# Kinetik Holdings Inc. (KNTK) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Kinetik Holdings Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1692787/000169278724000011/apa-20231231.htm
Accession: 0001692787-24-000011
Filing date: 2024-03-05
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/KNTK/
All MD&A years: /company/KNTK/mda/
Previous year: /company/KNTK/mda/fy2022/ (FY 2022)
Next year: /company/KNTK/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read together with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report, and the risk factors and related information set forth in Part I, Item 1A and Part II, Item 7A of this Annual Report. This section of this Annual Report generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are omitted in this Annual Report are incorporated by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 7, 2023.

Unless otherwise noted or the context requires otherwise, references herein to Kinetik Holdings Inc.,“the Company”, “us”, “our”, “we” or similar terms, with respect to time periods prior to February 22, 2022, include BCP and its consolidated subsidiaries and do not include ALTM and its consolidated subsidiaries, while references herein to Kinetik Holdings Inc.,“the Company”, “us”, “our”, “we” or similar terms, with respect to time periods from and after February 22, 2022, include ALTM and its consolidated subsidiaries.

Business Combination

On February 22, 2022, (“the Closing Date”), Kinetik Holdings Inc., a Delaware corporation (formerly known as Altus Midstream Company), consummated the business combination transactions contemplated by the Contribution Agreement, dated as of October 21, 2021 (the “Contribution Agreement”), by and among the Company, Altus Midstream LP (now known as Kinetik Holdings LP), a Delaware limited partnership and subsidiary of Altus Midstream Company (the “Partnership”), New BCP Raptor Holdco, LLC, a Delaware limited liability company, and BCP. The transactions contemplated by the Contribution Agreement are referred to herein as the “Transaction.” In connection with the closing of the Transaction (the “Closing”), the Company changed its name from “Altus Midstream Company” to “Kinetik Holdings Inc.” Upon closing of the business combination, BCP and its subsidiaries became wholly owned subsidiaries of the Partnership. The Transaction was accounted for as a reverse merger pursuant to ASC 805, Business Combination (“ASC 805”).

Refer to Note 3—Business Combination in the Notes to the Consolidated Financial Statements for further information regarding the Transaction.

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. The Company’s corporate office is located in Houston, Texas and 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 four EMI pipelines originating in the Permian Basin with various access points to the U.S. Gulf Coast, Kinetik NGL Pipelines and Delaware Link Pipeline. 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 1,600 miles of low and high-pressure steel pipeline located throughout the Delaware Basin. Gas processing assets are centralized at five processing complexes with total cryogenic processing capacity of approximately 2.0 Bcf/d.

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.

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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 four EMI pipelines in the Permian Basin with access to various points along the Texas Gulf Coast: 1) an approximate 55.5% equity interest in Permian Highway Pipeline LLC (“PHP”), which is also owned and operated by Kinder Morgan. The increase of equity interest in PHP was related to the completion of PHP’s expansion project in December 2023; 2) 16.0% equity interest in Gulf Coast Express Pipeline LLC (“GCX”), which is also owned and operated by Kinder Morgan; 3) 33.0% equity interest in Shin Oak, which is owned by Breviloba, LLC, and operated by Enterprise Products Operating LLC; and 4) 15.0% 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 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 580 MBbl/d.

Delaware Link Pipeline. The Delaware Link Pipeline consists of approximately 40 miles of 30-inch diameter pipeline with a capacity of approximately 1.0 Bcf/d that provides additional transportation capacity to Waha. The project reached commercial in-service in October 2023.

Recent Developments

Secondary Offering of Common Stock

On December 11, 2023, the Company and Apache Midstream (the “Selling Stockholder”) entered into an Underwriting Agreement with J.P. Morgan Securities 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, 7,475,000 shares of Class A Common Stock. The Company did not receive any proceeds from the sale of shares of Common Stock in the offering.

Sustainability-Linked Senior Notes Offerings

On December 6, 2023, the Partnership completed a private placement of $500.0 million aggregate principal amount of 6.625% Sustainability-Linked Senior Notes due 2028 (the “Original 2028 Notes”) at par; further, on December 19, 2023, the Company completed an additional private placement of $300.0 million aggregate principal amount of 6.625% Sustainability-Linked Senior Notes due 2028 (the “Additional 2028 Notes”) at 100.50% of face amount (collectively, the “2028 Notes”). The Original 2028 Notes and Additional 2028 Notes are treated as a single series of securities under the indenture governing the 2028 Notes, vote together as a single class, and have substantially identical terms, other than the issue date and issue price. The 2028 Notes are fully and unconditionally guaranteed by the Company and issued under our Sustainability-Linked Financing Framework. The Sustainability Performance Targets (“SPT”) as defined in the indenture governing the 2028 Notes related to three key performance indicators: (1) Reduction of Scope 1 and Scope 2 greenhouse gas emissions intensity, (2) Reduction of Scope 1 and Scope 2 methane gas emissions intensity and (3) female representation in corporate officer positions. For additional information regarding our SPTs, please see “—Sustainability-Linked Financing Framework” below.

Proceeds from the 2028 Notes together with cash on hand and borrowings under the Company’s Revolving Credit Facility (as defined below) were used to repay a portion of the outstanding borrowings under the Company’s existing Term Loan (as defined below).

Term Loan Credit Facility Amendment 2023

On December 6, 2023, the Partnership, the Company, PNC Bank, National Association (“PNC Bank”), as administrative agent, and the banks and other financial institutions party thereto, as lenders, entered into a First Amendment to Credit Agreement (the “First Amendment”) to amend certain terms of its existing Term Loan Credit Facility (the “Term Loan”), concurrently with the closing of its 2028 Notes discussed above. The First Amendment (1) extended the maturity of the Term Loan from June 8, 2025 to June 8, 2026 upon the prepayment of a principal amount of loans under the Term Loan of no less than $500.0 million; and (2) provided for an additional automatic six-month extension of the amended maturity date to December 8, 2026, at such time as no more than $1.00 billion of an aggregate principal amount of loans under the Term Loan remain outstanding, subject to customary conditions. The Company determined that the amendment of the maturity date is a

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modification of the original Term Loan. The fee paid directly to lenders in arranging the modification totaling $1.5 million was recorded as original debt discount and the costs incurred with third parties directly related to the modification totaling $0.6 million was expensed as incurred. Furthermore, the partial paydown of the principal totaling $800.0 million, using proceeds from the 2028 Notes, resulted in the $1.9 million write off (loss on extinguishment) of a proportional amount of the remaining unamortized debt issuance cost and original discount from the Term Loan immediately prior to the paydown.

PHP Expansion Project

In June 2022, PHP announced a final investment decision to proceed with its expansion project to increase total capacity to 2.65 Bcf/d, fully subscribed under 10 year take-or-pay contracts. The expansion project increased PHP’s capacity by nearly 550 MMcf/d. Approximately 67% of the funding for the expansion project was borne by the Company and the remainder by Kinder Morgan. As a result, upon completion of the project, the Company’s ownership interest in PHP increased to approximately 55.5%. The Company contributed $238.8 million to the expansion project during 2023 and the expansion went into service on December 1, 2023.

Sustainability-Linked Financing Framework

On May 16, 2022, we published our Sustainability-Linked Financing Framework, which we developed in alignment with the five components outlined in the International Capital Markets Association Sustainability-Linked Bond Principles as of June 2020 and the Loan Syndications and Trading Association Sustainability-Linked Loan Principles as of July 2021 (each as referred to in our Sustainability-Linked Financing Framework) and corresponding Second Party Opinion provided by ISS ESG.

This framework establishes KPIs that will be used to measure our progress against our SPTs. Under this framework, our KPIs are (1) Scope 1 and Scope 2 greenhouse gas emissions intensity, (2) Scope 1 and Scope 2 methane gas emissions intensity and (3) female representation in corporate officer positions. Our long-term SPTs are (1) reducing the intensity of all Scope 1 and Scope 2 greenhouse gas emissions from our operations by 35% by 2030 from a 2021 baseline year (as described in the Sustainability-Linked Financing Framework), (2) reducing the intensity of Scope 1 and Scope 2 methane gas emissions from our operations by 30% by 2030 from a 2021 baseline year, and (3) increasing female representation in corporate officer positions of Vice President and above to 20% by year-end 2026 from a 2021 baseline year.

Fiscal year 2022 marked the first measurement period for our Term Loan and Revolving Credit Facility, which are linked to the methane emissions intensity ratio KPI and the female officer representation KPI. For the methane emissions intensity ratio KPI, we achieved a 12.0% reduction from 2021 to 2022, which was 8.70% higher than the defined 2022 target in our debt agreements. For the female officer representation KPI, Kinetik achieved a 17.70% female participation rate in 2022, which was 8.00% higher than the defined 2022 target in our debt agreements.

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 armed conflict in Israel and the Gaza Strip, the ongoing armed conflict in Ukraine, and uncertainty from failures of two U.S. banks and the resulting effects on financial markets, 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 adversely. 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. Also, after a rapid rise of oil and natural gas prices in the first half of 2022, oil and natural gas prices have moderated from their peaks during the past twelve months in 2023. 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.

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Inflation and Interest Rates

The annual rate of inflation in the United States was 3.10% for the 12 months ending January 2024 compared to 6.4% for the 12 months ending in January 2023, as measured by the Consumer Price Index. The Federal Open Market Committee (“FOMC”) seeks to achieve maximum employment and inflation at the rate of 2.00% over the long run. In support of these goals, the FOMC maintained the target range for the federal funds rate to 5.25% - 5.50% during its meeting in January 2024. The Committee indicated it will not be appropriate to reduce the target range for the federal funds rate until it gains greater confidence that inflation is moving sustainably toward 2.00%. Increased interest rates beyond the term of our hedges will increase our financing costs and 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.

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Results of Operations

The following table presents the Company’s results of operations for the periods presented:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022*","","% Change"],["","","(In thousands, except percentages)"],["Revenues:"],["Service revenue","","$","417,751","","","$","393,954","","","6","%"],["Product revenue","","822,410","","","806,353","","","2","%"],["Other revenue","","16,251","","","13,183","","","23","%"],["Total revenues","","1,256,412","","","1,213,490","","","4","%"],["Operating costs and expenses:"],["Cost of sales (exclusive of depreciation and amortization expenses)**","","515,721","","","541,518","","","(5)","%"],["Operating expense","","161,520","","","137,289","","","18","%"],["Ad valorem taxes","","21,622","","","16,970","","","27","%"],["General and administrative","","97,906","","","94,268","","","4","%"],["Depreciation and amortization expenses","","280,986","","","260,345","","","8","%"],["Loss on disposal of assets","","19,402","","","12,611","","","54","%"],["Total operating costs and expenses","","1,097,157","","","1,063,001","","","3","%"],["Operating income","","159,255","","","150,489","","","6","%"],["Other income (expense):"],["Interest and other income","","2,004","","","489","","","NM"],["Gain on Preferred Units redemption","","\u2014","","","9,580","","","(100)","%"],["Loss on debt extinguishment","","(1,876)","","","(27,975)","","","(93)","%"],["Gain on embedded derivative","","\u2014","","","89,050","","","(100)","%"],["Interest expense","","(205,854)","","","(149,252)","","","38","%"],["Equity in earnings of unconsolidated affiliates","","200,015","","","180,956","","","11","%"],["Total other (expense) income, net","","(5,711)","","","102,848","","","(106)","%"],["Income before income tax","","153,544","","","253,337","","","(39)","%"],["Income tax (benefit) expense","","(232,908)","","","2,616","","","NM"],["Net income including noncontrolling interests","","$","386,452","","","$","250,721","","","54","%"]]
[[/GREPCENT_TABLE]]

*The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer to the Annual Report basis of presentation in Note 1—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements in this Annual Report, for further information.

**Cost of sales (exclusive of depreciation and amortization) is net of gas service revenues totaling $148.3 million and $70.4 million for the years ended December 31, 2023 and 2022, respectively, for certain volumes where we act as principal.

NM - Not meaningful

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Revenues

For the year ended December 31, 2023, revenue increased $42.9 million, or 4%, to $1,256.4 million, compared to $1,213.5 million for the same period in 2022. The increase was primarily driven by increases in gathered and disposed of produced water volumes, as well as similar increases in condensate and NGL volumes sold.

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Service revenue

Service revenue consists of service fees paid to the Company by its 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 year ended December 31, 2023, increased by $23.8 million, or 6%, to $417.8 million, compared to $394.0 million for the same period in 2022. This increase is primarily due to a period-over-period increase in gathered and disposed of produced water volumes of 76.4 MBbls per day, or $28.2 million. Period over period gathered and processed gas volumes increased 307.4 Mcf per day and 271.5 Mcf per day, respectively. However, the total gathered and processed gas volumes where we function as the agent decreased period over period, which lead to a $3.1 million decrease in service fees. Over 99% of service revenues are included in the Midstream Logistics segment.

Product revenue

Product revenue consists of commodity sales (including condensate, natural gas residue and NGLs). Product revenue for the year ended December 31, 2023, increased by $16.1 million, or 2%, to $822.4 million, compared to $806.4 million for the same period in 2022, primarily due to a period-over-period increase in NGL and condensate sales volumes. NGL and condensate sales volumes increased 14.7 million barrels, or over 80%. The increase in volume was partially offset by decreases in condensate prices of $22.38 per barrel, or 24%, and decreases of NGL prices of $14.31 per barrel, or 40%. In addition, natural gas residue sales volumes increased 0.5 million MMBtu, or 2%, but fully offsetting this increase in residue volumes, natural gas prices decreased period-over-period $3.84 per MMBtu, or 69%. 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 year ended December 31, 2023, cost of sales decreased $25.8 million, or 5%, to $515.7 million, compared to $541.5 million for the same period in 2022. The decrease was primarily driven by the period-to-period decreases in the aforementioned commodity prices. More than 99% of the cost of sales (exclusive of depreciation and amortization) are included in the Midstream Logistics segment.

Operating expenses

Operating expenses increased by $24.2 million, or 18%, to $161.5 million for the year ended December 31, 2023, compared to $137.3 million for the same period in 2022. Of the total increase, $6.3 million related to increased operating expenses from our water operations, predominantly related to the newly acquired midstream infrastructure assets. The remaining increase was primarily the result of higher leased compression ($8.8 million) and electricity costs ($5.6 million) from the increased gathered and processed volumes discussed above. Over 99% of operating expenses are included in the Midstream Logistics segment.

Loss on disposal of assets

For the year ended December 31, 2023, the Company recognized a loss on disposal of assets of $19.4 million compared with $12.6 million for the same period in 2022. The change was primarily related to retirements of vehicles, compressor stations and a refrigeration plant that had become idle due to operational changes.

Other Income (Expense)

Loss on debt extinguishment

For the year ended December 31, 2023, the Company recognized a loss on debt extinguishment of $1.9 million, compared with a loss of $28.0 million for the same period in 2022. The loss on debt extinguishment recognized during 2023 was related to unamortized debt issuance costs written off in relation to the $800 million repayment of the Term Loan as discussed in Note—8 Debt and Financing Costs in the Notes to Consolidated Financial Statements. The prior year loss on debt extinguishment was in relation to the comprehensive refinancing completed in June of 2022.

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Gain on embedded derivative

For the year ended December 31, 2022, the Company recognized a gain on an embedded derivative of $89.1 million as a result of the complete redemption of redeemable noncontrolling interest Preferred Units during July of 2022. There were no similar redemptions or activities for the year ended December 31, 2023.

Interest expense

The Company incurred interest expense of $205.9 million for the year ended December 31, 2023 compared with $149.3 million for the same period in 2022. Increases of $77.3 million were driven by higher average debt obligations and an overall increase in interest rates associated with the Term Loan and Revolving Credit Facility, which carried some variability. This increase was partially offset by higher capitalized interest of $15.5 million related to ongoing growth capital projects and the PHP expansion, as well as $7.8 million of year over year favorable valuation marks on our interest rate swaps. Refer to Note—13 Derivatives and Hedging Activities in the Notes to 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 $19.1 million, or 11% to $200.0 million for the year ended December 31, 2023, compared to $181.0 million for the same period in 2022. The increase was primarily due to additional equity interests in PHP from the recently completed expansion and due to the Company owning the former ALTM EMI pipelines for a full 12 months during 2023 versus 10 months in 2022. Equity in earnings of unconsolidated affiliates is included entirely in the Pipeline Transportation segment.

Income taxes (benefit) expense

The Company recorded income tax benefit of $232.9 million for the year ended December 31, 2023, compared to income tax expense of $2.6 million for the same period in 2022. The current year tax benefit was primarily due to the release of the valuation allowance on federal deferred tax assets during the fourth quarter of 2023. As the Company achieved a three-year cumulative level of profitability as of December 31, 2023, the Company has concluded that it is more likely than not that its deferred tax assets will be realized and as such, no valuation allowance was recorded.

Key Performance Metrics

Adjusted EBITDA

Adjusted EBITDA is defined as net income including noncontrolling interests adjusted for interest, taxes, depreciation and amortization, impairment charges, asset write-offs, the proportionate EBITDA from our EMI pipelines, equity in earnings from investments recorded using the equity method, share-based compensation expense, noncash increases and decreases related to trading and hedging agreements, extraordinary losses and unusual or non-recurring charges. Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.

We believe that Adjusted EBITDA provides a meaningful understanding of certain aspects of earnings before the impact of investing and financing charges and income taxes. Adjusted EBITDA is useful to an investor in evaluating our performance because this measure:

•Is widely used by analysts, investors and competitors to measure a company’s operating performance;

•Is a financial measurement that is used by rating agencies, lenders, and other parties to evaluate our credit worthiness; and

•Is used by our management for various purposes, including as a measure of performance and as a basis for strategic planning and forecasting.

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Adjusted EBITDA is not defined in GAAP

The GAAP measure used by the Company that is most directly comparable to Adjusted EBITDA is net income including noncontrolling interests. Adjusted EBITDA should not be considered as an alternative to the GAAP measure of net income including noncontrolling interests or any other measure of financial performance presented in accordance with GAAP. Adjusted EBITDA has important limitations as an analytical tool because it excludes some, but not all, items that affect net income including noncontrolling interests. Adjusted EBITDA should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP. The Company’s definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies in the industry, thereby diminishing its utility.

Reconciliation of non-GAAP financial measure

Company management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing the comparable GAAP measure, understanding the differences between Adjusted EBITDA as compared to net income including noncontrolling interests, and incorporating this knowledge into its decision-making processes. Management believes that investors benefit from having access to the same financial measure that the Company uses in evaluating operating results.

The following table presents a reconciliation of the GAAP financial measure of net income including noncontrolling interests to the non-GAAP financial measure of Adjusted EBITDA.

[[GREPCENT_TABLE]]
[["","","For The Year Ended December 31,"],["","","2023","","2022*","","% Change"],["","","(In thousands, except percentage)"],["Reconciliation of net income including noncontrolling interests to Adjusted EBITDA"],["Net income including noncontrolling interests","","$","386,452","","","$","250,721","","","54","%"],["Add back:"],["Interest expense","","205,854","","","149,252","","","38","%"],["Income tax (benefit) expense","","(232,908)","","","2,616","","","NM"],["Depreciation and amortization","","280,986","","","260,345","","","8","%"],["Amortization of contract costs","","6,620","","","1,807","","","NM"],["Proportionate EMI EBITDA","","306,072","","","268,826","","","14","%"],["Share-based compensation","","55,983","","","42,780","","","31","%"],["Loss on disposal of assets","","19,402","","","12,611","","","54","%"],["Loss on debt extinguishment","","1,876","","","27,975","","","(93)","%"],["Integration Costs","","1,015","","","12,208","","","(92)","%"],["Transaction Costs","","648","","","6,412","","","(90)","%"],["Other one-time cost or amortization","","11,901","","","16,355","","","(27)","%"],["Deduct:"],["Interest income","","677","","","\u2014","","","100","%"],["Warrant valuation adjustment","","88","","","133","","","(34)","%"],["Gain on redemption of mandatorily redeemable Preferred Units","","\u2014","","","9,580","","","(100)","%"],["Unrealized gain on derivatives","","4,291","","","\u2014","","","100","%"],["Gain on embedded derivative","","\u2014","","","89,050","","","(100)","%"],["Equity income from unconsolidated affiliates","","200,015","","","180,956","","","11","%"],["Adjusted EBITDA","","$","838,830","","","$","772,189","","","9","%"]]
[[/GREPCENT_TABLE]]

*The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer to the Annual Report basis of presentation in Note 1—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements in this Annual Report, for further information.

NM - Not meaningful

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Adjusted EBITDA increased by $66.6 million, or 9% to $838.8 million for the year ended December 31, 2023, compared to $772.2 million for the same period in 2022. As discussed in the Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Annual Report, $36.2 million of the increase was due to an increase in operating revenues of $42.9 million and lower cost of sales (exclusive of depreciation and amortization) of $25.8 million, partially offset by an increase in operating expenses, ad valorem taxes and general and administrative expenses totaling of $32.5 million. The increase was also driven by (i) higher proportionate EMI EBITDA of $37.2 million due to owning the EMI investments acquired through the Transaction for a full 12 months in 2023 and increased equity ownership in PHP upon completion of the PHP expansion project in December 2023 and (ii) an increase in the add back related to share-based compensation of $13.2 million due primarily to a full 12 months of amortization for the Class A Shares versus only 10 months in the prior period. These increases were partially offset by decreases in the add backs related to transaction and integration costs totaling $17.0 million related to the Transaction from 2022.

Segment Adjusted EBITDA

Segment Adjusted EBITDA is defined as segment net earnings adjusted to exclude interest expense, income tax expense, depreciation and amortization, the proportionate effect of these same items for our EMI pipelines and other non-recurring items. The following table presents segment adjusted EBITDA. Also refer to Note 19—Segments in the Notes to our Consolidated Financial Statements in this Annual Report for reconciliation of segment adjusted EBITDA to net income including noncontrolling interests.

[[GREPCENT_TABLE]]
[["","","For The Year Ended December 31,"],["","","2023","","2022*","","% Change"],["","","(In thousands, except percentage)"],["Midstream Logistics","","$","543,190","","","$","516,045","","","5","%"],["Pipeline Transportation","","311,106","","","269,237","","","16","%"],["Corporate and Other**","","(15,466)","","","(13,093)","","","18","%"],["Total segment adjusted EBITDA","","$","838,830","","","$","772,189","","","9","%"]]
[[/GREPCENT_TABLE]]

* The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer to Note 1—Description of Business and Basis of Presentation in the Notes to the Consolidated Financial Statements of this Annual Report for further information on the Company’s financial statement consolidation.

** Corporate and Other represents those results that: (i) are not specifically attributable to a reportable segment; (ii) are not individually reportable or (iii) have not been allocated to a reportable segment for the purpose of evaluating their performance, including certain general and administrative expense

Midstream Logistics segment adjusted EBITDA increased by $27.1 million, or 5%, to $543.2 million for the year ended December 31, 2023, compared to $516.0 million for the same period in 2022. The increase was primarily driven by an increase in the segment’s operating revenue of $38.0 million, or 3% and a decrease in costs of sales, excluding deprecation and amortization expense, of $25.8 million, or 5%. The increase was partially offset by an increase in operating expense of $24.8 million, or 18%. The reasons for the fluctuations are discussed in the Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Annual Report.

Pipeline Transportation segment adjusted EBITDA increased by $41.9 million, or 16%, to $311.1 million for the year ended December 31, 2023, compared to $269.2 million for the same period in 2022. The increase was driven by an increase in segment’s operating revenue of $4.9 million, or 267%, due to higher service revenue and other revenue from the pipelines acquired and constructed by the Company, and an increase in the Company’s EMIs’ proportionate EBITDA of $37.2 million, or 14%, due to owning the EMI investments acquired through the Transaction for a full 12 months and increased equity ownership in PHP upon completion of the PHP expansion project in December 2023.

Contractual Obligations

We have contractual obligations for principal and interest payments on our 2028 Notes, 2030 Notes and Term Loan. See Note 8—Debt and Financing Costs in the Notes to our Consolidated Financial Statements in this Annual Report.

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.

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For additional information regarding the Company’s obligations, please see Note 8—Debt and Financing Costs and Note 17—Commitments and Contingencies in the Notes to the Consolidated Financial Statements in this Annual Report.

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 2023, the Company’s primary capital spending were related to the PHP expansion project, the midstream infrastructure acquisition and other budgeted capital expenditures for construction of gathering and processing assets, the Company’s contractual debt obligations and quarterly cash dividends and distributions.

During the year ended December 31, 2023, the Company’s primary sources of cash were distributions from the EMI pipelines, borrowings under the Revolving Credit Facility, proceeds from debt offerings 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 Revolving Credit Facility 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. In addition, the Company entered into the First Amendment, which extended maturity of its Term Loan through June 2026. Upon the closing of the First Amendment and in conjunction with paying down $800 million on the Term Loan, the Company terminated one of its existing interest rate swap contracts and partially terminated another. As of December 31, 2023, the Company had two interest rate swap contracts with total notional amounts of $1.70 billion maturing on May 31, 2025, which pay a fixed rate ranging from 4.38% to 4.48% for the respective notional amounts.

Comprehensive Refinancing

On June 8, 2022, the Partnership completed the private placement of $1.00 billion aggregate principal amount of the 2030 Notes, which are fully and unconditionally guaranteed by the Company. The 2030 Notes are issued under our Sustainability-Linked Financing Framework and include sustainability-linked features. In addition, the Partnership entered into a revolving credit agreement, which provides for a $1.25 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”) maturing on June 8, 2027, and term loan credit agreement, which provides for a $2.00 billion senior unsecured Term Loan maturing on June 8, 2025, which was then extended to June 8, 2026 pursuant to the First Amendment. The Term Loan may be further extended to December 8, 2026, at such time as no more than $1.00 billion of an aggregate principal amount of loans under the Term Loan remain outstanding, subject to customary conditions. Proceeds from the 2030 Notes and the Term Loan were used to repay all outstanding borrowings under our then existing credit facilities and to pay fees and expenses related to the offering. Refer to Note 8 — Debt and Financing Costs in the Notes to our Consolidated Financial Statements in this Annual Report for further information.

December 2028 Sustainability-Linked Senior Notes

On December 6, 2023, the Partnership completed a private placement of $500.0 million aggregate principal amount at par. Further, on December 19, 2023, the Company completed an additional private placement of $300.0 million aggregate principal amount at 100.50% of the face amount. The Original 2028 Notes and the Additional 2028 Notes are treated as a single series of securities under the indenture governing the 2028 Notes, vote together as a single class, and have substantially identical terms, other than the issue date and issue price. The 2028 Notes are fully and unconditionally guaranteed by the Company and issued under our Sustainability-Linked Financing Framework. Proceeds from the 2028 Notes together with cash on hand and borrowings under the Partnership’s Revolving Credit Facility were used to repay a portion of the outstanding borrowings under the Partnership’s existing Term Loan.

Term Loan Amendment 2023

On December 6, 2023, the Partnership, the Company, PNC Bank and the banks and other financial institutions party thereto, as lenders, entered into the First Amendment concurrently with the closing of the Partnership’s 2028 Notes discussed above. The First Amendment (1) extended the maturity of the Term Loan from June 8, 2025 to June 8, 2026 upon the prepayment of a principal amount of loans under the Term Loan of no less than $500.0 million; and (2) provided for an additional automatic six-month extension of the amended maturity date if certain criteria are met. In conjunction with the principal prepayment of the existing Term Loan, the Company recognized a loss on extinguishment of debt of approximately $1.9 million from writing off the proportionate amount of unamortized debt issuance costs and original discount related to the partial extinguishment for the year ended December 31, 2023.

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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 year ended December 31, 2023 and 2022, capital spending for property, plant and equipment totaled $312.9 million and $206.2 million in 2022, and intangible asset purchases of $16.7 million in 2023 and $15.4 million in 2022. In addition, the Company acquired midstream infrastructure assets totaling $125.0 million through a business combination that closed in the first quarter 2023, see additional information in Note—3. Business Combinations in the Notes to the Consolidated Financial Statements in this Annual Report. Management believes its existing gathering, processing, and transmission infrastructure capacity is capable of fulfilling its contracts to service its customers. During the year ended December 31, 2023, the Company contributed $238.8 million to PHP for the expansion project, compared to $78.2 million contributed to the same period of 2022. See Note 19—Segments in the Notes to the Consolidated Financial Statements in this Annual Report for capital expenditure for each operating segment.

The Company estimates 2024 capital expenditures of approximately $125.0 million to $165.0 million, which is significantly lower than that in 2023 as the Company concluded the Delaware Link Pipeline construction in September 2023 and the PHP Expansion Project went in service during December 2023.

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 7—Equity Method Investments in the Notes to our Consolidated Financial Statements in this Annual Report.

Cash Flows

The following tables present cash flows from operating, investing, and financing activities:

[[GREPCENT_TABLE]]
[["","","For The Year Ended December 31,"],["","","2023","","2022"],["","","(In thousands)"],["Cash provided by operating activities","$","584,480","","","$","613,006"],["Cash used in investing activities","$","(686,320)","","","$","(286,130)"],["Cash provided by (used in) financing activities","$","99,956","","","$","(339,211)"]]
[[/GREPCENT_TABLE]]

Operating Activities. Net cash provided by operating activities decreased by $28.5 million for the year ended December 31, 2023 compared with the same period in 2022. The change in the operating cash flows reflected an increase in net income including noncontrolling interests of $135.7 million, and decreases in adjustments related to non-cash items of $135.5 million and cash provided by changes in working capital of $28.7 million. Period-to-period decrease in non-cash adjustments was primarily driven by a $235.5 million increase in deferred tax benefit due to the release of the Company’s valuation allowance for deferred tax assets during 2023 and a decrease in loss on debt extinguishment of $26.1 million related to the comprehensive refinancing which was completed in 2022. The decrease was partially offset by increases in derivative fair value adjustments of $61.8 million and depreciation and amortization expense of $20.6 million. Period-to-period changes in working capital was primarily related to a decrease in accrued liabilities and fluctuations in trade receivables and payables due to timing of collections and payments.

Investing Activities. Net cash used in investing activities increased by $400.2 million for the year ended December 31, 2023 compared with the same period in 2022. The increase was primarily driven by increases in property, plant and equipment expenditures, contributions made to the PHP expansion project and cash paid for the acquisition of certain midstream assets.

Financing Activities. Net cash provided by financing activities totaled $100.0 million for the year ended December 31, 2023 compared with net cash used in financing activities totaling $339.2 million in the same period in 2022. The $439.2 million change was primarily due to a reduction of cash outflow related to the redemption of Preferred Units for $644.8 million, as all Preferred Units were redeemed in 2022, lower net long term debt proceeds of $167.1 million and an increase in cash dividends paid to Class A Common Stock shareholders of $42.1 million.

Dividend and Distribution Reinvestment Agreement

On February 22, 2022, the Company entered into a Dividend and Distribution Reinvestment Agreement (the “Reinvestment Agreement”) with certain stockholders including BCP Raptor Aggregator, LP, BX Permian Pipeline Aggregator, LP, Buzzard Midstream LLC, APA Corporation, Apache Midstream LLC and certain individuals (each, a

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“Reinvestment Holder”). Under the Reinvestment Agreement, each Reinvestment Holder is obligated to reinvest at least 20% of all distributions on common units representing limited partner interests in the Partnership (“Common Units”) or dividends on shares of Class A Common Stock in the Company’s Class A Common Stock. For the calendar year 2023, the Audit Committee resolved 100% of all distributions or dividends received by each Reinvestment Holder would be reinvested in shares of Class A Common Stock. The Reinvestment Agreement will terminate automatically on March 8, 2024.

During 2023, the Company made cash dividend payments of $82.0 million to holders of Class A Common Stock and Common Units and $352.1 million was reinvested in shares of Class A Common Stock by the Reinvestment Holders.

Stock Split

On May 19, 2022, the Company announced a stock split with respect to its Class A Common Stock and Class C Common Stock in the form of a stock dividend (the “Stock Split”). The Stock Split was accomplished by distributing one additional share of Class A Common Stock for each share of Class A Common Stock outstanding and one additional share of Class C Common Stock for each share of Class C Common Stock outstanding. The additional shares of Common Stock were issued on June 8, 2022 to holders of record at the close of business on May 31, 2022.

Stock Repurchase Program

In February 2023, the Board approved the Repurchase Program, authorizing discretionary purchases of the Company’s Class A Common Stock up to $100.0 million in the aggregate. Repurchases may be made at management’s discretion from time to time, in accordance with applicable securities laws, on the open market or through privately negotiated transactions and may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act. Privately negotiated repurchases from affiliates are also authorized under the Repurchase Program, subject to such affiliates’ interest and other limitations. The repurchases will depend on market conditions and may be discontinued at any time without prior notice.

During the year ended December 31, 2023, the Company repurchased 194,174 shares at a total cost of $5.8 million. The Company retired all treasury stock as of December 31, 2023.

For more information regarding the non-deductible 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.

Dividend

On January 23, 2024, the Company declared a cash dividend of $0.75 per share on the Company’s Class A Common Stock and a distribution of $0.75 per Common Unit from the Partnership to the holders of Common Units. Dividends are payable on March 7, 2024 to holders of record as of market close on February 22, 2024. Certain holders of Class A Common Stock and Common Units will receive a cash dividend with the balance receiving additional shares of Class A Common Stock under the Reinvestment Agreement.

Series A Cumulative Redeemable Preferred Units

The Company issued Series A Cumulative Redeemable Preferred Units (“Preferred Units”) on June 12, 2019. Because the Transaction was accounted for as a reverse merger, certain Preferred Units that were issued and outstanding were assumed at Closing for accounting purposes. The Company assumed 525,000 Preferred Units as well as 29,983 paid-in-kind (“PIK”) Preferred Units immediately after the Closing.

In 2022, the Company redeemed all outstanding Preferred Units and PIK units for an aggregate redemption price of $644.8 million. The Company recognized a gain of $9.6 million on redemption of the mandatory redeemable Preferred Units and excess of carrying amount over redemption price of $109.5 million on redemption of the redeemable noncontrolling interest Preferred Units during 2022.

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Liquidity

The following table presents a summary of the Company’s key financial indicators:

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","2022"],["","","(In thousands)"],["Cash and cash equivalents","","$","4,510","","","$","6,394"],["Total debt, net of unamortized deferred financing cost","","$","3,562,809","","","$","3,368,510"],["Available committed borrowing capacity","","$","643,400","","","$","855,000"]]
[[/GREPCENT_TABLE]]

Off-Balance Sheet Arrangements

As of December 31, 2023, there were no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Part IV, Item 15. Exhibits, Financial Statement Schedules, Note 2—Summary of Significant Accounting Policies of this Annual Report.

The Company prepares its financial statements and the accompanying notes in conformity with U.S. GAAP, which require management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and the accompanying notes. We consider our critical accounting estimates to be those that require difficult, complex, or subjective judgment necessary in accounting for inherently uncertain matters and those that could significantly influence our financial results based on changes in those judgments. Critical accounting estimates cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. Management routinely discusses the development, selection, and disclosure of the following critical accounting estimates.

Business Combination

For acquired businesses, we recognize the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their estimated fair values on the date of acquisition with any excess purchase price over the fair value of net assets acquired recorded to goodwill. Determining the fair value of these items requires management’s judgment and/or the utilization of independent valuation specialists and involves the use of significant estimates and assumptions. The judgments made in the determination of the estimated fair value assigned to the assets acquired, the liabilities assumed and any noncontrolling interest in the investee, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition, such as through depreciation and amortization expense. See Note 3—Business Combination in our Notes to the Consolidated Financial Statements in this Annual Report for more information regarding our valuation approach.

Impairment of Long-lived Assets

Long-lived assets used in operations are evaluated for potential impairment when events or changes in circumstances indicate a possible significant deterioration in future cash flows expected to be generated by an asset group. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. If there is an indication that the carrying amount of an asset may not be recovered, the asset is assessed for impairment through an established process in which changes to significant assumptions such as service prices, throughput volumes, future development plans and fluctuation of commodity prices are reviewed. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to an estimated fair value. Such fair value is generally determined by discounting anticipated future net cash flows, an income valuation approach, or by a market-based valuation approach, which are Level 3 fair value measurements. Estimates and assumptions can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. An estimate of the sensitivity to changes in underlying assumptions of a fair value calculation is not practicable, given the numerous assumptions that can materially affect our estimates.

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Equity Method Investment

We evaluate our EMIs for impairment when events or circumstances indicate that the carrying value of the EMI may be impaired and that impairment is other than temporary. If an event occurs, we evaluate the recoverability of our carrying value based on the fair value of the investment. If an impairment is indicated, we adjust the carrying values of the investment downward, if necessary, to their estimated fair values.

We estimate the fair value of our EMIs based on a number of factors, including discount rates, projected cash flows, and enterprise value. Estimating projected cash flows requires us to make certain assumptions as it relates to the future operating performance of each of our EMIs (which includes assumptions, among others, about estimating future operating margins and related future growth in those margins, contracting efforts and the cost and timing of facility expansions) and assumptions related to our EMIs, such as their future capital and operating plans and their financial condition.

Derivatives Instruments and Hedging Activities

All our derivative contracts are recorded at estimated fair value. We utilize published prices, broker quotes, and estimates of market prices to estimate the fair value of these contracts; however, actual amounts could vary materially from estimated fair values as a result of changes in market prices. In addition, changes in the methods used to determine the fair value of these contracts could have a material effect on our results of operations. We do not anticipate future changes in the methods used to determine the fair value of these derivative contracts.

Income Taxes

We make significant judgments and estimates in determining our provision for income taxes, including our assessment of our income tax positions, interpretation and application of complex tax laws and regulations and determining a valuation allowance, if necessary. In particular, there are numerous and complex judgments and assumptions inherent in determining a valuation allowance, including factors such as future operating conditions and profitability. For more information, see Note 15—Income Taxes in our Notes to the Consolidated Financial Statements in this Annual Report.

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