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Table of Contents

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 March 31, 2023

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 001-40955

Graphic

Aris Water Solutions, Inc.

(Exact name of registrant as specified in its charter)

Delaware

87-1022110

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

9811 Katy Freeway, Suite 700

Houston, Texas

77024

(Address of principal executive offices)

(Zip Code)

281-501-3070

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value per share

ARIS

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

As of May 5, 2023, the registrant had 30,073,594 shares of Class A common stock, $0.01 par value per share, and 27,554,566 shares of Class B common stock, $0.01 par value per share, outstanding.

Table of Contents

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Cautionary Note Regarding Forward Looking Statements

3

Item 1.

Financial Statements (unaudited)

5

Condensed Consolidated Balance Sheets

5

Condensed Consolidated Statements of Operations

6

Condensed Consolidated Statements of Cash Flows

7

Condensed Consolidated Statements of Stockholders’ Equity

8

Notes to Unaudited Condensed Consolidated Financial Statements

9

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

Item 4.

Controls and Procedures

32

PART II. OTHER INFORMATION

32

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

33

Signatures

35

2

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Cautionary Note Regarding Forward-Looking Statements

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

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

3

Table of Contents

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.

4

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

Aris Water Solutions, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

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

    

March 31, 

December 31,

    

2023

2022

Assets

    

    

Cash

$

25,508

$

1,122

Accounts Receivable, Net

73,732

81,683

Accounts Receivable from Affiliate

27,239

46,029

Other Receivables

4,771

4,354

Prepaids and Deposits

4,543

5,805

Total Current Assets

135,793

138,993

Fixed Assets

Property, Plant and Equipment

955,848

907,784

Accumulated Depreciation

(97,479)

(88,681)

Total Property, Plant and Equipment, Net

858,369

819,103

Intangible Assets, Net

260,394

269,845

Goodwill

34,585

34,585

Deferred Income Tax Assets, Net

29,206

30,424

Right-of-Use Assets

8,754

9,135

Other Assets

1,139

1,281

Total Assets

$

1,328,240

$

1,303,366

Liabilities and Stockholders' Equity

Accounts Payable

$

27,733

$

22,982

Payables to Affiliate

2,611

3,021

Accrued and Other Current Liabilities

75,185

65,411

Total Current Liabilities

105,529

91,414

Long-Term Debt, Net of Debt Issuance Costs

435,389

428,921

Asset Retirement Obligation

17,962

17,543

Tax Receivable Agreement Liability

98,090

97,980

Other Long-Term Liabilities

10,048

10,421

Total Liabilities

667,018

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 March 31, 2023 and December 31, 2022

Class A Common Stock $0.01 par value, 600,000,000 authorized, 30,312,649 issued and 30,073,594 outstanding as of March 31, 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, 27,554,566 issued and outstanding as of March 31, 2023; 27,575,519 issued and outstanding as of December 31, 2022

276

276

Treasury Stock (at Cost), 239,055 shares as of March 31, 2023; 196,762 shares as of December 31, 2022

(3,490)

(2,891)

Additional Paid-in-Capital

322,167

319,545

Accumulated Deficit

(7,170)

(7,722)

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

312,085

309,508

Noncontrolling Interest

349,137

347,579

Total Stockholders' Equity

661,222

657,087

Total Liabilities and Stockholders' Equity

$

1,328,240

$

1,303,366

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

5

Table of Contents

Aris Water Solutions, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

Three Months Ended

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

March 31, 

2023

    

2022

Revenue

Produced Water Handling

$

46,100

$

35,100

Produced Water Handling — Affiliate

23,140

21,081

Water Solutions

13,882

11,644

Water Solutions — Affiliate

7,984

3,144

Other Revenue

465

Total Revenue

91,571

70,969

Cost of Revenue

Direct Operating Costs

43,845

26,671

Depreciation, Amortization and Accretion

18,606

16,579

Total Cost of Revenue

62,451

43,250

Operating Costs and Expenses

General and Administrative

11,799

10,711

Impairment of Long-Lived Assets

15,597

Research and Development Expense

408

19

Other Operating Expense

217

1,064

Total Operating Expenses

12,424

27,391

Operating Income

16,696

328

Other Expense

Interest Expense, Net

7,661

7,785

Income (Loss) Before Income Taxes

9,035

(7,457)

Income Tax Expense (Benefit)

1,327

(840)

Net Income (Loss)

7,708

(6,617)

Net Income (Loss) Attributable to Noncontrolling Interest

4,330

(4,395)

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

$

3,378

$

(2,222)

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

Basic

$

0.11

$

(0.11)

Diluted

$

0.11

$

(0.11)

Weighted Average Shares of Class A Common Stock Outstanding

Basic

29,935,145

21,852,966

Diluted

29,935,145

21,852,966

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

6

Table of Contents

Aris Water Solutions, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

Three Months Ended March 31, 

    

2023

    

2022

Cash Flow from Operating Activities

Net Income (Loss)

$

7,708

$

(6,617)

Adjustments to reconcile Net Income (Loss) to Net Cash provided by Operating Activities:

Deferred Income Tax Expense (Benefit)

1,300

(840)

Depreciation, Amortization and Accretion

18,606

16,579

Stock-Based Compensation

2,468

2,337

Impairment of Long-Lived Assets

15,597

(Gain) Loss on Disposal of Asset, Net

(13)

554

Amortization of Debt Issuance Costs, Net

508

565

Other

180

205

Changes in Operating Assets and Liabilities:

Accounts Receivable

7,951

(7,996)

Accounts Receivable from Affiliate

18,790

608

Other Receivables

(332)

795

Prepaids and Deposits

1,262

852

Accounts Payable

1,298

1,026

Payables to Affiliate

(410)

241

Accrued Liabilities and Other

357

2,484

Net Cash Provided by Operating Activities

59,673

26,390

Cash Flow from Investing Activities

Property, Plant and Equipment Expenditures

(35,315)

(9,810)

Net Cash Used in Investing Activities

(35,315)

(9,810)

Cash Flow from Financing Activities

Dividends and Distributions Paid

(5,373)

(8,856)

Repurchase of Shares

(599)

Repayment of Credit Facility

(9,000)

Proceeds from Credit Facility

15,000

Net Cash Provided by (Used In) Financing Activities

28

(8,856)

Net Increase in Cash

24,386

7,724

Cash, Beginning of Period

1,122

60,055

Cash, End of Period

$

25,508

$

67,779

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

7

Table of Contents

Aris Water Solutions, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

Three Months Ended March 31, 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)

-

-

-

-

-

-

-

(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

Three Months Ended March 31, 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)

-

-

-

-

-

-

-

(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

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 March 31, 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 three months ended March 31, 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. We conducted our annual goodwill impairment test during the fourth quarter of the year ended December 31, 2022 on a qualitative basis and determined that no adjustment to the carrying value of goodwill was necessary because the fair value of our reporting unit exceeded its carrying value.

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%.

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)

March 31, 2023

December 31, 2022

Carrying

Fair

Carrying

Fair

    

Amount

    

Value

    

Amount

    

Value

Senior Sustainability-Linked Notes

$

400,000

$

384,716

$

400,000

$

398,828

Credit Facility

$

41,000

$

41,000

$

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 $106.3 million and $96.8 million at March 31, 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 March 31, 2023 and December 31, 2022, we had accounts receivable from ConocoPhillips of $27.2 million and $46.0 million, respectively, that were recorded in accounts receivable from affiliate and we had payables to ConocoPhillips of $2.6 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

March 31, 

2023

    

2022

Revenues from ConocoPhillips

$

31,124

$

24,225

Operating Expenses Reimbursed to ConocoPhillips

58

385

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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. We are continuing to evaluate the effect that this guidance will have on our financial position, results of operations and cash flows.

3.Additional Financial Statement Information

Balance Sheet

Other balance sheet information is as follows:

(in thousands)

    

March 31, 

December 31,

    

2023

2022

Other Receivables

Insurance and Third Party Receivables for Remediation Expenses

$

3,919

$

3,600

Reimbursable Projects and Other

852

754

Total Other Receivables

$

4,771

$

4,354

Prepaids and Deposits

Prepaid Insurance and Other

$

4,499

$

5,744

Deposits

44

61

Total Prepaids and Deposits

$

4,543

$

5,805

Accrued and Other Current Liabilities

Accrued Operating Expense

$

24,546

$

28,877

Accrued Capital Costs

25,366

16,161

Accrued Interest

15,951

8,262

Accrued Compensation

3,272

4,809

Lease Liabilities

1,204

1,176

Asset Retirement Obligation

1,203

2,242

Other

3,643

3,884

Total Accrued and Other Current Liabilities

$

75,185

$

65,411

Other Long-Term Liabilities

Noncurrent Lease Liabilities

$

7,489

$

7,719

Contingent Consideration Liability

2,559

2,702

Total Other Long-Term Liabilities

$

10,048

$

10,421

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Statement of Operations

Other statement of operations information is as follows:

(in thousands)

Three Months Ended

March 31, 

2023

    

2022

Depreciation, Amortization and Accretion Expense

Depreciation - Property, Plant and Equipment

$

8,862

$

7,177

Amortization - Intangible Assets

9,452

9,184

Accretion of Asset Retirement Obligations

292

218

Total Depreciation, Amortization and Accretion Expense

$

18,606

$

16,579

Other Operating Expense

(Gain) Loss on Asset Disposal, Net

$

(13)

$

554

Transaction Costs

45

508

Other

185

2

Total Other Operating Expense

$

217

$

1,064

Interest Expense

Interest on Debt Instruments

$

8,561

$

7,812

Amortization of Debt Issuance Costs

610

610

Total Interest Expense

9,171

8,422

Less: Amounts Capitalized

(1,510)

(637)

Interest Expense, Net

$

7,661

$

7,785

4.Property, Plant and Equipment

Property, plant and equipment (“PP&E”) is stated at cost, less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful service life of the asset.

PP&E consists of the following:

(in thousands)

    

March 31, 

December 31,

    

2023

2022

Wells, Facilities, Water Ponds, and Related Equipment

$

479,983

$

437,894

Pipelines

377,368

363,577

Land

463

463

Vehicles, Equipment, Computers and Office Furniture

20,841

20,219

Assets Subject to Depreciation

878,655

822,153

Projects and Construction in Progress

77,193

85,631

Total Property, Plant and Equipment

955,848

907,784

Accumulated Depreciation

(97,479)

(88,681)

Total Property, Plant and Equipment, Net

$

858,369

$

819,103

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Accrued PP&E additions totaled $39.1 million and $26.4 million at March 31, 2023 and December 31, 2022, respectively.

Asset Exchanges

During the three months ended March 31, 2022, we completed multiple nonmonetary transactions. The transactions included exchanges of wells, facilities, permits and other assets. The total net book value of the 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.

Asset Impairment

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.

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 March 31, 2023.

The TRA liability totaled $98.1 million at March 31, 2023. The liability increased during the three months ended March 31, 2023 due to the redemption of Class B shares to Class A shares. See Note 9. Stockholders’ Equity.

As of March 31, 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 $198.1 million. If we experience a change of control (as defined under the TRA, which includes certain mergers, asset sales and other forms of business 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 March 31, 2023, we estimated the liability associated with this lump-sum payment (or “early termination payment”) would be approximately $131.5 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.

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6.Long-Term Debt

Our long-term debt consists of the following:

(in thousands)

    

March 31, 

December 31,

    

2023

2022

7.625% Senior Sustainability-Linked Notes

$

400,000

$

400,000

Credit Facility (1)

41,000

35,000

Total Long-Term Debt

441,000

435,000

Less: Unamortized Debt Issuance Costs

(5,611)

(6,079)

Total Long-Term Debt, Net of Debt Issuance Costs

$

435,389

$

428,921

(1)Credit Facility borrowings bore weighted average interest rates of 7.543% and 6.967% at March 31, 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. In addition, on or before April 1, 2023, we may redeem up to 40% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 107.625% of the principal amount of the Notes, plus accrued interest. At any time prior to April 1, 2023, we may also redeem the Notes, in whole or in part, at a price equal to 100% of the principal amount of the Notes plus a “make-whole” premium. 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 ending 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 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.

The Credit Facility provides for, at our option:

i.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) LIBOR plus 1%; plus a margin that ranges from 175 basis points to 275 basis points, depending upon our leverage ratio; or
ii.Eurodollar borrowings that bear interest at the lesser of (i) LIBOR plus a margin that ranges from 275 basis points to 375 basis points, depending upon our leverage ratio;

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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 March 31, 2023, we had $150 thousand in letters of credit outstanding and $158.85 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 March 31, 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

March 31, 2023

    

December 31, 2022

Assets

Right-of-Use Assets

Consolidated Balance Sheet

$

8,754

$

9,135

Liabilities

Current Lease Liabilities

Accrued and Other Current Liabilities

$

1,204

$

1,176

Noncurrent Lease Liabilities

Other Long-Term Liabilities

7,489

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 March 31, 

(in thousands)

2023

    

2022

Direct Operating Costs

$

293

$

220

General and Administrative

220

167

Total Lease Cost

$

513

$

387

Short-Term Leases

Our short-term lease cost, which consisted primarily of field equipment rentals, totaled $4.5 million and $1.8 million for the three months ended March 31, 2023 and 2022, respectively.

Cash Flow Information

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

Three Months Ended March 31, 

(in thousands)

2023

    

2022

Cash Paid for Amounts Included in Lease Liabilities

$

334

$

272

Right-of-Use Assets Obtained in Exchange for Operating Lease Liabilities, Net

71

(613)

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Lease Terms and Discount Rates

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

    

March 31, 2023

December 31, 2022

Weighted Average Remaining Lease Term (Years)

6.4

6.6

Weighted Average Discount Rate

2.85%

2.85%

Annual Lease Maturities

The following table provides maturities of lease liabilities at March 31, 2023:

(in thousands)

    

Remainder of 2023

$

1,016

2024

1,217

2025

952

2026

671

2027

1,597

Thereafter

4,250

Total Lease Payments

9,703

Less: Interest

(1,010)

Present Value of Lease Liabilities

$

8,693

Leases That Have Not Yet Commenced

We have entered into additional operating leases for office space and anticipate that the leases will commence during the remainder of 2023. Undiscounted future lease payments totaling $11.2 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.

Income Tax Expense (Benefit)

We recorded income tax expense (benefit) of $1.3 million and $(0.8) million for the three months ended March 31, 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 three months ended March 31, 2023 and 2022 was 14.7% and 11.3%, respectively. The difference between the federal statutory rate and our estimated annual ETR is due primarily to the impact of the noncontrolling interest.

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Table of Contents

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.

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 three months ended March 31, 2023 and 2022, 20,953 and 148,087, respectively, 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.

Dividends and Distributions

On March 3, 2023, we announced that our Board of Directors had declared a dividend on our Class A common stock for the first quarter of 2023 of $0.09 per share, which was paid on March 29, 2023 to holders of record of our Class A common stock as of the close of business on March 17, 2023. In conjunction with the dividend payment, a distribution of $0.09 per unit was paid to unit holders of Solaris LLC, subject to the same payment and record dates.

On May 8, 2023, we announced that our Board of Directors had declared a quarterly dividend of $0.09 per share for the second quarter of 2023 on our Class A common stock. The dividend will be paid on June 29, 2023, to holders of record of our Class A common stock as of the close of business on June 16, 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. We expect to begin delivering produced water during the during the later part of 2023, and the agreement requires us to make payments for any shortfall in delivering an annual minimum volume under 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.

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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 March 31, 2023, we have purchase obligations and commitments of approximately $40.8 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 months ended March 31, 2023 and 2022, we recognized $1.4 million and $0.7 million of expense, respectively, related to environmental matters that were recorded in direct operating cost. We also have insurance proceeds receivable of $3.9 million at March 31, 2023 that we believe are probable to collect and are reasonably estimable. Although we believe these estimates are reasonable, actual results could differ from these estimates.

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 March 31, 

2023

2022

Net Income (Loss) Attributable to Stockholders' Equity

$

7,708

$

(6,617)

Less: Net Income (Loss) Attributable to Noncontrolling Interest

4,330

(4,395)

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

3,378

(2,222)

Participating Basic Earnings (1)

(209)

(181)

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

$

3,169

$

(2,403)

Reallocation of Participating Net Income (Loss)

-

-

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

$

3,169

$

(2,403)

Basic Weighted Average Shares Outstanding

29,935,145

21,852,966

Dilutive Performance-Based Stock Units

-

-

Dilutive Weighted Average Shares Outstanding

29,935,145

21,852,966

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

$

0.11

$

(0.11)

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

$

0.11

$

(0.11)

(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

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27,568,302 weighted average shares and 31,568,017 weighted average shares of Class B common stock outstanding for the three months ended March 31, 2023 and 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, all PSUs were determined to be antidilutive for each period and were excluded from the computation of diluted earnings (loss) per share for those periods.

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.

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

980,805

10.24

Forfeited

(34,378)

12.67

Vested