Kinetik Holdings KNTK Form 10-Q filing Q3 FY2022

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GLOSSARY OF TERMS

The following are abbreviations and definitions of certain terms used in this Quarterly Report on Form 10-Q and certain terms which are commonly used in the exploration, production and midstream sectors of the oil and natural gas industry:

• ASC. Accounting Standards Codification.
• ASU. Accounting Standards Update.
• Bbl. One stock tank barrel of 42 United States (“U.S.”) gallons liquid volume used herein in reference to crude oil, condensate or natural gas liquids.
• Bcf. One billion cubic feet
• Bcf/d. One Bcf per day.
• Btu. One British thermal unit, which is the quantity of heat required to raise the temperature of a one-pound mass of water by one degree Fahrenheit.
• CODM. Chief Operating Decision Maker.
• Delaware Basin. Located on the western section of the Permian Basin. The Delaware Basin covers a 6.4M acre area.
• FASB. Financial Accounting Standards Board.
• Field. An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.
• Formation. A layer of rock which has distinct characteristics that differs from nearby rock.
• GAAP. United States Generally Accepted Accounting Principles.
• GHG. Greenhouse gas.
• LIBOR. London Interbank Offered Rate.
• MBbl. One thousand barrels of crude oil, condensate or NGLs.
• MBbl/d. One MBbl per day.
• Mcf. One thousand cubic feet of natural gas.
• Mcf/d. One Mcf per day.
• MMBtu. One million British thermal units.
• MMcf. One million cubic feet of natural gas.
• MMcf/d. One MMcf per day.
• MVC. Minimum volume commitments.
• NGLs. Natural gas liquids. Hydrocarbons found in natural gas, which may be extracted as liquefied petroleum gas and natural gasoline.
• Throughput. The volume of crude oil, natural gas, NGLs, water and refined petroleum products transported or passing through a pipeline, plant, terminal or other facility during a particular period.
• SEC. United States Securities and Exchange Commission.
• SOFR. Secured Overnight Financing Rate.
• WTI. West Texas Intermediate crude oil.

All references to the Company’s Class A common stock, par value $0.0001 per share (“Class A Common Stock”), and Class C common stock, par value $0.0001 per share (“Class C Common Stock”), reflect such share amounts as retrospectively restated to reflect the Company’s two-for-one stock split, which was effected via stock dividend on June 8, 2022.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

KINETIK HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

• The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer to the basis of presentation in Note 1—Description of the Organization and Summary of Significant Accounting Policies in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information.

** Share amounts have been retroactively restated to reflect the Company’s Stock Split (as defined in Note 10—Equity and Warrants), which was effected on June 8, 2022. Refer to Note 10 – Equity and Warrants in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information.

The accompanying Notes are an integral part of the unaudited Condensed Consolidated Financial Statements

KINETIK HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

• Share amounts have been retroactively restated to reflect the Company’s Stock Split (as defined in Note 10—Equity and Warrants), which was effected on June 8, 2022. Refer to Note 10—Equity and Warrants in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information.

The accompanying Notes are an integral part of the unaudited Condensed Consolidated Financial Statements

KINETIK HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying Notes are an integral part of the unaudited Condensed Consolidated Financial Statements

KINETIK HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND NONCONTROLLING INTERESTS

(Unaudited)

• Certain redemption features embedded within the Preferred Units require bifurcation and measurement at fair value. For further detail, refer to Note 11—Series A Cumulative Redeemable Preferred Units in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q.

** Share amounts have been retroactively restated to reflect the Company’s Stock Split (as defined in Note 10—Equity and Warrants), which was effected on June 8, 2022. Refer to Note 10—Equity and Warrants in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information.

The accompanying Notes are an integral part of the unaudited condensed consolidated financial statements

KINETIK HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND NONCONTROLLING INTERESTS - (Continued)

(Unaudited)

• Certain redemption features embedded within the Preferred Units require bifurcation and measurement at fair value. For further detail, refer to Note 11—Series A Cumulative Redeemable Preferred Units in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information.

** Share amounts have been retroactively restated to reflect the Company’s Stock Split (as defined in Note 10—Equity and Warrants), which was effected on June 8, 2022. Refer to Note 10—Equity and Warrants in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information.

The accompanying Notes are an integral part of the unaudited condensed consolidated financial statements

KINETIK HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

These condensed consolidated financial statements have been prepared by Kinetik Holdings Inc. (formerly known as Altus Midstream Company) (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). They reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for interim periods, on a basis consistent with the annual audited financial statements, with the exception of recently adopted accounting pronouncements. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10-Q should be read along with Kinetik Holdings Inc.’s audited financial statements and related notes thereto for the year ended December 31, 2021 filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on July 5, 2022.

1. DESCRIPTION OF THE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Transaction

On February 22, 2022 (the “Closing Date”), Kinetik Holdings Inc., a Delaware corporation (formerly known as Altus Midstream Company), consummated the previously announced 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 (“Contributor”), and BCP Raptor Holdco, LP, a Delaware limited partnership (“BCP”). The transactions are referred to herein as the “Transaction.”

Pursuant to the Contribution Agreement, in connection with the closing of the Transaction (the “Closing”), (i) Contributor contributed all of the equity interests of BCP and BCP Raptor Holdco GP, LLC, a Delaware limited liability company and the general partner of BCP (“BCP GP” and, together with BCP, the “Contributed Entities”), to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 common units representing limited partner interests in the Partnership (“Common Units”) and t 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share (“Class C Common Stock”).

The Company’s stockholders immediately prior to the Closing continued to hold their shares of the Company’s Class A Common Stock, par value $0.0001 per share (“Class A Common Stock,” and together with the Company’s Class C Common Stock, “Common Stock”). As a result of the Transaction, immediately following the Closing (i) Contributor held approximately 75% of the issued and outstanding Common Stock, (ii) Apache Midstream LLC, a Delaware limited liability company (“Apache Midstream”), held approximately 20% of the issued and outstanding Common Stock, and (iii) the Company’s remaining stockholders held approximately 5% of the issued and outstanding Common Stock.

The Company completed a two-for-one Stock Split in the form of a stock dividend on June 8, 2022. All corresponding per-share and share amounts for periods prior to June 8, 2022 have been retroactively restated elsewhere in this Form 10-Q to reflect the two-for-one Stock Split. However, the number of Common Units and shares of Class C Common Stock described in this Form 10-Q in relation to the Transaction are presented at pre-Stock-Split amounts to be consistent with our previous public filings and the terms of the Contribution Agreement.

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

Organization

BCP was formed on April 25, 2017 as a Delaware limited partnership to acquire and develop midstream oil and gas assets. BCP’s primary operating subsidiaries are EagleClaw Midstream Ventures, LLC (“EagleClaw”) and CR Permian Holdings, LLC (“CR Permian”). Both subsidiaries were formed to design, engineer, install, own and operate facilities and provide services for produced natural gas gathering, compression, processing, treating and dehydration, and condensate separation, stabilization, and storage, crude oil gathering and storage, water gathering and disposal assets.

ALTM was originally incorporated on December 12, 2016 in Delaware under the name Kayne Anderson Acquisition Corp. (“KAAC”) for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. KAAC completed its initial public offering in the second quarter of 2017. On August 3, 2018, Altus Midstream LP was formed in Delaware as a limited partnership and wholly-owned subsidiary of KAAC and entered into a contribution agreement with certain affiliates of Apache Corporation (“Apache” and such affiliates the “Altus Midstream Entities”), formed by Apache between May 2016 and January 2017, for the purpose of acquiring, developing, and operating midstream oil and gas assets in the Alpine High resource play and surrounding areas (“Alpine High”). On November 9, 2018, KAAC acquired all equity interests of the Altus Midstream Entities and changed its name to Altus Midstream Company.

On February 22, 2022, upon the Closing, 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 2—Business Combination in the Notes to our Condensed Consolidated Financial Statements for further information.

Nature of Operations

Through its consolidated subsidiaries, the Company provides comprehensive gathering, water disposal, transportation, compression, processing and treating services necessary to bring natural gas, NGLs and crude oil to market. Additionally, the Company owns equity interests in four separate Permian Basin pipeline entities that have access to various markets along the Texas Gulf Coast.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP. Certain reclassifications of prior year balances have been made to conform such amounts to current year presentation. These reclassifications have no impact on net income. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. All intercompany balances and transactions have been eliminated in consolidation.

Prior to the Closing, the Company’s financial statements that were filed with the SEC were derived from ALTM’s accounting records. As the Transaction was determined to be a reverse merger, BCP was considered as the accounting acquirer and ALTM was the legal acquirer. The accompanying Condensed Consolidated Financial Statements herein include (1) BCP’s net assets carried at historical value, (2) BCP’s historical results of operations prior to the Transaction, (3) the ALTM’s net assets carried at fair value as of the Closing Date and (4) the combined results of operations with the Company’s results presented within the Condensed Consolidated Financial Statements from February 22, 2022 going forward. Refer to Note 2—Business Combination to our Condensed Consolidated Financial Statements in this Form 10-Q for additional discussion.

The Company completed a two-for-one Stock Split on June 8, 2022. All corresponding per-share and share amounts for periods prior to June 8, 2022 have been retroactively restated in this Form 10-Q to reflect the two-for-one Stock Split, except for the number of Common Units and shares of Class C Common Stock described above in relation to the Transaction, which are presented at pre-Stock-Split amounts. This presentation election is consistent with our previous public filings and the terms of the Contribution Agreement.

Use of Estimates

Preparation of financial statements in conformity with GAAP and disclosure of contingent assets and liabilities requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The Company evaluates its estimates and assumptions on a regular basis. Actual results may differ from these estimates and assumptions used in preparation of its condensed consolidated financial statements, and changes in these estimates are recorded when known. Significant items subject to such estimates and assumptions include the valuation of tangible and intangible assets, share-based compensation, contingent liabilities, warrants, and noncontrolling interests.

Variable Interest Entity

The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities. The approach focuses on identifying which enterprise has the power to direct the activities that most significantly impact the variable interest entity’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits from the variable interest entity. In the event that the Company is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity would be consolidated in our financial statements. The Company has determined that it has significant influence over the operating and financial policies of the four pipeline entities in which it is invested, but does not exercise control over them; and hence, it accounts for these investments using the equity method. Refer to Note 9—Equity Method Investments in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q.

Redeemable Noncontrolling Interest — Common Units Limited Partners

Pursuant to the Contribution Agreement, in connection with the Closing, (i) Contributor contributed all of the equity interests of the Contributed Entities to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 common units representing limited partner interests in the Partnership and 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share. Please refer to “The Transaction” above.

The Common Units are redeemable at the option of unit holders and accounted for in the Company’s Condensed Consolidated Balance Sheet as a redeemable noncontrolling interest classified as temporary equity. The Company records the redeemable noncontrolling interest at the higher of (i) its initial value plus accumulated earnings/losses associated with the noncontrolling interest or (ii) the maximum redemption value as of the balance sheet date. The redemption value was determined based on a 5-day volume weighted-average closing price of the Class A Common Stock. See discussion and additional details in Note 10—Equity and Warrants in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q.

Redeemable Noncontrolling Interest — Preferred Unit Limited Partners

The Partnership issued Series A Cumulative Redeemable Preferred Units (“Preferred Units”) on June 12, 2019. As the Transaction was accounted for as a reverse merger, the Company assumed certain Preferred Units that were issued and outstanding at Closing for accounting purposes.

The Preferred Units are accounted for on the Company’s Condensed Consolidated Balance Sheet as a redeemable noncontrolling interest classified as temporary equity based on the terms of the Preferred Units. Certain redemption features embedded within the terms of the Preferred Units required bifurcation and measurement at fair value and are accounted for on the Company’s Condensed Consolidated Balance Sheet as a long-term liability embedded derivative. During the nine months ended September 30, 2022, the Company redeemed all outstanding Preferred Units. See discussion and additional detail in Note 11—Series A Cumulative Redeemable Preferred Units in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q.

Equity Method Investments

The Company follows the equity method of accounting when it does not exercise control over its equity interests, but can exercise significant influence over the operating and financial policies of the entity. Under this method, the equity investments are carried originally at acquisition cost, increased by the Company’s proportionate share of the equity interest’s net income and contributions made, and decreased by the Company’s proportionate share of the equity interest’s net losses and distributions received. The Company determines whether distributions are a return on or a return of the investment based on the nature of the distribution approach, under which the Company classifies distributions from an investee by evaluating the facts, circumstances and nature of each distribution. As distributions from the Company’s equity method investment (“EMI”) pipeline entities are generated from their respective normal course of business, the Company classifies the distributions as return on investments and as cash flow from operating activities. Please refer to Note 9—Equity Method Investments in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q, for further information of the Company’s equity method investments. Equity method investments acquired in the Transaction were recorded at fair value upon Closing. See discussion and additional detail inNote 2—Business Combination in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for purchase price allocation of the Transaction.

Inventory

Other current assets include condensate, residue gas and NGLs inventories that are valued at the lower of cost or market. At the end of each reporting period, the Company assesses the carrying value of inventory and makes any adjustments necessary to reduce the carrying value to the applicable net realizable value. Inventory was valued at $13.1 million and $2.1 million as of September 30, 2022 and December 31, 2021, respectively.

Impairment of Long-Lived Assets

In accordance with Financial Accounting Standards Board (“FASB”) ASC 360, Property, Plant and Equipment, long-lived assets, excluding goodwill, to be held and used by the Company are reviewed for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the assets have decreased below their carrying value. For long-lived assets to be held and used, the Company bases their evaluation on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present.

The Company’s management assesses whether there has been an impairment trigger, and if a trigger is identified, then the Company would perform an undiscounted cash flow test at the lowest level for which identifiable cash flows are independent of cash flows from other assets. If the sum of the undiscounted future net cash flows is less than the net book value of the property, an impairment loss is recognized for any excess of the property’s net book value over its estimated fair value. The Company did not recognize impairment losses for long-lived assets during the three and nine months ended September 30, 2022 and 2021.

Transactions with Affiliates

The accounts receivable from or payable to affiliates represent the net result of the Company’s monthly revenue, capital and operating expenditures, and other miscellaneous transactions to be settled with Apache and its subsidiaries, who controlled the Company prior to the Transaction. Accounts receivable from affiliates was $24.1 million as of September 30, 2022. Revenue from affiliates was $35.2 million and $81.4 million for the three and nine months ended September 30, 2022, respectively. Accrued expense due to affiliates was immaterial as of September 30, 2022, and operating expenses were $0.2 million and $0.5 million for the three and nine months ended September 30, 2022, respectively.

In addition, the Company incurred cost of sales with two of its EMI pipeline entities, Permian Highway Pipeline LLC (“PHP”) and Breviloba, LLC (“Breviloba”). The Company paid a demand fee to PHP and paid a capacity fee to Breviloba for certain volumes moving on the Shin Oak NGL Pipeline. For the three and nine months ended September 30, 2022, the Company recorded cost of sales of $3.7 million and $10.8 million, respectively, with these affiliates.

Net Income Per Share

Basic net income per share is calculated by dividing net income attributable to Class A common shareholders by the weighted-average number of shares of Class A Common Stock outstanding during the period. Class C Common Stock is excluded from the weighted-average shares outstanding for the calculation of basic net income per share, as holders of Class C Common Stock are not entitled to any dividends or liquidating distributions. No net income per share was computed for the three and nine months ended September 30, 2021, as no Class A Common Stock was outstanding with respect to BCP as the accounting acquirer as of September 30, 2021.

The Company uses the “if-converted method” to determine the potential dilutive effect of (i) an assumed exchange of outstanding Common Units (and the cancellation of a corresponding number of shares of outstanding Class C Common Stock) for shares of Class A Common Stock and (ii) an assumed exercise of the outstanding public and private warrants for shares of Class A Common Stock. The dilutive effect of any earn-out consideration payable in shares is only included in periods for which the underlying conditions for the issuance are met.

Recently Adopted Accounting Pronouncement

Effective January 1, 2022, the Company adopted ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which requires contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. Generally, this new guidance will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree.

Historically, such amounts were recognized by the acquirer at fair value. With adoption of ASU 2021-08, the Company assumed contract liabilities at carrying value of $9.1 million upon Closing.

Effective January 1, 2022, the Company adopted ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 was issued to ease the potential accounting burden expected when global capital markets move away from LIBOR, the benchmark interest rate banks use to make short-term loans to each other. The amendments in this update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationship, and other transactions affected by reference rate reform if certain criteria are met. Interest rate applied to the Company’s new Term Loan and Revolver borrowings resulting from the comprehensive refinance is based on Secured Overnight Financing Rate (“SOFR”), which is a broad measure of the cost of borrowing cash overnight collateralized by treasury securities. Refer to Note 6—Debt and Financing Costs in the Notes to our Condensed Consolidated Financial Statements of this Form 10-Q for discussion of SOFR applicable to the Company’s debt structures.

Recent Accounting Pronouncement Not Yet Adopted

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”). The amendments in ASU 2022-03 clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments also require the following disclosures for equity securities subject to contractual sale restrictions: (1) The fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet; (2) The nature and remaining duration of the restriction(s); (3) The circumstances that could cause a lapse in the restriction(s). This guidance is effective for public business entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the effect that ASU 2022-03 will have on its Consolidated Financial Statements.

In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method (“ASU 2022-01”). Current GAAP permits only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendments in ASU 2022-01 allow nonprepayable financial assets also to be included in a closed portfolio hedged using the portfolio layer method. That expanded scope permits an entity to apply the same portfolio hedging method to both prepayable and nonprepayable financial assets, thereby allowing consistent accounting for similar hedges. The amendments in ASU 2022-01 also clarify the accounting for and promote consistency in the reporting of hedge basis adjustments applicable to both a single hedged layer and multiple hedged layers as follows: (1) an entity is required to maintain basis adjustments in an existing hedge on a closed portfolio basis (that is, not allocated to individual assets), (2) an entity is required to immediately recognize and present the basis adjustment associated with the amount of the designated layer that was breached in interest income. In addition, an entity is required to disclose that amount and the circumstances that led to the breach, (3) an entity is required to disclose the total amount of the basis adjustments in existing hedges as a reconciling amount if other areas of GAAP require the disaggregated disclosure of the amortized cost basis of assets included in the closed portfolio, and (4) an entity is prohibited from considering basis adjustments in an existing hedge when determining credit losses. The guidance is effective for public business entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted on any date on or after the issuance of ASU 2022-01 for any entity that has adopted the amendments in ASU 2017-02 for the corresponding period. The Company is currently evaluating the effect that ASU 2022-01 will have on its Consolidated Financial Statements.

2. BUSINESS COMBINATION

Altus Business Combination

On February 22, 2022, the Company consummated the previously announced business combination transactions contemplated by the Contribution Agreement, dated as of October 21, 2021. Pursuant to the Contribution Agreement, in connection with the Closing, (i) Contributor contributed all of the equity interests of the Contributed Entities to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 common units representing limited partner interests in the Partnership and 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share. Please refer to “The Transaction” discussed above.

The Transaction was accounted as a reverse merger in accordance with ASC 805, which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair value. The Company also adopted ASU 2021-08, effective as of January 1, 2022, to record contract liabilities at their carrying value as of the acquisition date. Although the Company was the legal acquirer, BCP was determined to be the accounting acquirer and legal acquiree. As a result, BCP and its subsidiaries’ net assets were carried at historical value, acquired net assets were measured at fair value except contract liabilities being recorded at carrying value at the acquisition date, and results of operations of ALTM and its subsidiaries were included in the Company’s Condensed Consolidated Financial Statements from the Closing Date going forward.

The preliminary purchase price allocation is based on an assessment of the fair value of the assets acquired and liabilities assumed in the acquisition using inputs that are not observable in the market and thus Level 3 inputs. The fair value of the processing plant, gathering system and related facilities and equipment are based on market and cost approaches. The goodwill of $4.6 million relates to operational synergies and is included in the Midstream Logistics segment. The value of the Preferred Units and assumed contingent liability is determined through a probability-weighted analysis of the expected future cash flows and other applicable valuation techniques. See additional details for Preferred Units in Note 11—Series A Cumulative Redeemable Preferred Units and contingent liabilities in Note 8—Commitments and Contingencies in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q. Certain data necessary to complete the purchase price allocation is not yet available, including, but not limited to, valuation of the underlying assets of the equity method investments and liabilities assumed. However, the Company is continuing its review of these matters during the measurement period, and if new information obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized, as well as any additional liabilities that existed at the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional amounts initially recognized. The Company will finalize the purchase price allocation during the 12-month period following the acquisition date.

The following table summarizes the preliminary estimated fair value of assets acquired and liabilities assumed in the Transaction in accordance with ASC 805:

The Company incurred acquisition-related costs of $0.1 million and $6.4 million for the three and nine months ended September 30, 2022, respectively.

Supplemental Pro Forma Information

The unaudited supplemental pro forma financials are for informational purposes only and are not indicative of future results. The results below for the three and nine months ended September 30, 2022 and 2021 combine the results of the Company and the Partnership, giving effect to the Transaction as if it had been completed on January 1, 2021.

Given the assumed pro forma transaction date of January 1, 2021, we removed $1.5 million and $21.0 million of acquisition-related expenses for the three and nine months ended September 30, 2022, respectively, and recognized $0.1 million and $31.2 million of total acquisition-related expenses for the three and nine months ended September 30, 2021, respectively.

3. REVENUE RECOGNITION

Disaggregation of Revenue

The following table presents a disaggregation of the Company’s revenue:

There have been no significant changes to the Company’s contracts with customers during the three and nine months ended September 30, 2022. Contracts with customers acquired through the Transaction had similar structures as the Company’s existing contracts with customers. The Company recognized revenues from minimum volume commitment (“MVC”) deficiency payments of $0.7 million and nil for the three months ended September 30, 2022 and 2021, respectively, and $1.0 million and $2.5 million for the nine months ended September 30, 2022 and 2021, respectively.

Remaining Performance Obligations

The following table presents our estimated revenue from contracts with customers for remaining performance obligations that has not yet been recognized, representing our contractually committed revenues as of September 30, 2022:

Our contractually committed revenue, for purposes of the tabular presentation above, is generally limited to customer contracts that have fixed pricing and fixed volume terms and conditions, generally including contracts with payment obligations associated with MVCs.

Contract Liabilities

The following table provides information about contract liabilities from contracts with customers as of September 30, 2022:

Contract liabilities relate to payments received in advance of satisfying performance obligations under a contract, which result from contribution in aid of construction payments. Current and noncurrent contract liabilities are included in “Other Current Liabilities” and “Contract Liabilities,” respectively, of the Condensed Consolidated Balance Sheets.

Contract Cost Assets

The Company has capitalized certain costs incurred to obtain a contract that would not have been incurred if the contract had not been obtained. These costs are recovered through the net cash flows of the associated contract. As of September 30, 2022 and December 31, 2021, the Company had contract acquisition cost assets of $15.3 million and $18.4 million, respectively. Current and noncurrent contract cost assets are included in “Prepaid and Other Current Assets” and “Deferred Charges and Other Assets,” respectively, of the Condensed Consolidated Balance Sheets. The Company amortizes these assets as cost of sales on a straight-line basis over the life of the associated long-term customer contract. The Company recognized cost of sales associated with these assets of $0.4 million and $0.4 million for the three months ended September 30, 2022 and 2021, respectively, and $1.3 million and $1.8 million for the nine months ended September 30, 2022 and 2021, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are carried at cost or fair market value at the date of acquisition less accumulated depreciation. The cost basis of constructed assets includes materials, labor, and other direct costs. Major improvements or betterment are capitalized, while repairs that do not improve the life of the respective assets are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets.

Property, plant and equipment, at carrying value, is as follows:

The cost of property classified as “Construction in progress” is excluded from capitalized costs being depreciated. These amounts represent property that is not yet available to be placed into productive service as of the respective reporting date. The Company recorded $34.9 million and $26.8 million of depreciation expense for the three months ended September 30, 2022 and 2021, respectively, and $102.4 million and $79.0 million of depreciation expense for the nine months ended September 30, 2022 and 2021, respectively.

5. GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

The Company closed a business combination transaction on February 22, 2022, refer to the Transaction in Note 2—Business Combination in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q. The Transaction was accounted for as a business combination pursuant to ASC 805. In connection with the Transaction, the Company recorded excess of the purchase price over net assets acquired as goodwill. The Company recorded goodwill of $4.6 million as of September 30, 2022.

Goodwill is tested at least annually as of December 31 of each year, or more frequently as events occur or circumstances change that would more-likely-than-not reduce fair value of a reporting unit below its carrying value. Company’s management assesses whether there have been events or circumstances that trigger the fair value of the reporting unit to be lower than its net carrying value since consummation of the Transaction and concluded that goodwill was not impaired as of September 30, 2022.

Intangible Assets

Intangible assets, net are comprised of the following:

The fair value of acquired customer contracts was capitalized as a result of acquiring favorable customer contracts as of the closing dates of certain past acquisitions and is being amortized using a straight-line method over the remaining term of the customer contracts, which range from one to twenty years. Right of way assets relate primarily to underground pipeline easements and have a useful life of ten years and are amortized using the straight-line method. The right of way agreements are generally for an initial term of ten years with an option to renew for an additional ten years at agreed upon renewal rates based on certain indices or up to 130% of the original consideration paid.

The Company recorded $30.1 million and $30.4 million of amortization expense for the three months ended September 30, 2022 and 2021, respectively, and $90.2 million and $91.3 million of amortization expense for the nine months ended September 30, 2022 and 2021, respectively. There was no impairment recognized on intangible assets for the three and nine months ended September 30, 2022 and 2021.

6. DEBT AND FINANCING COSTS

June 2030 Senior Notes

On June 8, 2022, the Partnership completed a private placement of $1.00 billion aggregate principal amount of its 5.875% Sustainability-Linked Senior Notes due 2030 (the “Notes”), which are fully and unconditionally guaranteed by the Company.

The Notes were issued at 99.588% of their face amount and will mature on June 15, 2030. Interest accrues from June 8, 2022 and is payable semi-annually on June 15 and December 15 of each year, commencing December 15, 2022. The aggregate fees, expenses, and original issue discount paid to obtain the Notes totaled $21.5 million and were capitalized as debt issuance cost and included in the Condensed Consolidated Balance Sheets as a direct deduction to the Notes as the Notes were transferred to third-party investors that pay the stated principal amount without deduction for the initial purchasers’ discount.

On or after June 15, 2027, the interest rate accruing on the Notes will be increased by an additional 0.250% per annum unless the Partnership satisfies, and an independent external verifier confirms satisfaction of the Sustainability Performance Targets (“SPT”) as defined in the indenture governing the Notes related to the three key performance indicators outlined in the Sustainability-Linked Financing Framework published by the Company on May 16, 2022: 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. The interest rate accruing on the Notes will be increased by an additional 0.083% per annum for each SPT which has not been satisfied and externally verified.

The Partnership may redeem some or all of the Notes at any time or from time to time prior to maturity based on terms prescribed in the Notes.

Revolving Credit Facility

On June 8, 2022, the Partnership entered into a revolving credit agreement (the “RCA”) among Bank of America, N.A., as administrative agent (“Bank of America”), and the banks and other financial institutions party thereto, as lenders. The RCA provides for a $1.25 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”).

The Partnership may prepay borrowings under the Revolving Credit Facility at any time without premium or penalty (other than customary SOFR breakage costs), subject to certain notice requirements. All borrowings under the Revolving Credit Facility mature on June 8, 2027. The obligations under the RCA are fully and unconditionally guaranteed by the Company.

The RCA provides for borrowings of either, at the Partnership’s option, base rate loans or term SOFR loans. Base rate loans bear interest at a rate per annum equal to the greatest of (a) the prime rate as announced from time to time by Bank of America, (b) the greater of (i) the federal funds effective rate and (ii) the overnight bank funding rate, plus 1/2 of 1.00% and (c) the adjusted term SOFR rate for an interest period of one month plus 1.00%, plus a margin that ranges between 0.25% and 1.00%, depending on the credit rating of the Partnership. SOFR loans bear interest at a rate per annum equal to the term SOFR rate for such interest periods plus 0.10%, plus a margin that ranges between 1.25% and 2.00%, depending on the credit rating of the Partnership. In obtaining the RCA, the Partnership incurred fees and expenses totaling $7.8 million, which was capitalized and included in the Condensed Consolidated Balance Sheets as “Deferred charges and other assets.”

In addition, the Partnership is required to pay to each lender a commitment fee on the daily unfunded amount of such lender’s revolving commitment, which accrues at a rate that ranges between 0.15% and 0.35% depending on the credit rating of the Partnership.

Term Loan Credit Facility

On June 8, 2022, concurrently with the closing of the Revolving Credit Facility, the Partnership entered into a term loan credit agreement (the “TLA”) among PNC Bank, National Association, as administrative agent (“PNC Bank”), and the banks and other financial institutions party thereto, as lenders. The TLA provides for a $2.00 billion senior unsecured term loan credit facility (the “Term Loan Credit Facility”). The TLA matures on June 8, 2025. The obligations under the TLA are fully and unconditionally guaranteed by the Company.

The TLA provides for borrowings of either, at the Partnership’s option, base rate loans or term SOFR loans. Base rate loans bear interest at a rate per annum equal to the greatest of (a) the prime rate as announced from time to time by PNC Bank, (b) the greater of (i) the federal funds effective rate and (ii) the overnight bank funding rate, plus 1/2 of 1.00% and (c) the adjusted term SOFR rate for an interest period of one month plus 1.00%, plus a margin that ranges between 0.25% and 1.0%, depending on the credit rating of the Partnership. SOFR loans bear interest at a rate per annum equal to the term SOFR rate for such interest periods plus 0.10%, that if the plus a margin that ranges between 1.25% and 2.0%, depending on the credit rating of the Partnership. In obtaining the TLA, the Partnership incurred fee and expenses totaled $7.6 million, which was capitalized as debt issuance cost and included in the Condensed Consolidated Balance Sheets as a direct deduction to the Term Loan Credit Facility.

Both the RCA and the TLA contain a “Sustainability Adjustments” feature that could result in a 0.05% increase or reduction to the effective interest rate, dependent upon the Company’s meeting certain sustainability targets after 2022. “Sustainability Rate Adjustment” means, with respect to any KPI Metrics Report, for any period between Sustainability Pricing Adjustment Dates, (a) positive 0.05%, if neither of the Sustainability Performance Targets (as defined in the RCA and TLA) as set forth in the KPI Metrics Report have been satisfied for the relevant calendar year, (b) 0.00% if only one of the Sustainability Performance Targets as set forth in the KPI Metrics Report has been satisfied for the relevant calendar year and (c) negative 0.05% if both of the Sustainability Performance Targets as set forth in the KPI Metrics Report have been satisfied for the relevant calendar year; provided that, in each case, if the Partnership subsequently issues a sustainability-linked debt instrument linked to the same KPI Metric and with an observation date for such calendar year, but with a higher percentage of representation or reduction, as the case may be, the relevant Sustainability Performance Target shall be automatically adjusted upward to equal the percentage of representation or reduction, as applicable, required by such subsequent sustainability-linked debt instrument.

“Sustainability Performance Targets” in the RCA and TLA mean, for any calendar year, with respect to (a) the Female Representation KPI, the target percentage of female representation in corporate officer positions for such calendar year and (b)

the Methane Emissions KPI, the percentage reduction in methane gas emissions intensity relative to the baseline year for such calendar year.

Both the RCA and the TLA contain customary covenants and restrictive provisions which may, among other things, limit Partnership’s ability to create liens, incur additional indebtedness, make restricted payments, or liquidate, dissolve, consolidate with, or merge into or with any other person. As of September 30, 2022, the Partnership was in compliance with all customary and financial covenants.

Repayment of Existing Credit Facilities

In June 2022, the Company used the net proceeds from the Notes, together with cash on hand and proceeds from the Term Loan Credit Facility, to repay all outstanding borrowings under its existing credit facilities and to pay certain related fees and expenses. In conjunction with the extinguishment of existing outstanding borrowings, the Company recognized a loss on extinguishment of debt of approximately $28.0 million. In addition, the unamortized debt issuance costs related to the existing outstanding borrowings were fully amortized and included in the loss on debt extinguishment calculation for the three and nine months ended September 30, 2022.

The fair value of the Company and its subsidiaries’ consolidated debt as of September 30, 2022 and December 31, 2021 was $3.02 billion and $2.34 billion, respectively. At September 30, 2022, the Notes’ fair value was based on Level 1 inputs and the Term Loan Credit Facility and Revolver Credit Facility’s fair value was based on Level 3 inputs.

The following table summarizes the Company’s debt obligations as of September 30, 2022 and December 31, 2021:

(1) Excluded unamortized debt issuance cost related to the Revolving Credit Facility. Unamortized debt issuance cost associated with the Revolving Credit Facility was $7.3 million and $2.2 million as of September 30, 2022 and December 31, 2021, respectively, and were included in the “Deferred charges and other assets” of the Condensed Consolidated Balance Sheets.

The table below presents the components of the Company’s financing costs, net of capitalized interest:

As of September 30, 2022 and December 31, 2021, unamortized debt issuance costs associated with the Notes and the Term Loan Credit Facility were $27.5 million and $38.5 million, respectively.

As of September 30, 2022 and December 31, 2021, unamortized debt issuance costs associated with the new and existing revolving credit facilities were $7.3 million and $2.2 million, respectively. As of September 30, 2022, the unamortized debt issuance costs associated with the new revolving credit facilities were included in the “Deferred charges and other assets” of the

Condensed Consolidated Balance Sheets. As of December 31, 2021, the current and non-current portion of the unamortized debt issuance costs were included in the “Other non-current assets” and “Deferred charges and other assets” of the Condensed Consolidated Balance Sheets.

The amortization of the debt issuance costs was charged to interest expense for the periods presented. The amount of debt issuance costs included in interest expense was $1.5 million and $3.4 million for the three months ended September 30, 2022 and 2021, respectively, and $8.1 million and $10.0 million for the nine months ended September 30, 2022 and 2021, respectively.

7. ACCRUED EXPENSES

The following table provides detail of the Company’s accrued expenses at September 30, 2022 and December 31, 2021:

Accrued product purchases mainly consisted of accrued gas estimates as of September 30, 2022.

8. COMMITMENTS AND CONTINGENCIES

Accruals for loss contingencies arising from claims, assessments, litigation, environmental, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. As of September 30, 2022 and December 31, 2021, there were no accruals for loss contingencies.

Litigation

The Company is a party to various legal actions arising in the ordinary course of its businesses. In accordance with ASC 450, Contingencies, the Company accrues reserves for outstanding lawsuits, claims, and proceedings when a loss contingency is probable and can be reasonably estimated. The Company estimates the amount of loss contingencies using current available information from legal proceedings, advice from legal counsel and available insurance coverage. Due to the inherent subjectivity of the assessments and unpredictability of the outcomes of the legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s exposure and ultimate losses may be higher, and possibly significantly more, than the amounts accrued.

The Company has entered into litigation with two third parties to collect outstanding receivables totaling $19.6 million that remain outstanding from the Winter Storm Uri during February of 2021. Given the counterparties’ sufficient creditworthiness and the valid claims that we hold, no allowance has currently been established for these items as we have legally enforceable agreements with these parties.

Environmental Matters

As an owner of infrastructure assets with rights to surface lands, the Company is subject to various local and federal laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the Company for the cost of pollution clean-up resulting from operations and subject the Company to liability for pollution damages. The Company is not aware of any environmental claims existing as of September 30, 2022, that have not been provided for or would otherwise have a material impact on its financial position, results of operations, or liquidity.

Contingent Liabilities

Permian Gas Acquisition

As part of the acquisition of Permian Gas on June 11, 2019, consideration included a contingent liability arrangement with PDC Permian, Inc. (“PDC”). The arrangement requires additional monies to be paid by the Company to PDC on a per Mcf basis if the actual annual Mcf volume amounts exceed forecasted annual Mcf volume amounts starting in 2020 and continuing through 2029. The arrangement defines the incentive rate per Mcf for each qualifying year and the total monies paid under this arrangement are capped at $60.5 million. Amounts are payable on an annual basis over the earn-out period. The fair value of the contingent liability recognized on the acquisition date of $3.9 million was estimated utilizing the following key assumptions: (1) present value factors based on the Company’s weighted-average cost of capital, 2) a probability weighted payout based on an estimate of future volumes and (3) a discount period consistent with the arrangement’s life and the respective due dates of the potential future payments. Based on current forecasts and discussions with PDC, management revalued this contingent liability with updated assumptions at each reporting period. The Company did not expect PDC’s actual annual Mcf volume amounts to exceed forecasted amounts as of September 30, 2022; therefore, the estimated fair value of the contingent consideration liability was nil as of September 30, 2022. The estimated fair value of the contingent consideration liability related to this acquisition was $0.8 million as of December 31, 2021.

Original Altus Transaction

As part of the Transaction, the Company assumed contingent liabilities of $4.5 million related to earn-out consideration of up to 2,500,000 shares of Class A Common Stock, which was part of the original Altus transaction, as follows:

• 1,250,000 shares if the per share closing price of the Class A Common Stock as reported by the New York Stock Exchange (“NYSE”) during any 30-trading-day period ending prior to November 9, 2023 is equal to or greater than $140.00 for any 20 trading days within such 30-trading-day period.
• 1,250,000 shares if the per share closing price of the Class A Common Stock as reported by the NYSE during any 30-trading-day period ending prior to November 9, 2023 is equal to or greater than $160.00 for any 20 trading days within such 30-trading-day period.

Pursuant to ASC 805, this earn-out consideration was a pre-existing contingency and accounted for as an assumed liability to the acquirer on the acquisition date. Immediately subsequent to the Closing, the Company evaluated the earn-out consideration classification in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The Company determined the earn-out consideration to be classified as equity based on the settlement provision.

9. EQUITY METHOD INVESTMENTS

As of September 30, 2022, the Company owned investments in the following long-haul pipeline entities in the Permian Basin. These investments were accounted for using the equity method of accounting. For each EMI pipeline entity, the Company has the ability to exercise significant influence based on certain governance provisions and its participation in the significant activities and decisions that impact the management and economic performance of the EMI pipeline. The table below presents the ownership percentages and investment balances held by the Company for each entity:

(1) Ownership for PHP was 53.3% and 26.7% as of September 30, 2022 and December 31, 2021, respectively.

Additionally, as of September 30, 2022, the Company also owned 15.0% of Epic Crude Holdings, LP (“EPIC”). However, no dollar value was assigned through the purchase price allocation as adjustment was made to eliminate equity in losses of EPIC. No additional contribution was made to EPIC and no distribution or equity income was received from EPIC during the three and nine months ended September 30, 2022.

As of September 30, 2022, the unamortized basis differences included in the EMI pipelines balances were $349.8 million. There was no unamortized basis difference as of December 31, 2021. These amounts represent differences in the Company’s contributions to date and the Company’s underlying equity in the separate net assets within the financial statements of the respective entities. Unamortized basis differences will be amortized into equity income over the useful lives of the underlying pipeline assets. There was capitalized interest of $12.5 million and $12.8 million as of September 30, 2022 and December 31, 2021, respectively. Capitalized interest is amortized on a straight-line basis into equity income.

The following table presents the activity in the Company’s EMIs for the nine months ended September 30, 2022:

(1) For the nine months ended September 30, 2022, net of amortization of basis differences and capitalized interests, which represents undistributed earnings, the amortization was $5.3 million from Permian Highway Pipeline LLC, $0.5 million from Breviloba, LLC and $10.4 million from Gulf Coast Express Pipeline, LLC.

(2) The EMIs acquired in the Transaction are included in the results from February 22, 2022 to September 30, 2022, and this is also the case for the additional 26.67% of PHP that was acquired in the Transaction. The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer to Note 1—Description of the Organization and Summary of Significant Accounting Policies in the Notes to our Condensed Consolidated Financial Statements of this Form 10-Q, for further information on the Company’s basis of presentation.

Summarized Financial Information

The following tables represent selected statement of operations data for the Company’s EMI pipelines (on a 100 percent basis) for the three and nine months ended September 30, 2022 and 2021.

(1) For the three and nine months ended September 30, 2021, the Company only had equity interest in Permian Highway Pipeline LLC.

10. EQUITY AND WARRANTS

Redeemable Noncontrolling Interest — Common Unit Limited Partners

On February 22, 2022, the Company consummated the Transaction. Pursuant to the Contribution Agreement, in connection with the Closing, (i) Contributor contributed all of the equity interests of the Contributed Entities to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 common units representing limited partner interests in the Partnership and 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share. Please refer to “The Transaction” above.

The redemption option of the Common Unit is not legally detachable or separately exercisable from the instrument and is non-transferable, and the Common Unit is redeemable at the option of the holder. Therefore, the Common Unit is accounted for as redeemable noncontrolling interest and classified as temporary equity on the Company’s Condensed Consolidated Balance Sheet. During the first nine months of 2022, 5,730,000 common units were redeemed on a one-for-one basis for shares of Class A Common Stock and a corresponding number of shares of Class C Common Stock were cancelled. There were 94,270,000 Common Units and an equal number of Class C Common Stock issued and outstanding as of September 30, 2022. The Common Units fair value was approximately $3.06 billion as of September 30, 2022.

Redeemable Noncontrolling Interest — Preferred Unit Limited Partners

Upon Closing, the Company assumed certain Preferred Units that were issued and outstanding on acquisition date. The Company has redeemed all assumed Preferred Units since the Closing. Refer to Note 11—Series A Cumulative Redeemable Preferred Units for further discussion.

Public Warrants

As of September 30, 2022, there were 12,577,350 Public Warrants (as defined below) outstanding. Each whole public warrant entitles the holder to purchase one tenth of a share of Class A Common Stock at a price of $115.00 per share (the “Public Warrants”). The Public Warrants will expire on November 9, 2023 or upon redemption or liquidation. The Company may call the Public Warrants for redemption, in whole and not in part, at a price of $0.01 per warrant with not less than 30 days’ notice provided to the Public Warrant holders. However, this redemption right can only be exercised if the reported last sale price of the Class A Common Stock equals or exceeds $180.00 per share for any 20-trading days within a 30-trading day period ending three business days prior to sending the notice of redemption to the Public Warrant holders.

Private Placement Warrants

As of September 30, 2022, there were 6,364,281 Private Placement Warrants (as defined below) outstanding, of which Apache holds 3,182,140. The private placement warrants will expire on November 9, 2023 and are identical to the Public Warrants discussed above, except (i) they will not be redeemable by the Company so long as they are held by the initial holders or their respective permitted transferees and (ii) they may be exercised by the holders on a cashless basis (the “Private Placement Warrants” and, together with the Public Warrants, the “Warrants”).

The Company recorded a fair value of $0.1 million for the Public Warrants and a fair value of $0.1 million for the Private Warrants as of September 30, 2022 on the Condensed Consolidated Balance Sheet in other non-current liabilities. Refer to Note 15—Fair Value Measurement in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for additional discussion regarding valuation of the Warrants.

Dividend

On February 22, 2022, the Company entered into a Dividend and Distribution Reinvestment Agreement (the “Reinvestment Agreement”) with certain stockholders including BCP Raptor Aggregator, LP, BX Permian Pipeline Aggregator, LP, Buzzard Midstream LLC, APA Corporation Apache Midstream LLC, and certain individuals (each, a “Reinvestment Holder”). Under the Reinvestment Agreement, each Reinvestment Holder is obligated to reinvest at least 20% of all distributions on Common Units or dividends on shares of Class A Common Stock in the Company’s Class A Common Stock. Additionally, the Audit Committee and subsequently the Company’s Board of Directors (the “Board”) resolved that for the calendar year 2022, 100% of all distributions or dividends received by each Reinvestment Holder would be reinvested in newly issued shares of Class A Common Stock. 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.”

During the nine months ended September 30, 2022, the Company made cash dividend payments of $25.3 million to holders of Class A Common Stock and Common Units and $175.5 million was reinvested in shares of Class A Common Stock by Reinvestment Holders.

On October 19, 2022, the Board 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 November 17, 2022. Certain holders of Class A Common Stock and Class C Common Stock will receive a cash dividend with the balance receiving additional shares of Class A Common Stock under the Reinvestment Agreement.

Stock Split

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

All corresponding per-share and share amounts, excluding the Transaction, for periods prior to June 8, 2022 have been retroactively restated in this Form 10-Q to reflect the Stock Split.

11. SERIES A CUMULATIVE REDEEMABLE PREFERRED UNITS

Prior to the Closing Date of the Transaction, the Partnership had 625,000 Preferred Units issued and outstanding. Immediately prior to the Closing, on February 22, 2022, the Partnership redeemed for cash, 100,000 Preferred Units in an amount equal to approximately $120.1 million. The Company assumed the remaining 525,000 Preferred Units as well as 29,983 paid-in-kind (“PIK”) Preferred Units that were issued and outstanding at the closing of the Transaction. At the close, 150,000 preferred units and 8,567 associated PIK units became mandatorily redeemable and liability classified with the balance of preferred units remaining unchanged and classified as redeemable noncontrolling interest. The Company redeemed 125,000 mandatorily redeemable preferred units during the first two quarters of 2022 with the balance of mandatorily redeemable preferred units being redeemed during July for $30.7 million.

In July 2022, the Company redeemed all outstanding redeemable noncontrolling interest Preferred Units for an aggregate $461.5 million. The excess of the carrying amount of the redeemable noncontrolling interest Preferred units immediately prior to redemption over redemption price was included in “Retained Earnings” in the Condensed Consolidated Balance Sheets.

Activities related to Preferred Units for the nine months ended September 30, 2022 are as follows:

(1) Included 21,417 PIK units on a pro rata basis.

12. SHARE-BASED COMPENSATION

Prior to the Closing, the Company issued incentive units, which included performance and service conditions, to certain employees and board members. The units consisted of Class A-1, Class A-2, and Class A-3 units. These units derived value from the Company’s certain wholly owned subsidiaries. Class A-1 and A-2 units would have vested upon either (i) the date of consummation of a change in control or (ii) the date that is 1-year following the consummation of the initial public offering (“IPO”) of the Company (or its successor) (collectively “Exit Events”). Class A-3 units would have vested upon a change in control, if the participants were employed at the time of the event, or upon termination of the participant by the Company.

Immediately upon Closing, all outstanding Class A-1 and Class A-2 units were cancelled and exchanged for 5,300,000 shares (the “Class A Shares”), post-Stock Split, of the Company’s Class A Common Stock. These Class A Shares are issued and outstanding as they were distributed pro rata to all holders of Class A-1 and Class A-2 units by the Common Unit limited partners from the 50,000,000 common units, pre-Stock-Split, that such limited partners received upon the Closing. The Common Unit limited partners redeemed Common Units needed for the Class A shares distribution upon the Closing. The Class A Shares are held in escrow and will vest over three to four years. Similarly, the Class A-3 units were exchanged for approximately 326,000, post Stock Split, Class C Common Stock and Common Units (the “Class C Shares”) and will vest over four years. The Company also issued approximately 76,000, post Stock Split, replacement restricted share awards (“Replacement Awards”) to new employees that transitioned from ALTM as part of the Transaction. These changes for all three share types established a new measurement date. The Class A Shares, Class C Shares and Replacement Awards were valued based on the Company’s publicly quoted stock price on the measurement date, which was the Closing Date of the Transaction.

During 2022, pursuant to the Company’s 2019 Omnibus Compensation Plan, as amended from time to time (the “Plan”), the Company granted a total of 13,941 restricted stock units (“RSUs”) to certain members of the Board, which were vested immediately on grant date, and granted a total of 14,144 RSUs to new employees, which are subject to a vesting period between one and three years.

With respect to the above shares, the Company recorded compensation expenses of $12.7 million and $31.0 million for the three and nine months ended September 30, 2022, respectively, based on a straight line amortization of the associated awards’ fair value over the respective vesting life of the shares. With respect to the above incentive units, no compensation expenses were recorded for the three and nine months ended September 30, 2021, as the incentive units were considered non-vested prior to their cancellation and exchange for Class A or Class C Common Stock, and no RSUs were granted during 2021.

13. INCOME TAXES

The Company is subject to U.S. federal income tax and the Texas margin tax. Income tax expense included in the Condensed Consolidated Financial Statements in this Form 10-Q is as follows:

(1) Prior to the Closing on February 22, 2022, BCP, the accounting acquirer, was organized as limited partnership and was not subject to the U.S. federal income tax for the three and nine months ended September 30, 2021.

The effective tax rate for the three and nine months ended September 30, 2022 was lower than the statutory rate mainly due to the impact of tax attributable to noncontrolling interests related to the Common Units and Preferred Units limited partners and valuation allowance.

Upon Closing, the Company assumed certain uncertain tax positions from ALTM. The Company accounts for income taxes in accordance with ASC 740—Income Taxes, which prescribes a minimum recognition threshold a tax position must meet before being recognized in the financial statements. Tax positions generally refer to a position taken in a previously filed income tax return or expected to be included in a tax return to be filed in the future that is reflected in the measurement of current and deferred income tax assets and liabilities. Reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:

14. NET INCOME PER SHARE

The computation of basic and diluted net income per share for the periods presented in the Condensed Consolidated Financial Statements is shown in the tables below.

(1) The effect of an assumed exchange of the outstanding public and private warrants for shares of Class A Common Stock would have been anti-dilutive for all periods presented in which the public and private warrants were outstanding.

(2) The effect of an assumed exchange of outstanding Common Units (and the cancellation of a corresponding number of shares of outstanding Class C Common Stock) would have been anti-dilutive for all periods presented in which the Common Units were outstanding.

(3) Share amounts have been retroactively restated to reflect the Company’s two-for-one Stock Split. Refer to Note 10—Equity and Warrants in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information.

(4) Represents dividends paid to unvested restricted Class A common shareholders.

(5) Represented excess of carrying value of redeemable noncontrolling interest Preferred Units over redemption price at redemption.

15. FAIR VALUE MEASUREMENTS

The Company’s financial assets and liabilities measured at fair value on a recurring basis include cash and cash equivalents, accrued receivables, accounts receivable, accounts receivable from affiliates, dividends and distributions payable, interest rate and commodity swap derivatives, and Company’s private and public warrants and an embedded derivative liability related to the issuance of Preferred Units.

Topic 820 establishes a framework for measuring fair value in U.S. GAAP, clarifies the definition of fair value within that framework, and requires disclosures about the use of fair value measurements. Topic 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Topic 820 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.

Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1 inputs). The three levels of the fair value hierarchy under Topic 820 are described below:

Level 1 inputs: Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 inputs: Inputs, other than quoted prices in active markets, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 inputs: Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or inventory parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity.

The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:

The Company is exposed to certain risks arising from both its business operations and economic conditions, and the Company enters into certain derivative contracts to manage the exposures. Refer to Note 16—Derivatives and Hedging Activities in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further discussion related to commodity swaps and interest rate derivatives.

The Company bifurcated and recognized the embedded derivative associated with the Preferred Units related to the exchange option provided to the Preferred Unit holders under the terms of the Partnership LPA. The Company redeemed all outstanding Preferred Units in July 2022 and wrote off related embedded derivative liabilities as of September 30, 2022. The Company recorded gains of $0.5 million and $89.1 million for the three and nine months ended September 30, 2022, which was recorded as a “Gain on embedded derivative” in the Condensed Consolidated Statement of Operations.

The carrying value of the Company’s Public Warrants are recorded at fair value based on quoted market prices, a Level 1 fair value measurement. The carrying value of the Company’s Private Placement Warrants are recorded at fair value determined using an option pricing model, a Level 3 fair value measurement, which is calculated based on key assumptions related to expected volatility of the Company’s common stock, an expected dividend yield, the remaining term of the warrants outstanding and the risk-free rate based on the U.S. Treasury yield curve in effect at the time of the valuation. These assumptions are estimated utilizing historical trends of the Company’s common stock, Public Warrants and other factors. The Company has recorded a liability of $0.2 million as of September 30, 2022. There was no change in fair value of the warrants since closing of the Transaction through reporting date.

The carrying amounts reported on the Condensed Consolidated Balance Sheets for the Company’s remaining financial assets and liabilities approximate fair value due to their short-term nature. There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the three and nine months ended September 30, 2022 and 2021.

16. DERIVATIVES AND HEDGING ACTIVITIES

The Company is exposed to certain risks arising from both its business operations and economic conditions, and it enters into certain derivative contracts to manage exposure to these risks. The Company did not elect to apply hedge accounting to these derivative contracts and recorded fair value of the derivatives on the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021.

Interest Rate Risk

The Company manages market risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and by using derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high credit-rating counterparties.

The Company’s objectives in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and Term SOFR elections, (able to fix up to six months forward SOFR), granted under the company’s debt agreements as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract.

In June 2022, all of BCP PHP, LLC’s (“BCP PHP”) outstanding interest rate swaps were terminated as BCP PHP’s outstanding term loan credit facility was extinguished on June 8, 2022. Refer to Note 6—Debt and Financing Costs in the Notes to our Condensed Consolidated Financial Statements for additional information about the refinancing transactions.

The fair value or settlement value of the consolidated interest rate swaps outstanding are presented on a gross basis on the Condensed Consolidated Balance Sheets. Interest rate swap derivative liabilities were nil and $2.7 million as of September 30, 2022 and December 31, 2021, respectively. The Company recorded cash settlements on interest rate swap derivatives of nil and $0.7 million for the three months ended September 30, 2022 and 2021, respectively, and $11.3 and $2.2 million for the nine months ended September 30, 2022 and 2021, respectively, in “Interest Expense” of the Condensed Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of nil and $26 thousand for the change in fair value of the interest rate swap derivatives for the three months ended September 30, 2022 and 2021, respectively, and $14.0 million and $3.1 million for the nine months ended September 30, 2022 and 2021, respectively, in “Interest Expense” of the Condensed Consolidated Statements of Operations.

Commodity Price Risk

Similarly, in 2020 and 2021 BCP Raptor, LLC (“BCP I”) and BCP Raptor II, LLC (“BCP II”) had WTI crude hedges at a specific notional amount that provides for a fixed price for crude in the Permian Basin and Waha basis hub hedges on various notional quantities of gas that either provided for a fixed price differential of natural gas in the Permian Basin relative to the NYMEX natural gas contract or provided for a fixed price for natural gas in the Permian Basin.

All of the Company’s commodity swaps had reached maturity as of December 31, 2021. The fair value or settlement value of the swaps outstanding are presented on a gross basis on the Condensed Consolidated Balance Sheet. Commodity swap derivative liability was nil and $0.2 million as of September 30, 2022 and December 31, 2021, respectively. The Company recorded cash settlements on commodity swap derivatives of nil and $0.9 million for the three months ended September 30, 2022 and 2021, respectively, and $0.2 million and $15.8 million for the nine months ended September 30, 2022 and 2021, respectively, in “Other Revenue” of the Condensed Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $0.6 million and $17.1 million for the change in fair value of commodity swap derivatives for the three and nine months ended September 30, 2021, respectively, in “Other Revenue” of the Condensed Consolidated Statements of Operations. No fair value adjustment recognized for the three and nine months ended September 30, 2022 as no commodity swaps were outstanding.

17. SEGMENTS

Our two operating segments represent the Company’s segments for which discrete financial information is available and is utilized on a regular basis by our chief operating decision maker (“CODM”) to make key operating decisions, assess performance and allocate resources. Our Chief Executive Officer is the CODM. These segments are strategic business units with differing products and services. No operating segments have been aggregated to form the reportable segments. Therefore, our two operating segments represent our reportable segments. The activities of each of our reportable segments from which the Company earns revenues and incurs expenses are described below:

• Midstream Logistics: The Midstream Logistics segment operates under three streams, 1) gas gathering and processing, 2) crude oil gathering, stabilization and storage services and 3) water gathering and disposal.
• Pipeline Transportation: The Pipeline Transportation segment consists of equity investment interests in four Permian Basin pipelines that access various points along the Texas Gulf Coast, Brandywine NGL Pipeline and Delaware Link Pipeline that is under development. The current operating pipelines transport crude oil, natural gas and NGLs.

Upon Closing, our CODM reviewed the Company and ALTM’s reporting segment activities. The Company then renamed its Gathering and Processing segment to Midstream Logistics and its Transmission segment to Pipeline Transportation. These name changes were made to better align segment activities with the name of the respective segment. There was no change in segment composition or structure for the three and nine months ended September 30, 2022.

The following tables present the reconciliation of the segment profit measure as of and for the three and nine months ended September 30, 2022 and 2021:

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

(2) Results do not include legacy ALTM prior to February 22, 2022. Refer to Note 1 —Description of the Organization and Summary of Significant Accounting Policies in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q, for further information on the Company’s basis of presentation. Adjusted EBITDA is a non-GAAP measure; please seeKey Performance Metrics in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q, for a definition and reconciliation to the GAAP measure.

The following tables present the revenue for individual operating segment for the three and nine months ended September 30, 2022 and 2021:

The following table presents total assets for each operating segment as of September 30, 2022 and December 31, 2021:

18. SUBSEQUENT EVENTS

On October 10, 2022, the Company announced the transfer of its Class A Common Stock to the New York Stock Exchange (“NYSE”) from the Nasdaq Global Select Market (“Nasdaq”). The Company’s Class A Common Stock began trading on the NYSE under its current ticker symbol, “KNTK”, at the open of trading on Monday, October 24, 2022.

On October 19, 2022, the Board declared a cash dividend of $0.75 per share on the Company’s Class A Common Stock which will be payable to stockholders on November 17, 2022. 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. Please refer to Note 10—Equity and Warrants in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for additional information.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis addresses the results of our operations for the three and nine month periods ended September 30, 2022, as compared to our results of operations for the same periods in 2021. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods. The previously announced merger of ALTM and BCP and their respective consolidated subsidiaries closed on February 22, 2022. As the Transaction was determined to be a reverse merger, BCP was considered the accounting acquirer and ALTM was considered the legal acquirer. Therefore, BCP’s net assets, carried at historical value, were presented as the predecessor to the Company’s historical financial statements and the comparable period presented herein reflects the results of operations of BCP for the three and nine months ended September 30, 2022. The results of operations of ALTM is reflected within the Company’s Condensed Consolidated Financial Statements from the Closing Date through September 30, 2022.

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

The Transaction

On February 22, 2022, the Company consummated the previously announced business combination transactions contemplated by the Contribution Agreement, dated as of October 21, 2021, by and among the Company, the Partnership, Contributor and BCP. Pursuant to the Contribution Agreement, in connection with the Closing, (i) Contributor contributed all of the equity interests in BCP and BCP Raptor Holdco GP, LLC, a Delaware limited liability company and the general partner of BCP (“BCP GP”), to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 Common Units and 50,000,000 shares of the Company’s Class C common stock, par value $0.0001 per share (“Class C Common Stock”).

The Company’s stockholders immediately prior to the Closing continued to hold their shares of the Company’s Class A common stock, par value $0.0001 per share (“Class A Common Stock,” together with the Class C Common Stock, the “Common Stock”). As a result of the Transaction, immediately following the Closing (i) Contributor owns approximately 75% of the issued and outstanding Common Stock, (ii) Apache Midstream owns approximately 20% of the issued and outstanding Common Stock, and (iii) the Company’s remaining stockholders own approximately 5% of the issued and outstanding Common Stock. Upon close of the Transaction, the Company’s Pipeline Transportation segment expanded to include three additional EMI pipelines and to increase its ownership interest in PHP. Further note that a secondary offering of 4 million Apache shares was closed during March of 2022 further reducing Apache’s ownership to approximately 13%.

The Transaction also brought in additional volume capacity from ALTM for the Midstream Logistics segment, including 182 miles of in-service natural gas gathering pipelines, approximately 46 miles of residue gas pipelines with four market connections, and approximately 66 miles of NGLs pipelines. The increased volume capacity has contributed to the increase in operating revenue for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

Overview

We are an integrated midstream energy company in the Permian Basin providing comprehensive gathering, transportation, compression, processing, and treating services. Our core capabilities include a variety of service offerings across multiple streams, including natural gas gathering, transportation, compression, treating and processing; NGLs stabilization and transportation; produced water gathering and disposal; and crude oil gathering, stabilization, storage and transportation. We have approximately 2.0 Bcf/d cryogenic natural gas processing capacity strategically located near the Waha Hub in West Texas. As measured by processing capacity, we are the second largest natural gas processor in the Delaware Basin and the fourth largest across the entire Permian Basin. In addition, we have interests in four long-term contracted pipelines transporting natural gas, NGLs, and crude oil from the Permian Basin to the Gulf Coast.

Our Operations

Upon Closing, the Company renamed its Gathering and Processing segment to Midstream Logistics and renamed its Transmission segment to Pipeline Transportation. These name changes were made to better align segment activities with the name of each respective segment. The Midstream Logistics segment operates under three service offerings, 1) gas gathering and processing, 2) crude oil gathering, stabilization, and storage services, and 3) water gathering and disposal. The Pipeline Transportation segment consists of four EMI pipelines originating in the Permian Basin with various access points to the Texas

Gulf Coast, Kinetik NGL Pipeline and Delaware Link Pipeline that is under development. The pipelines transport crude oil, natural gas, and NGLs within the Permian Basin and to the Texas Gulf Coast.

Midstream Logistics

Gas Gathering and Processing

The Midstream Logistics segment provides gas gathering and processing services with approximately 1,200 miles of low and high-pressure steel pipeline located throughout the Southern Delaware Basin. Gas processing assets are centralized at five processing complexes with total cryogenic processing capacity of approximately 2.0 Bcf/d: the East Toyah complex (460 MMcf/d), the Pecos Bend complex (540 MMcf/d), the Pecos complex (260 MMcf/d), the Sierra Grande complex (60 MMcf/d), and Diamond Cryogenic complex (600 MMcf/d). The Company plans to expand the Diamond Cryogenic complex to 720 MMcf/d by the end of the first quarter of 2023. Current and under construction residue gas outlets include the El Paso Natural Gas Pipeline, Energy Transfer Comanche Trail Pipeline, ONEOK Roadrunner Pipeline, Energy Transfer Oasis Pipeline, and Whitewater Aqua Blanca Pipeline. NGLs outlets include Energy Transfer’s Lone Star NGL Pipeline, Targa’s Grand Prix NGL Pipeline, and Enterprise’s Shin Oak NGL Pipeline.

Crude Oil Gathering, Stabilization, and Storage Services

The Midstream Logistics segment also includes crude oil gathering, stabilization, and storage services throughout the Texas Delaware Basin. Crude gathering assets are centralized at the Caprock Stampede Terminal and the Pinnacle Sierra Grande Terminal. The system includes approximately 200 miles of gathering pipeline and 90,000 barrels of crude storage. The crude facilities have connections for takeaway transportation into Plains’ 285 Central Station and State Line and Oryx’s Orla & Central Mentone facilities.

Water Gathering and Disposal

In addition, this segment includes water gathering and disposal assets located in northern Reeves County, Texas which are included in the Midstream Logistics segment. The system includes approximately 70 miles of gathering pipeline and approximately 500,000 barrels per day of permitted disposal capacity.

Pipeline Transportation

The Pipeline Transportation segment consists of four EMI pipelines in the Permian Basin with access to various points along the Texas Gulf Coast, Brandywine NGL Pipeline and the Delaware Link Pipeline, which is currently under development. EMI pipelines include the following:

• An approximate 53.3% equity interest in Permian Highway Pipeline LLC (“PHP”), which is also owned and operated by Kinder Morgan Texas Pipeline, LLC (“Kinder Morgan”). PHP transports natural gas from the Waha area in northern Pecos County, Texas to the Katy, Texas area with connections to Texas Gulf Coast and Mexico markets. PHP was placed in service January 2021, with the total capacity of 2.1 Bcf/d fully subscribed under long-term contracts. In June 2022, PHP announced a final investment decision to proceed with its expansion project to increase total capacity to 2.65 Bcf/d fully subscribed under 10 year take or pay contracts. The project will increase PHP’s capacity by nearly 550 MMcf/d with target in-service date in November 2023. The funding for the expansion is 67% by the Company and the remainder by Kinder Morgan. As a result, post the in service of the expansion, Kinetik’s ownership interest in PHP will increase approximately 56.0%.
• A 16% equity interest in the Gulf Coast Express Pipeline (“GCX”), which is owned and operated by Kinder Morgan. GCX transports natural gas from the Permian Basin in West Texas to Agua Dulce near the Texas Gulf Coast. GCX was placed in service during 2019, with the total capacity of 2.0 Bcf/d fully subscribed under long-term contracts.
• A 33% equity interest in the Shin Oak NGL Pipeline (“Shin Oak”), which is owned by Breviloba, LLC, and operated by Enterprise Products Operating LLC. Shin Oak transports NGLs from the Permian Basin to Mont Belvieu, Texas. Shin Oak was placed in service during 2019, with total capacity of up to 550 MBbl/d.
• A 15% equity interest in the EPIC Crude oil pipeline (“EPIC”), which is operated by EPIC Consolidated Operations, LLC. EPIC transports crude oil from Orla, Texas in Northern Reeves County to the Port of Corpus Christi, Texas. EPIC was placed in service early 2020, with initial throughput capacity of approximately 600 MBbl/d.

Factors Affecting Our Business

The Significance of Crude Oil and Producer Volumes on Our Revenues, Cost of Sales and Gross Margin

The Company’s assets include approximately 1,700 miles of NGLs, natural gas, condensate, produced water, and crude oil pipelines as well as approximately 2 Bcf/d of natural gas processing capacity as of September 30, 2022. Most of the gas gathered and processed by the Company is associated gas included in the oil stream, making producers’ oil break-even prices the primary driver of activity. The average price of WTI crude oil was $98.39/Bbl during the first nine months of 2022. If crude prices were to fall below producers’ break-even prices for a prolonged period of time, drilling activity and volumes might decline and might have a negative impact on our business. In addition, because the Company’s Pipeline Transportation segment provides NGLs transmission service through its EMI pipelines, a decrease in natural gas and NGL price will have an adverse impact on the Company’s results of operations as it may lead to lower natural gas production and thus lower volumes of NGLs transported. The average natural gas price was $6.66/MMBtu during the first nine months of 2022. For additional risk factors that affect the Company’s business, please refer to Part II, Item 1A — Risk Factors of the Company’s Quarterly Report Form 10-Q for the first quarter of 2022 filed on May 10, 2022.

Recent Developments

Transfer to the New York Stock Exchange

On October 10, 2022, the Company notified the Nasdaq Global Select Market (“Nasdaq”) that it would voluntarily transfer the listing of its Class A Common Stock from Nasdaq to the New York Stock Exchange (the “NYSE”). The listing and trading of the Common Stock on Nasdaq ended at market close on October 21, 2022, and trading commenced on the NYSE at market open on October 24, 2022. The Class A Common Stock continues to trade under the current stock symbol “KNTK”.

Brandywine NGL Acquisition

In September 2022, the Company acquired approximately 30 miles of 20 inch NGL pipelines connected to Diamond Cryo called the Brandywine NGL Pipeline (“Brandywine”) for approximately $25 million. Brandywine is a strategic intrabasin natural gas liquids pipeline, affording Kinetik greater control over its system’s NGLs and providing interconnectivity to Shin Oak.

Comprehensive Refinancing

On June 8, 2022, the Partnership, completed a private placement of $1.00 billion aggregate principal amount of its 5.875% Sustainability-Linked Senior Notes due 2030 (the “Notes”), which are fully and unconditionally guaranteed by the Company. In addition, the Partnership entered into a new revolving credit agreement (the “RCA”), which provides for a $1.25 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”) maturing on June 8, 2027, and a new term loan agreement (the “TLA”), which provides for a $2.00 billion senior unsecured term loan credit facility (the “Term Loan Credit Facility”) maturing on June 8, 2025. Proceeds from the Notes and the Term Loan Credit Facility were used to repay all outstanding borrowings under our existing credit facilities and to pay fees and expenses related to the offering. Refer to Note 6 — Debt and Financing Costs in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information.

Sustainability-linked Financing Framework

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

This framework establishes key-performance indicators (“KPIs”) that will be used to measure our progress against sustainability performance targets (“SPTs”). Under this framework, our KPIs are Scope 1 and Scope 2 greenhouse gas emissions intensity, Scope 1 and Scope 2 methane gas emissions intensity and female representation in corporate officer positions and our SPTs are (1) reducing the intensity of all Scope 1 and Scope 2 greenhouse gas emissions from our operations by 35% by 2030 from a 2021 Baseline Year (as defined in the Sustainability Framework), (2) reducing the intensity of Scope 1 and Scope 2 methane gas emissions from our operations by 30% by 2030 from a 2021 Baseline Year, and (3) increasing female representation in corporate officer positions of Vice President and above to 20% by year-end 2026.

Stock Split

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

Commodity Price Volatility

There has been, and we believe there will continue to be, volatility in commodity prices and in the relationships among NGLs, crude oil and natural gas prices. As a result of uncertainty around global commodity supply and demand, the impact of China’s zero covid policy, the continued headwinds from a stronger US dollar, both here and abroad, global oil and natural gas commodity prices continue to remain volatile. The volatility and uncertainty of natural gas, crude oil and NGL prices impact drilling, completion and other investment decisions by producers and ultimately supply to our systems. Our operations benefit in an environment of higher natural gas, NGLs and condensate prices, the instability of international political environments and human and economic hardship resulting from the international political instability would have a uncertain impact on the U.S. economy, which in turn, might affect our business and operations adversely. The Company continues to monitor commodity prices closely and is likely to enter into commodity price hedges from time to time as necessary to mitigate the volatility risk.

Inflation and Interest Rates

The annual rate of inflation in the United States hit 8.2% in September 2022, as measured by the Consumer Price Index. We expect that inflation will continue to increase our operating costs and the overall cost of capital projects we undertake. In addition, the Federal Reserve has continued to tighten its monetary policy by raising interest rates and Chairman Powell has indicated that the target Federal Funds Rate range will likely be approximately 4.5% by the end of 2022. Furthermore, the Chairman of the Federal Reserve signaled that the Federal Reserve would continue to take necessary action to bring inflation down and to ensure price stability, including continued rate increases. Increased interest rates will have a negative impact on the Company’s ability to meet its contractual debt obligations and to fund its operating expenses, capital expenditures, dividends and distributions. The Company will continue to actively evaluate and analyze whether any form of interest rate hedging should be implemented to mitigate interest rate exposure.

Supply Chain Considerations

During 2021 and 2022, challenging supply chain issues have emerged that will continue at least through the remainder of 2022. Geopolitical events have further disrupted global supply chains and caused volatile commodity prices for natural gas, NGLs and crude oil. The United States has banned the import of Russian oil, NGLs and other energy commodities and European Union has taken steps to reduce imports of Russian oil and natural gas. The principal supply issues facing our industry for the next twelve months include: raw materials availability, finished good inventory, rising freight costs, delays due to port congestion and continued labor shortages.

All bidding will require the risk of shipping costs and delays to be factored into proposals. Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future. The import of raw materials from China will also incur price increases. To that end, accelerating tensions between China and the U.S. could also result in further supply disruption.

Results of Operations

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

*The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer to the Form 10-Q basis of presentation inNote 1—Description of the Organization and Summary of Significant Accounting Policies in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q, for further information.

NM - Not meaningful

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Revenues

For the three months ended September 30, 2022, revenue increased $158.6 million, or 95%, to $325.2 million, compared to $166.6 million for the same period in 2021. The increase was primarily driven by period to period higher commodity prices, increases in gathered and processed gas volumes, as well as similar increases in condensate and NGL volumes sold.

Service revenue

Service revenue consists of service fees paid to us by our customers for providing comprehensive gathering, treating, processing and water disposal services necessary to bring natural gas, NGLs and crude oil to market. Service revenue for the three months ended September 30, 2022, increased by $35.0 million, or 48%, to $107.6 million, compared to $72.6 million for the same period in 2021. This increase was primarily due to a period over period increase in gathered and processed gas volumes of 585.4 Mcf per day and 541.5 Mcf per day, respectively. Over 99% of service revenues are included in the Midstream Logistics segment.

Product revenue

Product revenue consists of commodity sales (including condensate, natural gas residue, and NGLs). Product revenue for the three months ended September 30, 2022, increased by $120.5 million, or 129%, to $213.8 million, compared to $93.3 million for the same period in 2021, primarily due to period over period increases in condensate prices combined with increased NGL and condensate sales volumes. Condensate prices increased $23.30 per barrel or 35%. NGL and condensate sales volumes increased 3.5 million barrels, or 550%. The increase in NGL and condensate sales volumes offset the decreased NGL prices of $5.77 per barrel, or 14%. This overall increase in NGL and condensate revenue was due to our plants being run in recovery for parts of the three months ended September 30, 2022 versus rejection during the same period in 2021. For the same reason, natural gas residue sales volumes decreased by 1.9 million MMBtu, or 28%. Partially offsetting this decrease in volumes, natural gas prices increased period over period by $3.34 per MMBtu, or 86%. Product revenues are included entirely in the Midstream Logistics segment.

Operating Costs and Expenses

Costs of sales (exclusive of depreciation and amortization)

Cost of sales (exclusive of depreciation and amortization) primarily consists of purchases of NGLs and natural gas from our producers at contracted market prices to support product sales to other third parties. For the three months ended September 30, 2022, cost of sales increased $84.7 million, or 140%, to $145.2 million, compared to $60.5 million for the same period in 2021. The increase was primarily driven by the period to period increase in commodity prices and increased NGL and condensate volumes. Cost of sales (exclusive of depreciation and amortization) are included entirely in the Midstream Logistics segment.

Operating expenses

Operating expenses increased by $13.1 million, or 58%, to $35.8 million for the three months ended September 30, 2022, compared to $22.7 million for the same period in 2021. Of the total increase, $7.7 million was driven by new operations acquired through the Transaction. The remaining increases were primarily driven by an increase in repairs and maintenance costs of $1.2 million, higher contract labor costs of $1.2 million, and higher safety and environmental expenditures of $0.8 million.

General and administrative

General and administrative (“G&A”) expense increased by $16.5 million, or 237%, to $23.5 million for the three months ended September 30, 2022, compared to $7.0 million for the same period in 2021. The increases were primarily driven by recognition of share-based compensation of $12.7 million, acquisition and integration costs of $2.7 million incurred in relation to the Transaction, and an increase of $0.8 million in insurance expenses.

Other Income (Expense)

Equity in earnings of unconsolidated affiliates

Income from EMI pipelines increased by $28.2 million, or 167%, to $45.0 million for the three months ended September 30, 2022, compared to $16.8 million for the same period in 2021. The increase was primarily due to the acquisition of new EMI pipelines and additional equity interests in the Company’s existing EMI pipeline, PHP. Equity in earnings of unconsolidated affiliates is included entirely in the Pipeline Transportation segment.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Revenues

For the nine months ended September 30, 2022, revenue increased $467.5 million, or 104%, to $918.0 million, compared to $450.5 million for the same period in 2021. The increase was primarily driven by period to period higher commodity prices, increases in gathered and processed gas volumes, as well as similar increases in condensate and NGL volumes sold.

Service revenue

Service revenue consists of service fees paid to us by our customers for providing comprehensive gathering, treating, processing and water disposal services necessary to bring natural gas, NGLs and crude oil to market. Service revenue for the nine months ended September 30, 2022, increased by $87.6 million, or 43%, to $290.1 million, compared to $202.5 million for the same period in 2021. This increase was primarily due to a period over period increase in gathered and processed gas volumes of 559.9 Mcf per day and 523.8 Mcf per day, respectively. Over 99% of service revenues are included in the Midstream Logistics segment.

Product revenue

Product revenue consists of commodity sales (including condensate, natural gas residue, and NGLs). Product revenue for the nine months ended September 30, 2022, increased by $374.0 million, or 153%, to $618.4 million, compared to $244.4 million for the same period in 2021, primarily due to period over period increases in NGL and condensate prices combined with increased sales volumes of these liquids. NGL prices increased $6.60 per barrel, or 20%, and condensate prices increased $35.69 per barrel, or 60%. NGL and condensate sales volumes increased 8.2 million barrels, or 280%. This substantial increase was due to our plants being run in recovery for most of the nine months ended September 30, 2022 versus rejection during the same period in 2021. For the same reason, natural gas residue sales volumes decreased by 3.2 million MMBtu, or 17%. Partially offsetting this decrease in volumes, natural gas prices increased period over period by $2.61 per MMBtu, or 73%. Product revenues are included entirely in the Midstream Logistics segment.

Operating Costs and Expenses

Costs of sales (exclusive of depreciation and amortization)

Cost of sales (exclusive of depreciation and amortization) primarily consists of purchases of NGLs and natural gas from our producers at contracted market prices to support product sales to other third parties. For the nine months ended September 30, 2022, cost of sales increased $277.2 million, or 197%, to $418.2 million, compared to $141.0 million for the same period in 2021. The increase was primarily driven by the period to period increases in commodity prices and NGL and condensate volumes discussed above. Cost of sales (exclusive of depreciation and amortization) are included entirely in the Midstream Logistics segment.

Operating expenses

Operating expenses increased by $37.4 million, or 59%, to $101.0 million for the nine months ended September 30, 2022, compared to $63.6 million for the same period in 2021. Of the total increase, $16.2 million was driven by the new operations acquired through the Transaction. The remaining increase was primarily driven by higher period over period electricity costs of $10.7 million, higher salaries and benefits of $3.7 million, higher repairs and maintenance costs of $2.9 million and higher contract labor costs of $2.8 million. The higher electricity costs were primarily due to electricity credits received in 2021 related to the extreme weather caused by Winter Storm Uri.

General and administrative

General and administrative (“G&A”) expense increased by $54.3 million, or 303%, to $72.2 million for the nine months ended September 30, 2022, compared to $17.9 million for the same period in 2021. The increases were primarily driven by recognized share-based compensation of $31.0 million, acquisition and integration costs of $18.5 million incurred in relation to the Transaction and an increase in insurance expenses of $2.2 million.

Depreciation and amortization

Depreciation and amortization expense increased by $22.3 million, or 13%, to $192.6 million for the nine months ended September 30, 2022, compared to $170.3 million for the same period in 2021. The increase was primarily driven by the new assets acquired through the Transaction.

Other Income (Expense)

Gain (loss) on debt extinguishment

For the nine months ended September 30, 2022, the Company recognized a loss on debt extinguishment of $28.0 million, compared with a gain of $4 thousand for the same period in 2021. The change reflected the loss on debt extinguishment recognized in relation to the comprehensive refinancing completed in June 2022.

Gain on embedded derivative

For the nine months ended September 30, 2022, the Company recognized a gain on embedded derivative of $89.1 million. The gain is a result of the decrease in fair value of the embedded derivative liability related to the redeemable noncontrolling interest Preferred Units, which was eliminated upon the ultimate redemption of these Preferred Units during July of 2022.

Equity in earnings of unconsolidated affiliates

Income from EMI pipelines increased by $76.0 million, or 170% to $120.7 million for the nine months ended September 30, 2022, compared to $44.7 million for the same period in 2021. The increase was primarily due to the acquisition of new EMI pipelines and additional equity interests in the Company’s existing EMI pipeline, PHP, through the Transaction closed in February 2022. Equity in earnings of unconsolidated affiliates is included entirely in the Pipeline Transportation segment.

Key Performance Metrics

Adjusted EBITDA

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

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

• Is widely used by analysts, investors and competitors to measure a company’s operating performance;
• Is a financial measurement that is used by rating agencies, lenders, and other parties to evaluate our credit worthiness; and;
• Is used by our management for various purposes, including as a measure of performance and as a basis for strategic planning and forecasting.

Adjusted EBITDA is not defined in GAAP

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

Reconciliation of non-GAAP financial measure

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

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

• The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer to Note 1—Description of the Organization and Summary of Significant Accounting Policies for further information on the Company’s basis of presentation.

NM - not meaningful

Adjusted EBITDA increased by $112.4 million, or 112%, to $212.4 million for the three months ended September 30, 2022, compared to $100.0 million for the same period in 2021. The increase was primarily driven by an increase in net income including noncontrolling interest of $44.8 million, or 965%, and increases in add back related to the Company’s proportionate share of its EMI pipelines’ EBITDA of $56.7 million, or 261%, share-based compensation of $12.7 million, interest expense of $9.9 million and depreciation and amortization expense of $7.9 million, which are results of new operations acquired through the Transaction. The increase in adjusted EBITDA was partially offset by increases in EMI pipelines equity income of $28.2 million, which was the result of acquisitions of new EMI pipeline entities and additional PHP equity interests acquired.

Adjusted EBITDA increased by $254.3 million, or 83% to $561.1 million for the nine months ended September 30, 2022, compared to $306.8 million for the same period in 2021. The increase was primarily driven by an increase in net income including noncontrolling interest of $194.8 million, or 2630%, and increases in add back related to the Company’s proportionate share of its EMI pipelines’ EBITDA of $130.8 million, or 219%, share-based compensation of $31.0 million, depreciation and amortization expense of $22.3 million and integration costs of $10.0 million. The increase in add back was also due to increase in loss on debt extinguishment of $28.0 million as the Company completed its comprehensive refinancing in June 2022. The increase in adjusted EBITDA was partially offset by increases in gain on embedded derivatives of $89.1 million, EMI pipelines equity income of $76.0 million and the derivative loss add back due to the Winter Storm Uri of $13.5 million.

The 2022 Adjusted EBITDA presented in the above table does not include any expected synergies including ad valorem taxes, operating expenses and corporate G&A, which continue to be recognized over the course of 2022.

Segment Adjusted EBITDA

Segment Adjusted EBITDA is defined as segment net earnings adjusted to exclude interest expense, income tax expense, depreciation and amortization, the proportionate effect of these same items for our equity method investments and other non-recurring items. The following table presents segment adjustment EBITDA for the three and nine months ended September 30,

2022 and 2021. Also refer to Note 17—Segments in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for reconciliation of segment adjusted EBITDA to net income including noncontrolling interests.

• The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer to Note 1—Description of the Organization and Summary of Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for further information on the Company’s financial statement consolidation.

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

Midstream Logistics segment adjusted EBITDA increased by $56.7 million, or 70%, to $137.5 million for the three months ended September 30, 2022, compared to $80.9 million for the same period in 2021. The increase was primarily driven by an increase in segment net income including noncontrolling interests of $71.7 million and increases in the add back related to depreciation and amortization expense of $7.6 million due to new operations acquired through the Transaction.

Midstream Logistics segment adjusted EBITDA increased by $125.0 million, or 49%, to $380.9 million for the nine months ended September 30, 2022, compared to $255.9 million for the same period in 2021. The increase was primarily driven by an increase in segment net income including noncontrolling interests of $111.5 million and increases in the add back related to loss on debt extinguishment of $28.0 million as the Company completed its comprehensive refinancing in June 2022, depreciation and amortization expense of $22.1 million due to new operations acquired through the Transaction.

Pipeline Transportation segment adjusted EBITDA increased by $57.3 million, or 268%, to $78.7 million for the three months ended September 30, 2022, compared to $21.4 million for the same period in 2021. The increase was driven by investments in GCX, EPIC and Shin Oak and a 100% increase in the Company’s investment in PHP, which were all acquired through the Transaction closed in February 2022. During the three months ended September 30, 2021, the Company only held a 26.67% interest in PHP.

Pipeline Transportation segment adjusted EBITDA increased by $131.9 million, or 227%, to $190.0 million for the nine months ended September 30, 2022, compared to $58.1 million for the same period in 2021. The increase was driven by the same factors driving the quarter over quarter increase disclosed above.

Capital Resources and Liquidity

For 2022, the Company’s primary capital spending requirements are anticipated to be related to the PHP expansion project, integration of the Alpine High gathering system with the legacy BCP system, certain integration related synergies including the relocation of compression units and treating assets to the legacy BCP processing plants, organic growth and maintenance capital expenditures in the Midstream Logistic segment, the Company’s contractual debt obligations and the Company’s payment of quarterly cash dividend on its Class A Common Stock and Class C Common Units as may be declared by its Board of Directors (the “Board”).

During the nine months ended September 30, 2022, the Company’s primary sources of cash were distributions from the EMI pipelines, borrowings under the Term Loan and Revolving Credit Facility, proceeds from the offering of the Notes, and cash generated from operations. Based on the Company’s current financial plan and related assumptions including the Reinvestment Agreement (as defined below), the Company believes that cash from operations and distributions from the EMI pipelines will generate cash flows in excess of capital expenditures and the amount required to fund the Company’s planned quarterly dividend over the next 12 months. Additionally, the Company has locked in the floating base rate on its Term Loan A through April 2023 to reduce short-term interest rate risk. Further, the Company entered into an interest rate swap with a $1 billion notional that is effective from May 1, 2023 through May 31, 2025 swapping floating SOFR for a fixed swap rate of 4.46%.

Comprehensive Refinancing

On June 8, 2022, the Partnership completed the private placement of $1.00 billion aggregate principal amount of 5.875% Sustainability-Linked Senior Notes due 2030, which are fully and unconditionally guaranteed by the Company. In addition, the Partnership entered into the new RCA, which provides for a $1.25 billion senior unsecured Revolving Credit Facility maturing on June 8, 2027, and a new TLA, which provides for a $2.00 billion senior unsecured Term Loan Credit Facility maturing on June 8, 2025. Proceeds from the Notes and the Term Loan Credit Facility were used to repay all outstanding borrowings under our existing credit facilities and to pay fees and expenses related to the offering. Refer to Note 6 — Debt and Financing Costs in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information.

Capital Requirements and Expenditures

Our operations can be capital intensive, requiring investments to expand, upgrade, maintain or enhance existing operations and to meet environmental and operational regulations. During the nine months ended September 30, 2022 and 2021, capital spending for midstream infrastructure assets totaled $160.5 million and $60.6 million, respectively. The current year capital spend includes $25 million for the purchase of Brandywine NGL Pipeline and $12.5 million for the ongoing construction of the Delaware Link Pipeline. Management believes its existing gathering, processing, and transmission infrastructure capacity is capable of fulfilling its midstream contracts to service its customers. During the nine months ended September 30, 2022, the Company contributed $56.2 million to PHP, for the 2022 Capacity Expansion Project, compared to $20.5 million contributed in the same period of 2021.

The Company anticipates its existing capital resources will be sufficient to fund the future capital expenditures for EMI pipelines and the Company’s existing infrastructure assets over the next 12 months. For further information on EMIs, refer to Note 9—Equity Method Investments in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q.

Cash Flows

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

Operating Activities. Net cash provided by operating activities increased by $293.9 million for the nine months ended September 30, 2022 compared with the same period in 2021. The change in the operating cash flows reflected increases in net income including noncontrolling interests of $194.8 million, adjustments related to non-cash items of $56.5 million and cash provided by changes in working capital of $42.5 million. Period over period increase in cash provided by operating activities was primarily driven by the new operations acquired through the Transaction, including distributions received from EMI pipelines acquired through the Transaction. The increase was partially offset by non-cash adjustment related to derivative fair value adjustment recognized during 2022.

Investing Activities. Net cash used in investing activities increased by $135.1 million for the nine months ended September 30, 2022 compared with the same period in 2021. The increase was primarily driven by an increase in property, plant and equipment expenditures of $99.9 million, which includes the Brandywine asset acquisition, an increase in contribution made to unconsolidated affiliates of $35.7 million and an increase in intangible assets expenditure of $9.6 million. The increase in cash outflow was offset by an increase in cash inflow of $13.4 million acquired through the acquisition closed in February 2022.

Financing Activities. Net cash used in financing activities increased by $181.4 million for the nine months ended September 30, 2022 compared with the same period in 2021. The increase was primarily due to increases in cash outflow for redemption of Preferred Units of $644.8 million, cash dividends paid to holders of Class A Common Stock of $24.4 million, cash distributions paid to holders of Preferred Units of $8.8 million and the increase in cash outflow was offset by net proceeds from the Company’s long-term debt and Revolving Credit Facility of $482.1 million and a reduction of cash distributions paid to holders of Class C Common Units of $29.3 million.

Dividend and Distribution Reinvestment Agreement

On February 22, 2022, the Company entered into a Dividend and Distribution Reinvestment Agreement (the “Reinvestment Agreement”) with certain stockholders including BCP Raptor Aggregator, LP, BX Permian Pipeline Aggregator, LP, Buzzard Midstream LLC, APA Corporation Apache Midstream LLC, and certain individuals (each, a “Reinvestment Holder”). Under the Reinvestment Agreement, each Reinvestment Holder is obligated to reinvest at least 20% of all distributions on Common Units or dividends on shares of Class A Common Stock in the Company’s Class A Common Stock. Additionally, the Audit Committee and subsequently the Board resolved that for the calendar year 2022, 100% of all distributions or dividends received by each Reinvestment Holder would be reinvested in newly issued shares of Class A Common Stock.

During the first nine months of 2022, the Company made cash dividend payments of $24.4 million to holders of Class A Common Stock and $175.5 million was reinvested in shares of Class A Common Stock by the Reinvestment Holders.

Stock Split

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

Dividend

On October 19, 2022, the Board declared a cash dividend of $0.75 per share on the Company’s Class A Common Stock, which will be payable on November 17, 2022. The Company, through its ownership of the general partner of the Partnership, also declared a distribution of $0.75 per Common Unit from the Partnership to the holders of Common Units, which will be payable on November 17, 2022. As context requires, dividends paid to holders of Class A Common Stock and distributions paid to holders of Common Units may be referred to collectively as “dividends.”

Series A Cumulative Redeemable Preferred Units

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

Since the Closing, the Company redeemed all outstanding Preferred Units and PIK units for an aggregate redemption price of $644.8 million. The Company recognized a gain of $9.6 million on redemption of the mandatorily redeemable Preferred Units and excess of carrying amount over redemption price of $109.5 million on redemption of the redeemable noncontrolling interest Preferred Units. Refer to Note 11—Series A Cumulative Redeemable Preferred Units in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q.

Liquidity

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

Cash and cash equivalents

As of September 30, 2022 and December 31, 2021, the Company had $11.7 million and $18.7 million, respectively, in cash and cash equivalents. The majority of the cash is invested in highly liquid, investment-grade instruments with maturities of three months or less at the time of purchase.

Total Debt and Available credit facilities

There is no assurance that the financial condition of banks with lending commitments to the Company will not deteriorate. The Company closely monitors the ratings of the banks in the Company’s bank group. Having a large bank group allows the Company to mitigate the potential impact of any bank’s failure to honor its lending commitment.

Guarantor Information

In June 2022, the Company completed the comprehensive refinancing, which included the issuance of the Notes and entry into the TLA and the Revolving Credit Agreement by the Partnership. These debt obligations are fully and unconditionally guaranteed by the Company. The guarantee of the Notes is subject to certain customary release, including the exercise of legal defeasance or covenant defeasance options, the satisfaction and discharge of the indentures governing the Notes, and the release of the guarantor from its guarantee of the Notes in accordance to the indentures governing the Notes.

Contractual Obligations

We have contractual obligations for principal and interest payments on our term loan credit facility. See Note 6—Debt and Financing Costs in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q.

Under certain of our transportation services agreements with third party pipelines to transport natural gas and NGLs, if we fail to ship a minimum throughput volume during any year, then we will pay a deficiency payment for transportation based on the volume shortfall up to the MVC amount. The Company has made no historical shortfall payments through September 30, 2022.

Off-Balance Sheet Arrangements

As of September 30, 2022, there were no off-balance sheet arrangements.

Critical Accounting Policies

The Company’s significant accounting policies, described in the Summary of Significant Accounting Policies in Exhibit 99.1 to Current Report on Form 8-K filed on July 5, 2022 and the Company’s Quarterly Report on Form 10-Q filed on May 10, 2022, are fundamental to understanding our results of operations and financial condition. There has been no significant change to the Company’s significant accounting policies subsequent to the Form 8-K filed on July 5, 2022. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in Note 1—Description of the Organization and Summary of Significant Accounting Policies in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosure About Market Risk

The Company is exposed to various market risks, including the effects of adverse changes in commodity prices and credit risk as described below. The Company continually monitors its market risk exposure, including the impact and developments related to the armed conflict in Ukraine, increase in interest rate and inflation trend, which introduced significant volatility and uncertainties in the financial markets during 2022.

Commodity Price Risk

The results of the Company’s operations may be affected by the market prices of oil and natural gas. A portion of the Company’s revenue is directly tied to local natural gas, NGLs and condensate prices in the Permian Basin. Fluctuations in commodity prices also impact operating cost elements both directly and indirectly. For example, commodity prices directly impact costs such as power and fuel, which are expenses that increase or decrease in line with changes in commodity prices. Commodity prices also affect industry activity and demand, thus indirectly impacting the cost of items such as labor and equipment rentals. Management regularly reviews the Company’s potential exposure to commodity price risk, and may periodically enter into financial or physical arrangements intended to mitigate potential volatility. Refer to Note 16—Derivative and Hedging Activities in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for additional discussion regarding our hedging strategies and objectives.

Interest Rate Risk

The market risk inherent in our financial instruments and our financial position represents the potential loss arising from adverse changes in interest rates. As of September 30, 2022, the Company had interest bearing debt, net of deferred financing costs, with principal amount of $3.45 billion. The interest rate for the revolving and term loan credit facilities are variable, which exposes the Company to the risk of increased interest expense in the event of increases to short-term interest rates. Accordingly, results of operations, cash flows, financial condition, and the ability to make cash distributions could be adversely affected by significant increases in interest rates. If interest rates increase by 1.0%, the Company’s consolidated interest expense would have increased by approximately $6.3 million for the quarter ended September 30, 2022. The Company may periodically enter into interest rate derivatives to add stability to interest expense and to manage its exposure to interest rate movements. Refer to Note 16—Derivative and Hedging Activities in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for additional discussion regarding our hedging strategies and objectives.

Credit Risk

The Company is subject to credit risk resulting from nonpayment or nonperformance by, or the insolvency or liquidation of third-party customers. Any increase in the nonpayment and nonperformance by, or the insolvency or liquidation of, the Company’s customers could adversely affect the Company’s results of operations.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of September 30, 2022, pursuant to Rule 13a-15(b) of the Exchange Act, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Accounting and Administrative Operating Officer, who serves as the principal accounting officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Accounting and Administrative Operating Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that the Company files under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Accounting and Administrative Operating Officer, as appropriate, to allow timely decisions regarding required disclosure.

Change in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2022, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For further information regarding legal proceedings, refer to Note 8—Commitments and Contingencies in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q.

ITEM 1A. RISK FACTORS

Please refer to Part II, Item 1A — Risk Factors of the Company’s Quarterly Report Form 10-Q for the first quarter of 2022 filed on May 10, 2022.

ITEM 5. OTHER INFORMATION

Amended and Restated Code of Business Conduct

On November 9, 2022, our Board of Directors adopted an amended and restated Code of Business Conduct (the “Code of Ethics”). The Code of Ethics includes, among other things, updates to reflect the Company’s transition from the Nasdaq to the NYSE. The Code of Ethics took effect upon adoption by our Board of Directors and did not result in any waiver, explicit or implicit, of any provision of our previous Code of Ethics.

The Code of Ethics is available on our website at www.ir.kinetik.com/governance.

The foregoing description of the amendments reflected in the Code of Ethics does not purport to be complete and is qualified in its entirety by reference to the Code of Ethics, attached as Exhibit 14.1 hereto and incorporated herein by reference.

ITEM 6. EXHIBITS

* Filed herewith.

** Furnished herewith.

*** Schedules and exhibits to this Exhibit have been omitted pursuant to Regulation S-K Item 601(b)(2). The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.