Kinetik Holdings Inc

14. SHARE-BASED COMPENSATION

Class A Shares and Class C Shares

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.

Immediately upon Closing, all outstanding Class A-1 and Class A-2 units were cancelled and exchanged for 5,300,000 Class A Shares, 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 tofour years. Similarly, the Class A-3 units were exchanged for approximately 326,000 Class C Shares and will vest over four years. The Company also issued approximately 76,000 replacement restricted share awards (“Replacement Awards”) to new employees that transitioned from ALTM as part of the merger. 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.

The table below summarizes Class A Shares and Class C Shares activity for the year ended December 31, 2023:

Table below summarizes aggregate intrinsic value (market value at vesting date) and grant-date fair value of vested Class A Shares for the years ended December 31, 2023 and 2022. No vesting or forfeitures occurred for Class C Shares during 2023 or 2022.

Restricted Stock Units

During 2023, pursuant to the Company’s 2019 Omnibus Compensation Plan, as amended from time to time, the Company granted (i) approximately 370,000 RSUs to employees that are scheduled to vest in full on January 1, 2026, subject to continued employment requirements, (ii) approximately 181,000 RSUs to employees in lieu of cash bonus awards that vested immediately upon grant and (iii) approximately 16,000 RSUs to certain members of the Board that vested immediately upon grant. These RSUs are valued at their fair value at the date of grant.

The table below summarizes RSUs activity for the year ended December 31, 2023:

(1)Number of shares and weighted average fair market value per share here include restricted share awards issued to new employees transitioned from ALTM as part of the merger.

The table below summarizes aggregate intrinsic value (market value at vesting date) and grant-date fair value of vested RSUs for the years ended December 31, 2023 and 2022.

With respect to above Class A Shares, Class C Shares and RSUs, the Company recorded compensation expenses of $56.0 million, $42.8 million andnil in “General and administrative expenses” of the Consolidated Statements of Operations, for the years ended December 31, 2023, 2022 and 2021, 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 expense was recognized during 2021 as they were considered non-vested prior to their cancellation and exchange. As of December 31, 2023, there were $73.0 million and $9.0 million of unrecognized compensation costs related to unvested Class A Shares and Class C Shares, and RSUs, respectively, and these costs are expected to be recognized over a weighted average period of 1.77 years and 1.97 years, respectively.

15. INCOME TAXES

The total income tax provision consists of the following:

The difference between the effective income tax rate and the U.S. statutory rate is reconciled below:

(1)Prior to the Closing on February 22, 2022, the Company was organized as a limited partnership and was not subject to the U.S. federal income tax for the year ended December 31, 2021.

The net deferred tax assets reflect the tax impact of temporary differences between the asset and liability amounts carried on the balance sheet under U.S. GAAP and amounts utilized for income tax purposes. The net deferred tax assets consist of the following:

For state purposes, the Company records deferred tax assets and liabilities based on the differences between the carrying value and tax basis of assets and liabilities recorded on the Consolidated Balance Sheets.

For federal purposes, the Company has deferred tax assets related to (i) its investment in the Partnership and (ii) net operating losses (“NOLs”) with no expiration date. The Company has evaluated all positive and negative evidence to conclude that it is more likely than not that such deferred tax assets will be realized. This determination was based, in part, on the fact that the Company achieved a three-year cumulative position of profitability as of December 31, 2023. It is also based on our projections of future taxable income at current commodity prices and our current cost structure. This positive evidence outweighs negative evidence regarding the realization of the Company’s deferred tax assets. As a result, no valuation allowance was recorded with respect to such deferred tax assets as of December 31, 2023.

Internal Revenue Code (“IRC”) Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. The Company experienced an ownership change within the meaning of IRC Section 382 during 2022 (prior to the closing of the Transaction) that subjected certain of the Company’s tax attributes, including NOLs, to an IRC Section 382 limitation. Subsequent ownership changes could further impact the limitation in future years. However, notwithstanding such limitation, we expect to use substantially all of our NOLs to offset our future federal tax liabilities. The timing of such usage will depend upon our future earnings and future tax circumstances.

The Company accounts for income taxes in accordance with FASB 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.

The Company hadno uncertain tax position as of December 31, 2023 and 2022.

The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company has recordedno interest or penalties associated with unrecognized tax benefits. As of December 31, 2023, tax years 2019 through 2023 remain subject to examination by various taxing authorities.