Kinetik Holdings Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial-statement figures are rounded to millions unless noted.
Business context and reporting period
Kinetik is a Permian Basin midstream company providing gathering, processing, transportation, and related services, with equity interests in pipeline businesses. On February 22, 2022, it completed its combination with BCP and included the acquired legacy ALTM business in consolidated results from that date. BCP is the accounting predecessor, so reported comparisons with 2021 are not like-for-like: the 2021 consolidated results exclude legacy ALTM, and the 2022 results include it only after closing.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $325.2m | $166.6m | $918.0m | $450.5m |
| Operating income | $45.8m | $16.0m | $105.5m | $48.2m |
| Net income, including noncontrolling interests | $49.4m | $4.6m | $202.3m | $7.4m |
| Net income attributable to Class A shareholders | $14.9m | — | $25.2m | — |
| Diluted Class A EPS | $1.04 | — | $1.24 | — |
| Adjusted EBITDA (non-GAAP) | $212.4m | $100.0m | $561.1m | $306.8m |
| Cash provided by operating activities | Not provided for quarter | Not provided for quarter | $453.2m | $159.4m |
Q3 operating margin was approximately 14.1%, compared with 9.6% in Q3 2021; nine-month operating margin was approximately 11.5%, compared with 10.7%. These comparisons are affected by the transaction and changing commodity prices. Revenue growth reflected higher commodity prices, increased gathered and processed volumes, and higher NGL and condensate sales. Product revenue rose 129% in Q3 and 153% for the nine-month period; service revenue rose 48% and 43%, respectively.
- Cash flow and investment: Nine-month investing cash outflow was $216.4m, including $160.5m of property, plant and equipment spending, $13.3m of intangible-asset spending, and $56.2m of contributions to equity-method investments. Financing cash outflow was $243.8m. Cash declined to $11.7m from $18.7m at year-end 2021.
- Debt and liquidity: September 30 debt principal was $3.475bn, or $3.448bn net of debt issuance costs, versus $2.346bn principal at year-end 2021. The company reported $775m of available committed borrowing capacity, in addition to $11.7m cash. Current assets were $318.8m and current liabilities $284.7m.
- Equity-method earnings: Earnings from unconsolidated affiliates were $45.0m in Q3 and $120.7m for nine months, compared with $16.8m and $44.7m in the prior-year periods. Distributions received from affiliates were $185.8m for nine months and are included in operating cash flow.
Material changes versus the prior comparable period
- The February combination expanded the business and added ALTM operations and pipeline interests; Kinetik also increased its interest in Permian Highway Pipeline. This makes year-over-year results materially affected by acquisition scope, not just organic performance.
- Adjusted EBITDA increased 112% in Q3 and 83% for nine months. Pipeline Transportation adjusted EBITDA rose to $78.7m in Q3 and $190.0m year to date, primarily reflecting acquired pipeline interests. Midstream Logistics adjusted EBITDA was $137.5m and $380.9m, respectively.
- Operating expenses and G&A increased, partly due to acquired operations, integration costs, and share-based compensation. Nine-month G&A was $72.2m, including $31.0m share-based compensation and $18.5m acquisition and integration costs.
- June refinancing replaced existing facilities with $1.0bn of 5.875% senior notes due 2030, a $2.0bn term loan due 2025, and a $1.25bn revolver due 2027. The company recorded a $28.0m debt-extinguishment loss. At September 30, $475m was drawn on the revolver.
- All assumed Preferred Units were redeemed during 2022 for an aggregate $644.8m. The nine-month results include a $89.1m gain on an embedded derivative and a $9.6m gain on redemption of mandatorily redeemable Preferred Units; these items affect reported net income.
Outlook, management commentary, risks, and contingencies
Management stated that operating cash flow and distributions from equity-method pipelines were expected to exceed capital expenditures and planned quarterly dividends over the next 12 months, based on current plans and assumptions. The filing does not provide numerical earnings or revenue guidance. Planned spending includes the PHP expansion, system integration, growth projects, and maintenance. The Diamond Cryogenic complex was expected to expand from 600 MMcf/d to 720 MMcf/d by the end of Q1 2023. PHP’s fully contracted expansion was targeting service in November 2023.
- The new debt facilities have variable-rate components. Management estimated that a 1 percentage-point rate increase would have raised Q3 interest expense by approximately $6.3m. The company had locked in the floating base rate on its term loan through April 2023 and entered a $1bn interest-rate swap effective May 2023 through May 2025 at a 4.46% fixed swap rate.
- Management cited commodity-price volatility, producer activity and throughput, inflation, rising interest rates, supply-chain constraints, weather, and counterparty performance as risks. The filing says prolonged oil prices below producer break-even levels could reduce drilling and volumes. No commodity swaps were outstanding at September 30.
- The company was in compliance with its debt covenants at September 30. It reported no off-balance-sheet arrangements and no accrued loss contingencies. It is litigating to collect $19.6m of receivables related to Winter Storm Uri; no allowance was recorded. Management reported no known unprovided environmental claims with a material impact.
- The company had $360.8m of estimated remaining contract revenue obligations, largely associated with fixed-price, fixed-volume customer contracts. It reported no historical shortfall payments under its transportation minimum-volume commitments through September 30.
- Subsequent to quarter-end, the board declared a $0.75 per-share Class A dividend and $0.75 per Common Unit distribution, payable November 17, 2022. The stock began trading on the NYSE under KNTK on October 24.
Important facts for investors to verify
- Assess performance on a pro forma or otherwise comparable basis, given that legacy ALTM is included only from February 22, 2022 in reported 2022 results.
- Review the composition and sustainability of Adjusted EBITDA and cash generation, including pipeline distributions and the effects of commodity prices and working capital.
- Confirm debt balances, revolver availability, variable-rate exposure, hedge coverage, covenant compliance, and the capacity to fund planned projects and dividends.
- Evaluate the impact and accounting treatment of the Preferred Unit redemptions, embedded-derivative gain, debt-extinguishment loss, and acquisition and integration costs.
- Track PHP and Diamond Cryogenic expansion schedules, expected capital requirements, and progress toward management’s stated liquidity outlook.
- Monitor collection of the $19.6m Winter Storm Uri receivable claims and any developments in other litigation or contingencies.