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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, 2024

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.)

9651 Katy Freeway, Suite 400

Houston, Texas

77024

(Address of principal executive offices)

(Zip Code)

(832) 304-7003

(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 6, 2024, the registrant had 30,547,736 shares of Class A common stock, $0.01 par value per share, and 27,543,565 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

32

Item 4.

Controls and Procedures

33

PART II. OTHER INFORMATION

33

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 3.

Defaults upon Senior Securities

34

Item 4.

Mine Safety Disclosures

34

Item 5.

Other Information

34

Item 6.

Exhibits

34

Signatures

36

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, 2023 (our “2023 Annual Report”) and found elsewhere in this Quarterly Report, including, but not limited to, the following:

the impact of the ongoing Russia-Ukraine and Middle Eastern conflicts on the global economy, including the impact on financial markets and the energy industry;
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 reliance on a limited number of customers and a particular region for substantially all of our revenues;
the impact of competition on our operations, including our ability to renew or replace expiring contracts on acceptable terms;
the degree to which our E&P customers may elect to operate their water-management services in-house rather than outsource these services to companies like us;
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;
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

3

Table of Contents

pricing, taxation of emissions, seismic activity, drilling and right-of-way access on governmental lands and various other matters;
delays or restrictions in obtaining, utilizing or maintaining permits and/or rights-of-way by us or our customers;
advances in technologies or practices that reduce the amount of water used or produced in the oil and gas production process, thereby reducing demand for our services;
changes in global political or economic conditions, both generally, and in the specific markets we serve, such as economic slowdown or recession, or uncertainty regarding the timing, pace and extent of an economic recovery;
adverse results from litigation and the use of financial resources to defend ourselves;
physical, electronic and cybersecurity breaches; and
the other risks described in our 2023 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 2023 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,

    

2024

2023

Assets

    

    

Cash

$

20,654

$

5,063

Accounts Receivable, Net

55,426

59,393

Accounts Receivable from Affiliate

25,669

22,963

Other Receivables

11,084

12,767

Prepaids and Deposits

6,350

8,364

Total Current Assets

119,183

108,550

Fixed Assets

Property, Plant and Equipment

1,079,012

1,041,703

Accumulated Depreciation

(131,121)

(121,989)

Total Property, Plant and Equipment, Net

947,891

919,714

Intangible Assets, Net

223,013

232,277

Goodwill

34,585

34,585

Deferred Income Tax Assets, Net

20,729

22,634

Right-of-Use Assets

16,454

16,726

Other Assets

5,740

5,995

Total Assets

$

1,367,595

$

1,340,481

Liabilities and Stockholders' Equity

Accounts Payable

$

37,814

$

25,925

Payables to Affiliate

695

894

Insurance Premium Financing Liability

3,676

5,463

Accrued and Other Current Liabilities

66,903

64,416

Total Current Liabilities

109,088

96,698

Long-Term Debt, Net of Debt Issuance Costs

422,259

421,792

Asset Retirement Obligations

20,149

19,030

Tax Receivable Agreement Liability

98,274

98,274

Other Long-Term Liabilities

16,423

16,794

Total Liabilities

666,193

652,588

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, 2024 and December 31, 2023

Class A Common Stock $0.01 par value, 600,000,000 authorized, 31,097,976 issued and 30,547,736 outstanding as of March 31, 2024; 30,669,932 issued and 30,251,613 outstanding as of December 31, 2023

310

306

Class B Common Stock $0.01 par value, 180,000,000 authorized, 27,543,565 issued and outstanding as of March 31, 2024 and December 31, 2023

275

275

Treasury Stock (at Cost), 550,240 shares as of March 31, 2024; 418,319 shares as of December 31, 2023

(6,714)

(5,133)

Additional Paid-in-Capital

333,252

328,543

Retained Earnings (Accumulated Deficit)

4,652

(87)

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

331,775

323,904

Noncontrolling Interest

369,627

363,989

Total Stockholders' Equity

701,402

687,893

Total Liabilities and Stockholders' Equity

$

1,367,595

$

1,340,481

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, 

    

2024

    

2023

Revenue

Produced Water Handling

$

59,106

$

46,100

Produced Water Handling — Affiliate

26,827

23,140

Water Solutions

11,702

13,882

Water Solutions — Affiliate

5,242

7,984

Other Revenue

529

465

Total Revenue

103,406

91,571

Cost of Revenue

Direct Operating Costs

39,646

43,845

Depreciation, Amortization and Accretion

19,421

18,606

Total Cost of Revenue

59,067

62,451

Operating Costs and Expenses

Abandoned Well Costs

335

General and Administrative

14,501

11,799

Research and Development Expense

1,065

408

Other Operating Expense, Net

580

217

Total Operating Expenses

16,481

12,424

Operating Income

27,858

16,696

Other Expense

Interest Expense, Net

8,438

7,661

Other

1

Total Other Expense

8,439

7,661

Income Before Income Taxes

19,419

9,035

Income Tax Expense

2,589

1,327

Net Income

16,830

7,708

Net Income Attributable to Noncontrolling Interest

9,207

4,330

Net Income Attributable to Aris Water Solutions, Inc.

$

7,623

$

3,378

Net Income Per Share of Class A Common Stock

Basic

$

0.23

$

0.11

Diluted

$

0.23

$

0.11

Weighted Average Shares of Class A Common Stock Outstanding

Basic

30,354,014

29,935,145

Diluted

30,354,014

29,935,145

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, 

    

2024

    

2023

Cash Flow from Operating Activities

Net Income

$

16,830

$

7,708

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

Deferred Income Tax Expense

2,129

1,300

Depreciation, Amortization and Accretion

19,421

18,606

Stock-Based Compensation

3,521

2,468

Abandoned Well Costs

335

Gain on Disposal of Assets, Net

(54)

(13)

Abandoned Projects

729

Amortization of Debt Issuance Costs, Net

716

508

Other

323

180

Changes in Operating Assets and Liabilities:

Accounts Receivable

3,371

7,951

Accounts Receivable from Affiliate

(2,706)

18,790

Other Receivables

1,683

(332)

Prepaids and Deposits

2,014

1,262

Accounts Payable

3,382

1,298

Payables to Affiliate

(199)

(410)

Accrued Liabilities and Other

(7,686)

357

Net Cash Provided by Operating Activities

43,809

59,673

Cash Flow from Investing Activities

Property, Plant and Equipment Expenditures

(19,582)

(35,315)

Proceeds from the Sale of Property, Plant and Equipment

1

Net Cash Used in Investing Activities

(19,581)

(35,315)

Cash Flow from Financing Activities

Dividends and Distributions Paid

(5,449)

(5,373)

Repurchase of Shares

(1,310)

(599)

Repayment of Credit Facility

(15,000)

(9,000)

Proceeds from Credit Facility

15,000

15,000

Payment of Insurance Premium Financing

(1,878)

Net Cash (Used in) Provided by Financing Activities

(8,637)

28

Net Increase in Cash

15,591

24,386

Cash, Beginning of Period

5,063

1,122

Cash, End of Period

$

20,654

$

25,508

Supplementary Cash Flow Data

    

Cash Paid for Interest

$

986

$

633

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 Months Ended March 31, 2024

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

Class A

Class B

Additional

Retained Earnings

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, 2024

$

306

30,669,932

$

275

27,543,565

$

328,543

$

(5,133)

418,319

$

(87)

$

363,989

$

687,893

Stock-Based Compensation Expense

4

428,044

-

-

4,503

-

-

-

(986)

3,521

Deferred Tax Assets Acquired

-

-

-

-

224

-

-

-

-

224

Dividends and Distributions ($0.09 per share or unit)

-

-

-

-

-

-

-

(2,884)

(2,601)

(5,485)

Purchase of Treasury Stock

-

-

-

-

(18)

(1,581)

131,921

-

18

(1,581)

Net Income

-

-

-

-

-

-

-

7,623

9,207

16,830

Balance at March 31, 2024

$

310

31,097,976

$

275

27,543,565

$

333,252

$

(6,714)

550,240

$

4,652

$

369,627

$

701,402

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 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

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 a 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/unit 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 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, 2023.

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. As the managing member of Solaris LLC, we operate and control all of 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, 2024, we own approximately 53% of Solaris LLC. Our condensed 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 long-lived assets, 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, accruals for environmental matters, the income tax provision, valuation allowances for deferred tax assets and our Tax Receivable Agreement (“TRA”) liability.

Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including current economic and industry conditions. Actual results could differ from management’s estimates as additional information or actual results become available in the future, and those differences could be material.

Significant Accounting Policies

See Note 2. Significant Accounting Policies to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023 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, 2024.

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 (as defined below) 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, 2024

December 31, 2023

Carrying

Fair

Carrying

Fair

    

Amount

    

Value

    

Amount

    

Value

Senior Sustainability-Linked Notes

$

400,000

$

403,864

$

400,000

$

405,090

Credit Facility

$

26,000

$

26,000

$

26,000

$

26,000

The carrying values of our other financial instruments, consisting of cash, accounts receivable, accounts payable and our insurance premium financing liability, approximate their fair values due to the short maturity of such instruments.

Intangible Assets

Intangible assets are net of accumulated amortization of $143.7 million and $134.4 million at March 31, 2024 and December 31, 2023, respectively.

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Related Parties

We and ConocoPhillips, one of our principal owners, are parties to a long-term water gathering and handling agreement, pursuant to which ConocoPhillips dedicates all the produced water generated from its current and future acreage in a defined area of mutual interest in New Mexico and Texas. As of March 31, 2024 and December 31, 2023, we had receivables of $25.7 million and $23.0 million, respectively, from ConocoPhillips that were recorded in “Accounts Receivable from Affiliate” on the condensed consolidated balance sheet. As of March 31, 2024 and December 31, 2023, we had payables of $0.6 million and $0.9 million, respectively, to ConocoPhillips that were recorded in “Payables to Affiliate” on the condensed consolidated balance sheet. Revenues related to ConocoPhillips were $32.1 million and $31.1 million, respectively, for the three months ended March 31, 2024 and 2023.

Collaborative Arrangements

We have a strategic agreement (the “Beneficial Reuse Strategic Agreement”) with Chevron U.S.A. Inc., ConocoPhillips and Exxon Mobil Corporation (collectively with us, the “alliance members”) to develop and pilot technologies and processes to treat produced water for potential beneficial reuse opportunities. We account for reimbursements of research and development costs under the Beneficial Reuse Strategic Agreement as contra-expenses in the period such expenses are incurred. This reflects the joint risk sharing nature of these activities within the collaborative arrangement. We classify advance billings or receivables recorded as “Accrued and Other Current Liabilities” or “Other Receivables,” respectively, on our condensed consolidated balance sheet.

For the three months ended March 31, 2024 and 2023, we incurred $2.6 million and $148 thousand, respectively, in total research and development expenses relating to the Beneficial Reuse Strategic Agreement, which was offset by $2.0 million and $0.1 million, respectively, in amounts due from the other alliance members for reimbursement of these shared costs.

Recent Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU primarily relate to the rate reconciliation and income taxes paid disclosures and improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. This ASU is effective for annual periods beginning after December 15, 2024 and may be applied prospectively or retrospectively. Other than the required disclosures, we do not expect a material impact on our condensed consolidated financial statements and related disclosures upon adoption.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This ASU improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this ASU require disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. This ASU is effective for annual periods beginning after December 15, 2024 and should be applied prospectively. Other than the required disclosures, we do not expect a material impact on our condensed consolidated financial statements and related disclosures upon adoption.

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3.Additional Financial Statement Information

Balance Sheet

Other balance sheet information is as follows:

(in thousands)

    

March 31, 

December 31,

    

2024

2023

Other Receivables

Insurance and Third Party Receivables for Remediation Expenses

$

3,510

$

4,064

Reimbursable Research and Development Receivable

227

1,450

Property Insurance Receivable

4,000

4,000

Reimbursable Projects and Other

3,347

3,253

Total Other Receivables

$

11,084

$

12,767

Prepaids and Deposits

Prepaid Insurance

$

3,824

$

5,494

Other Prepaids and Deposits

2,526

2,870

Total Prepaids and Deposits

$

6,350

$

8,364

Accrued and Other Current Liabilities

Accrued Operating Expense

$

25,335

$

33,491

Accrued Capital Costs

14,007

3,812

Accrued Interest

15,677

8,510

Accrued Compensation

4,419

10,118

Lease Liabilities

1,773

1,676

Asset Retirement Obligation

578

763

Contingent Consideration Liability

1,261

1,221

Advance Billings for Reimbursable Research and Development Expense

1,120

Other

3,853

3,705

Total Accrued and Other Current Liabilities

$

66,903

$

64,416

Other Long-Term Liabilities

Noncurrent Lease Liabilities

$

14,579

$

14,716

Contingent Consideration Liability

1,844

2,078

Total Other Long-Term Liabilities

$

16,423

$

16,794

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Statement of Operations

Other statement of operations information is as follows:

(in thousands)

Three Months Ended

March 31, 

    

2024

    

2023

Depreciation, Amortization and Accretion Expense

Depreciation - Property, Plant and Equipment

$

9,839

$

8,862

Amortization - Intangible Assets

9,263

9,452

Accretion of Asset Retirement Obligations

319

292

Total Depreciation, Amortization and Accretion Expense

$

19,421

$

18,606

Other Operating Expense, Net

Gain on Disposal of Assets, Net

$

(54)

$

(13)

Transaction Costs

7

45

Abandoned Projects

729

Other

(102)

185

Other Operating Expense, Net

$

580

$

217

Interest Expense

Interest on Debt Instruments

$

8,301

$

8,561

Amortization of Debt Issuance Costs

766

610

Total Interest Expense

9,067

9,171

Less: Capitalized Interest

(629)

(1,510)

Total Interest Expense, Net

$

8,438

$

7,661

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,

    

2024

2023

Wells, Facilities, Water Ponds and Related Equipment

$

569,701

$

561,059

Pipelines

434,154

427,528

Vehicles, Equipment, Computers and Office Furniture

25,019

24,496

Assets Subject to Depreciation

1,028,874

1,013,083

Land

463

463

Projects and Construction in Progress

49,675

28,157

Total Property, Plant and Equipment

1,079,012

1,041,703

Accumulated Depreciation

(131,121)

(121,989)

Total Property, Plant and Equipment, Net

$

947,891

$

919,714

Accrued PP&E additions totaled $31.2 million and $13.1 million at March 31, 2024 and December 31, 2023, respectively.

Abandoned Assets

In 2023, management determined a stand-alone produced water handling facility was no longer economically beneficial to the operations of the Company, and the well was shut-in and taken out of service. During the three months ended March 31, 2024, we recognized an additional $0.3 million of plugging and abandonment

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expense related to this well, which is included in “Abandoned Well Costs” in the condensed consolidated statements of operations.

Abandoned Projects

During the three months ended March 31, 2024, we recorded $0.7 million in abandoned project expense related to the write-off of permits for water handling facilities and right-of-way easements that either expired prior to use or that we no longer planned to use for future projects. This is recorded in “Other Operating Expense, Net” in the condensed consolidated statements of operations.

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 (computed by simplifying assumptions to address the impact of state and local taxes) 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, 2024.

As of March 31, 2024 and December 31, 2023, the TRA liability totaled $98.3 million.

As of March 31, 2024, 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 $240.9 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, 2024, we estimated the liability associated with this lump-sum payment (or “early termination payment”) would be approximately $149.0 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.Debt

Our debt consists of the following:

(in thousands)

    

March 31, 

December 31,

    

2024

2023

7.625% Senior Sustainability-Linked Notes

$

400,000

$

400,000

Credit Facility

26,000

26,000

Total Long-Term Debt

426,000

426,000

Less: Unamortized Debt Issuance Costs

(3,741)

(4,208)

Total Long-Term Debt, Net of Debt Issuance Costs

$

422,259

$

421,792

Insurance Premium Financing Liability

$

3,676

$

5,463

Total Debt

$

425,935

$

427,255

(1)Credit Facility borrowings bore weighted average interest rates of 8.173% and 8.276% at March 31, 2024 and December 31, 2023, respectively.

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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 at redemption prices ranging from 103.8125% through March 31, 2025 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.

Credit Facility

Our amended and restated credit agreement (as it may be amended and/or restated from time to time, the “Credit Agreement”) provides for, among other things, (i) commitments of $350.0 million, (ii) a maturity date of October 12, 2027, with a springing maturity of 91 days ahead of the Notes’ due date of April 1, 2026 in the event the Notes are voluntarily redeemed, repurchased, refinanced or otherwise retired in full prior to such springing maturity date, (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) an accordion feature permitting the Company to seek an increase of the Credit Facility of up to $150.0 million, subject to certain conditions, (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:

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) Term SOFR for an interest period of one month plus 1.00%; 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 Term SOFR plus SOFR Adjustment of 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 March 31, 2024, we had $150 thousand in letters of credit outstanding and $323.9 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. As of March 31, 2024, we were in compliance with all covenants contained in the Credit Facility.

Insurance Premium Financing

In the fourth quarter of 2023, we entered into a short-term agreement with a third-party to finance certain insurance premiums for an aggregate amount of $6.6 million. The insurance premium financing is repayable in monthly installments of principal and interest through September 2024. As of March 31, 2024, the remaining balance was $3.7 million and is included in “Insurance Premium Financing Liability” on the condensed consolidated balance sheet.

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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)

March 31, 

    

December 31,

Classification

2024

2023

Assets

Right-of-Use Assets

Right-of-Use Assets

$

16,454

$

16,726

Liabilities

Current Lease Liabilities

Accrued and Other Current Liabilities

$

1,773

$

1,676

Noncurrent Lease Liabilities

Other Long-Term Liabilities

14,579

14,716

Statement of Operations Information

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

(in thousands)

Three Months Ended March 31, 

2024

    

2023

Direct Operating Costs

$

336

$

293

General and Administrative

517

220

Total Lease Cost

$

853

$

513

Short-Term Leases

Our short-term lease costs, which consisted primarily of field equipment rentals, totaled $3.1 million and $4.5 million for the three months ended March 31, 2024 and 2023, respectively.

Cash Flow Information

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

(in thousands)

Three Months Ended March 31, 

2024

    

2023

Cash Paid for Amounts Included in Lease Liabilities

$

620

$

334

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

333

71

Lease Terms and Discount Rates

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

March 31, 2024

December 31, 2023

Weighted Average Remaining Lease Term (Years)

7.4

7.6

Weighted Average Discount Rate

6.34%

6.30%

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Annual Lease Maturities

The following table provides maturities of lease liabilities at March 31, 2024:

(in thousands)

2024

$

1,889

2025

2,210

2026

1,941

2027

3,182

2028

2,748

Thereafter

8,941

Total Lease Payments

20,911

Less: Interest

(4,559)

Present Value of Lease Liabilities

$

16,352

Subleases

During the fourth quarter of 2023, we entered into two subleases related to our previous office space in Houston, Texas. The subtenants are responsible for monthly fixed rent and certain operating expenses associated with the office building, including utilities, which are considered variable lease payments. The sublease income is recorded as a reduction of rent expense under our head lease and is included in “General and Administrative” expense on the consolidated statements of operations. During the three months ended March 31, 2024, we recognized total sublease income of $0.2 million, including variable lease payments.

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

We recorded income tax expense of $2.6 million for the three months ended March 31, 2024, of which $0.5 million was current, and the remainder was deferred. For the three months ended March 31, 2023, we recorded income tax expense of $1.3 million, substantially all of which was deferred.

Effective Tax Rate

We record our income tax expense 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, 2024 and 2023 was 13.3% and 14.7%, 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” on the

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condensed consolidated balance sheet decreased $1.9 million during the three months ended March 31, 2024.

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 2019 through 2023.

9.Stockholders’ Equity

Redemptions

During the three months ended March 31, 2024 and 2023, zero and 20,953 Solaris LLC units, respectively, 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 February 23, 2024, our Board of Directors declared a dividend of $0.09 per share for the first quarter of 2024 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 Solaris LLC for the first quarter of 2024, subject to the same payment and record dates.

On April 30, 2024, our Board of Directors declared a dividend on our Class A common stock for the second quarter of 2024 of $0.105 per share. In conjunction with the dividend payment, a distribution of $0.105 per unit will be paid to unit holders of Solaris LLC. The dividend will be paid on June 20, 2024 to holders of record of our Class A common stock as of the close of business on June 6, 2024. The distribution to unit holders of Solaris LLC will be subject to the same payment and record dates.

Treasury Stock

During the three months ended March 31, 2024 and 2023, 108,814 shares and 42,293 shares, respectively, of our Class A common stock were withheld for the payment of taxes due on shares of common stock issued to employees under our 2021 Equity Incentive Plan.

In connection with an asset acquisition in 2022, certain shares of our Class A common stock issued to the seller were held in escrow and could be released to the Company under certain conditions, including for the reimbursement of certain post-acquisition workover costs pursuant to the terms of the asset purchase agreement. During the three months ended March 31, 2024, 23,107 of these escrow shares were released and returned to the Company for reimbursement of such workover costs and are included in “Treasury Stock” at a value of $0.3 million, which was their fair market value at the date of receipt. The receipt of these shares was recorded as a non-cash treasury stock transaction, with an allocation of the difference between the contractually ascribed value of the shares per the asset purchase agreement and the cost of the shares at the date of receipt recorded against the workover costs in the amount of $0.1 million.

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 consolidated financial statements.

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Delivery Commitment

We have an agreement with an unaffiliated water disposal company to dispose of a minimum volume of produced water. As of March 31, 2024, the remaining term of this commitment was 6.2 years with a remaining minimum commitment of $24.8 million, undiscounted.

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, 2024, we had purchase obligations and commitments of approximately $30.1 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, 2024 and 2023, we recognized $0.4 million and $1.4 million of expense, respectively, related to environmental matters that were recorded in “Direct Operating Costs” in the condensed consolidated statements of operations. As of March 31, 2024, we accrued insurance proceeds and third-party receivables of $5.1 million, of which $3.5 million are included in “Other Receivables” and $1.6 million are included in “Other Assets.” As of December 31, 2023, we accrued insurance proceeds and third-party receivables of $5.7 million, of which $4.1 million are included in “Other Receivables” and $1.6 million are included in “Other Assets.” We believe these proceeds 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 Per Share

Basic and diluted net income per share attributable to our Class A common stock is computed by dividing net income 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 per share attributable to our Class A common stock for the periods indicated:

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

Three Months Ended March 31, 

2024

2023

Net Income Attributable to Stockholders' Equity

$

16,830

$

7,708

Less: Net Income Attributable to Noncontrolling Interest

9,207

4,330

Net Income Attributable to Aris Water Solutions, Inc.

7,623

3,378

Participating Basic Earnings (1)

(512)

(209)

Basic Net Income Attributable to Aris Water Solutions, Inc.

$

7,111

$

3,169

Reallocation of Participating Net Income

-

-

Diluted Net Income Attributable to Aris Water Solutions, Inc.

$

7,111

$

3,169

Basic Weighted Average Shares Outstanding

30,354,014

29,935,145

Dilutive Performance-Based Stock Units

-

-

Dilutive Weighted Average Shares Outstanding

30,354,014