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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, 2022

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

Graphic

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.)

9811 Katy Freeway, Suite 700

Houston, Texas

77024

(Address of principal executive offices)

(Zip Code)

281-501-3070

(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, the registrant had 26,514,063 shares of Class A common stock, $0.01 par value per share, and 30,811,322 shares of Class B common stock, $0.01 par value per share, outstanding.

Table of Contents

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Cautionary Note Regarding Forward Looking Statements

3

Item 1.

Financial Statements (unaudited)

5

Condensed Consolidated Balance Sheets

5

Condensed Consolidated Statements of Operations

6

Condensed Consolidated Statements of Cash Flows

7

Condensed Consolidated Statements of Stockholders’/Members’ Equity

8

Notes to Unaudited Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36

Item 4.

Controls and Procedures

37

PART II. OTHER INFORMATION

37

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3.

Defaults upon Senior Securities

37

Item 4.

Mine Safety Disclosures

37

Item 5.

Other Information

37

Item 6.

Exhibits

38

Signatures

39

2

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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 10Q (this “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report, including, without limitation, statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “guidance,” “preliminary,” “project,” “estimate,” “outlook,” “expect,” “continue,” “will,” “intend,” “plan,” “targets,” “believe,” “forecast,” “future,” “potential,” “should,” “may,” “possible,” “could” and variations of such words or similar expressions.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (our “2021 Annual Report”) and found elsewhere in this Quarterly Report, including, but not limited to, the following:

the 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;

3

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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.

4

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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)

    

September 30, 

December 31, 

    

2022

2021

Assets

    

    

Cash

$

25,180

$

60,055

Accounts Receivable, Net

76,273

41,973

Accounts Receivable from Affiliate

25,772

20,191

Other Receivables

6,287

4,126

Prepaids and Deposits

1,828

6,043

Total Current Assets

135,340

132,388

Fixed Assets

Property, Plant and Equipment

881,003

700,756

Accumulated Depreciation

(81,019)

(67,749)

Total Property, Plant and Equipment, Net

799,984

633,007

Intangible Assets, Net

277,379

304,930

Goodwill

34,585

34,585

Deferred Income Tax Assets, Net

24,377

19,933

Right-of-Use Assets

7,635

Other Assets

1,422

1,850

Total Assets

$

1,280,722

$

1,126,693

Liabilities and Stockholders' Equity

Accounts Payable

$

35,823

$

7,082

Payables to Affiliate

2,412

1,499

Accrued and Other Current Liabilities

85,089

40,464

Total Current Liabilities

123,324

49,045

Long-Term Debt, Net of Debt Issuance Costs

393,453

392,051

Asset Retirement Obligation

8,148

6,158

Tax Receivable Agreement Liability

80,009

75,564

Other Long-Term Liabilities

8,966

1,336

Total Liabilities

613,900

524,154

Commitments and Contingencies (see Note 10)

Stockholders' Equity

Preferred Stock $0.01 par value, 50,000,000 authorized. None issued or outstanding as of September 30, 2022 and December 31, 2021

Class A Common Stock $0.01 par value, 600,000,000 authorized, 26,166,400 issued and 26,156,209 outstanding as of September 30, 2022; 21,858,022 issued and 21,847,831 outstanding as of December 31, 2021

261

218

Class B Common Stock $0.01 par value, 180,000,000 authorized, 30,811,322 issued and outstanding as of September 30, 2022; 31,716,104 issued and outstanding as of December 31, 2021

308

317

Treasury Stock (at Cost), 10,191 shares as of September 30, 2022 and December 31, 2021

(135)

(135)

Additional Paid-in-Capital

282,917

212,926

Accumulated Deficit

(7,094)

(457)

Total Stockholders' Equity Attributable to Aris Water Solutions, Inc.

276,257

212,869

Noncontrolling Interests

390,565

389,670

Total Stockholders' Equity

666,822

602,539

Total Liabilities and Stockholders' Equity

$

1,280,722

$

1,126,693

The accompanying notes are an integral part of these condensed consolidated financial statements

5

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Aris Water Solutions, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

Three Months Ended

Nine Months Ended

(in thousands, except for share and per share amounts)

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Revenue

Produced Water Handling

$

39,674

$

24,639

$

110,299

$

71,368

Produced Water Handling — Affiliates

24,796

23,135

69,084

62,216

Water Solutions

20,392

7,666

46,744

11,824

Water Solutions — Affiliates

5,668

4,059

11,640

16,864

Other Revenue

246

364

Total Revenue

90,776

59,499

238,131

162,272

Cost of Revenue

Direct Operating Costs

43,885

23,497

101,337

66,703

Depreciation, Amortization and Accretion

16,942

15,378

49,724

45,550

Total Cost of Revenue

60,827

38,875

151,061

112,253

Operating Costs and Expenses

Abandoned Well Costs

9,222

27,402

14,637

27,402

General and Administrative

11,482

5,228

33,860

15,240

Impairment of Long-Lived Assets

15,597

Loss on Asset Disposal and Other

239

940

1,816

2,590

Total Operating Expenses

20,943

33,570

65,910

45,232

Operating Income (Loss)

9,006

(12,946)

21,160

4,787

Other Expense

Interest Expense, Net

6,763

7,880

21,863

17,855

Other

380

Total Other Expense

6,763

7,880

21,863

18,235

Income (Loss) Before Income Taxes

2,243

(20,826)

(703)

(13,448)

Income Tax Expense (Benefit)

287

(83)

(81)

(81)

Net Income (Loss)

1,956

(20,743)

(622)

(13,367)

Equity Accretion and Dividend — Redeemable Preferred Units

21

Net Income (Loss) Attributable to Stockholders'/Members' Equity

1,956

$

(20,743)

(622)

$

(13,346)

Net Income (Loss) Attributable to Noncontrolling Interest

1,257

(493)

Net Income (Loss) Attributable to Aris Water Solutions, Inc.

$

699

$

(129)

Net Income (Loss) Per Share of Class A Common Stock

Basic

$

0.02

$

(0.03)

Diluted

$

0.02

$

(0.03)

Weighted Average Shares of Class A Common Stock Outstanding

Basic

24,499,953

22,779,077

Diluted

24,546,632

22,779,077

The accompanying notes are an integral part of these condensed consolidated financial statements

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Aris Water Solutions, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

Nine Months Ended September 30, 

    

2022

    

2021

Cash Flow from Operating Activities

Net Loss

$

(622)

$

(13,367)

Adjustments to reconcile Net Loss to Net Cash provided by Operating Activities:

Deferred Income Tax Benefit

(96)

Depreciation, Amortization and Accretion

49,724

45,550

Stock-Based Compensation

9,134

Impairment of Long-Lived Assets

15,597

Abandoned Well Costs

14,637

27,402

Loss on Disposal of Asset, Net

481

225

Abandoned Projects

66

2,035

Amortization of Debt Issuance Costs, Net

1,563

1,320

Loss on Debt Modification

380

Other

311

216

Changes in Operating Assets and Liabilities:

Accounts Receivable

(33,683)

(11,231)

Accounts Receivable from Affiliate

(5,581)

(10,046)

Other Receivables

(2,139)

231

Prepaids, Deposits and Other Current Assets

4,215

2,516

Accounts Payable

3,233

(3,284)

Payables to Affiliate

913

(715)

Deferred Revenue

14

(46)

Accrued Liabilities and Other

19,418

16,000

Net Cash Provided by Operating Activities

77,185

57,186

Cash Flow from Investing Activities

Property, Plant and Equipment Expenditures

(96,991)

(62,728)

Cash Paid for Acquisitions

(3,353)

Proceeds from the Sale of Property, Plant and Equipment

7,441

Net Cash Used in Investing Activities

(92,903)

(62,728)

Cash Flow from Financing Activities

Dividends and Distributions Paid

(19,157)

Proceeds from Senior-Sustainability Linked Notes

400,000

Payments for Initial Public Offering Costs

(855)

Payments of Debt Issuance Costs Related to Issuance of Senior- Sustainability Linked Notes

(9,352)

Repayment of Credit Facility

(297,000)

Redemption of Redeemable Preferred Units

(74,357)

Payments of Debt Issuance Costs Related to Credit Facility

(1,442)

Members' Contributions

5

Net Cash (Used In) Provided by Financing Activities

(19,157)

16,999

Net (Decrease) Increase in Cash

(34,875)

11,457

Cash, Beginning of Period

60,055

24,932

Cash, End of Period

$

25,180

$

36,389

The accompanying notes are an integral part of these condensed consolidated financial statements

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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
Ended
September 30, 2021

Members'

    

Equity

Balance at January 1, 2021

$

633,915

Capital Contributions

5

Accretion and Dividend—Redeemable Preferred Units

7

Net Income

2,815

Balance at March 31, 2021

636,742

Accretion and Dividend—Redeemable Preferred Units

14

Net Income

4,561

Balance at June 30, 2021

641,317

Net Loss

(20,743)

Balance at September 30, 2021

$

620,574

The accompanying notes are an integral part of 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 closed on October 26, 2021.

Concurrent with the completion of the IPO, we became the new parent holding company of Solaris LLC. As the sole managing member of Solaris LLC, we operate and control the business and affairs of Solaris LLC, and through Solaris LLC and its subsidiaries, conduct our business. We consolidate the financial results of Solaris LLC and report noncontrolling interest related to the portion of Solaris LLC units not owned by us.

In these condensed consolidated financial statements, periods prior to IPO closing reflect the financial statements of Solaris LLC and its subsidiaries. Periods subsequent to IPO closing on October 26, 2021 reflect the financial statements of the consolidated Company including Aris Inc., Solaris LLC and Solaris LLC’s subsidiaries.

2.Basis of Presentation and Significant Accounting Policies

Basis of Presentation

All dollar amounts, except per share amounts, in the condensed consolidated financial statements and tables in the notes are stated in thousands of dollars unless otherwise indicated.

Interim Financial Statements

These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These financial statements have not been audited by our independent registered public accounting firm.

These condensed consolidated financial statements include the adjustments and accruals, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Consolidation

We have determined that the members with equity at risk in Solaris LLC lack the authority, through voting rights or similar rights, to direct the activities that most significantly impact Solaris LLC’s economic performance; therefore, Solaris LLC is considered a variable interest entity (“VIE”). As the managing member

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of Solaris LLC, we operate and control the business and affairs of Solaris LLC as well as have the obligation to absorb losses or the right to receive benefits that could be potentially significant to us. Therefore, we are considered the primary beneficiary and consolidate Solaris LLC.

Noncontrolling Interests

As of September 30, 2022, we own approximately 46% of Solaris LLC. Our consolidated financial statements include noncontrolling interests representing the percentage of Solaris LLC units not held by us.

Use of Estimates

Management has made certain estimates and assumptions that affect reported amounts in these condensed consolidated financial statements and disclosures of contingencies. These critical estimates include, among others, determining the fair values of assets acquired, liabilities assumed, and/or contingent consideration paid in acquisitions or nonmonetary exchanges or disposed through sale, determining the fair value and related impairment of assets held for sale, determining the fair value of performance-based restricted stock units (“PSUs”), useful lives of property, plant and equipment and amortizable intangible assets, the fair value of asset retirement obligations (“ARO”), accruals for environmental matters, the income tax provision, valuation allowances for deferred tax assets, and the liability associated with our Tax Receivable Agreement (the “TRA liability”). Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including current economic and industry conditions. Actual results could differ from management’s estimates as additional information or actual results become available in the future, and those differences could be material.

Significant Accounting Policies

See Note 2. Significant Accounting Policies to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for the discussion of our significant accounting policies. Other than the updates noted below in Recently Adopted Accounting Pronouncements, there were no significant updates or revisions to our accounting policies during the nine months ended September 30, 2022.

Fair Value Information

The fair value of 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. Fair value information regarding our debt is as follows:

(in thousands)

September 30, 2022

December 31, 2021

Carrying

Fair

Carrying

Fair

    

Amount

    

Value

    

Amount

    

Value

Senior Sustainability-Linked Notes

$

400,000

$

377,076

$

400,000

$

424,000

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 $87.7 million and $60.1 million at September 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, we had accounts receivable from ConocoPhillips of $25.8 million and $20.2 million, respectively, that were recorded in accounts receivable from affiliate. As of September 30, 2022 and December 31, 2021, we had payables to ConocoPhillips of $2.4 million and $1.5 million, respectively, that were recorded in payables to affiliate. Revenues and expenses related to ConocoPhillips were as follows:

(in thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Revenues from ConocoPhillips

$

30,464

$

27,194

$

80,724

$

79,080

Operating Expenses Reimbursed to ConocoPhillips

403

191

1,163

919

Operating expenses reimbursed to ConocoPhillips are related to ConocoPhillips’ costs for operating certain assets on our behalf between closing and the transfer of the acquired assets and other ongoing operating expenses.

Recently Adopted Accounting Pronouncements

Leases. Effective January 1, 2022, we adopted Accounting Standards Update (“ASU”) No. 2016-02: Leases and its subsequent amendments (collectively, “ASC Topic 842”). ASC Topic 842 supersedes prior accounting guidance for leases and requires, among other things, lessees to recognize substantially all right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Certain practical expedients are allowed for leases with terms of 12 months or less. ASC Topic 842 also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. Our adoption and implementation of ASC Topic 842 as of January 1, 2022 resulted in the recognition of right-of-use assets of $7.9 million and lease liabilities of $7.3 million.

We made policy elections not to capitalize short-term leases for all asset classes and not to separate non-lease components from lease components for all asset classes, except for real estate leases. We also did not elect the package of practical expedients that allowed for certain considerations under the original “Leases (Topic 840)” accounting standard to be carried forward upon adoption of ASU 2016-02.

ASU No. 2018-11, “Targeted Improvements,” provides a transition election not to restate comparative periods for the 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 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.

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Lease Term ─ Leases with an initial term of 12 months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one month to one year or more. Additionally, some of our leases include an option for early termination. We include renewal periods and exclude termination periods from our lease term if, at commencement, it is reasonably likely that we will exercise the option.

Lease Payments ─ Certain of our lease agreements include rental payments that are adjusted periodically for inflation or passage of time. These step payments are included within our present value calculation as they are known adjustments at commencement. Some of our lease agreements include variable payments that are excluded from our present value calculation.

Additionally, we have lease agreements that include lease and non-lease components, such as equipment maintenance, which are generally accounted for as a single lease component. For these leases, lease payments include all fixed payments stated within the contract. For real estate lease agreements, we account for lease and non-lease components separately. Our lease agreements do not contain any material residual value guarantees that would impact our lease payments.

See Note 7. Leases.

Financial Instruments – Credit Losses. Effective January 1, 2022, we adopted ASU 2016-13, Financial Instruments – Credit Losses and its subsequent amendments (collectively, “ASC Topic 326”). ASC Topic 326

requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The adoption of ASC Topic 326 did not have a material impact on our financial statements.

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3.Additional Financial Statement Information

Balance Sheet

Other balance sheet information is as follows:

(in thousands)

    

September 30, 

December 31, 

    

2022

2021

Other Receivables

Insurance and Third Party Receivables for Remediation Expenses

$

4,578

$

3,099

Reimbursable Projects and Other

1,709

1,027

Total Other Receivables

$

6,287

$

4,126

Prepaids and Deposits

Prepaid Insurance and Other

$

1,787

$

5,953

Deposits

41

90

Total Prepaids and Deposits

$

1,828

$

6,043

Accrued and Other Current Liabilities

Accrued Operating Expense

$

27,085

$

17,774

Accrued Capital Costs

30,680

4,603

Accrued Interest

15,250

7,625

Accrued Compensation

4,878

4,551

Dividends and Distributions Payable

44

3,847

Lease Liabilities

1,025

Other

6,127

2,064

Total Accrued and Other Current Liabilities

$

85,089

$

40,464

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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

(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)

    

September 30, 

December 31, 

    

2022

2021

Wells, Facilities, Water Ponds, and Related Equipment

$

407,608

$

329,935

Pipelines

340,817

327,140

Land

2,063

2,063

Vehicles, Equipment, Computers and Office Furniture

18,196

17,359

Assets Subject to Depreciation

768,684

676,497

Projects and Construction in Progress

112,319

24,259

Total Property, Plant and Equipment

881,003

700,756

Accumulated Depreciation

(81,019)

(67,749)

Total Property, Plant and Equipment, Net

$

799,984

$

633,007

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Asset Exchanges

During the nine months ended September 30, 2022, we completed multiple nonmonetary transactions. The transactions included exchanges of wells, facilities, permits and other assets. The total net book value of the divested assets and liabilities was $3.8 million. The acquired assets were recorded at a total fair value of $3.2 million, which resulted in a total pre-tax loss of $0.6 million.

Assets Sold

During the first quarter of 2022, management committed to a plan to sell certain of our assets located in the Midland Basin and determined that these assets met all the criteria for classification as assets held for sale. These assets were re-measured at their fair values less costs to sell, which resulted in the recognition of pre-tax impairment expense of $15.6 million during the first quarter of 2022. We estimated the fair value of the assets using indicative bids, which were representative of a Level 2 fair value measurement, and we ceased recording depreciation on the assets. During the third quarter of 2022, we closed the sale of these assets for proceeds of $7.4 million and recorded a gain of $0.1 million.

Abandoned Assets

In June 2022, management determined that two previously acquired saltwate