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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) |
(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 |
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.
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).
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 | ☐ |
☒ | 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
As of May 6, 2022, the registrant had
TABLE OF CONTENTS
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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 (the “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,” “expect,” “continue,” “intend,” “plan,” “believe,” “forecast,” “future,” “potential,” “may,” “possible,” “could” and variations of such words or similar expressions.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”) found elsewhere in this Quarterly Report, including, but not limited to, the following:
| ● | the impact of the current conflict between Russia and Ukraine on the global economy, including its impacts on financial markets and the energy industry; |
| ● | impacts of cost inflation on our operating margins; |
| ● | the impact of current and future laws, rulings and federal and state governmental regulations, including those related to hydraulic fracturing, accessing water, handling of produced water, carbon pricing, taxation of emissions, seismic activity, drilling and right-of-way access on federal lands, income taxes and various other matters; |
| ● | our reliance on a limited number of customers and a particular region for substantially all of our revenues; |
| ● | our ability to renew or replace expiring contracts on acceptable terms; |
| ● | 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; |
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| ● | our ability to retain key management and employees and to hire and retain skilled labor; |
| ● | our health, safety and environmental performance; |
| ● | 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; |
| ● | physical, electronic and cybersecurity breaches; and |
| ● | the other risks described in our 2021 Annual Report filed with the United States Securities and Exchange Commission (“SEC”). |
Many of the factors that will determine our future results are beyond the ability of management to control or predict. Should one or more of the risks or uncertainties described in this Quarterly Report or in our 2021 Annual Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, are expressly qualified in their entirety by this cautionary statement.
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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) |
| March 31, | December 31, | |||
| 2022 | 2021 | ||||
Assets |
|
| ||||
Cash | $ | | $ | | ||
Accounts Receivable, Net | | | ||||
Accounts Receivable from Affiliate | | | ||||
Other Receivables | | | ||||
Prepaids and Deposits | | | ||||
Assets Held for Sale | | — | ||||
Total Current Assets | | | ||||
Fixed Assets | ||||||
Property, Plant and Equipment | | | ||||
Accumulated Depreciation | ( | ( | ||||
Total Property, Plant and Equipment, Net | | | ||||
Intangible Assets, Net | | | ||||
Goodwill | | | ||||
Deferred Income Tax Assets, Net | | | ||||
Right-of-Use Assets | | — | ||||
Other Assets | | | ||||
Total Assets | $ | | $ | | ||
Liabilities and Stockholders' Equity | ||||||
Accounts Payable | $ | | $ | | ||
Payables to Affiliate | | | ||||
Accrued and Other Current Liabilities | | | ||||
Total Current Liabilities | | | ||||
Long-Term Debt, Net of Debt Issuance Costs | | | ||||
Asset Retirement Obligation | | | ||||
Tax Receivable Agreement Liability | | | ||||
Other Long-Term Liabilities | | | ||||
Total Liabilities | | | ||||
Commitments and Contingencies (see Note 10) | ||||||
Stockholders' Equity: | ||||||
Preferred Stock $ | ||||||
Class A Common Stock $ | | | ||||
Class B Common Stock $ | | | ||||
Treasury Stock (at Cost), | ( | ( | ||||
Additional Paid-in-Capital | | | ||||
Accumulated Deficit | ( | ( | ||||
Total Stockholders' Equity Attributable to Aris Water Solutions, Inc. | | | ||||
Noncontrolling Interests | | | ||||
Total Stockholders' Equity | | | ||||
Total Liabilities and Stockholders' Equity | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated financial statements
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Aris Water Solutions, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended | ||||||
(in thousands, except for share and per share amounts) | March 31, | |||||
| 2022 |
| 2021 | |||
Revenue | ||||||
Produced Water Handling | $ | | $ | | ||
Produced Water Handling—Affiliates | | | ||||
Water Solutions | | | ||||
Water Solutions—Affiliates | | | ||||
Total Revenue | | | ||||
Cost of Revenue | ||||||
Direct Operating Costs | | | ||||
Depreciation, Amortization and Accretion | | | ||||
Total Cost of Revenue | | | ||||
Operating Costs and Expenses | ||||||
General and Administrative | | | ||||
Impairment of Long-Lived Assets | | — | ||||
Loss on Asset Disposal and Other | | | ||||
Total Operating Expenses | | | ||||
Operating Income | | | ||||
Interest Expense, Net | | | ||||
(Loss) Income Before Income Taxes | ( | | ||||
Income Tax Benefit | ( | — | ||||
Net (Loss) Income | ( | | ||||
Equity Accretion and Dividend—Redeemable Preferred Units | — | | ||||
Net (Loss) Income Attributable to Stockholders'/Members' Equity | $ | ( | $ | | ||
Net Loss Attributable to Noncontrolling Interest | ( | |||||
Net Loss Attributable to Aris Water Solutions, Inc. | $ | ( | ||||
Net Loss Per Share of Class A Common Stock, Basic and Diluted | ( | |||||
Weighted Average Shares of Class A Common Stock Outstanding, Basic and Diluted | | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements
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Aris Water Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands) | Three Months Ended March 31, | |||||
| 2022 |
| 2021 | |||
Cash Flow from Operating Activities | ||||||
Net (Loss) Income | $ | ( | $ | | ||
Adjustments to reconcile Net (Loss) Income to Net Cash provided by Operating Activities: | ||||||
Deferred Income Tax Benefit | ( | — | ||||
Depreciation, Amortization and Accretion | | | ||||
Stock-Based Compensation | | — | ||||
Impairment of Long-Lived Assets | | — | ||||
Loss on Disposal of Asset, Net | | | ||||
Abandoned Projects | | | ||||
Amortization of Deferred Financing Costs, Net | | | ||||
Other | | — | ||||
Changes in Operating Assets and Liabilities: | ||||||
Accounts Receivable | ( | | ||||
Accounts Receivable from Affiliate | | ( | ||||
Other Receivables | | | ||||
Prepaids, Deposits and Other Current Assets | | | ||||
Accounts Payable | | ( | ||||
Payables to Affiliate | | | ||||
Adjustment in Deferred Revenue | | ( | ||||
Accrued Liabilities and Other | | ( | ||||
Net Cash Provided by Operating Activities | | | ||||
Cash Flow from Investing Activities | ||||||
Property, Plant and Equipment Expenditures | ( | ( | ||||
Net Cash Used in Investing Activities | ( | ( | ||||
Cash Flow from Financing Activities | ||||||
Dividends and Distributions Paid | ( | — | ||||
Members' Contributions | — | | ||||
Net Cash (Used In) Provided by Financing Activities | ( | | ||||
Net Increase (Decrease) in Cash | | ( | ||||
Cash, Beginning of Period | | | ||||
Cash, End of Period | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated financial statements
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Aris Water Solutions, Inc.
Condensed Consolidated Statements of Stockholders’/Members’ Equity
(unaudited)
Three Months Ended March 31, 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 | $ | | | $ | |
| |
| $ | |
| $ | ( | |
| $ | ( |
| $ | |
| $ | | ||||
Redemption of Class B Shares for Class A Shares | | | ( | ( | | - | - | - | ( | - | |||||||||||||||||
Stock-based Compensation | - | | - | - | | - | - | - | | | |||||||||||||||||
TRA Liability | - | - | - | - | ( | - | - | - | - | ( | |||||||||||||||||
Deferred Tax Assets Acquired | - | - | - | - | | - | - | - | - | | |||||||||||||||||
Dividends and Distributions ($ | - | - | - | - | - | - | - | ( | ( | ( | |||||||||||||||||
Net Loss | - | - | - | - | - | - | - | ( | ( | ( | |||||||||||||||||
Balance at March 31, 2022 | $ | | | $ | | | $ | | $ | ( | | $ | ( | $ | | $ | | ||||||||||
Three Months | |||
Members' | |||
| Equity | ||
Balance at January 1, 2021 | $ | | |
Capital Contributions | | ||
Accretion and Dividend—Redeemable Preferred Units | | ||
Net Income | | ||
Balance at March 31, 2021 | $ | | |
The accompanying notes are an integral part of these condensed consolidated financial statements
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Aris Water Solutions, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(unaudited)
1.Organization and Background of Business
Aris Water Solutions, Inc. (“Aris Inc.”, the “Company”, “we”, “our, or “us”) is an independent, environmentally-focused company headquartered in Houston, Texas, that, through its controlling interest in Solaris Midstream Holdings, LLC, a Delaware limited liability company (“Solaris LLC”), provides sustainability-enhancing services to oil and natural gas operators. We strive to build long-term value through the development, construction and operation of integrated produced water handling and recycling infrastructure that provides high-capacity, comprehensive produced water management, recycling and supply solutions for operators in the Permian Basin.
We were incorporated on May 26, 2021 as a Delaware corporation and were formed to serve as the issuer in an initial public offering of equity (the “IPO” or “Offering”) that occurred on October 26, 2021.
Concurrent with the completion of the IPO, we became the new parent holding company of Solaris LLC. As the sole managing member of Solaris LLC, we operate and control the business and affairs of Solaris LLC, and through Solaris LLC and its subsidiaries, conduct our business. We consolidate the financial results of Solaris LLC and report noncontrolling interest related to the portion of Solaris LLC units not owned by us.
In these condensed consolidated financial statements, periods prior to IPO closing reflect the financial statements of Solaris LLC and its subsidiaries. Periods subsequent to IPO closing on October 26, 2021 reflect the financial statements of the consolidated Company including Aris Inc., Solaris LLC and Solaris LLC’s subsidiaries.
2.Basis of Presentation and Significant Accounting Policies
Basis of Presentation
All dollar amounts, except per share amounts, in the financial statements and tables in the notes are stated in thousands of dollars unless otherwise indicated.
Interim Financial Statements
Our accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These financial statements have not been audited by our independent registered public accounting firm.
These financial statements include the adjustments and accruals, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Consolidation
We have determined that the members with equity at risk in Solaris LLC lack the authority, through voting rights or similar rights, to direct the activities that most significantly impact Solaris LLC’s economic performance; therefore, Solaris LLC is considered a variable interest entity (“VIE”). As the managing member of Solaris LLC, we operate and control the business and affairs of Solaris LLC as well as have the obligation
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to absorb losses or the right to receive benefits that could be potentially significant to us. Therefore, we are considered the primary beneficiary and consolidate Solaris LLC.
Noncontrolling Interests
As of March 31, 2022, we own approximately
Use of Estimates
Management has made certain estimates and assumptions that affect reported amounts in these financial statements and disclosures of contingencies. These critical estimates include, among others, determining the fair value of assets acquired and liabilities assumed in acquisitions or disposed through sale, determining the fair value and related impairment of assets held for sale, determining the fair value of assets acquired and liabilities assumed in nonmonetary exchanges, useful lives of property, plant and equipment and amortizable intangible assets, the fair value of asset retirement obligations (“ARO”), accruals for environmental matters, the income tax provision, valuation allowances for deferred tax assets, and the liability associated with our Tax Receivable Agreement (the “TRA liability”). Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including current economic and industry conditions. Actual results could differ from management’s estimates as additional information or actual results become available in the future, and those differences could be material.
Significant Accounting Policies
See Note 2. Significant Accounting Policies to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for the discussion of our significant accounting policies. Other than the updates noted below in Recently Adopted Accounting Pronouncements, there were no significant updates or revisions to our accounting policies during the three months ended March 31, 2022.
Fair Value Information
The fair value of our
(in thousands) | March 31, 2022 | December 31, 2021 | ||||||||||
Carrying | Fair | Carrying | Fair | |||||||||
| Amount |
| Value |
| Amount |
| Value | |||||
Senior Sustainability-Linked Notes | $ | | $ | | $ | | $ | | ||||
The carrying values of our financial instruments, consisting of cash, accounts receivable, and accounts payable, approximate their fair values due to the short maturity of such instruments.
Intangible Assets
Intangible assets are net of accumulated amortization of $
Related Parties
In 2020, we and ConocoPhillips, one of our principal owners, entered a water gathering and handling agreement, pursuant to which ConocoPhillips agreed to dedicate all the produced water generated from its current and future acreage in a defined area of mutual interest in New Mexico and Texas. As of March 31,
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2022 and December 31, 2021, we had accounts receivable from ConocoPhillips of $
(in thousands) | Three Months Ended | |||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Revenues from ConocoPhillips | $ | | $ | | ||
Operating Expense Reimbursed to ConocoPhillips | $ | | $ | | ||
Operating expenses reimbursed to ConocoPhillips are related to ConocoPhillips’ costs for operating certain assets on our behalf between closing and the transfer of the acquired assets and other ongoing operating expenses.
Recently Adopted Accounting Pronouncements
Leases. Effective January 1, 2022, we adopted Accounting Standards Update (“ASU”) No. 2016-02: Leases and its subsequent amendments (collectively, “ASC Topic 842”). ASC Topic 842 supersedes prior accounting guidance for leases and requires, among other things, lessees to recognize substantially all right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Certain practical expedients are allowed for leases with terms of 12 months or less. ASC Topic 842 also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. Our adoption and implementation of ASC Topic 842 as of January 1, 2022 resulted in the recognition of right-of-use assets of $
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 (“Topic 840”) 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 beginning of the year of adoption 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
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.
Lease Term ─ Leases with an initial term of 12 months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one month to one year or more. Additionally, some of our leases include an option for early termination. We include renewal periods
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and exclude termination periods from our lease term if, at commencement, it is reasonably likely that we will exercise the option.
Lease Payments ─ Certain of our lease agreements include rental payments that are adjusted periodically for inflation or passage of time. These step payments are included within our present value calculation as they are known adjustments at commencement. Some of our lease agreements include variable payments that are excluded from our present value calculation.
Additionally, we have lease agreements that include lease and non-lease components, such as equipment maintenance, which are generally accounted for as a single lease component. For these leases, lease payments include all fixed payments stated within the contract. For real estate lease agreements, we account for lease and non-lease components separately. Our lease agreements do not contain any material residual value guarantees that would impact our lease payments.
See Note 7. Leases.
Financial Instruments – Credit Losses. Effective January 1, 2022, we adopted ASU 2016-13, Financial Instruments – Credit Losses and its subsequent amendments (collectively, “ASC Topic 326”). ASC Topic 326
requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The adoption of ASC Topic 326 did not have a material impact on our financial statements.
3.Additional Financial Statement Information
Balance Sheet
Other balance sheet information is as follows:
(in thousands) |
| March 31, | December 31, | |||
| 2022 | 2021 | ||||
Other Receivables | ||||||
Insurance and Third Party Receivables for Remediation Expenses | $ | | $ | | ||
Reimbursable Projects and Other | | | ||||
Total Other Receivables | $ | | $ | | ||
Prepaids and Deposits | ||||||
Prepaid Insurance and Other | $ | | $ | | ||
Deposits | | | ||||
Total Prepaids and Deposits | $ | | $ | | ||
Accrued and Other Current Liabilities | ||||||
Accrued Operating Expense | $ | | $ | | ||
Accrued Capital Costs | | | ||||
Accrued Interest | | | ||||
Accrued Compensation | | | ||||
Dividends and Distributions Payable | — | | ||||
Lease Liabilities | | — | ||||
Other | | | ||||
Total Accrued and Other Current Liabilities | $ | | $ | | ||
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Statement of Operations
Other statement of operations information is as follows:
(in thousands) | Three Months Ended | |||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Depreciation, Amortization and Accretion Expense | ||||||
Depreciation - Property, Plant and Equipment | $ | | $ | | ||
Amortization - Intangible Assets | | | ||||
Accretion of Asset Retirement Obligations | | | ||||
Total Depreciation, Amortization and Accretion Expense | $ | | $ | | ||
Loss on Asset Disposal and Other | ||||||
Loss on Asset Disposal, Net | $ | | $ | | ||
Transaction Costs | | | ||||
Abandoned Projects (1) | | | ||||
Total Loss on Asset Disposal and Other | $ | | $ | | ||
Interest Expense | ||||||
Interest on Debt Instruments | $ | | $ | | ||
Amortization of Deferred Financing Costs | | | ||||
Total Interest Expense | | | ||||
Less: Amounts Capitalized | ( | ( | ||||
Interest Expense, Net | $ | | $ | | ||
| (1) | Abandoned Projects expense is primarily related to expirations of legacy permits and rights-of-way for projects that were not ultimately constructed. |
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) |
| March 31, | December 31, | |||
| 2022 | 2021 | ||||
Wells, Facilities, Water Ponds, and Related Equipment | $ | | $ | | ||
Pipelines | | | ||||
Land | | | ||||
Vehicles, Equipment, Computers and Office Furniture | | | ||||
Assets Subject to Depreciation | | | ||||
Projects and Construction in Progress | | | ||||
Total Property, Plant and Equipment | | | ||||
Accumulated Depreciation | ( | ( | ||||
Total Property, Plant and Equipment, Net | $ | | $ | | ||
Asset Exchanges
During the three months ended March 31, 2022, we completed multiple nonmonetary transactions. The transactions included exchanges of wells, facilities, permits and other assets. The total net book value of the
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divested assets and liabilities was $
Assets Held for Sale
Management has committed to a plan to sell certain of our assets located in the Midland Basin and has determined that as of March 31, 2022, these assets met all the criteria for classification as assets held for sale. We anticipate these assets will be sold in 2022. These assets have been re-measured at their fair values less costs to sell, which resulted in the recognition of pre-tax impairment expense of $
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
The TRA liability totaled $
As of December 31, 2021, we estimated that if all the remaining Solaris LLC units were redeemed for shares of Class A common stock, the TRA liability would be approximately $
6.Long-Term Debt
Our long-term debt consists of the following:
(in thousands) |
| March 31, | December 31, | |||
| 2022 | 2021 | ||||
$ | | $ | | |||
Revolving Credit Facility | — | — | ||||
Total Long-Term Debt | | | ||||
Less: Unamortized Deferred Financing Costs | ( | ( | ||||
Total Long-Term Debt, Net of Unamortized Financing Costs | $ | | $ | | ||
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Senior Sustainability-Linked Notes
Our 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
Certain of these redemption prices are subject to increase if we fail to satisfy the Sustainability Performance Target (as defined in the indenture governing the Notes and referred to herein as “SPT”) and provide notice of such satisfaction to the trustee. From and including the interest period ending on October 1, 2023, the interest rate will be increased by
Credit Facility
Our Restated Credit Agreement provides for, among other things, (i) commitments of $
As of March 31, 2022 and December 31, 2021, we had
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 March 31, 2022, we were in compliance with all covenants contained in the Credit Facility.
7.Leases
In the normal course of business, we enter into operating lease agreements to support our operations. Our leased assets include right-of-way easements for our wells and facilities, office space and other assets. We currently have no finance leases.
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Balance Sheet Information
The following table provides supplemental consolidated balance sheet information related to leases at March 31, 2022:
(in thousands) | Classification | March 31, 2022 | |||||
Assets | |||||||
Right-of-Use Assets | Consolidated Balance Sheet | $ | | ||||
Liabilities | |||||||
Current Lease Liabilities | | ||||||
Noncurrent Lease Liabilities | | ||||||
Statement of Operations Information
The following table provides the components of lease cost, excluding lease cost related to short-term leases, for the three months ended March 31, 2022:
Three Months Ended | |||||||
(in thousands) | March 31, 2022 | ||||||
Direct Operating Costs | $ | ||||||
General and Administrative | |||||||
Total Lease Cost | $ | ||||||
Short-Term Leases
Our short-term lease cost was $
Cash Flow Information
The following table summarizes supplemental cash flow information related to leases for the three months ended March 31, 2022:
(in thousands) | March 31, 2022 | ||||||
Cash Paid for Amounts Included in Measurement of Lease Liabilities | $ | ||||||
Reduction in Right-of-Use Assets and Lease Liabilities Due to Lease Agreement Modifications | ( | ||||||
Lease Terms and Discount Rates
The following table provides lease terms and discount rates related to leases at March 31, 2022:
March 31, 2022 | |||||||
Weighted Average Remaining Lease Term (Years) | |||||||
Weighted Average Discount Rate | |||||||
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Annual Lease Maturities
The following table provides maturities of lease liabilities at March 31, 2022:
(in thousands) | |||||||
2022 | $ | | |||||
2023 | | ||||||
2024 | | ||||||
2025 | | ||||||
2026 | | ||||||
Thereafter | | ||||||
Total Lease Payments | | ||||||
Less: Interest | ( | ||||||
Present Value of Lease Liabilities | $ | | |||||
Future Minimum Lease Commitments
Future minimum lease commitments under non-cancellable leases at December 31, 2021 were as follows:
(in thousands) | |||||||
2022 | $ | | |||||
2023 | | ||||||
2024 | | ||||||
2025 | | ||||||
2026 | | ||||||
Thereafter | | ||||||
Total | $ | | |||||
8.Income Taxes
Our predecessor, Solaris LLC, is a Delaware limited liability company treated as a partnership for federal income tax purposes and, therefore, has not been subject to U.S. federal income tax at an entity level. As a result, the consolidated net (loss) income in our historical financial statements does not reflect the tax (benefit) expense we would have incurred if we were subject to U.S. federal income tax at an entity level during periods prior to the IPO. Solaris LLC continues to be treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to U.S. federal income tax. Instead, taxable income is allocated to members, including Aris Inc., and except for Texas franchise tax, any taxable income of Solaris LLC is reported in the respective tax returns of its members.
Income Tax Benefit
We recorded an income tax benefit of $
Effective Tax Rate
We record our income tax (benefit) expense using an estimated annual effective tax rate (“ETR”) and recognize specific events discretely as they occur. The ETR for the three months ended March 31, 2022 was
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Deferred Tax Assets
We regularly evaluate the realizable tax benefits of deferred tax assets and record a valuation allowance, if required, based on an estimate of the amount of deferred tax assets that we believe does not meet the more-likely-than-not criteria of being realized. The balance of our deferred income tax assets, net increased $
Tax Examinations
Solaris LLC files income tax returns in the U.S. federal jurisdiction and various states. There are currently no federal or state income tax examinations underway for these jurisdictions. We are no longer subject to tax examinations for tax years prior to 2018 for federal income taxes and prior to 2017 for state income taxes.
9.Stockholders’/Members’ Equity
Redemptions
On February 28, 2022,
Dividends and Distributions
On February 25, 2022, our Board of Directors declared a dividend on our Class A common stock for the first quarter of 2022 of $
On May 6, 2022, our Board of Directors declared a dividend on our Class A common stock for the second quarter of 2022 of $
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 Commitments
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 March 31, 2022, we have purchase obligations and commitments of approximately $
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: $
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remainder of 2022, $
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 2025 and the remaining minimum commitment under the contract is $
Environmental
We are also subject to various federal, state and local laws and regulations relating to the protection of the environment. For the three months ended March 31, 2022 and 2021, we recognized $
11.Earnings Per Share
Net Loss Per Share
Basic and diluted net loss per share attributable to our Class A common stock is computed by dividing net 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, 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.
The following table sets forth the computation of basic and diluted net loss per share attributable to our Class A common stock for the three months ended March 31, 2022:
Three Months Ended | ||||||
(in thousands, except for share and per share amounts) | March 31, 2022 | |||||
Net Loss Attributable to Stockholders' Equity | $ | ( | ||||
Less: Net Loss Attributable to Noncontrolling Interest | ( | |||||
Net Loss Attributable to Aris Water Solutions, Inc. | ( | |||||
Dividends for Participating Securities (1) | ( | |||||
Basic Net Loss Attributable to Aris Water Solutions, Inc. | $ | ( | ||||
Basic and Diluted Weighted Average Outstanding Shares | ||||||
Class A Common Stock | | |||||
Basic and Diluted Net Loss Per Share of Class A Common Stock | ( |
| (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. |
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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
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 and restricted stock units (collectively, “RSUs”); and performance-based restricted stock units (“PSUs”).
Restricted Stock and Restricted Stock Units
RSU activity during the three months ended March 31, 2022 was as follows:
RSUs | Weighted-Average Grant Date Fair Value | |||
Outstanding at December 31, 2021 | | $ | | |
Granted | | | ||
Forfeited | ( | | ||
Vested | ( | | ||
Outstanding at March 31, 2022 | | $ | | |
The RSUs granted during the three months ended March 31, 2022 generally vest in the following installments: (i) -third at the first anniversary of the award date, (ii) -third at the second anniversary of the award date, and (iii) third at the third anniversary of the award date. As of March 31, 2022, approximately $
Performance-Based Restricted Stock
During the three months ended March 31, 2022, we granted
| ● | Relative PSUs: |
| ● | Absolute PSUs: |
The vesting and payout of the PSUs occur when the related service condition is completed, which is generally
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
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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. We used the following assumptions to estimate the fair value of PSUs granted during the three months ended March 31, 2022:
Assumptions | |||
Risk-free Interest Rate | 1.44% | ||
Volatility Range | 35.95% - 154.23% |
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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 months ended March 31, 2022, included elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2021, which includes disclosures regarding our critical accounting policies as part of “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The information provided below supplements, but does not form part of, our historical financial statements. This discussion includes forward-looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. 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.
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.
First Quarter 2022 Results
Significant financial and operating highlights for the three months ended March 31, 2022 include:
| ● | Total water volumes handled or sold of 1,167 kbwpd, an increase of 45% as compared with the first three months of 2021 |
| ● | Recycled produced water volumes sold of 273 kbwpd, an increase of 290% as compared with the first three months of 2021 |
| ● | Total revenue of $71.0 million, an increase of 54% as compared with the first three months of 2021 |
| ● | Impairment expense of $15.6 million due to the reclassification of certain Midland Basin assets to assets held for sale |
| ● | Pre-tax loss of $0.6 million related to asset exchanges |
| ● | Net loss of $6.6 million, as compared with net income of $2.8 million for the first three months of 2021 |
| ● | Adjusted EBITDA (non-GAAP financial measure) of $35.9 million, an increase of 54% as compared with the first three months of 2021 |
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| ● | Expansion of Texas Pacific Land Corporation (“TPL”) alliance on Northern Delaware Basin surface acreage |
| ● | Dividend declared on our Class A common stock for the first quarter of 2022 of $0.09 per share, along with a distribution of $0.09 per unit paid to unit holders of Solaris LLC |
TPL Alliance
On March 17, 2022, we announced an expansion of our alliance with TPL. As part of the expanded relationship, we have access across TPL’s Northern Delaware Basin surface acreage to provide a full suite of produced water services, including incremental water recycling for two leading large-cap customers operating on TPL royalty and surface acreage. In addition, we received key additional shallow interval water handling locations with the ability to permit more as needed.
Chevron Alliance
On May 9, 2022, we announced a new long-term full-cycle water management agreement with Chevron U.S.A. Inc. (“Chevron”) in the Permian Basin. Under the arrangement, we will provide produced water handling and recycling services in a portion of Chevron’s core position in the Delaware Basin, including acreage in Eddy and Lea Counties, New Mexico and Culberson and Reeves Counties, Texas.
For additional information regarding our non-GAAP financial measures, see Non-GAAP Financial Measures below.
General Trends and Outlook
Market Dynamics
The current conflict between Russia and Ukraine is having significant global economic implications and may result in higher inflation, weaker real GDP growth and disruption to global financial markets. The extent of these impacts will depend on the length of the conflict and whether the conflict spreads beyond Ukraine’s borders. In addition, there are particular impacts on commodity prices due to supply disruptions which are resulting in significantly higher West Texas Intermediate (“WTI”) crude oil prices. The continuing impact on commodity prices will also depend on the length of the conflict as well as OPEC’s future responses to supply disruptions and higher 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 March 31, 2022, the average WTI spot price was $95.18 as compared with $77.33 for the three months ended December 31, 2021. With the increase in WTI spot prices, our customers’ investment in new production activities has resumed and we believe that the activity levels of our customers will continue to increase.
We believe there are several industry trends that continue to provide meaningful support for future growth. Our key customers are allocating new capital to the Permian Basin including acreage where the water sourcing and production is dedicated to us. Additionally, operators continue to increase horizontal lateral lengths which corresponds to increased water sourcing and produced water handling volumes.
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 provide us with significant opportunities for both our Produced Water Handling and Water Solutions businesses.
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Inflation
During 2021, the U.S. began experiencing increased wage and price inflation, as evidenced by increases in the consumer price index (“CPI”), and inflation is expected to continue through 2022. Through May 2022, the Federal Reserve has approved two interest rate hikes that total a 0.75 percentage point increase, which are the first increases since December 2018. The Federal Reserve has indicated additional rate increases may be approved during the remainder of the year. The members of the Federal Reserve also expressed reduced expectations for economic growth this year and raised their outlook for inflation.
The degree of inflation, and length of time it continues, will be impacted by any further steps the U.S. Federal Reserve Bank takes to combat inflationary pressures, such as by continuing to adjust interest rates. 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 increase significantly higher than our contractually allowed fee increases, we could experience negative impacts to our operating margins.
Induced Seismicity
In New Mexico, we operate one well which is partially curtailed due to compliance with the New Mexico Oil Conservation Division’s Seismicity Response Protocol in the Hat Mesa Seismic Response Area (“SRA”). In Texas, we operate two deep injection wells and hold one deep injection well permit within the Gardendale SRA where the Texas Railroad Commission (“TRC”) suspended all active permits to inject oil and gas waste into deep strata. We requested a hearing to continue to operate our wells and the TRC granted approval to recomplete our deep wells to shallow injection intervals. We also operate within the Stanton SRA and participate in the operator-led response plan, that, if accepted as presented, would not result in any impacts to our current wells in the Stanton SRA.
Due to the integrated nature of our pipeline network and our system-wide redundancy, we have been able to comply with regulator responses to seismic activity, while continuing to provide service to our customers without significant disruption in our operations. In addition, our compliance with state regulator seismic response actions has not resulted in any material volumetric, revenue or cash flow decreases.
Factors Affecting the Comparability of our Results of Operations
Temporary Power Costs
In the past, we constructed assets in advance of permanent grid power infrastructure availability in order to secure long-term produced water handling contracts. As a result, we rented temporary power generation equipment that would not have been necessary if grid power connections had been available. We estimate temporary power costs by taking temporary power and rental expenses incurred during the period and subtracting estimated expenses that would have been incurred during such period had permanent grid power been available. Power infrastructure and permanent power availability rapidly expanded in the Permian Basin in 2020 and the first half of 2021, and, accordingly, we were able to make significant progress in reducing these expenses over that period. By the end of June 2021, all our significant facilities were being supported by permanent power. Beginning in the third quarter of 2021, we were no longer adjusting for temporary power costs.
We remove temporary power costs when calculating Adjusted Operating Margin to accurately assess long-term profitability and cash flow on a basis consistent with our long-term projections and current operating cost profile.
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Results of Operations
Results of operations were as follows:
(in thousands) | Three Months Ended March 31, |
| ||||||||||
| 2022 |
| 2021 |
| 2022 vs. 2021 | |||||||
Revenue |
|
|
|
|
|
|
|
| ||||
Produced Water Handling | $ | 35,100 | $ | 21,651 | $ | 13,449 | 62% | |||||
Produced Water Handling—Affiliates |
| 21,081 | 18,086 | 2,995 | 17% | |||||||
Water Solutions |
| 11,644 | 1,943 | 9,701 | 499% | |||||||
Water Solutions—Affiliates |
| 3,144 | 4,509 | (1,365) | (30)% | |||||||
Total Revenue |
| 70,969 | 46,189 | 24,780 | 54% | |||||||
Cost of Revenue |
| |||||||||||
Direct Operating Costs |
| 26,671 | 20,754 | 5,917 | 29% | |||||||
Depreciation, Amortization and Accretion |
| 16,579 | 14,957 | 1,622 | 11% | |||||||
Total Cost of Revenue |
| 43,250 | 35,711 | 7,539 | 21% | |||||||
Operating Costs and Expenses |
| |||||||||||
General and Administrative |
| 10,730 | 4,695 | 6,035 | 129% | |||||||
Impairment of Long-Lived Assets | 15,597 | — | 15,597 | N/M | ||||||||
Loss on Asset Disposal and Other |
| 1,064 | 317 | 747 | 236% | |||||||
Total Operating Expenses |
| 27,391 | 5,012 | 22,379 | 447% | |||||||
Operating Income |
| 328 | 5,466 | (5,138) | (94)% | |||||||
Interest Expense, Net |
| 7,785 | 2,651 | 5,134 | 194% | |||||||
(Loss) Income Before Income Taxes |
| (7,457) | 2,815 | (10,272) | (365)% | |||||||
Income Tax Benefit |
| (840) | — | (840) | N/M | |||||||
Net (Loss) Income | $ | (6,617) | $ | 2,815 | $ | (9,432) | (335)% | |||||
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. Our volumes for the periods indicated were as follows:
Three Months Ended | |||||||||||
March 31, | |||||||||||
| 2022 |
| 2021 | 2022 vs. 2021 | |||||||
Thousand barrels water per day | |||||||||||
Produced Water Handling Volumes | 803 | 648 | 155 | 24% | |||||||
Water Solutions Volumes: | |||||||||||
Recycled Produced Water Volumes Sold | 273 | 70 | 203 | 290% | |||||||
Groundwater Volumes Sold | 66 | 33 | 33 | 100% | |||||||
Groundwater Volumes Transferred | 25 | 55 | (30) | (55)% | |||||||
Total Water Solutions Volumes | 364 | 158 | 206 | 130% | |||||||
Total Volumes | 1,167 | 806 | 361 | 45% | |||||||
Per Barrel Operating Metrics | |||||||||||
Produced Water Handling Revenue/Barrel | $ | 0.78 | $ | 0.68 | $ | 0.10 | 14% | ||||
Water Solutions Revenue/Barrel | $ | 0.45 | $ | 0.45 | $ | (0.00) | (1)% | ||||
Revenue/Barrel of Total Volumes | $ | 0.68 | $ | 0.64 | $ | 0.04 | 6% | ||||
Direct Operating Costs/Barrel | $ | 0.25 | $ | 0.29 | $ | (0.03) | (12)% | ||||
Adjusted Operating Margin/Barrel (1) | $ | 0.42 | $ | 0.39 | $ | 0.04 | 10% | ||||
| (1) | See Non-GAAP Financial Measures below. |
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Revenues
An analysis of revenues for the three months ended March 31, 2022 as compared with the three months ended March 31, 2021 is as follows:
Produced Water Handling Revenues
Produced water handling revenues increased primarily due to:
| ● | An increase of $9.2 million due to a 155 kbwpd volume increase driven by activity associated with our long-term acreage dedication agreements, |
| ● | an increase of $4.9 million in skim oil sales primarily due to higher crude oil prices and increased volumes on the system, and |
| ● | an increase of $2.3 million due to contractual price adjustments. |
Water Solutions Revenue
Water solutions revenues increased primarily due to:
| ● | an increase of $8.4 million due to a 206 kbwpd volume increase driven by higher recycling volumes on higher completion activities across the Permian Basin in response to recovering commodity prices. |
Expenses
An analysis of expenses for the three months ended March 31, 2022 as compared with the three months ended March 31, 2021 is as follows:
Direct Operating Costs
Direct operating costs increased primarily due to increased volumes, offset by the absence of temporary power generation expenses.
On a per barrel basis, direct operating costs decreased primarily due to reduced temporary power generation expenses as well as improved labor productivity and increased recycling activities, which have a lower direct operating cost per barrel sold.
All our significant facilities have been on permanent power since the end of June 2021. For the three months ended March 31, 2021, the estimated incremental impact of temporary power expenses was $2.7 million or approximately $0.03 per barrel.
See Factors Affecting the Comparability of our Results of Operations — Temporary Power Costs for additional information.
Depreciation, Amortization and Accretion Expenses
Depreciation, amortization and accretion expense 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.
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General and Administrative Expenses
General and administrative (“G&A”) expenses increased primarily due to increased compensation and benefits expenses, travel, and insurance costs corresponding with 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. G&A expenses for the three months ended March 31, 2022 and 2021 included stock-based compensation expense of $2.2 million and none, respectively.
Impairment Expense
See Item 1. Financial Statements ─ Note 4. Property, Plant and Equipment.
Loss on Asset Disposal and Other
See Item 1. Financial Statements ─ Note 4. Property, Plant and Equipment.
Interest Expense, Net
Components of interest expense, net are as follows:
Three Months Ended | ||||||
(in thousands) | March 31, | |||||
2022 |
| 2021 | ||||
Interest on Debt Instruments | $ | 7,812 | $ | 2,793 | ||
Amortization of Deferred Financing Costs | 610 | 214 | ||||
Total Interest Expense | 8,422 | 3,007 | ||||
Less: Amounts Capitalized | (637) | (356) | ||||
Interest Expense, Net | $ | 7,785 | $ | 2,651 | ||
Interest expense, net increased primarily due to an increase in the total debt outstanding and an increase in the interest rate related to our debt instruments. For the first three months of 2022, our average outstanding debt balance was $400 million, all of which is attributable to our Notes, compared with $297 million for the first three months of 2021 related to our Credit Facility. The interest rate on our Notes is 7.625%, whereas the interest rate on the Credit Facility was 3.75% for the first three months of 2021. Net interest expense also increased due to higher amortization of financing costs. The increase in net interest expense is partially offset by an increase in capitalized interest as a result of a higher average interest rate and an increase in the amount of asset construction in progress.
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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 related to the vesting and payout of PSUs granted under our short-term incentive plan. We define Adjusted EBITDA as net income (loss) plus: interest expense; income taxes; depreciation, amortization and accretion expense; abandoned well costs, asset impairment and abandoned project charges; losses on the sale of assets; loss on debt modification; stock-based compensation expense; and non-recurring or unusual expenses or charges (including temporary power costs, discussed above), less any gains on sale of assets.
Adjusted Operating Margin and Adjusted Operating Margin per Barrel
Our Adjusted Operating Margin and Adjusted Operating Margin per Barrel are dependent upon the volume of produced water we gather and handle, the volume of recycled water and groundwater we sell and transfer, the fees we charge for such services, and the recurring operating expenses we incur to perform such services. We define Adjusted Operating Margin as Gross Margin plus depreciation, amortization and accretion and temporary power costs. We define Adjusted Operating Margin per Barrel as Adjusted Operating Margin divided by total volumes handled, sold or transferred. Adjusted Operating Margin and Adjusted Operating Margin per Barrel are non-GAAP financial measures.
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 (loss) income as determined in accordance with GAAP to Adjusted EBITDA and Adjusted Operating Margin for the periods indicated:
Three Months Ended | ||||||
(in thousands) | March 31, | |||||
| 2022 |
| 2021 | |||
Net (Loss) Income | $ | (6,617) | $ | 2,815 | ||
Interest Expense, Net | 7,785 | 2,651 | ||||
Income Tax Benefit | (840) | — | ||||
Depreciation, Amortization and Accretion | 16,579 | 14,957 | ||||
Impairment of Long-Lived Assets | 15,597 | — | ||||
Stock-Based Compensation | 2,337 | — | ||||
Abandoned Projects | 2 | 211 | ||||
Temporary Power Costs (1) | — | 2,650 | ||||
Loss on Disposal of Asset, Net | 554 | 44 | ||||
Transaction Costs | 508 | 62 | ||||
Adjusted EBITDA | $ | 35,905 | $ | 23,390 | ||
Total Revenue | $ | 70,969 | $ | 46,189 | ||
Cost of Revenue | (43,250) | (35,711) | ||||
Gross Margin | 27,719 | 10,478 | ||||
Depreciation, Amortization and Accretion | 16,579 | 14,957 | ||||
Temporary Power Costs (1) | — | 2,650 | ||||
Adjusted Operating Margin | $ | 44,298 | $ | 28,085 | ||
Total Volumes (Thousands of BBLs) | 105,006 | 72,555 | ||||
Adjusted Operating Margin/BBL | $ | 0.42 | $ | 0.39 | ||
| (1) | See discussion above under "Temporary Power Costs". |
Liquidity and Capital Resources
Overview
Our primary needs for cash are permitting, development and construction of water handling and recycling assets to meet customers’ needs, payment of contractual obligations including debt, and working capital obligations. When appropriate, we enhance shareholder returns by returning capital to shareholders, such as through dividend payments and share buybacks (to the extent determined by our Board).
Funding for these cash needs may be provided by any combination of internally generated cash flow, borrowings under the Credit Facility, or accessing the capital markets. 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 March 31, 2022, we had a cash balance of $67.8 million and working capital, defined as current assets less current liabilities, of $86.3 million. We had a long-term debt balance of $400.0 million, with $200.0 million of availability under the Credit Facility. As of March 31, 2022, we were in compliance with all the covenants under our Credit Facility and the indenture governing the Notes. On April 1, 2022, we made a cash payment of $15.3 million for interest on our Notes. See Item 1. Financial Statements ─ Note 6. Long-Term Debt for descriptions of the Credit Facility and Notes.
In addition, we are on track to achieve our SPT, as defined in the indenture governing the Notes, which is to increase our annual Recycling Key Performance Indicator (“KPI”) to 60% by 2022 from a 2020 baseline of 42.1%, with an observation date of December 31, 2022. The KPI is designed to reduce groundwater
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withdrawal for water intensive industrial operations in the Permian Basin by increasing our sales of recycled produced water.
Dividends and Distributions
On February 25, 2022, our Board of Directors declared a dividend on our Class A common stock for the first quarter of 2022 of $0.09 per share. The dividend was paid on March 29, 2022 to holders of record of our Class A common stock as of the close of business on March 17, 2022. In conjunction with the dividend payment, a distribution of $0.09 per unit was paid to unit holders of Solaris LLC, subject to the same payment and record dates. Dividends are also paid on unvested shares of restricted stock and RSUs. Dividends accrue on PSUs and are paid upon vesting. The total amount paid on such dividend and distribution was $5.0 million.
On May 6, 2022, our Board of Directors declared a dividend on our Class A common stock for the second quarter of 2022 of $0.09 per share. The dividend will be paid on May 31, 2022, to holders of record of our Class A common stock as of the close of business on May 19, 2022. In conjunction with the dividend payment, a distribution of $0.09 per unit will be paid to unit holders of Solaris LLC subject to the same payment and record dates.
Cash Flows from Operating Activities
For the three months ended March 31, 2022, Net Cash Provided by Operating Activities totaled $26.4 million as compared with $16.6 million for the three months ended March 31, 2021. The net increase is primarily due to the $24.8 million increase in total revenues offset by increases in direct operating costs and general and administrative expenses. Net Cash Provided by Operating Activities also included reductions of $2.0 million and $1.7 million for the three months ended March 31, 2022 and 2021, respectively, associated with changes in working capital items. Changes in working capital items adjust for the timing of receipts and payment of actual cash.
Cash Flows from Investing Activities
For the three months ended March 31, 2022, Net Cash Used in Investing Activities totaled $9.8 million as compared with $20.3 million for the three months ended March 31, 2021. Expenditures for property, plant and equipment were lower in 2022 as compared with 2021 due primarily to timing of invoice payments.
Cash Flows from Financing Activities
For the three months ended March 31, 2022, Net Cash Used in Financing Activities totaled $8.9 million as compared with $5 thousand for the three months ended March 31, 2021. Cash used in financing activities for the first three months of 2022 related to dividends and distributions paid.
Capital Requirements
For the year of 2022, we have revised our estimate of capital expenditures to be between $140.0 and $150.0 million. Our updated capital expenditure forecast is to support the recently signed full-cycle water management agreement with Chevron as well as incremental projected growth from our other long-term contracted customers. We intend to fund capital requirements through our primary sources of liquidity, which include cash on hand and cash flows from operations and, if needed, our borrowing capacity under the Credit Facility.
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Emerging Growth Company Status
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” We may take advantage of these exemptions until we are no longer an “emerging growth company.” Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than $1.0 billion of non-convertible debt securities over a three-year period.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. Currently, our market risks relate to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates. Going forward our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes.
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 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.
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. We do not currently have any borrowings under our Credit Facility.
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 March 31, 2022. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file 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
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procedures as of March 31, 2022, 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.
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 March 31, 2022, 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 Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)None.
(b)None.
(c)None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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 | ||
4.1* | ||
10.1*† | ||
10.2*† | ||
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.
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