Kinetik (KNTK) - 2021 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for Q2 2021 and 2020, including operations, balance sheet, and cash flows, noting a prior period revision for warrant accounting Statement of Consolidated Operations Net income attributable to Class A shareholders significantly improved to $11.7 million in Q2 2021 from a $1.0 million loss in Q2 2020, driven by derivative gains and equity method income Consolidated Operations Highlights (Q2 2021 vs Q2 2020) | Metric | Q2 2021 (In thousands) | Q2 2020 (In thousands) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $35,593 | $31,616 | +12.6% | | Operating Income | $13,606 | $11,711 | +16.2% | | Net Income (Loss) Attributable to Class A Shareholders | $11,663 | $(951) | Positive Turnaround | | Diluted EPS | $1.31 | $(0.25) | Positive Turnaround | Consolidated Operations Highlights (Six Months Ended June 30) | Metric | 2021 (In thousands) | 2020 (In thousands) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $69,739 | $72,383 | -3.6% | | Operating Income | $26,653 | $30,352 | -12.2% | | Net Income (Loss) Attributable to Class A Shareholders | $11,843 | $(9,032) | Positive Turnaround | | Diluted EPS | $2.50 | $(2.85) | Positive Turnaround | Consolidated Balance Sheet Total assets increased to $1.85 billion by June 30, 2021, driven by higher cash, while total liabilities also rose slightly due to increased long-term debt Key Balance Sheet Items | Account | June 30, 2021 (In thousands) | Dec 31, 2020 (In thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $75,092 | $24,188 | | Total Assets | $1,853,654 | $1,799,630 | | Long-Term Debt | $657,000 | $624,000 | | Total Liabilities | $879,598 | $863,478 | | Total Equity (Deficit) | $(506,198) | $(247,354) | Statement of Consolidated Cash Flows Net cash from operations increased to $101.1 million in H1 2021, while investing activities significantly decreased, and financing activities primarily funded distributions Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2021 (In thousands) | 2020 (In thousands) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $101,055 | $86,797 | | Net Cash Used in Investing Activities | $(11,288) | $(175,295) | | Net Cash Provided by (Used in) Financing Activities | $(38,863) | $84,395 | | Increase (Decrease) in Cash | $50,904 | $(4,103) | Notes to Consolidated Financial Statements Detailed notes explain accounting policies, including the revision for warrant accounting, transactions with Apache, debt, equity interests, and a subsequent dividend declaration - The company revised its 2020 financial statements to reclassify warrants from equity to a liability, resulting in a 'Warrants valuation adjustment' in the income statement, deemed an immaterial error correction[60][61] - The company's primary revenue source is midstream services provided to its affiliate, Apache Corporation, under fee-based agreements for assets in the Alpine High play[72][73] - As of June 30, 2021, the company had $657.0 million in borrowings outstanding under its $800.0 million revolving credit facility, maturing in November 2023[86] - The company holds significant equity method interests in four Permian Basin pipelines: Gulf Coast Express (16%), EPIC Crude (15%), Permian Highway (26.7%), and Breviloba (33%)[104] - On August 3, 2021, the Board declared a quarterly cash dividend of $1.50 per share on Class A Common Stock, payable in September 2021[139] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operational results, and liquidity, highlighting revenue and expense fluctuations, capital resources, and the growing contribution from equity method interests Adjusted EBITDA Reconciliation (Non-GAAP) | Metric | Q2 2021 (In thousands) | Q2 2020 (In thousands) | Six Months 2021 (In thousands) | Six Months 2020 (In thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) | $73,841 | $16,034 | $96,330 | $(9,337) | | Adjusted EBITDA | $69,242 | $43,641 | $134,278 | $90,183 | Results of Operations Q2 2021 total revenues increased to $35.6 million, driven by third-party sales, while net income significantly rose due to derivative fair value changes and increased equity method income - Midstream services revenue from affiliate Apache decreased by $8.4 million to $64.0 million for the six months ended June 30, 2021, due to lower natural gas throughput volumes[167] - Operations and maintenance expenses decreased by $5.4 million for the six months ended June 30, 2021, driven by increased operational efficiency from the centralized Diamond cryogenic complex[176] - Income from equity method interests increased by $18.6 million for the six months ended June 30, 2021, primarily due to the Permian Highway Pipeline commencing service in January 2021[183] - The company recognized a power credit of $9.7 million in the first six months of 2021 due to underutilization of a fixed-volume electricity contract during the Texas freeze event[184] Capital Resources and Liquidity Primary cash sources in H1 2021 included equity distributions and credit facility borrowings, with minimal capital spending and sufficient liquidity to fund planned dividends Key Liquidity Indicators | Metric | June 30, 2021 (In thousands) | December 31, 2020 (In thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $75,092 | $24,188 | | Total debt | $657,000 | $624,000 | | Available committed borrowing capacity | $141,000 | $176,000 | - In H1 2021, capital spending on midstream infrastructure was $2.4 million, a sharp decrease from $26.5 million in H1 2020, as major construction is complete[195] - The company paid two quarterly dividends of $1.50 per share in H1 2021, funded by distributions from Altus Midstream LP totaling $48.8 million[197] - The company's Leverage Ratio as of June 30, 2021, was less than 4.00:1.00, well below the 5.00:1.00 covenant limit[209][91] Quantitative and Qualitative Disclosures About Market Risk Primary market risks include indirect commodity price exposure affecting customer activity, interest rate risk on variable debt, and credit risk from its main customer - The company has indirect exposure to commodity price risk, as it affects the production decisions of its main customer, Apache, impacting throughput volumes[216] - The company has $657.0 million of variable-rate debt, where a hypothetical 1.0% interest rate increase would raise annual consolidated interest expense by approximately $1.7 million for Q2 2021[218] - The company is subject to credit risk from nonpayment or nonperformance by its customers, primarily Apache[219] Controls and Procedures Management identified a material weakness in internal controls over financial reporting related to complex financial instruments, specifically warrant accounting, leading to an immaterial restatement - Management identified a material weakness in controls over accounting for public and private warrants, which did not effectively apply ASC 815-40[221][222] - This weakness resulted in an immaterial error and revision of prior financial statements; a remediation plan is in place but not yet fully remediated[222][224] PART II — OTHER INFORMATION Legal Proceedings The company is not aware of any pending or threatened legal proceedings that would materially impact its financial position, results, or liquidity - The company is not aware of any pending or threatened legal proceedings that would materially impact its financial position, results of operations, or liquidity[97][227] Risk Factors This section refers readers to the detailed Risk Factors presented in the company's Annual Report on Form 10-K for fiscal year 2020 - The report refers to the Risk Factors section of the company's 2020 Annual Report on Form 10-K for a detailed discussion of risks[228] Exhibits This section lists exhibits filed with the Form 10-Q, including officer certifications and financial statements in Inline XBRL format - Key exhibits filed with this report include officer certifications (Exhibits 31.1, 31.2, 32.1) and financial data in Inline XBRL format (Exhibit 101)[229]