Kinetik Holdings Inc

Adjusted EBITDA

Adjusted EBITDA is defined as net income including noncontrolling interests adjusted for interest, taxes, depreciation and amortization, gain or loss on disposal of assets and debt extinguishment, the proportionate EBITDA from our EMI pipelines, equity income and gain from sale of investments recorded using the equity method, share-based compensation expense, noncash increases and decreases related to hedging activities, fair value adjustments for contingent liabilities, integration and transaction costs and extraordinary losses and unusual or non-recurring charges. Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.

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 and other parties to evaluate our credit worthiness; and

•is used by our management for various purposes, including 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 interest. Adjusted EBITDA should not be considered as an alternative to the GAAP measure of net income including noncontrolling interest 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 interest. 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 interest, 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 interest to the non-GAAP financial measure of Adjusted EBITDA.

NM - not meaningful

Adjusted EBITDA increased by $50.4 million, or 23%, to $265.7 million for the three months ended September 30, 2024, compared to $215.3 million for the same period in 2023. As discussed in the Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report on Form 10-Q, $49.2 million of the increase was due to increased total operating revenue of $66.1 million, partially offset by increased cost of sales (exclusive of depreciation and amortization), operating expenses, ad valorem taxes and general and administrative expense of $16.9 million. The remaining increases were primarily driven by higher proportionate EMI EBITDA of $9.6 million and higher non-cash amortizations or other one-time costs of $8.6 million. These increases were partially offset by a decrease of $17.1 million related to unrealized commodity hedging activities.

Adjusted EBITDA increased by $122.8 million, or 20%, to $733.6 million for the nine months ended September 30, 2024, compared to $610.8 million for the same period in 2023. As discussed in the Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report on Form 10-Q, $69.3 million of the increase was due to increased total operating revenue of $189.7 million, partially offset by increased cost of sales (exclusive of depreciation and amortization), operating expenses, ad valorem taxes and general and administrative expenses of $120.3 million. The increase was also driven by (i) higher proportionate EMI EBITDA of $37.6 million primarily related to the expanded capacity at PHP that was placed into service during December 2023 and (ii) increases related to stock based compensation of $9.5 million and integration, transaction and other one-time costs of $7.9 million, which was mainly related to the Durango Acquisition completed in June 2024.

Segment Adjusted EBITDA

Segment Adjusted EBITDA is defined as segment net earnings adjusted to exclude interest expense, income tax expense, depreciation and amortization, the proportionate effect of these same items for our equity method investments and other non-recurring items. The following table presents Segment Adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023. Also refer to Note 16—Segments in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for a reconciliation of Segment Adjusted EBITDA to net income before income taxes.

(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.

Midstream Logistics Segment Adjusted EBITDA increased by $33.2 million to $173.6 million for the three months ended September 30, 2024, compared to $140.4 million for the same period in 2023. The increase was primarily due to the increased total operating revenue of $57.9 million, partially offset by increased operating expense and ad valorem taxes of $12.7 million and a decrease of $17.1 million related to unrealized commodity hedging activities. The reasons for the fluctuations are discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report on Form 10-Q.

Midstream Logistics Segment Adjusted EBITDA increased by $67.4 million to $464.2 million for the nine months ended September 30, 2024, compared to $396.8 million for the same period in 2023. The increase was primarily due to the increased total operating revenue of $165.7 million, partially offset by increases in cost of sales (exclusive of depreciation and amortization) of $70.7 million and operating expense and ad valorem taxes of $26.2 million. The reasons for the fluctuations are discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report on Form 10-Q.

Pipeline Transportation Segment Adjusted EBITDA increased by $17.2 million to $96.1 million for the three months ended September 30, 2024, compared to $78.9 million for the same period in 2023. The increase was primarily driven by higher proportionate EMI EBITDA of $9.6 million due to increased profitability at PHP related to expanded capacity that was placed into service starting in December 2023. The increase was also driven by the increase in operating revenue of $8.2 million primarily related to the Delaware Link Pipeline going into service during October 2023. The reasons for the fluctuations are discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report on Form 10-Q.

Pipeline Transportation Segment Adjusted EBITDA increased by $59.2 million to $285.2 million for the nine months ended September 30, 2024, compared to $226.0 million for the same period in 2023. The increase was primarily driven by higher proportionate EMI EBITDA of $37.6 million due to increased profitability at PHP related to expanded capacity that was placed into service starting in December 2023. The remaining increase was driven by increased operating revenue of $23.9 million primarily related to the Delaware Link Pipeline going into service during October 2023. The reasons for the fluctuations are discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations to this Quarterly Report on Form 10-Q.

Contractual Obligations

We have contractual obligations for principal and interest payments on our 2028 Notes, 2030 Notes, and under the Term Loan Credit Facility, Revolving Credit Facility and A/R Facility. See Note 7—Debt and Financing Costs in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Under certain clauses of our transportation services agreements with third party pipelines to transport natural gas and NGLs, if we fail to ship a minimum throughput volume, then we will pay certain deficiency payments for transportation based on the volume shortfall up to the MVC amount.

Capital Resources and Liquidity

The Company’s primary use of capital since inception has been for the initial construction of gathering and processing assets, as well as the acquisitions of businesses and EMI pipelines and associated subsequent construction costs. For 2024, the Company’s primary spending requirements are related to the business acquisitions and other budgeted capital expenditures for construction and maintenance of gathering and processing assets, the Company’s contractual debt obligations and quarterly cash dividends. In addition, the Company may repurchase its Class A Common Stock pursuant to the Share Repurchase Program from time to time.

During the nine months ended September 30, 2024, the Company’s primary sources of cash were distributions from the EMI pipelines, borrowings under the Revolving Credit Facility and A/R Facility, proceeds from the GCX Sale and cash generated from operations. Based on the Company’s current financial plan, the Company believes that cash from operations and distributions from the EMI pipelines, and remaining borrowing capacity on our credit facilities will generate cash flows in excess of capital expenditures and the amount required to fund the Company’s planned quarterly dividend over the next 12 months.

A/R Facility

Pursuant to the A/R Facility, the Company and certain of its subsidiaries continuously transfer receivables to Kinetik Receivables and Kinetik Receivables transfers receivables that meet certain qualifying conditions to third-party purchasers in exchange for cash. These receivables are held by Kinetik Receivables and are pledged to secure the collectability of the sold receivables and are accounted for as secured borrowings. The amount available for borrowing at any one time under the A/R Facility is limited to an amount calculated based on the outstanding balance of eligible receivables sold to the purchasers, subject to certain reserves, concentration limits, and other limitations. As of September 30, 2024, eligible accounts receivable of $150.0 million was pledged to the A/R Facility as collateral.

The net proceeds of the A/R Facility were used, together with cash on hand, to repay a portion of the outstanding borrowings under the Term Loan Credit Facility during the second quarter 2024, lowering the remaining balance to $1.00 billion. As a result, the maturity of the Term Loan Credit Facility extended to December 8, 2026.

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, 2024 and 2023, capital spending for property, plant and equipment totaled $155.8 million and $245.8 million, respectively, intangible asset purchases totaled $7.7 million and $15.1 million, respectively, and contributions to EMI totaled $3.3 million and $202.7 million, respectively. The decrease in capital spending was mainly due to completion of the Delaware Link Pipeline and PHP expansion projects in the second half of 2023. Management believes its existing gathering, processing and transmission infrastructure capacity and future planned projects are capable of fulfilling its midstream contracts to service its customers.

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 6—Equity Method Investments in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Cash Flow

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 $87.8 million for the nine months ended September 30, 2024 compared with the same period in 2023. The change in the operating cash flows reflected (i) an increase in net income including noncontrolling interests of $108.9 million; (ii) a decrease in adjustments related to non-cash items of $20.8 million, which was mainly driven by a gain of $89.8 million recognized on the GCX Sale and an increase in equity in earnings from EMI of $22.8 million, partially offset by increases in distribution from EMIs of $17.8 million, deferred income taxes of $18.1 million, depreciation and amortization expense of $28.0 million and a decrease in favorable derivative activities adjustments of $26.8 million and (iii) a decrease in working capital of $0.4 million.

Investing activities. Net cash used in investing activities decreased by $516.7 million for the nine months ended September 30, 2024 compared with the same period in 2023. The decrease was primarily driven by cash proceeds from the GCX Sale of $524.4 million, lower capital expenditures of $97.3 million and a reduction of investments in EMIs of $199.5 million as the PHP expansion project was completed and put into service in December 2023, partially offset by net cash used in the Durango Acquisition and net cash used in the acquisition of additional equity interests in EPIC.

Financing activities. Net cash used in financing activities was $411.5 million for the nine months ended September 30, 2024, which was primarily comprised of net payments on the Partnership’s Term Loan, Revolving Credit Facility and A/R Facility of $138.6 million and cash dividend of $272.9 million paid to the holders of Class A Common Stock and Common Units, compared with net cash provided by financing activities of $170.7 million for the nine months ended September 30, 2023, which was primarily comprised of net proceeds from the Partnership’s Revolving Credit Facility of $235.0 million and cash dividend of $58.6 million paid to the holders of Class A Common Stock and Common Units. Significant increase in cash dividend paid in the first nine months of 2024 compared to the same period in 2023 was mainly due to the expiration of the Reinvestment Agreement on March 8, 2024, as such Reinvestment Holders are not obligated to reinvest a specified percent of all distributions on Common Units or dividends on shares of Class A Common Stock in the Company’s Class A Common Stock.

Dividend

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

On October 17, 2024, the Board declared a cash dividend of $0.78 per share on the Company’s Class A Common Stock which will be payable to stockholders on October 28, 2024. The Company, through its ownership of the general partner of the Partnership, declared a distribution of $0.78 per Common Unit from the Partnership to the holders of Common Units, which will be payable on November 7, 2024. As described in these Condensed Consolidated Financial Statements, as the context requires, dividends paid to holders of Class A Common Stock and distributions paid to holders of Common Units may be referred to collectively as “dividends.”

Share Repurchase Program

For nine months ended September 30, 2024, the Company did not repurchase any of its outstanding shares.

For more information regarding the 1% U.S. federal excise tax imposed on certain repurchases of stock by publicly traded U.S. corporations, please refer to Part I, Item 1A.—”Risk Factors— Risks Related to Ownership of our Common Stock” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed on March 5, 2024.

Liquidity

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

Total debt and available credit facilities

There is no assurance that the financial condition of banks with lending commitments to the Company and its subsidiaries 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.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates from those disclosed on our Annual Report on Form 10-K for the year ended December 31, 2023. Please refer to information regarding our critical accounting policies and estimates included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Commission on March 5, 2024.