Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.21.2
Derivative Instruments
9 Months Ended
Sep. 30, 2021
Consolidation, Less than Wholly Owned Subsidiary, Parent Ownership Interest, Effects of Changes, Net [Line Items]  
Derivative Instruments
NOTE 11 – Derivative Instruments
Warrant Liabilities
The Public Warrants, Forward Purchase Warrants, and Private Placement Warrants contain exercise and settlement features that preclude them from being classified within in shareholders’ equity, and therefore are recognized as derivative liabilities. The Company recognizes these warrant instruments as liabilities at fair value with changes in fair value included within other income (loss) in the Company’s consolidated condensed 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. As of September 30, 2021, the Company had 12,112,492 total Public Warrants and Forward Purchase Warrants (together the "Redeemable Warrants") and 6,771,000 Private Placement Warrants outstanding. Redeemable Warrants have an exercise price of $11.50 per share, subject to adjustments, and will expire on September 15, 2026, or earlier upon redemption or liquidation. The Redeemable Warrants became exercisable on October 26, 2021, and the Company may redeem the outstanding Redeemable Warrants even if the Company is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
If the last sale price of the Class A Common Stock equals or exceeds $10.00 per share on the last trading day before the notice of redemption is sent to the warrant holders, the Company may redeem the Redeemable Warrants for cash at a price of $0.10 per warrant. During the 30-day redemption period in this instance, warrant holders can elect to exercise their warrants on a cash or cashless basis.
If the last sale price of the Class A Common Stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day before the notice of redemption is sent to the warrant holders, the Company may redeem the outstanding Redeemable Warrants for cash at a price of $0.01 per warrant. If the Company calls the Redeemable Warrants for redemption for cash as described above, the Company will have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering Redeemable Warrants for that number of shares of Class A Common Stock equal to the quotient obtained by dividing (x) the product of the number of shares of Class A Common Stock underlying the Warrants,
multiplied by the difference between the exercise price of the Warrants and the “fair market value” (as defined in the following sentence) by (y) the fair market value. The “fair market value” of shares of the Company's Class A Common Stock shall mean the volume weighted average price of our shares of Class A Common Stock as reported during the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of the Warrants; however, in no event will the Redeemable Warrants be exercisable in connection with this redemption feature for more than 0.361 shares of Class A Common Stock per Redeemable Warrant (subject to adjustment).
Each Private Placement Warrant is exercisable to purchase one share of Class A Common Stock or, in certain circumstances, one Class A unit of Opco (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 of the Private Placement Warrants or their permitted transferees. There were no Private Placement Warrants transfers as of September 30, 2021.
The fair value of the Redeemable Warrants is based on observable listed prices on NYSE for such warrants (a Level 1 measurement). The fair value of the Private Placement Warrants was 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:
As of September 15,
2021
at Initial
Measurement
September 30,
2021
Stock price
$18.05 $18.94
Exercise price
$11.50 $11.50
Volatility
45.8  % 46.3  %
Expected term (years)
5.0 5.0
Risk-free interest rate
0.79  % 0.97  %
The change in the fair value of the warrant liabilities is recognized in gain (loss) on derivative contracts in the Consolidated Condensed Statement of Operations. The changes of the Redeemable Warrants and Private Placement Warrants through September 30, 2021 is as follows:
(in thousands)

Warrant liabilities as of September 15, 2021 (Closing Date)
$ 150,153 
Change in fair value - Closing Date through September 30, 2021
10,477 
Warrant liabilities as of September 30, 2021
$ 160,630 

In November 2021, the Company issued a redemption notice to the holders of the Company's Redeemable Warrants. The Company will redeem all Public Warrants for Class A Common Stock that remain outstanding at 5:00 p.m., New York City time, on December 6, 2021 (the "Redemption Date") for a redemption price of $0.10 per Public Warrant. The Public Warrants were issued under the Warrant Agreement, dated October 21, 2020, by and among the Company, LFG Acquisition Holdings LLC and Continental Stock Transfer & Trust Company (as warrant agent), as part of the units sold in the IPO. In addition, the Company will redeem all of the Forward Purchase Warrants that remain outstanding on the Redemption Date at a redemption price of $0.10 per Forward Purchase Warrant. The Private Placement Warrants held by the initial holders or their permitted transferees are not subject to the redemption.
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 swap agreement provides for a fixed to variable rate swap calculated monthly thorough 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 382,800 MMBtu as of September 30, 2021. The Company made no cash payments for the natural gas swap for the period from the Closing Date through September 30, 2021.
Changes in the fair values of the natural gas swap are recognized in gain (loss) on derivative contracts and realized losses are recognized as a component of cost of energy expense in the Consolidated Condensed 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.
The following summarizes the balance sheet classification and fair value of the Company’s derivative instruments:
(in thousands)
September 30,
2021
December 31,
2020
Natural gas swap asset (included in Other long-term assets)
$ 391  $ — 
Warrant liabilities (included in Derivative liabilities)
(160,630) — 
The following table summarizes the income statement effect of gains and losses related to derivative instruments:
(in thousands)
Three Months Ended Nine Months Ended
September 30,
2021
September 30,
2020
September 30,
2021
September 30,
2020
Cost of energy
$ —  $ —  $ —  $ — 
Gain (loss) on gas swap contracts
64  —  64  — 
Gain (loss) on warrant liabilities
(10,477) —  (10,477) — 
Total
$ (10,413) $ —  $ (10,413) $ — 
Aria Energy LLC  
Consolidation, Less than Wholly Owned Subsidiary, Parent Ownership Interest, Effects of Changes, Net [Line Items]  
Derivative Instruments 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 with a remaining notional quantity of 789,600 MMBtu as of December 31, 2020. The swap agreement 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 both September 14, 2021 and December 31, 2020 was valued at zero and all associated fees with this transaction were recorded. Aria made cash payments for the natural gas swap of $0.5 million and $1.1 million for the period January 1 to September 14, 2021 and for the nine months ended September 30, 2020 respectively.
(in thousands) December 31, 2020
Natural gas swap liability $ 1,268 

(in thousands) July 1 to September 14, 2021 July 1 to September 30, 2020 January 1 to September 14, 2021 January 1 to September 30, 2020
Natural gas swap - unrealized gain (loss) $ 574  $ 261  $ 1,129  $ (61)