NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These condensed consolidated financial statements have been prepared by Kinetik Holdings Inc. (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, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 7, 2023.
1. DESCRIPTION OF THE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
BCP Raptor Holdco, LP (“BCP”), the Company’s predecessor for accounting purposes, 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 and CR Permian Holdings, LLC. 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.
Altus Midstream Company (“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. 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 (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. The transactions contemplated by the Contribution Agreement are referred to herein as the “Transaction.” In connection with the closing of the Transaction (the “Closing”), the Company changed its name from “Altus Midstream Company” to “Kinetik Holdings Inc.” Unless the context otherwise requires, “ALTM” refers to the registrant prior to the Closing and “we,” “us,” “our,” and the “Company” refer to Kinetik Holdings Inc., the registrant and its subsidiaries following the Closing.
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; accordingly, you should read these consolidated financial statements in conjunction with our
consolidated financial statements and related notes included in our 2022 Form 10-K.. 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. Therefore, the results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. 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 is consistent with our previous public filings and the terms of the Contribution Agreement.
Significant Accounting Policies
The accounting policies that we follow are set forth in Note 2 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our Annual Report. There were no significant updates or revisions to our accounting policies during the three months ended March 31, 2023.
Inventory
Other current assets include condensate, residue gas and NGLs inventories that are valued at the lower of cost or market. Inventory was valued at $4.2 million and $4.8 million as of March 31, 2023 and December 31, 2022, respectively.
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 $24.2 million and $17.6 million as of March 31, 2023 and December 31, 2022, respectively. Revenue from affiliates was $25.3 million and $15.6 million for the three months ended March 31, 2023 and 2022, respectively. Accrued expense due to affiliates was immaterial, and operating expenses were $0.3 million and nil for the three months ended March 31, 2023 and 2022, respectively.
In addition, the Company incurred cost of sales with two of its equity method investment (“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 months ended March 31, 2023 and 2022, the Company recorded cost of sales of $14.6 million and $3.6 million, respectively, with these affiliates.
2. BUSINESS COMBINATIONS
As of March 31, 2023, our allocation of purchase price for acquisitions made during 2023 and 2022 are detailed below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Acquisition Date | | Acquisition | | Considerations Transferred | | Current Assets | | Property Plant & Equipment | | Intangible Assets | | Other Long Term Assets | | Goodwill | | Liabilities | | Noncontrolling Interest |
| | | | | | (In thousands) |
| (1) | | Q1 2023 | | Midstream Infrastructure Assets and Incentive and Acceleration Agreement(a) | | $ | 125,000 | | | $ | 4,736 | | | $ | 61,850 | | | $ | 3,150 | | | $ | 55,264 | | | $ | — | | | $ | — | | | $ | — | |
| (2) | | Q1 2022 | | Altus Midstream Company (“ALTM”) | | $ | 1,013,745 | | | $ | 38,750 | | | $ | 634,923 | | | $ | 13,200 | | | $ | 1,752,500 | | | $ | 5,077 | | | $ | (967,988) | | | $ | (462,717) | |
(a)Consideration includes $65 million paid for certain midstream assets and the $60 million paid related to the incentive and acceleration agreement.
Midstream Infrastructure Assets
The Partnership closed on a purchase and sale agreement for certain midstream assets for $65.0 million together with a new 20 year midstream service agreement. In addition, the Partnership entered into an incentive and acceleration agreement related to near term supplemental development activities on acreage dedicated for midstream services to affiliates of the Partnership. Such development activities will begin in 2023 and are subject to semi-annual performance milestones and subject to refund with consequential monetary penalty if not satisfied. Consideration for the incentive and acceleration agreement of $60 million was capitalized as a contract asset in accordance with ASC 606, of which $4.7 million is included in “Prepaid and Other Current Assets” and $55.3 million is included in “Deferred Charges and Other Assets” in the condensed consolidated balance sheet as of March 31, 2023. These transactions were accounted for as a business combination in accordance with ASC 805. Certain data necessary to complete the purchase price allocation is not yet available, including, but not limited to, the completion of the valuation of the underlying assets and liabilities assumed. The Company is continuing its review of these matters during the measurement period. Acquisition-related costs were immaterial for this transaction.
Altus Midstream Company
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 BCP and BCP Raptor Holdco GP, LLC, a Delaware limited liability company and the general partner of 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 and 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share.
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. During the 12-month measurement period following the acquisition date, the Company made necessary adjustments as information became available to the purchase price allocation, including, but not limited to, working capital and valuation of the underlying assets of the equity method investments. The Company recorded goodwill of $5.1 million as of December 31, 2022 related to operational synergies. The Company incurred acquisition-related costs of nil and $5.7 million for the three months ended March 31, 2023 and 2022, respectively, related to the Transaction.
3. REVENUE RECOGNITION
Disaggregation of Revenue
The following table presents a disaggregation of the Company’s revenue:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
| | | | | | | | |
| | | | | | (In thousands) |
| Gathering and processing services | | | | | | $ | 103,425 | | | $ | 80,445 | |
| Natural gas, NGLs and condensate sales | | | | | | 173,824 | | | 174,928 | |
| Other revenue | | | | | | 3,791 | | | 1,876 | |
| Total revenues and other | | | | | | $ | 281,040 | | | $ | 257,249 | |
There have been no significant changes to the Company’s contracts with customers during the three months ended March 31, 2023. The Company recognized revenues from minimum volume commitment (“MVC”) deficiency payments of $1.1 million and nil for the three months ended March 31, 2023 and 2022, 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 March 31, 2023:
| | | | | | | | |
| | Amount |
| | |
| Fiscal Year | | (In thousands) |
| Remaining of 2023 | | $ | 27,703 | |
| 2024 | | 38,970 | |
| 2025 | | 44,498 | |
| 2026 | | 34,631 | |
| 2027 | | 35,405 | |
| Thereafter | | 155,888 | |
| | $ | 337,095 | |
| | |
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 March 31, 2023:
| | | | | | | | |
| | Amount |
| | |
| | (In thousands) |
| Balance at December 31, 2022 | | $ | 29,300 | |
| Reclassification of beginning contract liabilities to revenue as a result of performance obligations being satisfied | | (2,059) | |
| Cash received in advance and not recognized as revenue | | 669 | |
| Balance at March 31, 2023 | | 27,910 | |
| Less: Current portion | | 5,919 | |
| Non-current portion | | $ | 21,991 | |
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 March 31, 2023 and December 31, 2022, the Company had contract acquisition cost assets of $76.2 million and $17.8 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 contracts. The Company recognized cost of sales associated with these assets of $1.7 million and $0.4 million for the three months ended March 31, 2023 and 2022, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at carrying value, is as follows:
| | | | | | | | | | | | |
| | March 31, | | December 31, |
| | 2023 | | 2022 |
| | | | |
| | (In thousands) |
| Gathering, processing, and transmission systems and facilities | | $ | 3,004,016 | | | $ | 2,904,084 | |
| Vehicles | | 10,331 | | 9,290 |
| Computers and equipment | | 5,504 | | | 4,289 |
| Less: accumulated depreciation and accretion | | (512,451) | | | (474,258) | |
| Total depreciable assets, net | | 2,507,400 | | | 2,443,405 | |
| Construction in progress | | 104,900 | | | 70,325 |
| Land | | 21,873 | | | 21,482 | |
| Total property, plant, and equipment, net | | $ | 2,634,173 | | | $ | 2,535,212 | |
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 $38.4 million and $30.8 million of depreciation expense for the three months ended March 31, 2023 and 2022, respectively. There were no triggering events for property, plant and equipment during the three months ended March 31, 2023 and 2022.
5. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill totaled $5.1 million as of March 31, 2023 and December 31, 2022. The goodwill of $5.1 million is within the Midstream Logistics segment, and pertains to excess of the purchase price over net assets acquired in connection with the Transaction.
Goodwill is tested at least annually as of November 30 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 March 31, 2023.
Intangible Assets
Intangible assets, net, are comprised of the following:
| | | | | | | | | | | | | | |
| | March 31, | | December 31, |
| | 2023 | | 2022 |
| | | | |
| | (In thousands) |
| Customer contracts | | $ | 1,142,278 | | | $ | 1,137,831 | |
| Right of way assets | | 134,716 | | | 127,539 | |
| Less accumulated amortization | | (600,478) | | | (569,981) | |
| Total amortizable intangible assets, net | | $ | 676,516 | | | $ | 695,389 | |
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.
On March 31, 2023, remaining weighted average amortization periods for customer contracts and right of way assets were approximately 7.36 years and 6.95 years, respectively. Overall remaining weighted average amortization period for the intangible assets as of March 31, 2023 was approximately 7.31 years.
The Company recorded $30.5 million and $30.2 million of amortization expense for the three months ended March 31, 2023 and 2022, respectively. There was no impairment recognized on intangible assets for the three months ended March 31, 2023 and 2022.
6. EQUITY METHOD INVESTMENTS
As of March 31, 2023, 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:
| | | | | | | | | | | | | | | | | | | | |
| | | | March 31, | | December 31, |
| | Ownership | | 2023 | | 2022 |
| | | | | | |
| | | | (In thousands) |
| Permian Highway Pipeline LLC ("PHP") | | 53.3% | | $ | 1,519,825 | | | $ | 1,474,800 | |
| Breviloba, LLC ("Breviloba") | | 33.0% | | 450,926 | | | 455,057 | |
| Gulf Coast Express Pipeline LLC ("GCX") | | 16.0% | | 442,154 | | | 451,483 | |
| | | | $ | 2,412,905 | | | $ | 2,381,340 | |
Additionally, as of March 31, 2023, the Company also owned 15.0% of Epic Crude Holdings, LP (“EPIC”). However, no dollar value was assigned through the Transaction’s purchase price allocation as an 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 months ended March 31, 2023.
The unamortized basis differences included in the EMI pipeline balances were $359.8 million and $363.2 million as of March 31, 2023 and December 31, 2022, respectively. 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 $14.7 million and $13.4 million as of March 31, 2023 and December 31, 2022, 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 three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Permian Highway Pipeline LLC | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC | | | | Total |
| | |
| | | | | | | | | | |
| | (In thousands) |
| Balance at December 31, 2022 | $ | 1,474,800 | | | $ | 455,057 | | | $ | 451,483 | | | | | $ | 2,381,340 | |
| Acquisitions | — | | | — | | | | | | | — | |
| Contributions | 57,218 | | | — | | | — | | | | | 57,218 | |
| Distributions | (42,570) | | | (11,869) | | | (19,118) | | | | | (73,557) | |
| Capitalized interest | 1,440 | | | — | | | — | | | | | 1,440 | |
Equity income, net(1) | 28,937 | | | 7,738 | | | 9,789 | | | | | 46,464 | |
| | | | | | | | | |
| Balance at March 31, 2023 | $ | 1,519,825 | | | $ | 450,926 | | | $ | 442,154 | | | | | $ | 2,412,905 | |
(1)For the three months ended March 31, 2023, net of amortization of basis differences and capitalized interests, which represents undistributed earnings, the amortization was $1.9 million from PHP, $0.2 million from Breviloba, LLC and $1.6 million from GCX.
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 months ended March 31, 2023 and 2022.
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| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| | Permian Highway Pipeline LLC | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC | | Permian Highway Pipeline LLC | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC |
| | | | | | |
| | | | | | | | | | | | |
| | (In thousands) |
| Revenues | | $ | 92,840 | | | $ | 45,901 | | | $ | 89,748 | | | $ | 97,856 | | | $ | 48,521 | | | $ | 89,973 | |
| Operating income | | 56,805 | | 21,949 | | 65,216 | | | 59,476 | | 26,314 | | 63,443 | |
| Net income | | 59,691 | | 22,211 | | 71,091 | | | 59,213 | | 26,366 | | 63,529 | |
7. DEBT AND FINANCING COSTS
The following table summarizes the Company’s debt obligations as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | March 31, | | December 31, |
| | 2023 | | 2022 |
| | | | |
| | (In thousands) |
$2.0 billion unsecured term loan | | $ | 2,000,000 | | | $ | 2,000,000 | |
$1.0 billion 2030 senior unsecured notes | | 1,000,000 | | | 1,000,000 | |
$1.25 billion revolving line of credit | | 537,000 | | | 395,000 | |
| | | | |
| | | | |
| | | | |
| Total long-term debt | | 3,537,000 | | | 3,395,000 | |
Less: Debt issuance costs, net(1) | | (25,352) | | | (26,490) | |
| Total long-term debt, net | | $ | 3,511,648 | | | $ | 3,368,510 | |
| | | | |
| | | | |
(1) Excluded unamortized debt issuance cost related to the revolving line of credit. Unamortized debt issuance cost associated with the revolving line of credit was $6.5 million and $6.9 million as of March 31, 2023 and December 31, 2022, respectively. The current and non-current portion of the unamortized debt issuance costs related to the revolving credit facilities were included in the “Prepaid and other current assets” and 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: | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
| | | | | | | | |
| | | | | | (In thousands) |
| Capitalized interest | | | | | | $ | (2,233) | | | $ | (104) | |
| Debt issuance costs | | | | | | 1,521 | | | 3,389 | |
| Interest expense | | | | | | 70,020 | | | 23,489 | |
| Total financing costs, net of capitalized interest | | | | | | $ | 69,308 | | | $ | 26,774 | |
As of March 31, 2023 and December 31, 2022, unamortized debt issuance costs associated with the senior unsecured notes and the term loan were $25.4 million and $26.5 million, respectively. 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 March 31, 2023 and 2022, respectively.
Compliance with our Covenants
Both the revolving credit agreement with Bank of America, N.A., as administrative agent and the term loan credit agreement with PNC Bank as administrative agent contain customary covenants and restrictive provisions which may, among other things, limit the 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. The 5.875% Senior Notes due 2030 also contain covenants and restrictive provisions.
As of March 31, 2023, the Partnership was in compliance with all customary and financial covenants.
Fair Value of Financial Instruments
The fair value of the Company and its subsidiaries’ consolidated debt as of March 31, 2023 and December 31, 2022 was $3.52 billion and $3.34 billion, respectively. On March 31, 2023, the senior unsecured notes’ fair value was based on Level 1 inputs and the term loan and revolving line of credit’s fair value was based on Level 3 inputs.
8. ACCRUED EXPENSES
The following table provides detail of the Company’s current accrued expenses on March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | March 31, | | December 31, |
| | | 2023 | | 2022 |
| | | | |
| | (In thousands) |
| Accrued product purchases | | $ | 95,922 | | | $ | 115,773 | |
| Accrued taxes | | 5,785 | | | 19,509 | |
| Accrued salaries, vacation, and related benefits | | 3,143 | | | 3,934 | |
| Accrued capital expenditures | | 15,830 | | | 3,892 | |
| Accrued interest | | 38,774 | | | 24,815 | |
| | | | |
| Accrued other expenses | | 16,853 | | | 5,991 | |
| Total current accrued expenses | | $ | 176,307 | | | $ | 173,914 | |
Accrued product purchases mainly accrue the liabilities related to producer payments and any additional business-related miscellaneous fees we owe to third parties, such as transport or capacity fees as of March 31, 2023.
9. LEASE
Components of lease costs are included in the Condensed Consolidated Statements of Operations as general and administrative expense for real-estate leases and operating expense for non-real estate leases. Total operating lease costs were $10.8 million and $9.1 million for the three months ended March 31, 2023 and 2022, respectively. Short-term lease costs were $19 thousand and $2.6 million for the three months ended March 31, 2023 and 2022, respectively. Variable lease cost was immaterial for the three months ended March 31, 2023 and 2022.
The following table presents other supplemental lease information: | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | |
| | | | | 2023 | | 2022 | |
| | | | | | | | |
| | | | (In thousands) | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| | | | | | | | |
| Operating cash flows from operating leases | | | | | $ | 10,632 | | | $ | 9,154 | | |
| | | | | | | | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | | | | $ | 63 | | | $ | 4,490 | | |
| Weighted-average remaining lease term — operating leases (in years) | | | | | 1.94 | | 1.82 | |
| Weighted-average discount rate — operating leases | | | | | 8.89 | % | | 7.58 | % | |
10. EQUITY AND WARRANTS
Redeemable Noncontrolling Interest — Common Unit Limited Partners
On February 22, 2022, the Company consummated a business combination with Altus 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 Sheets. During the first three months of 2023, 180,962 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 94,089,038 Common Units and an equal number of Class C Common Stock issued and outstanding as of March 31, 2023. The Common Units fair value was approximately $2.91 billion as of March 31, 2023.
Common Stock
As of March 31, 2023, there were 49,054,411 and 94,089,038 shares, respectively, of Class A Common Stock and Class C Common Stock issued and outstanding (collectively, “Common Stock”).
Public Warrants
As of March 31, 2023, 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 March 31, 2023, 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 $25 thousand for the Public Warrants and a fair value of $19 thousand for the Private Warrants as of March 31, 2023 on the Condensed Consolidated Balance Sheet in other non-current liabilities. Refer to Note 11—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. Stock Repurchase Program
In February 2023, the Board of Directors (the “Board”) approved a share repurchase program (“Repurchase Program”), authorizing discretionary purchases of the Company’s Class A Common Stock up to $100.0 million in the aggregate. Repurchases may be made at management’s discretion from time to time, in accordance with applicable securities laws, on the open market or through privately negotiated transactions and may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act. Privately negotiated repurchases from affiliates are also authorized under the Repurchase Program, subject to such affiliates’ interest and other limitations. The repurchases will depend on market conditions and may be discontinued at any time without prior notice. For the three months ended March 31, 2023, the Company repurchased 81,862 shares at a total cost of $2.4 million.
Dividend
During the three months ended March 31, 2023, the Company made cash dividend payments of $17.1 million to holders of Class A Common Stock and Class C Common Units and $87.9 million was reinvested in shares of Class A Common Stock by Reinvestment Holders.
See Note 18 - Subsequent Events for discussion of dividend declared on April 19, 2023.
11. FAIR VALUE MEASUREMENTS
The Company’s Condensed Consolidated Balance Sheets reflect a mixture of measurement methods for financial assets and liabilities. Public and private warrants, contingent liabilities and derivative financial instruments are reported at fair value. Other financial instruments are reported at historical cost or amortized cost on our Condensed Consolidated Balance Sheets. Long-term debt is primarily the other financial instrument for which carrying value could vary significantly from fair value. See Note 7—Debt and Financing Costs in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information. 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 March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (In thousands) |
| Commodity swap | | $ | — | | | $ | 10,545 | | | $ | — | | | $ | 10,545 | |
| Interest rate derivatives | | — | | | 3,413 | | | — | | | 3,413 | |
| Total assets | | $ | — | | | $ | 13,958 | | | $ | — | | | $ | 13,958 | |
| | | | | | | | |
| Commodity swaps | | $ | — | | | $ | 7,529 | | | $ | — | | | $ | 7,529 | |
| Interest rate derivatives | | — | | | 26,256 | | | — | | | 26,256 | |
| | | | | | | | |
| Public warrants | | 25 | | | — | | | — | | | 25 | |
| Private warrants | | — | | | — | | | 19 | | | 19 | |
| | | | | | | | |
| Total liabilities | | $ | 25 | | | $ | 33,785 | | | $ | 19 | | | $ | 33,829 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (In thousands) |
| Commodity swap | | $ | — | | | $ | 4,288 | | | $ | — | | | $ | 4,288 | |
| Interest rate derivatives | | — | | | 2,675 | | | — | | | 2,675 | |
| Total assets | | $ | — | | | $ | 6,963 | | | $ | — | | | $ | 6,963 | |
| | | | | | | | |
| Commodity swaps | | $ | — | | | $ | 5,718 | | | $ | — | | | $ | 5,718 | |
| Interest rate derivatives | | — | | | 8,328 | | | — | | | 8,328 | |
| | | | | | | | |
| Public warrants | | 50 | | | — | | | — | | | 50 | |
| Private warrants | | — | | | — | | | 38 | | | 38 | |
| | | | | | | | |
| Total liabilities | | $ | 50 | | | $ | 14,046 | | | $ | 38 | | | $ | 14,134 | |
Our derivative contracts consist of interest rate swaps and commodity swaps. Valuation of these derivative contracts involved both observable publicly quoted prices and certain inputs to the credit valuation that may not be readily observable in the marketplace. As such our derivative contracts are classified as Level 2 in the hierarchy. Refer to Note 12—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 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. Change in fair value of the warrants since closing of the Transaction through reporting date was recorded in “Interest and other income” of the Condensed Consolidated Statements of Operations.
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 months ended March 31, 2023 and 2022.
12. 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 Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 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 are 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 cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract.
During November 2022 and March 2023, the Company entered into three interest rate swaps with total notional amounts of $2.25 billion that are effective on May 1, 2023 and mature on May 31, 2025. Under these swaps, the Company pays a fixed rate ranging from 4.38% to 4.49% 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 Condensed Consolidated Balance Sheets. Interest rate swap derivative assets were $3.4 million and $2.7 million as of March 31, 2023 and December 31, 2022, respectively. Interest rate swap derivative liabilities were $26.3 million and $8.3 million as of March 31, 2023 and December 31, 2022, respectively. The Company recorded cash settlements on interest rate swap derivatives of nil and $0.7 million for the three months ended March 31, 2023 and 2022, respectively, in “Interest expense” of the Condensed Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $17.2 million and $11.6 million for the three months ended March 31, 2023 and 2022, respectively, in “Interest expense” of the Condensed 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 elements 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 the past two quarters, the Company has entered into numerous commodity swap contracts based on the OPIS NGL Mont Belvieu prices for ethane, propane and butane, the Waha Basis index and the NYMEX WTI 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 index swaps are effective over the next 1 to 15 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 detailed information of commodity swaps outstanding as of March 31, 2023 (in thousands, except volumes):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2023 |
| Commodity | | Instruments | | Unit | | Volume | | Net Fair Value |
| Natural Gas | | Commodity Swap | | MMBtus | | 6,380,000 | | | $ | (6,254) | |
| NGL | | Commodity Swap | | Gallons | | 157,281,600 | | | 9,252 | |
| Crude | | Commodity Swap | | Bbl | | 137,500 | | | 258 | |
| Natural Gas Basis Spread Swaps | | Commodity Swap | | MMBtus | | 29,850,000 | | | (574) | |
| Crude Gas Basis Spread Swaps | | Commodity Swap | | Bbl | | 496,000 | | | 334 | |
| | | | | | | | $ | 3,016 | |
The fair value or settlement value of the swaps outstanding are presented on a gross basis on the Condensed Consolidated Balance Sheets. Commodity swap derivative assets were $10.5 million and $4.3 million as of March 31, 2023 and December 31, 2022, respectively. Commodity swap derivative liabilities were $7.5 million and $5.7 million as of March 31, 2023 and December 31, 2022, respectively. The Company recorded cash settlements on commodity swap derivatives of $1.0 million and $0.2 million for the three months ended March 31, 2023 and 2022, respectively, in “Product revenue” of the Condensed Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $5.4 million and nil for the
change in fair value of commodity swap derivatives for the three months ended March 31, 2023 and 2022, respectively, in “Product revenue” of the Condensed Consolidated Statements of Operations.
13. 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 the first quarter of 2023, pursuant to the Company’s 2019 Omnibus Compensation Plan, as amended from time to time (the “Plan”), the Company granted approximately 370,000 restricted stock units (“RSUs”) to its employees with cliff vesting on January 1, 2026 and approximately 181,000 RSUs to employees that were vested immediately. The 181,000 RSUs with no vesting terms were granted to employees who received their bonus in Company stock in lieu of cash bonus awards.
With respect to the above shares, the Company recorded compensation expenses of $17.5 million and $6.1 million for the three months ended March 31, 2023 and 2022, respectively, based on a straight-line amortization of the associated awards’ fair value over the respective vesting life of the shares.
14. 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:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2023 | | 2022 |
| | | | | | | | |
| | | | | | (In thousands) |
| Income before income taxes | | | | | | $ | 4,715 | | | $ | 22,065 | |
| Income tax expense | | | | | | $ | 416 | | | $ | 676 | |
| Effective tax rate | | | | | | 8.82 | % | | 3.06 | % |
The effective tax rate for the three months ended March 31, 2023 was lower than the statutory rate mainly due to the impact of tax attributable to noncontrolling interests related to the Common Units limited partners and valuation allowance.
15. 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.
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2023 | | 2022 |
| | | | | | (In thousands, except per share amounts) |
| Net income attributable to Class A common shareholders | | | | | | $ | 1,436 | | | $ | 3,865 | |
Less: Net income available to participating unvested restricted Class A common shareholders(1) | | | | | | (4,156) | | | — | |
| | | | | | | | |
| Total net income (loss) attributable to Class A common shareholders | | | | | | $ | (2,720) | | | $ | 3,865 | |
| | | | | | | | |
Weighted average shares outstanding - basic(2) | | | | | | 47,392 | | | 37,392 | |
Dilutive effect(3)(4) of unvested Class A common shares | | | | | | 213 | | | 34 | |
| Weighted average shares outstanding - diluted | | | | | | 47,605 | | | 37,426 | |
| | | | | | | | |
| Net income (loss) available per common share - basic | | | | | | $ | (0.06) | | | $ | 0.10 | |
| Net income (loss) available per common share - diluted | | | | | | $ | (0.06) | | | $ | 0.10 | |
(1)Represents dividends paid to unvested restricted Class A common shareholders.
(2)Share amounts have been retrospectively 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 for further information. (3)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.
(4)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.
16. 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 March 31, 2023 and December 31, 2022, 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 March 31,
2023, 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 total monies paid under this arrangement are capped at $60.5 million. Amounts are payable on an annual basis over the earn-out period. Based on current forecasts and discussions with PDC, management revalues this contingent liability with updated assumptions at each reporting period. PDC’s actual annual Mcf volume did not exceed the incentive rate during the past three years and the Company did not expect PDC’s actual annual Mcf volume amounts to exceed forecasted amounts as of March 31, 2023; therefore, the estimated fair value of the contingent consideration liability was nil as of March 31, 2023 and December 31, 2022.
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.
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, Kinetik NGL Pipeline and Delaware Link Pipeline that is under development. The current operating pipelines transport crude oil, natural gas and NGLs.
The Midstream Logistics segment accounts for more than 99% of the Company’s operating revenues, cost of sales (excluding depreciation and amortization), operating expenses and ad valorem expenses. The Pipeline Transportation segment contains all of the Company’s equity method investments, which contribute more than 99% of the segment’s EBITDA. Corporate and Other contains the Company’s executive and administrative functions, including 85% of the Company’s general and administrative expenses and all of the Company’s debt service costs.
The following tables present the reconciliation of the segment profit measure as of and for the three months ended March
31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Midstream Logistics | | Pipeline Transportation | | Corporate and Other(1) | | Consolidated |
| | (In thousands) |
| For the Three Months Ended March 31, 2023 | | | | | | | | |
| Segment net income (loss) including noncontrolling interests | | $ | 51,012 | | | $ | 46,432 | | | $ | (93,145) | | | $ | 4,299 | |
| Add back: | | | | | | | | |
| Interest expense (income) | | 9 | | | — | | | 69,299 | | | 69,308 | |
| | | | | | | | |
| Income tax expense (benefit) | | — | | | — | | | 416 | | | 416 | |
| Depreciation and amortization | | 68,393 | | | 455 | | | 6 | | | 68,854 | |
| Contract assets amortization | | 1,655 | | | — | | | — | | | 1,655 | |
| | | | | | | | |
| Unrealized hedging (gain) loss | | (4,987) | | | — | | | — | | | (4,987) | |
| Proportionate EMI EBITDA | | — | | | 71,867 | | | — | | | 71,867 | |
| Share-based compensation | | — | | | — | | | 17,540 | | | 17,540 | |
| Loss (gain) on disposal of assets | | 102 | | | — | | | — | | | 102 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Integration costs | | 7 | | | — | | | 918 | | | 925 | |
| Acquisition transaction costs | | 33 | | | — | | | 235 | | | 268 | |
| Other one-time costs or amortization | | 3,025 | | | — | | | 723 | | | 3,748 | |
| Deduct: | | | | | | | | |
| Warrant valuation adjustment | | — | | | — | | | 44 | | | 44 | |
| | | | | | | | |
| | | | | | | | |
| Equity income from unconsolidated affiliates | | — | | | 46,464 | | | — | | | 46,464 | |
Segment adjusted EBITDA(3) | | $ | 119,249 | | | $ | 72,290 | | | $ | (4,052) | | | $ | 187,487 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Midstream Logistics | | Pipeline Transportation | | Corporate and Other(1) | | Consolidated(2) |
| | | | | | | | |
| | (In thousands) |
| For the Three Months Ended March 31, 2022 | | | | | | | | |
| Segment net income (loss) including noncontrolling interests | | $ | 9,185 | | | $ | 29,136 | | | $ | (16,932) | | | $ | 21,389 | |
| Add back: | | | | | | | | |
| Interest expense (income) | | 26,642 | | | (1,614) | | | 1,617 | | | 26,645 | |
| Gain on redemption of mandatorily redeemable Preferred units | | — | | | — | | | (4,493) | | | (4,493) | |
| Income tax expense (benefit) | | 457 | | | (39) | | | 258 | | | 676 | |
| Depreciation and amortization | | 60,893 | | | 130 | | | — | | | 61,023 | |
| Contract assets amortization | | 448 | | | — | | | — | | | 448 | |
| Proportionate EMI EBITDA | | — | | | 40,741 | | | — | | | 40,741 | |
| Share-based compensation | | — | | | — | | | 6,132 | | | 6,132 | |
| Loss on disposal of assets | | 110 | | | — | | | — | | | 110 | |
| Loss on debt extinguishment | | 129 | | | — | | | — | | | 129 | |
| Unrealized loss on embedded derivatives | | — | | | — | | | 2,886 | | | 2,886 | |
| | | | | | | | |
| Integration costs | | 4,104 | | | — | | | 2,047 | | | 6,151 | |
| Acquisition transaction costs | | 4 | | | — | | | 5,672 | | | 5,676 | |
| Other one-time costs or amortization | | 918 | | | — | | | 277 | | | 1,195 | |
| Deduct: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Equity income from unconsolidated affiliates | | — | | | 27,917 | | | — | | | 27,917 | |
Segment adjusted EBITDA(3) | | $ | 102,890 | | | $ | 40,437 | | | $ | (2,536) | | | $ | 140,791 | |
(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.
(3)Adjusted EBITDA is a non-GAAP measure; please see Key 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 months ended March 31, 2023 and 2022: | | | | | | | | | | | | | | | | | | | | | | |
| | Midstream Logistics | | Pipeline Transportation | | | | Consolidated |
| | | | | | | | |
| | (In thousands) |
| For the Three Months Ended March 31, 2023 | | |
| Revenue | | $ | 276,555 | | | $ | 694 | | | | | $ | 277,249 | |
| Other revenue | | 3,789 | | | 2 | | | | | 3,791 | |
| Total segment operating revenue | | $ | 280,344 | | | $ | 696 | | | | | $ | 281,040 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Midstream Logistics | | Pipeline Transportation | | | | Consolidated |
| | | | | | | | |
| | (In thousands) |
| For the Three Months Ended March 31, 2022 | | |
| Revenue | | $ | 255,373 | | | $ | — | | | | | $ | 255,373 | |
| Other revenue | | 1,874 | | | 2 | | | | | 1,876 | |
| Total segment operating revenue | | $ | 257,247 | | | $ | 2 | | | | | $ | 257,249 | |
The following table presents total assets for each operating segment as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | March 31, | | December 31, |
| | 2023 | | 2022 |
| | | | |
| | (In thousands) |
| Midstream Logistics | | $ | 3,637,003 | | | $ | 3,486,948 | |
Pipeline Transportation(1) | | 2,463,333 | | | 2,414,829 | |
| Segment total assets | | 6,100,336 | | | 5,901,777 | |
| Corporate and other | | 24,319 | | | 17,934 | |
| Total assets | | $ | 6,124,655 | | | $ | 5,919,711 | |
(1)Includes investment in unconsolidated affiliates of $2.41 billion and $2.38 billion as of March 31, 2023 and December 31, 2022, respectively.
18. SUBSEQUENT EVENTS
On April 19, 2023, 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 of record as of May 5, 2023 on May 17, 2023. 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.