NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These consolidated financial statements have been prepared by Altus Midstream 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 the 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 Altus Midstream Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (Form 10-K), which contains a summary of the Company’s significant accounting policies and other disclosures. Capitalized terms used but not defined herein shall have the meaning ascribed to such terms in the Form 10-K.
Unless the context otherwise requires, the “Company,” “ALTM” and “Altus” refers to Altus Midstream Company and its consolidated subsidiaries. “Altus Midstream” refers to Altus Midstream LP and its consolidated subsidiaries. “Apache” refers to Apache Corporation and its consolidated subsidiaries. All references to the Company’s Class A common stock, $0.0001 par value (Class A Common Stock), and Class C common stock, $0.0001 par value (Class C Common Stock), reflect such share amounts as retrospectively restated to reflect the Company’s reverse stock split, which was effected June 30, 2020. Refer to Note—9 Equity for further information.
Nature of Operations
Through its consolidated subsidiaries, the Company owns gas gathering, processing, and transmission assets in the Permian Basin of West Texas. Construction on the assets began in the fourth quarter of 2016, and operations commenced in the second quarter of 2017. Additionally, the Company owns equity interests in four separate Permian Basin pipeline entities that have access to various points along the Texas Gulf Coast. The Company’s operations consist of one reportable segment.
Organization
The Company 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. On August 8, 2018, KAAC and Altus Midstream LP entered into a contribution agreement (the Contribution Agreement) with certain wholly-owned subsidiaries of Apache, including four Delaware limited partnerships (collectively, Altus Midstream Operating) and their general partner (Altus Midstream Subsidiary GP LLC, a Delaware limited liability company, and together with Altus Midstream Operating, the Altus Midstream Entities). The Altus Midstream Entities were 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 (Alpine High).
On November 9, 2018 (the Closing Date) and pursuant to the terms of the Contribution Agreement, KAAC acquired from Apache the entire equity interests of the Altus Midstream Entities and options to acquire equity interests in five separate third-party pipeline projects (the Pipeline Options). The acquisition of the entities and the Pipeline Options is referred to herein as the Business Combination. In exchange, the consideration provided to Apache included economic voting and non-economic voting shares in KAAC and common partnership units representing limited partner interests in Altus Midstream LP (Common Units). Following the Closing Date and in connection with the completion of the Business Combination, KAAC changed its name to Altus Midstream Company.
Ownership of Altus Midstream LP
As of and following the Closing Date and in connection with the completion of the Business Combination, the Company’s wholly-owned subsidiary, Altus Midstream GP LLC, a Delaware limited liability company (Altus Midstream GP), is the sole general partner of Altus Midstream LP. The Company operates its business through Altus Midstream LP and its subsidiaries, which include Altus Midstream Operating. The Company holds approximately 23.1 percent of the outstanding Common Units, and a controlling interest, in Altus Midstream, while Apache holds the remaining 76.9 percent.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP).
The consolidated financial results of Altus Midstream are included in the Company’s consolidated financial statements due to the Company’s 100 percent ownership interest in Altus Midstream GP, and Altus Midstream GP’s control of Altus Midstream.
The Company has no independent operations or material assets other than its partnership interests in Altus Midstream, which constitutes all of its business. Additionally, the Company’s balance sheet reflects the presentation of noncontrolling interest ownership attributable to the limited partner interests in Altus Midstream held by Apache and the holders of Series A Cumulative Redeemable Preferred Units (the Preferred Units). Refer to Note 9—Equity and Note 10—Series A Cumulative Redeemable Preferred Units for further information.
Variable Interest Entity
Altus Midstream is a variable interest entity (VIE) because the partners in Altus Midstream with equity at risk lack the power, through voting or similar rights, to direct the activities that most significantly impact Altus Midstream’s economic performance.
A reporting entity that concludes it has a variable interest in a VIE must evaluate whether it has a controlling financial interest in the VIE, such that it is the VIE’s primary beneficiary and should consolidate. The Company is the primary beneficiary of Altus Midstream, and therefore should consolidate Altus Midstream because (i) the Company has the ability to direct the activities of Altus Midstream that most significantly affect its economic performance, and (ii) the Company has the right to receive benefits or the obligation to absorb losses that could be potentially significant to Altus Midstream.
Redeemable Noncontrolling Interest — Apache Limited Partner
The Company’s redeemable noncontrolling interest presented in the consolidated financial statements consists of Common Units representing limited partner interests in Altus Midstream held by Apache. Pursuant to certain provisions of the partnership agreement of Altus Midstream (as amended in connection with the Business Combination, and subsequent issuance of Preferred Units, the Amended LPA), the limited partner interests held by Apache are equal to the number of shares of the Company’s Class C Common Stock, held by Apache.
The Company initially recorded the redeemable noncontrolling interest upon the issuance of the Common Units to Apache as part of the Business Combination and based on the recapitalization value ascribed at the Closing Date to the limited partner interest. All or a portion of these Common Units may be redeemed at Apache’s option. The Company has the ability to settle the redemption option either (i) in shares of Class A Common Stock, on a one-for-one basis, or (ii) in cash (based on the fair market value of the Class A Common Stock as determined pursuant to the Contribution Agreement), subject to customary conversion rate adjustments for stock splits, stock dividends, and reclassifications. Upon the future redemption or exchange of Common Units held by Apache, a corresponding number of shares of Class C Common Stock will be cancelled.
The Company’s policy is to record the redeemable noncontrolling interest represented by the Common Units held by Apache at the higher of (i) its initial fair value plus accumulated earnings/losses associated with the noncontrolling interest or (ii) the redemption value as of the balance sheet date.
See discussion and additional detail further discussed in Note 9—Equity.
Redeemable Noncontrolling Interest — Preferred Unit Limited Partners
On June 12, 2019, Altus Midstream issued and sold the Preferred Units in a private offering, and the purchasers of the Preferred Units were admitted as limited partners of Altus Midstream. The Preferred Units will be exchangeable for shares of the Company’s Class A Common Stock at the option of the Preferred Unit holders after the seventh anniversary of the closing of the Preferred Unit offering or upon the occurrence of specified events, unless otherwise redeemed by Altus Midstream.
The Preferred Units are accounted for on the Company’s consolidated balance sheet as a redeemable noncontrolling interest classified as temporary equity based on the terms of the Preferred Units. Certain redemption features embedded within the terms of the Preferred Units require bifurcation and measurement at fair value and are accounted for on the Company’s consolidated balance sheet as a long-term liability embedded derivative.
Equity Method Interests
The Company follows the equity method of accounting when it does not exercise control over its equity interests, but can exercise significant influence over the operating and financial policies of the entity. Under this method, the equity interests are carried originally at acquisition cost, increased by Altus’ proportionate share of the equity interest’s net income and contributions made by Altus, and decreased by Altus’ proportionate share of the equity interest’s net losses and distributions received by Altus. Please refer to Note 8—Equity Method Interests, for further details of the Company’s equity method interests.
Use of Estimates
Preparation of financial statements in conformity with GAAP and disclosure of contingent assets and liabilities requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The Company evaluates its estimates and assumptions on a regular basis. Actual results may differ from these estimates and assumptions used in preparation of its financial statements, and changes in these estimates are recorded when known.
Revision of Previously Issued Consolidated Financial Statements for Immaterial Adjustment
Warrants
On April 12, 2021, the SEC Staff issued a Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (SPACs) (the SEC Staff Statement). The SEC Staff Statement addresses certain accounting and reporting considerations related to warrants of a kind similar to the Company’s public and private warrants outstanding at the time of the Business Combination. The SEC determined that certain features of warrants issued in SPAC transactions common across many entities, such as those outstanding for the Company, should be recorded as a derivative liability under ASC 815 “Derivatives and Hedges” with any changes in fair value being recorded as a gain or loss in the Company’s Statement of Consolidated Operations. The Company has historically accounted for its warrants as equity, with no change in fair value being recorded in the applicable period. The Company has concluded that the previous accounting policy to account for its warrants as equity rather than as a liability was an immaterial error. The Company has corrected this immaterial error by revising its consolidated financial statements as of and for the year ended December 31, 2020 and as of and for the three and nine months ended September 30, 2020 and the related notes included herein to include the effect of accounting for the warrants as a liability from the date of the Business Combination. Note 12—Net Income (Loss) Per Share and Note 13—Fair Value Measurements have also been updated to reflect this revision. In addition, management has corrected previously identified immaterial errors related to income from its equity method interests, net unrelated to the SEC Staff Statement.
The impacts of this adjustment in fiscal year 2020, as presented in the accompanying financial statements, are as follows:
Statement of Consolidated Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
As Reported
|
|
Change(1)
|
|
As Revised
|
|
|
|
|
|
|
|
(In thousands)
|
Income from equity method interests, net
|
$
|
14,320
|
|
|
$
|
1,667
|
|
|
$
|
15,987
|
|
Warrants valuation adjustment
|
—
|
|
|
209
|
|
|
209
|
|
Total other income (loss)
|
10,787
|
|
|
1,876
|
|
|
12,663
|
|
Net income (loss) before income taxes
|
29,322
|
|
|
1,876
|
|
|
31,198
|
|
Net income (loss) including noncontrolling interests
|
29,322
|
|
|
1,876
|
|
|
31,198
|
|
Net income (loss) attributable to common shareholders
|
9,990
|
|
|
1,876
|
|
|
11,866
|
|
Net income (loss) attributable to Apache limited partner
|
7,687
|
|
|
1,283
|
|
|
8,970
|
|
Net income (loss) attributable to Class A common shareholders
|
2,303
|
|
|
593
|
|
|
2,896
|
|
|
|
|
|
|
|
Net Income (Loss) Attributable To Class A Common Shareholders, Per Share
|
|
|
|
|
|
Basic
|
$
|
0.61
|
|
|
$
|
0.16
|
|
|
$
|
0.77
|
|
Diluted
|
$
|
0.30
|
|
|
$
|
0.02
|
|
|
$
|
0.32
|
|
(1)All changes related to Income from equity method interests, net above relate to an immaterial prior period adjustment unrelated to the SEC Staff Statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
As Reported
|
|
Change
|
|
As Revised
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Warrants valuation adjustment
|
$
|
—
|
|
|
$
|
1,668
|
|
|
$
|
1,668
|
|
Total other income (loss)
|
(28,907)
|
|
|
1,668
|
|
|
(27,239)
|
|
Net income (loss) before income taxes
|
19,496
|
|
|
1,668
|
|
|
21,164
|
|
Net income (loss) including noncontrolling interests
|
20,192
|
|
|
1,668
|
|
|
21,860
|
|
Net income (loss) attributable to common shareholders
|
(36,166)
|
|
|
1,668
|
|
|
(34,498)
|
|
|
|
|
|
|
|
Net income (loss) attributable to Class A common shareholders
|
(7,805)
|
|
|
1,668
|
|
|
(6,137)
|
|
|
|
|
|
|
|
Net Income (Loss) Attributable To Class A Common Shareholders, Per Share
|
|
|
|
|
|
Basic
|
$
|
(2.08)
|
|
|
$
|
0.44
|
|
|
$
|
(1.64)
|
|
Diluted
|
$
|
(2.23)
|
|
|
$
|
0.11
|
|
|
$
|
(2.12)
|
|
Statement of Consolidated Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
As Reported
|
|
Change(1)
|
|
As Revised
|
|
|
|
|
|
|
|
(In thousands)
|
Net income (loss) including noncontrolling interests
|
$
|
29,322
|
|
|
$
|
1,876
|
|
|
$
|
31,198
|
|
Comprehensive income (loss) including noncontrolling interests
|
30,003
|
|
|
1,876
|
|
|
31,879
|
|
Comprehensive income (loss) attributable to Apache limited partner
|
8,211
|
|
|
1,283
|
|
|
9,494
|
|
Comprehensive income (loss) attributable to Class A Common Shareholders
|
2,460
|
|
|
593
|
|
|
3,053
|
|
(1)All changes related to Income from equity method interests, net relate to an immaterial prior period adjustment unrelated to the SEC Staff Statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
As Reported
|
|
Change
|
|
As Revised
|
|
|
|
|
|
|
|
(In thousands)
|
Net income (loss) including noncontrolling interests
|
$
|
20,192
|
|
|
$
|
1,668
|
|
|
$
|
21,860
|
|
Comprehensive income (loss) including noncontrolling interests
|
20,079
|
|
|
1,668
|
|
|
21,747
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Class A Common Shareholders
|
(7,831)
|
|
|
1,668
|
|
|
(6,163)
|
|
Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
As Reported
|
|
Change
|
|
As Revised
|
|
|
|
|
|
|
|
(In thousands)
|
Other non-current liabilities
|
$
|
5,539
|
|
|
$
|
885
|
|
|
$
|
6,424
|
|
Total liabilities
|
862,593
|
|
|
885
|
|
|
863,478
|
|
Additional paid-in capital
|
144,716
|
|
|
(22,494)
|
|
|
122,222
|
|
Accumulated equity (deficit)
|
(391,042)
|
|
|
21,609
|
|
|
(369,433)
|
|
Statement of Consolidated Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
As Reported
|
|
Change
|
|
As Revised
|
|
|
|
|
|
|
|
(In thousands)
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income (loss) including noncontrolling interests
|
$
|
20,192
|
|
|
$
|
1,668
|
|
|
$
|
21,860
|
|
|
|
|
|
|
|
Warrants valuation adjustment
|
—
|
|
|
(1,668)
|
|
|
(1,668)
|
|
Net Cash Provided by Operating Activities
|
137,447
|
|
|
—
|
|
|
137,447
|
|
Fair Value Measurements
Accounting Standards Codification (ASC) 820-10-35, “Fair Value Measurement” (ASC 820), provides a hierarchy that prioritizes and defines the types of inputs used to measure fair value. The fair value hierarchy gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable; hence, these valuations have the lowest priority.
The valuation techniques that may be used to measure fair value include a market approach, an income approach and a cost approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. An income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectations, including present value techniques, option-pricing models, and the excess earnings method. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
Embedded features identified within the Company’s agreements are bifurcated and measured at fair value at the end of each period on the Company’s consolidated balance sheet. Such recurring fair value measurements are presented in further detail in Note 13—Fair Value Measurements. When required the Company also uses fair value measurements on a nonrecurring basis when certain qualitative assessments of its assets indicate a potential impairment.
Accounts Receivable From/Payable To Apache
The accounts receivable from or payable to Apache represent the net result of Altus Midstream’s monthly revenue, capital and operating expenditures, and other miscellaneous transactions to be settled with Apache as provided under the Construction, Operations and Maintenance Agreement (COMA) between the two entities. Generally, cash in this amount will be transferred to Apache in the month after the Company’s transactions are processed and the net results of operations are determined. However, from time to time, the Company may estimate and transfer the cash settlement amount in the month the transactions are processed, in order to minimize related-party working capital balances. See discussion and additional detail in Note 2—Transactions with Affiliates.
Other Income
In 2020, the Company entered into a contract with a provider to supply the Company with electrical power. If the Company does not utilize all of its fixed purchase volumes under this contract, then it will receive a credit based on a market rate for the related underutilization. In conjunction with increased power pricing due to the Texas freeze event and underutilization of contractual electricity volumes, the Company recognized an estimated total credit of approximately $9.7 million for the six months ended June 30, 2021. The Company did not recognize any additional credit during the three months ended September 30, 2021. These amounts are recorded on the statement of consolidated operations in “Other income.” The related power credit will offset the Company’s future monthly power payments and is recorded in “Prepaid assets and other” for the current portion and “Deferred charges and other” for the long-term portion on the consolidated balance sheet. No credits were recorded for the three and nine months ended September 30, 2020. The Company has no remaining performance obligations related to these credits as of September 30, 2021.
2. TRANSACTIONS WITH AFFILIATES
Revenues
The Company has contracted to provide services including gas gathering, compression, processing, transmission, and NGL transmission, pursuant to acreage dedications provided by Apache, comprising the entire Alpine High acreage. In accordance with the terms of these agreements, the Company receives prescribed fees based on the type and volume of product for which the services are provided. Additionally, beginning in 2020, Altus Midstream entered into three agreements to provide operating and maintenance services for Apache’s compressors in exchange for a fixed monthly fee per compressor serviced.
Revenues generated under these agreements are presented on the Company’s statement of consolidated operations as “Midstream services revenue — affiliate.” Revenues earned that have not yet been invoiced to Apache are presented on the Company’s consolidated balance sheet as “Revenue receivables.” Refer to Note 3—Revenue Recognition for further discussion.
Cost and Expenses
The Company has no employees and receives certain operational, maintenance, and management services from Apache under the COMA. Under the COMA, the Company incurred operations and maintenance expenses of $1.5 million and $1.2 million for the three months ended September 30, 2021 and 2020, respectively, and $3.8 million and $4.0 million for the nine months ended September 30, 2021 and 2020, respectively. The Company incurred general and administrative expenses from affiliates of $2.2 million and $1.6 million for the three months ended September 30, 2021 and 2020, respectively, and $6.8 million and $5.1 million for the nine months ended September 30, 2021 and 2020, respectively. These costs were primarily related to expenses associated with the COMA. Additional information regarding the COMA is provided below.
Construction, Operations and Maintenance Agreement
At the closing of the Business Combination, the Company entered into the COMA with Apache. Under the terms of the COMA, Apache provides certain services related to the design, development, construction, operation, management, and maintenance of certain gathering, processing and other midstream assets, on behalf of the Company. In return, the Company paid or will pay fees to Apache of (i) $5.0 million for the period of January 1, 2020 through December 31, 2020, (ii) $7.0 million for the period of January 1, 2021 through December 31, 2021 and (iii) $9.0 million annually thereafter, adjusted based on actual internal overhead and general and administrative costs incurred, until terminated. The annual fee was negotiated as part of the Business Combination to reimburse Apache for indirect costs of performing administrative corporate functions for the Company, including services for information technology, risk management, corporate planning, accounting, cash management, and others.
In addition, Apache may be reimbursed for certain internal costs and third-party costs incurred in connection with its role as service provider under the COMA. Costs incurred by Apache directly associated with midstream activity, where substantially all the services are rendered for Altus Midstream, are charged to Altus Midstream on a monthly basis.
The COMA stipulates that the Company shall provide reimbursement of amounts owing to Apache attributable to a particular month by no later than the last day of the immediately following month. Unpaid amounts accrue interest until settled.
The COMA will continue to be effective until terminated (i) upon the mutual consent of Altus and Apache, (ii) by either of Altus and Apache, at its option, upon 30 days’ prior written notice in the event Apache or an affiliate no longer owns a direct or indirect interest in at least 50 percent of the voting or other equity securities of Altus, or (iii) by Altus if Apache fails to perform any of its covenants or obligations due to willful misconduct of certain key personnel and such failure has a material adverse financial impact on Altus.
Distributions to Apache
In December 2020, May 2021, and August 2021, the Company’s Board of Directors declared a cash dividend of $1.50 per share on the Company’s Class A Common Stock, with each dividend declared totaling $5.6 million. The dividends were paid to stockholders during the first, second and third quarters of 2021. Each dividend included payment of approximately $0.5 million to Apache due to its 9.8 percent ownership of the Company’s Class A Common Stock. The Class A Common Stock dividends were funded by distributions from Altus Midstream to its common unitholders of $1.50 per Common Unit, totaling $24.4 million for each of the first, second and third quarters of 2021. For each distribution, $5.6 million, as noted above, was paid to the Company to fund the cash dividend payments to Class A Common stockholders, and the balance of $18.8 million was paid to Apache due to its 76.9 percent ownership of outstanding Common Units. Please refer to Note 9—Equity for further information.
3. REVENUE RECOGNITION
The following table presents a disaggregation of the Company’s revenue.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Gas gathering and compression
|
$
|
4,797
|
|
|
$
|
5,352
|
|
|
$
|
13,645
|
|
|
$
|
15,466
|
|
Gas processing
|
25,422
|
|
|
28,533
|
|
|
72,361
|
|
|
81,613
|
|
Transmission
|
3,229
|
|
|
3,861
|
|
|
9,513
|
|
|
11,262
|
|
NGL transmission
|
671
|
|
|
708
|
|
|
1,793
|
|
|
2,121
|
|
Other
|
429
|
|
|
415
|
|
|
1,232
|
|
|
790
|
|
Midstream services revenue — affiliate
|
34,548
|
|
|
38,869
|
|
|
98,544
|
|
|
111,252
|
|
Product sales — third parties
|
—
|
|
|
1,303
|
|
|
5,743
|
|
|
1,900
|
|
Total revenues
|
$
|
34,548
|
|
|
$
|
40,172
|
|
|
$
|
104,287
|
|
|
$
|
113,152
|
|
There were no significant changes to the Company’s contracts with customers during the three and nine months ended September 30, 2020, except that the Company entered into a new Gas Processing Agreement with Apache in October 2021, which superseded the prior agreement.
Payments under all contracts with customers are typically due one month after physical delivery of the product or service has been rendered. Revenue receivables from the Company’s contracts with Apache totaled $11.0 million and $11.4 million as of September 30, 2021 and December 31, 2020, respectively, as presented on the Company’s consolidated balance sheet. Accounts receivable from the Company’s contracts with third parties totaled nil and $1.0 million as of September 30, 2021 and December 31, 2020, respectively, as presented on the Company’s consolidated balance sheet.
In accordance with the provisions of ASC Topic 606, “Revenue from Contracts with Customers,” variable market prices for each short-term sale are allocated entirely to each performance obligation as the terms of payment relate specifically to the Company’s efforts to satisfy its obligations. As such, the Company has elected the practical expedients available under the standard to not disclose the aggregate transaction price allocated to unsatisfied, or partially unsatisfied, performance obligations as of the end of the reporting period.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at carrying value, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
(In thousands)
|
Gathering, processing and transmission systems and facilities(1)
|
|
$
|
207,481
|
|
|
$
|
204,643
|
|
Construction in progress
|
|
537
|
|
|
904
|
|
Other property and equipment
|
|
3,213
|
|
|
3,323
|
|
Total property, plant and equipment
|
|
211,231
|
|
|
208,870
|
|
Less: accumulated depreciation and amortization
|
|
(21,848)
|
|
|
(13,034)
|
|
Total property, plant and equipment, net
|
|
$
|
189,383
|
|
|
$
|
195,836
|
|
(1)Included in Gathering, processing, and transmissions systems and facilities are compressors under lease to Apache totaling $10.1 million and $6.2 million, net as of September 30, 2021 and December 31, 2020, respectively.
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 balance sheet date.
5. DEBT AND FINANCING COSTS
In November 2018, Altus Midstream entered into a revolving credit facility for general corporate purposes that matures in November 2023 (subject to Altus Midstream’s two, one year extension options). The agreement for this revolving credit facility, as amended (the Amended Credit Agreement), provides aggregate commitments from a syndicate of banks of $800.0 million. The aggregate commitments include a letter of credit subfacility of up to $100.0 million and a swingline loan subfacility of up to $100.0 million. Altus Midstream may increase commitments up to an aggregate $1.5 billion by adding new lenders or obtaining the consent of any increasing existing lenders. As of September 30, 2021, there were $657.0 million of borrowings and a $2.0 million of letter of credit outstanding under this facility. As of December 31, 2020, there were $624.0 million of borrowings and no letters of credit were outstanding under this facility.
Altus Midstream’s revolving credit facility is unsecured and is not guaranteed by the Company, Apache, APA Corporation or any of their respective subsidiaries.
At Altus Midstream’s option, the interest rate per annum for borrowings under this facility is either a base rate, as defined, plus a margin, or the London Interbank Offered Rate (LIBOR), plus a margin. Altus Midstream also pays quarterly a facility fee at a rate per annum on total commitments. The margins and the facility fee vary based upon (i) the Leverage Ratio (as defined below) until Altus Midstream has a senior long-term debt rating and (ii) such senior long-term debt rating once it exists. The Leverage Ratio is the ratio of (1) the consolidated indebtedness of Altus Midstream and its restricted subsidiaries to (2) EBITDA (as defined in the Amended Credit Agreement) of Altus Midstream and its restricted subsidiaries for the 12-month period ending immediately before the determination date. At September 30, 2021, the base rate margin was 0.05 percent, the LIBOR margin was 1.05 percent, and the facility fee was 0.20 percent. In addition, a commission is payable quarterly to the lenders on the face amount of each outstanding letter of credit at a per annum rate equal to the LIBOR margin then in effect. Customary letter of credit fronting fees and other charges are payable to issuing banks.
The Amended Credit Agreement contains restrictive covenants that may limit the ability of Altus Midstream and its restricted subsidiaries to, among other things, incur additional indebtedness or guaranty indebtedness, sell assets, make investments in unrestricted subsidiaries, enter into mergers, make certain payments and distributions, incur liens on certain property securing indebtedness, and engage in certain other transactions without the prior consent of the lenders.
Altus Midstream also is subject to a financial covenant under the Amended Credit Agreement, which requires it to maintain a Leverage Ratio not exceeding 5.00:1.00 at the end of any fiscal quarter, starting with the quarter ended December 31, 2019, except that during the period of up to one year following a qualified acquisition, the Leverage Ratio cannot exceed 5.50:1.00 at the end of any fiscal quarter. Unless the Leverage Ratio is less than or equal to 4.00:1.00, the Amended Credit Agreement limits distributions in respect of Altus Midstream LP’s capital to $30 million per calendar year until either (i) the consolidated net income of Altus Midstream LP and its restricted subsidiaries, as adjusted pursuant to the Amended Credit Agreement, for three consecutive calendar months equals or exceeds $350.0 million on an annualized basis or (ii) Altus Midstream LP has a specified senior long-term debt rating; in addition, before the occurrence of one of those events, the Leverage Ratio must be less than or equal to 5.00:1.00. In no event can any distribution be made that would, after giving effect
to it on a pro forma basis, result in a Leverage Ratio greater than (i) 5.00:1.00 or (ii) for a specified period after a qualifying acquisition, 5.50:1.00. The Leverage Ratio as of September 30, 2021 was less than 4.00:1.00.
The terms of Altus Midstream’s Preferred Units also contain certain restrictions on distributions on Altus Midstream LP’s Common Units, including the Common Units held by the Company, and any other units that rank junior to the Preferred Units with respect to distributions or distributions upon liquidation. Refer to Note 10—Series A Cumulative Redeemable Preferred Units for further information. In addition, the amount of any cash distributions to Altus Midstream LP by any entity in which it has an interest accounted for by the equity method is subject to such entity’s compliance with the terms of any debt or other agreements by which it may be bound, which in turn may impact the amount of funds available for distribution by Altus Midstream LP to its partners.
There are no clauses in the Amended Credit Agreement that permit the lenders to accelerate payments or refuse to lend based on unspecified material adverse changes. The Amended Credit Agreement has no drawdown restrictions or prepayment obligations in the event of a decline in credit ratings. However, the agreement allows the lenders to accelerate payment maturity and terminate lending and issuance commitments for nonpayment and other breaches, and if Altus Midstream or any of its restricted subsidiaries defaults on other indebtedness in excess of the stated threshold, is insolvent, or has any unpaid, non-appealable judgment against it for payment of money in excess of the stated threshold. Lenders may also accelerate payment maturity and terminate lending and issuance commitments if Altus Midstream undergoes a specified change in control or has specified pension plan liabilities in excess of the stated threshold. Altus Midstream was in compliance with the terms of the Amended Credit Agreement as of September 30, 2021.
Financing Costs, Net of Capitalized Interest
The following table presents the components of Altus Midstream’s financing costs, net of capitalized interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Interest expense
|
$
|
2,382
|
|
|
$
|
2,133
|
|
|
$
|
7,012
|
|
|
$
|
7,498
|
|
Amortization of deferred facility fees
|
292
|
|
|
292
|
|
|
875
|
|
|
857
|
|
Capitalized interest
|
—
|
|
|
(2,012)
|
|
|
—
|
|
|
(7,377)
|
|
Financing costs, net of capitalized interest
|
$
|
2,674
|
|
|
$
|
413
|
|
|
$
|
7,887
|
|
|
$
|
978
|
|
6. OTHER CURRENT LIABILITIES
The following table provides detail of the Company’s other current liabilities at September 30, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
(In thousands)
|
Accrued taxes other than income
|
|
$
|
10,263
|
|
|
$
|
165
|
|
Accrued operations and maintenance expense
|
|
1,558
|
|
|
926
|
|
Accrued incentive compensation
|
|
1,102
|
|
|
1,466
|
|
Accrued capital costs
|
|
1,093
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
1,891
|
|
|
2,696
|
|
Total other current liabilities
|
|
$
|
15,907
|
|
|
$
|
5,613
|
|
7. 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 September 30, 2021 and December 31, 2020, there were no accruals for loss contingencies.
Litigation
The Company is subject to governmental and regulatory controls arising in the ordinary course of business. The Company is not aware of any pending or threatened legal proceedings against it at the time of the filing of this Quarterly Report on Form 10-Q that would have a material impact on its financial position, results of operations, or liquidity.
Environmental Matters
As an owner of infrastructure assets and 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, including the potential impacts of climate change. 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. In some instances, Altus Midstream may be directed to suspend or cease operations. The Company maintains insurance coverage, which management believes is customary in the industry, although insurance does not fully cover against all environmental risks. Additionally, there can be no assurance that current regulatory requirements will not change or past non-compliance with environmental laws will not be discovered. The Company is not aware of any environmental claims existing as of September 30, 2021, that have not been provided for or would otherwise have a material impact on its financial position, results of operations, or liquidity.
Contractual Obligations
Altus Midstream’s existing fee-based midstream services agreements, which have no minimum volume commitments or firm transportation commitments, are underpinned by acreage dedications covering Alpine High. Pursuant to these agreements, Altus Midstream is obligated to perform low and high pressure gathering, processing, dehydration, compression, treating, conditioning, and transportation on all volumes produced from the dedicated acreage, so long as Apache has the right to market such gas.
At the closing of the Business Combination, the Company entered into the COMA with Apache, which includes contractual obligations for the Company to pay certain management fees to Apache over the term of the agreement. Refer to Note 2—Transactions with Affiliates for further discussion of the COMA.
In the second quarter of 2019, Altus Midstream issued and sold the Preferred Units. Under the terms of the Amended LPA, the Preferred Unit holders are entitled to receive quarterly distributions until such time as the Preferred Units are redeemed or exchanged. Refer to Note 10—Series A Cumulative Redeemable Preferred Units for further discussion regarding the terms of the Preferred Units and the rights of the holders thereof.
Additionally, the Company is required to fund its pro-rata portion of any future capital expenditures for the development of the pipeline projects as referenced in Note 8—Equity Method Interests.
At September 30, 2021 and December 31, 2020, there were no other material contractual obligations related to the entities included in the consolidated financial statements other than the performance of asset retirement obligations and required credit facility fees discussed in Note 5—Debt and Financing Costs.
8. EQUITY METHOD INTERESTS
As of September 30, 2021, the Company owned the following equity method interests in Permian Basin long-haul pipeline entities. For each of the equity method interests, 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 equity method interests. The table below presents the ownership percentage held by the Company for each entity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Ownership
|
|
Amount
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Gulf Coast Express Pipeline LLC
|
16.0%
|
|
$
|
276,093
|
|
|
$
|
283,530
|
|
EPIC Crude Holdings, LP
|
15.0%
|
|
164,497
|
|
|
176,640
|
|
Permian Highway Pipeline LLC
|
26.7%
|
|
632,720
|
|
|
615,186
|
|
Breviloba, LLC
|
33.0%
|
|
464,597
|
|
|
479,826
|
|
|
|
|
$
|
1,537,907
|
|
|
$
|
1,555,182
|
|
As of September 30, 2021 and December 31, 2020, unamortized basis differences included in the equity method interest balances were $36.8 million and $37.7 million, 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 net income over the useful lives of the underlying pipeline assets.
The following table presents the activity in the Company’s equity method interests for the nine months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast Express Pipeline LLC
|
|
EPIC Crude Holdings, LP
|
|
Permian Highway Pipeline LLC
|
|
Breviloba, LLC
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance at December 31, 2020
|
$
|
283,530
|
|
|
$
|
176,640
|
|
|
$
|
615,186
|
|
|
$
|
479,826
|
|
|
$
|
1,555,182
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
|
314
|
|
|
1,500
|
|
|
25,456
|
|
|
—
|
|
|
27,270
|
|
Distributions
|
(37,277)
|
|
|
—
|
|
|
(51,950)
|
|
|
(38,581)
|
|
|
(127,808)
|
|
Equity income (loss), net
|
29,526
|
|
|
(14,273)
|
|
|
44,028
|
|
|
23,352
|
|
|
82,633
|
|
Accumulated other comprehensive income
|
—
|
|
|
630
|
|
|
—
|
|
|
—
|
|
|
630
|
|
Balance at September 30, 2021
|
$
|
276,093
|
|
|
$
|
164,497
|
|
|
$
|
632,720
|
|
|
$
|
464,597
|
|
|
$
|
1,537,907
|
|
Summarized Financial Information
The following table represents aggregated selected income statement data for the Company’s equity method interests (on a 100 percent basis):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2021
|
|
2020
|
|
|
Gulf Coast Express Pipeline LLC
|
|
EPIC Crude Holdings, LP
|
|
Permian Highway Pipeline LLC
|
|
Breviloba, LLC
|
|
Gulf Coast Express Pipeline LLC
|
|
EPIC Crude Holdings, LP
|
|
Permian Highway Pipeline LLC
|
|
Breviloba, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Revenues
|
|
$
|
270,526
|
|
|
$
|
117,107
|
|
|
$
|
297,132
|
|
|
$
|
127,030
|
|
|
$
|
273,760
|
|
|
$
|
128,837
|
|
|
$
|
—
|
|
|
$
|
128,727
|
|
Operating income (loss)
|
|
186,356
|
|
|
(24,232)
|
|
|
167,011
|
|
|
72,098
|
|
|
196,154
|
|
|
(10,108)
|
|
|
(69)
|
|
|
80,747
|
|
Net income (loss)
|
|
185,464
|
|
|
(83,940)
|
|
|
166,662
|
|
|
71,621
|
|
|
195,460
|
|
|
(53,048)
|
|
|
587
|
|
|
74,188
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
4,197
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(752)
|
|
|
—
|
|
|
—
|
|
9. EQUITY
Reverse Stock Split
On June 30, 2020, the Company effected a reverse stock split of the Company’s Class A Common Stock and Class C Common Stock by a ratio of one-for-twenty. The par value and number of authorized shares of common stock and preferred stock were not affected by the reverse stock split. A corresponding number of Altus Midstream Common Units were also restated as part of the reverse stock split. All corresponding per-share and share amounts for periods prior to June 30, 2020 have been retroactively restated in this Quarterly Report on Form 10-Q to reflect the reverse stock split.
Redeemable Noncontrolling Interest — Apache Limited Partner
In conjunction with its ownership of the Class C Common Stock, Apache owns 12,500,000 Altus Midstream Common Units, representing approximately 76.9 percent of the total Common Units issued and outstanding. The financial results of Altus Midstream and its subsidiaries are included in the Company’s consolidated financial statements as detailed in Note 1—Summary of Significant Accounting Policies, under the section titled “Principles of Consolidation.”
Apache has the right, at any time, to cause Altus Midstream to redeem all or a portion of the Common Units issued to Apache, in exchange for shares of the Company’s Class A Common Stock on a one-for-one basis or, at Altus Midstream’s option, an equivalent amount of cash; provided that the Company may, at its option, effect a direct exchange of cash or Class A Common Stock for such Common Units in lieu of such a redemption by Altus Midstream. Upon the future redemption or exchange of Common Units held by Apache, a corresponding number of shares of Class C Common Stock held by Apache will be cancelled.
Apache’s limited partner interest associated with the Common Units issued with the Class C Common Stock is reflected as a redeemable noncontrolling interest in the Company. The redeemable noncontrolling interest is recognized at the higher of (i) its initial fair value plus accumulated earnings/losses associated with the noncontrolling interest and (ii) the maximum redemption value as of the balance sheet date. The redemption value is determined based on a 5-day volume weighted average closing price of the Class A Common Stock (5-day VWAP) as defined in the Amended LPA, a Level 1 non-recurring fair value measurement. At September 30, 2021 and December 31, 2020, the redeemable noncontrolling interest was recorded based on the redemption value as of the balance sheet date of $837.2 million and $575.1 million, respectively.
For further discussion of Apache’s right to receive additional shares of Class A Common Stock, and other outstanding equity instruments that may impact ownership interests and the limited partner interests of Altus Midstream in future periods, see Note 12—Net Income (Loss) Per Share.
Redeemable Noncontrolling Interest — Preferred Unit Limited Partners
On June 12, 2019, Altus Midstream issued and sold the Preferred Units in a private offering, and the purchasers of the Preferred Units were admitted as limited partners of Altus Midstream. The Preferred Units will be exchangeable for shares of the Company’s Class A Common Stock at the option of the Preferred Unit holders after the seventh anniversary of Closing (as defined below) or upon the occurrence of specified events, unless otherwise redeemed by Altus Midstream. Refer to Note 10—Series A Cumulative Redeemable Preferred Units for further discussion.
Common Stock Dividend
In December 2020, May 2021, and August 2021, the Company’s Board of Directors declared a cash dividend of $1.50 per share on the Company’s Class A Common Stock, with each dividend declared totaling $5.6 million. The dividends were paid to stockholders during the first, second and third quarters of 2021. Each dividend included payment of approximately $0.5 million to Apache due to its 9.8 percent ownership of the Company’s Class A Common Stock. The Class A Common Stock dividends were funded by distributions from Altus Midstream to its common unitholders of $1.50 per Common Unit, totaling $24.4 million for each of the first, second and third quarters of 2021. For each distribution, $5.6 million, as noted above, was paid to the Company to fund the cash dividend payments to Class A Common stockholders, and the balance of $18.8 million was paid to Apache due to its 76.9 percent ownership of outstanding Common Units.
10. SERIES A CUMULATIVE REDEEMABLE PREFERRED UNITS
On June 12, 2019, Altus Midstream issued and sold the Preferred Units in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended (the Closing). The Closing occurred pursuant to a Preferred Unit Purchase Agreement among Altus Midstream, the Company, and the purchasers party thereto, dated as of May 8, 2019. A total of 625,000 Preferred Units were sold at a price of $1,000 per Preferred Unit, for an aggregate issue price of $625.0 million. Altus Midstream received approximately $611.2 million in cash proceeds from the sale after deducting transaction costs and discounts to certain purchasers.
Accounting for the Preferred Units
Classification
The Preferred Units are accounted for on the Company’s consolidated balance sheet as a redeemable noncontrolling interest classified as temporary equity based on the terms of the Preferred Units, including the redemption rights with respect thereto.
Measurement
The Company applies a two-step approach to measure the redeemable noncontrolling interest related to the Preferred Units, by first allocating a portion of the net income of Altus Midstream. After consideration of the foregoing, the Company records an additional adjustment to the carrying value of the Preferred Unit redeemable noncontrolling interest at each period end, if applicable. The amount of such adjustment is determined based upon the accreted value method to reflect the passage of time until the Preferred Units are exchangeable at the option of the holder. Pursuant to this method, the net transaction price is accreted using the effective interest method, to the Redemption Price calculated at the seventh anniversary of Closing. The total adjustment is limited to an amount such that the carrying amount of the Preferred Unit redeemable noncontrolling interest at each period end is equal to the greater of (a) the sum of (i) the carrying amount of the Preferred Units determined in accordance with ASC 810, plus (ii) the fair value of the embedded derivative liability and (b) the accreted value of the net transaction price.
Activity related to the Preferred Units for the year ended December 31, 2020 and nine months ended September 30, 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units Outstanding
|
|
Financial Position(2)
|
|
|
|
|
|
|
|
(In thousands, except for unit data)
|
Redeemable noncontrolling interest — Preferred Units: at December 31, 2019
|
|
638,163
|
|
|
$
|
555,599
|
|
Distribution of in-kind additional Preferred Units
|
|
22,531
|
|
|
—
|
|
Cash distributions paid to Preferred Unit limited partners
|
|
—
|
|
|
(23,124)
|
|
Allocation of Altus Midstream net income
|
|
N/A
|
|
75,906
|
|
Redeemable noncontrolling interest — Preferred Units: at December 31, 2020
|
|
660,694
|
|
|
608,381
|
|
|
|
|
|
|
Cash distributions paid to Preferred Unit limited partners
|
|
—
|
|
|
(34,686)
|
|
Distributions payable to Preferred Unit limited partners
|
|
—
|
|
|
(11,562)
|
|
Allocation of Altus Midstream net income
|
|
N/A
|
|
59,475
|
|
Accreted redemption value adjustment
|
|
N/A
|
|
13,187
|
|
Redeemable noncontrolling interest — Preferred Units: at September 30, 2021
|
|
660,694
|
|
|
$
|
634,795
|
|
Embedded derivative liability(1)
|
|
|
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120,522
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$
|
755,317
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(1)Certain redemption features embedded within the terms of the Preferred Units require bifurcation and measurement at fair value. See Note 13—Fair Value Measurements for discussion of the fair value changes in the embedded derivative liability during the period.
(2)The Preferred Units are redeemable at Altus Midstream’s option at a redemption price (the Redemption Price), which as of September 30, 2021 is calculated as the greater of (i) an 11.5 percent internal rate of return and (ii) a 1.3 times multiple of invested capital. As of September 30, 2021, the Redemption Price would have been based on a 1.3 times multiple of invested capital, which was $812.5 million, less certain cash distributions. This was greater than using an 11.5 percent internal rate of return, which would equate to a redemption value of $729.8 million.
N/A - not applicable.
11. INCOME TAXES
The Company is subject to U.S. federal income tax and the Texas margin tax. Altus Midstream LP is a partnership for federal income tax purposes and passes through its taxable income to its partners, the Company, Apache, and the Preferred Unit holders. Thus, Altus Midstream LP does not record a federal income tax provision. Altus Midstream LP is subject to the Texas margin tax and as such, records a state income tax provision.
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in response to the COVID-19 pandemic. Under the CARES Act, 100 percent of net operating losses arising in tax years beginning after December 31, 2017 and before January 1, 2021 may be carried back to each of the five preceding tax years of such loss. In the first quarter of 2020, the Company recorded a current income tax benefit of $0.7 million associated with a net operating loss carryback claim.
During the three and nine months ended September 30, 2021, the Company’s effective income tax rate was primarily impacted by a decrease in valuation allowance. During the three and nine months ended September 30, 2020, the Company’s effective income tax rate was primarily impacted by the net operating loss carryback claim under the CARES Act and an increase in valuation allowance.
The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes,” which prescribes a minimum recognition threshold a tax position must meet before being recognized in the financial statements. Each quarter, the Company assesses the recognition amount and, as a result, may increase (expense) or reduce (benefit) the amount of interest and penalties. Interest and penalties are recorded as a component of income tax expense. The contributor of Altus Midstream’s operating assets, Apache, is currently under IRS audit for the 2014-2017 tax years as part of its normal course of business.
12. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing net income (loss) attributable to Class A common shareholders by the weighted average number of shares of Class A Common Stock outstanding during the period. Class C Common Stock is excluded from the weighted average shares outstanding for the calculation of basic net income (loss) per share, as holders of Class C Common Stock are not entitled to any dividends or liquidating distributions.
The Company uses the “if-converted method” to determine the potential dilutive effect of (i) an assumed exchange of outstanding Common Units of Altus Midstream (and the cancellation of a corresponding number of shares of outstanding Class C Common Stock) for shares of Class A Common Stock, (ii) an assumed exercise of the outstanding public and private warrants for shares of Class A Common Stock and (iii) an assumed exchange of the outstanding Preferred Units of Altus Midstream for shares of Class A Common Stock. The dilutive effect of any earn-out consideration payable in shares is only included in periods for which the underlying conditions for the issuance of shares are met.
The computation of basic and diluted net income (loss) per share for the periods presented in the consolidated financial statements is shown in the table below.
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Three Months Ended September 30,
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2021
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2020(1)
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Income
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Shares
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Per Share
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Income
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Shares
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Per Share
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(In thousands, except per share data)
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Basic:
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Net income attributable to Class A common shareholders
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$
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5,244
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3,746
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$
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1.40
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$
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2,896
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3,746
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$
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0.77
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Effect of dilutive securities:
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Redeemable noncontrolling interest — Apache limited partner
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$
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15,279
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12,500
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$
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3,928
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12,500
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Redeemable noncontrolling interest — Preferred Unit limited partners
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$
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—
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—
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$
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27,906
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93,609
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Diluted(2)(3):
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Net income attributable to Class A common shareholders
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$
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20,523
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16,246
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$
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1.26
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$
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34,730
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109,855
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$
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0.32
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Nine Months Ended September 30,
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2021
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2020(1)
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Income
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Shares
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Per Share
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Loss
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Shares
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Per Share
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(In thousands, except per share data)
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Basic:
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Net income (loss) attributable to Class A common shareholders
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$
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17,087
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3,746
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$
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4.56
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$
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(6,137)
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3,746
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$
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(1.64)
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Effect of dilutive securities:
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Redeemable noncontrolling interest — Apache limited partner
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$
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47,757
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12,500
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$
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(28,361)
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12,500
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Redeemable noncontrolling interest — Preferred Unit limited partners
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$
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62,688
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17,076
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$
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—
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—
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Diluted(2)(3):
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Net income (loss) attributable to Class A common shareholders
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$
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127,532
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33,322
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$
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3.83
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$
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(34,498)
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16,246
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$
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(2.12)
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(1)This period presented has been revised to reflect the Company’s fair value change of its underlying warrants. Refer to Note 1—Summary of Significant Accounting Policies, see the section titled Revision of Previously Issued Consolidated Financial Statements for Immaterial Adjustment for further information.
(2)The effect of an assumed exchange of the outstanding Preferred Units of Altus Midstream for shares of Class A Common Stock would have been anti-dilutive for the three months ended September 30, 2021 and the nine months ended September 30, 2020.
(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.
Further discussion of the Preferred Units and associated embedded features can be found in Note 10—Series A Cumulative Redeemable Preferred Units and Note 13—Fair Value Measurements, respectively. Earn-out consideration granting Apache the right to receive additional shares of Class A Common Stock is not included in the earnings per share calculation above, as the conditions for issuance were not satisfied for any of the periods presented.
13. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities measured at fair value on a recurring basis consist of: cash and cash equivalents; revenue receivables; accounts receivable; accounts receivable from/payable to Apache; dividends and distributions payable; the Company’s private and public warrants and an embedded derivative liability related to the issuance of Preferred Units.
The Company bifurcated and recognized an embedded derivative associated with the Preferred Units related to the exchange option provided to the Preferred Unit holders under the terms of the Amended LPA. The valuation of the embedded derivative (using an income approach) is based on a range of factors, including expected future interest rates using the Black-Karasinski model, the Company’s imputed interest rate, interest rate volatility, the expected timing of periodic cash distributions, the estimated timing for the potential exercise of the exchange option, and anticipated dividend yields of the Preferred Units. The Company recorded an unrealized gain of $4.0 million and an unrealized loss of $3.5 million for the three months ended September 30, 2021 and 2020, respectively, and an unrealized gain of $18.5 million and an unrealized loss of $76.1 million for the nine months ended September 30, 2021 and 2020, respectively, which are recorded in “Unrealized derivative instrument gain (loss)” in the statement of consolidated operations. Altus has classified these recurring fair value measurements as Level 3 in the fair value hierarchy.
As of the September 30, 2021 valuation date, the Company used the forward B-rated Energy Bond Yield curve to develop the following key unobservable inputs used to value this embedded derivative:
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Quantitative Information About Level 3 Fair Value Measurements
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Fair Value at September 30, 2021
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Valuation Technique
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Significant Unobservable Inputs
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Range/Value
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(In thousands)
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Preferred Units Embedded Derivative
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$
|
120,522
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Option Model
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Altus Midstream Company’s Imputed Interest Rate
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5.53-11.54%
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Interest Rate Volatility
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38.03%
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A one percent increase in the imputed interest rate assumption would significantly increase the value of the embedded derivative liability at September 30, 2021, while a one percent decrease would lead to a similar decrease in value as of September 30, 2021. The assumed expected timing until exercise of the exchange option at September 30, 2021 was 4.70 years.
The Company has additional embedded derivatives in the Preferred Units related to the exchange option and redemption features that are accounted for separately from the Preferred Units. Level 3 valuations of the embedded derivatives are based on a range of factors, including the likelihood of the event occurring, and these factors are assessed quarterly. There was no value associated with these additional identified embedded derivatives for any applicable period presented.
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 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. The Company has recorded a liability of $0.7 million and $0.9 million as of September 30, 2021 and December 31, 2020, respectively, in “Other noncurrent liabilities” included in its consolidated balance sheet and approximately $0.7 million and $0.2 million of income for the three months ended September 30, 2021 and 2020, respectively, and $0.2 million and $1.7 million of income for the nine months ended September 30, 2021 and 2020, respectively, reflected as “Total other income (loss)” in its statement of consolidated operations related to the fair value changes of the underlying warrants.
The carrying amounts reported on the consolidated balance sheet for the Company’s remaining financial assets and liabilities approximate fair value due to their short-term nature. The carrying amount of Altus Midstream’s revolving credit facility approximates fair value because the interest rate is variable and reflective of market rates. There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the nine months ended September 30, 2021 or year ended December 31, 2020.
14. SUBSEQUENT EVENTS
Common Stock Dividend
On November 2, 2021, the Company’s Board of Directors declared a cash dividend of $1.50 per share on the Company’s Class A Common Stock, totaling $5.6 million, to be paid on December 30, 2021, to stockholders of record as of the close of business on November 30, 2021. The common stock dividend will be funded by a distribution from Altus Midstream to its common unitholders of $1.50 per Common Unit, totaling $24.4 million, of which $5.6 million is payable to the Company and the balance is payable to Apache.
Altus Midstream Company and BCP Raptor Holdco LP Business Combination
On October 21, 2021, the Company announced that it will combine with privately-owned BCP Raptor Holdco LP (BCP) in an all-stock transaction, pursuant to the Contribution Agreement dated as of that same date and entered into by and among ALTM, Altus Midstream, New BCP Raptor Holdco, LLC (the Contributor), and BCP (the Contribution Agreement). BCP is the parent company of EagleClaw Midstream, which includes EagleClaw Midstream Ventures, the Caprock Midstream and Pinnacle Midstream businesses, and a 26.7% interest in the Permian Highway Pipeline.
As consideration for the transaction, the Company will issue 50 million Class C common shares (and Altus Midstream will issue corresponding Common Units) to BCP’s unitholders, which are principally funds affiliated with Blackstone and I Squared Capital. The transaction is expected to close during the first quarter 2022 following completion of customary closing conditions, including approval by the Company’s shareholders and regulatory reviews.