Kinetik Holdings Inc

13. 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. To minimize counterparty credit risk in derivative instruments, the Company enters into transactions with high credit-rating counterparties. The Company did not elect to apply hedge accounting to these derivative contracts and recorded the fair value of the derivatives on the Consolidated Balance Sheets as of December 31, 2023 and 2022.

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’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 as part of its interest rate risk management strategy. Interest rate swaps designated as interest rate derivatives involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract.

In November 2022 and March 2023, the Company entered into three interest rate swap contracts with total notional amounts of $2.25 billion effective on May 1, 2023 and maturing on May 31, 2025. Upon closing of the First Amendment of the Term Loan, the Company terminatedone existing interest rate swap contract and partially terminated another in December 2023. As of December 31, 2023, the Company hadtwo interest rate swap contracts with total notional amounts of $1.70 billion maturing on May 31, 2025 that pay a fixed rate ranging from 4.38% to 4.48% for the respective notional amounts.

The fair value or settlement value of the consolidated interest rate swaps outstanding are presented on a gross basis on the Consolidated Balance Sheets. Interest rate swap derivative assets were $4.3 million and $2.7 million as of December 31, 2023 and 2022, respectively. Interest rate swap derivative liabilities were $5.3 million and $8.3 million as of December 31, 2023 and 2022, respectively. The Company recorded cash settlements on interest rate swap derivatives of $12.7 million, $10.9 million and $(2.9) million, for the years ended December 31, 2023, 2022 and 2021, respectively, in “Interest Expense” of the Consolidated Statements of Operations. In addition, the Company recorded favorable fair value adjustments of $17.3 million,

$7.9 million and $4.5 million for the years ended December 31, 2023, 2022 and 2021, respectively, in “Interest Expense” of the Consolidated Statements of Operations.

Commodity Price Risk

The results of the Company’s operations may be affected by the market prices of oil, natural gas and NGLs. A portion of the Company’s revenue is directly tied to local natural gas, natural gas liquids and condensate prices in the Permian Basin and the U.S. Gulf Coast. Fluctuations in commodity prices also impact operating cost both directly and indirectly. Management regularly reviews the Company’s potential exposure to commodity price risk and manages exposure of such risk through commodity hedge contracts.

During 2023, the Company entered into multiple commodity swap contracts based on the OPIS NGL Mont Belvieu prices for ethane, propane and butane, the Waha Basis index and the NYMEX West Texas Intermediate Control index. These contracts are on various notional quantities of NGLs, natural gas and crude. Similarly, the Company has entered into various natural gas and crude basis spread swaps. These contracts are effective overthe next 1 to 17 months and are used to hedge against location price risk of the respective commodity resulting from supply and demand volatility and protect cash flows against price fluctuations.

The table below presents detail information of commodity swaps outstanding as of December 31, 2023 (in thousands, except volumes):

The fair value or settlement value of the swaps outstanding are presented on a gross basis on the Consolidated Balance Sheets. Commodity swap derivative assets were $3.7 million and $4.3 million as of December 31, 2023 and 2022, respectively. Commodity swap derivative liabilities were $1.7 million and $5.7 million as of December 31, 2023 and 2022, respectively. The Company recorded cash settlements on commodity swap derivatives of $13.1 million, $(0.2) million and $(16.5) million for the years ended December 31, 2023, 2022 and 2021, respectively, in “Product Revenue” of the Consolidated Statements of Operations. In addition, the Company recorded favorable (unfavorable) fair value adjustments of $16.4 million, $(1.4) million and $(16.9) million for the years ended December 31, 2023, 2022 and 2021, respectively, in “Product Revenue” of the Consolidated Statements of Operations.