Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments - Predecessor

v3.22.2.2
Derivative Instruments - Predecessor
 6 Months Ended
Jun. 30, 2022
Consolidation, Less than Wholly Owned Subsidiary, Parent Ownership Interest, Effects of Changes, Net [Line Items]  
Derivative Instruments - Predecessor
NOTE 13 – Derivative Instruments
Warrant Liabilities
In June 2022, 234,399 Private Placement Warrants were exercised on cashless basis at an exercise price of $11.50 per share in exchange for a total of 100,009 shares of Class A Common Stock. As of June 30, 2022, 6,536,601 Private Placement Warrants remain outstanding, and each is exercisable to purchase one share of Class A Common Stock or, in certain circumstances, one Class A Opco Unit and corresponding share of Class B Common Stock. The Private Placement Warrants expire on September 15, 2026, or earlier upon redemption or liquidation. Private Placement Warrants are nonredeemable so long as they are held by the initial purchasers or their permitted transferees. The outstanding Private Placement Warrants continue to be held by the initial purchasers or their permitted transferees as of June 30, 2022.
The Private Placement Warrants contain exercise and settlement features that preclude them from being classified within stockholders’ equity, and therefore are recognized as derivative liabilities. The Company recognizes the warrant instruments as liabilities at fair value with changes in fair value included within gain (loss) on warrants and derivative contracts in the Company’s consolidated statements of operations. Derivative warrant liabilities are classified as non-current liabilities as their liquidation is not reasonably expected to require the use of current assets or require the creation of current liabilities.
The fair value of the Private Placement Warrants is estimated using the Black-Scholes option pricing model (a Level 3 measurement).
The Company used the following assumptions to estimate the fair value of the Private Placement Warrants:
June 30, 2022 December 31, 2021
Stock price
 $ 15.53 $ 18.28
Exercise price
 $ 11.50 $ 11.50
Volatility
 49.5  % 46.0  %
Expected term (years)
 4.2 4.7
Risk-free interest rate
 3.0  % 1.2  %
The change in the fair value of the warrant liabilities is recognized in gain (loss) on warrants and derivative contracts in the consolidated statement of operations. The changes in the warrant liabilities for the six months ended June 30, 2022 are as follows:
(in thousands)

Warrant liabilities as of December 31, 2021
 $ 67,290 
Change in fair value
 (13,004)
Less fair value of warrants exercised (1,556)
Warrant liabilities as of June 30, 2022
 $ 52,730 
Natural Gas Swap
In conjunction with the Business Combinations, the Company assumed a natural gas variable to fixed priced swap agreement entered into by Aria. The Company is the fixed price payer under the swap agreement that provides for monthly net settlements through the termination date of June 30, 2023. The agreement was intended to manage the risk associated with changing commodity prices. The agreement has a remaining notional of 219,000 MMBtu as of June 30, 2022.
Changes in the fair values and realized gains (losses) for the natural gas swap are recognized in gain (loss) on warrants and derivative contracts in the consolidated statement of operations. Valuation of the natural gas swap was calculated by discounting future net cash flows that were based on a forward price curve for natural gas over the remaining life of the contract (a Level 2 measurement), with an adjustment for each counterparty’s credit rate risk.
Interest Rate Swap
In December 2021, the Company entered into an interest rate swap that locks in payments of a fixed interest rate of 1.094% in exchange for a floating interest rate that resets monthly based on LIBOR. The interest rate swap was not designated as a hedging instrument, and net gains and losses are recognized currently in gain (loss) on warrants and derivative contracts. The interest rate swap notional was $107.9 million as of June 30, 2022 and declines over the term of the swap to $94.9 million at the December 2024 contract termination date.
The following summarizes the balance sheet classification and fair value of the Company’s derivative instruments as of June 30, 2022 and December 31, 2021:
(in thousands)
 June 30, 2022 December 31, 2021
Prepaid expenses and other current assets
Natural gas swap asset $ 245  $ — 
Interest rate swap asset 1,906  — 
Other non-current assets
Interest rate swap asset 2,814  439 
Total derivative assets $ 4,965  $ 439 
Accrued and other current liabilities
Natural gas swap liability $ 55  $ 44 
Interest rate swap liability —  727 
Derivative liabilities
Natural gas swap liability
 —  134 
Warrant liabilities
 52,730  67,290 
Total derivative liabilities $ 52,785  $ 68,195 
The following table summarizes the income statement effect of gains and losses related to warrants and derivative instruments for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, Six Months Ended June 30,
(in thousands)
 2022 2021 2022 2021
Gain (loss) on natural gas swap contract
 $ 116  $ —  $ 570  $ — 
Gain (loss) on interest rate swap contract 963  —  4,606  — 
Gain (loss) on warrant liabilities
 37,016  —  13,004  — 
Total
 $ 38,095  $ —  $ 18,180  $ — 
Aria Energy LLC  
Consolidation, Less than Wholly Owned Subsidiary, Parent Ownership Interest, Effects of Changes, Net [Line Items]  
Derivative Instruments - Predecessor Derivative Instruments - Predecessor
Aria was exposed to certain risks in the normal course of its business operations. The main risks are those relating to the variability of future earnings and cash flows – e.g., market risks, which are managed through the use of derivative instruments. All derivative financial instruments are reported in the consolidated balance sheets at fair value, unless they meet the normal purchase normal sale criteria and are designated and documented as such.
Aria has a natural gas variable to fixed-priced swap agreement which provides for a fixed to variable rate swap calculated monthly, until the termination date of the contract, June 30, 2023. The agreement was intended to manage the risk associated with changing commodity prices. Changes in the fair values of natural gas swap are recognized in gain (loss) on derivative contracts and realized losses are recognized as a component of cost of energy expense as summarized in the table below.
Valuation of the natural gas swap was calculated by discounting future net cash flows that were based on a forward price curve for natural gas over the life of the contract (a Level 2 measurement), with an adjustment for each counterparty's credit rate risk.
On April 6, 2020, Aria entered into an interest rate cap with a total notional amount of $110 million and an effective date of April 30, 2020. The cap agreement provides a fixed cap rate of 1.00% per annum related to the one-month LIBOR and has a termination date of May 31, 2022. The market value at June 30, 2021 was valued at zero and all associated fees with this transaction were recorded.
(in thousands) Three Months Ended June 30, 2021 Six Months Ended June 30, 2021
Natural gas swap - unrealized gain (loss) $ 446  $ 556