Item 2. Management’s Discussion and Analysis
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 six month period ended June 30, 2024, as compared to our results of operations for the same periods in 2023 . Please read the following discussion of our financial condition and results of operations in conjunction with the financial statements and notes thereto included elsewhere in this report.
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 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. Our operations are strategically located in the heart of the Delaware Basin.
Our Operations and Segments
We have two reportable segments which are strategic business units with various products and services. The Midstream Logistics segment operates under three service offerings, 1) gas gathering and processing, 2) crude oil gathering, stabilization and storage services and 3) produced water gathering and disposal. The Pipeline Transportation segment consists of three EMI pipelines originating in the Permian Basin with various access points to the U.S. Gulf Coast, as well as Kinetik NGL and Delaware Link Pipelines. The pipelines transport crude oil, natural gas and NGLs within the Permian Basin and to the U.S. Gulf Coast.
Midstream Logistics
Gas Gathering and Processing. The Midstream Logistics segment provides gas gathering and processing services with over 4,100 miles of low and high-pressure steel pipeline located throughout the Delaware Basin, including over 2,500 miles of gas pipeline acquired through the Durango Acquisition. Gas processing assets are centralized at five processing complexes with total cryogenic processing capacity of approximately 2.2 Bcf/d as of today and over 2.4 Bcf/d once the Kings Landing Project is complete in early 2025.
Crude Oil Gathering, Stabilization and Storage Services. Crude gathering assets are centralized at the Caprock Stampede Terminal and the Pinnacle Sierra Grande Terminal. The system includes approximately 220 miles of gathering pipeline and 90,000 barrels of crude storage.
Water Gathering and Disposal. The system includes over 360 miles of gathering pipeline and approximately 580,000 barrels per day of permitted disposal capacity.
Pipeline Transportation
EMI pipelines. The Company owns the following equity interests in three EMI pipelines in the Permian Basin with access to various points along the U.S. Gulf Coast: 1) an approximate 55.5% equity interest in Permian Highway Pipeline LLC (“PHP”), which is also owned and operated by Kinder Morgan; 2) 33.0% equity interest in Breviloba, LLC (“Breviloba”), the owner of Shin Oak (“Shin Oak”), which is operated by Enterprise Products Operating LLC; and 3) 15% equity interest in Epic Crude Holdings, LP (“EPIC”), which is operated by EPIC Consolidated Operations, LLC.
Kinetik NGL Pipelines. The Kinetik NGL Pipelines consist of approximately 96 miles of NGL pipelines connecting our East Toyah and Pecos complexes to Waha, including our 20-inch Dewpoint pipeline that spans over 40 miles, and our 30 mile, 16-inch Brandywine Pipeline connecting to our Diamond Cryogenic complex. The Kinetik NGL pipeline system has a capacity of approximately 560 MBbl/d.
Delaware Link Pipeline. The Delaware Link Pipeline consists of approximately 40 miles of 30-inch diameter pipeline with an initial capacity of approximately 1.0 Bcf/d that provides additional transportation capacity to Waha. The project reached commercial in-service in October 2023.
29
Table of Contents
Recent Developments
Durango Acquisition
On June 24, 2024, the Company consummated the previously announced Durango Acquisition for an adjusted purchase price of approximately $845.2 million, consisting of (i) $358.0 million of cash consideration paid at closing, (ii) approximately 3.8 million shares of Class C Common Stock and an equivalent number of OpCo Units, issued at closing and (iii) approximately 7.7 million shares of Class C Common Stock and an equivalent number of OpCo Units to be issued on July 1, 2025. Durango Seller is also entitled to an earn out of up to $75.0 million in cash contingent upon the completion and placing into service of the Kings Landing Project in Eddy County, New Mexico, which is currently under construction. This earn out is subject to reduction based on actual capital costs associated with the Kings Landing Project. This transaction was accounted for as a business combination pursuant to ASC 805. Refer to Note 2—Business Combinations in the Notes to our Condensed Consolidated Financial Statements for further information.
The Durango Acquisition significantly expands Kinetik’s footprint into New Mexico and the Northern Delaware Basin, expanding Kinetik’s processing capacity by 225 million cubic feet per day and doubling its existing gathering pipeline mileage. An additional 200 MMcf/d of processing capacity will be added upon completion of the Kings Landing Project.
GCX Divestiture
On June 4, 2024, the Company consummated the previously announced transaction contemplated by the GCX Purchase Agreement to sell its 16% equity interest in GCX for an adjusted purchase price of $524.4 million, consisting of $494.4 million of cash, including working capital adjustments at closing and an additional $30.0 million earn out in cash upon the approval by the GCX Board of Directors of one or more capital projects that achieve certain capacity expansion criteria. Net cash proceeds of $494.4 million were received on June 4, 2024. The Company recognized a gain of $59.9 million upon closing of the GCX Sale.
A/R Facility
On April 2, 2024, Kinetik Receivables, a bankruptcy remote special purpose entity formed as a direct subsidiary of the Partnership, entered into an A/R Facility with an initial facility limit of $150.0 million with PNC Bank, as the administrative agent, and certain purchasers party thereto from time to time, which has a scheduled termination date of April 1, 2025. Pursuant to the A/R Facility, the Company and certain of its subsidiaries continuously transfer receivables to Kinetik Receivables and Kinetik Receivables transfers ownership and control of certain receivables that meet certain qualifying conditions to third-party purchasers in exchange for cash. Certain receivables are held by Kinetik Receivables and are pledged to secure the collectability of the sold receivables. The amount available for purchases of receivables at any one time under the A/R Facility is limited to an amount calculated based on the outstanding balance of eligible receivables sold to the purchasers, subject to certain reserves, concentration limits, and other limitations. As of June 30, 2024, eligible accounts receivable of $148.8 million was pledged to the A/R Facility as collateral and $1.2 million was available to be invested by the purchasers. The net proceeds of the A/R Facility were used, together with cash on hand, to repay a portion of the outstanding borrowings under the existing Term Loan Credit Facility, lowering the remaining balance to $1.00 billion. As a result, the maturity of the Term Loan Credit Facility extended to December 8, 2026.
Secondary Offering of Common Stock
On March 13, 2024, the Company and Apache (the “Selling Stockholder”) entered into an Underwriting Agreement with Goldman Sachs & Co. LLC, as representative of the several underwriters named therein (collectively, the “Underwriters”), pursuant to which the Selling Stockholder agreed to sell to the Underwriters, and the Underwriters agreed to purchase from the Selling Stockholder, subject to and upon the terms and conditions set forth therein, 13,079,871 shares of Class A Common Stock. The Company did not receive any proceeds from the sale of shares of Common Stock in the offering.
30
Table of Contents
Factors Affecting Our Business
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 current conflict in Israel and the Gaza Strip and elsewhere in the Middle East, as well as the ongoing armed conflict in Ukraine, 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. Although ongoing armed conflicts might generate commodity price upward pressure, and our operations could benefit in an environment of higher natural gas, NGLs and condensate prices, the instability of the international political environment and human and economic hardship resulting from the conflicts would have a highly uncertain impact on the U.S. economy, which in turn, might affect our business and operations adv ersely. Our product sales revenue is exposed to commodity price fluctuations. Therefore, commodity price decline and sustained periods of low natural gas and NGL prices could have an adverse effect on our product revenue stream. The Company continues to monitor commodity prices closely and may enter into commodity price hedges from time to time as necessary to mitigate the volatility risk. In addition, the Company, when economically appropriate, enters into fee-based arrangements that insulate the Company from commodity price volatility.
Inflation and Interest Rates
The annual rate of inflation in the United States was 3.0% in June 2024 as measured by the Consumer Price Index. However, the Federal Open Market Committee (“FOMC”) maintains its long-term goals of maximum employment and inflation at the rate of 2.00%. In support of these goals, the FOMC maintained the target range for the federal funds rate at 5.25% - 5.50% during its meeting in July 2024. During the meeting, the FOMC noted that in considering any adjustments to the target range for the federal funds rate, the FOMC will carefully assess incoming data, the evolving outlook, and the balance of risks. The FOMC does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2.00%. Elevated interest rates beyond the term of our hedges may increase our financing costs and could 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.
31
Table of Contents
Results of Operations
The following table presents the Company’s results of operations for the periods presented:
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 % Change 2024 2023
% Change
(In thousands, except percentages)
Revenues:
Service revenue $ 96,415 $ 102,551 (6 %) $ 198,610 $ 205,976 (4 %)
Product revenue 260,102 191,430 36 % 496,669 365,254 36 %
Other revenue 2,940 2,222 32 % 5,572 6,013 (7 %)
Total revenues 359,457 296,203 21 % 700,851 577,243 21 %
Operating costs and expenses:
Cost of sales (exclusive of depreciation and amortization) (1)
146,513 110,467 33 % 300,200 226,344 33 %
Operating expense 44,068 39,906 10 % 87,474 75,879 15 %
Ad valorem taxes 6,212 3,889 60 % 12,504 9,347 34 %
General and administrative 31,091 22,869 36 % 65,227 50,380 29 %
Depreciation and amortization 75,061 69,482 8 % 148,667 138,336 7 %
(Gain) loss on disposal of assets
(76) 12,137 (101 %) 4,090 12,239 (67 %)
Total operating costs and expenses 302,869 258,750 17 % 618,162 512,525 21 %
Operating income 56,588 37,453 51 % 82,689 64,718 28 %
Other income (expense):
Interest and other income 309 1,042 (70 %) 400 1,336 (70 %)
Loss on debt extinguishment (525) — 100 % (525) — 100 %
Gain on sale of equity method investments
59,884 — 100 % 59,884 — 100 %
Interest expense (54,049) (16,126) NM (101,516) (85,434) 19 %
Equity in earnings of unconsolidated affiliates 55,955 49,610 13 % 116,424 96,074 21 %
Total other income, net
61,574 34,526 (78 %) 74,667 11,976 NM
Income before income taxes 118,162 71,979 64 % 157,356 76,694 105 %
Income tax expense 9,214 311 NM 13,001 727 NM
Net income including noncontrolling interest $ 108,948 $ 71,668 52 % $ 144,355 $ 75,967 90 %
(1) Cost of sales (exclusive of depreciation and amortization) is net of gas service revenues totaling $54.7 million and $38.1 million for the three months ended June 30, 2024 and 2023, respectively, and $99.2 million and $68.5 million for the six months ended June 30, 2024 and 2023, respectively, for certain volumes, where we act as principal.
NM - Not meaningful
32
Table of Contents
Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023
Revenues
For the three months ended June 30, 2024, revenue increased $63.3 million, or 21%, to $359.5 million, compared to $296.2 million for the same period in 2023. The increase was primarily driven by higher product revenue related to increased commodity prices and increased natural gas residue volumes sold.
Service revenue
Service revenue consists of service fees paid to us by our customers for providing comprehensive gathering, treating, processing and produced water disposal services necessary to bring natural gas, NGLs and crude oil to market. Service revenue for the three months ended June 30, 2024, decreased by $6.1 million, or 6%, to $96.4 million, compared to $102.6 million for the same period in 2023. This decrease was driven by lower period-over-period gas gathering fees of $6.2 million. Period-over-period gathered and processed gas volumes increased by 95.4 Mcf per day, or 5% and by 121.9 Mcf per day, or 8%, respectively. However, the total gathered and processed gas volumes where we function as the agent decreased period over period causing the change in net gas gathering fees presented as revenues to be down 6%. Over 91% 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 three months ended June 30, 2024, increased by $68.7 million, or 36%, to $260.1 million, compared to $191.4 million for the same period in 2023, primarily due to increased residue gas volumes sold and higher commodity prices. Period over period natural gas residue volumes sold increased 15.1 million MMBtu, or over 900%. Further contributing to the quarter over quarter increase, composite NGL prices increased $12.21 per barrel, or 64%, and condensate prices increased $8.40 per barrel or 12%. Partially offsetting these increases, NGL and condensate volumes sold decreased 2.1 million barrels, or 27% and residue gas prices decreased $0.37 per MMBtu, or 25%. 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 June 30, 2024, cost of sales increased $36.0 million, or 33%, to $146.5 million, compared to $110.5 million for the same period in 2023. The increase was primarily driven by aforementioned period over period increases in commodity prices and natural gas residue volumes sold, but were slightly offset by residue price decreases and NGL and condensate volume decreases. Over 99% of cost of sales (exclusive of depreciation and amortization) is included entirely in the Midstream Logistics segment.
General and administrative expenses
General and administrative expenses increased by $8.2 million, or 36% to $31.1 million for the three months ended June 30, 2024, compared to $22.9 million for the same period in 2023. The increase was mainly driven by an increase in share-based compensation of $1.8 million due to new RSUs and PSUs granted to employees during the first half of 2024 and increases in professional fees of $2.2 million, legal fees of $1.7 million and bank fees of $0.8 million primarily due to costs associated with the GCX Sale and the Durango Acquisition.
(Gain) loss on disposal of assets
The Company recognized a gain on disposal of assets of $0.1 million for the three months ended June 30, 2024, compared to a loss of $12.1 million for the same period in 2023. The loss incurred during the second quarter of 2023 was primarily related to the write off of an obsolescent train at the Pecos Bend Plant.
33
Table of Contents
Other Income (Expense)
Interest expense
Interest expense increased by $37.9 million, or 235%, to $54.0 million for the three months ended June 30, 2024, compared to $16.1 million for the same period in 2023. The increase was primarily driven by a decrease in unrealized gains from favorable valuation marks on our interest rate swaps of $36.6 mainly due less fluctuation in the forward interest rate curves during 2024 as well as the termination of one existing and partial termination of another interest rate swap contract during the fourth quarter of 2023. Refer to Note—11 Derivatives and Hedging Activities in the Notes to Condensed Consolidated Financial Statements regarding the Company’s strategy in managing interest rate risk.
Gain on sale of equity method investment
Gain on sale of equity method investment increased by $59.9 million, or 100%, for the three months ended June 30, 2024 compared to the same period in 2023. The increase was related to the GCX Sale consummated in the second quarter of 2024.
Income Tax Expense
Income tax expense increased by $8.9 million for the three months ended June 30, 2024 compared to the same period in 2023. The increase was primarily due to the release of the valuation allowance against deferred tax assets in December 2023 and the recognition of federal income tax of $8.6 million for the three months ended June 30, 2024 compared to nil for same period in 2023.
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Revenues
For the six months ended June 30, 2024, revenue increased $123.6 million, or 21%, to $700.9 million, compared to $577.2 million for the same period in 2023. The increase was primarily driven by higher period-over-period product revenue due to increased commodity prices and increased natural gas residue 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 six months ended June 30, 2024, decreased by $7.4 million, or 4%, to $198.6 million, compared to $206.0 million for the same period in 2023. The decrease was primarily driven by lower period-over-period gas gathering fees of $6.6 million. Total gathered and processed gas volumes increased 150.9 Mcf per day, or 9% and 163.0 Mcf per day, or 12%, respectively. However, the total gathered and processed gas volumes where we function as the agent decreased period over period causing the change in net gas gathering fees presented as revenues to be down 4%. Over 91% 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 six months ended June 30, 2024, increased by $131.4 million, or 36%, to $496.7 million, compared to $365.3 million for the same period in 2023, primarily due to period-over-period increases in commodity prices and residue gas volumes sold. Period over period NGL prices increased $10.46 per barrel, or 49%, condensate prices increased $5.75 per barrel or 8% and residue prices increased $0.09 per MMBtu, or 6%. The increase was also driven by period-over-period increase in natural gas residue sales volumes of 23.2 million MMBtu, or 203%. The overall increase was partially offset by decreases in NGL and condensate volumes sold of 2.3 million barrels, or 16%. 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 six months ended June 30, 2024, cost of sales increased $73.9 million, or 33%, to $300.2 million, compared to $226.3 million for the same period in 2023.
34
Table of Contents
The increase was primarily driven by a period to period increases in commodity prices and natural gas residue volumes sold, slightly offset by a decrease in NGL and condensate volumes sold. Over 99% of cost of sales (exclusive of depreciation and amortization) is included entirely in the Midstream Logistics segment.
Operating Expense
Operating expenses increased by $11.6 million, or 15%, to $87.5 million for the six months ended June 30, 2024, compared to $75.9 million for the same period in 2023. Of the total increase, 3.2 million was driven by internal labor, $2.6 million due to higher electricity costs, 2.1 million due to maintenance and 1.4 million due to lubricants and chemicals. These increases were primarily driven by the increased gathered and processed volumes discussed above. Over 99% of operating expenses are included in the Midstream Logistics segment.
General and administrative expenses
General and administrative expenses increased by $14.8 million, or 29% to $65.2 million for the six months ended June 30, 2024, compared to $50.4 million for the same period in 2023. The increase was mainly driven by an increase in share-based compensation of $6.9 million due to new RSUs and PSUs granted during the first half of 2024 and by increases in professional fees of $2.1 million, legal fees of $1.5 million and bank fees of $0.6 million primarily due to costs associated with the GCX Sale and Durango Acquisition.
Other Income (Expense)
Interest Expense
Interest expense increased by $16.1 million, or 19%, to $101.5 million for the six months ended June 30, 2024, compared to $85.4 million for the same period in 2023. The increase was driven by overall higher period over period interest expense of $5.8 million due primarily to higher variable interest rate, a decrease in capitalized interest expense of $5.1 million given the completion of the PHP expansion in December of 2023, and a net decrease in realized and unrealized gains on interest rate swaps of $4.6 million comparing to the same period in 2023. Refer to Note—11 Derivatives and Hedging Activities in the Notes to Condensed Consolidated Financial Statements regarding the Company’s strategy in managing interest rate risk.
Gain on sale of equity method investment
Gain on sale of equity method investment increased by $59.9 million, or 100%, for the six months ended June 30, 2024 compared to the same period in 2023. The increase was related to the GCX Sale consummated in the second quarter of 2024.
Equity in earnings of unconsolidated affiliates
Income from EMI pipelines increased by $20.4 million, or 21%, to $116.4 million for the six months ended June 30, 2024, compared to $96.1 million for the same period in 2023. An increase of $23.8 million was driven by higher profitability from the Company’s investment in PHP due to its expanded capacity that was placed into service in December 2023. This increase was partially offset by the decrease in equity in earnings of unconsolidated affiliates from GCX of $3.4 million due to the GCX Sale consummated in the second quarter of 2024.
Income Tax Expense
Income tax expense increased by $12.3 million for the six months ended June 30, 2024 compared to the same period in 2023. The increase was primarily due to the release of the valuation allowance against deferred tax assets in December 2023 and the recognition of federal income tax of $11.8 million for six months ended June 30, 2024 compared to nil for the same period in 2023.
35
Table of Contents
Key Performance Metrics
Adjusted EBITDA
Adjusted EBITDA is defined as net income including noncontrolling interests adjusted for interest, taxes, depreciation and amortization, warrant valuation, gain or loss on disposal of assets and debt extinguishment, the proportionate EBITDA from our EMI pipelines, equity income and gain from sale of investments recorded using the equity method, share-based compensation expense, noncash increases and decreases related to hedging activities, integration and transaction costs and 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 and other parties to evaluate our credit worthiness; and
• is used by our management for various purposes, including 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 interest. Adjusted EBITDA should not be considered as an alternative to the GAAP measure of net income including noncontrolling interest 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 interest. 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 interest, 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.
36
Table of Contents
The following table presents a reconciliation of the GAAP financial measure of net income including noncontrolling interest to the non-GAAP financial measure of Adjusted EBITDA.
Three Months Ended June 30,
Six Months Ended June 30,
2024 2023 % Change 2024 2023 % Change
(In thousands, except percentages)
Reconciliation of net income including noncontrolling interest to Adjusted EBITDA
Net income including noncontrolling interest $ 108,948 $ 71,668 52 % $ 144,355 $ 75,967 90 %
Add back:
Interest expense 54,049 16,126 NM 101,516 85,434 19 %
Income tax expense 9,214 311 NM 13,001 727 NM
Depreciation and amortization 75,061 69,482 8 % 148,667 138,336 7 %
Amortization of contract costs 1,655 1,655 — % 3,310 3,310 — %
Proportionate EMI EBITDA 85,922 74,481 15 % 174,324 146,348 19 %
Share-based compensation 15,136 13,299 14 % 37,697 30,839 22 %
(Gain) Loss on disposal of assets
(76) 12,137 (101 %) 4,090 12,239 (67 %)
Loss on debt extinguishment 525 — 100 % 525 — 100 %
Commodity hedging unrealized loss
— — — % 6,883 — 100 %
Integration costs
2,510 41 NM 2,551 953 168 %
Transaction costs
3,232 2 NM 3,232 270 NM
Other one-time cost or amortization 2,581 1,104 134 % 5,006 4,864 3 %
Deduct:
Interest income 310 — 100 % 887 — 100 %
Warrant valuation adjustment — 33 (100 %) — 77 (100 %)
Commodity hedging unrealized gain 8,205 2,678 NM — 7,643 (100 %)
Gain on sale of equity method investment
59,884 — 100 % 59,884 — 100 %
Equity income from EMI's 55,955 49,610 13 % 116,424 96,074 21 %
Adjusted EBITDA $ 234,403 $ 207,985 13 % $ 467,962 $ 395,493 18 %
NM - not meaningful
Adjusted EBITDA increased by $26.4 million, or 13%, to $234.4 million for the three months ended June 30, 2024, compared to $208.0 million for the same period in 2023. As discussed in the Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report Form 10-Q, $12.5 million of the increase was due to increased total operating revenue of $63.3 million, partially offset by increased cost of sales (exclusive of depreciation and amortization), operating expenses, ad valorem taxes and general and administrative expense of $50.8 million. The remaining increase was primarily driven by higher proportionate EMI EBITDA of $11.4 million.
Adjusted EBITDA increased by $72.5 million, or 18%, to $468.0 million for the six months ended June 30, 2024, compared to $395.5 million for the same period in 2023. As discussed in the Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report Form 10-Q, $20.2 million of the increase was due to increased total operating revenue of $123.6 million, partially offset by increased cost of sales (exclusive of depreciation and amortization), operating expenses, ad valorem taxes and general and administrative expenses of $103.5 million. The increase was also driven by (i) higher proportionate EMI EBITDA of $28.0 million primarily related to the expanded capacity at PHP that was placed into service during December 2023 and (ii) increases in the add backs related to unrealized loss on commodity hedging activities of $14.5 million and stock based compensation of $6.9 million.
37
Table of Contents
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 Adjusted EBITDA for the three and six months ended June 30, 2024 and 2023. Also refer to Note 16—Segments in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for a reconciliation of Segment Adjusted EBITDA to net income before income taxes.
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 % Change 2024 2023 % Change
(In thousands, except percentages)
Midstream Logistics $ 147,558 $ 136,570 8 % $ 290,543 $ 256,362 13 %
Pipeline Transportation 93,537 74,835 25 % 189,058 147,127 28 %
Corporate and Other (1)
(6,692) (3,420) 96 % (11,639) (7,996) 46 %
Total Segment Adjusted EBITDA
$ 234,403 $ 207,985 13 % $ 467,962 $ 395,493 18 %
(1) 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 $11.0 million, or 8%, to $147.6 million for the three months ended June 30, 2024, compared to $136.6 million for the same period in 2023. The increase was primarily due to the increased total operating revenue of $55.1 million, partially offset by increases in cost of sales (exclusive of depreciation and amortization) of $36.0 million and operating expense and ad valorem taxes of $5.8 million. The reasons for the fluctuations are discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report on Form 10-Q.
Midstream Logistics Segment Adjusted EBITDA increased by $34.2 million, or 13%, to $290.5 million for the six months ended June 30, 2024, compared to $256.4 million for the same period in 2023. The increase was primarily due to the increased total operating revenue of $107.8 million, partially offset by increases in cost of sales (exclusive of depreciation and amortization) of $73.8 million and operating expense and ad valorem taxes of $13.3 million. The reasons for the fluctuations are discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report on Form 10-Q. The increase was also driven by an increase in add back related to unrealized loss on commodity hedging activities of $14.5 million compared to the same period in 2023.
Pipeline Transportation Segment Adjusted EBITDA increased by $18.7 million, or 25%, to $93.5 million for the three months ended June 30, 2024, compared to $74.8 million for the same period in 2023. The increase was primarily driven by higher proportionate EMI EBITDA of $11.4 million due to increases in equity income from EMIs, which was mainly related to expanded capacity in PHP that was placed into service starting in December 2023. The increase was also driven by the increase in operating revenue of $8.2 million. The reasons for the fluctuations are discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report on Form 10-Q.
Pipeline Transportation Segment Adjusted EBITDA increased by $41.9 million, or 28%, to $189.1 million for the six months ended June 30, 2024, compared to $147.1 million for the same period in 2023. The increase was primarily driven by higher proportionate EMI EBITDA of $28.0 million due to increases in equity income. The remaining increase was driven by increased operating revenue of $15.8 million. The reasons for the fluctuations are discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report on Form 10-Q.
Contractual Obligations
We have contractual obligations for principal and interest payments on our 2028 Notes, 2030 Notes, and under the Term Loan Credit Facility, Revolving Credit Facility and A/R Facility. See Note 7 —Debt and Financing Costs in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
38
Table of Contents
Under certain clauses of our transportation services agreements with third party pipelines to transport natural gas and NGLs, if we fail to ship a minimum throughput volume, then we will pay certain deficiency payments for transportation based on the volume shortfall up to the MVC amount.
Capital Resources and Liquidity
The Company’s primary use of capital since inception has been for the initial construction of gathering and processing assets, as well as the acquisition of the EMI pipelines and associated subsequent construction costs. For 2024, the Company’s primary capital spending requirements are related to the business and midstream infrastructure acquisitions and other budgeted capital expenditures for construction and maintenance of gathering and processing assets, the Company’s contractual debt obligations and quarterly cash dividends. In addition, the Company may repurchase its Class A Common Stock pursuant to the Share Repurchase Program from time to time.
During the six months ended June 30, 2024, the Company’s primary sources of cash were distributions from the EMI pipelines, borrowings under the Revolving Credit Facility and A/R Facility, proceeds from the GCX Sale and cash generated from operations. Based on the Company’s current financial plan, the Company believes that cash from operations and distributions from the EMI pipelines, and remaining borrowing capacity on our credit facilities 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.
A/R Facility
On April 2, 2024, Kinetik Receivables, a special purpose entity formed as a direct subsidiary of the Partnership , entered into an A/R Facility which has a scheduled termination date of April 1, 2025. Pursuant to the A/R Facility, the Company and certain of its subsidiaries continuously transfer receivables to Kinetik Receivables and Kinetik Receivables transfers ownership and control of certain receivables that meet certain qualifying conditions to third-party purchasers in exchange for cash. Certain receivables are held by Kinetik Receivables and are pledged to secure the collectability of the sold receivables. The amount available for purchases of receivables at any one time under the A/R Facility is limited to an amount calculated based on the outstanding balance of eligible receivables sold to the purchasers, subject to certain reserves, concentration limits, and other limitations. As of June 30, 2024, eligible accounts receivable of $148.8 million was pledged to the A/R Facility as collateral and $1.2 million was available to be invested by the purchasers.
The net proceeds of the A/R Facility were used, together with cash on hand, to repay a portion of the outstanding borrowings under the Term Loan Credit Facility, lowering the remaining balance to $1.00 billion. As a result, the maturity of the Term Loan Credit Facility extended to December 8, 2026.
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 six months ended June 30, 2024 and 2023, capital spending for property, plant and equipment totaled $97.4 million and $160.2 million, respectively, intangible asset purchases totaled $2.8 million and $14.0 million, respectively, and contributions to EMI totaled $3.3 million and $154.7 million, respectively. The decrease in capital spending was mainly due to completion of the Delaware Link Pipeline and PHP expansion projects in the second half of 2023. Management believes its existing gathering, processing and transmission infrastructure capacity and future planned projects are capable of fulfilling its midstream contracts to service its customers.
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 6—Equity Method Investments in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
39
Table of Contents
Cash Flow
The following tables present cash flows from operating, investing and financing activities during the periods presented:
Six Months Ended June 30,
2024 2023
(In thousands)
Cash provided by operating activities $ 279,222 $ 231,047
Cash provided by (used in) investing activities
$ 43,302 $ (447,903)
Cash (used in) provided by financing activities
$ (314,485) $ 212,699
Operating activities . Net cash provided by operating activities increased by $48.2 million for the six months ended June 30, 2024 compared with the same period in 2023. The change in the operating cash flows reflected (i) an increase in net income including noncontrolling interest of $68.4 million; (ii) a decrease in adjustments related to non-cash items of $18.2 million, which was primarily driven by a gain of $59.9 million recognized on the GCX Sale and an increase in equity in earnings from EMI’s of $20.4 million, partially offset by increases in distributions from EMI’s of $16.4 million, deferred income taxes of $11.8 million, depreciation and amortization expense of $10.3 million and a decrease in derivative activities of $23.7 million and (iii) a decrease in working capital of $2.0 million.
Investing activities . Net cash provided by investing activities was $43.3 million for the six months ended June 30, 2024, compared to net cash used in investing activities of $447.9 million in the same period of 2023. The change was mainly driven by the cash proceeds from the GCX Sale of $494.4 million and a reduction of investments in EMI’s of $151.4 million as the PHP expansion project was completed and put into service in December 2023, partially offset by increased outgoing cash for acquisitions of $224.3 million related to the Durango Acquisition.
Financing activities . Net cash used in financing activities was $314.5 million for the six months ended June 30, 2024, which was primarily comprised of net payments on the Partnership’s Term Loan, Revolving Credit Facility and A/R Facility of $158.2 million and cash dividends of $154.7 million paid to the holders of Class A Common Stock and Common Units, compared with net cash provided by financing activities of $212.7 million for the six months ended June 30, 2023, which was primarily comprised of net proceeds from the Partnership’s Revolving Credit Facility of $255.0 million and cash dividends of $36.5 million paid to the holders of Class A Common Stock and Common Units. The significant increase in cash dividends paid in the first half of 2024 compared to the same period in 2023 was mainly due to the expiration of the Reinvestment Agreement on March 8, 2024, as such Reinvestment Holders are not obligated to reinvest a specified percent of all distributions on Common Units or dividends on shares of Class A Common Stock in the Company’s Class A Common Stock.
Dividend
During the six months ended June 30, 2024, the Company made cash dividend payments of $154.7 million to holders of Class A Common Stock and Common Units and $74.8 million was reinvested in shares of Class A Common Stock by the Reinvestment Holders.
On July 18, 2024, the Board declared a cash dividend of $0.75 per share on the Company’s Class A Common Stock which will be payable to stockholders on July 29, 2024. The Company, through its ownership of the general partner of the Partnership, declared a distribution of $0.75 per Common Unit from the Partnership to the holders of Common Units, which will be payable on August 7, 2024. As described in these Condensed Consolidated Financial Statements, as the 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.”
Share Repurchase Program
For six months ended June 30, 2024, the Company did not repurchase any of its outstanding shares.
For more information regarding the 1% U.S. federal excise tax imposed on certain repurchases of stock by publicly traded U.S. corporations, please refer to Part I, Item 1A.—”Risk Factors— Risks Related to Ownership of our Common Stock” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed on March 5, 2024.
40
Table of Contents
Liquidity
The following table presents a summary of the Company’s key liquidity indicators at the dates presented:
June 30, December 31,
2024 2023
(In thousands)
Cash and cash equivalents $ 12,549 $ 4,510
Total debt, net of unamortized deferred financing cost $ 3,407,203 $ 3,562,809
Available committed borrowing capacity $ 751,600 $ 643,400
Total debt and available credit facilities
There is no assurance that the financial condition of banks with lending commitments to the Company and its subsidiaries 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.
Off-Balance Sheet Arrangements
As of June 30, 2024, there were no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates from those disclosed on our Annual Report on Form 10-K for the year ended December 31, 2023. Please refer to information regarding our critical accounting policies and estimates included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Commission on March 5, 2024.
41
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.