Kinetik Holdings Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This annual filing is not a standalone fourth-quarter report. Kinetik is an integrated Permian Basin midstream company providing gathering, processing, transportation, crude oil and produced-water services.
Business context and comparability
On February 22, 2022, Kinetik completed a business combination with BCP, accounted for as a reverse merger with BCP as the accounting acquirer. Accordingly, 2022 results include the acquired ALTM operations only from the closing date; 2021 results do not include them. Year-over-year comparisons are therefore not fully like-for-like. Kinetik reported approximately 2.0 Bcf/d of gas processing capacity and interests in four long-haul pipeline ventures.
Key financial metrics
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Total revenue | $1.213 billion | $662.0 million | +83% |
| Operating income | $150.5 million | $53.5 million | +181% |
| Net income, including noncontrolling interests | $250.7 million | $1.5 million | Increase |
| Adjusted EBITDA (non-GAAP) | $772.2 million | $415.7 million | +86% |
| Cash from operating activities | $613.0 million | $235.6 million | +$377.4 million |
| Cash and cash equivalents at year-end | $6.4 million | $18.7 million | Down |
| Debt, net of unamortized financing costs | $3.369 billion | $2.308 billion | Up |
| Available committed borrowing capacity | $855 million | $133 million | Up |
Operating margin was approximately 12.4% of revenue. The filing reports no single consolidated gross-margin measure. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Service revenue rose 44% to $394.0 million, principally reflecting higher gathered and processed volumes and acquired operations. Product revenue rose 109% to $806.4 million, driven by higher condensate prices and increased NGL and condensate sales volumes; higher commodity-related cost of sales also contributed to the increase in expenses. Income from equity-method pipeline investments was $181.0 million, versus $63.1 million.
Material changes, financing and cash use
- Operating cash flow increased to $613.0 million. Investing activities used $286.1 million, including $206.2 million of property and equipment spending and $78.2 million contributed to the Permian Highway Pipeline (PHP) expansion. Financing activities used $339.2 million.
- June 2022 refinancing established $1.0 billion of 5.875% senior notes due 2030, a $2.0 billion term loan due 2025 and a $1.25 billion revolving facility due 2027. Year-end principal debt was $3.395 billion; the term loan and revolver carry variable rates. The company reported covenant compliance at year-end.
- Interest expense increased 27% to $149.3 million. Management estimated that a 10% increase in interest rates would have added approximately $63.4 million to FY 2022 interest expense on a pro forma basis.
- Cash dividends and distributions were $40.5 million, while $263.3 million was reinvested in Class A shares under the reinvestment arrangement. All outstanding preferred units were redeemed during 2022.
- Special items included an $89.1 million gain on embedded derivatives, a $9.6 million gain on redemption of mandatorily redeemable preferred units, and a $28.0 million loss on debt extinguishment. These items materially affect interpretation of reported net income.
Outlook, management commentary and risks
- Management estimated 2023 capital expenditures of $490 million to $540 million, including $235 million to $265 million for Midstream Logistics and $255 million to $275 million for Pipeline Transportation. The company expects operating cash flow and pipeline distributions to cover capital expenditures and the planned quarterly dividend over the following 12 months, based on its assumptions.
- PHP’s fully contracted expansion is targeted for service in November 2023, increasing capacity to 2.65 Bcf/d; Kinetik expects its ownership interest to rise from 53.3% to approximately 55.5%. The Delaware Link pipeline, planned at 1.0 Bcf/d, was expected to enter service in Q4 2023. These are forward-looking targets, not completed results.
- A $100 million discretionary share repurchase program was approved in February 2023. A $0.75-per-share dividend was declared for payment in February 2023.
- Key exposures include concentration of wholly owned assets in the Delaware Basin, reliance on customer drilling and throughput, customer and producer concentration, downstream pipeline availability, competition, commodity-sensitive product sales and variable-rate debt. The filing also highlights environmental and methane rules, produced-water disposal and seismicity restrictions, extreme weather, inflation, supply-chain constraints, cyber incidents and limited insurance coverage.
- Kinetik targets reductions in greenhouse-gas and methane intensity and increased female representation in senior leadership; sustainability targets are linked to debt pricing. Failure to meet specified targets can increase borrowing costs or the notes’ coupon under the relevant terms.
- The company reported no accrued loss contingencies or recorded environmental liabilities at year-end. It disclosed litigation to collect $19.6 million of receivables related to Winter Storm Uri, for which it had not established an allowance.
Most important facts for investors to verify
- Assess underlying performance using the reverse-merger reporting basis: acquired ALTM results are included only from February 22, 2022, so reported growth is not fully comparable with 2021.
- Reconcile GAAP net income to adjusted EBITDA and evaluate the effects of the derivative and preferred-unit gains and refinancing loss.
- Review debt maturities, variable-rate exposure, covenant headroom, committed availability and the ability to fund the stated 2023 capital plan and dividend.
- Track actual completion, cost and utilization of the PHP expansion and Delaware Link, and whether contracted volumes and customer activity support expected returns.
- Monitor commodity exposure, major-customer and producer concentration, disposal-well restrictions, environmental compliance costs and the Winter Storm Uri receivable litigation.