Kinetik Holdings Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis addresses the results of our operations for the three and nine month periods ended September 30, 2022, as compared to our results of operations for the same periods in 2021. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods. The previously announced merger of ALTM and BCP and their respective consolidated subsidiaries closed on February 22, 2022. As the Transaction was determined to be a reverse merger, BCP was considered the accounting acquirer and ALTM was considered the legal acquirer. Therefore, BCP’s net assets, carried at historical value, were presented as the predecessor to the Company’s historical financial statements and the comparable period presented herein reflects the results of operations of BCP for the three and nine months ended September 30, 2022. The results of operations of ALTM is reflected within the Company’s Condensed Consolidated Financial Statements from the Closing Date through September 30, 2022. Unless otherwise noted or the context requires otherwise, references herein to Kinetik Holdings Inc. “the Company”, “us”, “our”, “we” or similar terms, with respect to time periods prior to February 22, 2022, include BCP and its consolidated subsidiaries and do not include ALTM and its consolidated subsidiaries, while references herein to Kinetik Holdings Inc. with respect to time periods from and after February 22, 2022, include ALTM and its consolidated subsidiaries. The Transaction On February 22, 2022, the Company consummated the previously announced business combination transactions contemplated by the Contribution Agreement, dated as of October 21, 2021, by and among the Company, the Partnership, Contributor and BCP. Pursuant to the Contribution Agreement, in connection with the Closing, (i) Contributor contributed all of the equity interests in BCP and BCP Raptor Holdco GP, LLC, a Delaware limited liability company and the general partner of BCP (“BCP GP”), to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 Common Units and 50,000,000 shares of the Company’s Class C common stock, par value $0.0001 per share (“Class C Common Stock”). The Company’s stockholders immediately prior to the Closing continued to hold their shares of the Company’s Class A common stock, par value $0.0001 per share (“Class A Common Stock,” together with the Class C Common Stock, the “Common Stock”). As a result of the Transaction, immediately following the Closing (i) Contributor owns approximately 75% of the issued and outstanding Common Stock, (ii) Apache Midstream owns approximately 20% of the issued and outstanding Common Stock, and (iii) the Company’s remaining stockholders own approximately 5% of the issued and outstanding Common Stock. Upon close of the Transaction, the Company’s Pipeline Transportation segment expanded to include three additional EMI pipelines and to increase its ownership interest in PHP. Further note that a secondary offering of 4 million Apache shares was closed during March of 2022 further reducing Apache’s ownership to approximately 13%. The Transaction also brought in additional volume capacity from ALTM for the Midstream Logistics segment, including 182 miles of in-service natural gas gathering pipelines, approximately 46 miles of residue gas pipelines with four market connections, and approximately 66 miles of NGLs pipelines. The increased volume capacity has contributed to the increase in operating revenue for the three and nine months ended September 30, 2022 compared to the same periods in 2021. Overview We are an integrated midstream energy company in the Permian Basin providing comprehensive gathering, transportation, compression, processing, and treating services. Our core capabilities include a variety of service offerings across multiple streams, including natural gas gathering, transportation, compression, treating and processing; NGLs stabilization and transportation; produced water gathering and disposal; and crude oil gathering, stabilization, storage and transportation. We have approximately 2.0 Bcf/d cryogenic natural gas processing capacity strategically located near the Waha Hub in West Texas. As measured by processing capacity, we are the second largest natural gas processor in the Delaware Basin and the fourth largest across the entire Permian Basin. In addition, we have interests in four long-term contracted pipelines transporting natural gas, NGLs, and crude oil from the Permian Basin to the Gulf Coast. Our Operations Upon Closing, the Company renamed its Gathering and Processing segment to Midstream Logistics and renamed its Transmission segment to Pipeline Transportation. These name changes were made to better align segment activities with the name of each respective segment. The Midstream Logistics segment operates under three service offerings, 1) gas gathering and processing, 2) crude oil gathering, stabilization, and storage services, and 3) water gathering and disposal. The Pipeline Transportation segment consists of four EMI pipelines originating in the Permian Basin with various access points to the Texas 31 Table of Contents Gulf Coast, Kinetik NGL Pipeline and Delaware Link Pipeline that is under development. The pipelines transport crude oil, natural gas, and NGLs within the Permian Basin and to the Texas Gulf Coast. Midstream Logistics Gas Gathering and Processing The Midstream Logistics segment provides gas gathering and processing services with approximately 1,200 miles of low and high-pressure steel pipeline located throughout the Southern Delaware Basin. Gas processing assets are centralized at five processing complexes with total cryogenic processing capacity of approximately 2.0 Bcf/d: the East Toyah complex (460 MMcf/d), the Pecos Bend complex (540 MMcf/d), the Pecos complex (260 MMcf/d), the Sierra Grande complex (60 MMcf/d), and Diamond Cryogenic complex (600 MMcf/d). The Company plans to expand the Diamond Cryogenic complex to 720 MMcf/d by the end of the first quarter of 2023. Current and under construction residue gas outlets include the El Paso Natural Gas Pipeline, Energy Transfer Comanche Trail Pipeline, ONEOK Roadrunner Pipeline, Energy Transfer Oasis Pipeline, and Whitewater Aqua Blanca Pipeline. NGLs outlets include Energy Transfer’s Lone Star NGL Pipeline, Targa’s Grand Prix NGL Pipeline, and Enterprise’s Shin Oak NGL Pipeline. Crude Oil Gathering, Stabilization, and Storage Services The Midstream Logistics segment also includes crude oil gathering, stabilization, and storage services throughout the Texas Delaware Basin. Crude gathering assets are centralized at the Caprock Stampede Terminal and the Pinnacle Sierra Grande Terminal. The system includes approximately 200 miles of gathering pipeline and 90,000 barrels of crude storage. The crude facilities have connections for takeaway transportation into Plains’ 285 Central Station and State Line and Oryx’s Orla & Central Mentone facilities. Water Gathering and Disposal In addition, this segment includes water gathering and disposal assets located in northern Reeves County, Texas which are included in the Midstream Logistics segment. The system includes approximately 70 miles of gathering pipeline and approximately 500,000 barrels per day of permitted disposal capacity. Pipeline Transportation The Pipeline Transportation segment consists of four EMI pipelines in the Permian Basin with access to various points along the Texas Gulf Coast, Brandywine NGL Pipeline and the Delaware Link Pipeline, which is currently under development. EMI pipelines include the following: • An approximate 53.3% equity interest in Permian Highway Pipeline LLC (“PHP”), which is also owned and operated by Kinder Morgan Texas Pipeline, LLC (“Kinder Morgan”). PHP transports natural gas from the Waha area in northern Pecos County, Texas to the Katy, Texas area with connections to Texas Gulf Coast and Mexico markets. PHP was placed in service January 2021, with the total capacity of 2.1 Bcf/d fully subscribed under long-term contracts. In June 2022, PHP announced a final investment decision to proceed with its expansion project to increase total capacity to 2.65 Bcf/d fully subscribed under 10 year take or pay contracts. The project will increase PHP’s capacity by nearly 550 MMcf/d with target in-service date in November 2023. The funding for the expansion is 67% by the Company and the remainder by Kinder Morgan. As a result, post the in service of the expansion, Kinetik’s ownership interest in PHP will increase approximately 56.0%. • A 16% equity interest in the Gulf Coast Express Pipeline (“GCX”), which is owned and operated by Kinder Morgan. GCX transports natural gas from the Permian Basin in West Texas to Agua Dulce near the Texas Gulf Coast. GCX was placed in service during 2019, with the total capacity of 2.0 Bcf/d fully subscribed under long-term contracts. • A 33% equity interest in the Shin Oak NGL Pipeline (“Shin Oak”), which is owned by Breviloba, LLC, and operated by Enterprise Products Operating LLC. Shin Oak transports NGLs from the Permian Basin to Mont Belvieu, Texas. Shin Oak was placed in service during 2019, with total capacity of up to 550 MBbl/d. • A 15% equity interest in the EPIC Crude oil pipeline (“EPIC”), which is operated by EPIC Consolidated Operations, LLC. EPIC transports crude oil from Orla, Texas in Northern Reeves County to the Port of Corpus Christi, Texas. EPIC was placed in service early 2020, with initial throughput capacity of approximately 600 MBbl/d. 32 Table of Contents Factors Affecting Our Business The Significance of Crude Oil and Producer Volumes on Our Revenues, Cost of Sales and Gross Margin The Company’s assets include approximately 1,700 miles of NGLs, natural gas, condensate, produced water, and crude oil pipelines as well as approximately 2 Bcf/d of natural gas processing capacity as of September 30, 2022. Most of the gas gathered and processed by the Company is associated gas included in the oil stream, making producers’ oil break-even prices the primary driver of activity. The average price of WTI crude oil was $98.39/Bbl during the first nine months of 2022. If crude prices were to fall below producers’ break-even prices for a prolonged period of time, drilling activity and volumes might decline and might have a negative impact on our business. In addition, because the Company’s Pipeline Transportation segment provides NGLs transmission service through its EMI pipelines, a decrease in natural gas and NGL price will have an adverse impact on the Company’s results of operations as it may lead to lower natural gas production and thus lower volumes of NGLs transported. The average natural gas price was $6.66/MMBtu during the first nine months of 2022. For additional risk factors that affect the Company’s business, please refer to Part II, Item 1A — Risk Factors of the Company’s Quarterly Report Form 10-Q for the first quarter of 2022 filed on May 10, 2022. Recent Developments Transfer to the New York Stock Exchange On October 10, 2022, the Company notified the Nasdaq Global Select Market (“Nasdaq”) that it would voluntarily transfer the listing of its Class A Common Stock from Nasdaq to the New York Stock Exchange (the “NYSE”). The listing and trading of the Common Stock on Nasdaq ended at market close on October 21, 2022, and trading commenced on the NYSE at market open on October 24, 2022. The Class A Common Stock continues to trade under the current stock symbol “KNTK”. Brandywine NGL Acquisition In September 2022, the Company acquired approximately 30 miles of 20 inch NGL pipelines connected to Diamond Cryo called the Brandywine NGL Pipeline (“Brandywine”) for approximately $25 million. Brandywine is a strategic intrabasin natural gas liquids pipeline, affording Kinetik greater control over its system’s NGLs and providing interconnectivity to Shin Oak. Comprehensive Refinancing On June 8, 2022, the Partnership, completed a private placement of $1.00 billion aggregate principal amount of its 5.875% Sustainability-Linked Senior Notes due 2030 (the “Notes”), which are fully and unconditionally guaranteed by the Company. In addition, the Partnership entered into a new revolving credit agreement (the “RCA”), which provides for a $1.25 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”) maturing on June 8, 2027, and a new term loan agreement (the “TLA”), which provides for a $2.00 billion senior unsecured term loan credit facility (the “Term Loan Credit Facility”) maturing on June 8, 2025. Proceeds from the Notes and the Term Loan Credit Facility were used to repay all outstanding borrowings under our existing credit facilities and to pay fees and expenses related to the offering. Refer to Note 6 — Debt and Financing Costs in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information. Sustainability-linked Financing Framework On May 16, 2022, we published our Sustainability Framework, which we developed in alignment with the five components outlined in the International Capital Markets Association Sustainability-Linked Bond Principles as of June 2020 and the Loan Syndications and Trading Association Sustainability-Linked Loan Principles as of July 2021 (each as referred to in our Sustainability-Linked Financing Framework), and corresponding Second Party Opinion provided by ISS ESG. This framework establishes key-performance indicators (“KPIs”) that will be used to measure our progress against sustainability performance targets (“SPTs”). Under this framework, our KPIs are Scope 1 and Scope 2 greenhouse gas emissions intensity, Scope 1 and Scope 2 methane gas emissions intensity and female representation in corporate officer positions and our SPTs are (1) reducing the intensity of all Scope 1 and Scope 2 greenhouse gas emissions from our operations by 35% by 2030 from a 2021 Baseline Year (as defined in the Sustainability Framework), (2) reducing the intensity of Scope 1 and Scope 2 methane gas emissions from our operations by 30% by 2030 from a 2021 Baseline Year, and (3) increasing female representation in corporate officer positions of Vice President and above to 20% by year-end 2026. 33 Table of Contents Stock Split On May 19, 2022, the Company announced a two-for-one stock split with respect to its Class A Common Stock and Class C Common Stock in the form of a stock dividend (the “Stock Split”). The Stock Split was accomplished by distributing one additional share of Class A Common Stock for each share of Class A Common Stock outstanding and one additional share of Class C Common Stock for each share of Class C Common Stock outstanding. The additional shares of Common Stock were issued on June 8, 2022 to holders of record at the close of business on May 31, 2022. Commodity Price Volatility There has been, and we believe there will continue to be, volatility in commodity prices and in the relationships among NGLs, crude oil and natural gas prices. As a result of uncertainty around global commodity supply and demand, the impact of China’s zero covid policy, the continued headwinds from a stronger US dollar, both here and abroad, global oil and natural gas commodity prices continue to remain volatile. The volatility and uncertainty of natural gas, crude oil and NGL prices impact drilling, completion and other investment decisions by producers and ultimately supply to our systems. Our operations benefit in an environment of higher natural gas, NGLs and condensate prices, the instability of international political environments and human and economic hardship resulting from the international political instability would have a uncertain impact on the U.S. economy, which in turn, might affect our business and operations adversely. The Company continues to monitor commodity prices closely and is likely to enter into commodity price hedges from time to time as necessary to mitigate the volatility risk. Inflation and Interest Rates The annual rate of inflation in the United States hit 8.2% in September 2022, as measured by the Consumer Price Index. We expect that inflation will continue to increase our operating costs and the overall cost of capital projects we undertake. In addition, the Federal Reserve has continued to tighten its monetary policy by raising interest rates and Chairman Powell has indicated that the target Federal Funds Rate range will likely be approximately 4.5% by the end of 2022. Furthermore, the Chairman of the Federal Reserve signaled that the Federal Reserve would continue to take necessary action to bring inflation down and to ensure price stability, including continued rate increases. Increased interest rates will have a negative impact on the Company’s ability to meet its contractual debt obligations and to fund its operating expenses, capital expenditures, dividends and distributions. The Company will continue to actively evaluate and analyze whether any form of interest rate hedging should be implemented to mitigate interest rate exposure. Supply Chain Considerations During 2021 and 2022, challenging supply chain issues have emerged that will continue at least through the remainder of 2022. Geopolitical events have further disrupted global supply chains and caused volatile commodity prices for natural gas, NGLs and crude oil. The United States has banned the import of Russian oil, NGLs and other energy commodities and European Union has taken steps to reduce imports of Russian oil and natural gas. The principal supply issues facing our industry for the next twelve months include: raw materials availability, finished good inventory, rising freight costs, delays due to port congestion and continued labor shortages. All bidding will require the risk of shipping costs and delays to be factored into proposals. Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future. The import of raw materials from China will also incur price increases. To that end, accelerating tensions between China and the U.S. could also result in further supply disruption. 34 Table of Contents Results of Operations The following table presents the Company’s results of operations for the periods presented: Three Months Ended September 30,* Nine Months Ended September 30,* 2022 2021 % Change 2022 2021 % Change (In thousands, except percentages) Revenues: Service revenue $ 107,597 $ 72,578 48 % $ 290,122 $ 202,482 43 % Product revenue 213,803 93,266 129 % 618,382 244,358 153 % Other revenue 3,776 742 409 % 9,493 3,615 163 % Total revenues 325,176 166,586 95 % 917,997 450,455 104 % Operating costs and expenses: Cost of sales (exclusive of depreciation and amortization) 145,208 60,503 140 % 418,197 141,011 197 % Operating expense 35,845 22,731 58 % 100,996 63,575 59 % Ad valorem taxes 5,903 3,238 82 % 15,936 9,003 77 % General and administrative 23,468 6,957 237 % 72,180 17,920 303 % Depreciation and amortization 65,005 57,154 14 % 192,609 170,291 13 % Loss (gain) on disposal of assets 3,946 (37) (10765) % 12,602 417 2922 % Total operating costs and expenses 279,375 150,546 86 % 812,520 402,217 102 % Operating income 45,801 16,040 186 % 105,477 48,238 119 % Other income (expense): Interest and other income — 3,578 (100) % 250 4,141 (94) % Gain on Preferred Units redemption — — NM 9,580 — NM Gain (loss) on debt extinguishment — (56) (100) % (27,975) 4 (699475) % Gain on embedded derivative 488 — NM 89,050 — NM Interest expense (40,464) (30,541) 32 % (92,585) (88,458) 5 % Equity in earnings of unconsolidated affiliates 45,003 16,826 167 % 120,706 44,692 170 % Total other income (expense), net 5,027 (10,193) (149) % 99,026 (39,621) (350) % Income before income tax 50,828 5,847 769 % 204,503 8,617 2273 % Current income tax expense 1,406 1,207 16 % 2,244 1,207 86 % Net income including noncontrolling interests $ 49,422 $ 4,640 965 % $ 202,259 $ 7,410 2630 % * The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer to the Form 10-Q basis of presentation in Note 1—Description of the Organization and Summary of Significant Accounting Policies in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q, for further information. NM - Not meaningful Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 Revenues For the three months ended September 30, 2022, revenue increased $158.6 million, or 95%, to $325.2 million, compared to $166.6 million for the same period in 2021. The increase was primarily driven by period to period higher commodity prices, increases in gathered and processed gas volumes, as well as similar increases in condensate and NGL volumes sold. Service revenue Service revenue consists of service fees paid to us by our customers for providing comprehensive gathering, treating, processing and water disposal services necessary to bring natural gas, NGLs and crude oil to market. Service revenue for the three months ended September 30, 2022, increased by $35.0 million, or 48%, to $107.6 million, compared to $72.6 million for the same period in 2021. This increase was primarily due to a period over period increase in gathered and processed gas volumes of 585.4 Mcf per day and 541.5 Mcf per day, respectively. Over 99% of service revenues are included in the Midstream Logistics segment. 35 Table of Contents Product revenue Product revenue consists of commodity sales (including condensate, natural gas residue, and NGLs). Product revenue for the three months ended September 30, 2022, increased by $120.5 million, or 129%, to $213.8 million, compared to $93.3 million for the same period in 2021, primarily due to period over period increases in condensate prices combined with increased NGL and condensate sales volumes. C ondensate prices increased $23.30 per barrel or 35%. NGL and condensate sales volumes increased 3.5 million barrels, or 550%. The increase in NGL and condensate sales volumes offset the decreased NGL prices of $5.77 per barrel, or 14%. This overall increase in NGL and condensate revenue was due to our plants being run in recovery for parts of the three months ended September 30, 2022 versus rejection during the same period in 2021. For the same reason, natural gas residue sales volumes decreased by 1.9 million MMBtu, or 28%. Partially offsetting this decrease in volumes, natural gas prices increased period over period by $3.34 per MMBtu, or 86%. Product revenues are included entirely in the Midstream Logistics segment. Operating Costs and Expenses Costs of sales (exclusive of depreciation and amortization) Cost of sales (exclusive of depreciation and amortization) primarily consists of purchases of NGLs and natural gas from our producers at contracted market prices to support product sales to other third parties. For the three months ended September 30, 2022, cost of sales increased $84.7 million, or 140%, to $145.2 million, compared to $60.5 million for the same period in 2021. The increase was primarily driven by the period to period increase in commodity prices and increased NGL and condensate volumes. Cost of sales (exclusive of depreciation and amortization) are included entirely in the Midstream Logistics segment. Operating expenses Operating expenses increased by $13.1 million, or 58%, to $35.8 million for the three months ended September 30, 2022, compared to $22.7 million for the same period in 2021. Of the total increase, $7.7 million was driven by new operations acquired through the Transaction. The remaining increases were primarily driven by an increase in repairs and maintenance costs of $1.2 million, higher contract labor costs of $1.2 million, and higher safety and environmental expenditures of $0.8 million. General and administrative General and administrative (“G&A”) expense increased by $16.5 million, or 237%, to $23.5 million for the three months ended September 30, 2022, compared to $7.0 million for the same period in 2021. The increases were primarily driven by recognition of share-based compensation of $12.7 million, acquisition and integration costs of $2.7 million incurred in relation to the Transaction, and an increase of $0.8 million in insurance expenses. Other Income (Expense) Equity in earnings of unconsolidated affiliates Income from EMI pipelines increased by $28.2 million, or 167%, to $45.0 million for the three months ended September 30, 2022, compared to $16.8 million for the same period in 2021. The increase was primarily due to the acquisition of new EMI pipelines and additional equity interests in the Company’s existing EMI pipeline, PHP. Equity in earnings of unconsolidated affiliates is included entirely in the Pipeline Transportation segment. Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 Revenues For the nine months ended September 30, 2022, revenue increased $467.5 million, or 104%, to $918.0 million, compared to $450.5 million for the same period in 2021. The increase was primarily driven by period to period higher commodity prices, increases in gathered and processed gas volumes, as well as similar increases in condensate and NGL volumes sold. 36 Table of Contents Service revenue Service revenue consists of service fees paid to us by our customers for providing comprehensive gathering, treating, processing and water disposal services necessary to bring natural gas, NGLs and crude oil to market. Service revenue for the nine months ended September 30, 2022, increased by $87.6 million, or 43%, to $290.1 million, compared to $202.5 million for the same period in 2021. This increase was primarily due to a period over period increase in gathered and processed gas volumes of 559.9 Mcf per day and 523.8 Mcf per day, respectively. Over 99% of service revenues are included in the Midstream Logistics segment. Product revenue Product revenue consists of commodity sales (including condensate, natural gas residue, and NGLs). Product revenue for the nine months ended September 30, 2022, increased by $374.0 million, or 153%, to $618.4 million, compared to $244.4 million for the same period in 2021, primarily due to period over period increases in NGL and condensate prices combined with increased sales volumes of these liquids. NGL prices increased $6.60 per barrel, or 20%, and condensate prices increased $35.69 per barrel, or 60%. NGL and condensate sales volumes increased 8.2 million barrels, or 280%. This substantial increase was due to our plants being run in recovery for most of the nine months ended September 30, 2022 versus rejection during the same period in 2021. For the same reason, natural gas residue sales volumes decreased by 3.2 million MMBtu, or 17%. Partially offsetting this decrease in volumes, natural gas prices increased period over period by $2.61 per MMBtu, or 73%. Product revenues are included entirely in the Midstream Logistics segment. Operating Costs and Expenses Costs of sales (exclusive of depreciation and amortization) Cost of sales (exclusive of depreciation and amortization) primarily consists of purchases of NGLs and natural gas from our producers at contracted market prices to support product sales to other third parties. For the nine months ended September 30, 2022, cost of sales increased $277.2 million, or 197%, to $418.2 million, compared to $141.0 million for the same period in 2021. The increase was primarily driven by the period to period increases in commodity prices and NGL and condensate volumes discussed above. Cost of sales (exclusive of depreciation and amortization) are included entirely in the Midstream Logistics segment. Operating expenses Operating expenses increased by $37.4 million, or 59%, to $101.0 million for the nine months ended September 30, 2022, compared to $63.6 million for the same period in 2021. Of the total increase, $16.2 million was driven by the new operations acquired through the Transaction. The remaining increase was primarily driven by higher period over period electricity costs of $10.7 million, higher salaries and benefits of $3.7 million, higher repairs and maintenance costs of $2.9 million and higher contract labor costs of $2.8 million. The higher electricity costs were primarily due to electricity credits received in 2021 related to the extreme weather caused by Winter Storm Uri. General and administrative General and administrative (“G&A”) expense increased by $54.3 million, or 303%, to $72.2 million for the nine months ended September 30, 2022, compared to $17.9 million for the same period in 2021. The increases were primarily driven by recognized share-based compensation of $31.0 million, acquisition and integration costs of $18.5 million incurred in relation to the Transaction and an increase in insurance expenses of $2.2 million. Depreciation and amortization Depreciation and amortization expense increased by $22.3 million, or 13%, to $192.6 million for the nine months ended September 30, 2022, compared to $170.3 million for the same period in 2021. The increase was primarily driven by the new assets acquired through the Transaction. Other Income (Expense) Gain (loss) on debt extinguishment For the nine months ended September 30, 2022, the Company recognized a loss on debt extinguishment of $28.0 million, compared with a gain of $4 thousand for the same period in 2021. The change reflected the loss on debt extinguishment recognized in relation to the comprehensive refinancing completed in June 2022. 37 Table of Contents Gain on embedded derivative For the nine months ended September 30, 2022, the Company recognized a gain on embedded derivative of $89.1 million. The gain is a result of the decrease in fair value of the embedded derivative liability related to the redeemable noncontrolling interest Preferred Units, which was eliminated upon the ultimate redemption of these Preferred Units during July of 2022. Equity in earnings of unconsolidated affiliates Income from EMI pipelines increased by $76.0 million, or 170% to $120.7 million for the nine months ended September 30, 2022, compared to $44.7 million for the same period in 2021. The increase was primarily due to the acquisition of new EMI pipelines and additional equity interests in the Company’s existing EMI pipeline, PHP, through the Transaction closed in February 2022. Equity in earnings of unconsolidated affiliates is included entirely in the Pipeline Transportation segment. Key Performance Metrics Adjusted EBITDA Adjusted EBITDA is defined as net income including noncontrolling interests adjusted for interest, taxes, depreciation and amortization, impairment charges, asset write-offs, the proportionate EBITDA from our equity method investments, equity in earnings from investments recorded using the equity method, share-based compensation expense, extraordinary losses and unusual or non-recurring charges. Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance. We believe that Adjusted EBITDA provides a meaningful understanding of certain aspects of earnings before the impact of investing and financing charges and income taxes. Adjusted EBITDA is useful to an investor in evaluating our performance because this measure: • Is widely used by analysts, investors and competitors to measure a company’s operating performance; • Is a financial measurement that is used by rating agencies, lenders, and other parties to evaluate our credit worthiness; and; • Is used by our management for various purposes, including as a measure of performance and as a basis for strategic planning and forecasting. Adjusted EBITDA is not defined in GAAP The GAAP measure used by the Company that is most directly comparable to Adjusted EBITDA is net income including noncontrolling interests. Adjusted EBITDA should not be considered as an alternative to the GAAP measure of net income including noncontrolling interests or any other measure of financial performance presented in accordance with GAAP. Adjusted EBITDA has important limitations as an analytical tool because it excludes some, but not all, items that affect net income including noncontrolling interests. Adjusted EBITDA should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP. The Company’s definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies in the industry, thereby diminishing its utility. Reconciliation of non-GAAP financial measure Company management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing the comparable GAAP measure, understanding the differences between Adjusted EBITDA as compared to net income including noncontrolling interests, and incorporating this knowledge into its decision-making processes. Management believes that investors benefit from having access to the same financial measure that the Company uses in evaluating operating results. The following table presents a reconciliation of the GAAP financial measure of net income including noncontrolling interests to the non-GAAP financial measure of Adjusted EBITDA. 38 Table of Contents Three Months Ended September 30,* Nine Months Ended September 30,* 2022 2021 % Change 2022 2021 % Change Reconciliation of net income including noncontrolling interests to Adjusted EBITDA (In thousands, except percentages) Net income including noncontrolling interests $ 49,422 $ 4,640 965 % $ 202,259 $ 7,410 2630 % Add back: Interest expense 40,464 30,541 32 % 92,585 88,458 5 % Income tax expense 1,406 1,207 16 % 2,244 1,207 86 % Depreciation and amortization 65,005 57,154 14 % 192,609 170,291 13 % Amortization of contract costs 448 448 — % 1,344 1,815 (26) % Proportionate EMI EBITDA 78,357 21,704 261 % 190,438 59,677 219 % Share-based compensation 12,661 — NM 30,966 — NM Loss (gain) on sale of assets 3,946 (37) (10765) % 12,602 417 2922 % Loss (gain) on debt extinguishment — 56 (100) % 27,975 (4) (699475) % Derivative loss due to Winter Storm Uri — — NM — 13,456 (100) % Integration Costs 2,338 — NM 10,012 — NM Acquisition transaction Costs 62 — NM 6,412 — NM Other one-time cost or amortization 3,752 1,167 222 % 10,969 2,010 446 % Producer Settlement — — NM — 6,827 (100) % Deduct: Interest and other income — 74 (100) % — 115 (100) % Gain on redemption of mandatorily redeemable Preferred Units — — NM 9,580 — NM Gain on embedded derivative 488 — NM 89,050 — NM Equity income from unconsolidated affiliates 45,003 16,826 167 % 120,706 44,692 170 % Adjusted EBITDA $ 212,370 $ 99,980 112 % $ 561,079 $ 306,757 83 % * The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer to Note 1—Description of the Organization and Summary of Significant Accounting Policies for further information on the Company’s basis of presentation. NM - not meaningful Adjusted EBITDA increased by $112.4 million, or 112%, to $212.4 million for the three months ended September 30, 2022, compared to $100.0 million for the same period in 2021. The increase was primarily driven by an increase in net income including noncontrolling interest of $44.8 million, or 965%, and increases in add back related to the Company’s proportionate share of its EMI pipelines’ EBITDA of $56.7 million, or 261%, share-based compensation of $12.7 million, interest expense of $9.9 million and depreciation and amortization expense of $7.9 million, which are results of new operations acquired through the Transaction. The increase in adjusted EBITDA was partially offset by increases in EMI pipelines equity income of $28.2 million, which was the result of acquisitions of new EMI pipeline entities and additional PHP equity interests acquired. Adjusted EBITDA increased by $254.3 million, or 83% to $561.1 million for the nine months ended September 30, 2022, compared to $306.8 million for the same period in 2021. The increase was primarily driven by an increase in net income including noncontrolling interest of $194.8 million, or 2630%, and increases in add back related to the Company’s proportionate share of its EMI pipelines’ EBITDA of $130.8 million, or 219%, share-based compensation of $31.0 million, depreciation and amortization expense of $22.3 million and integration costs of $10.0 million. The increase in add back was also due to increase in loss on debt extinguishment of $28.0 million as the Company completed its comprehensive refinancing in June 2022. The increase in adjusted EBITDA was partially offset by increases in gain on embedded derivatives of $89.1 million, EMI pipelines equity income of $76.0 million and the derivative loss add back due to the Winter Storm Uri of $13.5 million. The 2022 Adjusted EBITDA presented in the above table does not include any expected synergies including ad valorem taxes, operating expenses and corporate G&A, which continue to be recognized over the course of 2022. Segment Adjusted EBITDA Segment Adjusted EBITDA is defined as segment net earnings adjusted to exclude interest expense, income tax expense, depreciation and amortization, the proportionate effect of these same items for our equity method investments and other non-recurring items. The following table presents segment adjustment EBITDA for the three and nine months ended September 30, 39 Table of Contents 2022 and 2021. Also refer to Note 17—Segments in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for reconciliation of segment adjusted EBITDA to net income including noncontrolling interests. Three Months Ended September 30,* Nine Months Ended September 30,* 2022 2021 % Change 2022 2021 % Change (In thousands, except percentages) Midstream Logistics $ 137,545 $ 80,877 70 % $ 380,919 $ 255,890 49 % Pipeline Transportation 78,692 21,381 268 % 190,023 58,138 227 % Corporate and Other** (3,867) (2,278) 70 % (9,863) (7,271) 36 % Total segment adjusted EBITDA $ 212,370 $ 99,980 112 % $ 561,079 $ 306,757 83 % * The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer to Note 1—Description of the Organization and Summary of Significant Accounting Policie s in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for further information on the Company’s financial statement consolidation. ** Corporate and Other represents those results that: (i) are not specifically attributable to a reportable segment; (ii) are not individually reportable or (iii) have not been allocated to a reportable segment for the purpose of evaluating their performance, including certain general and administrative expense items. Midstream Logistics segment adjusted EBITDA increased by $56.7 million, or 70%, to $137.5 million for the three months ended September 30, 2022, compared to $80.9 million for the same period in 2021. The increase was primarily driven by an increase in segment net income including noncontrolling interests of $71.7 million and increases in the add back related to depreciation and amortization expense of $7.6 million due to new operations acquired through the Transaction. Midstream Logistics segment adjusted EBITDA increased by $125.0 million, or 49%, to $380.9 million for the nine months ended September 30, 2022, compared to $255.9 million for the same period in 2021. The increase was primarily driven by an increase in segment net income including noncontrolling interests of $111.5 million and increases in the add back related to loss on debt extinguishment of $28.0 million as the Company completed its comprehensive refinancing in June 2022, depreciation and amortization expense of $22.1 million due to new operations acquired through the Transaction. Pipeline Transportation segment adjusted EBITDA increased by $57.3 million, or 268%, to $78.7 million for the three months ended September 30, 2022, compared to $21.4 million for the same period in 2021. The increase was driven by investments in GCX, EPIC and Shin Oak and a 100% increase in the Company’s investment in PHP, which were all acquired through the Transaction closed in February 2022. During the three months ended September 30, 2021, the Company only held a 26.67% interest in PHP. Pipeline Transportation segment adjusted EBITDA increased by $131.9 million, or 227%, to $190.0 million for the nine months ended September 30, 2022, compared to $58.1 million for the same period in 2021. The increase was driven by the same factors driving the quarter over quarter increase disclosed above. Capital Resources and Liquidity For 2022, the Company’s primary capital spending requirements are anticipated to be related to the PHP expansion project, integration of the Alpine High gathering system with the legacy BCP system, certain integration related synergies including the relocation of compression units and treating assets to the legacy BCP processing plants, organic growth and maintenance capital expenditures in the Midstream Logistic segment, the Company’s contractual debt obligations and the Company’s payment of quarterly cash dividend on its Class A Common Stock and Class C Common Units as may be declared by its Board of Directors (the “Board”). During the nine months ended September 30, 2022, the Company’s primary sources of cash were distributions from the EMI pipelines, borrowings under the Term Loan and Revolving Credit Facility, proceeds from the offering of the Notes, and cash generated from operations. Based on the Company’s current financial plan and related assumptions including the Reinvestment Agreement (as defined below), the Company believes that cash from operations and distributions from the EMI pipelines will generate cash flows in excess of capital expenditures and the amount required to fund the Company’s planned quarterly dividend over the next 12 months. Additionally, the Company has locked in the floating base rate on its Term Loan A through April 2023 to reduce short-term interest rate risk. Further, the Company entered into an interest rate swap with a $1 billion notional that is effective from May 1, 2023 through May 31, 2025 swapping floating SOFR for a fixed swap rate of 4.46%. 40 Table of Contents Comprehensive Refinancing On June 8, 2022, the Partnership completed the private placement of $1.00 billion aggregate principal amount of 5.875% Sustainability-Linked Senior Notes due 2030, which are fully and unconditionally guaranteed by the Company. In addition, the Partnership entered into the new RCA, which provides for a $1.25 billion senior unsecured Revolving Credit Facility maturing on June 8, 2027, and a new TLA, which provides for a $2.00 billion senior unsecured Term Loan Credit Facility maturing on June 8, 2025. Proceeds from the Notes and the Term Loan Credit Facility were used to repay all outstanding borrowings under our existing credit facilities and to pay fees and expenses related to the offering. Refer to Note 6 — Debt and Financing Costs in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information. Capital Requirements and Expenditures Our operations can be capital intensive, requiring investments to expand, upgrade, maintain or enhance existing operations and to meet environmental and operational regulations. During the nine months ended September 30, 2022 and 2021, capital spending for midstream infrastructure assets totaled $160.5 million and $60.6 million, respectively. The current year capital spend includes $25 million for the purchase of Brandywine NGL Pipeline and $12.5 million for the ongoing construction of the Delaware Link Pipeline. Management believes its existing gathering, processing, and transmission infrastructure capacity is capable of fulfilling its midstream contracts to service its customers. During the nine months ended September 30, 2022, the Company contributed $56.2 million to PHP, for the 2022 Capacity Expansion Project, compared to $20.5 million contributed in the same period of 2021. The Company anticipates its existing capital resources will be sufficient to fund the future capital expenditures for EMI pipelines and the Company’s existing infrastructure assets over the next 12 months. For further information on EMIs, refer to Note 9—Equity Method Investments in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q. Cash Flows The following tables present cash flows from operating, investing, and financing activities during the periods presented: For the Nine Months Ended September 30, 2022 2021 (In thousands) Cash provided by operating activities $ 453,244 $ 159,350 Cash used in investing activities $ (216,418) $ (81,323) Cash used in financing activities $ (243,827) $ (62,439) Operating Activities . Net cash provided by operating activities increased by $293.9 million for the nine months ended September 30, 2022 compared with the same period in 2021. The change in the operating cash flows reflected increases in net income including noncontrolling interests of $194.8 million, adjustments related to non-cash items of $56.5 million and cash provided by changes in working capital of $42.5 million. Period over period increase in cash provided by operating activities was primarily driven by the new operations acquired through the Transaction, including distributions received from EMI pipelines acquired through the Transaction. The increase was partially offset by non-cash adjustment related to derivative fair value adjustment recognized during 2022. Investing Activities . Net cash used in investing activities increased by $135.1 million for the nine months ended September 30, 2022 compared with the same period in 2021. The increase was primarily driven by an increase in property, plant and equipment expenditures of $99.9 million, which includes the Brandywine asset acquisition, an increase in contribution made to unconsolidated affiliates of $35.7 million and an increase in intangible assets expenditure of $9.6 million. The increase in cash outflow was offset by an increase in cash inflow of $13.4 million acquired through the acquisition closed in February 2022. Financing Activities . Net cash used in financing activities increased by $181.4 million for the nine months ended September 30, 2022 compared with the same period in 2021. The increase was primarily due to increases in cash outflow for redemption of Preferred Units of $644.8 million, cash dividends paid to holders of Class A Common Stock of $24.4 million, cash distributions paid to holders of Preferred Units of $8.8 million and the increase in cash outflow was offset by net proceeds from the Company’s long-term debt and Revolving Credit Facility of $482.1 million and a reduction of cash distributions paid to holders of Class C Common Units of $29.3 million. 41 Table of Contents Dividend and Distribution Reinvestment Agreement On February 22, 2022, the Company entered into a Dividend and Distribution Reinvestment Agreement (the “Reinvestment Agreement”) with certain stockholders including BCP Raptor Aggregator, LP, BX Permian Pipeline Aggregator, LP, Buzzard Midstream LLC, APA Corporation Apache Midstream LLC, and certain individuals (each, a “Reinvestment Holder”). Under the Reinvestment Agreement, each Reinvestment Holder is obligated to reinvest at least 20% of all distributions on Common Units or dividends on shares of Class A Common Stock in the Company’s Class A Common Stock. Additionally, the Audit Committee and subsequently the Board resolved that for the calendar year 2022, 100% of all distributions or dividends received by each Reinvestment Holder would be reinvested in newly issued shares of Class A Common Stock. During the first nine months of 2022, the Company made cash dividend payments of $24.4 million to holders of Class A Common Stock and $175.5 million was reinvested in shares of Class A Common Stock by the Reinvestment Holders. Stock Split On May 19, 2022, the Company announced a two-for-one Stock Split with respect to its Class A Common Stock and Class C Common Stock in the form of a stock dividend. The Stock Split was accomplished by distributing one additional share of Class A Common Stock for each share of Class A Common Stock outstanding and one additional share of Class C Common Stock for each share of Class C Common Stock outstanding. The additional shares of Common Stock were issued on June 8, 2022 to holders of record at the close of business on May 31, 2022. Dividend On October 19, 2022, the Board declared a cash dividend of $0.75 per share on the Company’s Class A Common Stock, which will be payable on November 17, 2022. The Company, through its ownership of the general partner of the Partnership, also declared a distribution of $0.75 per Common Unit from the Partnership to the holders of Common Units, which will be payable on November 17, 2022. As context requires, dividends paid to holders of Class A Common Stock and distributions paid to holders of Common Units may be referred to collectively as “dividends.” Series A Cumulative Redeemable Preferred Units The Partnership issued Preferred Units on June 12, 2019. Because the Transaction was accounted for as a reverse merger, certain Preferred Units that were issued and outstanding were assumed at Closing for accounting purposes. The Company assumed 525,000 Preferred Units as well as 29,983 paid-in-kind (“PIK”) Preferred Units immediately after the Closing. Since the Closing, the Company redeemed all outstanding Preferred Units and PIK units for an aggregate redemption price of $644.8 million. The Company recognized a gain of $9.6 million on redemption of the mandatorily redeemable Preferred Units and excess of carrying amount over redemption price of $109.5 million on redemption of the redeemable noncontrolling interest Preferred Units. Refer to Note 11—Series A Cumulative Redeemable Preferred Units in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q. Liquidity The following table presents a summary of the Company’s key liquidity indicators at the dates presented: September 30, 2022 December 31, 2021 (In thousands) Cash and cash equivalents $ 11,728 $ 18,729 Total debt $ 3,447,513 $ 2,307,702 Available committed borrowing capacity $ 775,000 $ 133,000 Cash and cash equivalents As of September 30, 2022 and December 31, 2021, the Company had $11.7 million and $18.7 million, respectively, in cash and cash equivalents. The majority of the cash is invested in highly liquid, investment-grade instruments with maturities of three months or less at the time of purchase. 42 Table of Contents Total Debt and Available credit facilities There is no assurance that the financial condition of banks with lending commitments to the Company will not deteriorate. The Company closely monitors the ratings of the banks in the Company’s bank group. Having a large bank group allows the Company to mitigate the potential impact of any bank’s failure to honor its lending commitment. Guarantor Information In June 2022, the Company completed the comprehensive refinancing, which included the issuance of the Notes and entry into the TLA and the Revolving Credit Agreement by the Partnership. These debt obligations are fully and unconditionally guaranteed by the Company. The guarantee of the Notes is subject to certain customary release, including the exercise of legal defeasance or covenant defeasance options, the satisfaction and discharge of the indentures governing the Notes, and the release of the guarantor from its guarantee of the Notes in accordance to the indentures governing the Notes. Contractual Obligations We have contractual obligations for principal and interest payments on our term loan credit facility. See Note 6—Debt and Financing Costs in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q. Under certain of our transportation services agreements with third party pipelines to transport natural gas and NGLs, if we fail to ship a minimum throughput volume during any year, then we will pay a deficiency payment for transportation based on the volume shortfall up to the MVC amount. The Company has made no historical shortfall payments through September 30, 2022. Off-Balance Sheet Arrangements As of September 30, 2022, there were no off-balance sheet arrangements. Critical Accounting Policies The Company’s significant accounting policies, described in the Summary of Significant Accounting Policie s in Exhibit 99.1 to Current Report on Form 8-K filed on July 5, 2022 and the Company’s Quarterly Report on Form 10-Q filed on May 10, 2022, are fundamental to understanding our results of operations and financial condition. There has been no significant change to the Company’s significant accounting policies subsequent to the Form 8-K filed on July 5, 2022. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in Note 1—Description of the Organization and Summary of Significant Accounting Policies in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q. 43 Table of Contents