Aris Water Solutions 10Q 2023 Q2 Quarterly report

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 June 30, 2023

☐	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

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 August 1, 2023, the registrant had 30,074,118 shares of Class A common stock, $0.01 par value per share, and 27,554,042 shares of Class B common stock, $0.01 par value per share, outstanding.

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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’ Equity		8
Notes to Unaudited Condensed Consolidated Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	35
PART II. OTHER INFORMATION		36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	36
Signatures		38

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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10‑Q (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, 2022 (our “2022 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;

●

the impacts of cost inflation on our operating margins and capital costs;

●

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 governmental lands, and various other matters;

●

our reliance on a limited number of customers and a particular region for substantially all of our revenues;

●

the level of capital spending and development by oil and gas companies, including potential reductions in capital expenditures by oil and gas producers in response to commodity price volatility and/or reduced demand;

●

our ability to renew or replace expiring contracts on acceptable terms;

●

our customers’ ability to complete and produce new wells;

●

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;

●

our ability to retain key management and employees and to hire and retain skilled labor;

●

our health, safety and environmental performance;

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●

the impact of competition on our operations;

●

the degree to which our customers may elect to operate their water-management services in-house rather than outsource these services to companies like us;

●

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;

●

changes in global political or economic conditions, both generally, and in the specific markets we serve, such as an economic slowdown or recession, concern over a potential recession, or increased uncertainty regarding the economic outlook;

●

physical, electronic and cybersecurity breaches; and

●

the other risks described in our 2022 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 2022 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. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.

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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)	June 30,		December 31,
	2023		2022
Assets
Cash	$	4,016	$	1,122
Accounts Receivable, Net		66,586		81,683
Accounts Receivable from Affiliate		27,721		46,029
Other Receivables		8,732		4,354
Prepaids and Deposits		4,222		5,805
Assets Held for Sale		17,777		—
Total Current Assets		129,054		138,993
Fixed Assets
Property, Plant and Equipment		982,857		907,784
Accumulated Depreciation		(102,578)		(88,681)
Total Property, Plant and Equipment, Net		880,279		819,103
Intangible Assets, Net		250,942		269,845
Goodwill		34,585		34,585
Deferred Income Tax Assets, Net		27,670		30,424
Right-of-Use Assets		9,165		9,135
Other Assets		998		1,281
Total Assets	$	1,332,693	$	1,303,366
Liabilities and Stockholders' Equity
Accounts Payable	$	36,718	$	22,982
Payables to Affiliate		2,443		3,021
Accrued and Other Current Liabilities		73,699		65,411
Total Current Liabilities		112,860		91,414
Long-Term Debt, Net of Debt Issuance Costs		423,856		428,921
Asset Retirement Obligation		18,051		17,543
Tax Receivable Agreement Liability		98,093		97,980
Other Long-Term Liabilities		10,467		10,421
Total Liabilities		663,327		646,279
Commitments and Contingencies (see Note 10)
Stockholders' Equity
Preferred Stock $0.01 par value, 50,000,000 authorized. None issued or outstanding as of June 30, 2023 and December 31, 2022		—		—
Class A Common Stock $0.01 par value, 600,000,000 authorized, 30,313,173 issued and 30,074,118 outstanding as of June 30, 2023; 30,115,979 issued and 29,919,217 outstanding as of December 31, 2022		302		300
Class B Common Stock $0.01 par value, 180,000,000 authorized, 27,554,042 issued and outstanding as of June 30, 2023; 27,575,519 issued and outstanding as of December 31, 2022		276		276
Treasury Stock (at Cost), 239,055 shares as of June 30, 2023; 196,762 shares as of December 31, 2022		(3,490)		(2,891)
Additional Paid-in-Capital		323,799		319,545
Accumulated Deficit		(5,291)		(7,722)
Total Stockholders' Equity Attributable to Aris Water Solutions, Inc.		315,596		309,508
Noncontrolling Interest		353,770		347,579
Total Stockholders' Equity		669,366		657,087
Total Liabilities and Stockholders' Equity	$	1,332,693	$	1,303,366

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				Six Months Ended
(in thousands, except for share and per share amounts)	June 30,				June 30,
	2023		2022		2023		2022
Revenue
Produced Water Handling	$	49,716	$	35,525	$	95,816	$	70,625
Produced Water Handling — Affiliate		23,181		23,207		46,321		44,288
Water Solutions		14,928		14,708		28,810		26,352
Water Solutions — Affiliate		8,163		2,828		16,147		5,972
Other Revenue		645		118		1,110		118
Total Revenue		96,633		76,386		188,204		147,355
Cost of Revenue
Direct Operating Costs		44,446		30,781		88,291		57,452
Depreciation, Amortization and Accretion		19,086		16,203		37,692		32,782
Total Cost of Revenue		63,532		46,984		125,983		90,234
Operating Costs and Expenses
Abandoned Well Costs		—		5,415		—		5,415
General and Administrative		12,682		11,567		24,481		22,278
Impairment of Long-Lived Assets		—		—		—		15,597
Research and Development Expense		650		81		1,058		100
Other Operating (Income) Expense		(192)		513		25		1,577
Total Operating Expenses		13,140		17,576		25,564		44,967
Operating Income		19,961		11,826		36,657		12,154
Other Expense
Interest Expense, Net		7,971		7,315		15,632		15,100
Income (Loss) Before Income Taxes		11,990		4,511		21,025		(2,946)
Income Tax Expense (Benefit)		1,559		472		2,886		(368)
Net Income (Loss)		10,431		4,039		18,139		(2,578)
Net Income (Loss) Attributable to Noncontrolling Interest		5,733		2,645		10,063		(1,750)
Net Income (Loss) Attributable to Aris Water Solutions, Inc.	$	4,698	$	1,394	$	8,076	$	(828)

Net Income (Loss) Per Share of Class A Common Stock
Basic	$	0.15	$	0.06	$	0.25	$	(0.05)
Diluted	$	0.15	$	0.05	$	0.25	$	(0.05)
Weighted Average Shares of Class A Common Stock Outstanding
Basic		30,036,593		21,984,313		29,985,869		21,918,639
Diluted		30,036,593		22,101,106		29,985,869		21,918,639

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)	Six Months Ended June 30,
	2023		2022
Cash Flow from Operating Activities
Net Income (Loss)	$	18,139	$	(2,578)
Adjustments to reconcile Net Income (Loss) to Net Cash provided by Operating Activities:
Deferred Income Tax Expense (Benefit)		2,837		(384)
Depreciation, Amortization and Accretion		37,692		32,782
Stock-Based Compensation		5,585		5,539
Impairment of Long-Lived Assets		—		15,597
Abandoned Well Costs		—		5,415
Loss on Disposal of Asset, Net		57		578
Amortization of Debt Issuance Costs, Net		1,041		1,099
Other		504		393
Changes in Operating Assets and Liabilities:
Accounts Receivable		15,097		(20,922)
Accounts Receivable from Affiliate		18,308		(1,492)
Other Receivables		(4,005)		1,021
Prepaids and Deposits		1,583		1,313
Accounts Payable		(1,001)		(2,201)
Payables to Affiliate		(578)		620
Accrued Liabilities and Other		1,208		477
Net Cash Provided by Operating Activities		96,467		37,257

Cash Flow from Investing Activities
Property, Plant and Equipment Expenditures		(77,981)		(48,318)
Deposit on Assets Held for Sale		1,750		—
Net Cash Used in Investing Activities		(76,231)		(48,318)

Cash Flow from Financing Activities
Dividends and Distributions Paid		(10,743)		(13,859)
Repurchase of Shares		(599)		—
Repayment of Credit Facility		(36,000)		—
Proceeds from Credit Facility		30,000		—
Net Cash Used in Financing Activities		(17,342)		(13,859)

Net Increase (Decrease) in Cash		2,894		(24,920)
Cash, Beginning of Period		1,122		60,055
Cash, End of Period	$	4,016	$	35,135

Supplementary Cash Flow Data
Cash Paid for Interest	$	17,413	$	15,250

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’ Equity

(unaudited)


		Three and Six Months Ended June 30, 2023
(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, 2023		$	300	30,115,979	$	276	27,575,519	$	319,545	$	(2,891)	196,762		$	(7,722)		$	347,579		$	657,087
Redemption of Class B Shares for Class A Shares			-	20,953		-	(20,953)		267		-	-			-			(267)			-
Stock-based Compensation Expense			2	175,717		-	-		2,383		-	-			-			83			2,468
Increase in TRA Liability Related to Share Redemption			-	-		-	-		(110)		-	-			-			-			(110)
Deferred Tax Assets Acquired			-	-		-	-		82		-	-			-			-			82
Dividends and Distributions ($0.09 per share or unit)			-	-		-	-		-		-	-			(2,826)			(2,588)			(5,414)
Purchase of Treasury Stock			-	-		-	-		-		(599)	42,293			-			-			(599)
Net Income			-	-		-	-		-		-	-			3,378			4,330			7,708
Balance at March 31, 2023		$	302	30,312,649	$	276	27,554,566	$	322,167	$	(3,490)	239,055		$	(7,170)		$	349,137		$	661,222
Redemption of Class B Shares for Class A Shares			-	524		-	(524)		7		-	-			-			(7)			-
Stock-based Compensation Expense			-	-		-	-		1,626		-	-			-			1,491			3,117
Increase in TRA Liability Related to Share Redemption			-	-		-	-		(3)		-	-			-			-			(3)
Deferred Tax Assets Acquired			-	-		-	-		2		-	-			-			-			2
Dividends and Distributions ($0.09 per share or unit)			-	-		-	-		-		-	-			(2,819)			(2,584)			(5,403)
Net Income			-	-		-	-		-		-	-			4,698			5,733			10,431
Balance at June 30, 2023		$	302	30,313,173	$	276	27,554,042	$	323,799	$	(3,490)	239,055		$	(5,291)		$	353,770		$	669,366



		Three and Six Months Ended June 30, 2022
		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 or unit)			-	-		-	-		-		-	-			(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 or unit)			-	-		-	-		-		-	-			(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

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 are the 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.

These unaudited condensed consolidated financial statements 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, 2022.

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 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.

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Noncontrolling Interest

As of June 30, 2023, we own approximately 52% of Solaris LLC. Our consolidated financial statements include a noncontrolling interest 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 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 of 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, goodwill impairment testing, 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.

Reclassification of Prior Year Presentation

Certain prior period amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

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, 2022 for the discussion of our significant accounting policies. There were no significant updates or revisions to our accounting policies during the six months ended June 30, 2023.

Goodwill

All of our goodwill is assigned to a single reporting unit. We perform our annual goodwill impairment test during the fourth quarter of our fiscal year, and more frequently if impairment indicators exist.

During the quarter ended March 31, 2023, we conducted a quantitative interim test of goodwill due to a decline in the price of our Class A common stock during the period. As a result of our interim test, no goodwill impairment was identified. The fair value of our reporting unit exceeded the carrying value by more than 10%. We concluded there were no new impairment triggering events as of and for the three months ended June 30, 2023. As such, there was no goodwill impairment as of June 30, 2023.

Some of the inherent estimates and assumptions used in determining the fair value of our reporting unit are outside the control of management, including interest rates, cost of capital, tax rates, market multiples and credit ratings. While we believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting unit, it is possible a material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, it could result in a material impairment of our goodwill.

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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. The fair value of our Credit Facility approximates carrying value as the debt bears interest at a variable rate which is reflective of current rates otherwise available to us. Management has designated this measurement as Level 3. Fair value information regarding our debt is as follows:


(in thousands)	June 30, 2023				December 31, 2022
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Senior Sustainability-Linked Notes	$	400,000	$	388,908	$	400,000	$	398,828
Credit Facility	$	29,000	$	29,000	$	35,000	$	35,000

The carrying values of our other 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 $115.7 million and $96.8 million at June 30, 2023 and December 31, 2022, respectively.

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 June 30, 2023 and December 31, 2022, we had accounts receivable from ConocoPhillips of $27.7 million and $46.0 million, respectively, that were recorded in accounts receivable from affiliate, and we had payables to ConocoPhillips of $2.4 million and $3.0 million, respectively, that were recorded in payables to affiliate. Revenues and expenses related to ConocoPhillips were as follows:


(in thousands)	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Revenues from ConocoPhillips	$	31,344	$	26,035	$	62,468	$	50,260
Operating Expenses Reimbursed to ConocoPhillips		(75)		375		(17)		760

Operating expenses reimbursed to ConocoPhillips are related to ConocoPhillips’ costs incurred on our behalf and other ongoing operating expenses.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) interest rate or another reference rate expected to be discontinued because of reference rate reform. This guidance was to be effective prospectively upon issuance through December 31, 2022 and applied from the beginning of an interim period that included the issuance date of this ASU. However, in December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” which deferred the sunset date from December 31, 2022 to December 31, 2024. All other provisions of ASU 2020-04 were unchanged. In May 2023, the Credit Agreement was amended to, among other things, transition the loans under the Credit Facility to be made at the Secured Overnight Financing

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Rate (“SOFR”) instead of LIBOR. The Company adopted this accounting pronouncement with the execution of the First Amendment to the Second Amended and Restated Credit Agreement in May 2023. See Note 6 Long-Term Debt for further discussion of the Company's accounting for its outstanding debt, credit facility and related issuance costs. This guidance provides an optional practical expedient that allows qualifying modifications to be accounted for as a debt modification rather than be analyzed under existing guidance to determine if the modification should be accounted for as a debt extinguishment. In adopting this accounting standard, we have elected to apply this optional expedient. Adopting this accounting standard did not have a material impact on the Company's condensed consolidated financial statements and related disclosures.

3.Additional Financial Statement Information

Balance Sheet

Other balance sheet information is as follows:


(in thousands)	June 30,		December 31,
	2023		2022
Other Receivables
Insurance and Third Party Receivables for Remediation Expenses	$	4,233	$	3,600
Reimbursable Research and Development Receivable		1,578		—
Reimbursable Projects and Other		2,921		754
Total Other Receivables	$	8,732	$	4,354

Prepaids and Deposits
Prepaid Insurance and Other	$	4,179	$	5,744
Deposits		43		61
Total Prepaids and Deposits	$	4,222	$	5,805

Accrued and Other Current Liabilities
Accrued Operating Expense	$	31,615	$	28,877
Accrued Capital Costs		20,504		16,161
Accrued Interest		7,722		8,262
Accrued Compensation		5,076		4,809
Lease Liabilities		1,185		1,176
Asset Retirement Obligation		762		2,242
Held for Sale Liability		554		—
Other		6,281		3,884
Total Accrued and Other Current Liabilities	$	73,699	$	65,411

Other Long-Term Liabilities
Noncurrent Lease Liabilities	$	8,116	$	7,719
Contingent Consideration Liability		2,351		2,702
Total Other Long-Term Liabilities	$	10,467	$	10,421

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Statement of Operations

Other statement of operations information is as follows:


(in thousands)	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Depreciation, Amortization and Accretion Expense
Depreciation - Property, Plant and Equipment	$	9,335	$	6,920	$	18,197	$	14,097
Amortization - Intangible Assets		9,451		9,184		18,903		18,368
Accretion of Asset Retirement Obligations		300		99		592		317
Total Depreciation, Amortization and Accretion Expense	$	19,086	$	16,203	$	37,692	$	32,782

Other Operating (Income) Expense
Loss on Disposal of Asset, Net	$	70	$	24	$	57	$	578
Transaction Costs		100		425		145		933
Other		(362)		64		(177)		66
Other Operating (Income) Expense	$	(192)	$	513	$	25	$	1,577

Interest Expense
Interest on Debt Instruments	$	8,543	$	7,794	$	17,104	$	15,606
Amortization of Debt Issuance Costs		608		610		1,218		1,220
Total Interest Expense		9,151		8,404		18,322		16,826
Less: Amounts Capitalized		(1,180)		(1,089)		(2,690)		(1,726)
Interest Expense, Net	$	7,971	$	7,315	$	15,632	$	15,100

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)	June 30,		December 31,
	2023		2022
Wells, Facilities, Water Ponds and Related Equipment	$	492,720	$	437,894
Pipelines		389,730		363,577
Land		463		463
Vehicles, Equipment, Computers and Office Furniture		21,859		20,219
Assets Subject to Depreciation		904,772		822,153
Projects and Construction in Progress		78,085		85,631
Total Property, Plant and Equipment		982,857		907,784
Accumulated Depreciation		(102,578)		(88,681)
Total Property, Plant and Equipment, Net	$	880,279	$	819,103

Accrued PP&E additions totaled $45.5 million and $26.4 million at June 30, 2023 and December 31, 2022, respectively.

Asset Exchanges

No asset exchanges were completed during the six months ended June 30, 2023.

During the six months ended June 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

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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 Held for Sale and Asset Impairment

During the three months ended June 30, 2023, management entered into a non-binding letter of intent with a third party to sell certain of our assets. These assets met the criteria for classification as assets held for sale and are included as such on the condensed consolidated balance sheet at June 30, 2023. No impairment was recorded on these assets when they were classified as held for sale as their fair value exceeds their carrying value. The assets are no longer being depreciated. During the three months ended June 30, 2023, we received a $1.8 million deposit related to the anticipated sale, which is included in “Accrued and Other Current Liabilities” on the condensed consolidated balance sheet at June 30, 2023. The sale is anticipated to close in the third quarter of 2023.

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

No assets were abandoned during the six months ended June 30, 2023.

During the second quarter of 2022, management determined that two previously acquired saltwater disposal wells (“SWD wells”) were no longer economically beneficial to the operations of the Company due to required workover costs and determined that the SWD wells should be shut-in and taken out of service. Also during the second quarter of 2022, management removed the cost of a well that was under construction in Texas. The well had encountered technical difficulties during the drilling phase and progress on the well was stopped. Accordingly, the costs and the associated accumulated depreciation related to these wells were removed and are included in “Abandoned Well Costs” in the condensed consolidated statements of operations for the three and six months ended June 30, 2022.

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 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that we actually realize or, are deemed to realize in certain circumstances, in periods after our initial public offering (the “IPO”) as a result of certain increases in tax basis that occur as a result of our acquisition or Solaris LLC’s redemption, respectively, of all or a portion of such TRA Holder’s Solaris LLC units in connection with the IPO or pursuant to the exercise of a redemption right or call right. We retain the remaining 15% of these cash savings. The future benefit of these cash savings is included, alongside other tax attributes, in our total deferred income tax asset balance at June 30, 2023.

The TRA liability totaled $98.1 million at June 30, 2023. The liability increased $0.1 million during the six months ended June 30, 2023 due to the redemption of Class B shares to Class A shares. See Note 9. Stockholders’ Equity.

As of June 30, 2023, we estimated that if all the remaining Solaris LLC units were redeemed for shares of our Class A common stock, the TRA liability would be approximately $223.2 million. If we experience a change of control (as defined under the TRA, which includes certain mergers, asset sales and other forms of business

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combinations and change of control events) or the TRA terminates early (at our election or as a result of our breach), we could be required to make an immediate lump-sum payment under the terms of the TRA. As of June 30, 2023, we estimated the liability associated with this lump-sum payment (or “early termination payment”) would be approximately $133.8 million, discounted. These amounts can be significantly impacted by the closing price of our Class A shares on the applicable redemption date. We currently do not anticipate experiencing a change of control or an early termination of the TRA.

6.Long-Term Debt

Our long-term debt consists of the following:


(in thousands)	June 30,		December 31,
	2023		2022
7.625% Senior Sustainability-Linked Notes	$	400,000	$	400,000
Credit Facility ⁽¹⁾		29,000		35,000
Total Long-Term Debt		429,000		435,000
Less: Unamortized Debt Issuance Costs		(5,144)		(6,079)
Total Long-Term Debt, Net of Debt Issuance Costs	$	423,856	$	428,921

(1)	Credit Facility borrowings bore weighted average interest rates of 8.066% and 6.967% at June 30, 2023 and December 31, 2022, respectively.

Senior Sustainability-Linked Notes

Our 7.625% Senior Sustainability-Linked Notes (the “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 103.8125% on or after April 1, 2023 to 100% on or after April 1, 2025. If we undergo a change of control, we may be required to repurchase all or a portion of the Notes at a price equal to 101% of the principal amount of the Notes, plus accrued interest.

During the first quarter of 2023, we notified the trustee for the Notes that, for the year ended December 31, 2022, we had satisfied the Sustainability Performance Target (as defined in the indenture governing the Notes) in accordance with the requirements and procedures. As a result, the interest rate on the Notes will remain 7.625% for the remainder of the term of the Notes.

Credit Facility

Our amended and restated credit agreement (the “Credit Agreement”) provides for, among other things, (i) commitments of $200.0 million, (ii) a maturity date of April 1, 2025, (iii) loans made under our revolving credit facility (the “Credit Facility”) and unused commitment fees to be determined based on a leverage ratio ranging from 3.00:1.00 to 4.50:1.00, (iv) a $75.0 million incremental revolving facility, which will be on the same terms as under the Credit Facility, (v) a leverage ratio covenant which comprises a maximum total funded debt to EBITDA ratio, net of $40.0 million of unrestricted cash and cash equivalents if the facility is drawn, and net of all unrestricted cash and cash equivalents if the facility is undrawn, (vi) a leverage ratio covenant test level which is currently 4.50 to 1.00 and (vii) a secured leverage covenant of 2.50 to 1.00.

In May 2023, the Credit Agreement was amended to, among other things, transition the loans under the Credit Facility to be made at the Secured Overnight Financing Rate (“SOFR”) instead of LIBOR and to allow financial reporting to be satisfied based on delivery of the consolidated financial statements of Aris Water Solutions, Inc., so long as it remains a passive holding company, instead of Solaris Midstream Holdings, LLC.

The Credit Facility provides for, at our option:

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Base rate borrowings that bear interest at the highest of (a) the prime rate, (b) the federal funds effective rate plus 0.50% and (c) Term SOFR plus 0.10%; plus a margin that ranges from 175 basis points to 275 basis points, depending upon our leverage ratio; or

ii.

SOFR borrowings that bear interest at the lesser of (i) Term SOFR plus 0.10% plus a margin that ranges from 275 basis points to 375 basis points, depending upon our leverage ratio;

In addition, the Credit Facility provides for commitment fee rates that range from 37.5 basis points to 50.0 basis points, depending upon our leverage ratio.

As of June 30, 2023, we had $150 thousand in letters of credit outstanding and $170.9 million in revolving commitments available.

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 June 30, 2023, 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.

Balance Sheet Information

The following table provides supplemental consolidated balance sheet information related to leases:


(in thousands)	Classification	June 30, 2023		December 31, 2022
Assets
Right-of-Use Assets	Consolidated Balance Sheet	$	9,165	$	9,135
Liabilities
Current Lease Liabilities	Accrued and Other Current Liabilities	$	1,185	$	1,176
Noncurrent Lease Liabilities	Other Long-Term Liabilities		8,116		7,719

Statement of Operations Information

The following table provides the components of lease cost, excluding lease cost related to short-term leases:


		Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)		2023		2022		2023		2022
Direct Operating Costs	$	310	$	226	$	603	$	446
General and Administrative		177		165		397		332
Total Lease Cost	$	487	$	391	$	1,000	$	778

Short-Term Leases

Our short-term lease cost, which consisted primarily of field equipment rentals, totaled $3.2 million and $2.0 million for the three months ended June 30, 2023 and 2022, respectively, and $7.7 million and $3.8 million for the six months ended June 30, 2023 and 2022, respectively.

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Cash Flow Information

The following table summarizes supplemental cash flow information related to leases:


	Six Months Ended June 30,
(in thousands)		2023		2022
Cash Paid for Amounts Included in Lease Liabilities	$	625	$	542
Right-of-Use Assets Obtained in Exchange for Operating Lease Liabilities, Net		1,415		(198)

Lease Terms and Discount Rates

The following table provides lease terms and discount rates related to leases:



	June 30, 2023		December 31, 2022
Weighted Average Remaining Lease Term (Years)		6.3		6.6
Weighted Average Discount Rate		4.07%		2.85%

Annual Lease Maturities

The following table provides maturities of lease liabilities at June 30, 2023:


(in thousands)
Remainder of 2023	$	735
2024		1,389
2025		1,127
2026		850
2027		1,871
Thereafter		4,742
Total Lease Payments		10,714
Less: Interest		(1,413)
Present Value of Lease Liabilities	$	9,301

Leases That Have Not Yet Commenced

We have entered into an additional operating lease for office space, which will commence during the fourth quarter of 2023. Undiscounted future lease payments totaling $10.1 million will be included in the determination of the right-of-use assets and lease liabilities upon lease commencement.

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 income (loss) in our historical financial statements does not reflect the tax expense (benefit) 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.

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Income Tax Expense (Benefit)

We recorded income tax expense of $1.6 million and $0.5 million for the three months ended June 30, 2023 and 2022, respectively, substantially all of which was deferred. We recorded income tax expense (benefit) of $2.9 million and $(0.4) million for the six months ended June 30, 2023 and 2022, respectively, substantially all of which was deferred.

Effective Tax Rate

We record our income tax expense (benefit) using an estimated annual effective tax rate (“ETR”) and recognize specific events discretely as they occur. The ETR for the six months ended June 30, 2023 and 2022 was 13.7% and 12.5%, respectively. The difference between the federal statutory rate and our estimated annual ETR is primarily due to the impact of the noncontrolling interest.

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 decreased $2.8 million during the six months ended June 30, 2023.

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. Its federal and state returns remain open to examination for tax years 2018 through 2022.

9.Stockholders’ Equity

Redemptions

During the six months ended June 30, 2023, Solaris LLC units, together with an equal number of shares of our Class B common stock, were redeemed for shares of our Class A common stock on a one-for-one basis as follows:

●

20,953 shares were redeemed on March 1, 2023; and

●

524 shares were redeemed on June 1, 2023.

During the six months ended June 30, 2022, Solaris LLC units, together with an equal number of shares of our Class B common stock, were redeemed for shares of our Class A common stock on a one-for-one basis as follows:

●

148,087 shares were redeemed on February 28, 2022; and

●

107,914 shares were redeemed on June 1, 2022.

Dividends and Distributions

On March 3, 2023 and May 8, 2023, we announced that our Board of Directors had declared quarterly dividends of $0.09 per share for the first and second quarter of 2023, respectively, on our Class A common stock. In conjunction with the dividend payments, a distribution of $0.09 per unit was paid to unit holders of

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Solaris LLC for both the first quarter and second quarter of 2023, subject to the same payment and record dates.

On August 2, 2023, we announced that our Board of Directors had declared a quarterly dividend of $0.09 per share for the third quarter of 2023 on our Class A common stock. The dividend will be paid on September 28, 2023, to holders of record of our Class A common stock as of the close of business on September 14, 2023. 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.

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.

Delivery Commitment

In 2023, we entered into an agreement with an unaffiliated water disposal company to dispose of a minimum volume of produced water over a term of seven years, for a total financial commitment of approximately $28.0 million, undiscounted. The agreement requires us to make payments for any shortfall in delivering an annual minimum volume under the commitment as well as a cumulative minimum volume over the duration of the term of the commitment. The minimum volume commitment is contingent on several performance factors to be achieved by the unaffiliated water disposal company throughout the term of the contract, which, if not achieved, would provide us with the option of cancelling the contract and discharging the remaining minimum volume commitment. We began delivering produced water under this agreement in June 2023.

Purchase Obligations

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 June 30, 2023, we had purchase obligations and commitments of approximately $39.8 million due in the next twelve months.

Environmental

We are also subject to various federal, state and local laws and regulations relating to the protection of the environment. For the three and six months ended June 30, 2023, we recognized $1.5 million and $2.9 million of expense, respectively, related to environmental matters that were recorded in direct operating cost. For the three and six months ended June 30, 2022, the expense related to environmental matters was $0.3 million and $1.0 million, respectively. We also have insurance proceeds receivable of $4.2 million at June 30, 2023, which we believe are probable to collect and are reasonably estimable. Although we believe these estimates are reasonable, actual results could differ from these estimates.

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11.Earnings Per Share

Net Income (Loss) Per Share

Basic and diluted net income (loss) per share attributable to our Class A common stock is computed by dividing net income (loss) attributable to Aris Water Solutions, Inc. 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 (“RSUs”), which receive nonforfeitable dividends. Shares issued during the period are weighted for the portion of the period in which the shares were outstanding.

The following table sets forth the computation of basic and diluted net income (loss) per share attributable to our Class A common stock:


(in thousands, except for share and per share amounts)	Three Months Ended June 30,				Six Months Ended June 30,
		2023		2022		2023		2022
Net Income (Loss) Attributable to Stockholders' Equity	$	10,431	$	4,039	$	18,139	$	(2,578)
Less: Net Income (Loss) Attributable to Noncontrolling Interest		5,733		2,645		10,063		(1,750)
Net Income (Loss) Attributable to Aris Water Solutions, Inc.		4,698		1,394		8,076		(828)
Participating Basic Earnings ⁽¹⁾		(300)		(179)		(498)		(360)
Basic Net Income (Loss) Attributable to Aris Water Solutions, Inc.	$	4,398	$	1,215	$	7,578	$	(1,188)
Reallocation of Participating Net Income (Loss)		-		-		-		-
Diluted Net Income (Loss) Attributable to Aris Water Solutions, Inc.	$	4,398	$	1,215	$	7,578	$	(1,188)

Basic Weighted Average Shares Outstanding		30,036,593		21,984,313		29,985,869		21,918,639
Dilutive Performance-Based Stock Units		-		116,793		-		-
Dilutive Weighted Average Shares Outstanding		30,036,593		22,101,106		29,985,869		21,918,639

Basic Net Income (Loss) Per Share of Class A Common Stock	$	0.15	$	0.06	$	0.25	$	(0.05)
Diluted Net Income (Loss) Per Share of Class A Common Stock	$	0.15	$	0.05	$	0.25	$	(0.05)

(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 so.

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 one-for-one basis. A total of 27,554,393 weighted average shares and 27,561,348 weighted average shares of Class B common stock outstanding for the three and six months ended June 30, 2023, respectively, were determined to be antidilutive and were excluded from the computation of diluted earnings (loss) per share of Class A common stock. In addition, all PSUs were determined to be antidilutive for each 2023 period and were excluded from the computation of diluted earnings (loss) per share for those periods.

A total of 31,532,441 weighted average shares and 31,597,946 weighted average shares of Class B common stock outstanding for the three and six months ended June 30, 2022, respectively, were determined to be antidilutive and were excluded from the computation of diluted earnings (loss) per share of Class A common stock. In addition, no PSUs were determined to be antidilutive for the three months ended June 30, 2022. All PSUs were determined to be antidilutive for the six months ended June 30, 2022 and were excluded from the computation of diluted earnings (loss) per share.

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; RSUs; and PSUs.

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Restricted Stock and Restricted Stock Units

RSU activity during the period was as follows:


	RSUs	Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2022	1,317,072	$	13.78
Granted	1,002,167		10.22
Forfeited	(151,263)		11.95
Vested	(175,717)		14.78
Outstanding at June 30, 2023	1,992,259	$	12.04

The RSUs granted during the six months ended June 30, 2023 generally vest in the following installments: (i) one-third at the first anniversary of the award date, (ii) one-third at the second anniversary of the award date, and (iii) one-third at the third anniversary of the award date. As of June 30, 2023, approximately $18.6 million of compensation cost related to unvested shares of restricted stock and RSUs remained to be recognized. The cost is expected to be recognized over a weighted-average period of 1.3 years.

Performance-Based Restricted Stock Units

PSU activity during the period was as follows:


	PSUs	Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2022	144,526	$	25.36
Granted	358,551		8.44
Forfeited	(45,363)		16.11
Outstanding at June 30, 2023	457,714	$	13.02

The PSUs granted in 2023 were granted to management under the 2021 Plan and have the following performance criteria:

●

Relative PSUs: 50% of the PSUs are based on total shareholder return relative to the total shareholder return of a predetermined group of peer companies. This relative total shareholder return is calculated at the end of the performance periods stipulated in the PSU agreement.

●

Absolute PSUs: 50% of the PSUs have a performance criteria of absolute total shareholder return calculated at the end of the performance period stipulated in the PSU agreement.

The vesting and payout of the PSUs occur when the related service condition is completed, which is approximately three years after the grant date regardless of the duration of the stipulated performance period. The PSUs can be paid out in either Class A common stock or cash, at our election. As of June 30, 2023, approximately $4.2 million of compensation cost related to unvested PSUs remained to be recognized. The cost is expected to be recognized over a weighted-average period of 2.2 years.

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 periods consistent with the remaining performance periods. The risk-free rate was based on the U.S. Treasury

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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 six months ended June 30, 2023:


	Assumptions
Risk-free Interest Rate		4.32%
Volatility Range	24.31% - 78.49%

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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 and six months ended June 30, 2023, included elsewhere in this report, as well as our 2022 Annual Report, 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.

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.

Second Quarter 2023 Results

Significant financial and operating highlights for the three months ended June 30, 2023 include:

●

Total water volumes handled or sold of 1,497 thousand barrels of water per day (“kbwpd”), an increase of 21% as compared with the second quarter of 2022

●

Recycled produced water volumes sold of 296 kbwpd, consistent with the second quarter of 2022, and groundwater volumes sold of 156 kbwpd, an increase of 50% as compared with the second quarter of 2022

●

Total revenue of $96.6 million, an increase of 27% as compared with the second quarter of 2022

●

Net income of $10.4 million, an increase of 158% as compared with the second quarter of 2022

●

Adjusted EBITDA (non-GAAP financial measure) of $42.6 million, an increase of 14% as compared with the second quarter of 2022

●

Dividend paid on our Class A common stock for the second quarter of 2023 of $0.09 per share, along with a distribution of $0.09 per unit paid to unit holders of Solaris LLC

For additional information regarding our non-GAAP financial measures, see Non-GAAP Financial Measures below.

Beneficial Reuse Strategic Agreement

In January 2023, Exxon Mobil Corporation (“ExxonMobil”) joined our strategic agreement with Chevron U.S.A. Inc. (“Chevron U.S.A.”) and ConocoPhillips to develop and pilot technologies and processes to treat produced water for potential beneficial reuse opportunities. Our goal under the strategic agreement is to develop cost effective and scalable methods of treating produced water to create a potential water source for industrial, commercial and non-consumptive agricultural purposes. Aris is leading the engineering, construction and

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execution of the testing protocols and pilot projects, while leveraging the combined technical expertise of Chevron U.S.A., ConocoPhillips and ExxonMobil. The treated water will then be reused in a variety of ongoing research projects, including non-consumptive agriculture, low emission hydrogen production and the direct air capture of atmospheric carbon dioxide. Aris, Chevron U.S.A., ConocoPhillips and ExxonMobil are working with appropriate regulators, with a goal to complete testing and performance evaluation of pilot technologies in the first half of 2024. We have incurred $0.5 million of research and development expense during the six months ended June 30, 2023, in conjunction with this alliance, and have a related receivable of $1.6 million from the other alliance members as of June 30, 2023.

General Trends and Outlook

Market Dynamics

The current conflict between Russia and Ukraine continues to have significant global economic implications and impacts on financial markets and the energy industry. The extent of these impacts will depend on the length of the conflict and whether the conflict spreads beyond Ukraine’s borders.

In addition, commodity prices are being impacted by multiple factors such as supply disruptions and current recessionary concerns. During the three months ended June 30, 2023, the average West Texas Intermediate (“WTI”) crude oil spot price was $73.54 as compared with $108.83 for the three months ended June 30, 2022. During the six months ended June 30, 2023, the average WTI spot price was $74.73 as compared with $102.01 for the six months ended June 30, 2022.

Commodity prices will also continue to depend on the responses of the Organization of Petroleum Exporting Countries and other oil exporting nations (“OPEC+”) to supply disruptions and higher prices. On April 2, 2023, OPEC+ announced further oil output reductions.

We believe there are several industry trends that continue to provide meaningful support for future growth. Our key customers’ capital allocation to the Permian Basin and New Mexico in particular remains consistent and significant, including on acreage where the water sourcing and production is dedicated to us. Permian Basin oil and associated water production growth continues to outpace production growth in other parts of the United States.

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.

Cost Inflation

During 2021, the U.S. began experiencing increased wage and price inflation, as evidenced by increases in the Consumer Price Index (“CPI”). Although the current rate of consumer inflation has eased, core inflation remains high. 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.

During the first half of 2023, as compared with the first half of 2022, our revenue growth was partially offset by inflationary pressure on costs. 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 remain significantly higher than our contractually allowed fee increases, we could continue to experience negative impacts to our operating margins.

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Seismicity

We operate wells located in Seismic Response Areas (“SRA”) in New Mexico and Texas, one of which is partially curtailed. Due to the integrated nature of our pipeline network and our system-wide redundancy, we have been able to adapt to regulator responses to seismic activity, while continuing to provide service to our customers without significant disruption in our operations. In addition, although we cannot anticipate with any certainty future regulatory actions and the effect such actions could have on our business, our compliance with state regulator seismic response actions to date has not resulted in any significant volumetric, revenue or cash flow decreases.

Results of Operations

Results of operations were as follows for the three-month periods ended June 30, 2023 and 2022:


(in thousands)	Three Months Ended June 30,
	2023		2022		2023 vs. 2022
Revenue
Produced Water Handling	$	49,716	$	35,525	$	14,191	40%
Produced Water Handling—Affiliates		23,181		23,207		(26)	0%
Water Solutions		14,928		14,708		220	1%
Water Solutions—Affiliates		8,163		2,828		5,335	189%
Other Revenue		645		118		527	447%
Total Revenue		96,633		76,386		20,247	27%
Cost of Revenue
Direct Operating Costs		44,446		30,781		13,665	44%
Depreciation, Amortization and Accretion		19,086		16,203		2,883	18%
Total Cost of Revenue		63,532		46,984		16,548	35%
Operating Costs and Expenses
Abandoned Well Costs		—		5,415		(5,415)	N/M
General and Administrative		12,682		11,567		1,115	10%
Research and Development Expense		650		81		569	702%
Other Operating (Income) Expense		(192)		513		(705)	(137)%
Total Operating Expenses		13,140		17,576		(4,436)	(25)%
Operating Income		19,961		11,826		8,135	69%
Interest Expense, Net		7,971		7,315		656	9%
Income Before Income Taxes		11,990		4,511		7,479	166%
Income Tax Expense		1,559		472		1,087	230%
Net Income	$	10,431	$	4,039	$	6,392	158%

N/M Not Meaningful

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Results of operations were as follows for the six-month periods ended June 30, 2023 and 2022:


(in thousands)	Six Months Ended June 30,
	2023		2022		2023 vs. 2022
Revenue
Produced Water Handling	$	95,816	$	70,625	$	25,191	36%
Produced Water Handling—Affiliate		46,321		44,288		2,033	5%
Water Solutions		28,810		26,352		2,458	9%
Water Solutions—Affiliate		16,147		5,972		10,175	170%
Other Revenue		1,110		118		992	841%
Total Revenue		188,204		147,355		40,849	28%
Cost of Revenue
Direct Operating Costs		88,291		57,452		30,839	54%
Depreciation, Amortization and Accretion		37,692		32,782		4,910	15%
Total Cost of Revenue		125,983		90,234		35,749	40%
Operating Costs and Expenses
Abandoned Well Costs		—		5,415		(5,415)	N/M
General and Administrative		24,481		22,278		2,203	10%
Impairment of Long-Lived Assets		—		15,597		(15,597)	N/M
Research and Development Expense		1,058		100		958	958%
Other Operating Expense		25		1,577		(1,552)	(98)%
Total Operating Expenses		25,564		44,967		(19,403)	(43)%
Operating Income		36,657		12,154		24,503	202%
Interest Expense, Net		15,632		15,100		532	4%
Income (Loss) Before Income Taxes		21,025		(2,946)		23,971	(814)%
Income Tax Expense (Benefit)		2,886		(368)		3,254	(884)%
Net Income (Loss)	$	18,139	$	(2,578)	$	20,717	(804)%

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.

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Our volumes were as follows for the three-month periods ended June 30, 2023 and 2022:


	Three Months Ended
	June 30,
	2023		2022			2023 vs. 2022
(thousands of barrels of water per day)
Produced Water Handling Volumes		1,045		841		204	24%
Water Solutions Volumes
Recycled Produced Water Volumes Sold		296		297		(1)	0%
Groundwater Volumes Sold		156		104		52	50%
Total Water Solutions Volumes		452		401		51	13%
Total Volumes		1,497		1,242		255	21%

Per Barrel Operating Metrics ⁽¹⁾
Produced Water Handling Revenue/Barrel	$	0.77	$	0.77	$	-	0%
Water Solutions Revenue/Barrel	$	0.56	$	0.48	$	0.08	17%
Revenue/Barrel of Total Volumes	$	0.70	$	0.67	$	0.03	4%
Direct Operating Costs/Barrel	$	0.33	$	0.27	$	0.06	22%
Gross Margin/Barrel	$	0.24	$	0.26	$	(0.02)	(8)%
Adjusted Operating Margin/Barrel ⁽²⁾	$	0.38	$	0.41	$	(0.03)	(7)%

(1)	Per barrel operating metrics are calculated independently. Therefore, the sum of individual amounts may not equal the total presented.

(2)	See Non-GAAP Financial Measures below.

Our volumes were as follows for the six-month periods ended June 30, 2023 and 2022:


	Six Months Ended
	June 30,
	2023		2022			2023 vs. 2022
(thousands of barrels of water per day)
Produced Water Handling Volumes		1,008		822		186	23%
Water Solutions Volumes
Recycled Produced Water Volumes Sold		277		285		(8)	(3)%
Groundwater Volumes Sold		151		85		66	78%
Groundwater Volumes Transferred⁽¹⁾		—		12		(12)	N/M
Total Water Solutions Volumes		428		382		46	12%
Total Water Volumes		1,436		1,204		232	19%

Per Barrel Operating Metrics ⁽²⁾
Produced Water Handling Revenue/Barrel	$	0.78	$	0.77	$	0.01	1%
Water Solutions Revenue/Barrel	$	0.58	$	0.47	$	0.11	23%
Revenue/Barrel of Total Volumes	$	0.72	$	0.68	$	0.04	6%
Direct Operating Costs/Barrel	$	0.34	$	0.26	$	0.08	31%
Gross Margin/Barrel	$	0.24	$	0.26	$	(0.02)	(8)%
Adjusted Operating Margin/Barrel ⁽³⁾	$	0.38	$	0.41	$	(0.03)	(7)%

(1)	The groundwater transfer assets were sold in the first quarter of 2022.

(2)	Per barrel operating metrics are calculated independently. Therefore, the sum of individual amounts may not equal the total presented.

(3)	See Non-GAAP Financial Measures below.

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Our skim oil volumes recovered were as follows for the three-month periods ended June 30, 2023 and 2022:


	Three Months Ended
	June 30,
	2023		2022			2023 vs. 2022
Skim Oil Volumes (bpd)		1,042		668		374	56%
Skim Oil Volumes/Produced Water Handling Volumes		0.10%		0.08%		0.02%	25%
Skim Oil Sales Revenue/Barrel of Skim Oil ⁽¹⁾	$	65.44	$	99.23	$	(33.79)	(34)%

(1)	Skim oil price received from the purchaser is net of certain customary deductions.

Our skim oil volumes recovered were as follows for the six-month periods ended June 30, 2023 and 2022:


	Six Months Ended
	June 30,
	2023		2022			2023 vs. 2022
Skim Oil Volumes (bpd)		1,194		750		444	59%
Skim Oil Volumes/Produced Water Handling Volumes		0.12%		0.09%		0.03%	33%
Skim Oil Sales Revenue/Barrel of Skim Oil ⁽¹⁾	$	67.18	$	90.72	$	(23.54)	(26)%

(1)	Skim oil price received from the purchaser is net of certain customary deductions.

Revenues

An analysis of revenues is as follows:

Produced Water Handling Revenues

Total produced water handling revenues and produced water handling revenues per barrel were as follows for the periods indicated:


		Three Months Ended			Six Months Ended
(in thousands, except per unit amounts)		June 30,			June 30,
		2023		2022		2023		2022
Produced Water Handling Fees	$	66,690	$	52,703	$	127,614	$	102,597
Skim Oil Sales Revenue		6,207		6,029		14,523		12,316
Total Produced Water Handling Revenue	$	72,897	$	58,732	$	142,137	$	114,913

Produced Water Handling Fees/Bbl	$	0.70	$	0.69	$	0.70	$	0.69
Skim Oil Sales Revenue/Bbl		0.07		0.08		0.08		0.08
Total Produced Water Handling Revenue/Bbl	$	0.77	$	0.77	$	0.78	$	0.77

Produced water handling revenues for the three months ended June 30, 2023 as compared with the three months ended June 30, 2022 increased primarily due to:

●

an increase of $13.0 million due to a 204 kbwpd volume increase driven by activity associated with our long-term acreage dedication agreements.

Produced water handling revenues for the six months ended June 30, 2023 as compared with the six months ended June 30, 2022 increased primarily due to:

●

an increase of $23.5 million due to a 186 kbwpd volume increase driven by activity associated with our long-term acreage dedication agreements, and

●

an increase of $2.2 million in skim oil sales revenue due to increased volumes on the system and higher skim oil recoveries per barrel of produced water received, offset by a reduction in average crude oil prices.

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Water Solutions Revenue

Water solutions revenues for the three months ended June 30, 2023 as compared with the three months ended June 30, 2022 increased primarily due to:

●

an increase of $2.6 million primarily due to a 52 kbwpd volume increase in groundwater volumes sold, and

●

an increase of $2.9 million related to pricing primarily due to groundwater volumes sold constituting a larger portion of overall water solutions volumes.

Water solutions revenues for the six months ended June 30, 2023 as compared with the six months ended June 30, 2022 increased primarily due to:

●

an increase of $4.8 million primarily due to a 66 kbwpd volume increase in groundwater volumes sold, offset by a 12 kbwpd decrease in groundwater volumes transferred, and

●

an increase of $7.8 million related to pricing primarily due to groundwater volumes sold constituting a larger portion of overall water solutions volumes.

Expenses

An analysis of expenses is as follows:

Direct Operating Costs

Direct operating costs for the three months ended June 30, 2023 as compared with the three months ended June 30, 2022 increased primarily due to higher volumes for both produced water handling and water solutions, as well as higher landowner royalties paid on increased skim oil revenue, cost inflation in labor and fuel expenses, and increased rental equipment associated with temporary power generation at recycling facilities. On a per barrel basis, direct operating costs increased for the three months ended June 30, 2023 as compared with the three months ended June 30, 2022 due to higher landowner royalties paid on increased skim oil revenue, cost inflation in labor and fuel expenses, and increased rental equipment associated with temporary power generation at recycling facilities.

Direct operating costs for the six months ended June 30, 2023 as compared with the six months ended June 30, 2022 increased due to higher volumes for both produced water handling and water solutions, as well as higher landowner royalties paid on increased skim oil revenue, cost inflation in labor and fuel expenses, increased filtration and waste disposal costs at recycling facilities and increased rental equipment associated with temporary power generation at recycling facilities. On a per barrel basis, direct operating costs increased for the six months ended June 30, 2023 as compared with the six months ended June 30, 2022 due to higher landowner royalties paid on increased skim oil revenue, cost inflation in labor and fuel expenses, and increased filtration and waste disposal costs at recycling facilities.

Depreciation, Amortization and Accretion Expenses

Depreciation, amortization and accretion expense for the three and six months ended June 30, 2023 as compared with the three and six months ended June 30, 2022 increased primarily due to higher depreciation expense related to new assets placed in service.

Abandoned Well Costs

See Item 1. Financial Statements ─ Note 4. Property, Plant and Equipment.

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General and Administrative Expenses

General and administrative (“G&A”) expenses for the three and six months ended June 30, 2023 as compared with the three and six months ended June 30, 2022 increased primarily due to increased compensation and benefits expenses associated with higher headcount and higher professional fees associated with an enterprise resource platform implementation and contracted accounting and tax services. G&A expenses for the three and six months ended June 30, 2023 included stock-based compensation expense of $2.9 million and $5.2 million, respectively. G&A expenses for the three and six months ended June 30, 2022 included stock-based compensation expense of $3.0 million and $5.2 million, respectively.

Impairment Expense

See Item 1. Financial Statements ─ Note 4. Property, Plant and Equipment.

Research and Development Expense

Research and development expenses for the three and six months ended June 30, 2023 as compared with the three and six months ended June 30, 2022 increased primarily due to our Beneficial Reuse Strategic Agreement entered into in the fourth quarter of 2022, as described above.

Other Operating Expense

Other operating expense includes net gains and losses on asset sales, transaction costs and other expenses. See Item 1. Financial Statements ─ Note 3. Additional Financial Statement Information.

Interest Expense, Net

Components of interest expense, net are as follows for the periods indicated:


	Three Months Ended				Six Months Ended
(in thousands)	June 30,				June 30,
	2023		2022			2023		2022
Interest on Debt Instruments	$	8,543	$	7,794	$	17,104	$	15,606
Amortization of Debt Issuance Costs		608		610		1,218		1,220
Total Interest Expense		9,151		8,404		18,322		16,826
Less: Amounts Capitalized		(1,180)		(1,089)		(2,690)		(1,726)
Interest Expense, Net	$	7,971	$	7,315	$	15,632	$	15,100

Interest expense, net for the three months ended June 30, 2023 as compared with the three months ended June 30, 2022 increased due to Credit Facility borrowings. The average outstanding debt balance for the three months ended June 30, 2023 was $447 million compared with $400 million for the three months ended June 30, 2022.

Interest expense, net for the six months ended June 30, 2023 as compared with the six months ended June 30, 2022 increased due to Credit Facility borrowings and was partially offset by an increase in capitalized interest related primarily to the increase in assets under construction. The average outstanding debt balance for the six months ended June 30, 2023 was $446 million compared with $400 million for the six months ended June 30, 2022.

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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 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; transaction costs; research and development expense; loss on debt modification; stock-based compensation expense; and other non-recurring or unusual expenses or charges (such as temporary power costs, litigation expenses and severance costs), less any gains on sale of assets. For the fourth quarter of 2022, we began including research and development expense in our calculation of Adjusted EBITDA due to our new beneficial reuse pilot projects, which are discreet, non-revenue initiatives.

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. 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, 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 income (loss) as determined in accordance with GAAP to Adjusted EBITDA and Adjusted Operating Margin for the periods indicated:


	Three Months Ended				Six Months Ended
(in thousands)	June 30,				June 30,
	2023		2022		2023		2022
Net Income (Loss)	$	10,431	$	4,039	$	18,139	$	(2,578)
Interest Expense, Net		7,971		7,315		15,632		15,100
Income Tax Expense (Benefit)		1,559		472		2,886		(368)
Depreciation, Amortization and Accretion		19,086		16,203		37,692		32,782
Abandoned Well Costs		—		5,415		—		5,415
Impairment of Long-Lived Assets		—		—		—		15,597
Stock-Based Compensation		3,117		3,202		5,585		5,539
Loss on Disposal of Asset, Net		70		24		57		578
Transaction Costs		100		425		145		933
Research and Development Expense		650		81		1,058		100
Other		(362)		64		(466)		66
Adjusted EBITDA	$	42,622	$	37,240	$	80,728	$	73,164

Total Revenue	$	96,633	$	76,386	$	188,204	$	147,355
Cost of Revenue		(63,532)		(46,984)		(125,983)		(90,234)
Gross Margin		33,101		29,402		62,221		57,121
Depreciation, Amortization and Accretion		19,086		16,203		37,692		32,782
Adjusted Operating Margin	$	52,187	$	45,605	$	99,913	$	89,903
Total Volumes (Thousands of BBLs)		136,282		113,042		260,097		218,048
Adjusted Operating Margin/BBL	$	0.38	$	0.41	$	0.38	$	0.41

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 of Directors).

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 June 30, 2023, we had a cash balance of $4.0 million and working capital, defined as current assets less current liabilities, of $16.2 million. We had $400.0 million face value of Notes outstanding and $29.0 million outstanding under our Credit Facility, with $170.9 million of availability under the Credit Facility. As of June 30, 2023, we were in compliance with all the covenants under our Credit Facility and the indenture governing the Notes. See Item 1. Financial Statements ─ Note 6. Long-Term Debt.

As of August 1, 2023, we had an outstanding balance of $44 million on our Credit Facility at a weighted average interest rate of 8.077%. The borrowings are primarily being used to fund our capital program.

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In 2023, we entered into an agreement with an unaffiliated water disposal company to dispose of a minimum volume of produced water over a term of seven years, for a total financial commitment of approximately $28.0 million, undiscounted. We began delivering produced water under this agreement in June 2023. As of June 30, 2023, we had short-term purchase obligations for products and services of approximately $39.8 million due in the next twelve months. See Item 1. Financial Statements ─ Note 10. Commitments and Contingencies.

Dividends and Distributions

Cash Flows from Operating Activities

For the six months ended June 30, 2023, net cash provided by operating activities totaled $96.5 million as compared with $37.3 million for the six months ended June 30, 2022. The net increase is primarily due to the $40.8 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 a net increase (decrease) of $30.6 million and ($21.2) million for the six months ended June 30, 2023 and 2022, respectively, associated with changes in working capital items. Changes in working capital items adjust for the timing of receipts and payment of actual cash. The increase in cash provided from changes in working capital in 2023 was primarily due to lower receivable balances associated with improved collections timing.

Cash Flows from Investing Activities

For the six months ended June 30, 2023, net cash used in investing activities totaled $76.2 million as compared with $48.3 million for the six months ended June 30, 2022. Expenditures for property, plant and equipment were higher in 2023 as compared with 2022 primarily due to increased capital activity to support our growing operations, including our management agreement with Chevron Corporation.

Cash Flows from Financing Activities

For the six months ended June 30, 2023, net cash used in financing activities consisted of $6.0 million net Credit Facility repayments, $10.7 million dividends and distributions paid and $0.6 million treasury stock repurchases related to tax withholding on stock awards that vested. For the six months ended June 30, 2022, net cash used in financing activities totaled $13.9 million which consisted of dividends and distributions paid.

Capital Requirements

We expect our capital expenditures will be between approximately $160.0 million to $170.0 million for 2023, which is based on our currently contracted customers’ latest outlooks on our dedicated acreage. Factors that could result in an increase in our capital expenditures include an increase in expected drilling activity due to the sale or exchange of dedicated acreage to customers with more active drilling practices and other changes in drilling programs. We intend to fund capital requirements through our primary sources of liquidity, which

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include cash on hand and cash flows from operations and, if needed, our borrowing capacity under the Credit Facility.

Critical Accounting Estimate ─ Goodwill

As further described in Critical Accounting Policies and Estimates – Impairment of Goodwill included in our 2022 Annual Report, we assess goodwill for impairment annually as of the fourth quarter of our fiscal year and more frequently when circumstances warrant. During the quarter ended March 31, 2023, we conducted a quantitative interim test of goodwill due to a decline in the price of our Class A common stock during the period. Based on the interim assessment, we determined no impairment was necessary as the fair value of our reporting unit exceeded its carrying value. We concluded there were no new impairment triggering events as of and for the three months ended June 30, 2023. As such, there was no goodwill impairment as of June 30, 2023.

Our impairment analysis contains inherent estimates and assumptions, many of which are outside the control of management including interest rates, cost of capital, tax rates, market multiples and credit ratings, which could positively or negatively impact the anticipated future economic and operating conditions. The assumptions and estimates used in determining fair value require considerable judgement, and these assumptions can change in future periods as a result of overall economic conditions, including the impacts of inflationary pressures, increased interest and discount rates and global supply chain constraints, among others. As a result, there can be no assurance that estimates and assumptions made for the purpose of assessing impairment will prove to be an accurate prediction of the future. Potential circumstances that could have a negative effect on the fair value of our reporting unit include, but are not limited to, lower than forecasted revenue growth rates, higher operating or capital costs, lower operating margins, changes in discount rates and changes in income tax rates. A reduction in the estimated fair value of the reporting unit could trigger an impairment in the future. We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of our goodwill. A goodwill impairment would have no effect on our liquidity or capital resources. However, it could result in a material non-cash charge and could materially adversely affect our financial results in the period recognized.

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 $1.235 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates 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. We believe that our exposures to market

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risk have not changed materially since those reported under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in our 2022 Annual Report.

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 and timing of activity 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. In addition, revenue from skim oil sales is directly exposed to fluctuations in the price of crude oil.

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. As of June 30, 2023, we had $29.0 million of outstanding borrowings under our Credit Facility at a weighted-average interest rate of 8.066%. The outstanding borrowings under our Credit Facility generally bear a rate of interest (after giving effect to the amendment to our amended and restated credit agreement discussed below) at the Secured Overnight Financing Rate (“SOFR”) plus 0.1% plus an alternative base rate spread and are therefore susceptible to interest rate fluctuations. A hypothetical one percentage point increase in interest rates on the borrowings outstanding under our Credit Facility at June 30, 2023 would increase annual interest expense by approximately $0.3 million. In anticipation of the phase-out of LIBOR as a reference rate, our amended and restated credit agreement was amended to, among other things, transition the loans under the Credit Facility to be made at Term SOFR instead of LIBOR in May 2023. We cannot predict the consequences of the replacement of LIBOR on financial markets generally or on our business, financial condition or results of operations specifically, and our transition to successor rates could cause the amount of interest payable on our long-term debt to be different or higher than expected.

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 June 30, 2023. 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 procedures as of June 30, 2023, 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 June 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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 2022 Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

Trading Arrangements for Directors and Officers

During the quarter ended June 30, 2023, no director or Section 16 officer adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S-K).

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

Second Amended and Restated Certificate of Incorporation of Aris Water Solutions, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 9, 2023, File No. 001-40955).

3.2

Amended and Restated Bylaws of Aris Water Solutions, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 filed on October 26, 2021, File No. 333-260499).

10.1†

Aris Water Solutions, Inc. Executive Severance Plan, effective as of May 12, 2023 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 16, 2023, file No. 001-40955).

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10.2†*		Form of Director Restricted Stock Unit Award Agreement.
10.3*		Limited Waiver and First Amendment to Second Amended and Restated Credit Agreement, dated as of May 16, 2023, among Solaris Midstream Holdings, LLC, the guarantors party thereto, the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent, issuing bank and lender.

31.1*		Certification of Amanda M. Brock pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Stephan E. Tompsett pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Amanda M. Brock pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Stephan E. Tompsett pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


August 3, 2023	Aris Water Solutions, Inc.

	By:	/s/ Amanda M. Brock
		Amanda M. Brock
		President and Chief Executive Officer

		/s/ Stephan E. Tompsett
		Stephan E. Tompsett R. Schroer
		Chief Financial Officer

		/s/ Jeffrey K. Hunt
		Jeffrey K. Hunt
		Chief Accounting Officer

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Aris Water Solutions (ARIS) 10-Q2023 Q2 Quarterly report

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