sourcing and produced water disposal services for PetroLegacy Energy II, LLC (“PetroLegacy”) as well as third-party operators.
Pearlsnap is a wholly-owned subsidiary of PetroLegacy II Holdings, LLC, a company formed with an equity investment from Encap Investments and Management.
All references to “we”, “our”, “us”, “Pearlsnap” and the “Company” refer to Pearlsnap Midstream, LLC.
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Pearlsnap Midstream, LLC.
Property, Plant and Equipment
Property, plant and equipment consist of saltwater disposal wells, pipeline, construction in progress, land, water wells, and other equipment. For the three months ended March 31, 2023 and 2022, the Company recorded depreciation expense on property, plant and equipment of $0.3 million and $0.3 million, respectively.
Commitments and Contingencies
Liabilities for loss contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment and or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Accounts Receivable
Receivables consist of trade receivables recorded at the invoice amount, plus accrued revenue that is earned, but not yet billed. Accounts receivable from third-parties are generally due within 60 days or less. The majority of receivables relate to services provided to PetroLegacy, another wholly- owned subsidiary of PetroLegacy II Holdings, LLC. The Company did not record any allowance for doubtful accounts as of March 31, 2023 nor as of December 31, 2022.
Recently Issued Accounting Standards
To be Adopted in a Future Period
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU, along with subsequent related updates and amendments, replaces the current incurred loss model for measurement of credit losses on financial assets including trade receivables with a forward-looking expected loss model based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those years. During their October 2019 board meeting the FASB delayed the effective date for private entities with fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. We are evaluating the impact of the adoption of this guidance on our condensed financial statements.
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Pearlsnap Midstream, LLC
Notes to Condensed Financial Statements
March 31, 2023 and 2022
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.” This update is intended to simplify the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance. This update is effective for private entities with fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. We are evaluating the impact of the adoption of this guidance on our condensed financial statements.
The Company considers the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable or clarifications of ASUs previously disclosed.
3. | Related Parties |
The majority of the Company’s revenue is earned through service to a related party, PetroLegacy. Pearlsnap gathers produced water for the majority of PetroLegacy’s operated assets and provides freshwater and recycled water for PetroLegacy II, LLC’s completion activities. Rates associated with these activities are considered to be at market rates. For the three months ending March 31, 2023 and 2022, water gathering revenue incurred with PetroLegacy totaled $4.7 million and $1.5 million respectively. For the same periods, fresh and recycled water sold to PetroLegacy totaled $2.9 million and $1.9 million. Revenues owed by PetroLegacy are periodically settled throughout the year through cash and non-cash transactions. As of March 31, 2023, PetroLegacy owed Pearlsnap Midstream $5.7 million, represented in related party receivable on the balance sheets. As of December 31, 2022, all receivables from PetroLegacy had been settled.
In addition, the employees of PetroLegacy provide support services to the Company. The cost of these services is allocated to the Company under the terms of a master service agreement. For the three months ended March 31, 2023 and 2022, the Company incurred $460 thousand and $168 thousand, respectively, under this agreement reported as General and Administrative Expense on the statements of operations. The remainder of the balance relates to certain expenses paid by PetroLegacy, but services are shared with Pearlsnap Midstream. As of March 31, 2023 and as of December 31, 2022, Pearlsnap Midstream, LLC owed PetroLegacy $3.5 million and $2.9 million, respectively, represented in related party payable on the balance sheets.
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.
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Pearlsnap Midstream, LLC
Notes to Condensed Financial Statements
March 31, 2023 and 2022
PP&E consists of the following:
As of March 31, 2023 | As of December 31, 2022 | |||||||
Construction in progress | $ | 4,232 | $ | 3,757 | ||||
Saltwater disposal wells | 11,166 | 11,167 | ||||||
Pipelines | 12,602 | 12,823 | ||||||
Freshwater pits and wells | 5,716 | 5,718 | ||||||
Produced water pits | 8,330 | 8,331 | ||||||
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42,046 | 41,796 | |||||||
Less: Accumulated depreciation | (3,883 | ) | (3,584 | ) | ||||
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Total property, plant and equipment, net | $ | 38,163 | $ | 38,212 | ||||
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Property, Plant and Equipment cash expenditures were $0.8 million and $4.6 million for the three months ended March 31, 2023 and 2022, respectively.
Accrued PP&E totaled $0.6 million as of March 31, 2023 and $2.3 million as of March 31, 2022.
5. | Members’ Equity |
Upon the formation of Pearlsnap Midstream, LLC in 2018, $3.5 million was contributed by PetroLegacy II Holdings, LLC to the Company. The Company continues to receive contributions to fund capital expenditures in excess of revenues. During the three months ended March 31, 2022, the Company received net capital contributions of $7.5 million. There were no capital contributions to Pearlsnap during the three months ended March 31, 2023.
6. | Commitments and Contingencies |
Litigation
From time to time, the Company may be involved in legal proceedings and claims that arise in the ordinary course of business. The Company believes that the final disposition of such current matters will not have a material adverse effect on its financial position, results of operations, or liquidity.
7. | Subsequent Events |
The Company performed a review of events subsequent to March 31, 2023 through May 8, 2023, the date the condensed financial statements were available to be issued.
Divestiture
In April 2023, PetroLegacy II Holdings, LLC entered into a definitive purchase agreement to divest all of the Company’s assets to Ovintiv Inc. (“Ovintiv”) selling 100% of all equity interests in Pearlsnap Midstream, LLC. The effective date of the sale is January 1, 2023. The transaction, which is expected to close by the end of the second quarter, is subject to the satisfaction of customary closing conditions and customary closing adjustments.
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