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Item 2. Management’s Discussion and Analysis

2024-11-08 compared with 2024-08-09 · 141 added, 137 removed, 219 unchanged (56% of the section changed)

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 .

The following discussion and analysis addresses the results of our operations for the three and nine month period ended September 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.

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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.

The pipelines transport natural gas, NGLs and crude oil within the Permian Basin and to the U.S.

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.

The Midstream Logistics segment provides gas gathering and processing services with over 3,900 miles of low and high-pressure steel pipeline located throughout the Delaware Basin, including over 2,300 miles of gas pipeline acquired through the Durango Acquisition, and over 570,000 horsepower of compression capacity.

Gas processing assets are centralized at seven processing complexes with system-wide front-end amine treating capability, 6.5 Mmcfpd AGI capacity and 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.

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The Company owns the following equity interests in three EMI pipelines in the Permian Basin with access to various points along the U.S.

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;

1) an approximate 55.5% equity interest in Permian Highway Pipeline LLC (“PHP”), which is operated by Kinder Morgan;

2) 33.0% equity interest in Breviloba, LLC (“Breviloba”), the owner of the Shin Oak NGL Pipeline (“Shin Oak”), which is operated by Enterprise Products Operating LLC;

and 3) 27.5% equity interest in Epic Crude Holdings, LP (“EPIC”), which is operated by EPIC Consolidated Operations, LLC.

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Recent Developments

EPIC Equity Interest

During the third quarter, the Company consummated the Equity Sale and Purchase Agreement with Dos Rios Crude Intermediate LLC (“Seller”) to purchase a 12.5% of equity interest in EPIC.

The acquisition of additional interest is accounted for as a business acquisition pursuant to ASC 805.

After completion of the transaction, the Company owned a 27.5% equity interest in EPIC as of September 30, 2024.

EPIC has over 800 miles of pipeline connecting the Delaware and Midland Basins and has a capacity of 625 MBbl/d.

Durango Acquisition

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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.

The Durango Acquisition significantly expands Kinetik’s footprint into New Mexico and the Northern Delaware Basin, expanding Kinetik’s processing capacity by over 200 MMcf/d 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.

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 (the "GCX Sale"), including 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 from the GCX Buyer on June 4, 2024 and the cash earn out was received in September 2024.

The Company recognized a gain of $89.8 million upon closing of the GCX Sale.

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.

Factors Affecting Our Business

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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.

The annual rate of inflation in the United States was 2.4% in September 2024 as measured by the Consumer Price Index.

In light of the recent economic activity, unemployment level and progress on lowering inflation, the Federal Open Market Committee (“FOMC”) decided to lower the target range for the federal funds rate by 0.50% to 4.75% - 5.00% during its meeting in September 2024.

During the meeting, the FOMC noted that the economic outlook is uncertain and the Committee is attentive to the risks to both sides of its dual mandate.

If interest rates elevated beyond the term of our hedges, our financing cost will increase and could have a negative impact on the Company’s ability to meet its contractual debt obligations and to fund its operating expenses and capital expenditures.

The Company will continue to monitor the FOMC’s monetary policy and interest rate movement.

Refer to Note 11—Derivatives and Hedging Activities in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional discussion regarding our hedging strategies and objectives for interest rate risk.

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,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 % Change 2024 2023

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General and administrative 29,619 22,751 30 % 94,846 73,131 30 %

Depreciation and amortization 75,061 69,482 8 % 148,667 138,336 7 %

(Gain) loss on disposal of assets

Depreciation and amortization expense

87,583 69,935 25 % 236,250 208,271 13 %

Loss on disposal of assets

— 2,927 (100 %) 4,090 15,166 (73 %)

Total operating costs and expenses 323,488 291,901 11 % 941,650 804,426 17 %

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Other income (expense):

Interest and other income 309 1,042 (70 %) 400 1,336 (70 %)

Interest and other income 1,872 289 NM 2,272 1,625 40 %

Loss on debt extinguishment — — — % (525) — 100 %

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29,953 — 100 % 89,837 — 100 %

Interest expense (54,049) (16,126) NM (101,516) (85,434) 19 %

Interest expense (66,029) (45,009) 47 % (167,545) (130,443) 28 %

Equity in earnings of unconsolidated affiliates 53,244 50,754 5 % 169,668 146,828 16 %

Total other income, net

61,574 34,526 (78 %) 74,667 11,976 NM

19,040 6,034 NM 93,707 18,010 NM

Income before income taxes 91,914 44,434 107 % 249,270 121,128 106 %

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Net income including noncontrolling interest $ 83,654 $ 43,131 94 % $ 228,009 $ 119,098 91 %

(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.

(1) Cost of sales (exclusive of depreciation and amortization) is net of gas service revenues totaling $60.2 million and $38.6 million for the three months ended September 30, 2024 and 2023, respectively, and $159.4 million and $107.1 million for the nine months ended September 30, 2024 and 2023, respectively, for certain volumes, where we act as principal.

NM - Not meaningful

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

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.

Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

For the three months ended September 30, 2024, revenue increased $66.1 million, or 20%, to $396.4 million, compared to $330.3 million for the same period in 2023.

The increase was primarily driven by higher product revenue related to increased natural gas residue volumes sold and increased gathered and processed gas volumes.

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.

Service revenue for the three months ended September 30, 2024, decreased by $1.2 million, or 1%, to $103.1 million, compared to $104.3 million for the same period in 2023.

This decrease was driven by lower period-over-period gas gathering fees of $1.7 million.

Period-over-period gathered and processed gas volumes increased by 212.3 Mcf per day, or 12% and by 238.7 Mcf per day, or 16%, respectively.

Of the increase, Durango’s operation accounted for 207.2 Mcf per day and 195.8 Mcf per day of gathered and processed gas volume, 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 2%.

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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 revenue for the three months ended September 30, 2024, increased by $69.1 million, or 31%, to $290.4 million, compared to $221.3 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 36.1 million MMBtu, of which, Durango’s operations accounted for 14.2 million MMBtu.

Partially offsetting this increase, NGL and condensate volumes sold decreased 2.0 million barrels, or 24%.

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.

Operating expenses

Operating expenses increased by $12.9 million, or 30%, to $55.8 million for the three months ended September 30, 2024, compared to $42.9 million for the same period in 2023.

Of the total increase, $11.7 million was driven by Durango’s operations that were acquired during June 2024.

Over 99% of operating expenses are included 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.

General and administrative expenses increased by $6.9 million, or 30% to $29.6 million for the three months ended September 30, 2024, compared to $22.8 million for the same period in 2023.

The increase was mainly driven by increases in share-based compensation of $2.7 million due to new RSUs and PSUs granted during 2024 and Durango integration costs of $2.2 million.

The remaining $2.0 million increase primarily relates to higher internal labor and insurance expenses that have resulted from the overall growth of the organization.

Depreciation and amortization expense

Depreciation and amortization expense increased by $17.6 million, or 25% to $87.6 million for the three months ended September 30, 2024, compared to $69.9 million for the same period in 2023.

Of the total increase, $12.8 million was driven by the Durango Acquisition that was completed during June of 2024.

The remaining increase was driven by assets placed in service since third quarter of 2023, primarily related to the Delaware Link Pipeline that was placed in service in October 2023.

Other Income (Expense)

Gain on sale of equity method investment

Gain on sale of equity method investment increased by $30.0 million, or 100%, for the three months ended September 30, 2024.

The increase was related to the cash earn out received in September 2024 related to the GCX Sale.

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.

Interest expense increased by $21.0 million, or 47%, to $66.0 million for the three months ended September 30, 2024.

The increase was primarily driven by an unrealized loss on interest rate swaps of $12.3 million during the three months ended September 30, 2024 versus an unrealized gain on interest rate swaps of $7.8 million during 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 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

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.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

For the nine months ended September 30, 2024, revenue increased $189.7 million, or 21%, to $1,097.2 million, compared to $907.5 million for the same period in 2023.

The increase was primarily driven by higher period-over-period product revenue due to increased natural gas residue volumes sold and increased gathered and processed gas volumes.

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.

Service revenue for the nine months ended September 30, 2024, decreased by $8.6 million, or 3%, to $301.7 million, compared to $310.3 million for the same period in 2023.

The decrease was primarily driven by lower period-over-period gas gathering fees of $8.2 million.

Total gathered and processed gas volumes increased 171.1 Mcf per day, or 10% and 188.0 Mcf per day, or 13%, respectively.

Of the increase, Durango’s operations accounted for 74.8 Mcf per day and 70.6 Mcf per day of gathered and processed gas volume, 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 3%.

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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 revenue for the nine months ended September 30, 2024, increased by $200.6 million, or 34%, to $787.1 million, compared to $586.5 million for the same period in 2023, primarily due to a period-over-period increase in residue gas volumes sold.

Natural gas residue sales volumes increased 59.6 million MMBtu, of which Durango’s operations accounted for 14.6 million MMBtu.

The increase was also driven by a period over period increase in NGL prices of $8.46 per barrel, or 39%.

The overall increase was partially offset by decreases in NGL and condensate volumes sold of 4.3 million barrels, or 19% and a decrease in natural gas prices of $0.42 per MMBtu, or 25%.

Product revenues are included entirely in the Midstream Logistics segment.

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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.

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.

For the nine months ended September 30, 2024, cost of sales increased $70.7 million, or 19%, to $444.8 million, compared to $374.1 million for the same period in 2023.

As discussed above, the increase was primarily driven by period to period increases in natural gas residue volumes sold, slightly offset by a decrease in NGL and condensate volumes sold as well as lower natural gas prices.

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.

Operating expenses increased by $24.5 million, or 21%, to $143.3 million for the nine months ended September 30, 2024, compared to $118.8 million for the same period in 2023.

Of the total increase, $12.7 million was driven by Durango’s operations that were acquired during June of 2024.

The remaining increase was primarily driven by increases in internal labor, repairs and maintenance and lubricants and chemicals totaling $9.8 million, which was related to the increased gathered and processed volumes during 2024.

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.

General and administrative expenses increased by $21.7 million, or 30% to $94.8 million for the nine months ended September 30, 2024, compared to $73.1 million for the same period in 2023.

The increase was mainly driven by higher share-based compensation of $9.5 million due to new RSUs and PSUs granted during 2024 and $7.9 million of integration and transaction costs associated with the 2024 Durango and Epic transactions.

The remaining $4.3 million increase primarily relates to higher internal labor and insurance expenses that have resulted from the overall growth of the organization.

Depreciation and amortization expense

Depreciation and amortization expense increased by $28.0 million, or 13% to $236.3 million for the nine months ended September 30, 2024, compared to $208.3 million for the same period in 2023.

Of the total increase, $13.6 million was driven by Durango Acquisition that was completed during June of 2024.

The remaining increase was driven by assets placed in service since third quarter of 2023, primarily related to the Delaware Link Pipeline that was placed in service in October 2023 and the rich gas lateral into Lea County, New Mexico.

Loss on disposal of assets

Loss on disposal of asset decreased by $11.1 million, or 73% to $4.1 million for the nine months ended September 30, 2024, compared to $15.2 million for the same period in 2023.

The decrease was mainly due to the write off of obsolete gathering and processing systems and facilities of $11.8 million in 2023, but no similar write off took place in 2024.

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.

Gain on sale of equity method investment increased by $89.8 million, or 100%, for the nine months ended September 30, 2024, compared to the same period in 2023.

The increase was related to the GCX Sale consummated in the second quarter of 2024.

Interest Expense

Interest expense increased by $37.1 million, or 28%, to $167.5 million for the nine months ended September 30, 2024, compared to $130.4 million for the same period in 2023.

The increase was driven by a decrease in capitalized interest expense of $8.9 million given the completion of the PHP expansion in December of 2023, and an unrealized loss on interest rate swaps of $2.8 million during the nine months ended September 30, 2024 versus an unrealized gain on interest swaps of $27.5 million during 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.

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.

Income from EMI pipelines increased by $22.8 million, or 16%, to $169.7 million for the nine months ended September 30, 2024, compared to $146.8 million for the same period in 2023.

An increase of $35.9 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.

This increase was partially offset by the decrease in equity in earnings of unconsolidated affiliates from GCX 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.

Income tax expense increased by $19.2 million for the nine months ended September 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 deferred federal income tax of $18.4 million for nine months ended September 30, 2024 compared to nil for the same period in 2023.

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 is defined as net income including noncontrolling interests adjusted for interest, taxes, depreciation and amortization, 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, fair value adjustments for contingent liabilities, 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.

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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,

Three Months Ended September 30,

Nine Months Ended September 30,

2024 2023 % Change 2024 2023 % Change

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Net income including noncontrolling interest $ 83,654 $ 43,131 94 % $ 228,009 $ 119,098 91 %

Interest expense 54,049 16,126 NM 101,516 85,434 19 %

Interest expense 66,029 45,009 47 % 167,545 130,443 28 %

Income tax expense 8,260 1,303 NM 21,261 2,030 NM

Depreciation and amortization 75,061 69,482 8 % 148,667 138,336 7 %

Depreciation and amortization expenses

87,583 69,935 25 % 236,250 208,271 13 %

Amortization of contract costs 1,655 1,655 — % 4,965 4,965 — %

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Share-based compensation 15,171 12,502 21 % 52,868 43,340 22 %

(Gain) Loss on disposal of assets

Loss on disposal of assets

— 2,927 (100 %) 4,090 15,166 (73 %)

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— 8,259 (100 %) — 616 (100 %)

Contingent liability fair value adjustment

1,400 — 100 % 1,400 — 100 %

Integration costs

2,510 41 NM 2,551 953 168 %

Transaction costs

2,540 21 NM 5,091 985 NM

Acquisition transaction costs

31 378 (92 %) 3,538 648 NM

Other one-time cost or amortization 3,717 2,662 40 % 8,448 7,545 12 %

Interest income 310 — 100 % 887 — 100 %

Warrant valuation adjustment — 4 (100 %) — — — %

Commodity hedging unrealized gain 8,205 2,678 NM — 7,643 (100 %)

Interest income 572 293 95 % 1,459 314 NM

Warrant valuation adjustment — — — % — 73 (100 %)

Commodity hedging unrealized gain 8,817 — 100 % 1,935 — 100 %

Gain on sale of equity method investment

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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.

Adjusted EBITDA increased by $50.4 million, or 23%, to $265.7 million for the three months ended September 30, 2024, compared to $215.3 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 on Form 10-Q, $49.2 million of the increase was due to increased total operating revenue of $66.1 million, partially offset by increased cost of sales (exclusive of depreciation and amortization), operating expenses, ad valorem taxes and general and administrative expense of $16.9 million.

The remaining increases were primarily driven by higher proportionate EMI EBITDA of $9.6 million and higher non-cash amortizations or other one-time costs of $8.6 million.

These increases were partially offset by a decrease of $17.1 million related to unrealized commodity hedging activities.

Adjusted EBITDA increased by $122.8 million, or 20%, to $733.6 million for the nine months ended September 30, 2024, compared to $610.8 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 on Form 10-Q, $69.3 million of the increase was due to increased total operating revenue of $189.7 million, partially offset by increased cost of sales (exclusive of depreciation and amortization), operating expenses, ad valorem taxes and general and administrative expenses of $120.3 million.

The increase was also driven by (i) higher proportionate EMI EBITDA of $37.6 million primarily related to the expanded capacity at PHP that was placed into service during December 2023 and (ii) increases related to stock based compensation of $9.5 million and integration, transaction and other one-time costs of $7.9 million, which was mainly related to the Durango Acquisition completed in June 2024.

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.

The following table presents Segment Adjusted EBITDA for the three and nine months ended September 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,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 % Change 2024 2023 % Change

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(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.

Midstream Logistics Segment Adjusted EBITDA increased by $33.2 million to $173.6 million for the three months ended September 30, 2024, compared to $140.4 million for the same period in 2023.

The increase was primarily due to the increased total operating revenue of $57.9 million, partially offset by increased operating expense and ad valorem taxes of $12.7 million and a decrease of $17.1 million related to unrealized commodity hedging activities.

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.

Midstream Logistics Segment Adjusted EBITDA increased by $67.4 million to $464.2 million for the nine months ended September 30, 2024, compared to $396.8 million for the same period in 2023.

The increase was primarily due to the increased total operating revenue of $165.7 million, partially offset by increases in cost of sales (exclusive of depreciation and amortization) of $70.7 million and operating expense and ad valorem taxes of $26.2 million.

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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.

Pipeline Transportation Segment Adjusted EBITDA increased by $17.2 million to $96.1 million for the three months ended September 30, 2024, compared to $78.9 million for the same period in 2023.

The increase was primarily driven by higher proportionate EMI EBITDA of $9.6 million due to increased profitability at PHP related to expanded capacity that was placed into service starting in December 2023.

The increase was also driven by the increase in operating revenue of $8.2 million primarily related to the Delaware Link Pipeline going into service during October 2023.

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.

Pipeline Transportation Segment Adjusted EBITDA increased by $59.2 million to $285.2 million for the nine months ended September 30, 2024, compared to $226.0 million for the same period in 2023.

The increase was primarily driven by higher proportionate EMI EBITDA of $37.6 million due to increased profitability at PHP related to expanded capacity that was placed into service starting in December 2023.

The remaining increase was driven by increased operating revenue of $23.9 million primarily related to the Delaware Link Pipeline going into service during October 2023.

The reasons for the fluctuations are discussed in Item 2.

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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.

The Company’s primary use of capital since inception has been for the initial construction of gathering and processing assets, as well as the acquisitions of businesses and EMI pipelines and associated subsequent construction costs.

For 2024, the Company’s primary spending requirements are related to the business 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.

During the nine months ended September 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.

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.

Certain receivables are held by Kinetik Receivables and are pledged to secure the collectability of the sold receivables.

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.

Pursuant to the A/R Facility, the Company and certain of its subsidiaries continuously transfer receivables to Kinetik Receivables and Kinetik Receivables transfers receivables that meet certain qualifying conditions to third-party purchasers in exchange for cash.

These receivables are held by Kinetik Receivables and are pledged to secure the collectability of the sold receivables and are accounted for as secured borrowings.

The amount available for borrowing 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 September 30, 2024, eligible accounts receivable of $150.0 million was pledged to the A/R Facility as collateral.

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 during the second quarter 2024, lowering the remaining balance to $1.00 billion.

As a result, the maturity of the Term Loan Credit Facility extended to December 8, 2026.

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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.

During the nine months ended September 30, 2024 and 2023, capital spending for property, plant and equipment totaled $155.8 million and $245.8 million, respectively, intangible asset purchases totaled $7.7 million and $15.1 million, respectively, and contributions to EMI totaled $3.3 million and $202.7 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.

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The following tables present cash flows from operating, investing and financing activities during the periods presented:

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

Cash provided by operating activities $ 493,356 $ 405,585

Cash provided by (used in) investing activities

Cash used in investing activities

$ (65,909) $ (582,600)

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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.

Net cash provided by operating activities increased by $87.8 million for the nine months ended September 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 interests of $108.9 million;

(ii) a decrease in adjustments related to non-cash items of $20.8 million, which was mainly driven by a gain of $89.8 million recognized on the GCX Sale and an increase in equity in earnings from EMI of $22.8 million, partially offset by increases in distribution from EMIs of $17.8 million, deferred income taxes of $18.1 million, depreciation and amortization expense of $28.0 million and a decrease in favorable derivative activities adjustments of $26.8 million and (iii) a decrease in working capital of $0.4 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.

Net cash used in investing activities decreased by $516.7 million for the nine months ended September 30, 2024 compared with the same period in 2023.

The decrease was primarily driven by cash proceeds from the GCX Sale of $524.4 million, lower capital expenditures of $97.3 million and a reduction of investments in EMIs of $199.5 million as the PHP expansion project was completed and put into service in December 2023, partially offset by net cash used in the Durango Acquisition and net cash used in the acquisition of additional equity interests in EPIC.

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.

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.

Net cash used in financing activities was $411.5 million for the nine months ended September 30, 2024, which was primarily comprised of net payments on the Partnership’s Term Loan, Revolving Credit Facility and A/R Facility of $138.6 million and cash dividend of $272.9 million paid to the holders of Class A Common Stock and Common Units, compared with net cash provided by financing activities of $170.7 million for the nine months ended September 30, 2023, which was primarily comprised of net proceeds from the Partnership’s Revolving Credit Facility of $235.0 million and cash dividend of $58.6 million paid to the holders of Class A Common Stock and Common Units.

Significant increase in cash dividend paid in the first nine months 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.

During the nine months ended September 30, 2024, the Company made cash dividend payments of $272.9 million to holders of Class A Common Stock and Common Units and $75.2 million was reinvested in shares of Class A Common Stock by the Reinvestment Holders.

On October 17, 2024, the Board declared a cash dividend of $0.78 per share on the Company’s Class A Common Stock which will be payable to stockholders on October 28, 2024.

The Company, through its ownership of the general partner of the Partnership, declared a distribution of $0.78 per Common Unit from the Partnership to the holders of Common Units, which will be payable on November 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 nine months ended September 30, 2024, the Company did not repurchase any of its outstanding shares.

For more information regarding the 1% U.S.

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The following table presents a summary of the Company’s key liquidity indicators at the dates presented:

June 30, December 31,

September 30, December 31,

(In thousands)

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Off-Balance Sheet Arrangements

As of June 30, 2024, there were no off-balance sheet arrangements.

As of September 30, 2024, there were no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis