UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20212022
or | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission file number 001-38048
Altus Midstream CompanyKINETIK HOLDINGS INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | | | 81-4675947 |
(State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification
|
One Post Oak Central, 20002700 Post Oak Boulevard, Suite 100, 300
Houston, Texas 77056-4400
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (713) 296-6000621-7330
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Class A common stock, $0.0001 par value | | ALTMKNTK | | Nasdaq Global MarketNew York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | | ☐ | | Accelerated filer | | ☒ | | Emerging growth company | | ☒☐ |
| Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No ☒
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Aggregate market value of the voting and non-voting common equity held by non-affiliates of registrant as of June 30, 20212022 | $564,554,574 | 219,150,084 | |
Number of shares of registrant’s Class A common stock, $0.0001 issued and outstanding as of January 31, 2022February 28, 2023 | 16,246,46048,954,863 | |
Number of shares of registrant’s Class C common stock, $0.0001 issued and outstanding as of January 31, 2022February 28, 2023 | —94,089,038 | |
Documents Incorporated By Reference
Portions of registrant’s proxy statement relating to registrant’s 20212023 annual meeting of stockholders have been incorporated by reference in Part II and Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
| | Item | Item | | Page | Item | | Page |
| | PART I | | | | |
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| 1. | | | |
| | | | PART I | |
| | 1 and 2. | | 1 and 2. | | |
| 1A. | 1A. | | | 1A. | | |
| 1B. | 1B. | | | 1B. | | |
| 2. | | | |
| | 3. | 3. | | | 3. | | |
| 4. | | | |
| | | | PART II | | | PART II | |
| | 5. | 5. | | | 5. | | |
| 6. | 6. | | | 6. | | |
| 7. | 7. | | | 7. | | |
| 7A. | 7A. | | | 7A. | | |
| 8. | 8. | | | 8. | | |
| 9. | 9. | | | 9. | | |
| 9A. | 9A. | | | 9A. | | |
| 9B. | 9B. | | | 9B. | | |
| 9C. | 9C. | | | 9C. | | |
| | | PART III | | | PART III | |
| | 10. | 10. | | | 10. | | |
| 11. | 11. | | | 11. | | |
| 12. | 12. | | | 12. | | |
| 13. | 13. | | | 13. | | |
| 14. | 14. | | | 14. | | |
| | | PART IV | | | PART IV | |
| | 15. | 15. | | | 15. | | |
| 16. | 16. | | | 16. | | |
| | | | |
GLOSSARY
The following are abbreviations and definitions of certain terms used in this Annual Report on Form 10-K and certain terms which are commonly used in the exploration, production, and midstream sectors of the oil and natural gas industry:
•ASC. Accounting Standards Codification
•ASU. Accounting Standards Update
•Bbl. One stock tank barrel of 42 United States (“U.S.”) gallons liquid volume used herein in reference to crude oil, condensate or natural gas liquids
•Bcf. One billion cubic feet
•Bcf/d. One Bcf per day
•Btu. One British thermal unit, which is the quantity of heat required to raise the temperature of a one-pound mass of water by one degree Fahrenheit
•CODM. Chief Operating Decision Maker.
•Delaware Basin. Located on the western section of the Permian Basin. The Delaware Basin covers a 6.4M acre area
•FASB. Financial Accounting Standards Board
•Field. An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations
•Formation. A layer of rock which has distinct characteristics that differs from nearby rock
•GAAP. United States Generally Accepted Accounting Principles
•GHG. Greenhouse gas
•LIBOR. London Interbank Offered Rate
•MBbl. One thousand barrels of crude oil, condensate or NGLs
•MBbl/d. One MBbl per day
•Mcf. One thousand cubic feet of natural gas
•Mcf/d. One Mcf per day
•MMBtu. One million British thermal units
•MMcf. One million cubic feet of natural gas
•MMcf/d. One MMcf per day
•MVC. Minimum volume commitments
•NGLs. Natural gas liquids. Hydrocarbons found in natural gas, which may be extracted as liquefied petroleum gas and natural gasoline
•Throughput. The volume of crude oil, natural gas, NGLs, water and refined petroleum products transported or passing through a pipeline, plant, terminal or other facility during a particular period
•SEC. United States Securities and Exchange Commission
•SOFR. Secured Overnight Financing Rate
•WTI. West Texas Intermediate crude oil
FORWARD-LOOKING STATEMENTS AND RISK
This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act)“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act)“Exchange Act”). All statements other than statements of historical facts included or incorporated by reference in this Annual Report on Form 10-K, including, without limitation, statements regarding the Company’sour future financial position, business strategy, budgets, projected revenues, projected costs and plans, and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on the Company’s examination of historical operating trends, production and growth forecasts of Apache Corporation’s Alpine High field development and other data in the Company’s possession or available from third parties. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “plan,” “believe,” “continue,” “seek,” “guidance,” “might,” “outlook,” “possibly,” “potential,” “prospect,” “should,” “would,” or similar terminology, but the absence of these words does not mean that a statement is not forward looking. Although the Company believeswe believe that the expectations reflected in such forward-looking statements are reasonable under the circumstances, itwe can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’sour expectations include, but are not limited to, its assumptions about:
•the ability of Altus and the Contributed Entities (as defined herein) to consummate the BCP Business Combination (as defined herein);
•the timing of the consummation of the BCP Business Combination;
•the ability of Altus to integrate the Contributed Entities’ operations and achieve or realize any anticipated benefits, savings, or growth from the BCP Business Combination;
•the scope, duration, and reoccurrence of any epidemics or pandemics (including, specifically, the coronavirus disease 2019 (COVID-19) pandemic and any related variants) and the actions taken by third parties, including, but not limited to, governmental authorities, customers, contractors, and suppliers, in response to such epidemics or pandemics;
•the mandate, availability, and effectiveness of vaccine programs and other therapeutics related to the treatment of COVID-19;
•the market prices of oil, natural gas, natural gas liquids (NGLs),NGLs, and other products or services;
•pipelinecompetition from other pipelines, terminals or other forms of transportation and competition from other service providers for gathering system capacity and availability;
•production rates, throughput volumes, reserve levels, and development success of dedicated oil and gas fields;
•economicour future financial condition, results of operations, liquidity, compliance with debt covenants and competitive conditions;position;
•our future revenues, cash flows and expenses;
•our access to capital and its anticipated liquidity;
•our future business strategy and other plans and objectives for future operations;
•the availability of capital;
•cash flowamount, nature and the timing of expenditures;
•our future capital expenditures, and other contractual obligations;
•weather conditions;
•inflation rates;including future development costs;
•the availabilityrisks associated with potential acquisitions, divestitures, new joint ventures or other strategic opportunities;
•the recruitment and retention of goodsour officers and services;personnel;
•the likelihood of success of and impact of litigation and other proceedings, including regulatory proceedings;
•our assessment of our counterparty risk and the ability of our counterparties to perform their future obligations;
•the impact of federal, state, and local political, pressure,regulatory and the influence of environmental groups and other stakeholders, on decisions and policies related to the industries in which the Company and its affiliates operate;developments where we conduct our business operations;
•legislative, regulatory,the occurrence of an extreme weather event, terrorist attack or policy changes;other event that materially impacts project construction and our operations, including cyber or other attached on electronic systems;
•terrorism or cyberattacks;our ability to successfully implement and execute our environmental, social and governance goals and initiatives and achieve the anticipated results of such initiatives;
•occurrenceour ability to successfully implement our share repurchase program;
•our ability to integrate operations or realize any anticipated benefits, savings or growth of property acquisitionsthe Transaction (as defined herein). See Note 3 — Business Combination in the Notes to our Consolidated Financial Statements set forth in this Form 10-K; •the scope, duration and reoccurrence of any epidemics or divestitures;pandemics (including, specifically, the coronavirus disease 2019 (“COVID-19”) pandemic or any related variants) and the actions taken by third parties in response to such epidemics or pandemics;
•general economic and political conditions, including the integration of acquisitions;
•a declinearmed conflict in oil, natural gas, and NGL production,Ukraine and the impact of general economic conditions on the demand for oil, natural gas,continued inflation and NGLs;
•the impact of environmental, health and safety, and other governmental regulations and of current or pending legislation, including initiatives addressing the impact of global climate change;
•environmental risks;
•the effects of competition;
•the retention of key members of senior management and key technical personnel;
•increases in interest rates;
•the effectiveness of the Company’s business strategy;
•associated changes in technology;
•market-related risks, such as general credit, liquidity, and interest-rate risks;
•the timing, amount, and terms of the Company’s future issuances of equity and debt securities;monetary policy; and
Other factors or events that could cause the Company’s actual results to differ materially from the Company’s expectations may emerge from time to time, and it is not possible for the Company to predict all such factors or events. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. All forward-looking statements speak only as of the date of this Annual Report on Form 10-K. Except as required by law, the Company disclaims any obligation to update or revise its forward-looking statements, whether based on changes in internal estimates or expectations, new information, future developments, or otherwise.
GLOSSARY OF TERMS
The following are abbreviations and definitions of certain terms used in this Annual Report on Form 10-K and certain terms which are commonly used in the exploration, production, and midstream sectors of the oil and natural gas industry:
•Bbl. One stock tank barrel of 42 United States (U.S.) gallons liquid volume used herein in reference to crude oil, condensate or NGLs.
•Bbl/d. One Bbl per day.
•Bcf. One billion cubic feet of natural gas.
•Bcf/d. One Bcf per day.
•Btu. One British thermal unit, which is the quantity of heat required to raise the temperature of a one-pound mass of water by one degree Fahrenheit.
•Field. An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.
•Formation. A layer of rock which has distinct characteristics that differs from nearby rock.
•MBbl. One thousand barrels of crude oil, condensate or NGLs.
•MBbl/d. One MBbl per day.
•Mcf. One thousand cubic feet of natural gas.
•Mcf/d. One Mcf per day.
•MMBbl. One million barrels of crude oil, condensate or NGLs.
•MMBtu. One million British thermal units.
•MMcf. One million cubic feet of natural gas.
•MMcf/d. One MMcf per day.
•NGLs. Natural gas liquids. Hydrocarbons found in natural gas, which may be extracted as liquefied petroleum gas and natural gasoline.
•Reserves. Estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to market and all permits and financing required to implement the project.
References to “Altus,” “ALTM,” and the “Company” mean Altus Midstream Company and its consolidated subsidiaries, unless otherwise specifically stated.
References to “Apache” mean Apache Corporation and its consolidated subsidiaries. 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.
PART I
ITEMS 1.1 and 2. BUSINESS AND PROPERTIES
Corporate HistoryThe Transaction
On February 22, 2022 (the “Closing Date”), Kinetik Holdings Inc., a Delaware corporation ( the “Company”, formerly known as Altus Midstream Company), consummated the business combination transactions contemplated by the Contribution Agreement, dated as of October 21, 2021 (the “Contribution Agreement”), by and among the Company, Altus Midstream LP (now known as Kinetik Holdings LP), a Delaware limited partnership and subsidiary of Altus Midstream Company was originally incorporated on December 12, 2016 in(the “Partnership”), New BCP Raptor Holdco, LLC, a Delaware under the name Kayne Anderson Acquisition Corp. (KAAC) for the purpose of effectinglimited liability company (“Contributor”), and BCP Raptor Holdco, LP, 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, after which its securities began trading on the Nasdaq Capital Market (Nasdaq).
On August 3, 2018, Altus Midstream LP was formed in Delaware as a limited partnership and wholly-owned subsidiary(“BCP”). The transactions contemplated by the Contribution Agreement are referred to herein as the “Transaction.”
Pursuant to the Contribution Agreement, in connection with the closing of the Company. On August 8, 2018, KAACTransaction (the “Closing”), (i) Contributor contributed all of the equity interests of BCP and Altus Midstream LP entered into a contribution agreement (the Altus Contribution Agreement) with certain wholly-owned subsidiaries of Apache Corporation (Apache), including four Delaware limited partnerships (collectively, Altus Midstream Operating) and their general partner (Altus Midstream SubsidiaryBCP Raptor Holdco GP, LLC, a Delaware limited liability company and the general partner of BCP (“BCP GP” and, together with Altus Midstream Operating,BCP, 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“Contributed Entities”), to the terms ofPartnership; and (ii) in exchange for such contribution, the Altus Contribution Agreement, KAAC acquired from Apache the entire equity interests of the Altus Midstream Entities and optionsPartnership transferred 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 Altus Combination. In exchange, the consideration provided to Apache included economic voting and non-economic voting shares in KAAC andContributor 50,000,000 common partnership units representing limited partner interests in Altus Midstream LP (Common Units).
Following the Closing DatePartnership (“Common Units”) and in connection with the closing50,000,000 shares of the Altus Combination:
•KAAC changed its name to Altus Midstream Company;
•Altus Midstream 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;
•Altus Midstream Company operates its business through Altus Midstream LP and its subsidiaries, which include Altus Midstream Operating (collectively, Altus Midstream);
•Altus Midstream Company held approximately 23.1 percent of the outstanding Common Units and a controlling interest in Altus Midstream LP and Apache held the remaining 76.9 percent; and
•Altus Midstream Company’s Class A common stock, $0.0001 par value (Class A Common Stock), continued trading on the Nasdaq under the new symbol “ALTM.”
For further information on Altus’ equity structure, refer to Note 10—Equity and Warrants set forth in Part IV, Item 15 of this Annual Report on Form 10-K.Business Combination with BCP
On October 21, 2021, the Company announced that it will combine with privately-owned BCP Raptor Holdco LP (BCP and, together with BCP Raptor Holdco GP, LLC, the Contributed Entities) in an all-stock transaction, pursuant to the Contribution Agreement dated as of that same date and entered into by and among Altus, Altus Midstream LP (the Partnership), New BCP Raptor Holdco, LLC (the Contributor), and BCP (the BCP Contribution Agreement). The combination creates an integrated midstream company in the Texas Delaware Basin offering services for residue gas, NGLs, crude oil and water. There are numerous expected commercial and financial synergies generated from the complementary midstream systems and enhanced scale of the business. The combined business will have a more diversified asset profile and customer base, with a lower risk profile than either entity on a stand-alone basis. BCP is the parent company of EagleClaw Midstream, which includes EagleClaw Midstream Ventures, the Caprock Midstream and Pinnacle Midstream businesses, and a 26.7 percent interest in the Permian Highway Pipeline. Pursuant to the BCP Contribution Agreement, Contributor will contribute all of the equity interests of the Contributed Entities (the Contributed Interests) to the Partnership, with each Contributed Entity becoming a wholly-owned subsidiary of the Partnership (the BCP Business Combination).
As consideration for the contribution of the Contributed Interests, the Company will issue 50 million shares of Class C Common Stock, (and Altus Midstream LP will issue a corresponding numberpar value $0.0001 per share (“Class C Common Stock”).
The Company’s public stockholders immediately prior to the Closing continued to hold their shares of the Company’s Class A Common Units) to BCP’s unitholders, which are principally funds affiliatedStock, par value $0.0001 per share (“Class A Common Stock,” and together with Blackstone and I Squared Capital. The transaction is expected to close during the first quarter of 2022 following completion of customary closing conditions.
Company’s Class C Common Stock, “Common Stock”). As a result of the transaction,Transaction, immediately following the Company’s current stockholders will continue to hold their sharesClosing (i) members of Class A Common Stock and Class C Common Stock (collectively, Altus Common Stock), and Contributor or its designees will collectively ownheld approximately 75% of the issued and outstanding shares of Altus Common Stock.Stock, (ii) Apache Midstream LLC, a wholly-owned subsidiary of APA Corporation, which currently owns approximately 79% of the issued and outstanding shares of Altus Common Stock, will ownDelaware limited liability company (“Apache Midstream”), held approximately 20% of the issued and outstanding shares of Altus Common Stock, and (iii) the Company’s remaining current stockholders will ownheld approximately 5% of the issued and outstanding shares of Altus Common Stock.
The Company completed a stock split in the form of a stock dividend on June 8, 2022 (the “Stock Split”). All corresponding per-share and share amounts for periods prior to June 8, 2022 have been retrospectively restated elsewhere in this Form 10-K to reflect the Stock Split. However, the number of Common Units and shares of Class C Common Stock described in this Form 10-K in relation to the Transaction are presented at pre-Stock-Split amounts to be consistent with our previous public filings and the terms of the Contribution Agreement.
In connection with the closing of the Transactions, the Company changed its name from “Altus Midstream Company” (“ALTM”) to “Kinetik Holdings Inc.” Unless the context otherwise requires, “ALTM” refers to the registrant prior to the Closing and “we,” “us,” “our,” and the “Company” refer to Kinetik Holdings Inc., the registrant and its subsidiaries following the Closing.
Prior to the Closing, the Company’s financial statements that were filed with the SEC were derived from ALTM’s accounting records. As the Transaction was determined to be a reverse merger, BCP was considered the accounting acquirer and ALTM was the legal acquirer. The accompanying Consolidated Financial Statements herein include (1) BCP’s net assets carried at historical value as of December 31, 2022 , (2) BCP’s historical results of operations prior to the Transaction, (3) the ALTM’s net assets carried at fair value as of the Closing Date and (4) the combined results of operations with the Company’s results presented within the Consolidated Financial Statements from February 22, 2022 going forward. Refer to Note 2—Business Combinationto our Consolidated Financial Statements in this Form 10-K for additional discussion. Overview
Altus Midstream Company has no independent operations or material assets outside its partnership interests in Altus Midstream, whichWe are reported on a consolidated basis. The Company’s segment analysis and presentation is the same as that of Altus Midstream. Altus Midstream owns gas gathering, processing, and transmission assetsan integrated midstream energy company in the Permian Basin providing comprehensive gathering, transportation, compression, processing and treating services. Our core capabilities include a variety of service offerings including natural gas gathering, transportation, compression, treating and processing; NGLs stabilization and transportation; produced water gathering and disposal; and crude oil gathering, stabilization, storage and transportation. We have approximately 2.0 billion cubic feet per day (“Bcf/d”) cryogenic natural gas processing capacity strategically located near the Waha Hub in West Texas, anchoredTexas. As measured by midstream service contractsprocessing capacity, we are the second largest natural gas processor in the Delaware Basin and fourth largest across the entire Permian Basin. In addition, we have interests in four long-term contracted pipelines transporting natural gas, NGLs, and crude oil from the Permian Basin to service Apache’s production from Alpine High. Additionally, Altusthe Gulf Coast.
Organizational Structure
The Company operates through its wholly own subsidiary Kinetik Holdings LP and its consolidated operating subsidiaries. The Company also owns equity interests in four intrastate Permian Basin pipelines (the Equity Method Interest Pipelines) that have access to various points along the Texas Gulf Coast. The Company’s operations consistare strategically located in the heart of one reportable segment.
Throughthe Delaware Basin in the Permian and the Company’s website, www.altusmidstream.com, you can access, free of charge, electronic copies of the charters of the committees of Altus’ board of directors, other documents related tooperational headquarters is located at 303 Veterans Airpark Lane in Midland, Texas 79705. The Company’s corporate governance (including Altus’ Code of Business Conduct), and documents the Company files with the Securities and Exchange Commission (SEC), including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K,office is located at 2700 Post Oak Boulevard, Suite 300, Houston, Texas 77056. The following chart summarizes our organizational structure as well as any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Access to these electronic filings is available as soon as reasonably practicable after Altus electronically files such material with, or furnishes it to, the SEC. You may also request printed copies of the Company’s certificate of incorporation, bylaws, committee charters, or other governance documents free of charge by writing to Altus’ corporate secretary at the address on the cover of this Annual Report on Form 10-K. From time to time, the Company also posts announcements, updates, and investor information on its website in addition to copies of all recent press releases. Information on Altus’ website or any other website is not incorporated by reference into, and does not constitute a part of, this Annual Report on Form 10-K.
Assets of Altus Midstream
As of December 31, 2021, Altus Midstream’s assets included2022. For simplicity, certain entities and ownership interests have not been depicted.
Our Operating Segments and Properties
We have two reportable segments which are strategic business units with differing products and services. The activities of each of our reportable segments from which the Company earns revenues, records equity income or losses and incurs expenses are described below:
Midstream Logistics
The Midstream Logistics segment provides three service offerings: 1) gas gathering and processing, 2) crude oil gathering, stabilization and storage services and 3) water gathering and disposal.
Gas Gathering and Processing
The Midstream Logistics segment provides gas gathering and processing services with approximately 1821,500 miles of in-service naturallow and high-pressure steel pipeline located throughout the Southern Delaware Basin. Gas processing assets are centralized at five processing complexes with total cryogenic processing capacity of approximately 2.0 Bcf/d: Diamond Cryogenic complex (600 MMcf/d), the Pecos Bend complex (540 MMcf/d), the East Toyah complex (460 MMcf/d), the Pecos complex (260 MMcf/d), and the Sierra Grande complex (60 MMcf/d). The Company expects to expand the Diamond Cryogenic complex to 720 MMcf/d by the end of the second quarter of 2023. Current residue gas outlets are the El Paso Natural Gas Pipeline, Energy Transfer Comanche Trail Pipeline, ONEOK Roadrunner Pipeline, Whitewater Aqua Blanca Pipeline, Permian Highway Pipeline LLC and the Company’s wholly owned and operated Delaware Link Pipeline expected to be in service in the fourth quarter of 2023. NGLs outlets are Energy Transfer’s Lone Star NGL Pipeline, Targa’s Grand Prix NGL Pipeline and Enterprise’s Shin Oak NGL Pipeline.
Crude Oil Gathering, Stabilization, and Storage Services
The Midstream Logistics segment provides crude oil gathering, pipelines,stabilization and storage services throughout the Texas Delaware Basin. Crude gathering assets are centralized at the Caprock Stampede Terminal and the Pinnacle Sierra Grande Terminal. The system includes approximately 46220 miles of residue gas pipelines with four marketgathering pipeline and 90,000 barrels of crude storage. The crude facilities have connections for takeaway transportation into Plains’ 285 Central Station and State Line and Oryx’s Orla & Central Mentone facilities.
Water Gathering and Disposal
In addition, the Midstream Logistics segment provides water gathering and disposal services through assets located in northern Reeves County, Texas. The system includes approximately 80 miles of gathering pipeline and approximately 38 miles490,000 barrels per day of NGL pipelines. Three cryogenic processing trains, each with nameplate capacity of 200 MMcf/d, were placed into service during 2019. Other assets include an NGL truck loading terminal with six Lease Automatic Custody Transfer units and eight NGL bullet tanks with 90,000 gallon capacity per tank. The Company’s existing gathering, processing, and transmission infrastructure is expected to provide capacity levels capable of fulfilling its midstream contracts to service Apache’s production from Alpine High and potential third-party customers as market activity in the area continues to develop.permitted disposal capacity.
Equity Method Interest PipelinesPipeline Transportation
As of December 31, 2021,2022, the Company owned equity interests in four Equity Method Interest Pipelines.equity method interest (“EMI”) pipelines. Each Equity Method Interest PipelineEMI pipeline is operated by a third-party limited liability entity, as further described below. For a more in-depth discussion of the estimated capital resources, liquidity and timing associated with each Equity Method Interest Pipeline,EMI pipeline, please see Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part IV, Item 15, Note 9—7—Equity Method InterestsInvestments, set forth in this Annual Report on Form 10-K. During 2022, the Company acquired full ownership and operatorship of approximately 30 miles of 20-inch NGL pipeline connected to the Diamond Cryogenic complex called the Brandywine NGL Pipeline (“Brandywine”) and the Company’s Delaware Link Pipeline has started construction. Gulf Coast ExpressPermian Highway Pipeline
In December 2018, Altus Midstream closed on the exercise of its
The Company owns an approximately 53.3% equity interest in Permian Highway Pipeline Option withLLC (“PHP”), which is also owned and operated by Kinder Morgan Texas Pipeline, LLC (Kinder Morgan), thereby acquiring a 15 percent equity interest in the Gulf Coast Express Pipeline Project (GCX)(“Kinder Morgan”). Altus Midstream acquired an additional 1 percent equity interest in May 2019, for a total 16 percent equity interest in GCX. GCX is a long-haul natural gas pipeline with capacity of approximately 2.0 Bcf/d andPHP transports natural gas from the Waha area in northern Pecos County, Texas to the Katy, Texas area with connections to Texas Gulf Coast and Mexico markets. PHP was placed in service in January 2021, with the total capacity of 2.1 Bcf/d fully subscribed under long-term contracts. In June 2022, PHP announced a final investment decision to proceed with its expansion project to increase total capacity to 2.65 Bcf/d fully subscribed under 10 year take or pay contracts. The expansion project will increase PHP’s capacity by nearly 550 MMcf/d with a target in-service date in November 2023. Approximately 67% of the funding for the expansion project will be borne by the Company and the remainder by Kinder Morgan. As a result, following the in-service date of the expansion, Kinetik’s ownership interest in PHP will increase to approximately 55.5%.
Gulf Coast Express Pipeline
The Company owns a 16% equity interest in the Gulf Coast Express Pipeline (“GCX”), which is also owned and operated by Kinder Morgan. GCX transports natural gas from the Permian Basin in West Texas to Agua Dulce Hub near the Texas Gulf Coast. GCX was placed in service during 2019, with the total capacity of 2.0 Bcf/d fully subscribed under long-term contracts.
Breviloba, LLC
The Company owns a 33% equity interest in the Shin Oak NGL Pipeline (“Shin Oak”), which is owned by Breviloba, LLC, and operated by Kinder Morgan andEnterprise Products Operating LLC. Shin Oak transports NGLs from the Permian Basin to Mont Belvieu, Texas. Shin Oak was placed intoin service in September 2019.during 2019, with total capacity of up to 550 MBbl/d.
EPIC Crude Oil Pipeline
In March 2019, Altus Midstream closed on the exercise of its Pipeline Option with EPIC Pipeline LP, thereby acquiringThe Company owns a 15 percent15% equity interest in the EPIC Crude oil pipeline (“EPIC”), which is operated by EPIC Consolidated Operations, LLC. EPIC transports crude oil pipeline (EPIC). The long-haul crude oil pipeline extends from the Orla, areaTexas in northernNorthern Reeves County Texas to the Port of Corpus Christi, Texas, and has Permian BasinTexas. EPIC was placed in service early 2020, with initial throughput capacity of approximately 600 MBbl/d. The project includes terminals in Orla, Pecos, Crane, Robstown, Hobson, and Gardendale, Texas with Port of Corpus Christi connectivity and export access. It services Delaware Basin, Midland Basin, and Eagle Ford Shale production. EPIC is operated by EPIC Consolidated Operations, LLC and was placed into service in early 2020.
Permian Highway Pipeline
In May 2019, Altus Midstream closed on the exercise of its Pipeline Option with Kinder Morgan, thereby acquiring an approximate 26.7 percent equity interest in the Permian Highway Pipeline (PHP). The long-haul natural gas pipeline has capacity of approximately 2.1 Bcf/d and transports natural gas from the Waha area in northern Pecos County, Texas to the Katy, Texas area with connections to U.S. Gulf Coast and Mexico markets. PHP is operated by Kinder Morgan and was placed into service in January 2021.
Shin Oak NGL Pipeline
In July 2019, Altus Midstream closed on the exercise of its Pipeline Option with Enterprise Products Operating LLC (Enterprise Products), thereby acquiring a 33 percent equity interest in Breviloba LLC, which owns the Shin Oak NGL Pipeline (Shin Oak). The long-haul NGL pipeline has capacity of up to 550 MBbl/d and transports NGL production from the Orla area in northern Reeves County, Texas, through the Waha area in northern Pecos County, Texas, and on to Mont Belvieu, Texas. Shin Oak is operated by Enterprise Products and was placed into service during 2019.
Salt Creek NGL Pipeline
Altus Midstream’s option to acquire a 50 percent equity interest in the Salt Creek NGL Pipeline, an intra-basin NGL pipeline, was not exercised and expired on March 2, 2020.
Altus’ Relationship with Apache
About Apache
Apache is an independent energy company that explores for, develops, and produces natural gas, crude oil, and NGLs. As a result of the Altus Combination, Apache is the largest single owner of the Company’s voting common stock and also has an approximate 76.9 percent noncontrolling interest in Altus Midstream.
Additionally, as a result of the Altus Combination, Apache received certain equity instruments, which may impact its ownership and the ownership interest of Altus Midstream LP’s limited partners. For further information on the consideration received by Apache, please refer to Note 10—Equity and Warrants, within Part IV, Item 15 of this Annual Report on Form 10-K.Apache’s Alpine High Resource Play
Altus’ midstream infrastructure and facilities were initially constructed to service Apache’s production from Alpine High. Alpine High lies in the southern portion of the Delaware Basin, primarily in Reeves County, Texas. The play contains multiple geologic formations and target zones spanning the hydrocarbon phase window from dry gas to wet gas to oil. During 2018 and 2019, Apache focused on geological testing and transitioned to initial tests of full-field development of the Alpine High play, drilling 100 wells and 82 wells, respectively. Given the prevailing gas and NGL price environment and disappointing performance of multi-well development pads in the second half of 2019, Apache materially reduced planned investment and future drilling plans at Alpine High.
Agreements with ApacheThe following table summarizes our ownership and capacity of properties in our Pipeline Transportation segment as of December 31, 2022:
The Company and/or its consolidated subsidiaries have entered into certain agreements with Apache. Those material agreements are described | | | | | | | | | | | |
| Asset | Ownership Interest | Approximate Pipeline System Miles | Capacity |
| Pipeline Transportation | | | |
| | | |
PHP(1) | 53.3% | 430 | 2.1 Bcf/d |
| GCX | 16% | 450 | 2.0 Bcf/d |
| Shin Oak | 33% | 658 | 550 MBbl/d |
| EPIC | 15% | 700 | 650 MBbl/d |
| Brandywine | 100% | 30 | 225 MBbl/d |
Delaware Link(2) | 100% | 40 | 1.0 Bcf/d |
| | |
(1)Upon completion of PHP expansion project, the pipeline capacity will increase to 2.65 Bcf/d and the Company’s equity interest in further detail below.PHP will increase to 55.5%.
Midstream Service Agreements
Apache has been Altus Midstream’s most significant customer since operations commenced(2)Delaware Link Pipeline is under construction and the project is expected to be complete in the secondfourth quarter of 2017. Altus Midstream Operating has contracted to provide gas gathering, compression, processing, transmission, and NGL transmission services pursuant to acreage dedications provided by Apache, comprising the entire Alpine High acreage discussed above. The Company is pursuing similar long-term commercial service contracts with third parties that could be accommodated by existing capacity.
In addition, Apache agreed that any gas produced from Apache-operated wells located within the dedication area that is owned by other working interest owners and royalty owners is dedicated to Altus Midstream, so long as Apache has the right to market such gas. The agreements, with the exception of the Gas Processing Agreement, are effective for primary terms beginning on July 1, 2018 and ending March 31, 2032. The primary term will automatically extend for two five-year periods unless Apache provides at least nine months’ prior written notice of its election not to extend the primary term. The covenants under the agreements are intended to run with the land and will be binding on any transferee of the interests within the dedicated area. The Company entered into a new Gas Processing Agreement with Apache with an effective date of September 1, 2021, which superseded the prior agreement. The contractual periods documented above, other than the effective date of the new Gas Processing Agreement, remain unchanged.
During 2020, Altus Midstream entered into separate agreements to provide compressor maintenance, operations, and related services to Apache for a fixed monthly fee per compressor serviced. Please refer to Note 3—Revenue Recognition set forth in Part IV, Item 15 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.Operational Services Agreement
Prior to the Altus Combination, Apache provided operations, maintenance, and management services to Altus Midstream Operating, pursuant to an agreement hereby referred to as the “Services Agreement.” In accordance with the terms of the Services Agreement, Apache received a fixed fee per month for its overhead and indirect costs incurred on behalf of Altus Midstream Operating. Altus Midstream Operating had no banking or cash management activities prior to the Altus Combination, and therefore, all costs incurred by Altus Midstream Operating were paid by Apache. In connection with the closing of the Altus Combination, the Services Agreement was superseded by the COMA (as defined below).
Construction, Operations, and Maintenance Agreement
In connection with the closing of the Altus Combination, the Company entered into a construction, operations, and maintenance agreement with Apache (the COMA), pursuant to which Apache provides certain services related to the design, development, construction, operation, management, and maintenance of the Company’s assets, on the Company’s behalf.
Under the COMA, the Company paid or will pay fees to Apache of (i) $3.0 million from November 9, 2018 through December 31, 2019, (ii) $5.0 million for the period of January 1, 2020 through December 31, 2020, (iii) $7.0 million for the period of January 1, 2021 through December 31, 2021, and (iv) $9.0 million annually thereafter, adjusted based on actual internal overhead and general and administrative costs incurred, until terminated. 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.
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 respective 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. The Company anticipates that the COMA will be terminated upon closing of the BCP Business Combination.
Purchase Rights and Restrictive Covenants Agreement
At the closing of the Altus Combination, Altus and Apache entered into a purchase rights and restrictive covenants agreement (the Purchase Rights and Restrictive Covenants Agreement). Under the Purchase Rights and Restrictive Covenants Agreement, until the later of the five-year anniversary of the Closing Date or the date on which Apache and its affiliates cease to own a majority of the Company’s voting common stock, Apache is obligated to provide the Company with (i) the first right
to pursue any opportunity (including any expansion opportunities) of Apache to acquire or invest, directly or indirectly (including equity interests), in any midstream assets or participate in any midstream opportunities located, in whole or part, within an area covering approximately 1.7 million acres in Reeves, Pecos, Brewster, Culberson, and Jeff Davis Counties in Texas, and (ii) a right of first offer on certain retained midstream assets of Apache.
Amended and Restated Agreement of Limited Partnership of Altus Midstream
At the closing of the Altus Combination, the Company, Altus Midstream GP, and Apache entered into an amended and restated agreement of limited partnership of Altus Midstream LP, which was further amended in June 2019 pursuant to a second amended and restated agreement of limited partnership of Altus Midstream LP (the Amended LPA). Altus Midstream GP is the sole general partner of Altus Midstream LP and is ultimately responsible for all operational and administrative decisions of Altus Midstream including the day-to-day management of its business. Altus Midstream GP cannot be removed as the general partner of Altus Midstream LP except by its election and, subject to limited exceptions, may not transfer or assign its general partner interest. The Amended LPA contains certain provisions intended to ensure that a one-to-one ratio is maintained, at all times and subject only to limited exceptions, between (i) the number of outstanding shares of Class A Common Stock, and the number of Common Units held by Altus and (ii) the number of outstanding shares of Class C common stock $0.0001 par value (Class C Common Stock), and the number of Common Units held by any holder other than Altus.
On June 12, 2019, Altus Midstream LP issued and sold Series A Cumulative Redeemable Preferred Units (the Preferred Units) in a private offering. Concurrently, the Preferred Units were established as a new class of partnership unit representing limited partner interests in Altus Midstream LP pursuant to the terms of the Amended LPA, and the purchasers were admitted as limited partners of Altus Midstream LP. For further details on the terms of the Preferred Units and the rights of the holders thereof, refer to Note 11—Series A Cumulative Redeemable Preferred Units, within Part IV, Item 15 of this Annual Report on Form 10-K.Lease Agreements
Concurrent with the closing of the Altus Combination, Altus Midstream entered into an operating lease agreement with Apache, relating to the use of certain office buildings, warehouse, and storage facilities located in Reeves County, Texas (the Lease Agreement). Under the terms of the Lease Agreement, Altus Midstream pays to Apache on a monthly basis the sum of (i) a base rental charge of $44,500 and (ii) an amount based on Apache’s estimate of the annual costs it shall incur in connection with the ownership, operation, repair, and/or maintenance of the facilities. Unpaid amounts accrue interest until settled. The initial term of the Lease Agreement is four years and may be extended by Altus Midstream for three additional, consecutive periods of twenty-four months. To accommodate Altus Midstream’s desire to vacate the leased premises, the Lease Agreement was amended in July 2020 to provide for its termination with respect to all or any portion of the leased premises which Apache may sell, with a pro rata rent reduction if Apache sells less than all of the leased premises.
In 2020 and 2021, Altus Midstream entered into various operating lease agreements with Apache related to the use of certain of Altus Midstream’s compressors. Under the terms of the agreement, Apache pays Altus Midstream fixed monthly lease payments, which are recorded as “Other” in the Company’s consolidated statement of operations. The lease agreements have an initial term of thirty months and automatically extend on a month-to-month basis unless either party cancels the agreement. The Company recorded income related to these agreements of $1.6 million and $0.4 million for the years ended December 31, 2021 and 2020, respectively. Altus also earns a monthly fee to operate and maintain the compressors under lease. Refer to Note 3—Revenue Recognition for further discussion.2023.Title to Properties and Permits
The Company’s interest inCertain of the pipelines connecting our facilities are constructed on rights-of-way granted by the apparent record owners of the property onand in some instances these rights-of-way are revocable at the election of the grantor. In several instances, lands over which its assets are located derives from leases, easements, rights-of-way permits, or licenses from landowners or governmental authorities, permitting the use of such land for its operations. The Company has leased or acquired easements, rights-of-way, permits, or licenses in these lands without any material challenge knownhave been obtained could be subject to prior liens that have not been subordinated to the Company relatingright-of-way grants. We have obtained permits from public authorities to cross over or under, or to lay pipelines in or along, watercourses, county roads, municipal streets and state highways and, in some instances, these permits are revocable at the election of the grantor. These permits may also be subject to renewal from time to time and we will generally seek renewal or arrange alternative means of transport through additional investment or commercial agreements. We have also obtained permits from railroad companies to cross over or under lands or rights-of-way, many of which are also revocable at the grantor’s election.
We believe we have satisfactory permits and/or title to the land upon which its assets are located, and Altus believesall our material rights-of-way. We also believe that it has satisfactory interests in such lands. In certain situations, the Company elected to allow Apache to acquire easements, rights-of-way, permits, and licenses from landowners to expedite the build-out of midstream infrastructure. Other than the aforementioned Apache real property, the Company has no knowledge of any challenge to the underlying fee title of any material lease, easement, right-of-way, permit, or license held by it or to its title to any material lease, easement, right-of-way, permit, or lease, and the Company believes that it haswe have satisfactory title to all of itsour material leases, easements, rights-of-way, permits, and licenses.
Seasonality
While the results of gathering, processing, and transmission are not materially affected by seasonality, from time to time the Company’s operations and construction of assets can be impacted by inclement weather.assets.
Competition
The business of providing gathering, compression, processing and transmission services for natural gas and NGLs is highly competitive. AltusThe Company faces strong competition in obtaining natural gas and NGL volumes, including from major integrated and independent exploration and production companies, interstate and intrastate pipelines, and other companies that gather, compress, treat, process, transmit or market natural gas and NGLs. Competition for supplies is primarily based on geographic location of facilities in relation to production or markets, the reputation, efficiency and reliability of the midstream company, and the pricing arrangements offered by the midstream company. For areas where acreage is not dedicated to Altus,the Company, the Company will compete with similar enterprises in providing additional gathering, compression, processing and transmission services in the same area of operation.
Human Capital
We recognize that people are our greatest asset and their success is our success. We support our employees so they can deliver on our commitment to the highest standards of safety, performance, integrity and customer service. We strive to retain top talent by fostering a culture that promotes health and safety, employee inclusion and diversity and employee engagement and development. As of December 31, 2022, we employed approximately 300 people that primarily support our operations. None of these employees are covered by collective bargaining agreements, and we consider our employee relations to be good.
Health and Safety. We believe that a strong health and safety program leads to less workplace accidents and injuries, enhances productivity and morale and avoids disruption to the business. The bulk of our employees are field-based workers who face potential safety risks associated with driving long distances and working with heavy equipment and flammable and pressurized hydrocarbons. The Company’s Environment, Health and Safety (“EHS”) Management System lays out our requirements, processes, and guidelines for process safety and occupational health and safety. We also have computer-based health and safety training, change management and reporting tools to make it easier to identify hazards and manage EHS issues across our business. We have a standardized, formal joint hazard analysis routine for employees. We continue to communicate regularly with our employees on health and safety issues and to provide training on various health and safety issues. We have set our safety targets for 2023 to have Total Recordable Incident Rate of less than 1.75 and total Motor Vehicle Incident Rate of less than 1.50.
Employee Inclusion and Diversity. In 2021, Kinetik introduced a Diversity, Equity and Inclusion (“DEI”) Policy as part of our ongoing commitment to build an inclusive workplace, and the majority of our employees participated in DEI training, which covered topics such as hiring and unconscious bias. We also created a program to help employees learn from one another and from community leaders of various cultural groups. To further improve workplace gender balance, the Company’s sustainability linked debt includes a target to increase the percentage of women on our senior leadership team from the current 7% to 20% by 2026. This is above our industry peer average of 17% women in senior leadership positions.
Employee Engagement and Development. We use a blend of formal and informal employee recognition strategies, including both monetary and non-monetary incentives. We recognize employee performance, service milestones and special occasions. We reward employees for operations-based milestones based on safety and regulatory compliance achievements and give awards for exceptional performance in safety, landowner engagement, innovative thinking, teamwork and customer service. We continuously enhance our training programs and provide regular performance and career development reviews to our employees to help them achieve their career goals.
Regulation of Operations
Natural Gas Pipeline Regulation
Under the Natural Gas Act (NGA)(“NGA”), the Federal Energy Regulatory Commission (FERC)(“FERC”) regulates the transportation of natural gas in interstate commerce. Intrastate transportation of natural gas is largely regulated by the state in which such transportation takes place. To the extent that the Company’s intrastate natural gas transportation system transportssystems transport natural gas in interstate commerce, the rates, terms and conditions of such services are subject to FERC jurisdiction under Section 311 of the Natural Gas Policy Act of 1978 (NGPA)(“NGPA”). The NGPA regulates, among other things, the provision of transportation services by an intrastate natural gas pipeline on behalf of a local distribution company or an interstate natural gas pipeline. Under Section 311 of the NGPA, rates charged for interstate transportation must be fair and equitable, and amounts collected in excess of fair and equitable rates are subject to refund with interest. The terms and conditions of service set forth in the Company’s statement of operating conditions for transportation service under Section 311 of the NGPA are also subject to FERC review and approval. Failure to observe the service limitations applicable to transportation services under Section 311, failure to comply with the rates approved by the FERC for Section 311 service, or failure to comply with the terms and conditions of service established in the pipeline’s FERC-approved statement of operating conditions could result in a change of jurisdictional status and/or the imposition of administrative, civil and criminal remedies.
The Company’s intrastate natural gas operations are also subject to regulation by various agencies in Texas, principally the Railroad Commission of Texas (TRRC)(“TRRC”). AltusThe Company’s intrastate pipeline operations are also subject to the Texas Utilities Code and the Texas Natural Resources Code, as implemented by the TRRC. Generally, the TRRC is vested with authority to ensure that rates, operations and services of gas utilities, including intrastate pipelines, are just and reasonable and not discriminatory. The rates the Company charges for transportation services are deemed just and reasonable under Texas law unless challenged in a customer or TRRC complaint. Failure to comply with the Texas Utilities Code or the Texas Natural Resources Code can result in the imposition of administrative, civil and criminal remedies.
Natural Gas Gathering Regulation
Section 1(b) of the NGA exempts natural gas gathering facilities from the jurisdiction of the FERC. The Company believes that its natural gas gathering pipelines meet the traditional tests the FERC has used to establish whether a pipeline is a gathering pipeline that is not subject to FERC jurisdiction. However, the distinction between FERC-regulated transmission services and federally unregulated gathering services has been the subject of substantial litigation and varying interpretations. In addition, the FERC’s determinations as to whether a pipeline is a gathering pipeline are made on a case-by-case basis, so the classification and regulation of the Company’s natural gas pipeline system could be subject to change based on future determinations by the FERC and the courts. State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements and complaint-based rate regulation.
The Company’s natural gas pipeline system isgathering facilities are subject to regulation by the TRRC under the Texas Utilities Code and the Texas Natural Resources Code in the same manner as described above for intrastate pipeline transportation facilities. The Company’s natural gas gathering pipeline system is also subject to ratable take and common purchaser statutes in Texas. The ratable take statute generally requires gatherers to take, without undue discrimination, natural gas production that may be tendered to the gatherer for handling. Similarly, the common purchaser statute generally requires gatherers to purchase without undue discrimination as to source of supply or producer. These statutes are designed to prohibit discrimination in favor of one producer over another producer or one source of supply over another source of supply.
Crude Oil and Natural Gas Liquids Pipeline Regulation
Transmission services rendered by Altusthe Company are subject to the regulation of the TRRC. The TRRC has the authority to regulate rates, though it generally has not investigated the rates or practices of intrastate pipelines in the absence of shipper complaints.
Employee Safety
Altus complies with the requirements of the Occupational Safety and Health Administration (OSHA) and comparable state laws that regulate the protection of the health and safety of workers. In addition, with respect to OSHA hazard communication standards, the Company believes that its operations are in substantial compliance with OSHA requirements, including general industry standards, hazard communication, record keeping requirements, and monitoring of occupational exposure to regulated substances.
Pipeline Safety Regulations
Some of Altus’Company’s pipelines are subject to regulation by the U.S. Department of Transportation’s (DOT)(“DOT”) Pipeline and Hazardous Materials Safety Administration (PHMSA)(“PHMSA”) pursuant to the Natural Gas Pipeline Safety Act of 1968 (NGPSA)(“NGPSA”), with respect to natural gas, and the Hazardous Liquids Pipeline Safety Act of 1979 (HLPSA)(“HLPSA”), with respect to NGLs. The NGPSA and HLPSA regulate safety requirements in the design, construction, operation, and maintenance of natural gas, crude oil, and NGL pipeline facilities, while the Pipeline Safety Improvement Act of 2002 (PSIA)(“PSIA”) establishes mandatory inspections for all U.S. crude oil, NGL, and natural gas transmission pipelines in high consequence areas (HCAs)(“HCAs”), the violation of which can result in administrative, civil and criminal penalties, including civil fines, injunctions, or both.
PHMSA regularly revises its pipeline safety regulations. Recently, the TRRC adopted rules that require operators of natural gas and hazardous liquid gathering lines in rural areas to report accidents, conduct investigations, and perform necessary corrective action.
States are largely preempted by federal law from regulating pipeline safety for interstate lines but most are certified by the DOT to assume responsibility for enforcing federal intrastate pipeline regulations and inspection of intrastate pipelines. States may adopt stricter standards for intrastate pipelines than those imposed by the federal government for interstate lines; however, states vary considerably in their authority and capacity to address pipeline safety. State standards may include requirements for facility design and management in addition to requirements for pipelines. The Company believesFor example, recently, the TRRC adopted rules that its pipeline operations arerequire operators of natural gas and hazardous liquid gathering lines in substantial compliance with applicable PHMSArural areas to report accidents, conduct investigations and state requirements; however, dueperform necessary corrective action. Due to the possibility of new or amended laws and regulations or reinterpretation of existing laws and regulations, there can be no assurance that future compliance with PHMSA or state requirements will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
Environmental Mattersand Occupational Health and Safety
ManyThe Company complies with the requirements of the Occupational Safety and Health Administration (“OSHA”) and comparable state laws that regulate the protection of the health and safety of workers. In addition, with respect to OSHA hazard communication standards, the Company believes that its operations are in substantial compliance with OSHA requirements, including general industry standards, hazard communication, record keeping requirements and monitoring of occupational exposure to regulated substances.
Our business operations are also subject to numerous environmental and occupational health and safety laws and regulations imposed at the federal, regional, state and local levels. The activities the Company conducts in connection with the gathering, compression, dehydration, treatment, processing and transportation of Altus’ pipelines,natural gas and gathering, systems, processing plants,stabilization, transportation and other facilitiesstorage of crude oil are subject to, significant federal,or may become subject to, stringent environmental regulation. The Company has implemented a number of programs and policies designed to monitor and pursue continued operation of our activities in a manner consistent with environmental and occupational health and safety laws and regulations. To that end, the Company has incurred and will continue to incur operating and capital expenditures to comply with these laws and regulations. Some of these environmental compliance costs may be material and have an adverse effect on our business, financial condition and results of operations.
Certain existing environmental and occupational health and safety laws and regulations include the following U.S. legal standards, which may be amended from time to time:
•the Clean Air Act (“CAA”), which restricts the emission of air pollutants from many sources and imposes various pre-construction, operational, monitoring and reporting requirements, and which the EPA has relied upon as authority for adopting climate change regulatory initiatives relating to GHG emissions;
•the Clean Water Act, which regulates discharges of pollutants to state and federal waters as well as establishing the extent to which waterways are subject to federal jurisdiction and rulemaking as protected waters of the United States;
•the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), which imposes liability on generators, transporters and arrangers of hazardous substances at sites where releases, or threatened releases, of such hazardous substances has occurred;
•the Resource Conservation and Recovery Act (“RCRA”), which governs the generation, treatment, storage, transport and disposal of solid wastes, including hazardous wastes;
•the Oil Pollution Act, which imposes liability for removal costs and damages arising from an oil spill in waters of the United States on owners and operators of onshore facilities, pipelines and other facilities;
•the National Environmental Policy Act, which requires federal agencies to evaluate major agency actions that have the potential to significantly impact the environment, to include the preparation of an Environmental Assessment to assess potential direct, indirect, and cumulative impacts of the proposed project, and, if necessary, prepare a more detailed Environmental Impact Statement that may be made available to the public for comment;
•the Safe Drinking Water Act, which ensures the quality of the nation’s public drinking through adoption of drinking water standards and controlling the injection of waste fluids into below-ground formations that may adversely affect drinking water sources;
•the Endangered Species Act, which imposes restrictions on activities that may adversely affect federally identified endangered and threatened species or their habitats, to include the implementation of operating restrictions or a temporary, seasonal or permanent ban in affected areas;
•the Emergency Planning and Community Right-to-Know Act, which requires the implementation of a safety hazard communication program and the dissemination of information to employees, local emergency planning committees, and response departments on toxic chemicals use and inventories;
•the Occupational Safety and Health Act, which establishes workplace standards for the protection of both the health and safety of employees, to include the implementation of hazard communications programs to inform employees about hazardous substances in the workplace, the potential harmful effects of those substances and appropriate control measures; and
•the DOT regulations relating to the advancement of safe transportation of energy and hazardous materials and emergency response preparedness.
These environmental and occupational health and safety laws and regulations generally restrict the level of substances generated as a result of the Company’s operations that may be emitted to the ambient air, discharged to surface water, and disposed or released to surface and below-ground soils and groundwater. There are also state and local jurisdictions where we operate in the U.S. that have, are developing, or are considering developing, similar environmental and occupational health and safety laws. Any failure by the Company to comply with these laws and regulations could result in adverse effects upon our business to include the (i) assessment of sanctions, including administrative, civil, and criminal penalties; (ii) imposition of investigatory, remedial, and corrective action obligations or the incurrence of capital expenditures; (iii) occurrence of delays or cancellations in the permitting, development or expansion of projects; and (iv) issuance of injunctions restricting or prohibiting some or all of our activities in a particular area. Some environmental laws provide for citizen suits which allow for environmental organizations to act in place of the government and sue operators for alleged violations of environmental law. The ultimate financial impact arising from environmental laws and regulations the violationis not clearly known nor determinable as existing standards are subject to change and new standards continue to evolve.
Environmental laws and regulations increasesare frequently subject to change. More stringent environmental laws that apply to our operations and the operations of our customers may result in increased and material operating costs and capital expenditures for compliance, including, but not limited to, those related to the emission of GHGs and climate change. As a result, we cannot predict the scope of any final methane regulatory requirements or the cost to comply with such requirements. However, given the long-term trend toward increasing regulation, future federal GHG regulations of the oil and gas industry remain a significant possibility.
We own and operate several assets that have been used for crude oil and natural gas midstream services. Under environmental laws such as CERCLA and RCRA, the Company could incur strict, joint and several liability for remediating hydrocarbons, hazardous substances or wastes or other emerging contaminants, such as per- and poly-fluoroalkyl (PFAS), that may become subject to regulation. We could also incur costs related to the cleanup of third-party sites to which we sent regulated substances for disposal or to which we sent equipment for cleaning, and for damages to natural resources or other claims relating to releases of regulated substances at or from such third-party sites.
Trends in environmental and worker health and safety regulation over time has been to typically place increasing restrictions and limitations on activities that could result in adverse effects to the environment or expose workers to injury. These changes in environmental and worker safety laws and regulations, or reinterpretations or enforcement policies that may arise in the future and result in increasingly stringent or costly waste management or disposal, pollution control, remediation or worker health and safety-related requirements, may have a material adverse effect on our business, operations and financial condition. We may not have insurance or be fully covered by insurance against all risks relating to environmental or occupational health and safety, and we may be unable to pass on the increased cost of compliance arising from such risks to our customers. We regularly review regulatory and environmental issues as they pertain to the Company and we consider these as part of our general risk management approach.
Insurance
Our business has operating risks normally associated with the gathering, stabilization, transportation and storage of crude oil and gathering, compression, dehydration, treatment, processing and transportation of natural gas, which could cause damage to life or property. In accordance with industry practice, we maintain insurance against some, but not all, potential operating losses. For some operating risks, the Company may not obtain insurance if the cost of available insurance is excessive relative to the risks presented; in such a case, if a significant operating accident or other event occurs which is not fully covered by the insurance the Company has, this could adversely affect our operations and business. As we continue to grow, we will continue to evaluate our policy limits and deductibles as they relate to the overall cost and scope of our insurance program.
Environment, Social and Governance Considerations
Overview
The Company strongly values ethics, responsibility and integrity. The Company’s overall costsenvironmental, social and governance policies are designed to ensure that our employees, officers and directors conduct business with the highest standards of doingintegrity and in compliance with all applicable laws and regulations. In July of 2022, the Company published its fiscal year 2021 Environmental, Social and Governance (“ESG”) Report after Closing of the Transaction. The Report focused on four key areas: Governance, Our Environment, People and Community Engagement.
Governance
We have a Board of Directors (the “Board”) that includes an Audit Committee, Compensation Committee and Governance and Sustainability Committee. The Company has developed an Enterprise Risk Management (“ERM”) program across all functional areas and mechanisms for identifying, prioritizing, and mitigating risks. We evaluate risks across the enterprise on a regular basis, examining the potential impact to our operating flexibility, along with the financial and reputational impact of such risks. Our Audit Committee of the Board has ultimate oversight over the ERM process, providing ongoing assessments of the company’s risk management processes and system of internal control. Our Executive Vice President, Chief Administrative Officer and Chief Accounting Officer has functional oversight of the Enterprise Risk function.
As a company that manages critical infrastructure for the energy sector, cybersecurity is of great concern to our organization, and we aim to protect our systems, networks and programs from digital attacks. We adhere to external cybersecurity standards, such as National Institute of Standards and Technology and ISO frameworks, along with Sarbanes-Oxley controls in our accounting system. We have multifactor authentications for all users, a 180-day password change policy, separation of duties in accounting systems, controlled access to network drives endpoint protection, mobile device management, device encryption and ongoing monitoring of threats. All our plant sites have devices that help control third-party access to our plant systems and also provide 24/7 monitoring of our infrastructure. We also have mandatory training for our employees on Security Awareness twice a year, using a library of cybersecurity training modules.
The Company believes that our employees, officers, directors, and contractors should conduct business including costswith integrity and in compliance with all applicable laws, regulations and government requirements. Our Code of planning, constructing,Business Conduct outlines the requirements that all our employees and operating plants,contractors must follow to conduct business fairly and ethically. The Company also recognizes the importance of receiving, retaining and addressing concerns from our directors, officers, employees and other stakeholders seriously and expeditiously. We use a confidential third-party Ethics Hotline and a web-based message interface to enable anyone to report concerns.
Environmental Responsibility
The Company is committed to being a good steward of the environment. Our primary focus is on air quality, emissions and land use/disturbance(s) in and around our pipelines and otherprocessing facilities, both during construction and operation. Our EHS management system focuses on continuous improvement and pulls on principles identified in API RP 1173 – Pipeline Safety Management Systems and ISO 14001:2015-Environmental Management Systems. Our ongoing environmental goals include: 1) Zero fines - Operate without any fines or similar types of penalties from our regulatory agencies; 2) Continuously reduce the number of agency reportable loss of primary containment or releases compared to the prior year; 3) Extensively train all operations employees on our EHS management system, with a focus on Leak Detection and Repair (LDAR) and environmental control devices; and 4) Continuously reduce our methane intensity compared to prior years.
Methane is a potent GHG, with 25 times more heat trapping ability than carbon dioxide in the atmosphere. Therefore, we focus on ensuring that any natural gas that we transport stays in our system. We use a combination of constant and intermittent monitoring to reduce leaks, including pressurized trucks, storage tank emission control devices, LDAR, optical gas imaging cameras and participating in industry flyovers with an infrared imaging spectrometer to characterize emission sources and determine any areas for remediation and repair. To continue reducing our direct emissions from operations, we have been investing in energy efficient equipment, including electric pumps and electric drive gas and refrigeration compressors. We were the first major gathering and processing company in the Permian Basin to announce our commitment to source renewable energy for 100% of the electricity used in our operations.
In addition to emission reduction efforts observed in operation, we further link employee remuneration and our debt capital structure to achievement of specific ESG goals. In 2022, all salaried employees, including executives, had 20% of their at-risk pay tied to the achievement of specific ESG goals. In May 2022, we published our Sustainability-Linked Financing Framework which establishes key-performance indicators (“KPIs”) that will be used to measure our progress against sustainability performance targets (“SPTs”): (1) a 35% reduction to Kinetik’s GHG emissions intensity ratio from 2021 baseline levels by 2030; (2) a 30% reduction to Kinetik’s methane emissions intensity from 2021 baseline levels by 2030; and (3) 20% representation of women in senior leadership positions by 2026. After completion of our comprehensive refinancing in June 2022, we are proud to say that 100% of Kinetik’s total debt capital and commitments, representing over $4.0 billion is tied to achieving specific sustainability performance goals as welldefined in respective debt agreements, which are aligned with the SPTs in our Sustainability-Linked Financing Framework.
We also recognize that we cannot tackle climate change alone. Since 2020, the Company has been a member of Our Nation’s Energy Future (“ONE Future”), a growing coalition of over 50 companies committed to voluntarily reducing methane emissions across the natural gas value chain to 1% or less by 2025. By joining, the Company has committed to meeting the lowest methane intensity targets set by ONE Future for the natural gas gathering and processing segments. We are also active members of The Environmental Partnership and GPA Midstream Association.
When we make plans to construct new or expand existing assets or facilities, our assets and pipelines are included as capital expenditures necessarypart of an Asset Integrity Management Program, through which we account for the overall environmental footprint of a project throughout its lifecycle to maintainidentify, prioritize, and manage or upgrade equipmentmitigate potential impacts. We currently have approximately 1,700 miles of pipe, most of which is under 10 years old. To ensure safe and facilities. Similar costsefficient operations, we monitor our pipeline systems with a risk-based inspection schedule based on the potential for internal or external corrosion, soil erosion, adverse weather conditions, or potential for damage from construction by others in the vicinity of our assets. Pipelines are likely upon changespatrolled by operations personnel on the ground and monitored through Gas Control data monitoring systems and by air, including biweekly aerial patrols and routine flyovers of our regulated pipelines. We also utilize various advanced technology emissions monitoring systems throughout our assets and are continuously expanding implementation of such devices. In addition, we are accessible to landowners in lawscase they detect any damage or regulations and upon any future acquisition of operating assets.spills.
The Company believes that its operations are in substantial compliance with applicable environmental regulations and attempts to anticipate future regulatory requirements that might be imposed and plan accordingly. While any new or amended laws and regulations or reinterpretation of existing laws and regulations would not be expected to be any more burdensome to Altusthe Company than to other, similarly situated operators, there can be no assurance that future compliance with any new environmental requirements will not have an adverse effect on the Company’s financial condition, results of operations or cash flows.
We recognize we have an intrinsic connection with our communities; as such, we continue to encourage our team to give back to the communities where they live and work, providing employees with 8 hours of paid volunteer time each year. We expanded our Community Investment Program to address various needs identified by our employees and our communities. We continue to focus our program on the thematic areas of local public education, environmental activities, business entrepreneurship in the local community, support of authorized emergency responders, support of at-risk individuals and support of local healthcare providers. Furthermore, we try to source goods and services for our company locally in Texas or New Mexico, to the extent possible, which helps to reduce lead times, shipping and storage, and also helps to build the economic resilience of our communities.
Climate ChangeAvailable Information
FederalThe Company’s website is www.kinetik.com. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Proxy Statements, Current Reports on Form 8-K, amendments to those reports filed or state legislativefurnished pursuant to Section 13(a) or regulatory initiatives that regulate or restrict emissions15(d) of greenhouse gasses (GHGs) in areas in which Altus conducts business could adversely affect the availability of, or demand for,Exchange Act, and other filings with the productsSEC are available at https://ir.kinetik.com/overview/default.aspx under the heading “Financials” - “SEC Filings”, as soon as reasonably practicable after the Company stores, transmits, and processes and, dependingelectronically files such material with, or furnishes it to, the SEC. These reports are also available on the particular program adopted, could increaseSEC’s website at www.sec.gov. In addition to reports filed or furnished with the costsSEC, we publicly disclose material information from time to time in press releases, at annual meetings of Altus’ operations, including costs to operateshareholders, in publicly accessible conferences and maintain facilities, install new emission controls on facilities, acquire allowances to authorize GHG emissions, pay any taxes related to GHG emissions, and/or administerinvestor presentations, and manage a GHG emissions program. The Company may be unable to recover any such lost revenues or increased costs in the rates charged to customers, and any such recovery may depend on events beyond its control, including the provisions of any final legislation or regulations. Reductions inthrough our website. In addition, the Company’s revenues or increases in expenses as a resultCode of climate change initiatives could have adverse effectsBusiness Conduct and Ethics, Corporate Governance Guidelines, charters of the Audit Committee, Compensation Committee, Governance and Sustainability Committee, and other corporate governance materials are available on the Investor Relations section of the Company’s website. The information contained on the Company’s business, financial condition, results of operations, or cash flows.
Finally, some scientific studies have concluded that increasing concentrations of GHGswebsite as referenced in the atmosphere could lead to climate change, which could result in the increased frequencythis report is not, and severity of climate events, including storms, floods, and fires. If any such effects were to occur, there mayshould not be an increased potential for adverse effects on the Company’s assets and operations.
Emerging Growth Company Status
Altus is an “emerging growth company,” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (JOBS Act). As such, the Company is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved, and reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements. If some investors find Altus securities less attractive as a result, there may be a less active trading market for Altus’ securities and the prices of Altus’ securities may be more volatile.
In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. While Altus has not opted out of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, the Company does not intend to take advantage of the benefits of this extended transition period.
Altus will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following April 4, 2022, the fifth anniversary of the completion of its initial public offering, (b) in which Altus has total annual gross revenue of at least $1.07 billion, or (c) in which Altus is deemed to be, part of this report.
Request of a large accelerated filer, which means the market valuecopy of Class A Common Stock that is held by non-affiliates exceeds $700.0 million asany of the last business day of Altus’ prior second fiscal quarter (typically June 30th)above-referenced reports and corporate governance documents may be directed in writing to: Investor Relations, Kinetik Holdings Inc., and (2) the date on which Altus has issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Employees
The Company has no employees. All individuals who conduct business for Altus are employed by Apache. Per the terms of the COMA, Apache operates, maintains and administers the Company’s operations and also provides management services.
Offices
Altus does not own any real estate or other physical properties materially important to its operation. The Company’s executive office is located at One2700 Post Oak Central, 2000 Post Oak Boulevard,Blvd, Suite 100,300 Houston, Texas 77056-4400. Refer to the “Agreements with Apache—Lease Agreement” section above for further discussion.TX 77056 or by calling (713) 621-7330.
ITEM 1A. RISK FACTORS
Risks Related to Our Business
The Company’s business activitiesoperating assets are currently located exclusively in the Permian Basin, making it vulnerable to risks associated with operating in a single geographic area.
The Company’s wholly owned midstream assets are currently located exclusively in the Delaware Basin which is part of the broader Permian Basin. As a result of this concentration, the Company will be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation, obtaining rights-of-way, market limitations, water shortages or restrictions, drought related conditions, or other weather-related conditions or interruption of the valueprocessing or transportation of its securities are subject to significant hazardscrude oil, natural gas and risks, including those described below.water. If any of such events should occur, Altus’these factors were to impact the Permian Basin more than other producing regions, the Company’s business, financial condition liquidity, and/orand results of operations could be materially harmed, and holders and purchasers of Altus’ securities could lose part or all of their investments. Additional risks relatingadversely affected relative to Altus’ securities may be included in the prospectuses for securities the Company may issue in the future.
RISKS RELATED TO THE BCP BUSINESS COMBINATION
Failure to complete, or significant delays in completing, the BCP Business Combination could negatively affect the trading price of the Class A Common Stock and Altus’ future business and financial results.other midstream companies that have a more geographically diversified asset portfolio.
CompletionBecause of the BCP Business Combination is not assurednatural decline in hydrocarbon production from existing wells, the Company’s success depends, in part, on its ability to maintain or increase hydrocarbon throughput volumes on its midstream systems, which depends on its customers’ levels of development and is subjectcompletion activity on its dedicated acreage.
The level of crude oil and natural gas volumes handled by the Company’s midstream systems depends on the level of production from crude oil and natural gas wells dedicated to risks, including the risks that approval of the issuance of the equity consideration by Altus’ stockholdersits midstream systems, which may be less than expected and which will naturally decline over time. To maintain or approval of the transaction by governmental agencies is not obtained or that other closing conditions are not satisfied. If the transaction is not completed, or if there are significant delays in completing the transaction, the trading price of the Class A Common Stock and Altus’ future business and financial results could be negatively affected, andincrease throughput levels on its midstream systems, the Company willmust obtain production from wells completed by customers on acreage dedicated to its midstream systems or execute agreements with other third parties in its areas of operation.
The Company has no control over producers’ levels of development and completion activity in its areas of operation, the amount of reserves associated with wells connected to its systems, or the rate at which production from a well declines. In addition, the Company has no control over producers or their exploration and development decisions, which may be subject to several risks, including the following:affected by, among other things:
•Altus may be liable for damages to Contributor under the termsavailability and cost of the BCP Contribution Agreement;capital;
•negative reactions fromdemand for and the financial markets, including a decline in the trading priceprevailing and projected prices of the Class A Common Stock due to the fact that current prices may reflect a market assumption that the transaction will be completed;crude oil, natural gas and NGLs;
•havingpolitical and economic conditions and events in foreign oil, natural gas and NGL producing countries, including embargoes, disrupted global supply chains, continued hostilities in the Middle East and other sustained military campaigns, the armed conflict in Ukraine and associated economic sanctions on Russia;
•increase in interest rates and rising or sustained inflation;
•levels of reserves;
•geologic considerations;
•changes in the strategic importance customers assign to pay certain significant costs relatingdevelopment in the Delaware Basin as opposed to other potential future operations they may acquire, which could adversely affect the financial and operational resources such customers are willing to devote to development of their acreage in the Permian Basin;
•increased levels of taxation related to the transaction,exploration and production of crude oil, natural gas and NGLs;
•environmental or other governmental regulations, including in certain circumstances,those related to the prorationing of oil and gas production, the availability of permits, the regulation of hydraulic fracturing, and a termination feegovernmental determination that multiple facilities are to Contributor;be treated as a single source for air permitting purposes; and
•the attentioncosts of Altus’ management will have been divertedproducing and ability to produce crude oil, natural gas and NGLs and the transaction rather than Altus’ own operationsavailability and pursuitcosts of drilling rigs, pipeline transportation facilities and other opportunities that could have been beneficial to it.equipment.
The pendency of the BCP Business Combination could materially adversely affectDue to these and other factors, even if reserves are known to exist in areas served by the Company’s future business and operations or result in a loss of personnel.
Uncertainty about the effect of the BCP Business Combination on personnel, customers, and suppliersmidstream assets, producers may have an adverse effect on the Company’s business. These uncertainties may impair the ability to attract, retain, and motivate key personnel of Apache providing services to Altus pursuant to the COMA until the transactions are consummated and for a period of time thereafter, and could cause customers, suppliers, and others who deal with the Company to change their existing business relationships, which could negatively affect the Company’s revenues, earnings, and cash flows, as well as the market price of the Company’s Class A Common Stock, regardless of whether the transactions are completed. Retention of personnel may be particularly challenging during the pendency of the transactions because personnel may experience uncertainty about their future roles with the combined company. If, despite retention efforts, key personnel depart because of issues relating to the uncertainty and difficulty of integration or a desirechoose not to remain withdevelop those reserves. If producers choose not to develop their reserves or join the combined company, the Company’s business could be seriously harmed. Similar risks could affect BCP and, therefore, the combined company if the transactions are completed.
The BCP Contribution Agreement includes restrictions relatingthey choose to the conduct of the Company’s business while the transactions are pending, which could adversely affect the Company’s business and operations.
Under the terms of the BCP Contribution Agreement, the Company is subject to certain restrictions on the conduct of its business prior to completing the transactions, which may adversely affect its ability to execute certain of its business strategies, including, subject to certain exceptions, restrictions on the acquisition or disposition of assets, the incurrence of capital expenditures, the entry into contracts, the incurrence of indebtedness, or the settlement of claims and lawsuits, unless the Company obtains the prior written consent of Contributor. Such limitations could negatively affect the Company’s business and operations prior to the completion of the transactions.
The failure to successfully integrate the business and operations of the Contributed Entities in the expected time frame may adversely affect Altus’ future results.
Altus believes that the acquisition of the Contributed Entities will result in certain benefits, including certain cost synergies and operational efficiencies. However, to realize these anticipated benefits, the businesses of Altus and the Contributed Entities must be successfully combined. The success of the BCP Business Combination will depend on Altus’
ability to realize these anticipated benefits from combining the businesses of Altus and the Contributed Entities. Due to legal restrictions, Altus and Contributor have conducted, and until the completion of the transactions will conduct, only limited planning regarding the integration of the businesses following the transactions and will not determine the exact nature in which the businesses will be combined until after the transactions have been completed. The actual integration may result in additional and unforeseen expenses or delays. If the post-BCP Business Combination company is not able to successfully integrate the Contributed Entities’ businesses and operations, or if there are delays in combining the businesses, the anticipated benefits of the transaction may not be realized fully or at all or may take longer to realize than expected.
Additional risks related to the BCP Business Combination are describedslow their development rate in the Company’s definitive proxy statement filedareas of operation, utilization of its midstream systems will be below anticipated levels. Reductions in development activity, coupled with the SEC on January 12, 2022.
RISKS RELATED TO THE COMPANY’S PRIMARY CUSTOMER AND MAJORITY OWNER
Altus derives a substantial portionnatural decline in production from its current dedicated acreage, would result in the Company’s inability to maintain the then-current levels of utilization of its revenue from Apache,midstream assets, which could materially and if Apache changes its business strategy, alters its current drilling and development plan on acreage dedicated to Altus, or otherwise significantly reduces the volumes of natural gas or NGLs with respect to which Altus performs midstream services, Altus’ revenue would decline andadversely affect its business, financial condition, results of operations, and cash flows wouldflow.
The acquisition of additional businesses and assets is part of our growth strategy. We may experience difficulties completing acquisitions or integrating new businesses and properties, and we may be materially and adversely affected.unable to achieve the benefits we expect from any future acquisitions.
Substantially all
Part of the Company’s current commercial agreements are with Apache,business strategy includes acquiring additional businesses and as a result, Altus derives substantially all of its midstream services revenueassets. We cannot provide any assurance that we will be able to find complementary acquisition targets or complete such acquisitions or achieve the desired results from Apache. Accordingly, Altusany acquisitions we do complete. Any acquired businesses or assets will be subject to many of the same risks as our existing businesses and may not achieve the levels of performance that we anticipate.
We may not realize anticipated operating advantages and cost savings. Integration of acquired businesses or assets involves a number of risks, including (i) the loss of key customers of the acquired business; (ii) demands on management related to the increase in our size; (iii) the diversion of management’s attention from the management of daily operations; (iv) difficulties in implementing or unanticipated costs of accounting, budgeting, reporting, internal controls and other systems; and (v) difficulties in the retention and assimilation of necessary employees.
Difficulties in integration may be magnified if we make multiple acquisitions over a relatively short period of time. Because of difficulties in combining and expanding operations, we may not be able to achieve the cost savings and other size-related benefits that we hoped to achieve after these acquisitions, which could materially and adversely affect our financial condition and results of operations.
The Company owns interests in certain pipeline projects and other joint ventures, and it may in the future enter into additional joint ventures, and the Company’s control of such entities is limited by provisions of the limited partnership and limited liability company agreements of such entities and by the Company’s percentage ownership in such entities.
The Company has ownership interests in several joint ventures, including the PHP, GCX, Breviloba and EPIC joint ventures, and it may enter into other joint venture arrangements in the future. While the Company owns equity interests and has certain voting rights with respect to its joint ventures, it does not act as operator of or control the joint ventures, each of which is operated by another joint venture partner. The Company has limited ability to influence the business decisions of these entities, and it may therefore be difficult or impossible for the Company to cause the joint venture to take actions that the Company believes would be in its or the relevant joint venture’s best interests. Moreover, joint venture arrangements involve various risks and uncertainties, such as committing the Company to fund operating and/or capital expenditures, the timing and amount of which the Company may not control, and which could materially and adversely affect its cash flow.
The Company also may be unable to control the amount of cash it will receive from the operation of these entities, which could further adversely affect its cash flow. Joint venture arrangements may also restrict the Company’s operational and organizational flexibility and its ability to manage risk, which could have a material and adverse effect on its business, riskscash flow and results of Apache, the most significant of which include the following:operations.
•
If the third-party pipelines interconnected, or at some future point expected to be interconnected, to the Company’s pipelines become unavailable to transport or store crude oil, NGLs or natural gas, the Company’s revenue and available cash could be adversely affected.
a
The Company depends upon third-party downstream pipelines and associated operations to provide delivery options from its processing system. Because the Company does not control these pipelines and associated operations, their continuing operation is not within its control. If any downstream pipeline were to become unavailable for current or future volumes due to repairs, damage to the facility, force majeure, lack of capacity, shut in by regulators, failure to recommencemeet quality requirements or anyfurther or subsequent reduction in or slowing of Apache’s drilling other reason, the Company’s ability to operate efficiently and development plans for or deferrals of production from the acreage dedicated to the Company, including as a result of volatility in the price ofcontinue shipping crude oil, natural gas and NGLs or the availability of capitalrefined products to fund Apache’s activities, which would directly and adversely impactmajor demand for Altus’ midstream services;
•drilling and operating risks, including potential environmental liabilities, associated with Apache’s operations on the acreage dedicated to the Company;
•downstream processing and transportation capacity constraints and interruptions, including the failure of Apache to have sufficient contracted transportation capacity;
•adverse effects of increased or changed governmental and environmental regulation or enforcement of existing regulation, including legislative, regulatory, policy changes, or initiatives addressing the impact of global climate change, hydraulic fracturing, methane emissions, flaring, or water disposal; and
•Apache’s financial condition, credit ratings, leverage, market reputation, responses to ESG initiatives, liquidity, and cash flows.
Further, Altus does not have control over Apache’s business decisions and operations, and Apache is under no obligation to adopt a business strategy that is favorable to the Company. Thus, Altus will be subject to the risk of cancellation of planned development, nonperformance of commitments with respect to future dedications, and other nonpayment or nonperformance by Apache, including with respect to its commercial agreements, which do not contain minimum volume commitments. Furthermore, there is no guarantee that Apache will extend any agreements with the Company beyond their initial terms or that Altus will be able to renew or replace these agreements on equal or better terms, or at all, upon their expiration. Any material nonpayment or nonperformance by Apache under its commercial agreements with the Company would have a significant adverse impact on Altus’ business, financial condition, results of operations, and cash flows.
Altus does not have any employees and relies entirely on services provided by Apache’s employees.
The Company does not have any employees. Instead, Altus relies entirely on Apache’s employees to conduct the Company’s business and activities pursuant to the COMA. Therecenters could be material competition for the time and effort of the Apache officers and employees who provide services to both Altus and Apache. If Apache’s employees who provide services to the Company do not devote sufficient attention to the management and operation of Altus’ business and activities, Altus’ business, financial condition, results of operations, and cash flowsrestricted, thereby reducing revenue. Any temporary or permanent interruption at these pipelines could be materially and adversely affected.
Although the COMA provides for certain fixed annual limits on the support services fee payable to Apache through 2022, there is no limit on such fees thereafter. As a result, after 2022, Altus may be required to pay Apache higher fees than would be available from third parties. The COMA is subject to termination by Altus or Apache under certain circumstances, including if Apache and its affiliates no longer own a direct or indirect interest in at least 50 percent of the voting or other equity securities of the Company. Should the COMA be terminated by Altus or Apache, Altus will be required to attract and hire employees to
perform the services currently performed by Apache’s employees under the COMA or otherwise contract with third parties for the provision of such services, which, in either case, could subject Altus to substantial additional costs, could cause significant disruptions to Altus’ business, may be on terms less favorable than the terms of the COMA, and as a result, Altus’ financial condition, results of operations, and cash flows could be adversely affected.
Altus’ executive officers and directors may face potential conflicts of interest in managing the Company’s business.
Altus’ executive officers and certain directors are also officers or employees of Apache. These relationships may create conflicts of interest regarding corporate opportunities and other matters. The resolution of any such conflicts may not always be in the Company’s or its stockholders’ best interests. In addition, these overlapping executive officers and directors allocate their time among Altus and Apache. These officers and directors face potential conflicts regarding the allocation of their time, which may adversely affect the Company’s business, results of operations, and financial condition.
Substantially all of Altus’ gathering and processing operations are located within the Southern Delaware Basin of West Texas, making it vulnerable to risks associated with having revenue-producing operations concentrated in one geographic area.
Altus’ revenue-producing operations are geographically concentrated primarily within the Southern Delaware Basin of West Texas, which disproportionately exposes the Company to risks associated with regional factors and increases its exposure to unexpected events that may occur in this region, such as natural disasters or localized pandemic outbreaks. Furthermore, the Company may be exposed to increases in costs as a result of regional economic conditions and the availability of goods and services, such as a skilled labor force, which could become more expensive (or at certain times, unavailable) if the labor market in the Permian Basin were to tighten. Any of these risks could adversely affect the Company’s financial condition results of operations, or cash flows.flow.
Apache
The Company’s customers may suspend, reduce or terminate itstheir obligations under itsthe Company’s commercial agreements with Altusthem in certain circumstances, which could have a material adverse effect on Altus’ financial condition, results of operations, and cash flow.
Altus is party to certain commercial agreements with Apache that permit Apache to suspend, reduce, or terminate its obligations under the agreement if certain events occur. These events include force majeure events that would prevent the Company from performing some or all of the required services under the applicable agreement. Apache, as the counterparty under these commercial agreements, has the discretion to make such decisions, which may significantly and adversely affect the Company. Any such reduction, suspension, or termination of Apache’s obligations under these agreements would have a material adverse effect on the Company’s financial condition, results of operations and cash flow.
While Apache
The Company has granted Altus a right of first offerentered into gas gathering, compression and processing agreements, crude oil gathering agreements, and produced water gathering and disposal agreements with its customers, which include provisions that permit the customer to provide additional midstream services and acquire Apache’s retained midstream assets in Alpine High, Apache does not have to accept the Company’s offer.
Apache has granted Altus a right of first offer to provide additional midstream services and acquire Apache’s retained midstream assets in Alpine High. Although Apache granted Altus this right of first offer,suspend, reduce or terminate its obligations under each agreement if certain events occur. These events include non-performance by the Company can make no assurances that the economic terms that it offers Apache will be acceptable to Apache, and another midstream services provider or a third party may be willing to make an offer to Apache on economic terms that Altus is unwilling or unable to offer. Altus’ inability to take advantage of the opportunities with respect to the right of first offer could adversely affect its growth strategy.
A significant amount of the revenue currently generated by Altus is from contracts with Apache that contain most favored nations rights and other consent rights, limiting flexibility to offer certain rates or capacity to new shippers.
Certainforce majeure events which are out of the Company’s commercial agreements with Apache contain most favored nations rights (MFNs), which require that certain terms (includingcontrol. The customers have the rates charged thereunder) are no less favorablediscretion to Apache than those provided to any similarly situated counterparty. Without Apache’s consent,make such decisions notwithstanding the MFNs effectively limit the Company’s flexibility in negotiating rates for some of Altus’ services with other shippers, because triggering the MFNs would lead to a reduction in the rates that the Company charges to Apache, which would adversely affect Altus’ financial condition, results of operations, or cash flows. Additionally, certain of the commercial agreements may require Apache’s consent to offer third-party customers priority of service in the Company’s facilities that is at least equal to Apache’s priority of service. If Apache refuses to grant such consent, the Company’s ability to attract third-party customers to its midstream facilities could be negatively impacted.
If Apache elects to sell acreage that is dedicated to Altus to a third party, then the third party’s financial condition could be materially worse than Apache’s, and Altus could be subject to the nonpayment or nonperformance by the third party.
If Apache elects to sell acreage that is dedicated to the Company to a third party, then the third party’s financial condition could be materially worse than Apache’s. In such a case, the Company may be subject to risks of loss resulting from nonpayment or nonperformance by the third party, which risks may increase during periods of economic uncertainty. Furthermore, the third party may be subject to their own operating and regulatory risks, which increases the riskfact that they may default on their obligations tosignificantly and adversely affect the Company. Any material nonpaymentsuch reduction, suspension or nonperformance by the third party could adversely impact the business, financial condition, results of operations, and cash flows of the Company.
Apache owns a majority of Altus’ outstanding voting shares and thus strongly influences all of Altus’ corporate actions.
Apache and its affiliates beneficially own approximately 79 percent of Altus’ outstanding voting common stock. Under the Stockholders Agreement, Apache is entitled to nominate up to seven directors to Altus’ board of directors depending on its and its affiliates’ ownership of Altus’ outstanding voting common stock. As long as Apache and its affiliates own or control a significant percentage of Altus’ outstanding voting power, it will have the ability to strongly influence all corporate actions, including those requiring stockholder approval, the election and removal of directors, the size of Altus’ board of directors, any amendment of Altus’ charter or bylaws, any action impacting the Equity Method Interest Pipelines or the ownership of such interests, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of Altus’ assets, and will be able to cause or prevent a change in the composition of Altus’ board of directors or a change in control of the Company that could deprive stockholders of an opportunity to receive a premium for their common stock as part of a sale of the Company. The interests of Apache may not align with the interests of Altus’ other stockholders.
RISKS RELATED TO CONSTRUCTING OR MAINTAINING ASSETS AND OPERATING THE BUSINESS
The COVID-19 pandemic has and may continue to adversely impact the Company’s business, financial condition, and results of operations, the global economy, and the demand for and prices of oil, natural gas, and NGLs. The unprecedented nature of the current situation makes it impossible for the Company to identify all potential risks related to the pandemic or estimate the ultimate adverse impact that the pandemic may have on its business.
The COVID-19 pandemic and the actions taken by third parties, including, but not limited to, governmental authorities, businesses, and consumers, in response to the pandemic have adversely impacted the global economy and created significant volatility in the global financial markets. Business closures, restrictions on travel, “stay-at-home” or “shelter-in-place” orders, and other restrictions on movement within and among communities have significantly reduced demand for and the prices of oil, natural gas, and NGLs. As of the date of this report, efforts to contain COVID-19 have not been successful in many regions, vaccination distribution programs have encountered delays, new variants have emerged, and the global pandemic remains ongoing. While some geographic regions have lifted, relaxed, or otherwise modified their pandemic response measures to lessen the impact of such measures on business operations and commerce, these regions may reinstitute restrictions as circumstances change. A continued, prolonged period or a renewed period of reduced demand, the failure to timely distribute or the ineffectiveness of or reluctance or refusal of individuals to take any vaccines, the failure to develop adequate treatments, and other adverse impacts from the pandemic may materially adversely affect the Company’s business, financial condition, cash flows, and results of operations.
The Company’s operations rely on Apache and its workforce being able to access the Company’s various facilities. Additionally, because Apache has previously implemented, and may elect to or be required in the future to reimplement, remote working procedures for a significant portion of its workforce for health and safety reasons and/or to comply with applicable national, state, and/or local government requirements, the Company relies on such persons having sufficient access to applicable information technology systems, including through telecommunication hardware, software, and networks. If a significant portion of Apache’s workforce cannot effectively perform their responsibilities, whether resulting from a lack of physical or virtual access, quarantines, illnesses, governmental actions or restrictions, including vaccine mandates and the reactions thereto, information technology or telecommunication failures, or other restrictions or adverse impacts resulting from the pandemic, the Company’s business, financial condition, cash flows, and results of operations may be materially adversely affected.
The unprecedented nature of the current situation resulting from the COVID-19 pandemic makes it impossible for the Company to identify all potential risks related to the pandemic or estimate the ultimate adverse impact that the pandemic may have on its business, financial condition, cash flows, or results of operations. Such results will depend on future events, which the Company cannot predict, including the scope, duration, and potential reoccurrence of the COVID-19 pandemic, the emergence and impact of additional variants, or any other localized epidemic or global pandemic, the distribution and effectiveness of vaccines, therapeutics and treatments, the demand for and the prices of oil, natural gas, and NGLs, and the
actions taken by third parties, including, but not limited to, governmental authorities, customers, contractors, and suppliers, in response to the COVID-19 pandemic or any other epidemics or pandemics. The COVID-19 pandemic and its unprecedented consequences have amplified, and may continue to amplify, the other risks identified in this report.
Construction and maintenance of Altus’ assets (including the Equity Method Interest Pipelines) subjects the Company to risks of construction delays, cost over-runs, and negative effects on its financial condition, results of operations, or cash flows.
The construction and maintenance of Altus’ assets (including the Equity Method Interest Pipelines) and any additions or modifications to any such assets are complex projects that are subject to a number of factors beyond the Company’s control, including numerous regulatory, environmental, political, and legal uncertainties, delays from third-party landowners or their refusal to provide necessary consents, the permitting process, complying with laws, unavailability or increased cost of or tariffs on materials, labor disruptions, labor availability, environmental hazards, protests, third-party legal actions, financing, accidents, weather, and other factors. If the Company undertakes these projects, it may not be able to complete them on schedule, at the budgeted cost, or at all. Any delay in the completion or continued maintenance of such assets or any increase in or change in the timing of capital expenditures necessary to fund such construction or maintenance may require the expenditure of significant amounts of capital and could adversely affect the Company’s financial condition, results of operations, liquidity, or cash flows.
If the Company seeks to acquire assets or businesses but is unable to do so on economically acceptable terms or is unable to successfully integrate any acquired assets or operations, its future growth will be limited.
From time to time, the Company may evaluate and seek to acquire assets or businesses that it believes complement its existing business and related assets. The Company may acquire assets or businesses that it plans to use in a manner materially different from their prior owners’ uses. Any acquisition involves potential risks, including the inability to integrate the operations of recently acquired businesses or assets, especially if the assets acquired are in a new business segment or geographic area, the failure to realize expected volumes, revenues, profitability, or growth, the failure to realize any expected synergies and cost savings, the assumption of unknown liabilities, the loss of customers or key employees from the acquired businesses, and potential environmental or regulatory liabilities and title problems.
Any assessmenttermination of these risks will be inexactcustomers’ obligations under their commercial agreements could materially and may not reveal or resolve all existing or potential problems associated with an acquisition. Realization of any of these risks could adversely affect the Company’s financial condition, results of operations and cash flows. If Altus consummates anyflow.
Increased competition from other companies that provide midstream services, or from alternative fuel sources, could have a negative impact on the demand for the Company’s services, which could materially and adversely affect its financial results.
The Company will compete for third-party customers primarily with other crude oil and natural gas gathering and transportation systems and produced water service providers. Some of its competitors may now, or in the future, acquisition, its capitalizationhave access to greater supplies of crude oil, natural gas and resultsproduced water than the Company does. Some of operationsthese competitors may change significantly.
If third-party pipelinesexpand or construct gathering systems or other midstreampipeline transportation facilities interconnected to the Company’s gathering, processing, or transmission systems become partially or fully unavailable or if the volumes Altus gathers, processes, or transmits do not meet the quality requirements of the pipelines or facilities to which Altus connects, its cash flows could be adversely affected.
The Company’s gathering, processing, and transmission assets connect to other pipelines or facilities owned and operated by unaffiliated third parties, and continuing access to such third-party pipelines, processing facilities, and other midstream facilities are not within the Company’s control. These pipelines, plants, and other midstream facilities may become unavailable because of testing, turnarounds, maintenance, reduced capacity, regulatory requirements, and other curtailments of receipt or deliveries. If the Company’s costs to access and transmit on these third-party pipelines significantly increase, if any of these pipelines or other facilities become unable to receive, transmit, or process product, or if the volumes the Company gathers or transmits do not meet the product quality requirements, then Altus’ cash flows could be adversely affected.
Increased competitive pressure could adversely affect Altus’ financial condition, results of operations, or cash flows.
Altus competes with similar enterprises in its industry, including large midstream companies that have greater financial resources and access to supplies than the Company. The principal elements of competition are rates, terms of service, and flexibility and reliability of service. Expansion or construction of competing gathering, processing, transmission, and storage systems and excess pipeline capacity would create additional competition for the services the Company provideswould provide to itsthird party customers. In addition, potential third-party customers may develop their own gathering systems or pipeline transportation facilities instead of using the Company’s systems.
Further, natural gas utilized as a fuel competeshydrocarbon fuels compete with other forms of energy available to end-users.end-users, including renewable electricity and coal. Increased demand for such other forms of energy at the expense of natural gashydrocarbons could lead to a reduction in demand for Altus’ midstream servicesthe Company’s services.
All these competitive pressures could make it more difficult for the Company to attract new customers as it seeks to expand its business, which could materially and adversely affect its business, financial condition and results of operations. In addition, competition could intensify the negative impact of factors that decrease demand for crude oil, natural gas and produced water services in the markets served by the Company’sits systems, such as adverse economic conditions, weather, higher fuel costs and taxes or other governmental or regulatory actions. Allactions that directly or indirectly increase the cost or reduce demand for its services.
The Company’s exposure to commodity price risk may change over time and the Company cannot guarantee the terms of any existing or future agreements for its midstream services with its customers.
The Company currently generates revenues pursuant to a variety of different contractual arrangements, including fee-based agreements based on volumetric fees, keep-whole arrangements used for processing services,percent-of-proceeds arrangements based on a percent of the proceeds from the sale of gathering and processing outputs on behalf of a producer and percent-of-products arrangements in which the Company is assigned a portion of the natural gas it gathers and processes as partial compensation. Consequently, the Company’s existing operations and cash flow have limited direct exposure to commodity price risk. However, the Company’s customers are exposed to commodity price risk, and extended reduction in commodity prices could reduce the production volumes available for the Company’s midstream services in the future below expected levels. In addition, in the past, excess capacity has created a highly competitive environment that has decreased commodity price differentials between the Permian Basin and end markets, which has reduced the demand for the Company's services resulting in decreases in volumes transported and lower rates the Company is able to charge to its customers. Although the Company intends to maintain these competitive pressurespricing terms on both new contracts and existing contracts for which prices have not yet been set, its efforts to negotiate such terms may not be successful, which could materially and adversely affect its business.
The use of derivative financial instruments could result in material financial losses by us.
From time to time, the Company’sCompany has sought to reduce its exposure to fluctuations in commodity prices and interest rates by using derivative instruments. To the extent that we hedge our commodity price and interest rate exposures, we will forego the benefits we would otherwise experience if commodity prices or interest rates were to change in our favor. In addition, hedging activities can result in losses that might be material to our financial condition, results of operations orand cash flows. Such losses could occur under various circumstances, including those situations where a counterparty does not perform its obligations under a hedge arrangement, the hedge is not effective in mitigating the underlying risk, or our risk management policies and procedures are not followed. Adverse economic conditions (e.g., a significant decline in energy commodity prices that negatively impacts the cash flows of oil and gas producers) increase the risk of nonpayment or performance by our hedging counterparties.
Altus
The Company’s construction of new midstream assets may be subject to new or additional regulatory, environmental, political, contractual, legal and economic risks, which could materially and adversely affect its cash flow, results of operations and financial condition.
The construction of additions or modifications to the Company’s existing systems and the expansion into new production areas to service its customers involve numerous regulatory, environmental, political and legal uncertainties beyond the Company’s control and may require the expenditure of significant amounts of capital, and the Company may not be able to retainconstruct in certain locations due to setback requirements or acquire new customers, which would reduce Altus’ revenuesexpand certain facilities that are deemed to be part of a single source. Regulations clarifying how crude oil and limitnatural gas production facility emissions must be aggregated under the federal Clean Air Act permitting program were finalized in June 2016. This action clarified certain permitting requirements yet could still impact permitting and compliance costs. As the Company builds infrastructure to meet its future profitability.customers’ needs, it may not be able to complete such projects on schedule, at the budgeted cost, or at all.
The renewalCompany’s revenues may not increase immediately (or at all) upon the expenditure of funds on a particular project. For instance, if the Company builds additional gathering assets, the construction may occur over an extended period of time and it may not receive any material increases in revenues until the project is completed or replacement of the Company’s existing contracts withat all. The Company may construct facilities to capture anticipated future production growth from its customers at rates sufficient to maintain or increase current revenues and cash flows depends on a number of factors, some of which are beyond the Company’s control, including competition and the price of, and demand for, commodities in the markets Altus serves. The inability of the Company to renew or replace its current or future contracts as they expire could have a negative effect on its profitability.
Altusan area where such growth does not own in fee the land on which itsmaterialize. As a result, new midstream assets are located,may not be able to attract enough throughput to achieve their expected investment return, which could result in disruptions to its operations.
The Company does not own in fee any of the land on which its midstream assets have been constructed. Altus’ only interests in these properties are rights granted under surface use agreements, rights-of-way, surface leases, or other easement rights (collectively, Rights-of-Way), of which Apachematerially and certain of its affiliates are a party, and such Rights-of-Way may limit or restrict Altus’ access to or use of the surface estates, which may adversely affect Altus’ operations. The Company is also subject to the possibility of more onerous terms or increased costs to retain necessary land use if Altus does not have valid Rights-of-Way or if such usage rights lapse or terminate. The loss of these rights could have a material adverse effect on theCompany’s business, financial condition, results of operations and cash flowsflow.
The construction of the Company.
A failure in Altus’ computer systems or a terrorist or cyberattack on Altus or third parties with whom Altus does business may adversely affectadditions to the Company’s abilityexisting assets may require it to operate its business.
obtain new rights-of-way, surface use agreements or other real estate agreements prior to constructing new pipelines or facilities. The Company is reliant on technology to conduct its business. The Company depends upon its operational and financial computer systems to process the data necessary to conduct almost all aspects of its business, including operating its pipelines and gathering and processing facilities, recording and reporting commercial and financial transactions, and receiving and making payments. Any failure of the Company’s computer systems or those of its customers, suppliers, or others with whom it does business, including Apache, could materially disrupt the Company’s ability to operate its business.
Cyberattacks against the Company may disrupt computer systems and operations and result in the theft of funds or data. In addition, the Company’s pipeline systems may be targets of terrorist attacksunable to timely obtain such rights-of-way to connect new crude oil, natural gas and water sources to its existing infrastructure or environmental activist group activities that could disrupt Altus’ ability to conduct its business. Protecting against such threatscapitalize on other attractive expansion opportunities. Additionally, it may requirebecome more expensive for the Company to expend significant additional resources,obtain new rights-of-way or to expand or renew existing rights-of-way, leases or other agreements. If the cost of renewing or obtaining new agreements increases, the Company’s cash flow could be materially and any such attack or disruption could have a material adverse effect on Altus’ business and results of operations.adversely affected.
Altus’
The Company’s business involves many hazards and operational risks, some of which may not be fully covered by insurance. The occurrence of a significant accident or other event that is not fully insured could curtail its operations and materially and adversely affect Altus’ operations and financial condition.its cash flow.
The Company’s operations are subject to all the many hazards inherent in the gathering compressing, processing, and transmissiontransportation of crude oil, natural gas and NGLs, including produced water, including:
•damage to pipelines, compressor stations, centralized gathering facilities, pump stations, storage terminals, related equipment, and surrounding properties caused by hurricanes, floods, fires, explosions, freezes, otherdesign, installation, construction materials or operational flaws, natural or anthropogenic disasters, acts of terrorism, and cyberattacks, acts of third parties or other unforeseen circumstances.
•leaks of crude oil, natural gas or NGLs or losses of crude oil, natural gas or NGLs as a result of the malfunction of, or other disruptions associated with, equipment, facilities or pipelines;
•fires, ruptures and explosions; and
•other hydrocarbons, and induced seismicity.
These riskshazards that could also result in substantial losses due to personal injury and/orand loss of life, severe damage topollution and destruction of property and equipment, including information technology systems, and pollution or other environmental damage and may result in curtailment or suspension of operations.
The Company may elect to not obtain insurance, maintain a self-insured retention or increase deductibles for any or all of these risks if it believes that the Company’s related operations.cost of available insurance is excessive relative to the risks presented. In accordance with typical industry practice, Altus has appropriate levels of business interruption, property,addition, pollution and other insurance, but the Company isenvironmental risks generally are not fully insured against all risks incident to its business. If a significant accident orinsurable. The occurrence of an event occurs that is not fully insured, itcovered by insurance could materially and adversely affect Altus’ financial condition, results of operations, or cash flows.
RISKS RELATED TO THE EQUITY METHOD INTEREST PIPELINES AND OTHER NON-OPERATED ASSETS
Altus owns or operates a portion of its business with one or more equity interest partners or in circumstances where Altus is not the operator, including the Equity Method Interest Pipelines, which may restrict its operational and corporate flexibility; actions taken by other partners or third-party operators may materially impact the Company’s financial position and results of operations, and Altus may not realize the benefits it expects to realize from an equity interest.
As is common in the midstream industry, Altus owns or operates one or more of its properties with one or more equity interest partners, including the Equity Method Interest Pipelines, or contracts with a third-party to control operations. These relationships require the Company to share operational and other control or to defer to another party’s control, such that it does not have the flexibility to control the development of these properties. If Altus does not timely meet its financial commitments in such circumstances, its rights to participate may be adversely affected. If an equity interest partner is unable or fails to pay its portion of development costs or if a third-party operator does not operate in accordance with the Company’s expectations, the Company’s costs of operations could be increased. Altus could also incur liability or not realize expected benefits as a result of actions taken by an equity interest partner or third-party operator. Actions taken by Apache may also negatively impact Altus’ ownership in or the expected benefits from such assets. Disputes between Altus and the other party or parties in an equity interest may result in litigation or arbitration that would increase the Company’s expenses, delay or terminate projects, and distract the Company’s officers and directors from focusing their time and effort on Altus’ business.
If any of the Equity Method Interest Pipelines experience cost overruns or do not generate the cash flows Altus expects, the Company’s plans for growth and dividends will be impaired.
The Company’s strategy to grow its business, depends in part on the Equity Method Interest Pipelines. Altus can offer no assurance that the Equity Method Interest Pipelines will perform as expected. If applicable pipelines do not perform as expected, Altus may experience losses in relation to its equity interests. In addition, each of the Equity Method Interest Pipelines is subject to risks associated with cost over-runs, operational hazards, environmental matters, regulatory matters, creditworthiness of counterparties, and legal matters, as well as other risks and uncertainties, many of which are beyond the control of the operator of the pipeline. If any of these risks were to materialize, Altus’ financial condition, results of operations and cash flowsflow.
A shortage of equipment and skilled labor could reduce equipment availability and labor productivity and increase labor and equipment costs, which could materially and adversely affect the Company’s business and results of operations.
The Company’s gathering and other midstream services require special equipment and laborers who are skilled in multiple disciplines, such as equipment operators, mechanics and engineers, among others. If the Company experiences shortages of necessary equipment or skilled labor in the future, its labor and equipment costs and overall productivity could be materially and adversely affected. If the Company’s equipment or labor prices increase or if the Company experiences materially increased health and benefit costs for employees, its business and results of operations could be materially and adversely affected.
Environmental and Regulatory Risk Factors Related to the Company
The Company operates in a highly regulated environment and its business and profitability could be adversely affected.affected by actions by governmental entities, changes to current laws or regulations, or a failure to comply with laws or regulations.
RISKS RELATED TO THE VOLUME AND PROCESSING OF PRODUCTS THE COMPANY SERVICES
Altus is dependent on the supply of commodities to its system, and any decrease in such supply or the volumes that Altus gathers, processes, or transmits or any decrease in Altus’ processing efficiency would adversely affect its financial condition, results of operations, or cash flows.
The Company’s financial performance dependsbusiness is highly regulated and subject to a large extentnumerous governmental laws, rules, regulations and requires permits, authorizations and various governmental and agency approvals, in the various jurisdictions in which the Company operates, that impose various restrictions and obligations that may have material effects on the volumesCompany’s business and results of operations. Each of the applicable laws or regulatory requirements and limitations is subject to change, either through new laws or regulations enacted on the federal, state or local level, or by new or modified regulations that may be implemented under existing law. The nature and extent of any changes in these laws, rules, regulations and permits may be unpredictable, have retroactive effects and may have material effects on the Company’s business and profitability. Future legislation and regulations or changes in existing legislation and regulations, or interpretations thereof, could cause additional expenditures, tax liabilities, restrictions and delays in connection with the Company’s current business as well as future projects, the extent of which cannot be predicted and which may require the Company to limit substantially, delay or cease operations in some circumstances.
The Company’s sales of oil, natural gas, and NGLs gathered, processed,are subject to market manipulation requirements promulgated by FERC pursuant to the authority delegated to it by the Energy Policy Act of 2005 (“EPAct 2005”). The EPAct 2005 amended the NGA and transmittedNGPA to give FERC authority to impose civil penalties for violations of these statutes and regulations. The Commodity Futures Trading Commission (“CFTC”) also holds authority to monitor certain segments of the physical and futures energy commodities market pursuant to the Commodity Exchange Act. The Company believes, however, that neither the EPAct 2005, nor the regulations promulgated by FERC as a result of the EPAct 2005, nor the regulations promulgated by the CFTC will affect it in a way that materially differs from the way they affect other sellers of oil, natural gas, or NGLs with which the Company competes.
For a general overview of federal, state and local regulation applicable to the Company’s assets, see the “Regulation” section included within Part I, Items 1 and 2 of this annual report. This regulatory oversight can affect certain aspects of the Company’s business and the market for its products and could materially and adversely affect the Company’s financial position, results of operations and cash flows.
Rate regulation, challenges by shippers to the rates the Company charges on its pipelines or changes in the jurisdictional characterization of some of the Company’s assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of its assets, which may cause its operating expenses to increase, limit the rates it charges for certain services and decreasesdecrease the amount of cash flow.
Natural gas and crude oil gathering may receive greater regulatory scrutiny at the federal and state level. Therefore, the Company’s natural gas and crude oil gathering operations could be adversely affected should they become subject to the application of federal or state regulation of rates and services. The Company’s gathering operations could also be subject to safety and operational regulations relating to the design, construction, testing, operation, replacement and maintenance of gathering facilities. Intrastate transportation of NGLs and crude oil may also receive greater regulatory scrutiny at the federal and state level.The Company’s intrastate NGL transportation services are subject to the TRRC regulations and must be provided in a manner that is just, reasonable and non-discriminatory.Such operations could be subject to additional regulation if the NGLs and crude oil are transported in interstate or foreign commerce, whether by the Company’s pipelines or other means of transportation. The Company cannot predict what effect, if any, such changes might have on its operations, but it could be required to incur additional capital expenditures and increased operating costs depending on future legislative and regulatory changes.
The Company’s midstream and intrastate transportation and storage services that are regulated are generally subject to rate regulation and the regulation of the terms and conditions of service. If we do not comply with this regulation, we may be subject to claims for refunds of amounts charged, the modification, cancellation or suspension of a permit or other authorization, civil penalties and other relief. Additional rules and legislation pertaining to these matters are considered or adopted from time to time. The Company cannot predict what effect, if any, such changes might have on its operations, but the industry could be required to incur additional capital expenditures and increased costs depending on future legislative and regulatory changes.
Federal and state legislative and regulatory initiatives relating to pipeline safety, which are often subject to change, may result in more stringent regulations or enforcement and could subject the Company to increased operational costs, increased capital costs and potential operational delays.
Some of the Company’s pipelines are subject to regulation by the PHMSA pursuant to the Natural Gas Pipeline Safety Act of 1968 (“NGPSA”), with respect to natural gas, and the HLPSA, with respect to crude oil and NGLs. Both the NGPSA and the HLPSA were amended by the Pipeline Safety Act of 1992, the Accountable Pipeline Safety and Partnership Act of 1996, the PSIA, as reauthorized and amended by the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006, and the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011. The NGPSA and HLPSA regulate safety requirements in the design, construction, operation, and maintenance of natural gas, crude oil and NGL pipeline facilities, while the PSIA establishes mandatory inspections for all U.S. crude oil, NGL and natural gas transmission pipelines in HCAs.
PHMSA has developed regulations that require pipeline operators to implement integrity management programs, including more frequent inspections and other measures to ensure pipeline safety in HCAs. The regulations require operators, including the Company, to:
•perform ongoing assessments of pipeline integrity;
•identify and characterize applicable threats to pipeline segments that could impact an HCA;
•improve data collection, integration and analysis;
•repair and remediate pipelines as necessary; and
•implement preventive and mitigating actions.
PHMSA may revise these standards from time-to-time. For example, in October 2019, PHMSA published three final rules that create or expand reporting, inspection, maintenance and other pipeline safety obligations. Additional future regulatory action expanding PHMSA’s jurisdiction and imposing stricter integrity management requirements is possible. For instance, following the passage of Protecting Our Infrastructure of Pipelines and Enhancing Safety Act of 2020, operators of jurisdictional pipelines were required to update their inspection and maintenance plans to identify procedures to prevent and mitigate both vented and fugitive pipeline methane emission by the end of 2021. Separately, the U.S. Congress reauthorized PHMSA through 2023 as part of the Consolidated Appropriations Act of 2021 and directed the agency to move forward with several regulatory actions. In November 2021, PHMSA released a final rule expanding the definition of regulated gathering pipelines and imposing safety measures on certain previously unrelated gathering pipelines, to include criteria for inspection and repair of fugitive emissions. The final rule also imposes reporting requirements on all gathering pipelines, and specifically requires operators to report safety information to PHMSA. More recently, in August 2022, PHMSA published a final rule expanding the Management of Change process, extending corrosion requirements for gas transmission pipelines, adding requirements that operators ensure no conditions exist following an extreme weather event that could adversely affect the safe operation of the pipeline and adopting repair criteria for non-HCAs similar to those applicable to HCAs. The adoption of laws or regulations that apply more comprehensive or stringent safety standards could require the Company to install new or modified safety controls, pursue new capital projects or conduct maintenance programs on an accelerated basis, all of which could require the Company to incur increasing operating costs that may be significant. Further, should the Company fail to comply with PHMSA or comparable state regulations, it could be subject to substantial fines and penalties.
Increased regulation of hydraulic fracturing could result in reductions or delays in crude oil and natural gas production by the Company’s customers, which could reduce the throughput on its gathering and other midstream systems, which could adversely impact its revenues.
The Company does not conduct hydraulic fracturing operations, but substantially all the saltwater, crude oil and natural gas production of its customers is developed from unconventional sources that require hydraulic fracturing as part of the completion process. Hydraulic fracturing is a well stimulation process that utilizes large volumes of water and sand combined with fracturing chemical additives that are pumped at high pressure to crack open previously impenetrable rock to release hydrocarbons. There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally.
Hydraulic fracturing is typically regulated by state oil and gas commissions and similar agencies. Some states and local governments, including those in which the Company operates, have adopted, and other states are considering adopting, regulations that could impose more stringent disclosure or well construction requirements on hydraulic fracturing operations. In addition, several states and local governments have banned or significantly restricted hydraulic fracturing and, over the past several years, federal agencies such as the U.S. Environmental Protection Agency (“EPA”) have sought to assert jurisdiction over the process. While the EPA has previously sought to relax environmental regulation and reduce enforcement efforts, including with respect to energy developed from unconventional sources, environmental groups and states have filed lawsuits challenging the EPA’s recent actions. The Company cannot predict the results of these or future lawsuits, or how such lawsuits will affect the regulation of hydraulic fracturing operations. Certain environmental groups have also suggested that additional laws at the federal, state and local levels of government may be needed to more closely and uniformly regulate the hydraulic fracturing process. The Company cannot predict whether any such legislation will be enacted and if so, what its provisions would be. Governmental actions such as these could impact the oil and gas industry and the Company’s future potential growth in such areas. Additional levels of regulation and permits required through the adoption of new laws and regulations at the federal, state or local level could lead to delays, increased operating costs and process prohibitions that could reduce the volumes would directlyof crude oil and natural gas that move through the Company’s gathering systems and decrease demand for its water services, which in turn could materially and adversely impact its revenues.
In recent history, public concern surrounding increased seismicity has heightened focus on the oil and gas industry’s use of water in operations, which may cause increased costs, regulations or environmental initiatives impacting the use or disposal of water. The adoption of federal, state and local legislation and regulations intended to address induced seismicity in the areas in which the Company operates could restrict drilling and production activities, as well as the Company's ability to dispose of produced water gathered from such activities and could result in increased costs and additional operating restrictions or delays, that could, in turn, materially and adversely impact the Company's business and results of operations.
Adoption of new or more stringent legal standards relating to induced seismic activity associated with produced-water disposal could affect the Company’s operations.
The Company disposes of produced water generated from oil and natural-gas production operations. The legal requirements related to the disposal of produced water into a non-producing geologic formation by means of underground injection wells are subject to change based on concerns of the public or governmental authorities, including concerns relating to recent seismic events near injection wells used for the disposal of produced water. In response to such concerns, regulators in some states (including Texas, where the Company’s produced water gathering and disposal assets are) have imposed, or are considering imposing, additional requirements in the permitting and operating of produced-water disposal wells or are otherwise investigating the existence of a relationship between seismicity and the use of such wells. These developments could result in additional regulation and restrictions on the Company’s use of injection wells to dispose of produced water, including a possible shut down of wells, which could materially and adversely affect its business, financial condition, and results of operations. The Company currently operates produced water injection wells injecting into shallow formations in Texas, where the Texas Railroad Commission has recently addressed seismic activity by establishing Seismic Response Areas, curtailing injected volumes and/or suspending certain permits for disposal wells injecting into deep strata. Should the Texas Railroad Commission take additional action within the existing Seismic Response Areas or establish new Seismic Response Areas near the Company’s operations, or cash flows. These volumes can be influenced by factors beyond Altus’ control, includingit could have a significant adverse effect on its business. Furthermore, additional regulations weather, storage levels, increasedand restrictions on the use of alternative energy sources, decreased demand,injection wells could indirectly result in reduced gas gathering and changes in production. The Company’s financial condition, results of operations,processing volumes and / or cash flows may also be adversely affected if the reserves or estimates thereof reported bycrude gathering volumes from the Company’s customers, which could materially and adversely affect its business, financial condition, and results of operations.
The Company may incur significant liability under, or costs and expenditures to comply with, health, safety and environmental laws and regulations, which are complex and subject to frequent change.
The Company is subject to various stringent and complex federal, state and local laws and regulations governing health and safety aspects of its operations, the discharge of materials into the environment and the protection of the environment and natural resources (including endangered or threatened species). These laws and regulations may impose on the Company’s operations numerous requirements, including the acquisition of permits, approvals and certificates before conducting regulated activities; restrictions on the types, quantities and concentration of materials that may be released into the environment; the application of specific health and safety criteria to protect the public or workers; and the responsibility for whichcleaning up pollution resulting from operations. Moreover, many of the Company does not obtain independent evaluations, is less than anticipated or ifpermits required for the infrastructure to gatherconstruction and process supply into and outoperation of the Company’s assets may be subject to challenge by third parties, resulting in project delays or the imposition of stringent environmental controls as a precondition to issuing such permits. The Company may incur substantial costs to maintain compliance with these existing laws and regulations and the permits and other approvals thereunder. Additionally, the Company’s costs of compliance may increase or operational delays may occur if existing laws and regulations are revised or reinterpreted, or if new laws and regulations apply to its operations. Numerous governmental authorities, such as the EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued thereunder, oftentimes requiring difficult and costly response actions. Failure to comply with these laws and regulations may result in the assessment of sanctions,
including administrative, civil and criminal penalties; the imposition of investigatory, remedial or corrective action obligations; the incurrence of capital expenditures, the occurrence of delays in the permitting, development or expansion of projects, and enjoining some or all of the Company’s future operations in a particular area. Compliance with more stringent standards and other environmental regulations could prohibit the Company’s ability to obtain permits for operations or require it to install additional equipment, the costs of which could be significant.
The risk of incurring environmental costs and liabilities in connection with the Company’s operations is significant because of its handling of natural gas, crude and other petroleum products, its air emissions and product-related discharges arising out of its operations and as a result of historical industry practices and waste disposal practices. For example, an accidental release from one of the Company’s facilities could subject it to substantial liabilities arising from environmental cleanup and restoration costs, claims made by neighboring landowners and other third parties for personal injury, natural resources and property damages and fines and penalties for related violations of environmental laws or regulations.
Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly requirements could require the Company to make significant expenditures to attain and maintain compliance or may otherwise have a material adverse effect on its operations, competitive position or financial condition.
Public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stringent environmental legislation and regulations applied to the oil and natural gas industry could continue, resulting in increased costs of doing business and, consequently, affecting profitability. Additionally, fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas and technological advances in fuel economy and energy generation devices, could all reduce demand for oil and natural gas and consequently reduce demand for the midstream services the Company provides. The impact of this changing demand could materially and adversely affect the Company’s business, operations and cash flows.
Climate change laws and regulations restricting emissions of GHGs could result in increased operating costs and reduced demand for the crude oil and natural gas the Company gathers, while potential physical effects of climate change could disrupt the Company’s operations, cause damage to its pipelines and other facilities and cause it to incur significant costs in preparing for or responding to those effects.
Climate change continues to attract considerable public and scientific attention. There is a broad consensus of scientific opinion that human-caused emissions of GHGs are linked to climate change. Climate change and the costs that may be associated with its impacts and the regulation of GHGs have the potential to materially affect the Company’s business in many ways, to include negatively impacting the costs the Company incurs in providing its products and the demand for and consumption of its products.
The EPA adopted regulations requiring the reporting of GHG emissions from specific categories of higher GHG emitting sources in the United States, including certain oil and natural gas facilities, which include certain of the Company’s operations. Information in such reporting may form the basis for further GHG regulation. The EPA has also continued with its comprehensive strategy for further reducing methane and volatile organic compound (“VOC”) emissions from oil and gas operations. In May 2016, a final rule established specific new requirements regarding emissions from production-related wet seal and reciprocating compressors, and from pneumatic controllers and storage vessels. Additionally, the regulations placed new requirements to detect and repair VOC and methane leaks at certain well sites and compressor stations. However, in September 2020, the EPA finalized a rule removing transportation and storage activities from the purview of the rules. On January 20, 2021, President Biden signed an executive order calling for the suspension, revision, or rescission of the September 2020 rule, and the reinstatement or issuance of methane emissions standards for new, modified, and existing oil and gas facilities, including transmission and storage facilities. Following approval by Congress, the resolution was signed into law in June 2021 and effectively vacated the September 2020 rule, reinstating the prior standards under the May 2016 rule. In November 2021, as required by the President’s executive order, the EPA proposed new regulations to establish comprehensive standards of performance and emission guidelines for methane and VOC emissions from new and existing operations in the oil and gas sector, including the exploration and production, transmission, processing and storage segments. On November 11, 2022, the EPA released its supplemental methane proposal. The proposal includes the tightening of proposed requirements under the CAA for methane and VOC emissions from sources that commenced construction, modification, or reconstruction after November 15, 2021, to include proposed standards for previously unregulated emission sources for this category. Additionally, the proposal sets forth specific revisions strengthening the first nationwide emission guidelines for states to limit methane emissions from existing crude oil and natural gas facilities. The proposal also revises requirements for fugitive emissions monitoring and repair as well as equipment leaks and the frequency of monitoring surveys, establishes a “super-emitter” response program to timely mitigate emissions events, and provides additional options for the use of advanced monitoring to encourage the deployment of innovative technologies to detect and reduce methane emissions. The EPA’s supplemental methane rule will likely work alongside the Inflation Reduction Act of 2022 (“IRA”), which was signed into law in August 2022, and appropriates significant federal funding for renewable energy initiatives, alongside amending the CAA to
impose a first-time fee on the emission of methane from sources required to report their GHG emissions to the EPA. The methane emissions charge imposes a fee on excess methane emissions from certain oil facilities starting at $900 per metric ton of leaked methane in 2024 and rising to $1,200 in 2025 and $1,500 in 2026 and thereafter. Compliance with the EPA’s proposed new regulations and the IRA’s methane emissions fee could increase the Company’s operating costs and accelerate the transition away from fossil fuels, which could in turn reduce the demand for its services, thereby adversely affecting its operations and potentially restricting or delaying the Company’s ability to obtain applicable permits, approvals, or certificates for new or modified facilities.
Climate change remains a priority for the current administration, which could lead to additional regulations or restrictions on oil and gas development. In February 2021, the administration recommitted the United States to the Paris Agreement, a framework for parties to the agreement to cooperate and report actions to reduce GHG emissions. The Paris Agreement calls for parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The current administration, in April 2021, announced a target for the United States to achieve a 50% – 52% reduction from 2005 levels in economy-wide net GHG pollution in 2030. This target builds upon the President’s goals to create a carbon pollution-free power sector by 2035 and a net zero emissions economy by 2050. In November 2021, the international community gathered again in Glasgow at the 26th Conference to the Parties on the UN Framework Convention on Climate Change (“COP26”), during which multiple announcements were made, including a call for parties to eliminate certain fossil fuel subsidies and pursue further action on non-carbon dioxide GHGs. Relatedly, the United States and European Union jointly announced the launch of the “Global Methane Pledge,” which aims to cut global methane pollution at least 30% by 2030 relative to 2020 levels, including “all feasible reductions” in the energy sector. At COP27 in Sharm El-Sheik in November 2022, countries reiterated the agreements from COP26 and were called upon to accelerate efforts toward the phase out of inefficient fossil fuel subsidies. The United States also announced, in conjunction with the European Union and other partner countries, that it would develop standards for monitoring and reporting methane emissions to help create a market for low methane-intensity gas. Although no firm commitment or timeline to phase out or phase down all fossil fuels was made at COP27, there can be no guarantees that countries will not seek to implement such a phase out in the future. At COP27 in Sharm El-Sheik in November 2022, countries reiterated the agreements from COP26 and were called upon to accelerate efforts toward the phase out of inefficient fossil fuel subsidies. The United States also announced, in conjunction with the European Union and other partner countries, that it would develop standards for monitoring and reporting methane emissions to help create a market for low methane-intensity gas. Although no firm commitment or timeline to phase out or phase down all fossil fuels was made at COP27, there can be no guarantees that countries will not seek to implement such a phase out in the future. Meeting these goals may require further regulations that could adversely impact the Company’s operations and financial performance or otherwise reduce demand for the products it stores, processes, and transports.
The adoption of legislation or regulatory programs to reduce emissions of GHGs could require the Company to incur increased operating costs, such as costs to purchase and operate emissions and vapor control systems are unavailable or inadequate.to comply with new regulatory or reporting requirements. If the Company is unable to maintainrecover or increase the volumes on its system or if its processing efficiency falls below contractually required levels, the Company’s business, financial conditions, results of operations, or cash flows could be adversely affected.
The Company’s exposure to commodity price risk may change over time.
The Company currently generates substantially allpass through a significant level of its midstream services revenue pursuantcosts related to fee-based contracts under which the Company is paid basedcomplying with climate change regulatory requirements imposed on the volumes that it, gathers, processes, and transmits, rather than the underlying value of the commodity, and only has an immaterial portion of its revenues that are based on the underlying value of a commodity. However, Altus may enter into contracts or may acquire or develop additional midstream assets in a manner that increases its exposure to commodity price risk, whichit could adversely affect Altus’ financial condition, results of operations, or cash flows.
RISKS RELATED TO CAPITAL EXPENDITURES
To maintain and grow its business, Altus is, and will be, required to make substantial capital expenditures.
To maintain and grow its business, Altus will need to make substantial capital expenditures to fund growth capital expenditures as well as its share of capital expenditures associated with the Equity Method Interest Pipelines. If the Company does not make sufficient or effective capital expenditures, it will be unable to maintain and grow its business, and, as a result, it may be unable to increase its cash flow over the long term. To fund Altus’ capital expenditures, it will be required to use cash from its operations, incur debt, engage in structured financial transactions, or sell additional shares of Class A Common Stock or other equity securities.
Additionally, the Company’s ability to obtain bank financing or its ability to access the capital markets for future equity or debt offerings may be limited by its then-current financial condition and the covenants in its then-current debt agreements, as well as by general economic conditions and uncertainties that are beyond its control. Also, due to Altus’ relationship with Apache, material adverse changes affecting Apache could negatively impact the Company’s ability to access the capital markets, including the pricing or other terms of any capital markets transactions, or engage in certain transactions that might otherwise be considered beneficial to the Company.
The capital and global credit markets have experienced volatility and disruption in the past, and further volatility and disruption may have an adverse effect on Altus’s ability to access the credit markets to finance its operations or expansions.
The capital and global credit markets have experienced volatility and disruption in the past. In many cases during these periods, the capital markets have exerted downward pressure on equity values and reduced the credit capacity for certain companies. Similar or more severe levels of global market disruption and volatility may have an adverse effect on Altus resulting from, but not limited to, disruption of Altus’ access to capital and credit markets, difficulty in obtaining financing necessary to expand facilities or acquire assets, increased financing costs, and increasingly restrictive covenants.
If Altus is unable to access capital at competitive rates, the Company’s strategy of enhancing the earnings potential of its existing assets, including through capital-growth projects and acquisitions of complementary assets or businesses, may be affected adversely.
RISKS RELATED TO THE COMPANY’S FINANCIAL CONDITION AND OBLIGATIONS
Debt Altus incurs may limit its flexibility to obtain financing and to pursue other business opportunities.
The Company’s current and future level of debt could have important consequences to it, and the Company’s ability to obtain additional financing, if necessary, for working capital, capital expenditures, or other purposes may be impaired or such financing may not be available on favorable terms. The funds available for operations, future business opportunities, and the payment of dividends, if any, to the Company’s stockholders will be reduced by that portion of its cash flows required to make interest payments on its debt, and the Company may be more vulnerable to competitive pressures or a downturn in its business or the economy generally.
Altus’ ability to service any debt will depend upon, among other things, its future financial and operating performance, which will be affected by prevailing economic conditions and other factors, some of which are beyond its control. If the Company’s operating results are not sufficient to service any future indebtedness, it will be forced to take actions such as reducing or eliminating dividends, reducing or delaying its business activities, investments, or capital expenditures, selling assets, or issuing equity. Altus may not be able to effect any of these actions on satisfactory terms or at all.
The discontinuation and uncertain cessation date of LIBOR, and the adoption of an alternative reference rate, may have a material adverse impacteffect on Altus Midstream’s floating rate indebtednessthe Company’s results of operations and financing costs.
Pursuant to the terms of Altus Midstream’s revolving credit facility, Altus Midstream may elect to use the London Interbank Offering Rate (LIBOR) as a benchmark for establishing the interest rate on floating interest rate borrowings under its revolving credit facility. On November 30, 2020, the ICE Benchmark Administration (IBA) announced that it intends to continue publishing LIBOR until the end of June 2023, beyond the previously announced 2021 cessation date. The IBA announcement was supported by announcements from the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, and the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency (U.S. Regulators). However, both the FCA and U.S. Regulators in their announcements also advised banks to cease entering into new contracts referencing LIBOR after December 2021. These announcements indicate that the continuation of LIBOR in existing contracts may not be assured after 2021 and will not be assured beyond 2023. In light of these recent announcements, the future of LIBOR at this time is uncertain, and any changes in the methods by which LIBOR is determinedfinancial condition. Any such legislation or regulatory activity relatedprograms could also increase the cost of consuming, and thereby reduce demand for, the natural gas the Company stores, processes and transports. Consequently, legislation and regulatory programs to LIBOR’s phase-out could cause LIBOR to perform differently than in the past or cease to exist.
In the United States, the Alternative Reference Rates Committee (the working group formed to recommend an alternative rate to LIBOR) has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for LIBOR. There can be no guarantee that SOFR will become a widely-accepted benchmark in placereduce emissions of LIBOR. Although the full impact of the transition away from LIBOR, including the discontinuance of LIBOR publication and the adoption of SOFR as the replacement rate for LIBOR, remains unclear, these changes may have an adverse impact on Altus Midstream’s floating rate indebtedness and financing costs under its revolving credit facility.
Altus is exposed to the credit risk of its customers and counterparties, including Apache, and their nonpayment or nonperformanceGHGs could have an adverse effect on the Company’s business, financial condition, and results of operations. Moreover, incentives to conserve energy or use alternative energy sources as a means of addressing climate change could reduce demand for the Company’s products.
In addition, parties concerned about the potential effects of climate change have directed their attention at sources of funding for energy companies, which has resulted in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in oil and natural gas activities. Financial institutions may adopt policies that have the effect of reducing the funding provided to the fossil fuel sector. For example, in late 2020, the Federal Reserve announced that it had joined the Network for Greening the Financial System (“NGFS”), a consortium of financial regulators focused on addressing climate-related risks in the financial sector, and, in September 2022, announced that six of the U.S.’ largest banks will participate in a pilot climate scenario analysis exercise, launched in early 2023, to enhance the ability of firms and supervisors to measure and manage climate-related financial risk. While the Company cannot predict what policies may result from this, a material reduction in the capital available to the fossil fuel industry could make it more difficult to secure funding for exploration, development, production, transportation and processing activities, which could result in decreased demand for the Company’s midstream services. Additionally, in March 2022, the Securities and Exchange Commission released a proposed rule that would establish a framework for the reporting of climate risks, targets, and metrics. If a final rule is released, the Company cannot predict what any such rule may require. To the extent the rule imposes additional reporting obligations, the Company could face increased costs. Separately, the SEC has also announced that it is scrutinizing existing climate-change related disclosures in public filings, increasing the potential for enforcement if the SEC were to allege an issuer’s climate disclosures are misleading or deficient.
Finally, it should be noted that there are increasing risks to the Company’s operations resulting from the potential physical impacts of climate change, such as drought, wildfires, damage to infrastructure and resources from flooding, storms and other natural disasters, chronic shifts in temperature and precipitation patterns and other physical disruptions. One or cash flows.more of these developments could materially and adversely affect the Company’s business, financial condition and results of operation.
The
Increasing attention to ESG matters and conservation measures may adversely impact the Company’s business.
Increasing attention to climate change, societal expectations on companies to address climate change, investor and societal expectations regarding voluntary ESG disclosures and consumer demand for alternative forms of energy may result in increased costs, reduced demand for the Company’s products, reduced profits, increased investigations and litigation and negative impacts on the Company’s access to capital markets. Increasing attention to climate change and environmental conservation, for example, may result in demand shifts for oil and natural gas products and additional governmental investigations and private litigation against the Company or its customers. To the extent that societal pressures or political or other factors are involved, it is possible that such liability could be imposed without regard to the Company’s causation of or contribution to the asserted damage, or to other mitigating factors. While the Company may participate in various voluntary frameworks and certification programs to improve the ESG profile of its operations and services, the Company cannot guarantee that such participation or certification will have the intended results on its ESG profile.
Moreover, while the Company may create and publish voluntary disclosures regarding ESG matters from time to time, many of the statements in those voluntary disclosures will be based on hypothetical expectations and assumptions that may or may not be representative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Such expectations and assumptions are necessarily uncertain and may be prone to error or subject to risks of loss resulting from nonpayment or nonperformance by its customers or other counterparties, including Apache. Any increase inmisinterpretation given the nonpayment or nonperformance by such parties could adversely affect Altus’ financial condition, results of operations, or cash flows. Additionally, the combination of a reduction of cash flow resulting from lower commodity prices, a reduction in borrowing bases under reserve-based credit facilities,long timelines involved and the lack of availability of debt or equity financingan established single approach to identifying, measuring, and reporting on many ESG matters. Additionally, while the Company may result in a significant reductionalso announce various voluntary ESG targets, such targets are aspirational. The Company may not be able to meet such targets in the liquiditymanner or on such a timeline as initially contemplated including, but not limited to, as a result of unforeseen or increased costs associated therewith. To the extent that the Company does meet such targets, it may be achieved through various contractual arrangements, including the purchase of various credits or offsets that may be deemed to mitigate the Company’s ESG impact instead of actual changes in its ESG performance. Also, despite these goals, the Company may receive pressure from investors, lenders, or other groups to adopt more aggressive climate or other ESG-related goals, but it cannot guarantee that it will be able to implement such goals because of potential costs or technical or operational obstacles.
In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings and recent activism directed at shifting funding away from companies with energy-related assets could lead to increased negative investor sentiment toward the Company, its customers, and its industry and to the diversion of investment to other industries, which could have a negative impact on business and the Company’s access to and costs of capital. Also, institutional lenders may decide not to provide funding for fossil fuel energy companies or the corresponding infrastructure projects based on climate change related concerns, which could affect the Company’s access to capital for potential growth projects.
Furthermore, public statements with respect to ESG matters, such as emissions reduction goals, other environmental targets or other commitments addressing certain social issues, are becoming increasingly subject to heightened scrutiny from public and governmental authorities related to the risk of potential “greenwashing,” i.e., misleading information or false claims overstating potential ESG benefits. For example, in March 2021, the SEC established the Climate and ESG Task Force in the Division of Enforcement to identify and address potential ESG-related misconduct, including greenwashing. Certain non-governmental organizations and other private actors have also filed lawsuits under various securities and consumer protection laws alleging that certain ESG-statements, goals or standards were misleading, false or otherwise deceptive. Moreover, the Federal Trade Commission in August 2022 indicated its intent to issue revised “Green Guides” which will likely address greenwashing risks arising from ESG-related matters. As a result, the Company may face increased litigation risks from private parties and their abilitygovernmental authorities related to make payment or perform on their obligationsits ESG efforts. Additionally, the Company could face increasing costs as it attempts to the Company. Furthermore, somecomply with and navigate further regulatory focus and scrutiny.
Risks Related to Ownership of Our Common Stock
Entities controlled by Blackstone, I Squared Capital and Apache Midstream own a majority of the Company’s customersoutstanding voting shares and thus strongly influence all the Company’s corporate actions.
As long as Blackstone, I Squared Capital, Apache Midstream and their respective affiliates own or control a significant percentage of the Company’s outstanding voting power, they will have the ability to strongly influence all corporate actions, including stockholder approval of the election of and removal of directors. The interests of Blackstone, I Squared Capital or Apache Midstream may not align with the interests of the Company’s other stockholders.
Although we currently are not considered to be a “controlled company” under the NYSE corporate governance rules, we may in the future become a controlled company due to the concentration of voting power among entities controlled by Blackstone.
Although we currently are not considered to be a “controlled company” under the NYSE corporate governance rules, we may in the future become a controlled company. As of December 31, 2022, entities controlled by Blackstone own approximately 49.8% of our outstanding Common Stock and, pursuant to the Reinvestment Agreement, will be obligated to reinvest all 2023 dividends and distributions in shares of Class A Common Stock. Consequently, entities controlled by Blackstone may own more than 50% of our Common Stock at some point in 2023. A “controlled company” pursuant to the NYSE corporate governance rules is a company of which more than 50% of the voting power is held by an individual, group, or another company. In the event that Blackstone and its affiliates or other counterpartiesstockholders own more than 50% of the voting power of the Company, we may in the future be able to rely on the “controlled company” exemptions under the NYSE corporate governance rules due to this concentration of voting power. If we were a controlled company, we would be eligible, and could elect, not to comply with certain of the NYSE corporate governance standards. Such standards include the requirement that a majority of directors on our Board are independent directors, subject to certain phase-in periods, and the requirement that our compensation, nominating and governance committee consist entirely of independent directors. In such a case, if the interests of our stockholders differ from the group of stockholders holding a majority of the voting power, our stockholders would not have the same protection afforded to stockholders of companies that are subject to all of the NYSE corporate governance standards, and the ability of our independent directors to influence our business policies and corporate matters may be leveragedreduced.
Potential future sales pursuant to registration rights granted by the Company and subjectunder Rule 144 may depress the market price for our shares of Class A Common Stock.
The Company has granted a number of its stockholders, including Blackstone, I Squared Capital and Apache Midstream, registration rights with respect to their own operatingshares of Class A Common Stock, including shares of Class A Common Stock issuable upon redemption of OpCo Units. In addition, under Rule 144 under the Securities Act, a person who has satisfied a minimum holding period of between six months and regulatory risks, which increasesone-year and any other applicable requirements of Rule 144, may thereafter sell such shares in transactions exempt from registration. A significant number of our currently issued and outstanding shares of Class A Common Stock held by existing stockholders, including officers and directors and other principal stockholders are currently eligible for resale pursuant to and in accordance with the risk that theyprovisions of Rule 144. The possible future sale of our shares by our existing stockholders, pursuant to and in accordance with the provisions of Rule 144, may default.
Altus may be required to take write-downs, write-offs, or restructuring and impairment or other charges that could have a significant negativedepressive effect on its financial condition, resultsthe price of operations, and stock price.
Altus cannot assure its stockholders that its due diligence will reveal all material issues that may be presentour shares of Class A Common Stock in the businesses that it may acquire, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of its control will not later arise. As a result, Altus may be forced to later write down or write off assets, restructure its operations, or incur impairment or other charges that could result in losses. Even though these charges may be non-cash items and may not have an immediate impact on the Company’s liquidity, the fact that it reports charges of this nature could contribute to negative market perceptions about the Company or its securities.applicable trading marketplace.
The Company’s ability to utilize net operating lossesreturn capital to stockholders through dividends and other tax attributes to reduce future taxable income may be limited if the Company experiences an ownership change.
As described in Note 12—Income Taxes within Part II, Item 8 of this Annual Report on Form 10-K, the Company has substantial net operating loss carryforwards (NOLs) and other tax attributes available to potentially offset future taxable income. If the Company were to experience an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended, which is generally defined as a greater than 50 percentage point change, by value, in the Company’s equity ownership by five-percent shareholders over a three-year period, the Company’s ability to utilize its pre-change NOLs and other pre-change tax attributes to potentially offset its post-change income or taxes may be limited. Such a limitation could materially adversely affect the Company’s operating results or cash flows by effectively increasing its future tax obligations.Altus’ ability to pay dividendsstock repurchases depends on its ability to generate sufficient cash flow, which it may not be able to accomplish.
The Company’s ability to payreturn capital to stockholders through dividends and stock repurchases principally depends upon the amount of cash it generates from its operations, which will fluctuate from quarter to quarter based on, among other things, income from the Equity Method Interest Pipelines,Pipeline Transportation JVs, the volumes of natural gas and NGLs it gathers and processes, commodity prices, and other factors impacting Altus’the Company’s financial condition, some of which are beyond its control. In addition, under Delaware law, dividends on Altus’the Company’s capital stock may only be paid from “surplus,” which is the amount by which the fair value of Altus’the Company’s total assets exceeds the sum of its total liabilities, including contingent liabilities, and the amount of its capital; if there is no surplus, cash dividends on capital stock may only be paid from Altus’the Company’s net profits for the then-current and/or the preceding fiscal year.
Altus’ only significant assets are ownership of the non-economic general partner interest and an approximate 23.1 percent limited partner interest in Altus Midstream LP, and such ownership may not be sufficient for Altus Midstream LP to make distributions or loans to Altus to enable it to pay any dividends or satisfy its other financial obligations.
Altus has no direct operations and no significant assets other than the ownership of the non-economic general partner interest and an approximate 23.1 percent limited partner interest in Altus Midstream LP. The Company depends on Altus Midstream LP for distributions, loans, and other payments to generate the funds necessary to meet its financial obligations and to pay dividends with respect to its Class A Common Stock. Subject to certain restrictions, Altus Midstream LP generally will be required to (i) make pro rata distributions to its partners, including the Company, on a quarterly basis in an amount at least sufficient to allow the Company to pay the Company’s taxes and make tax advances to Altus Midstream LP’s limited partners, other than the Company, in certain circumstances, and (ii) reimburse the Company for certain corporate and other overhead expenses. However, legal and contractual restrictions in agreements governing existing and future indebtedness of Altus Midstream LP, as well as the financial condition and operating requirements of Altus Midstream LP, may limit the Company’s ability to obtain cash from Altus Midstream LP. In addition, Altus Midstream LP is required to pay specified quarterly distributions on its Series A Cumulative Redeemable Preferred Units before paying distributions on Common Units. The earnings from, or other available assets of, Altus Midstream LP may not be sufficient to make distributions or loans to the Company, to enable it to pay dividends on its Class A Common Stock, or to satisfy its other financial obligations. The Delaware
Revised Uniform Limited Partnership Act generally restricts distributions to the extent that the liabilities of the limited partnership exceed the fair value of its assets.
Holders of Altus Midstream’s Series A Cumulative Redeemable Preferred Units have rights, preferences, and privileges that are not held by, and are preferential to the rights of, holders of Common Units, and could dilute or otherwise adversely affect the holders of Common Units.
Altus Midstream is required to pay specified quarterly distributions on the Series A Cumulative Redeemable Preferred Units (the Preferred Units) before paying distributions on its Common Units. If Altus Midstream fails to pay the Preferred Unit distribution in respect of any quarter in full in cash, then Altus Midstream will not be permitted to declare or make any distributions on its Common Units until all accrued and accumulated but unpaid Preferred Unit distributions have been paid in full. In addition, Altus Midstream’s cash payment of distributions on, and for redemption of, its Common Units is limited in amount and subject to satisfaction of leverage ratios.
The Preferred Units are redeemable at any time at the option of Altus Midstream and under certain circumstances, the Preferred Units are redeemable at the holders’ option, in each case, at a price which incorporates an agreed return on the holders’ investment. The Preferred Units also rank senior to the Common Units in distribution and liquidation rights, and holders of Preferred Units will be entitled to receive a liquidation preference that incorporates an agreed return on the holders’ investment.
The Company depends on Altus Midstream for distributions, loans, and other payments to generate the funds necessary to meet the Company’s financial obligations or to pay any dividends with respect to its Class A Common Stock. Obligations of Altus Midstream in respect of the Preferred Units may restrict, reduce, or render unavailable funds that otherwise may be available to be distributed, loaned, or paid to the Company by Altus Midstream or loaned to, or invested in, Altus Midstream by third parties.
RISKS RELATED TO PERMITTING, REGULATIONS, AND OTHER LEGAL CHANGES
Altus may be unable to obtain or renew permits necessary for its operations, which could inhibit its ability to do business.
Performance of the Company’s operations require that it obtain and maintain a number of federal, state, and local permits, licenses, and approvals, which is an expensive and lengthy process, with terms and conditions containing a significant number of prescriptive limits and performance standards in order to operate. All of these permits, licenses, approvals, limits, and standards require a significant amount of monitoring, record keeping, and reporting. Noncompliance or incomplete documentation may result in the imposition of fines, penalties, and injunctive relief. Moreover, the public may engage in the permitting process, including through intervention in the courts. Negative public perception could cause the permits Altus requires to conduct its operations to be withheld, delayed, or burdened by restrictive requirements. A decision by a government agency to deny or delay the issuance of a new or existing material permit or other approval or to revoke or substantially modify an existing permit or other approval could adversely affect the Company’s financial condition, results of operations, or cash flows.
Altus is subject to regulation by multiple governmental agencies, which could adversely impact its business, results of operations, and financial condition.
The Company is subject to regulation by multiple federal, state, and local governmental agencies, including those related to pipeline and environmental safety, and regulation by the stock exchange on which its common stock is listed. Proposals and proceedings that could affect the Company or its industry are regularly considered by Congress, as well as by state legislatures and federal and state regulatory commissions, agencies, and courts and stock exchanges. The Company cannot predict when or whether any such proposals or proceedings may become effective or the magnitude of the impact changes in or interpretations of laws, regulations, and exemptions may have on its business. However, additions to the regulatory burden on the Company and the midstream industry can increase the Company’s cost of doing business and affect its profitability.
Altus may become subject to the requirements of the Investment Company Act of 1940, which would limit its business operations and require it to spend significant resources to comply with such act.
The Investment Company Act of 1940 (the Investment Company Act) defines an “investment company” as an issuer that is engaged in the business of investing, reinvesting, owning, holding, or trading in securities and owns investment securities having a value exceeding 40 percent of the issuer’s unconsolidated assets, excluding cash items and securities issued by the federal government. It is possible that some or all of the interests in the Equity Method Interest Pipelines may be investment securities and that the value of those interests that are investment securities over time may exceed 40 percent of the applicable subsidiaries’ unconsolidated assets, excluding cash and government securities, in which case such subsidiaries may meet this threshold definition of an investment company. However, the Investment Company Act provides certain exclusions from this definition and other alternative relief from the application of the Investment Company Act.
The ramifications of becoming an investment company, both in terms of the restrictions it would have on such subsidiary and the cost of compliance, would be significant. For example, in addition to expenses related to initially registering as an investment company, the Investment Company Act also would impose various restrictions with regard to the subsidiary’s ability to enter into affiliated transactions, the diversification of its assets, and its ability to borrow money. If any of Altus’ subsidiaries became subject to the Investment Company Act at some point in the future, then the subsidiary’s ability to continue pursuing its business plan would be severely limited.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of Altus’ income or other tax returns could adversely affect its financial condition and results of operations.
Altus is subject to income taxes in the United States, and its domestic tax liabilities may be subject to the allocation of expenses in differing jurisdictions. Altus’ future effective tax rates could be subject to volatility or adversely affected by a number of factors, including changes in the valuation of Altus’ deferred tax assets and liabilities, expected timing and amount of the release of any tax valuation allowances, tax effects of stock-based compensation, costs related to intercompany restructurings, changes in tax laws, regulations, or interpretations thereof, or lower than anticipated future earnings in jurisdictions where Altus has lower statutory tax rates and higher than anticipated future earnings in jurisdictions where Altus has higher statutory tax rates.
In addition, Altus may be subject to audits of its income, franchise, sales, and other transaction taxes by U.S. federal and state authorities. Outcomes from these audits could have an adverse effect on the Company’s financial condition and results of operations.
RISKS RELATED TO CLIMATE CHANGE
Climate change legislation, and regulatory initiatives could result in increased operating costs and reduced demand for the natural gas and NGLs services the Company provides.
Legislative bodies and governmental agencies have from time to time considered or adopted legislation or regulations to reduce emissions of GHGs. Wide-ranging policy debates regarding the impact of these gases and possible means for their regulation, along with efforts toward the adoption of international treaties or protocols that would address global climate change issues, are ongoing. Numerous proposals have been made and could continue to be made at the national, regional, and state levels of government to monitor and limit existing emissions of GHGs as well as to restrict or eliminate such future emissions. Moreover, on January 27, 2021, the President issued an executive order that commits to substantial action on climate change, calling for, among other things, the increased use of zero-emissions vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry, and increased emphasis on climate-related risk across governmental agencies and economic sectors. Any such legislation or regulation, if enacted, could either tax or assess some form of GHG-related fees on the Company’s operations and could lead to increased operating expenses or result in the Company making significant capital investments for infrastructure modifications.
Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas as GHG cap-and-trade programs, carbon taxes, reporting and tracking programs, restriction of emissions, electric vehicle mandates, and combustion engine phaseouts. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, oil, natural gas, and NGLs. Additionally, political, litigation, and financial risks related to climate change may result in curtailed refinery activity, increased regulation, or other adverse direct and indirect effects on the Company’s business, financial condition and results of operations. For example, there is a risk that financial institutions will be required to adopt policies that have the effect of reducing the funding provided to the fossil fuel sector. Recently, the Federal Reserve announced that it has joined the Network for Greening the Financial System, a consortium of financial regulators focused on addressing climate-related risks in the financial sector.
Although it is not possible at this time to predict whether legislation or regulations may be adopted to address GHG emissions or how such measures would impact the Company’s business, the imposition of reporting or permitting obligations on, or limiting emissions of GHGs from, Altus’ equipment and operations could require the Company to incur additional costs, adversely affect its performance of operations, or adversely affect demand for the Company’s services.
Altus’ customers, including Apache, and suppliers are subject to the risk of increased federal, state, and local legislation and regulatory initiatives, which could adversely affect Altus’ financial condition, results of operations, or cash flows.
The production of crude oil, natural gas, and NGLs by the Company’s customers, including Apache, and the Company’s suppliers are subject to regulation by multiple federal, state, and local governmental agencies, which may enact additional or more restrictive or onerous regulations, including those that may further regulate, restrict, or prohibit certain drilling methods, including hydraulic fracturing, or impose additional permit requirements and operational restrictions, such as a reduction or prohibition of venting or flaring, in certain jurisdictions or in environmentally sensitive areas. If additional levels of regulation and permits are required, that could lead to delays, increased operating costs, and process prohibitions for the Company’s suppliers and customers that could reduce the volumes of natural gas and NGLs that move through the Company’s systems, which could materially adversely affect its revenue and results of operations.
RISKS RELATED TO THE COMPANY’S OWNERSHIP AND FILING STATUS
Altus is a “controlled company” within the meaning of the Nasdaq listing rules and, as a result, qualifies for, and intends to rely on, exemptions from certain corporate governance requirements.
Because Apache and its affiliates control a majority of Altus’ outstanding voting common stock, Altus is a controlled company within the meaning of the Nasdaq corporate governance standards. Under the Nasdaq listing rules, a controlled company may elect not to comply with certain Nasdaq corporate governance requirements, including the requirements that a majority of the board of directors consist of independent directors, the nominating and governance committee be composed entirely of independent directors, and the compensation committee be composed entirely of independent directors. These requirements will not apply to Altus as long as it remains a controlled company, and Altus currently utilizes and intends to continue to utilize some, if not all, of these exemptions. Accordingly, Altus’ stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq listing rules.
The JOBS Act permits “emerging growth companies” like Altus to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies.
Altus qualifies as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). As such, Altus is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies and of extended transition periods for as long as Altus continues to be an emerging growth company, including:
•the exemption from the independent registered public accounting firm attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act;
•the exemptions from say-on-pay, say-on-frequency, and say-on-golden parachute voting requirements;
•an extended transition period for complying with new or revised accounting standards; and
•reduced disclosure obligations regarding executive compensation in Altus’ periodic reports and proxy statements.
As a result, Altus’ stockholders may not have access to certain information they deem important and may not be able to directly compare the Company’s financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period, because of the potential differences in accounting standards used. Altus cannot predict if investors will find its Class A Common Stock less attractive if it relies on these exemptions. If some investors find Altus’ Class A Common Stock less attractive as a result, there may be a less active trading market for its Class A Common Stock, and its stock price may be more volatile.
RISKS RELATED TO THE COMPANY’S WARRANTS
Although Altus has registered the shares of Class A Common Stock issuable upon exercise of the warrants under the Securities Act, such registration may not be in place when an investor desires to exercise warrants, thus precluding such
investor from being able to exercise its warrants except on a cashless basis and potentially causing such warrants to expire worthless.
Although Altus has registered the shares of Class A Common Stock issuable upon exercise of the warrants under the Securities Act, it may not be able to maintain a current prospectus relating to the Class A Common Stock issuable upon exercise of the warrants until the expiration of the warrants in accordance with the provisions of the warrant agreement. Altus cannot assure holders that it will be able to do so if, for example, any facts or events arise which represent a fundamental change in the information set forth in such registration statement or prospectus, the financial statements contained or incorporated by reference therein are not current or correct, or the SEC issues a stop order. If the shares issuable upon exercise of the warrants are not registered under the Securities Act, Altus will be required to permit holders to exercise their warrants on a cashless basis.
However, no warrant will be exercisable for cash or on a cashless basis, and Altus will not be obligated to issue any shares to holders seeking to exercise their warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state of the exercising holder or an exemption is available.
Notwithstanding the above, if Altus’ Class A Common Stock is at the time of any exercise of a warrant not listed on a national securities exchange such that it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities Act, Altus may, at its option, require holders of warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act, and, in the event Altus so elects, it will not be required to file or maintain in effect a registration statement, but it will use its best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available. In no event will Altus be required to net cash settle any warrant or issue securities or other compensation in exchange for the warrants in the event that it is unable to register or qualify the shares underlying the warrants under applicable state securities laws. If the issuance of the shares upon exercise of the warrants is not so registered or qualified or exempt from registration or qualification, the holder of such warrant shall not be entitled to exercise such warrant, and such warrant may have no value and expire worthless. If and when the warrants become redeemable by Altus, it may exercise its redemption right even if it is unable to register or qualify the underlying shares of Class A Common Stock for sale under all applicable state securities laws.
Altus may amend the terms of the warrants in a manner that may be adverse to holders with the approval by the holders of at least 50 percent of the then-outstanding public warrants. As a result, the exercise price of your public warrants could be increased, the exercise period could be shortened, and the number of shares of Altus’ Class A Common Stock purchasable upon exercise of a public warrant could be decreased, all without your approval.
Altus’ public warrants were issued in connection with its initial public offering in registered form under a warrant agreement between American Stock Transfer & Trust Company, as warrant agent, and Altus. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at least 50 percent of the then-outstanding public warrants to make any change that adversely affects the interests of the registered holders. Accordingly, Altus may amend the terms of the public warrants in a manner adverse to a holder if holders of at least 50 percent of the then-outstanding public warrants approve of such amendment. Although Altus’ ability to amend the terms of the public warrants with the consent of at least 50 percent of the then-outstanding public warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the public warrants, shorten the exercise period, or decrease the number of shares of Altus’ Class A Common Stock purchasable upon exercise of a public warrant.
There is no guarantee that Altus’s warrants will ever be in the money prior to their expiration, and Altus may redeem unexpired warrants prior to their exercise at a time that is disadvantageous to warrant holders, thereby making the warrants worthless.
The exercise price for Altus’ warrants is $230.00 per share of Class A Common Stock. There is no guarantee that the public warrants will ever be in the money prior to their expiration, and, as such, the warrants may expire worthless.
Additionally, Altus has the ability to redeem outstanding warrants at any time prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of its Class A Common Stock equals or exceeds $360.00 per share for any 20 trading days within a 30 trading-day period ending on the third trading day prior to the date Altus sends the notice of redemption to the warrant holders. If and when the warrants become redeemable by Altus, it may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
Redemption of the outstanding warrants could force the warrant holders to exercise their warrants and pay the exercise price therefor at a time when it may be disadvantageous for them to do so, sell their warrants at the then-current market price
when they might otherwise wish to hold their warrants, or accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of their warrants.
RISKS RELATED TO STOCK OWNERSHIP DILUTION
The warrants are exercisable for Altus’ Class A Common Stock, which will, upon exercise, increase the number of shares eligible for future resale in the public market and result in dilution to Altus’ stockholders.
Altus has outstanding public and private placement warrants to purchase shares of Class A Common Stock. To the extent such warrants are exercised, additional shares of Class A Common Stock will be issued, which will result in dilution to the then-existing holders of Altus’ Class A Common Stock and increase the number of shares eligible for resale in the public market, which could adversely affect the market price of Altus’ Class A Common Stock.
In the future, Apache may receive earn-out consideration in the form of shares of Class A Common Stock upon the achievement of certain stock price and operational goals, which would increase the number of shares eligible for future resale in the public market and result in dilution to Altus’ stockholders.
Pursuant to the Altus Contribution Agreement, Apache will have the right to receive earn-out consideration in the form of additional shares of Class A Common Stock if certain stock price and operational goals are achieved. To the extent such stock price or operational goals are achieved and Apache becomes entitled to receive a portion or all of the earn-out consideration, additional shares of Class A Common Stock will be issued, which will result in dilution to the then-existing holders of Class A Common Stock and increase the number of shares eligible for resale in the public market. The shares of Class A Common Stock issuable to Apache as earn-out consideration have been registered for resale with the SEC. Sales of substantial numbers of such shares by Apache in the public market could adversely affect the market price of Class A Common Stock.
The Preferred Units may be exchanged for shares of Altus’ Class A Common Stock at a discount under certain circumstances, which could be dilutive to existing holders of its Class A Common Stock.
The Preferred Units may be exchanged for shares of Altus’ Class A Common Stock at a discount under certain circumstances, which could be dilutive to existing holders of its Class A Common Stock. The number of shares of Class A Common Stock issued in any exchange would be based on its then-current trading price. Accordingly, the lower the trading price of Altus’ Class A Common Stock at the time of any exchange, the greater the number of shares of Class A Common Stock that would be issued upon exchange of the Preferred Units, increasing potential dilution to existing holders of Altus’ Class A Common Stock. Further, if the former holders of Preferred Units dispose of a substantial portion of their newly-exchanged Class A Common Stock in the public market, particularly over a short time period, it could adversely affect the market price for Altus’ Class A Common Stock and possibly make it more difficult for Altus to issue additional Class A Common Stock in the future at an attractive price.
A significant portion of Altus’ total outstanding shares may be sold into the market in the near future. This could cause the market price of its Class A Common Stock to drop significantly, even if its business is doing well.
Sales of a substantial number of shares of Class A Common Stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of Altus’ Class A Common Stock. Additionally, Apache’s Common Units have been exchanged for shares of Class A Common Stock on a one-for-one basis. The shares of Class A Common Stock issued to Apache upon such exchange have been registered for resale with the SEC. Sales of substantial numbers of such shares by Apache in the public market could adversely affect the market price of Altus’ Class A Common Stock.
RISKS RELATED TO RESTRICTIONS ON STOCKHOLDER ACTIONS
Altus’Company’s charter designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by its stockholders, which could limit its stockholders’ ability to obtain a favorable judicial forum for disputes with Altusthe Company or its directors, officers, employees or agents.
The charter provides that, unless Altusthe Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (Court of Chancery) will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for any derivative action or proceeding brought on the Company’s behalf; any action asserting a claim of breach of a fiduciary duty owed by any of the Company’s directors, officers or other employees to it or its stockholders; any action asserting a claim against the Company or any of its directors, officers or employees arising pursuant to any provision of the DGCL, the charter or the Company’s bylaws; or any action asserting a claim against the Company or any of its directors, officers or other employees that is governed by the internal affairs doctrine.
The above does not apply for such claims as to which the Court of Chancery determines that it does not have personal jurisdiction over an indispensable party, exclusive jurisdiction is vested in a court or forum other than the Court of Chancery or the Court of Chancery does not have subject matter jurisdiction.
Any person or entity purchasing or otherwise acquiring any interest in shares of the Company’s capital stock will be deemed to have notice of, and consented to, the provisions of Altus’the Company’s charter described in the preceding sentence. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder finds favorable for disputes with the Company or its directors, officers or other employees, which may discourage such lawsuits against the Company and such persons. Alternatively, if a court were to find these provisions of Altus’the Company’s charter inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, the Company may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect its business, financial condition or results of operations.
Altus’
The Company’s charter provides that the exclusive forum provision will be applicable to the fullest extent permitted by applicable law. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Accordingly, the charter provides that the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act, the Securities Act or any other claim for which the federal courts have exclusive jurisdiction.
GENERAL RISK FACTORS
If Altusthe Company fails to maintain an effective system of internal controls, it may not be able to report accurately its financial results or prevent fraud. As a result, current and potential holders of the Company’s equity could lose confidence in its financial reporting, which would harm its business and cost of capital.
Effective internal controls are necessary for Altusthe Company to provide reliable financial reports, prevent fraud, and operate successfully as a public company. The Company cannot be certain that its efforts to maintain its internal controls will be successful, that it will be able to maintain adequate controls over its financial processes and reporting in the future, or that it will be able to continue to comply with its obligations under Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to maintain effective internal controls or to implement or improve the Company’s internal controls could harm its operating results or cause it to fail to meet its reporting obligations. Ineffective internal controls could also cause investors to lose confidence in the Company’s reported financial information, which would likely have a negative effect on the trading price of its equity interests.
If the performance of the Company does not meet the expectations of investors, stockholders or financial analysts, the market price of Altus’the Company’s securities may decline.
The price of the Company’s securities could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond the Company’s control, and such fluctuations could contribute to the loss of all or part of a stockholder’s investment. Fluctuations or changes in the Company’s quarterly financial results, changes in or failure to meet market or financial analysts’ expectations about the Company, changes in laws and regulations, commencement of or involvement in litigation, changes in the Company’s capital structure and general economic and political conditions could have a material adverse effect onmaterially and adversely affect a stockholder’s investment in the Company’s securities, and its securities may trade at prices significantly below the price paid for them. In such circumstances, the trading price of the Company’s securities may not recover and may experience a further decline.
Broad market and industry factors may materially harm the market price of the Company’s securities irrespective of Altus’the Company’s operating performance. The stock market in general and Nasdaq havehas experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks and of the Company’s securities may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to the Company could depress the Company’s stock price regardless of its business, prospects, financial conditions or results of operations.
General Risks
Continuing or worsening inflationary issues and associated changes in monetary policy have resulted in and may result in additional increases to the cost of the Company’s services and personnel, which in turn cause the Company’s capital expenditures and operating costs to rise.
The U.S. inflation rate has been steadily increasing throughout 2022. These inflationary pressures have resulted in and may result in additional increases to the costs of the Company’s services and personnel, which in turn cause the Company’s capital expenditures and operating costs to rise. Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates multiple times in 2022 and the U.S. Federal Reserve has indicated its intention to continue to raise benchmark interest rates throughout the remainder of 2022 and into 2023 in an effort to curb inflationary pressure on the costs of goods and services across the U.S., which could have the effects of raising the cost of capital and depressing economic growth, either of which—or the combination thereof—could hurt the financial and operating results of the Company’s business. To the extent elevated inflation remains, the Company may experience further cost increases for its operations.
A terrorist attack, cyber-attack or armed conflict could harm the Company’s business.
Terrorist activities, cyber-attacks, anti-terrorist efforts and other armed conflicts involving the United States or other countries may adversely affect the United States and global economies and could prevent the Company from meeting its financial and other obligations. For example, on February 24, 2022, Russia launched a large-scale invasion of Ukraine. As a result, the United States, the United Kingdom, the member states of the European Union and other public and private actors have levied severe sanctions on Russia. The geopolitical and macroeconomic consequences of this invasion and associated sanctions have impacted the world economy, particularly with regard to demand and prices for crude oil and natural gas, and the ongoing effect of further hostilities in Ukraine cannot be predicted. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for crude oil and natural gas, potentially putting downward pressure on demand for the Company’s services and causing a reduction in its revenues. Crude oil and natural gas related facilities could be direct targets of terrorist attacks, and the Company’s operations could be adversely impacted if infrastructure integral to its operations is destroyed or damaged. Additionally, destructive forms of protest or opposition by activists, including acts of sabotage or eco-terrorism could cause significant damage or injury to people, property, or the environment or lead to extended interruptions of our operations. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.
A cyber incident could result in information theft, data corruption, operational disruption and/or financial loss.
The oil and gas industry has become increasingly dependent on digital technologies to conduct day-to-day operations including certain midstream activities. For example, software programs are used to manage gathering and transportation systems and for compliance reporting. The use of mobile communication devices has increased rapidly. Industrial control systems such as SCADA (supervisory control and data acquisition) now control large scale processes that can include multiple sites and long distances, such as crude oil and natural gas pipelines.
The Company depends on digital technology, including information systems and related infrastructure as well as cloud applications and services, to process and record financial and operating data and to communicate with its employees and business service providers. The Company’s business service providers, including vendors and financial institutions, are also dependent on digital technology. The technologies needed to conduct midstream activities make certain information the target of theft or misappropriation.
The Company’s technologies, systems, networks, and those of its business partners may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of its business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period.
A cyber incident involving the Company’s information systems and related infrastructure, or that of its business service providers, could disrupt its business plans and negatively impact its operations in the following ways, among others:
•a cyber-attack on a vendor or other service provider could result in supply chain disruptions, which could delay or halt development of additional infrastructure, effectively delaying the start of cash flow from the project;
•a cyber-attack on downstream pipelines could prevent the Company from delivering product at the tailgate of its facilities, resulting in a loss of revenues;
•a cyber-attack on a communications network or power grid could cause operational disruption resulting in loss of revenues;
•a deliberate corruption of its financial or operational data could result in events of non-compliance which could lead to regulatory fines or penalties; and
•business interruptions could result in expensive remediation efforts, distraction of management, damage to its reputation or a negative impact on cash flow.
The Company’s implementation of various controls and processes, including globally incorporating a risk-based cyber security framework, to monitor and mitigate security threats and to increase security for its information, facilities and infrastructure is costly and labor intensive. Moreover, there can be no assurance that such measures will be sufficient to prevent security breaches from occurring. As cyber threats continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities. Any such breakdowns or breaches, or resulting access, disclosure or other loss of information, could significantly disrupt the Company’s business and result in legal claims or proceedings, liability under laws that protect the privacy of personal information and damage to its reputation, any of which could materially and adversely affect its business, financial position, results of operations or cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 3. LEGAL PROCEEDINGS
For further information regarding legal proceedings, see Note 8—18—Commitments and Contingencies in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on this Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common units (Units), Class A Common Stock and warrants were eachis traded on the NasdaqNew York Stock Exchange under the symbols “KAACU,” “KAAC,” and “KAACW,” respectively, prior to the closing of the Altus Combination. In connection with the closing of the Altus Combination, the Units ceased trading, and the Class A Common Stock and warrants began trading on the Nasdaq under the symbols “ALTM” and “ALTMW,” respectively.symbol “KNTK”. The Company’s Units commenced public trading on March 30, 2017, and the Class A Common Stock and warrants commenced public trading on April 27, 2017.
The Company’s warrants ceased trading on the Nasdaq at the opening of business on December 20, 2018 and since that time have beenare quoted on the over-the-counter markets operated by OTC Markets Group under the symbol “ALTMW.” The warrants may still be exercised in accordance with their terms to purchase shares of the Company’s Class A Common Stock. The table below sets forth the high and low prices of the warrants, as reported on the OTC Marketplace, for each of the quarterly periods presented. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| High | | Low | | High | | Low |
| First Quarter | $ | 0.10 | | | $ | 0.03 | | | $ | 0.15 | | | $ | 0.01 | |
| Second Quarter | $ | 0.07 | | | $ | 0.03 | | | $ | 0.04 | | | $ | — | |
| Third Quarter | $ | 0.06 | | | $ | 0.02 | | | $ | 0.05 | | | $ | 0.01 | |
| Fourth Quarter | $ | 0.07 | | | $ | 0.01 | | | $ | 0.12 | | | $ | 0.01 | |
On January 31, 2022,February 28, 2023, the Class A Common Stock had a closing price of $63.03,of $29.75, and the warrants had a closing price of $0.01.$0.001.
Holders
On January 31, 2022,February 28, 2023, there were 121 holders204 holders of record of the Company’s Class A Common Stock and there was nonine holders of record of the Company’s Class C Common Stock outstanding.Stock.
Dividends
Altus has paidHolders of the Company’s common stock are entitled to receive cash dividends on its Class A Common Stock each quarter in 2021 at a rate of $1.50 per share. When, and if,when declared by the Company’s boardBoard out of directors,legally available funds. The Board presently intends to continue the policy of paying quarterly cash dividends, however, future dividend payments will depend upon our level of earnings, capital expenditure requirements, debt obligation, financial requirements,condition and other relevant factors.
Securities Authorized for Issuance Under Equity Compensation Plans
Information about the Company’s equity compensation plans is incorporated herein by reference to Altus’ definitive proxy statement for its 2022 Annual Meeting of Stockholders.
Recent Sales of Unregistered Securities
None.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
None.
Performance Graph
The graph and table below compares the Company’s cumulative return to holders of its common stock, the NASDAQ Composite Index, the NYSE Composite Index and the Alerian US Midstream Energy Index during the period beginning on December 31, 2017 and ending on December 31, 2022. The NYSE Composite Index was added to the performance graph because the Company changed the listing of its Class A Common Stock to the NYSE from the Nasdaq in October 2022.In accordance with SEC rules, the performance graph presents both the indices used in the previous year and the newly selected index. The performance graph was prepared based on the following assumptions: (i) $100 was invested in our Class A Common Stock and in each of the indices at beginning of the period, and (ii) dividends were reinvested on the relevant payment dates. The stock price performance included in this graph is intended to allow review of stockholder returns, expressed in terms of the performance of the Company’s common stock relative to both a broad equity market indexhistorical and a published industry index. The information is included for historical comparative purposes only and should not be considerednecessarily indicative of future stock price performance. The graph compares
COMPARISON CUMULATIVE TOTAL RETURN(1)(2)
Among Kinetik Holdings Inc., the yearly percentage change in the cumulative total stockholder return on the Company’s Class A Common Stock with the cumulative total return of bothNYSE Composite Index, the Nasdaq Composite Index and the Alerian US Midstream Energy Index from April 30, 2017 through December 31, 2021.
(1)The stock performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC norfor purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall informationnot be deemed to be incorporated by reference into any future filing of the Company under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act each as amended, except to the extent that the Companywe specifically incorporatesrequest it be treated as soliciting material or specifically incorporate it by reference into such filing.reference.
COMPARISON OF 56 MONTH CUMULATIVE TOTAL RETURN*
Among Altus Midstream Company, the Nasdaq Composite Index,
and the Alerian US Midstream Energy Index
* $100$100 invested on 5/2/17 in stock or 4/30/1712/31/2017 in index, including reinvestment of dividends.
Fiscal year ending December 31.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 5/2/2017 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
| Altus Midstream Company | $ | 100.00 | | | $ | 100.10 | | | $ | 79.69 | | | $ | 29.48 | | | $ | 24.46 | | | $ | 34.82 | |
| Nasdaq Composite Index | 100.00 | | | 114.59 | | | 110.42 | | | 152.76 | | | 221.37 | | | 270.47 | |
| Alerian US Midstream Energy Index | 100.00 | | | 93.29 | | | 83.11 | | | 96.05 | | | 72.08 | | | 104.52 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| | | | | | | | | | | |
| Kinetik Holdings, Inc. | $ | 100.00 | | | $ | 79.61 | | | $ | 29.45 | | | $ | 24.44 | | | $ | 34.85 | | | $ | 40.04 | |
| NYSE Composite Index | 100.00 | | | 96.12 | | | 135.23 | | | 143.64 | | | 174.36 | | | 116.65 | |
| Nasdaq Composite Index | 100.00 | | | 88.80 | | | 122.32 | | | 104.40 | | | 123.37 | | | 109.14 | |
| Alerian US Midstream Energy Index | 100.00 | | | 80.97 | | | 79.32 | | | 50.42 | | | 65.01 | | | 79.07 | |
ITEM 6. SELECTED FINANCIAL DATA
Omitted.[RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K, and the risk factors and related information set forth in Part I, Item 1A and Part II, Item 7A of this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are omitted in this Annual Report on Form 10-K are incorporated by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Exhibit 99.199.6 of the Company’s Current Report on Form 8-K, filed on December 14, 2021.February 28, 2022.
OverviewUnless otherwise noted or the context requires otherwise, references herein to Kinetik Holdings Inc., “the Company”, “us”, “our”, “we” or similar terms, with respect to time periods prior to February 22, 2022, include BCP and its consolidated subsidiaries and do not include ALTM and its consolidated subsidiaries, while references herein to Kinetik Holdings Inc., “the Company”, “us”, “our”, “we” or similar terms, with respect to time periods from and after February 22, 2022, include ALTM and its consolidated subsidiaries.
Altus
The Transaction
On February 22, 2022, the Company consummated the business combination transactions contemplated by the Contribution Agreement, dated as of October 21, 2021, by and among the Company, the Partnership, Contributor and BCP. Pursuant to the Contribution Agreement, in connection with the Closing, (i) Contributor contributed all the equity interests in BCP and BCP Raptor Holdco GP, LLC, a Delaware limited liability company and the general partner of BCP (“BCP GP”), to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 Common Units and 50,000,000 shares of the Company’s Class C Common Stock.
The Company’s public stockholders immediately prior to the Closing continued to hold their shares of the Company’s Class A Common Stock. As a result of the Transaction, immediately following the Closing (i) Contributor held approximately 75% of the issued and outstanding Common Stock, (ii) Apache Midstream Company (the Company or Altus), throughheld approximately 20% of the issued and outstanding Common Stock, and (iii) the Company’s remaining stockholders held approximately 5% of the issued and outstanding Common Stock. Upon close of the Transaction, the Company’s Pipeline Transportation segment expanded to include three additional EMI pipelines and to increase its ownership interest in AltusPHP. Further, a secondary offering of 4 million shares held by Apache Midstream LP (Altus Midstream), owns gas gathering, processing, and transmission assets in the Permian Basinwas closed during March of West Texas, anchored by midstream service agreements2022, reducing Apache’s ownership to service Apache Corporation’s (Apache) production from its Alpine High resource play and surrounding areas (Alpine High)approximately 13%. Additionally, the Company owns equity interests in four intrastate Permian Basin pipelines (the Equity Method Interest Pipelines) that have access to various points along the Texas Gulf Coast. The Company’s operations consist of one reportable segment.
The Company has no independent operations or material assets outside its ownership interestTransaction also brought in Altusadditional volume capacity from ALTM for the Midstream which is reported onLogistics segment, including a consolidated basis. Astotal of December 31, 2021, Altus Midstream’s assets included approximately600 MMcf/d of existing state-of-the-art operating processing capacity, 182 miles of in-service natural gas gathering pipelines, approximately 46 miles of residue gas pipelines with four market connections, and approximately 3866 miles of NGLs pipelines. The increased volume capacity has contributed to the increase in operating revenue for the year ended December 31, 2022 compared to the same periods in 2021.
Overview
We are an integrated midstream energy company in the Permian Basin providing comprehensive gathering, transportation, compression, processing, and treating services. Our core capabilities include a variety of service offerings including natural gas gathering, transportation, compression, treating and processing; NGLs stabilization and transportation; produced water gathering and disposal; and crude oil gathering, stabilization, storage and transportation. The Company’s corporate office is located in Houston, TX and our operations are strategically located in the heart of the Delaware Basin in the Permian.
Our Operations and Segments
Upon Closing, the Company renamed its Gathering and Processing segment to Midstream Logistics and renamed its Transmission segment to Pipeline Transportation. These name changes were made to better align segment activities with the name of each respective segment. The Midstream Logistics segment operates under three service offerings, 1) gas gathering and processing, 2) crude oil gathering, stabilization, and storage services, and 3) water gathering and disposal. The Pipeline Transportation segment consists of four EMI pipelines in the Permian Basin with various access points to the Texas Gulf Coast, Kinetik NGL pipelines. ThreePipeline and our Delaware Link Pipeline that is under construction. The EMI pipelines transport crude oil, natural gas, and NGLs within the Permian Basin and to the Texas Gulf Coast.
Midstream Logistics
Gas Gathering and Processing. The Midstream Logistics segment provides gas gathering and processing services with approximately 1,500 miles of low and high-pressure steel pipeline located throughout the Southern Delaware Basin. Gas processing assets are centralized at five processing complexes with total cryogenic processing trains, each with nameplate capacity of 200 MMcf/d, were placed into service during 2019. Otherapproximately 2.0 Bcf/d.
Crude Oil Gathering, Stabilization, and Storage Services. Crude gathering assets include an NGL truck loading terminal with six Lease Automatic Custody Transfer unitsare centralized at the Caprock Stampede Terminal and eight NGL bullet tanks withthe Pinnacle Sierra Grande Terminal. The system includes approximately 220 miles of gathering pipeline and 90,000 gallon capacitybarrels of crude storage.
Water Gathering and Disposal. The system includes approximately 80 miles of gathering pipeline and approximately 490,000 barrels per tank. The Company’s existing gathering, processing, and transmission infrastructure is expected to provide capacity levels capableday of fulfilling its midstream contracts to service Apache’s production from Alpine High and potential third-party customers.permitted disposal capacity.
As of December 31, 2021, thePipeline Transportation
EMI pipelines. The Company owns the following Equity Method Interest Pipelines:
•A 16 percentequity interests in four EMI pipelines in the Permian Basin with access to various points along the Texas Gulf Coast: 1) an approximate 53.3% equity interest in the Gulf Coast Express Pipeline Project (GCX), which is owned and operated by Kinder Morgan Texas Pipeline, LLC (Kinder Morgan). GCX transports natural gas from the Waha area in West Texas to Agua Dulce near the Texas Gulf Coast. GCX was placed in service during 2019, with the total capacity of 2.0 Bcf/d fully subscribed under long-term contracts.
•A 15 percent equity interest in the EPIC crude oil pipeline (EPIC), which is operated by EPIC Consolidated Operations, LLC. EPIC transports crude oil from Orla, Texas in Northern Reeves County to the Port of Corpus Christi, Texas. EPIC was placed in service in early 2020, with initial throughput capacity of approximately 600 MBbl/d.
•An approximate 26.7 percent equity interest in the Permian Highway Pipeline (PHP),PHP, which is also owned and operated by Kinder Morgan. PHP transports natural gas from the Waha area in northern Pecos County, Texas to the Katy, Texas area with connections to Texas Gulf Coast and Mexico markets. PHP was placed in service in January 2021, with the total capacity of 2.1 Bcf/d fully subscribed under long-term contracts.
•A 33 percentMorgan; 2) 16% equity interest in theGCX, which is owned and operated by Kinder Morgan; 3) 33% equity interest in Shin Oak, NGL Pipeline (Shin Oak), which is owned by Breviloba, LLC, and operated by Enterprise Products Operating LLC; and 4) 15% equity interest in EPIC, which is operated by EPIC Consolidated Operations, LLC. Shin Oak transports NGLs from
Brandywine NGL Pipeline. Approximately 30 miles of 20-inch NGL pipelines connected to our Diamond Cryogenic complex.
Delaware Link Pipeline. The Company is currently building the Permian BasinDelaware Link Pipeline, which will provide additional transportation capacity to Mont Belvieu, Texas. Shin Oak was placedWaha when it is put into service. The project is expected to be complete in service during 2019, with totalthe fourth quarter of 2023. Upon completion, this pipeline is estimated to be 40 miles and to have a capacity of up1.0 Bcf/d.
Recent Developments
Transfer to 550 MBbl/d.the New York Stock Exchange
On October 21, 2021,10, 2022, the Company announcednotified the Nasdaq Global Select Market (“Nasdaq”) that it will combine with privately-owned BCP Raptor Holdco LP (BCP) in an all-stock transactionwould voluntarily transfer the listing of its Class A Common Stock from Nasdaq to the New York Stock Exchange (the BCP Business Combination)“NYSE”). BCP isThe listing and trading of the parent company of EagleClaw Midstream, which includes EagleClaw Midstream Ventures,Common Stock on Nasdaq ended at market close on October 21, 2022, and trading commenced on the Caprock Midstream and Pinnacle Midstream businesses, and a 26.7 percent interest inNYSE at market open on October 24, 2022. The Class A Common Stock continues to trade under the Permian Highway Pipeline.current stock symbol “KNTK”.
As consideration for the transaction,
Brandywine NGL Acquisition
In September 2022, the Company will issue 50 million sharesacquired approximately 30 miles of Class C Common Stock (and Altus Midstream will issue20-inch NGL pipelines connected to our Diamond Cryogenic complex, Brandywine, for approximately $25 million. Brandywine is a corresponding numberstrategic intrabasin natural gas liquids pipeline, affording Kinetik greater control over its system’s NGLs and providing interconnectivity to Shin Oak.
Comprehensive Refinancing
On June 8, 2022, the Partnership, completed a private placement of Common Units) to BCP’s unitholders,$1.0 billion aggregate principal amount of its 5.875% Senior Notes due 2030 (the “Notes”), which are principally funds affiliated with Blackstonefully and I Squared Capital. The transaction is expected to close during the first quarter of 2022 following completion of customary closing conditions.
The global economy and the energy industry have been deeply impactedunconditionally guaranteed by the effects ofCompany. The Notes are issued under our Sustainability-Linked Financing Framework and include sustainability-linked features. In addition, the coronavirus disease 2019 (COVID-19) pandemic and related governmental actions. Uncertainty in the oil markets and the negative demand implications
of the COVID-19 pandemic continue to impact oil supply and demand. Altus management continues to monitor natural gas throughput volumes from Apache and capacity utilization of the Equity Method Interest Pipelines.
The current crisis, however, is still evolving and may become more severe and complex. The ultimate impact and the extent to which the COVID-19 pandemic will continue to affect the Company’s business, results of operation, and financial condition is difficult to predict and depends on numerous evolving factors outside of Altus’ control, including the duration and scope of the pandemic, new and continuing government, social, business, and other actions taken in response to the pandemic, any additional waves of the virus, the mandate, availability, and ultimate efficacy of the vaccines on new variants of the virus, and the effect of the pandemic on short- and long-term general economic conditions. As a result, the COVID-19 pandemic may still materially and adversely affect Altus’ results in a manner that is either not currently known or that the Company does not currently consider to be a significant risk to its business. For additional information about the business risks relating to the COVID-19 pandemic, please refer to Part II, Item 1A—Risk Factors of this Annual Report on Form 10-K.Altus Midstream Operational Metrics
The Company uses a variety of financial and operational metrics to assess the performance of its operations and growth compared to expected plan estimates. These metrics include:
•Throughput volumes and associated revenues;
•Costs and expenses; and
•Adjusted EBITDA (as defined below).
Throughput Volumes and Associated Revenues
The Company’s operating results are driven primarily by the volume of natural gas gathered, processed, compressed, and/or transmitted. For the periods presented, substantially all revenues were generated through fee-based agreements with Apache, a related party. The volumes of natural gas that Altus gathers or processes in future periods will depend on the production level of Apache’s assets in areas Altus services and any additional third-party service contracts or incremental use of Altus Midstream infrastructure resulting from the potential close of the BCP Business Combination discussed above. The Company’s assets were initially constructed to serve Apache’s anticipated development of Alpine High and its surrounding areas. As such, the amount and pace of upstream development activity by Apache could directly impact Altus’ aggregate gathering and processing volumes because the production rate of natural gas wells declines over time.
The CompanyPartnership entered into a new
Gas Processing Agreement with Apache in October 2021,revolving credit agreement (the “RCA”), which
supersededprovides for a $1.25 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”) maturing on June 8, 2027, and a new term loan agreement (the “TLA”), which provides for a $2.00 billion senior unsecured term loan credit facility (the “Term Loan Credit Facility”) maturing on June 8, 2025. Proceeds from the
prior agreement. The updated processing agreement contains modified gas processingNotes and the Term Loan Credit Facility were used to repay all outstanding borrowings under our existing credit facilities and to pay fees
for new volumes from future Apache drilling activities at Alpine High that are more consistent with current market practices. Part ofand expenses related to the
modified fee structureoffering. Refer to Note 8 — Debt and Financing Costs in the new Gas Processing Agreement establishes fixed processing rates. Any monthly difference between actual recovery rates and fixed recovery rates will create either excess recovery volumesNotes to our Consolidated Financial Statements in this Form 10-K for ALTM to sell or processing volume deficiencies which ALTM would owe Apache. Commodity price fluctuations and oil and gas industry dynamics that existed when the original agreement was signed have changed dramatically, and the updated terms of the new Gas Processing Agreement were established to potentially attract new business from both Apache and other third-party producers and midstream companies.The Company remains focused on increasing third-party processing opportunities in addition to Alpine High, and other producers are developing oil and gas plays in surrounding areas that may provide Altus opportunities to enter into third-party processing and gathering agreements. Producers’ willingness to engage in new drilling is determined by a number of factors, all of which are affected by the COVID-19 pandemic, the most important of which are the prevailing and projected prices of oil, natural gas, and NGLs, the cost to drill and operate a well, the availability and cost of capital, and environmental and government regulations. Company management believes that its midstream assets are positioned in one of the most active regions for oil and gas exploration and development activities in the United States. The Company has actively pursued strategic alternatives for future growth, which culminated in the recently announced BCP Business Combination, a combination with a midstream company that has existing commitments with various third-party customers.
For more information about the Company’s relationship with Apache, please see the section entitled Altus’ Relationship with Apache in Part I, Items 1 and 2 of this Annual Report on Form 10-K.
CostsPHP Expansion Project
In June 2022, PHP announced a final investment decision to proceed with its expansion project to increase total capacity to 2.65 Bcf/d fully subscribed under 10 year take-or-pay contracts. The expansion project will increase PHP’s capacity by nearly 550 MMcf/d with a target in-service date in November 2023. Approximately 67% of the funding for the expansion project will be borne and Expenses
Coststhe remainder by Kinder Morgan. As a result, following the in-service date of product sales — affiliate
Costs of product sales — affiliate represent the cost of excess recovery volumes of residue gasexpansion, Kinetik’s ownership interest in PHP will increase to approximately 55.5%. During 2022, the Company receivescontributed $78.2 million to the expansion project.
Sustainability-Linked Financing Framework
On May 16, 2022, we published our Sustainability-Linked Financing Framework, which we developed in alignment with the five components outlined in the International Capital Markets Association Sustainability-Linked Bond Principles as of June 2020 and the Loan Syndications and Trading Association Sustainability-Linked Loan Principles as of July 2021 (each as referred to in our Sustainability-Linked Financing Framework) and corresponding Second Party Opinion provided by ISS ESG.
This framework establishes KPIs that will be used to measure our progress against SPTs. Under this framework, our KPIs are (1) Scope 1 and Scope 2 greenhouse gas emissions intensity, (2) Scope 1 and Scope 2 methane gas emissions intensity and (3) female representation in corporate officer positions and our SPTs are (1) reducing the intensity of all Scope 1 and Scope 2 greenhouse gas emissions from Apache underour operations by 35% by 2030 from a 2021 baseline year (as described in the termsSustainability-Linked Financing Framework), (2) reducing the intensity of the new Gas Processing Agreement, whichScope 1 and Scope 2 methane gas emissions from our operations by 30% by 2030 from a 2021 baseline year, and (3) increasing female representation in corporate officer positions of Vice President and above to 20% by year-end 2026 from a 2021 baseline year.
Stock Split
On May 19, 2022, the Company then ownsannounced the Stock Split with respect to its Class A Common Stock and controls priorClass C Common Stock in the form of a stock dividend. The Stock Split was accomplished by distributing one additional share of Class A Common Stock for each share of Class A Common Stock outstanding and one additional share of Class C Common Stock for each share of Class C Common Stock outstanding. The additional shares of Common Stock were issued on June 8, 2022 to ultimate saleholders of record at the close of business on May 31, 2022.
Factors Affecting Our Business
Commodity Price Volatility
There has been, and we believe there will continue to Apache. The costs related to excess recovery volumes are directly associated with volumes of excess recoveries under the new Gas Processing Agreement, if any.
Costs of product sales — third parties
Costs of product sales — third parties represent purchases of NGLs from a third party and the cost of excess recovery volumes of condensate the Company receives from Apache under the terms of the new Gas Processing Agreement. The Company owns and controls such volumes prior to ultimate sale to customers. The costs related to third party purchases of NGLs are directly associated with the volume and amount of third-party contracts entered into and could fluctuate depending on market conditions and product prices.
Operations and maintenance
Operations and maintenance expenses primarily comprise those costs that are directly associated with the operations of the Company’s assets. The most significant of these costs are associated with direct labor and supervision, power, repair and maintenance expenses, and equipment rentals. Fluctuationsbe, volatility in commodity prices impact operating cost elements both directly and indirectly. For example,in the relationships among NGLs, crude oil and natural gas prices. As a result of uncertainty around global commodity supply and demand, uncertainty in global economic recovery from the aftereffects of the COVID-19 pandemic and the armed conflict in Ukraine, global oil and natural gas commodity prices directlycontinue to remain volatile. The volatility and uncertainty of natural gas, crude oil and NGL prices impact costs such as powerdrilling, completion and fuel, which are expenses that increase (or decrease)other investment decisions by producers and ultimately supply to our systems. Although the armed conflict in line with changesUkraine generated commodity price upward pressure, and our operation could benefit in commodity prices. Commodityan environment of higher natural gas, NGLs and condensate prices, also affect industry activitythe instability of international political environment and demand, thus indirectly impactinghuman and economic hardship resulting from the cost of items such as labor and equipment rentals.
Depreciation and accretion
Depreciationconflict would have a highly uncertain impact on the capitalizedU.S. economy, which in turn, might affect our business and operations adversely. Our product sales revenue is exposed to commodity price fluctuations. Therefore, commodity price decline and sustained periods of low natural gas and NGL prices could have an adverse effect on our product revenue stream. The Company continues to monitor commodity prices closely and may enter into commodity price hedges from time to time as necessary to mitigate the volatility risk. In addition, the Company, when economically appropriate, enters into fee-based arrangements that insulate the Company from commodity price volatility.
Inflation and Interest Rates
The annual rate of inflation in the United States dropped slightly to 6.40% in January 2023, as measured by the Consumer Price Index, which was the lowest since October 2021. However, the Federal Open Market Committee (“FOMC”) maintains its long run goals of maximum employment and inflation at the rate of 2.00%. In support of these goals, the FOMC decided to raise the target range for the federal funds rate to 4.50% and 4.75% during its meeting in January 2023. There is uncertainty regarding whether inflation will continue to be tamed by the FOMC’s effort or whether the FOMC will continue to tighten its monetary policy in the next 12 months. Increased interest rates will increase our operating costs incurred to acquire and develophave a negative impact on the Company’s midstream assets is computed based on estimated useful livesability to meet its contractual debt obligations and estimated salvage values. Also included within this expense isto fund its operating expenses, capital expenditures, dividends and distributions. The Company will continue to actively evaluate and analyze whether any additional forms of interest rate hedging should be implemented to mitigate interest rate exposure.
Supply Chain Considerations
During 2021 and 2022, challenging supply chain issues have emerged that will continue at least through the accretion associated with estimated asset retirement obligations (ARO). Depreciationfirst half of 2023. Geopolitical events have further disrupted global supply chains and accretion expense would be expectedcaused volatile commodity prices for natural gas, NGLs and crude oil. The United States has banned the import of Russian oil, NGLs and other energy commodities and the European Union has taken steps to increase during future periods in-line with additional infrastructurereduce imports of Russian oil and natural gas. The principal supply issues facing our industry for the next twelve months include: raw materials availability, finished good inventory, rising freight costs, incurred; however, any future asset sales or long-lived asset impairments would decrease expected depreciation expensedelays due to commensurate levels.
Generalport congestion and administrativeoverall labor shortages.
General and administrative (G&A) expense represents indirect
All bidding will require the risk of shipping costs and overhead expenditures incurred bydelays to be factored into proposals. Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the Company associated with managingforeseeable future. The import of raw materials from China will also incur price increases. To that end, accelerating tensions between China and the midstream assets. These expenses primarily comprise fixed fees set forthU.S. could also result in further supply disruption.
Results of Operations
The following table presents the Company’s results of operations for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, * |
| | 2022 | | 2021 | | % Change | | |
| | | | | | | | |
| | (In thousands, except percentages) |
| Revenues: | | | | | | | | |
| Service revenue | | $ | 393,954 | | | $ | 272,677 | | | 44 | % | | |
| Product revenue | | 806,353 | | | 385,622 | | | 109 | % | | |
| Other revenue | | 13,183 | | | 3,745 | | | NM | | |
| Total revenues | | 1,213,490 | | | 662,044 | | | 83 | % | | |
| Operating costs and expenses: | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | | 541,518 | | | 233,619 | | | 132 | % | | |
| Operating expense | | 137,289 | | | 90,894 | | | 51 | % | | |
| Ad valorem taxes | | 16,970 | | | 11,512 | | | 47 | % | | |
| General and administrative | | 94,268 | | | 28,588 | | | NM | | |
| Depreciation and amortization | | 260,345 | | | 243,558 | | | 7 | % | | |
| Loss on disposal of assets | | 12,611 | | | 382 | | | NM | | |
| Total operating costs and expenses | | 1,063,001 | | | 608,553 | | | 75 | % | | |
| Operating income | | 150,489 | | | 53,491 | | | 181 | % | | |
| Other income (expense): | | | | | | | | |
| Interest and other income | | 489 | | | 4,143 | | | (88) | % | | |
| Gain on Preferred Units redemption | | 9,580 | | | — | | | 100 | % | | |
| Gain (loss) on debt extinguishment | | (27,975) | | | 4 | | | NM | | |
| Gain on embedded derivatives | | 89,050 | | | — | | | 100 | % | | |
| Interest expense | | (149,252) | | | (117,365) | | | 27 | % | | |
| Equity in earnings of unconsolidated affiliates | | 180,956 | | | 63,074 | | | 187 | % | | |
| Total other income (expense), net | | 102,848 | | | (50,144) | | | NM | | |
| Income before income tax | | 253,337 | | | 3,347 | | | NM | | |
| Income tax expense | | 2,616 | | | 1,865 | | | 40 | % | | |
| Net income including noncontrolling interests | | $ | 250,721 | | | $ | 1,482 | | | NM | | |
| | | | | | | | |
*The results of the legacy ALTM business are not included in the Construction, Operations and Maintenance Agreement (COMA) entered into with Apache.Company’s consolidated financials prior to February 22, 2022. Refer to the Form 10-K basis of presentation inNote 2—Transactions with Affiliates1—Description of Business and Basis of Presentationin the Notes to Consolidated Financial Statements set forth in Part IV of this Annual Report on Form 10-K, for further information. TaxesNM - Not meaningful
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Revenues
For the year ended December 31, 2022, revenue increased $551.4 million, or 83%, to $1,213.5 million, compared to $662.0 million for the same period in 2021. The increase was primarily driven by period-to-period higher commodity prices, increases in gas gathered and processed volumes, as well as similar increases in condensate and NGL volumes sold. Volume increase reflected synergy realized from the new operations acquired through the Transaction.
Service revenue
Service revenue consists of service fees paid to the Company by its customers for providing comprehensive gathering, treating, processing and water disposal services necessary to bring natural gas, NGLs and crude oil to the market. Service revenue for the year ended December 31, 2022, increased by $121.3 million, or 44%, to $394.0 million, compared to $272.7 million for the same period in 2021. This increase is primarily due to a period over period increase in gathered and processed gas volumes of 556.4 Mcf per day and 522.9 Mcf per day, respectively, of which 318.7 Mcf per day of gathered gas volume and 236.6 Mcf/d of processed gas volume were result of new operations acquired through the Transaction. Over 99% of service revenues are included entirely in the Midstream Logistics segment.
Product revenue
Product revenue consists of commodity sales (including condensate, natural gas residue, and NGLs). Product revenue for the year ended December 31, 2022, increased by $420.7 million, or 109%, to $806.4 million, compared to $385.6 million for the same period in 2021, primarily due to period-to-period increases in condensate prices combined with increased NGL and condensate sales volumes. Condensate prices increased $27.80 per barrel, or 44%. NGL and condensate sales volumes increased 12.7 million barrels, or over 300%. The increase in NGL and condensate sales volumes offset the decreased NGL prices of $0.80 per barrel, or 2%. This substantial increase in NGL and condensate revenue was due to our plants being run in recovery for part of the year ended December 31, 2022 versus rejection during the same period in 2021. For the same reason, natural gas residue sales volumes decreased 6.3 million MMBtu, or 25%. Partially offsetting this decrease in volumes, natural gas prices increased period over period $1.44 per MMBtu, or 37%. Product revenues are included entirely in the Midstream Logistics segment.
Operating Costs and Expenses
Costs of sales (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) primarily consists of purchases of NGLs and natural gas from our producers at contracted market prices to support product sales to other than incomethird parties. For the year ended December 31, 2022, cost of sales increased $307.9 million, or 132%, to $541.5 million, compared to $233.6 million for the same period in 2021. The increase was primarily driven by the period-to-period increases in commodity prices and NGL and condensate volumes discussed above. Cost of sales (exclusive of depreciation and amortization) are included entirely in the Midstream Logistics segment.
Taxes other than income areOperating expenses
Operating expenses increased by $46.4 million, or 51%, to $137.3 million for the year ended December 31, 2022, compared to $90.9 million for the same period in 2021. Of the total increase, $25.0 million was driven by the newly acquired operations. The remaining increase was primarily driven by higher period over period electricity costs of $10.7 million, higher internal and contract labor costs of $5.8 million, and higher repairs and maintenance costs of $3.5 million. The higher electricity costs were primarily due to electricity credits received from one of our primary electricity providers during the month of February 2021 related to the extreme weather caused by Winter Storm Uri while no similar credit was generated in 2022.
General and administrative
General and administrative (“G&A”) expense increased by $65.7 million, or 230%, to $94.3 million for the year ended December 31, 2022, compared to $28.6 million for the same period in 2021. The increase was primarily driven by $42.8 million of recognized share-based compensation, higher insurance costs of $2.9 million and acquisition and integration costs of $20.6 million incurred in relation to the newly acquired operations.
Loss on disposal of assets
For the year ended December 31, 2022, the Company recognized a loss on disposal of assets of $12.6 million compared with $0.4 million for the same period in 2021. The change was primarily related to ad valorem taxesretirements of compressor or booster stations and a refrigeration plant that had become idle due to operational changes.
Other Income (Expense)
Gain (loss) on debt extinguishment
For the year ended December 31, 2022, the Company recognized a loss on debt extinguishment of $28.0 million, compared with a gain of $4 thousand for the same period in 2021. The change reflected the loss on debt extinguishment recognized in relation to the comprehensive refinancing completed in June 2022.
Gain on embedded derivatives
For the year ended December 31, 2022, the Company recognized a gain on embedded derivatives of $89.1 million. The gain is a result of the decrease in fair value of the embedded derivative liability related to the redeemable noncontrolling interest Preferred Units, which was eliminated upon the ultimate redemption of these Preferred Units during July of 2022.
Interest expense
The Company incurred interest expense of $149.3 million for the year ended December 31, 2022 compared with $117.4 million for the same period in 2021. The increase was primarily related to higher debt obligations resulting from the comprehensive refinancing completed in June 2022. The increase also reflected an overall increase in interest rates associated with the Term Loan and Revolving Credit Facility, which carried some variability. Refer to Note—14 Derivatives and Hedging Activities in the Notes to our Consolidated Financial Statements regarding the Company’s midstream assets.strategy in managing interest rate risk. Equity in earnings of unconsolidated affiliates
Income from EMI pipelines increased by $117.9 million, or 187% to $181.0 million for the year ended December 31, 2022, compared to $63.1 million for the same period in 2021. The increase was primarily due to the acquisition of new EMI pipelines and additional equity interests in the Company’s existing EMI pipeline, PHP, through the Transaction and due to higher earnings from our EMI pipelines. Equity in earnings of unconsolidated affiliates is included entirely in the Pipeline Transportation segment.
Key Performance Metrics
Adjusted EBITDA
The Company defines Adjusted EBITDA is defined as net income (loss) including noncontrolling interests before financing costs (net of capitalized interest),adjusted for interest, income, income taxes, depreciation and accretionamortization, impairment charges, asset write-offs, the proportionate EBITDA from our equity method investments, equity in earnings from investments recorded using the equity method, share-based compensation expense, extraordinary losses and adjusts suchunusual or non-recurring charges. Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items as applicable, fromthat we do not believe are indicative of our core operating performance.
We believe that Adjusted EBITDA provides a meaningful understanding of certain aspects of earnings before the impact of investing and financing charges and income from the Equity Method Interest Pipelines. Altus also excludes (when applicable) impairments, unrealized gains or losses on derivative instruments, and other items affecting comparability of results to peers. Company management believestaxes. Adjusted EBITDA is useful to an investor in evaluating our performance because this measure:
•Is widely used by analysts, investors and competitors to measure a company’s operating performance;
•Is a financial measurement that is used by rating agencies, lenders, and other parties to evaluate our credit worthiness; and
•Is used by our management for evaluating operatingvarious purposes, including as a measure of performance and comparing results of operations from period-to-periodas a basis for strategic planning and against peers without regard to financing or capital structure. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (loss) including noncontrolling interests or any other measure determined in accordance with accounting principles generally accepted in the United States (GAAP) or as an indicator of the Company’s operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing Altus’ financial performance, such as cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. The presentation of Adjusted EBITDA should not be construed as an inference that the Company’s results will be unaffected by unusual or non-recurring items. Additionally, the Company’s computation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
Adjusted EBITDA is not defined in GAAP
The GAAP measure used by the Company that is most directly comparable to Adjusted EBITDA is net income (loss) including noncontrolling interests. Adjusted EBITDA should not be considered as an alternative to the GAAP measure of net income (loss) including noncontrolling interests or any other measure of financial performance presented in accordance with GAAP. Adjusted EBITDA has important limitations as an analytical tool because it excludes some, but not all, items that affect net income (loss) including noncontrolling interests. Adjusted EBITDA should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP. The Company’s definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies in the industry, thereby diminishing its utility.
Reconciliation of non-GAAP financial measure
Company management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing the comparable GAAP measure, understanding the differences between Adjusted EBITDA as compared to net income (loss) including noncontrolling interests, and incorporating this knowledge into its decision-making processes. Management believes that investors benefit from having access to the same financial measure that the Company uses in evaluating operating results.
The following table presents a reconciliation of the GAAP financial measure of net income (loss) including noncontrolling interests to the non-GAAP financial measure of Adjusted EBITDA.
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
| | | | |
| | (In thousands) |
| Reconciliation of net income including noncontrolling interests to Adjusted EBITDA | | | | |
| Net income including noncontrolling interests | | $ | 99,221 | | | $ | 81,684 | |
| Add: | | | | |
| Financing costs, net of capitalized interest | | 10,598 | | | 2,190 | |
| | | | |
| Depreciation and accretion | | 16,201 | | | 15,945 | |
| Impairments | | 441 | | | 1,643 | |
| Impairment on equity method interests | | 160,441 | | | — | |
| Unrealized derivative instrument loss | | — | | | 36,080 | |
| Equity method interests Adjusted EBITDA | | 188,959 | | | 111,675 | |
| Transaction costs | | 4,472 | | | — | |
| Loss on sale of assets, net | | — | | | 2,234 | |
| Other | | 1,258 | | | 348 | |
| Less: | | | | |
| Gain on sale of assets, net | | 1,243 | | | — | |
| Unrealized derivative instrument gain | | 82,114 | | | — | |
| Interest income | | 4 | | | 9 | |
| Income from equity method interests, net | | 113,764 | | | 58,739 | |
| Warrants valuation adjustment | | 664 | | | 1,200 | |
| Income tax benefit | | — | | | 696 | |
| | | | |
| Adjusted EBITDA | | $ | 283,802 | | | $ | 191,155 | |
| | | | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31,* |
| | 2022 | | 2021 | | % Change |
| | | | | | |
| | (In thousands, except percentage) |
| Reconciliation of net income including noncontrolling interests to Adjusted EBITDA | | | | | | |
| Net income including noncontrolling interests | | $ | 250,721 | | | $ | 1,482 | | | NM |
| Add back: | | | | | | |
| Interest expense | | 149,252 | | | 117,365 | | | 27 | % |
| | | | | | |
| Income tax expense | | 2,616 | | | 1,865 | | | 40 | % |
| Depreciation and amortization | | 260,345 | | | 243,558 | | | 7 | % |
| Amortization of contract costs | | 1,807 | | | 1,792 | | | 1 | % |
| Proportionate EMI EBITDA | | 268,826 | | | 83,593 | | | NM |
| Share-based compensation | | 42,780 | | | — | | | 100 | % |
| Loss on disposal of assets | | 12,611 | | | 382 | | | NM |
| Loss (gain) on debt extinguishment | | 27,975 | | | (4) | | | NM |
| Derivative loss due to Winter Storm Uri | | — | | | 13,456 | | | (100) | % |
| Integration Costs | | 12,208 | | | — | | | 100 | % |
| Transaction Costs | | 6,412 | | | 5,730 | | | 12 | % |
| Other one-time cost or amortization | | 16,355 | | | 2,856 | | | NM |
| Producer Settlement | | — | | | 6,827 | | | (100) | % |
| Deduct: | | | | | | |
| Interest income | | — | | | 115 | | | (100) | % |
| Warrant valuation adjustment | | 133 | | | — | | | 100 | % |
| Gain on redemption of mandatorily redeemable Preferred Units | | 9,580 | | | — | | | 100 | % |
| Gain on embedded derivatives | | 89,050 | | | — | | | 100 | % |
| Equity income from unconsolidated affiliates | | 180,956 | | | 63,074 | | | 187 | % |
| Adjusted EBITDA | | $ | 772,189 | | | $ | 415,713 | | | 86 | % |
Results*The results of Operations
The following table presentsthe legacy ALTM business are not included in the Company’s results of operations for the periods presented:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | |
| | | | | | |
| | (In thousands) |
| REVENUES: | | | | | | |
| Midstream services revenue — affiliate | | $ | 142,727 | | | $ | 144,714 | | | |
| Product sales — affiliate | | 9,754 | | | — | | | |
| Product sales — third parties | | 8,136 | | | 3,695 | | | |
| Total revenues | | 160,617 | | | 148,409 | | | |
| COSTS AND EXPENSES: | | | | | | |
| Costs of product sales — affiliate | | 9,754 | | | — | | | |
| Costs of product sales — third parties | | 7,793 | | | 2,988 | | | |
| Operations and maintenance | | 32,748 | | | 37,993 | | | |
| General and administrative | | 14,182 | | | 13,155 | | | |
| Depreciation and accretion | | 16,201 | | | 15,945 | | | |
| Impairments | | 441 | | | 1,643 | | | |
| Taxes other than income | | 13,886 | | | 15,069 | | | |
| Total costs and expenses | | 95,005 | | | 86,793 | | | |
| OPERATING INCOME | | 65,612 | | | 61,616 | | | |
| Unrealized derivative instrument gain (loss) | | 82,114 | | | (36,080) | | | |
| Interest income | | 4 | | | 9 | | | |
| Income from equity method interests, net | | 113,764 | | | 58,739 | | | |
| Impairment on equity method interests | | (160,441) | | | — | | | |
| Warrants valuation adjustment | | 664 | | | 1,200 | | | |
| Transaction costs | | (4,472) | | | — | | | |
| Other | | 12,574 | | | (2,306) | | | |
| Total other income | | 44,207 | | | 21,562 | | | |
| Financing costs, net of capitalized interest | | 10,598 | | | 2,190 | | | |
| NET INCOME BEFORE INCOME TAXES | | 99,221 | | | 80,988 | | | |
| Current income tax benefit | | — | | | (696) | | | |
| | | | | | |
| NET INCOME INCLUDING NONCONTROLLING INTERESTS | | 99,221 | | | 81,684 | | | |
| Net income attributable to Preferred Unit limited partners | | 161,906 | | | 75,906 | | | |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | | (62,685) | | | 5,778 | | | |
| Net income (loss) attributable to Apache limited partner | | (48,741) | | | 2,987 | | | |
| NET INCOME (LOSS) ATTRIBUTABLE TO CLASS A COMMON SHAREHOLDERS | | $ | (13,944) | | | $ | 2,791 | | | |
| KEY PERFORMANCE METRICS: | | | | | | |
Adjusted EBITDA(1) | | $ | 283,802 | | | $ | 191,155 | | | |
| OPERATING DATA: | | | | | | |
| Average throughput volumes of natural gas (MMcf/d) | | 440 | | | 499 | | | |
| | | | | | |
(1)Adjusted EBITDA is not defined by GAAP and should not be considered an alternativeconsolidated financials prior to or more meaningful than, net income (loss), operating income (loss), net cash provided by (used in) operating activities, or any other measures prepared under GAAP. For the definition and reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see the section titled Altus Midstream Operational Metrics—Adjusted EBITDA above.
Since the Company commenced operations in the second quarter of 2017, its most significant customer has been Apache. Altus Midstream is pursuing similar long-term commercial service contracts with third-parties that could be accommodated by existing capacity. Altus’ midstream service agreements with Apache contain no minimum volume commitments and as such, future results of operations may be materially impacted by Apache’s production volumes from Alpine High and Altus’ ability to contract third-party business.February 22, 2022. Refer to Part I, Item 1A—Risk Factors of this Annual Report onthe Form 10-K for further discussion.Revenues
The following table summarizes the Company’s revenues for the periods presented:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | |
| | | | | | |
| | (In thousands) |
| REVENUES: | | | | | | |
| Midstream services revenue — affiliate | | $ | 142,727 | | | $ | 144,714 | | | |
| Product sales — affiliate | | 9,754 | | | — | | | |
| Product sales — third parties | | 8,136 | | | 3,695 | | | |
| Total revenues | | $ | 160,617 | | | $ | 148,409 | | | |
For excess recovery volumes the Company obtains control and takes title, if any, on a monthly basis, the related non-cash consideration of these volumes is included in “midstream services revenue — affiliate” at market value. Subsequent sales of excess recovery volumes are recognized as product sales and, simultaneously, cost of product sales are recognized at the value attributed to the excess recovery volumes when they were earned.
Additionally, during 2020 the Company began providing compressor operations, maintenance, and related services to Apache in exchange for a fixed monthly fee per compressor unit serviced. For more details, please refer toPresentation Note 3—Revenue Recognitionin the Notes to Consolidated Financial Statements included within Part IV, Item 15 ofin this Annual Report on Form 10-K.10-K, for further information.Midstream services revenue — affiliateNM - Not meaningful
Midstream services revenue — affiliate decreasedAdjusted EBITDA increased by $2.0$356.5 million, or 86% to $142.7$772.2 million for the year ended December 31, 2021, as2022, compared to $144.7$415.7 million for the same period in 2021. The increase was primarily driven by an increase in net income including noncontrolling interest of $249.2 million, or 16818%, and increases in add back related to the Company’s proportionate share of its EMI pipelines’ EBITDA of $185.2 million, or 222%, share-based compensation of $42.8 million, depreciation and amortization expense of $16.8 million and integration costs of $12.2 million, which are results of new operations acquired through the Transaction. The increase in add back was also due to increases in interest expense of $31.9 million and loss on debt extinguishment of $28.0 million as the Company completed its comprehensive refinance in June 2022. The increase in adjusted EBITDA was partially offset by increases in EMI pipelines equity income of $117.9 million and gain on embedded derivatives of $89.1 million, and a decrease in derivative loss add back due to the Winter Storm Uri of $13.5 million as no similar credit was taken during 2022.
Segment Adjusted EBITDA
Segment Adjusted EBITDA is defined as segment net earnings adjusted to exclude interest expense, income tax expense, depreciation and amortization, the proportionate effect of these same items for our equity method investments and other non-recurring items. The following table presents segment adjusted EBITDA for the year ended December 31, 2022. Also refer to Note 20—Segments in the Notes to our Consolidated Financial Statements in this Form 10-K for reconciliation of segment adjusted EBITDA to net income including noncontrolling interests. | | | | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31,* |
| 2022 | | 2021 | | % Change |
| | | | | | |
| | (In thousands, except percentage) |
| Midstream Logistics | $ | 516,045 | | | $ | 343,809 | | | 50 | % |
| Pipeline Transportation | 269,237 | | | 81,861 | | | NM |
| Corporate and Other** | (13,093) | | | (9,957) | | | 31 | % |
| Total segment adjusted EBITDA | $ | 772,189 | | | $ | 415,713 | | | 86 | % |
| | | | | | |
* The results of the legacy ALTM business are not included in the Company’s consolidated financials prior to February 22, 2022. Refer toNote 1—Description of Business and Basis of Presentation in the Notes to the Consolidated Financial Statements of this Form 10-K for further information on the Company’s financial statement consolidation. ** Corporate and Other represents those results that: (i) are not specifically attributable to a reportable segment; (ii) are not individually reportable or (iii) have not been allocated to a reportable segment for the purpose of evaluating their performance, including certain general and administrative expense items.
NM - Not meaningful
Midstream Logistics segment adjusted EBITDA increased by $172.2 million, or 50%, to $516.0 million for the year ended December 31, 2020.2022, compared to $343.8 million for the same period in 2021. The decreaseincrease was primarily driven by lower throughputan increase in segment net income including noncontrolling interests of natural gas volumes from Apache, which reduced revenues,$186.9 million and increases in the add back related to loss on debt extinguishment of $28.0 million as the Company completed its comprehensive refinancing in June 2022, depreciation and amortization expense of $16.3 million and other one-time costs or amortization of $11.6 million due to new operations acquired through the Transaction, and loss on disposal of assets of $12.3 million for assets retired during 2022. The increase was offset by approximately $13.4 million of revenuesdecreases in add back related to excess recovery volumes earned under the new Gas Processing Agreement in the fourth quarter of 2021.
Product sales — affiliate
The $9.8 million increase in product sales — affiliate during the year ended December 31, 2021, was solelyderivative loss due to the saleWinter Storm Uri of excess recovery volumes$13.5 million and producer settlement of residue gas received$6.8 million as considerationno similar credits were taken in 2022 and interest expense of $63.0 million as refinanced debt was consolidated under the new Gas Processing Agreement, which were subsequently soldCorporate and Other for better risk management.
Pipeline Transportation segment adjusted EBITDA increased by $187.4 million, or NM, to Apache. Refer to Costs of product sales – affiliate under Costs and Expenses below.
Product sales — third parties
The $4.4 million increase in product sales — third parties during the year ended December 31, 2021, as compared to the year ended December 31, 2020, was driven by higher volumes of NGLs and condensates purchased and processed by Altus from a third party and subsequently sold to non-affiliated customers. Additionally, nearly $2.4 million of the increase reflects the sale of excess recovery volumes of condensates received as a consideration under the new Gas Processing Agreement,
which was subsequently sold to non-affiliated customers. Refer to Costs of product sales – third parties under Costs and Expenses below.
Costs and Expenses
The following table summarizes the Company’s costs and expenses for the periods presented:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | |
| | | | | | |
| | (In thousands) |
| Costs of product sales — affiliate | | $ | 9,754 | | | $ | — | | | |
| Costs of product sales — third parties | | 7,793 | | | 2,988 | | | |
| Operations and maintenance | | 32,748 | | | 37,993 | | | |
| General and administrative | | 14,182 | | | 13,155 | | | |
| Depreciation and accretion | | 16,201 | | | 15,945 | | | |
| Impairments | | 441 | | | 1,643 | | | |
| Taxes other than income | | 13,886 | | | 15,069 | | | |
| Total costs and expenses | | $ | 95,005 | | | $ | 86,793 | | | |
Costs of product sales —affiliate
The $9.8 million increase in cost of product sales — affiliate during the year ended December 31, 2021, as compared to the year ended December 31, 2020, was solely due to the cost of excess recovery volumes of gas received as consideration under the new Gas Processing Agreement subsequently sold to Apache.
Costs of product sales — third parties
The $4.8 million increase in costs of product sales — third parties during the year ended December 31, 2021, as compared to the year ended December 31, 2020, was driven by higher volumes of purchases of NGLs from a third-party and the cost of excess recovery condensate volumes under the new Gas Processing Agreement.
Operations and maintenance
Operations and maintenance expenses decreased by approximately $5.2 million to $32.7$269.2 million for the year ended December 31, 2021, as2022, compared to $38.0$81.9 million for the year ended December 31, 2020. This decrease was primarily driven by increased operational efficiency as a result of transitioning from mechanical refrigeration units to the Company’s centralized Diamond cryogenic complex. Work related to this transition was still being completedsame period in the first half of 2020. 2021. The transition resulted in decreases in various costs, the most significant being contract labor, equipment rentals, and chemical expenses. These savings were partially offset by higher power costs and higher repair and maintenance expenses.
General and administrative and Depreciation and accretion
General and administrative expenses were approximately $1.0 million higher in 2021 compared to 2020 primarily due to the escalating price terms under the COMA. Depreciation and accretion expense in 2021 was consistent with 2020, as the Company’s carrying value of its property, plant, and equipment assets did not meaningfully change during the comparative periods.
Impairments
During the fourth quarter of 2020, the Company sold certain of its power generators to a third party and, as a result, the remaining power generators owned by the Company were remeasured at fair value calculated based on the proceeds of such sale. This remeasurement resulted in an impairment of $1.6 million on these assets. Impairments in 2021 were insignificant.
Taxes other than income
The decrease in taxes other than incomeincrease was driven by changes related to ad valorem taxes,investments in GCX and Shin Oak and a 100% increase in the Company’s investment in PHP, which decreased by $1.2 million to $13.5 million forwere all acquired through the Transaction in February 2022. During the year ended December 31, 2021, as compared to $14.7 million for the year ended December 31, 2020. The $1.2 million decrease is primarily related to a decrease in tax assessed value for the Company’s property, plant, and equipment.
Other Income (Loss) and Financing Costs, Net of Capitalized Interest
The components of other income, other loss, and financing costs, net of capitalized interest are presented below:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | |
| | | | | | |
| | (In thousands) |
| Unrealized derivative instrument gain (loss) | | $ | 82,114 | | | $ | (36,080) | | | |
| Interest income | | 4 | | | 9 | | | |
| Income from equity method interests, net | | 113,764 | | | 58,739 | | | |
| Impairment on equity method interests | | (160,441) | | | — | | | |
| Warrants valuation adjustment | | 664 | | | 1,200 | | | |
| Transaction costs | | (4,472) | | | — | | | |
| Other | | 12,574 | | | (2,306) | | | |
| Total other income | | $ | 44,207 | | | $ | 21,562 | | | |
| | | | | | |
| Interest expense | | $ | 9,431 | | | $ | 9,775 | | | |
| Amortization of deferred facility fees | | 1,167 | | | 1,148 | | | |
| Capitalized interest | | — | | | (8,733) | | | |
| Total Financing costs, net of capitalized interest | | $ | 10,598 | | | $ | 2,190 | | | |
Unrealized derivative instrument gain (loss)
During the year ending December 31, 2021, the Company recognized an unrealized derivative instrument gain of $82.1 milliononly held a 26.67% interest in relation to an embedded exchange option identified upon the issuance and sale of Series A Cumulative Redeemable Preferred Units (the Preferred Units). The recognized unrealized loss related to this embedded feature was $36.1 million for the year ended December 31, 2020. The associated derivative liability is recorded on the consolidated balance sheet at fair value. The fair value of the embedded derivative is determined (using an income approach) by a range of factors, including expected future interest rates using the Black-Karasinski model, interest rate volatility, the Company’s imputed interest rate, the expected timing of periodic cash distributions, the expected timing of any partial redemption of the Preferred Units, the estimated timing for the potential exercise of the exchange option, and anticipated dividend yields of the Preferred Units. The value of the derivative during the year ending December 31, 2021 was primarily impacted by the expected mandatory redemption of certain of the Preferred Units on, and after, the closing of the BCP Business Combination.Refer to Note 11—Series A Cumulative Redeemable Preferred Units within Part IV, Item 15 of this Annual Report on Form 10-K for further discussion.PHP.Income from equity method interests, net
Income from equity method interests increased by $55.0 million to $113.8 million for the year ended December 31, 2021, as compared to $58.7 million for the year ended December 31, 2020. The increase was primarily due to the Company’s 26.7 percent share of net income from the Permian Highway Pipeline, which commenced service in January 2021.
Impairment on equity method interests
The $160.4 million increase in impairment on equity method interests for the year ended December 31, 2021, as compared to December 31, 2020, was a result of the Company’s impairment of its interest in the EPIC Crude Oil Pipeline in the fourth quarter of 2021. Refer to Note 1—Summary of Significant Accounting Policies and Note 9—Equity Method Interests within Part IV, Item 15 of this Annual Report on Form 10-K for further discussion.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 February 2021, in conjunction with increased power pricing due to the Texas freeze event and underutilization of contractual electricity volumes, the Company recognized an estimated credit of approximately $9.7 million for the year ended December 31, 2021. No credits were recognized for the year ended December 31, 2020.
The remainder of the increase to other income primarily relates to the Company recording a gain on the sale of certain non-core assets of $1.2 million for the year ended December 31, 2021 compared to a loss on the sale of certain non-core assets of $2.2 million for the year ended December 31, 2020.
Financing costs, net of capitalized interest
Financing costs incurred, net of capitalized interest, includes increases in interest expense not eligible to have interest capitalized related to balances drawn on Altus Midstream’s credit facility throughout the current year. The changes to gross interest expense for the years presented is insignificant.
Provisions for income taxes
Current income tax benefit for the years ended December 31, 2021 and 2020 were a benefit of nil and $0.7 million, respectively. 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. For the year ended December 31, 2020, the Company recorded a current income tax benefit of $0.7 million associated with a net operating loss carryback claim.
The Company recorded no deferred income tax expense for the years ended December 31, 2021 and 2020.
Please refer to Note 12—Income Taxes set forth in Part IV, Item 15 of this Annual Report on Form 10-K for further discussion.Key Performance Metric—EBITDA
Net income before income taxes was $99.2 million for the year ended December 31, 2021, an increase of $18.2 million from a net income before income taxes of $81.0 million for the year ended December 31, 2020. The increase in net income before income taxes was primarily driven by a $118.2 million decrease to expense related to the fair value measurement of an embedded derivative at December 31, 2021, a $55.0 million increase due to higher income from the Equity Method Interest Pipelines, an increase of $12.2 million in total revenues, a $5.2 million decrease in operations and maintenance expenses, a $1.2 million decrease in impairment expense and an increase of $14.9 million in other income compared to the prior year period (as discussed above). The increases to net income were offset by a $160.4 million impairment of an equity method interest at December 31, 2021, a $14.6 million increase in costs of product sales, an $8.4 million increase in interest expense from lower capitalized interest, and a net increase of $5.1 million in transaction and various other costs of the Company.
Adjusted EBITDA increased by $92.6 million for the year ended December 31, 2021 compared to the prior year period. Adjusted EBITDA, which excludes the impacts of depreciation, accretion, impairments, and the changes to the embedded derivative, benefited from an incremental $22.3 million increase related to excluding depreciation, and interest in the Company’s proportionate share of EBITDA from the Equity Method Interest Pipelines. This amount was further benefited by a decrease of $2.4 million, in the aggregate, of various other insignificant costs of the Company.
For additional information, see the section titled Altus Midstream Operational Metrics—Adjusted EBITDA above.
Capital Resources and Liquidity
The Company’s primary use of capital since inception has been for the initial construction of gathering and processing assets, as well as the acquisition of the Equity Method Interest PipelinesEMI pipelines and associated subsequent construction costs. For 2022, the Company’s primary capital spending requirements are anticipatedwere related to be relatedthe PHP expansion project, integration by pipeline of the Alpine High gathering system with the legacy BCP system, certain integration-related synergies including the relocation of compression units and treating assets to the legacy BCP processing plants, the Company’s contractual debt obligation, the Company’s payment of a quarterly cash dividenddividends on its Class A Common Stock and distributions on Common Units as may be declared by its boardthe Board and cash payment upon redemption of directorsall remaining mandatorily redeemable Preferred Units.
For 2023, the Company’s primary capital spending requirements are related to the PHP expansion project and paymentother budgeted capital expenditures for construction of gathering and processing assets and the Company’s contractual debt obligations. The Company will continue to have Apache, Blackstone and I Squared reinvest 100% of their 2023 distribution and dividends into shares of our Class A Common Stock. In addition, the Board has approved a share repurchase program (“Repurchase Program”) authorizing discretionary purchases of the Company’s quarterly distributionClass A Common Stock up to $100 million in aggregate.
During the Preferred Unit limited partners.
During 2021,year ended December 31, 2022, the Company’s primary sources of cash were distributions from the Equity Method Interest Pipelines,EMI pipelines, borrowings under the revolving credit facility,Term Loan and Revolving Credit Facility, proceeds from the offering of the Notes, and cash generated from operations. Based on Altus’the Company’s current financial plan and related assumptions, including the Reinvestment Agreement and Class A Common Stock Repurchase Program, the Company believes that cash from operations a reduced capital program for its midstream infrastructure, and distributions from the Equity Method Interest PipelinesEMI pipelines will generate cash flows in excess of capital expenditures and the amount required to fund the Company’s planned quarterly dividend over the next 12 months. Additionally, the Company has locked in the floating base rate, see more information of floating base rate on its Term Loan through April 2023 to reduce short-term interest rate risk. See more information regarding the floating base rate in Note 8—Debt and quarterly paymentsFinancing Costs in the Notes to our Consolidated Financial Statements in this Annual Report Form 10-K. Further, the Company entered into an interest rate swap with a $1.00 billion notional that is effective from May 1, 2023 through May 31, 2025 swapping floating SOFR for a fixed swap rate of 4.46%.
Comprehensive Refinancing
On June 8, 2022, the Partnership completed the private placement of $1.00 billion aggregate principal amount of the Notes, which are fully and unconditionally guaranteed by the Company. The Notes are issued under our Sustainability-Linked Financing Framework and include sustainability-linked features. In addition, the Partnership entered into a new Revolving Credit Agreement, which provides for a $1.25 billion senior unsecured Revolving Credit Facility maturing on June 8, 2027, and a new term loan agreement, which provides for a $2.00 billion senior unsecured Term Loan Credit Facility maturing on June 8, 2025. Proceeds from the Notes and the Term Loan Credit Facility were used to repay all outstanding borrowings under our existing credit facilities and to pay fees and expenses related to the Preferred Unit limited partners during 2022.offering. Refer to Note 8 — Debt and Financing Costs in the Notes to our Consolidated Financial Statements in this Form 10-K for further information. Given recent crude oil price volatility and uncertain economic activity resulting from the COVID-19 pandemic and related governmental actions, the Company continues to monitor expected natural gas throughput volumes from Apache and capacity utilization of the Equity Method Interest Pipelines. Further, given the pending BCP Business Combination noted above, together with the recent price volatility and continuing economic uncertainty related to COVID-19, future projections remain dynamic. Altus’ results, including projections related to capital resources and liquidity, could be materially affected by the continuing COVID-19 pandemic and the effects of the BCP Business Combination if closed.
Altus Midstream Capital Requirements and Expenditures
Our operations can be capital intensive, requiring investments to expand, upgrade, maintain or enhance existing operations and to meet environmental and operational regulations. During 2021the year ended December 31, 2022 and 2020,2021, capital spending for midstream infrastructureproperty, plant and equipment totaled $206.2 million, which included the Brandywine NGL Pipeline acquisition, and $78.0 million, respectively and intangible assets totaled $4.6purchases of $15.4 million and $30.0$4.7 million, respectively. Management believes its existing gathering, processing, and transmission infrastructure capacity is capable of fulfilling its midstream contracts to service Apache’s production from Alpine High and any potential third-partyits customers. As such,During the Company expects remaining capital requirements for its existing infrastructure assets during 2022 to be minimal.
Additionally, during the yearsyear ended December 31, 2021 and 2020,2022, the Company made cash contributions totaling $28.4contributed $78.2 million and $327.3 million, respectively,to one of its EMI pipelines, PHP, for the Equity Method Interest Pipelines, which includes2022 Capacity Expansion Project, compared to $20.5 million contributed to the following equity interest ownership stakes:
•same period of 2021. See a 16.0 percent interestNote 20—Segments in GCX;the Notes to the Consolidated Financial Statements in this Form 10-K for capital expenditure for each operating segment.•a 15.0 percent interest in EPIC;
•an approximate 26.7 percent interest in PHP; and
•a 33.0 percent interest in Shin Oak.
The Company estimates it will incur minimal2023 capital contributionsexpenditures to be between $490 million and $540 million, which includes between $235 million and $265 million of Midstream Logistics capital and between $255 million and $275 million of Pipeline Transportation capital.
during 2022 for its equity interest in these joint venture pipelines. The Company anticipates its existing capital resources will be sufficient to fund the Company’s future capital expenditures for the Equity Method Interest PipelinesEMI pipelines and the Company’s existing infrastructure assets.assets over the next 12 months. For further information on the Equity Method Interest Pipelines,EMIs, refer to Note 9—7—Equity Method InterestsInvestmentsin the Notes to our Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.Altus MidstreamCash Flows
The following tables present cash flows from operating, investing, and financing activities during the periods presented:
| | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31, | | |
| | 2022 | | 2021 | | | | |
| | | | | | | | |
| | (In thousands) |
| Cash provided by operating activities | $ | 613,006 | | | $ | 235,569 | | | | | |
| Cash used in investing activities | $ | (286,130) | | | $ | (99,621) | | | | | |
| Cash used in financing activities | $ | (339,211) | | | $ | (136,810) | | | | | |
Operating Activities. Net cash provided by operating activities increased by $377.4 million for the year ended December 31, 2022 compared with the same period in 2021. The change in the operating cash flows reflected increases in net income including noncontrolling interests of $249.2 million, adjustments related to non-cash items of $79.0 million and cash provided by changes in working capital of $49.2 million. Period-to-period increase in non-cash adjustments was primarily driven by the new operations acquired through the Transaction, including three EMI pipelines and additional equity interests of the Company’s existing EMI pipeline, PHP, acquired through the Transaction. The increase was offset by derivative fair value adjustment recognized during 2022. Period-to-period changes in working capital was primarily related to fluctuations in trade receivables and accrued liabilities due to timing of collection and payments.
Investing Activities. Net cash used in investing activities increased by $186.5 million for the year ended December 31, 2022 compared with the same period in 2021. The increase was primarily driven by an increase in property, plant and equipment expenditure of $128.1 million, contributions made to the PHP expansion project of $57.6 million and intangible assets expenditure of $10.7 million. The increase in cash outflow was offset by an increase in cash inflow of $13.4 million acquired through the Transaction closed in February 2022.
Financing Activities. Net cash used in financing activities increased by $202.4 million for the year ended December 31, 2022 compared with the same period in 2021. The increase was primarily due to increases in cash outflow for redemption of noncontrolling interest Preferred Units of $461.5 million and redemption of mandatorily redeemable Preferred Units of $183.3 million, cash dividends paid to holders of Class A Common Stock of $39.3 million, cash distributions paid to holders of Preferred Units of $8.8 million and reduction of equity contribution receipt of $14.9 million. The increase in cash outflow was offset by net proceeds from long-term debt of net payments to the Company’s outstanding debts of $455.4 million and a reduction of cash distributions paid to holders of Class C Common Units of $50.0 million.
Dividend and Distribution Reinvestment Agreement
On February 22, 2022, the Company entered into a Dividend and Distribution Reinvestment Agreement (the “Reinvestment Agreement”) with certain stockholders including BCP Raptor Aggregator, LP, BX Permian Pipeline Aggregator, LP, Buzzard Midstream LLC, APA Corporation Apache Midstream LLC, and certain individuals (each, a “Reinvestment Holder”). Under the Reinvestment Agreement, each Reinvestment Holder is obligated to reinvest at least 20% of all distributions on Common Units or dividends on shares of Class A Common Stock in the Company’s Class A Common Stock. Additionally, the Audit Committee resolved that for the calendar year 2022, 100% of all distributions or dividends received by each Reinvestment Holder would be reinvested in shares of Class A Common Stock. The Audit Committee approved a similar determination for 2023. In addition, the Board approved the Repurchase Program in February 2023 authorizing discretionary purchase of the Company’s Class A Common Stock up to $100 million in aggregate. Shares acquired under the Repurchase Program are expected to be reissued under the Company’s reinvestment plan, pursuant to the Reinvestment Agreement.
During 2022, the Company made cash dividend payments of $40.5 million to holders of Class A Common Stock and Common Units Distributionsand $263.3 million was reinvested in shares of Class A Common Stock by each Reinvestment Holder.
During 2021,Stock Split
On May 19, 2022, the Company paid an aggregate $22.5 millionannounced the Stock Split with respect to its Class A Common Stock and Class C Common Stock in dividendsthe form of a stock dividend. The Stock Split was accomplished by distributing one additional share of Class A Common Stock for each share of Class A Common Stock outstanding and one additional share of Class C Common Stock for each share of Class C Common Stock outstanding. The additional shares of Common Stock were issued on June 8, 2022 to holders of record at the close of business on May 31, 2022.
Dividend
On January 17, 2023, the Company declared a cash dividend of $0.75 per share on the Company’s Class A Common Stock
and a distribution of
which $5.6 million, or $1.50$0.75 per
share, was paid in each quarterCommon Unit from the Partnership to the holders of
2021.Each quarterlyCommon Units. Dividends are payable on February 16, 2023. Certain holders of Class A Common Stock and Class C Common Stock will receive a cash dividend was funded by a distribution from Altus Midstream to its common unitholders of $1.50 per Common Unit, with each quarterly distribution totaling $24.4 million, of which $5.6 million was paid to the Company and the balance was paid to Apache.For more information please refer to Note 2—Transactions with Affiliates and Note 10—Equity and Warrants in the Notes to the Consolidated Financial Statements set forth in Part IV, Item 15receiving additional shares of this Annual Report on Form 10-K.
Sources and Uses of Cash
The following table presents the sources and uses of the Company’s cash and cash equivalents for the periods presented.
| | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | |
| | | | | | |
| | | (In thousands) |
| Sources of cash and cash equivalents: | | | | | | |
| Proceeds from revolving credit facility | | $ | 33,000 | | | $ | 228,000 | | | |
| Proceeds from sale of assets | | 3,037 | | | 10,240 | | | |
| Capital distributions from equity method interests | | 38,755 | | | 17,419 | | | |
| Net cash provided by operating activities | | 209,719 | | | 164,294 | | | |
| | 284,511 | | | 419,953 | | | |
| Uses of cash and cash equivalents: | | | | | | |
Capital expenditures(1) | | (4,588) | | | (29,981) | | | |
| Distributions paid to Preferred Unit limited partners | | (46,249) | | | (23,124) | | | |
| Contributions to equity method interests | | (28,420) | | | (327,305) | | | |
| Distributions paid to Apache limited partner | | (75,000) | | | — | | | |
| Dividends paid | | (22,479) | | | — | | | |
| Finance lease payments | | — | | | (11,789) | | | |
| Deferred facility fees | | — | | | (816) | | | |
| Capitalized interest paid | | — | | | (8,733) | | | |
| | (176,736) | | | (401,748) | | | |
| Increase in cash and cash equivalents | | $ | 107,775 | | | $ | 18,205 | | | |
(1)The table presents capital expenditures on a cash basis; therefore, the amounts may differ from those discussed elsewhere in this document, which include accruals.
Liquidity
The following table presents a summary of the Company’s key financial indicators at the dates presented:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| | | | |
| | | (In thousands) |
| Cash and cash equivalents | | $ | 131,963 | | | $ | 24,188 | |
| Total debt | | 657,000 | | | 624,000 | |
| Available committed borrowing capacity | | 141,000 | | | 176,000 | |
Cash and cash equivalents
At December 31, 2021 and December 31, 2020, the Company had $132.0 million and $24.2 million, respectively, in cash and cash equivalents. The majority of the cash is invested in highly liquid, investment-grade instruments with maturities of three months or less at the time of purchase.
Debt
As of December 31, 2021 and December 31, 2020, the Company had debt outstanding totaling $657.0 million and $624.0 million, respectively.
Available credit facilities
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 December 31, 2021 there were $657.0 million of borrowings and a $2.0 million letter of credit outstanding under this facility. As of December 31, 2020, there were $624.0 million of borrowings and no letters of credit 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 amended credit 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 December 31, 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 covenantClass A Common Stock 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 two 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 December 31, 2021 was less than 4.00:1.00.Reinvestment Agreement.
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 11—Series A Cumulative Redeemable Preferred Units in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K 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 December 31, 2021.
There is no assurance that the financial condition of banks with lending commitments to Altus Midstream will not deteriorate. Altus closely monitors the ratings of the banks in the Company’s bank group. Having a large bank group allows the Company to mitigate the potential impact of any bank’s failure to honor its lending commitment.
Series A Cumulative Redeemable Preferred Units
OnThe Company issued Preferred Units on June 12, 2019, Altus Midstream2019. Because the Transaction was accounted for as a reverse merger, certain Preferred Units that were issued and sold theoutstanding were assumed at Closing for accounting purposes. The Company assumed 525,000 Preferred Units in a private offering exempt fromas well as 29,983 paid-in-kind (“PIK”) Preferred Units immediately after the registration requirementsClosing.
Since the Securities Act (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 625,000redeemed all outstanding Preferred Units were sold at a price of $1,000 per Preferred Unit,and PIK units for an aggregate issueredemption price of $625.0$644.8 million. Altus Midstream received approximately $611.2The Company recognized a gain of $9.6 million in cash proceeds from the sale after deducting transaction costs and discounts to certain purchasers. These proceeds were used to fund ongoing capital contributions related to Altus’ Equity Method Interest Pipelines and repayment of outstanding principal on the revolving credit facility (discussed above).
•The Preferred Units entitle the holders thereof to receive quarterly distributions at a rate of 7 percent per annum, commencing with the quarter ended June 30, 2019. The rate increases to 10 percent per annum after the fifth anniversary of Closing and upon the occurrence of specified events. For any quarter ending on or prior to December 31, 2020, Altus Midstream could elect to pay distributions on the Preferred Units in-kind and did so in respect of quarters ended on and before March 31, 2020.
•The Preferred Units are redeemable at Altus Midstream’s option at any time in cash at a redemption price (the Redemption Price) equal to (a) the greater of (i) an 11.5 percent internal rate of return (increasing to 13.75 percent after the fifth anniversary of Closing), and (ii) a 1.3x multiple of invested capital plus (b) if applicable, the value of any accrued and unpaid distributions. The Preferred Units will be redeemable at the holder’s option upon a change of control or liquidation of Altus Midstream and certain other events, including certain asset dispositions. The Company and Altus Midstream remained subsidiaries of Apache upon consummation of the January 2022 direct exchange by the Company and Apache under the Amended LPA, pursuant to which the Company succeeded to Apache’s 12.5 million Common Units, issued an additional 12.5 million shares of Class A Common Stock to Apache, and cancelled Apache’s 12.5 million shares of Class C Common Stock (as further discussed in Note 10—Equity and Warrants in the Notes to our Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K).10-K.•Liquidity
The Preferred Units will be exchangeable for sharesfollowing table presents a summary of the Company’s Class A Common Stockkey financial indicators at the optiondates presented:
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | | | |
| | | (In thousands) |
| Cash and cash equivalents | | $ | 6,394 | | | $ | 18,729 | |
| Total debt, net of unamortized deferred financing cost | | $ | 3,368,510 | | | $ | 2,307,702 | |
| Available committed borrowing capacity | | $ | 855,000 | | | $ | 133,000 | |
Cash and cash equivalents
At December 31, 2022 and 2021, the Company had $6.4 million and $18.7 million, respectively, in cash and cash equivalents.
Total Debt and Available credit facilities
There is no assurance that the financial condition of banks with lending commitments to the Company will not deteriorate. The Company closely monitors the ratings of the Preferred Unit holders after the seventh anniversary of Closing or upon the occurrence of specified events. Each Preferred Unit will be exchangeable for a number of shares of Class A Common Stock equal to the Redemption Price divided by the volume-weighted average trading price of the Class A Common Stock on the Nasdaq Global Select Market for the 20 trading days immediately preceding the second trading day prior to the applicable exchange date, less a 6 percent discount.
•Each outstanding Preferred Unit has a liquidation preference equal to the Redemption Price payable before any amounts are paid in respect of Altus Midstream’s Common Units and any other units that rank junior to the Preferred Units with respect to distributions or distributions upon liquidation.
•Altus Midstream is restricted from declaring or making cash distributions on its Common Units until all required distributions on the Preferred Units have been paid. In addition, before the fifth anniversary of Closing, aggregate cash distributions on, and redemptions of, Common Units are limited to $650.0 million of cash from ordinary course of operations if permitted under Altus Midstream’s Amended Credit Agreement. Cash distributions on, and redemptions of, Common Units also are subject to satisfaction of leverage ratio requirements specifiedbanks in the Amended LPA.
Distributions not paid in accordance withCompany’s bank group. Having a large bank group allows the termsCompany to mitigate the potential impact of the Amended LPA attract an additional percentage per annum, cumulativeany bank’s failure to the distribution rates noted above. Altus Midstream’s ability to exercise or satisfy redemption options in cash or pay quarterly distributions is predicated upon Altus Midstream’s ability to generate sufficient cash from operations in addition to the availability of borrowing capacity underhonor its existing revolving credit facility.lending commitment.
Since the Preferred Units could be exchangeable for a number of shares of Class A Common Stock equal to 20 percent or more of the Company’s outstanding voting power, the Company submitted the potential issuance of such shares for approval of its stockholders (the Stockholder Approval) at its annual stockholder meeting in 2020 and obtained Stockholder Approval.
Off-Balance Sheet Arrangements
Other than the arrangements described herein, the Company has not entered into any transactions, agreements, or other contractual arrangements with unconsolidated entities that are reasonably likely to materially affect its liquidity or capital resource positions.
At the closeAs of the Altus Combination, Apache was granted the right to receive contingent consideration of up to 1,250,000 shares of Class A Common Stock as follows:December 31, 2022, there were no off-balance sheet arrangements.
•625,000 shares if the per share closing price of the Class A Common Stock as reported by Nasdaq during any 30-day-trading period ending prior to the fifth anniversary of the Closing Date is equal to or greater than $280.00 for any 20 trading days within such 30-trading-day period.
•625,000 shares if the per share closing price of the Class A Common Stock as reported by Nasdaq during any 30-trading-day period ending prior to the fifth anniversary of the Closing Date is equal to or greater than $320.00 for any 20 trading days within such 30-trading-day period.
All share amounts referenced above have been retrospectively restated to reflect the Company’s reverse stock split, which was effected June 30, 2020. For additional information regarding these arrangements, please see Note 10—Equity and Warrants in the Notes to the Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.
Contractual Obligations
Altus Midstream exercised four of the Company’s five Pipeline Options acquired from Apache at the closing of the Altus Combination. The fifth option to acquireWe have contractual obligations for principal and interest in the Salt Creek NGL pipeline was not exercised, and expired during 2020. The Company may be required to fund its proportionate share of future capital expenditures for its equity interest share in the development of the pipelines as referenced. The Company estimates it will incur minimal capital contributions during 2022 for its equity interests.
The Company’s midstream assets service Altus Midstream’s revenue agreements, which are underpinned by acreage dedications covering Alpine High. There are no minimum volume or firm transportation commitments. Pursuant to these agreements, Altus Midstream is obligated to perform low and high pressure gathering, processing, dehydration, compression, treating, conditioning, and transmissionpayments on all volumes produced from the dedicated acreage, so long as Apache has the right to market such gas. Although Altus believes its existing gathering, processing, and transmission infrastructure is expected to provide capacity levels capable of fulfilling its midstream contracts to service Apache’s production and additional third-party customers, current capital spending may be increased in future periods if additional cryogenic processing capacity is needed, commensurate with any forecasted throughput increases.
During the fourth quarter of 2020, the Company entered into a three year fixed-rate power contract with a third-party. The Company estimates its minimum obligation will be $4.7 million and $3.6 million for 2022 and 2023, respectively. The actual amount incurred will vary based on usage.
Altus Midstream may also be subject to various contingent obligations that become payable only if certain events or rulings were to occur. The inherent uncertainty surrounding the timing of and monetary impact associated with these events or rulings prevents any meaningful accurate measurement, which is necessary to assess settlements resulting from litigation, regulatory, or environmental matters. As of December 31, 2021, there were no accruals or loss contingencies related to such matters. For a detailed discussion of the Company’s environmental and legal contingencies, please seeour term loan credit facility. See Note 8—CommitmentsDebt and ContingenciesFinancing Costsin the Notes to our Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.
Under certain clauses of our transportation services agreements with third party pipelines to transport natural gas and NGLs, if we fail to ship a minimum throughput volume, then we will pay certain deficiency payments for transportation based on the volume shortfall up to the MVC amount.
Critical Accounting Policies and Estimates
Insurance Program
The Company has the benefit of insurance policies that include coverage for physical damage to assets, general liabilities, business interruption insurance, sudden and accidental pollution, and other risks. Altus’ insurance coverage is subject to deductibles or retentions that Altus must satisfy prior to recovering on insurance. Additionally, the insurance coverage is subject to policy exclusions and limitations. There is no assurance that insurance coverage will adequately protect the Company against liability from all potential consequences and damages.
Future insurance coverage for the industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable.
Critical Accounting Estimates
Altus prepares its financial statements and the accompanying notes in conformity with GAAP, which require management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and the accompanying notes. Altus identifies certainWe consider our critical accounting policies involving estimation as criticalestimates to be those that require difficult, complex, or subjective judgment necessary in accounting for inherently uncertain matters and those that could significantly influence our financial results based on among other things, their impact on the portrayal of Altus’ financial condition, results of operations, or liquidity and the degree of difficulty, subjectivity, and complexitychanges in their deployment.those judgments. Critical accounting estimates cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. Management routinely discusses the development, selection, and disclosure of each of the critical accounting policies. The following is a discussion of Altus’ most critical accounting estimates.
Business Combination
For acquired businesses, we recognize the identifiable assets acquired, the liabilities assumed and Equipment
When assets are placed into service, management makes estimates with respect to useful lives and salvage values that management believes are reasonable. However, subsequent events could cause a change in estimates, thereby impacting future depreciation amounts. Uncertainties that may impact these estimates include, among others, changes in laws and regulations relating to environmental matters, including air and water quality, restoration and abandonment requirements, economic conditions, and supply and demandany noncontrolling interest in the
area. Depreciation is computedacquiree at their estimated fair values on the date of acquisition with any excess purchase price over the
asset’sfair value of net assets acquired is recorded to goodwill. Determining the fair value of these items requires management’s judgment and/or the utilization of independent valuation specialists and involves the use of significant estimates and assumptions. The judgments made in the determination of the estimated fair value assigned to the assets acquired, the liabilities assumed and any noncontrolling interest in the investee, as well as the estimated useful life
usingof each asset and the
straight-line method based on estimated useful livesduration of each liability, can materially impact the financial statements in periods after acquisition, such as through depreciation and
asset salvage values.amortization expense. See Note 3—Business Combination in our Notes to the Consolidated Financial Statements in this Annual Report Form 10-K for more information regarding our valuation approach.Impairment of Long-lived Assets
Long-lived assets used in operations including gathering, processing, and transmission facilities, are evaluated for potential impairment when events or changes in circumstances indicate a possible significant deterioration in future cash flows expected to be generated by an asset group. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. If there is an indication that the carrying amount of an asset may not be recovered, the asset is assessed for impairment through an established process in which changes to significant assumptions such as service prices, throughput volumes, and future development plans and fluctuation of commodity pricing are reviewed. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to an estimated fair value. Because there is usually a lack of quoted market prices for long-lived assets, theSuch fair value is generally determined by discounting anticipated future net cash flows, an income valuation approach, or by a market-based valuation approach, which are Level 3 fair value measurements. The estimates and assumptions can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. An estimate of the impaired assets is assessed by management using the income approach.
Under the income approach, thesensitivity to changes in underlying assumptions of a fair value of each asset groupcalculation is estimated based onnot practicable, given the present value of expected future cash flows. The income approach is dependent on a number of key factors andnumerous assumptions including estimates of forecasted throughput volumes, operating expenses, commercial development and capital costs, inflation expectations, discount rates, and other variables. Management also evaluates changes in Altus’ business and economic conditions and their implications on future development plans and ultimate disposition of the assets. Global and regional economic conditions, including commodity prices and drilling activity by third party customers, may alsothat can materially affect estimated future cash flows.our estimates.
The final measure of impairment to be recognized, if any, depends upon management’s calculation using the income approach; however, management does consider other factors in determining the asset’s fair value including indicative values at which similar assets were transferred in recent market transactions, if such data is available. Although the Company bases its fair value measurement of each asset group on assumptions it believes to be reasonable, those assumptions are inherently unpredictable and uncertain, and actual results could differ from the estimates. Negative revisions in throughput estimates, increases in future operating and capital costs, divestitures of significant components of an asset group, or sustained market deterioration in the oil and gas industry could lead to further reductions in expected future cash flows and possibly additional impairments in future periods.
Impairment of Equity Method InterestsInvestment
EquityWe evaluate our equity method interests are assessedinvestments for impairment whenever changes in the facts andwhen events or circumstances indicate a loss in value has occurred, if the loss is deemed to be other than temporary. When the loss is deemed to be other than temporary,that the carrying value of the equity method investment may be impaired and that impairment is written down to fair value, andother than temporary. If an event occurs, we evaluate the amountrecoverability of the write-down is included in income.
Altus recorded an impairment charge on its equity method interest in EPIC during the fourth quarter of 2021. The fair value of the impaired interest was determined using the income approach. The income approach first considered Altus’ estimates of future throughput volumes, tariff rates, and costs. These assumptions were applied to develop future operating cash flow projections that were then discounted using a discount rate believed to be consistent with that which would be applied by market participants. The amount arrived at using this approach was then considered against EPIC’s debt and theour carrying value of Altus’ investment in EPIC as of December 31, 2021, resulting in the fourth quarter impairment charge. Altus has classified this nonrecurring fair value measurement as Level 3 in the fair value hierarchy. Please refer to Note 9—Equity Method Interests, within Part IV, Item 15 of this Annual Report on Form 10-K for further details of the Company’s equity method interests. Negative revisions in future estimates of throughput volumes, revenue assumptions or costs related to the Company’s equity method interests could lead to further impairments of such interests in future periods.Income Taxes
Altus’ operations are subject to U.S. federal and state taxation on income. The Company records deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in the Company’s financial statements and tax returns. Altus routinely assesses the ability to realize its deferred tax assets. If Altus concludes that it is more likely than not that some portion or all of the deferred tax assets will not be realized under accounting standards, the tax asset would be reduced by a valuation allowance. The Company recorded a full valuation allowance against its deferred tax asset as of December 31, 2021 and December 31, 2020.
The Company regularly assesses and, if required, establishes accruals for uncertain tax positions that could result from assessments of additional tax by taxing jurisdictions where the Company operates. The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. These accruals for uncertain tax positions are subject to a significant amount of judgment and are reviewed and adjusted on a periodic basis in light of changing facts and circumstances considering the progress of ongoing tax audits, case law, and any new legislation. There was no material change in the Company’s uncertain tax positions in the period.
Fair Value Measurements — Preferred Units Embedded Derivative
As noted in the discussion related to the Preferred Units above, the fair value of the embedded derivativeinvestment. If an impairment is determined byindicated, we adjust the carrying values of the investment downward, if necessary, to their estimated fair values.
We estimate the fair value of our equity method investments based on a rangenumber of factors, including expecteddiscount rates, projected cash flows, and enterprise value. Estimating projected cash flows requires us to make certain assumptions as it relates to the future interest rates usingoperating performance of each of our equity method investments (which includes assumptions, among others, about estimating future operating margins and related future growth in those margins, contracting efforts and the Black-Karasinski model, the Company’s imputed interest rate, interest rate volatility, the expectedcost and timing of periodic cash distributions,facility expansions) and assumptions related to our equity method investments, such as their future capital and operating plans and their financial condition.
Derivatives and Hedging Activities
All our derivative contracts are recorded at estimated fair value. We utilize published prices, broker quotes, and estimates of market prices to estimate the estimated timing for the potential exercise of the exchange option, any anticipated early redemptions of the Preferred Units, and anticipated dividend yields of the Preferred Units. Thefair value of the unrealized derivative liability during the year ended December 31, 2021 decreased by $82.1 million, primarily driven bythese contracts; however, actual amounts could vary materially from estimated fair values as a current year assumption that a portionresult of the Preferred Units will be redeemed before the holders of the Preferred Units could theoretically exercise their exchange option. Absent any changes to assumptions regarding the timing of redemptions in general, a one percent increasemarket prices. In addition, changes in the expected imputed interest rate assumption would significantly increasemethods used to determine the
fair value of these contracts could have a material effect on our results of operations. We do not anticipate future changes in the embedded derivative liability at any period end, while a one percent decrease would lead a similar decrease in value.
A summary of key assumptionsmethods used to determine the fair value this instrument at December 31, 2021 and 2020 is included below:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Range of Altus Midstream Company's Imputed Interest Rate | | 5.54-11.21% | | 7.32-11.73% |
Interest Rate Volatility(1) | | 40.08% | | 37.08% |
| Expected Time to Exercise of the Exchange Option | | 4.45 years | | 5.45 Years |
| Assumed Number of Units Exchanged | | 375,000 | | 625,000 |
(1)A 1% change in either direction of the interest rate volatility assumption in any period would not have a significant effect on the valuation of the embedded feature.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to various market risks, including the effects of adverse changes in commodity prices and credit risk as described below. The Company continually monitors its market risk exposure, including the impact and developments related to the COVID-19 pandemic,armed conflict in Ukraine, increase in interest rate and inflation trend, which introduced significant volatility and uncertainties in the financial markets during 2020 and 2021.2022.
Commodity Price Risk
Currently, a majorityThe results of the Company’s midstream service agreements are fee-based, with no direct commodity price exposure tooperations may be affected by the market prices of oil and natural gas, or NGLs, and only an immaterialgas. A portion of the agreements are based on the underlying value of a commodity. However, the CompanyCompany’s revenue is indirectly exposeddirectly tied to adverse changes in commodity prices through Apache and potential third-party customers’ economic decisions to develop and produce oil andlocal crude, natural gas, from which Altus receives revenues for providing gathering, processing,NGLs and transmission services.
condensate prices in the Permian Basin. Fluctuations in commodity prices also impact operating cost elements both directly and indirectly. For example, commodity prices directly impact costs such as power and fuel, which are expenses that increase or decrease in line with changes in commodity prices. Commodity prices also affect industry activity and demand, thus indirectly impacting the cost of items such as labor and equipment rentals. Management regularly reviews the Company’s potential exposure to commodity price risk and may periodically enter into financial or physical arrangements intended to mitigate potential volatility.
Refer to Note 14—Derivative and Hedging Activitiesin the Notes to our Consolidated Financial Statements in this Form 10-Kfor additional discussion regarding our hedging strategies and objectives, including certain commodity hedges entered into during the fourth quarter of 2022. Interest Rate Risk
AtThe market risk inherent in our financial instruments and our financial position represents the potential loss arising from adverse changes in interest rates. As of December 31, 2021, Altus Midstream2022, the Company had $657.0 millioninterest bearing debt, net of proceeds drawn on its revolving credit facility.deferred financing costs, with principal amount of $3.37 billion. The interest rate for the facilityrevolving and term loan credit facilities is variable, which exposes the Company to the risk of increased interest expense in the event of increases toof short-term interest rates. If interest rates increased by 1.0 percent, the Company’s annual consolidated interest expense would have increased by approximately $6.7 million. Accordingly, results of operations, cash flows, financial condition, and the ability to make cash distributions could be adversely affected by significant increases in interest rates. Altus currently has noIf interest rates increase by 10.0%, the Company’s consolidated interest expense would have increased by approximately $63.4 million for the year ended December 31, 2022 on a pro forma basis giving effect to the Company’s comprehensive sustainability-linked refinancing completed at the beginning of the second quarter of 2022. To manage its exposure to interest rate derivative instruments outstanding, butmovements, in November 2022, the Company continues to monitor itsentered into an interest rate exposureswap with a notional amount of $1.00 billion at a fixed rate of 4.46% that is effective from May 1, 2023 to May 31, 2025. Refer to Note 14—Derivative and may enter into interest rate derivative instruments Hedging Activitiesin the future if it determines that it is necessaryNotes to investour Consolidated Financial Statements in such instrumentsthis Form 10-K for additional discussion regarding our hedging strategies and objectives. The Company also expects to realize 0.05% reductions to the effective interest rates of both the revolving credit facility and the term loan credit facility during 2023 in orderrelation to mitigate its interestsustainability adjustment features embedded in these facilities. The rate risk.reductions are dependent upon the Company meeting certain sustainability targets after 2022, which are currently subject to the completion of certain attestation procedures.Credit Risk
The Company is subject to credit risk resulting from nonpayment or nonperformance by, or the insolvency or liquidation of Apache or third-party customers. Any increase in the nonpayment and nonperformance by, or the insolvency or liquidation of, the Company’s customers could adversely affect the Company’s results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required to be filed under this Item 8 are presented on pagesin page F-1 through F-37F-43 in Part IV, Item 15 of this Annual Report on Form 10-K and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s Chief Executive Officer, President, Chief Financial Officer and President,Director, in his capacity as principal executive officer, and the Company’s Executive Vice President, Chief FinancialAccounting and Chief Administrative Officer, and Treasurer, in his capacity as principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) or 15d-15(e)) as of December 31, 2021,2022, the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation and as of the date of that evaluation, these officers concluded that the Company’s disclosure controls and procedures were effective, providing effective means to ensure that the information the Company is required to disclose under applicable laws and regulations is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms and accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
The Company periodically reviews the design and effectiveness of its disclosure controls, including compliance with various laws and regulations that apply to operations. The Company makes modifications to improve the design and effectiveness of its disclosure controls, and may take other corrective action, if the Company’s reviews identify deficiencies or weaknesses in its controls.
Management’s Annual Report on Internal Control Over Financial Reporting
The management report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to the “Report of ManagementManagement’s Report on Internal Control Over Financial Reporting” is included on page F-1 in Part IV, Item 15 of this Annual Report on Form 10-K.
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act10-K and is not required to comply with theincorporated herein by reference. Management concluded that our internal control over financial reporting was effective as of December 31, 2022. The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by KPMG LLP, an independent registered public accounting firm attestation requirementsfirm. See Attestation Report of Section 404Independent Registered Public Accounting Firm under Part II, Item 8 of the Sarbanes-Oxley Act. As such, this Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended December 31, 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.reporting, except as described in this Item 9A. As of December 31, 2022, the company is required to file a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued our audit report. See the Report of Management on Internal Control of Financial Reporting and the Report of Independent Registered Public Accounting Firm beginning on page F-1 of this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None.Disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934
Pursuant to Section 13(r) of the Exchange Act, we may be required to disclose in our annual and quarterly reports to the SEC whether we or any of our “affiliates” knowingly engaged in certain activities, transactions or dealings relating to Iran or with certain individuals or entities targeted by US economic sanctions. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law. Because the SEC defines the term “affiliate” broadly, it includes any entity under common “control” with us (and the term “control” is also construed broadly by the SEC).
The description of the activities below has been provided to us by Blackstone Inc. (“BX”), affiliates of which: (i) beneficially own more than 10% of our outstanding common stock and are members of our board of directors, and (ii) hold a minority non-controlling interest in Atlantia S.p.A. Atlantia S.p.A. may therefore be deemed to be under common “control” with us; however, this statement is not meant to be an admission that common control exists.
The disclosure below relates solely to activities conducted by Atlantia S.p.A. The disclosure does not relate to any activities conducted by us or by BX and does not involve our or BX’s management. Neither we nor BX has had any involvement in or control over the disclosed activities, and neither we nor BX has independently verified or participated in the preparation of the disclosure. Neither we nor BX is representing as to the accuracy or completeness of the disclosure nor do we or BX undertake any obligation to correct or update it.
We understand that BX disclosed the following in its annual report on Form 10-K, filed with the SEC on February 24, 2023:
Disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934. Funds affiliated with BX first invested in Atlantia S.p.A. on November 18, 2022 in connection with the voluntary public tender offer by Schema Alfa S.p.A. for all of the shares of Atlantia S.p.A., pursuant to which such funds obtained a minority non-controlling interest in Atlantia S.p.A. Atlantia S.p.A. owns and controls Aeroporti di Roma S.p.A. (“ADR”), an operator of airports in Italy including Leonardo da Vinci-Fiumicino Airport. Iran Air has historically operated periodic flights to and from Leonardo da Vinci-Fiumicino Airport as authorized, from time to time, by an aviation-related bilateral agreement between Italy and Iran, scheduled in compliance with European Regulation 95/93, and approved by the Italian Civil Aviation Authority. ADR, as airport operator, is under a mandatory obligation to provide airport services to all air carriers (including Iran Air) authorized by the applicable Italian authority. The relevant turnover attributable to these activities (whose consideration is calculated on the basis of general tariffs determined by such independent Italian authority) in the quarter ended December 31, 2022 was less than €30,000. Atlantia S.p.A. does not track profits specifically attributable to these activities.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the captions “Election of Directors” and “Information About Our Executive Officers” in the proxy statement relating to the Company’s 20222023 Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed no later than 120 days after December 31, 2021 (the Proxy Statement),2022, is incorporated herein by reference.
Code of Ethics
Pursuant to Rule 5610 of the Nasdaq Listing Rules, theThe Company is required to adopt a code of conduct for its directors, officers, and employees. The Company’s board of directorsBoard has adopted the Code of Business Conduct (Codeand Ethics (the “Code of Conduct)Ethics”), which was most recently revised in December 2020.November 2022. The Code of ConductEthics also meets the requirements of a code of ethics under Item 406 of Regulation S-K. YouOne can access the Company’s Code of ConductEthics on the AboutInvestor - Governance page of the Company’s website at www.altusmidstream.com.www.kinetik.com. Any stockholder who so requests may obtain a printed copy of the Code of ConductEthics without charge by submitting a request to the Company’s corporate secretary at the address on the cover of this Annual Report on Form 10-K. Changes in and waivers to the Code of ConductEthics for the Company’s directors, chief executive officer, and certain senior financial officers will be posted on the Company’s website within four business days and maintained for at least 12 months. Information on the Company’s website or any other website is not incorporated by reference into, and does not constitute a part of, this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption “Executive Compensation” in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information set forth under the captions “Securities Ownership and Principal Holders,” “Securities Authorized for Issuance Under Equity Compensation Plans,” and “Delinquent Section 16(a) Reports” (if such a caption is included) in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
See Note 2—19—Related Party Transactions with Affiliates of the Company’s consolidated financial statements, under Item 8 above, for information regarding payments to or from Apache Corporation.related party transactions. The information set forth under the captions “Certain Business Relationships and Transactions” and “Director Independence” in the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth under the caption “Ratification of the Appointment of Independent Auditor” in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)Documents included in this Annual Report on Form 10-K:
| | | | | |
| 2. | Financial Statement Schedules |
| Financial statement schedules have been omitted because they are either not required, not applicable or the information required to be presented is included in the Company’s financial statements and related notes. |
| Pursuant to Rule 3-09 of Regulation S-X, the audited financial statements of Gulf Coast Express Pipeline LLC, Breviloba, LLC, Permian Highway Pipeline LLC, and EPIC Crude Holdings, LP, which are equity method interests of the Company, are included in the Annual Report on Form 10-K as Exhibits 99.1, 99.2, 99.3, and 99.4, respectively. |
Financial statement schedules have been omitted because they are either not required, not applicable or the information required to be presented is included in the Company’s financial statements and related notes.
Pursuant to Rule 3-09 of Regulation S-X, the audited financial statements of Permian Highway Pipeline LLC, which is an equity method investment of the Company, is included in this Annual Report on Form 10-K as Exhibits 99.1
INDEX TO EXHIBITS
| | EXHIBIT NO. | EXHIBIT NO. | | DESCRIPTION | EXHIBIT NO. | | DESCRIPTION |
| 2.1*** | 2.1*** | – | Contribution Agreement, dated as of August 8, 2018, by and among Kayne Anderson Acquisition Corp., Altus Midstream LP, Apache Midstream LLC, Altus Midstream Gathering LP, Altus Midstream Pipeline LP, Altus Midstream Processing LP, Altus Midstream NGL Pipeline LP and Altus Midstream Subsidiary GP LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on August 8, 2018, SEC File No. 001-38048). | 2.1*** | – | |
| 2.2*** | – | | |
| 3.1 | 3.1 | – | | 3.1 | – | |
| 3.2 | 3.2 | – | | 3.2 | – | |
| 3.3 | – | | |
| 4.1 | 4.1 | – | | 4.1 | – | Amended and Restated Stockholders Agreement, dated October 21, 2021, by and among APA Corporation, Apache Midstream LLC, Altus Midstream Company, New BCP Raptor Holdco, LLC, Raptor Aggregator, LP, BX Permian Pipeline Aggregator, LP, Buzzard Midstream LLC, and BCP Raptor Holdco, LP. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on February 22, 2022). |
| 4.2 | 4.2 | – | | 4.2 | – | Second Amended and Restated Registration Rights Agreement, dated February 22, 2022, by and among Altus Midstream Company, Apache Midstream LLC, Raptor Aggregator, LP, BX Permian Pipeline Aggregator, LP, Buzzard Midstream LLC and the other holders party thereto. (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on February 22, 2022). |
| 4.3 | 4.3 | – | | 4.3 | – | |
| 4.4 | 4.4 | – | | 4.4 | – | |
| 4.5 | – | | |
| 4.6 | – | | |
| 4.7 | – | | |
| 4.8 | – | | |
| 10.1 | 10.1 | – | Credit Agreement, dated as of November 9, 2018, among Altus Midstream, LP, the lenders party thereto, the issuing banks party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Wells Fargo Bank, National Association, as Syndication Agent, Citibank, N.A., Bank of America, N.A., The Toronto-Dominion Bank, New York Branch, MUFG Bank Ltd., and The Bank of Nova Scotia, Houston Branch, as Co-Documentation Agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 13, 2018, SEC File No. 001-38048). | 10.1 | – | |
| 10.2 | – | First Amendment to Credit Agreement, dated as of April 17, 2019 but effective May 8, 2019, among Altus Midstream LP, the lenders party thereto, the swingline lender party thereto, the issuing banks party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents party thereto (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 13, 2019, SEC File No. 001-38048). | |
| 10.3 | – | Second Amendment to Credit Agreement, dated as of February 7, 2020, among Altus Midstream LP, the lenders party thereto, the swingline lender party thereto, the issuing banks party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 11, 2020, SEC File No. 001-38048). | |
| 10.4 | – | | |
| 10.2† | | 10.2† | – | |
| 10.3† | | 10.3† | – | |
| 10.4† | | 10.4† | – | |
| 10.5† | | 10.5† | – | |
| 10.6† | | 10.6† | – | |
| 10.7† | | 10.7† | – | |
| 10.8† | | 10.8† | – | |
| 10.9† | | 10.9† | – | |
| 10.10† | | 10.10† | – | |
| 10.11 | | 10.11 | – | Dividend and Distribution Reinvestment Agreement, dated February 22, 2022, by and among Altus Midstream Company, Altus Midstream LP, APA Corporation, Apache Midstream LLC, Buzzard Midstream LLC, Raptor Aggregator, LP, BX Permian Pipeline Aggregator, LP and each of the other parties set forth on the signature pages thereto. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 22, 2022). |
| 21.1* | | 21.1* | – | |
| 23.1* | | 23.1* | – | |
| 23.2* | | 23.2* | – | |
| | 31.1* | | 31.1* | – | |
| 31.2* | | 31.2* | – | |
| 32.1** | | 32.1** | – | |
| 32.2** | | 32.2** | – | |
| 99.1* | | 99.1* | – | |
| 101* | | 101* | – | The following financial statements from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Changes in Equity and Noncontrolling Interests and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. |
| | | | | | | | |
| 10.5 | – | |
| 10.6 | – | |
| 10.7 | – | |
| 10.8 | – | |
| 10.9 | – | |
| 10.10 | – | |
| 10.11‡ | – | |
| 10.12‡ | – | |
| 10.13‡ | – | |
| 10.14‡ | – | |
| 10.15† | – | |
| 10.16† | – | |
| 10.17† | – | |
| 10.18† | – | |
| 10.19 | – | |
| 10.20 | – | |
| 10.21 | – | |
| 21.1* | – | |
| 23.1* | – | |
| 23.2* | – | |
| 23.3* | – | |
| 23.4* | – | |
| 23.5* | – | |
| 24.1* | – | |
| | | | | | | | |
31.1* | – | |
31.2* | – | |
32.1** | – | |
99.1* | – | |
99.2* | – | |
99.3* | – | |
99.4* | – | |
101.INS* | – | Inline XBRL Instance Document. (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
| 101.SCH* | – | Inline XBRL Taxonomy Schema Document. |
| 101.CAL* | – | Inline XBRL Calculation Linkbase Document. |
| 101.DEF* | – | Inline XBRL Definition Linkbase Document. |
| 101.LAB* | – | Inline XBRL Label Linkbase Document. |
| 101.PRE* | – | Inline XBRL Presentation Linkbase Document. |
| 104* | – | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| | |
| * Filed herewith. |
| ** Furnished herewith |
| *** Schedules and exhibits to this Exhibit have been omitted pursuant to Regulation S-K Item 601(b)(2). The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. |
† Management contracts or compensatory plans or arrangements required to be filed herewith pursuant to Item 15 hereof. |
‡ Portions have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv), because the omitted information is both not material and is the type that the Company treats as private or confidential. |
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALTUS MIDSTREAM COMPANY | | | | | | | | | | | |
| | | KINETIK HOLDINGS INC. |
| | |
| Dated: | March 7, 2023 | | /s/ Jamie Welch |
| | | Jamie Welch |
| | | Chief Executive Officer, President, Chief Financial Officer and Director |
| | | (Principal Executive Officer) |
| | |
| Dated: | March 7, 2023 | | /s/ Steven Stellato |
| | | Steven Stellato |
| | | Executive Vice President, Chief Accounting and Chief Administrative Officer |
| | | (Principal Financial Officer) |
/s/ Clay Bretches
Clay Bretches
Chief Executive Officer and President
Dated: February 22, 2022
POWER OF ATTORNEY
The officers and directors of Altus Midstream Company,Kinetik Holdings Inc., whose signatures appear below, hereby constitute and appoint Clay Bretches and Ben C. Rodgers, and each of them (with full power to each of them to act alone), the true and lawful attorney-in-fact to sign and execute, on behalf of the undersigned, any amendment(s) to this report and each of the undersigned does hereby ratify and confirm all that said attorneys shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Name | | Title | | Date |
/s/ Clay Bretches Clay Bretches
Jamie Welch | | | Director, Chief Executive Officer, and President,
(principal executive officer) | | February 22, 2022 |
/s/ Ben C. Rodgers
Ben C. Rodgers
| | Director, Chief Financial Officer and Treasurer
(principal financial officer)Director | | February 22, 2022March 7, 2023 |
/s/ Rebecca A. Hoyt Rebecca A. Hoyt
Steven Stellato
| | SeniorExecutive Vice President, Chief Accounting Officer and Controller
(principal accounting officer)Chief Administrative Officer | | February 22, 2022March 7, 2023 |
/s/ Mark Borer Mark Borer
David Foley | | Chair | Director | | February 22, 2022March 7, 2023 |
/s/ Staci L. Burns
Staci L. Burns
| | Director | | February 22, 2022 |
/s/ Joe C. Frana
Joe C. Frana
| | Director | | February 22, 2022 |
/s/ D. Mark Leland
D. Mark Leland
| | Director | | February 22, 2022 |
/s/ Kevin S. McCarthy
Kevin S. McCarthy
| | Director | | February 22, 2022 |
/s/ Christopher J. MonkJohn Paul Munfa
Christopher J. Monk | | Director | | February 22, 2022March 7, 2023 |
/s/ Stephen P. Noe Stephen P. Noe
Elizabeth Cordia | | Director | | February 22, 2022March 7, 2023 |
/s/ Robert S. Purgason Robert S. Purgason
Ronald Scweizer | | Director | | February 22, 2022March 7, 2023 |
/s/ Jon W. Sauer Jon W. Sauer
Joseph Payne | | Director Chairman of the Board, and Senior Vice President | | March 7, 2023 |
| /s/ Ben Rogers | | February 22, 2022Director | | March 7, 2023 |
| /s/ Laura Sugg | | Director | | March 7, 2023 |
| /s/ Kevin McCarhty | | Director | | March 7, 2023 |
| /s/ Mark Leland | | Director | | March 7, 2023 |
| /s/ Deborah Byers | | Director | | March 7, 2023 |
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the CompanyKinetik Holdings Inc. (the “Company”) is responsible for the preparation and integrity of the consolidated financial statements appearing in this annual reportAnnual Report on Form 10-K. The financial statements were prepared in conformity with accounting principles generally accepted in the United States and include amounts that are based on management’s best estimates and judgments.
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements. Our internal control over financial reporting is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel and a written code of business conduct adopted by our Company’s board of directors, applicable to all Company directors and all officers of our Company.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on our assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2021.2022.
The Company’s independent auditors, Ernst & Young LLP,KPMG, a registered public accounting firm, are appointed by the Audit Committee of the Company’s board of directors. Ernst & Young LLP haveKPMG has audited and reported on the consolidated financial statements of Altus Midstream CompanyKinetik Holdings Inc. and its subsidiaries. The reportreports of the independent auditors follows this report on page F-2.F-2 through F-5.
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act and is not required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act. As such, this annual report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
| | |
/s/ Clay BretchesJamie Welch |
| Jamie Welch |
Chief Executive Officer, President, Chief Financial Officer and PresidentDirector |
(principal executive officer)Principal Executive Officer) |
|
/s/ Ben C. RodgersSteven Stellato |
| Steven Stellato |
Executive Vice President, Chief FinancialAccounting and Chief Administrative Officer and Treasurer |
(principal financial officer)Principal Financial Officer) |
|
/s/ Rebecca A. HoytJake Loden |
Senior Jake Loden |
Vice President Chief Accounting Officer and Controller |
(principal accounting officer) |
Houston, Texas
February 22, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and the Board of Directors of Altus Midstream Company:
Kinetik Holdings Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Altus Midstream CompanyKinetik Holdings Inc. and subsidiaries (the Company) as of December 31, 20212022 and 2020,2021, the related consolidated statements of operations, comprehensive income (loss), cash flows and changes in equity and noncontrolling interests, and cash flows for each of the three years in the three-year period ended December 31, 2021,2022, and the related notes (collectively, referred to as the “consolidatedconsolidated financial statements”)statements). In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company atas of December 31, 20212022 and 2020,2021, and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 2021,2022, in conformity with U.S. generally accepted accounting principles.
We did not auditalso have audited, in accordance with the financial statementsstandards of Gulf Coast Express Pipeline LLC (“GCX”), an entity in which the Public Company has a 16% interest, for the years ended December 31, 2021, 2020 and 2019; EPIC Crude Holdings, LP (“EPIC”)Accounting Oversight Board (United States) (PCAOB), an entity in which the Company has a 15% interest, for the year ended December 31, 2020; or Permian Highway Pipeline LLC (“PHP”), an entity in which the Company has an approximately 26.7% interest, for the year ended December 31, 2019. In the consolidated financial statements, the Company’s equity method interest in GCX is stated at approximately $274 million and $284 millioninternal control over financial reporting as of December 31, 20212022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and 2020, respectively, andour report dated March 7, 2023 expressed an unqualified opinion on the effectiveness of the Company’s income from equity method interest, net, of GCX is stated at approximately $40 million in 2021, $42 million in 2020, and $18 million in 2019. The Company’s equity method interest in EPIC is approximately $177 million as of December 31, 2020, and the Company’s loss from equity method interest, net, of EPIC is approximately $16 million for the year ended December 31, 2020. The Company’s equity method interest in PHP is approximately $310 million as of December 31, 2019, and the Company’s income from equity method interest, net, of PHP is approximately $0.4 million for the year ended December 31, 2019. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for GCX, EPIC and PHP, is based solely on the reports of the other auditors.internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2018.
Houston, Texas
February 22, 2022
Report of Independent Registered Public Accounting Firm
Board of Directors and Members
Gulf Coast Express Pipeline LLC
Houston, Texas
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Gulf Coast Express Pipeline LLC (the “Company”) as of December 31, 2021 and 2020, the related statements of income, members’ equity and cash flows for each of the three years ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
Emphasis of Matter — Significant Transactions with Related Parties
As discussed in Note 4 to the financial statements, the Company has entered into significant transactions with related parties.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2020.
Houston, Texas
February 16, 2022
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Owners
EPIC Crude Holdings, LP:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of EPIC Crude Holdings, LP and subsidiaries (the Partnership) as of December 31, 2020, the related consolidated statements of operations, changes in owners’ equity, and cash flows for the year then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
The consolidated financial statements of the Partnership as of December 31, 2019 and for the year then ended were audited by other auditors whose report dated March 11, 2020, expressed an unmodified opinion on those consolidated financial statements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Partnership’s auditor since 2020.
San Antonio, Texas
February 25, 2021
Report of Independent Registered Public Accounting Firm
Board of Directors and Members
Permian Highway Pipeline LLC
Houston, Texas
Opinion on the Financial Statements
We have audited the accompanying statements of operations, members’ equity, and cash flows of Permian Highway Pipeline LLC (the “Company”) for the year ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sthese consolidated financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America.PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our auditaudits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of impairment indicators for long-lived assets
As discussed in Note 2 to the consolidated financial statements, the Company assesses property, plant, and equipment, net and intangible assets, net (collectively, long-lived assets) for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairments exist when the carrying value of a long-lived asset exceeds the total estimated undiscounted net cash flows from the future use and eventual disposition of the asset. The carrying value of property, plant, and equipment, net and intangible assets, net as of December 31, 2022 was $2.5 billion and $695.4 million, respectively.
We identified the evaluation of impairment indicators for long-lived assets as a critical audit matter. Evaluating the Company’s judgments in determining whether events or changes in circumstances indicate carrying values may not be recoverable required a higher degree of subjective auditor judgment. Sustained decreases in pricing or throughput volumes and significant increases in competition or operating costs could significantly affect the recoverability of the long-lived assets, and the evaluation of these factors required a higher degree of auditor judgment.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process to evaluate triggering events related to the impairment of long-lived assets. We assessed the Company’s identification of potential impairment indicators by evaluating the Company’s assessment of the factors identified.
Specifically, we:
•read publicly available information to evaluate the performance of industry peers, commodity price trends, and overall macro-economic conditions
•analyzed the financial results for the current period compared to historical results for long-lived assets to determine if there were significant degradations in the related cash flows
•compared the remaining useful lives of the long-lived assets to the period of time required to recover the carrying value of the assets based on historical cash flows
•read publicly available information for the industry, peers, and customers to determine whether a potential impairment indicator was not considered in management’s analysis.
Fair value of certain acquired equity method investments
As discussed in Notes 3 and 7 to the consolidated financial statements, on February 22, 2022, BCP Raptor Holdco, LP (BCP) completed a reverse merger with Altus Midstream Company (a publicly traded entity) (Altus) and Altus Midstream LP (consolidated subsidiary of Altus). As a result of the transaction, BCP applied the acquisition method of accounting. The acquired assets included equity method investments of $1.8 billion. BCP used an income approach, through a discounted cash flow method, and market approach, through a guideline public company method, to estimate the initial fair value of the acquired equity method investments.
We identified the evaluation of the fair value of Permian Highway Pipeline LLC and Gulf Coast Express Pipeline LLC equity method investments as a critical audit matter. A high degree of subjective auditor judgment was required to evaluate the weighting of the income and market approaches. The weighting applied to those selected methods could have a significant effect on the determination of the initial fair value. Additionally, the audit effort associated with evaluating the fair value of certain acquired equity method investments required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s acquisition-date valuation process, including a control related to the weighting of the methods used to estimate the initial fair value of the acquired equity method investments. We performed sensitivity analyses over the weighting of the methods to assess the impact on the Company’s determination of initial fair value.
In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the fair value of certain acquired equity method investments by reviewing:
•the selection of the discounted cash flow method
•the selection of the guideline public company method
•weighting to be applied to those methods to determine the fair value of the equity method investments by comparing to expectations based on similar transactions.
Fair value of assumed preferred units and associated embedded derivative
As discussed in Notes 3 and 12 to the consolidated financial statements, on February 22, 2022, BCP completed a reverse merger with Altus. As a result of the transaction, BCP applied the acquisition method of accounting, which included recording the noncontrolling interest at fair value. The noncontrolling interest included $462.7 million of preferred units along with an $89.1 million associated liability for an embedded derivative. BCP used a stochastic interest rate model, specifically the Black–Karasinski model (an income approach), to estimate the initial fair values of the preferred units and associated embedded derivative.
We identified the evaluation of the method the Company used to determine the initial fair value of the preferred units and associated embedded derivative assumed in the reverse merger with Altus as a critical audit matter. A high degree of subjective auditor judgment was required to evaluate the method used by the Company because the selection of the method could have a significant effect on the determination of the initial fair value. Additionally, the audit effort associated with evaluating the valuation method required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s acquisition-date valuation process, including a control related to the selection of the method used to determine the fair value of the preferred units and associated embedded derivative. We read the Contribution Agreement and Preferred Unit Purchase Agreement to understand the nature, contractual terms and embedded features of the preferred units. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating whether the method used was reasonable and consistent with valuation practice given the characteristics of the preferred units and associated embedded derivative being measured.
We have served as the Company’s auditor since 2017.
Houston, Texas
March 7, 2023
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
Kinetik Holdings Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Kinetik Holdings Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in equity and noncontrolling interests, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated March 7, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
EmphasisDefinition and Limitations of Matter — Significant TransactionsInternal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Related Parties
As discussed in Note 3generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company has entered into significant transactionscompany are being made only in accordance with related parties.authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2020.
Houston, Texas
March 16, 20207, 2023
ALTUS MIDSTREAM COMPANYKINETIK HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In thousands, except per share data) |
| REVENUES: | | | | | | |
| Midstream services revenue — affiliate (Note 3) | | $ | 142,727 | | | $ | 144,714 | | | $ | 135,798 | |
| Product sales — affiliate (Note 3) | | 9,754 | | | — | | | — | |
| Product sales — third parties | | 8,136 | | | 3,695 | | | — | |
| Total revenues | | 160,617 | | | 148,409 | | | 135,798 | |
| COSTS AND EXPENSES: | | | | | | |
| Costs of product sales — affiliate (Note 3) | | 9,754 | | | — | | | — | |
| Costs of product sales — third parties | | 7,793 | | | 2,988 | | | — | |
Operations and maintenance(1) | | 32,748 | | | 37,993 | | | 55,858 | |
General and administrative(2) | | 14,182 | | | 13,155 | | | 10,301 | |
| Depreciation and accretion | | 16,201 | | | 15,945 | | | 41,480 | |
| Impairments | | 441 | | | 1,643 | | | 1,300,719 | |
| Taxes other than income | | 13,886 | | | 15,069 | | | 13,231 | |
| Total costs and expenses | | 95,005 | | | 86,793 | | | 1,421,589 | |
| OPERATING INCOME (LOSS) | | 65,612 | | | 61,616 | | | (1,285,791) | |
| Unrealized derivative instrument gain (loss) | | 82,114 | | | (36,080) | | | (8,470) | |
| Interest income | | 4 | | | 9 | | | 3,606 | |
| Income from equity method interests, net | | 113,764 | | | 58,739 | | | 19,069 | |
| Impairment on equity method interests | | (160,441) | | | — | | | — | |
| Warrants valuation adjustment | | 664 | | | 1,200 | | | 11,180 | |
| Transaction costs | | (4,472) | | | — | | | — | |
| Other | | 12,574 | | | (2,306) | | | (622) | |
| Total other income | | 44,207 | | | 21,562 | | | 24,763 | |
| Financing costs, net of capitalized interest | | 10,598 | | | 2,190 | | | 1,792 | |
| NET INCOME (LOSS) BEFORE INCOME TAXES | | 99,221 | | | 80,988 | | | (1,262,820) | |
| Current income tax benefit | | — | | | (696) | | | (15) | |
| Deferred income tax expense | | — | | | — | | | 64,915 | |
| NET INCOME (LOSS) INCLUDING NONCONTROLLING INTERESTS | | 99,221 | | | 81,684 | | | (1,327,720) | |
| Net income attributable to Preferred Unit limited partners | | 161,906 | | | 75,906 | | | 38,809 | |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | | (62,685) | | | 5,778 | | | (1,366,529) | |
| Net income (loss) attributable to Apache limited partner | | (48,741) | | | 2,987 | | | (1,008,039) | |
| NET INCOME (LOSS) ATTRIBUTABLE TO CLASS A COMMON SHAREHOLDERS | | $ | (13,944) | | | $ | 2,791 | | | $ | (358,490) | |
| | | | | | |
NET INCOME (LOSS) ATTRIBUTABLE TO CLASS A COMMON SHAREHOLDERS, PER SHARE(3) | | | | | | |
| Basic | | $ | (3.72) | | | $ | 0.75 | | | $ | (95.70) | |
| Diluted | | (3.86) | | | 0.36 | | | (95.70) | |
WEIGHTED AVERAGE SHARES(3) | | | | | | |
| Basic | | 3,746 | | 3,746 | | 3,746 |
| Diluted | | 16,246 | | 16,246 | | 3,746 |
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands, except per share data) |
| Operating revenues: | | | | | | |
| Service revenue | | $ | 393,954 | | | $ | 272,677 | | | $ | 272,829 | |
| Product revenue | | 806,353 | | | 385,622 | | | 135,330 | |
| Other revenue | | 13,183 | | | 3,745 | | | 2,017 | |
Total operating revenues(1) | | 1,213,490 | | | 662,044 | | | 410,176 | |
| Operating costs and expenses: | | | | | | |
Costs of sales (exclusive of depreciation and amortization shown separately below)(2) | | 541,518 | | | 233,619 | | | 65,053 | |
| Operating expenses | | 137,289 | | | 90,894 | | | 93,704 | |
| Ad valorem taxes | | 16,970 | | | 11,512 | | | 10,985 | |
| General and administrative expenses | | 94,268 | | | 28,588 | | | 22,917 | |
| Depreciation and amortization expenses | | 260,345 | | | 243,558 | | | 223,763 | |
| Loss on disposal of assets | | 12,611 | | | 382 | | | 3,454 | |
| Goodwill impairment | | — | | | — | | | 1,010,773 | |
| Total operating costs and expenses | | 1,063,001 | | | 608,553 | | | 1,430,649 | |
| Operating income | | 150,489 | | | 53,491 | | | (1,020,473) | |
| Other income (expense): | | | | | | |
| Interest and other income | | 489 | | | 4,143 | | | 608 | |
| Gain on redemption of mandatorily redeemable Preferred Units | | 9,580 | | | — | | | — | |
| Gain (loss) on debt extinguishment | | (27,975) | | | 4 | | | 868 | |
| Gain on embedded derivative | | 89,050 | | | — | | | — | |
| Interest expense | | (149,252) | | | (117,365) | | | (135,516) | |
| Equity in earnings (losses) of unconsolidated affiliates | | 180,956 | | | 63,074 | | | (308) | |
| | | | | | |
| Total other income (expense), net | | 102,848 | | | (50,144) | | | (134,348) | |
| Income (loss) before income taxes | | 253,337 | | | 3,347 | | | (1,154,821) | |
| Income tax expense | | 2,616 | | | 1,865 | | | 968 | |
| | | | | | |
| Net income (loss) including noncontrolling interest | | 250,721 | | | 1,482 | | | (1,155,789) | |
| Net income attributable to Preferred Unit limited partners | | 115,203 | | | — | | | — | |
| Net income (loss) attributable to common shareholders | | 135,518 | | | 1,482 | | | (1,155,789) | |
| Net income (loss) attributable to Common Unit limited partners | | 94,783 | | | 1,482 | | | (1,155,789) | |
| Net income attributable to Class A Common Stock Shareholders | | $ | 40,735 | | | $ | — | | | $ | — | |
| | | | | | |
| Net income attributable to Class A Common Shareholders per share | | | | | | |
| Basic | | $ | 1.48 | | | $ | — | | | $ | — | |
| Diluted | | $ | 1.48 | | | $ | — | | | $ | — | |
| | | | | | |
Weighted-average shares(3) | | | | | | |
| Basic | | 41,326 | | — | | — |
| Diluted | | 41,361 | | — | | — |
(1)Includes amounts of $5.6$107.7 million, $5.4$7.3 million, and $8.8$13.3 million associated with related parties for the years ended December 31, 2022, 2021, 2020, and 2019,2020, respectively. Refer to Note 2—19—Related Party Transactions with Affiliates.in the Notes to our Consolidated Financial Statements in this Form 10-K for further information. (2)Includes amounts of $9.1$39.3 million, $7.062.9 million, and $5.4$37.1 million associated with related parties for the years ended December 31, 2022, 2021, 2020, and 2019,2020, respectively. Refer to Note 2—19—Related Party Transactions with Affiliates.in the Notes to our Consolidated Financial Statements in this Form 10-K for further information. (3)Share and per share amounts have been retroactivelyretrospectively restated to reflect the Company’s reverse stock split, which was effected June 30, 2020.8, 2022. Refer toNote—1011 Equity and Warrants in the Notes to our Consolidated Financial Statements in this Form 10-K for further information. The accompanying notes to consolidated financial statements are an integral part of this statement.
ALTUS MIDSTREAM COMPANYKINETIK HOLDINGS INC.
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)BALANCE SHEETS
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In thousands) |
| NET INCOME (LOSS) INCLUDING NONCONTROLLING INTERESTS | | $ | 99,221 | | | $ | 81,684 | | | $ | (1,327,720) | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | | | | | | |
| Share of equity method interests other comprehensive income (loss) | | 630 | | | 523 | | | (1,152) | |
| COMPREHENSIVE INCOME (LOSS) INCLUDING NONCONTROLLING INTERESTS | | 99,851 | | | 82,207 | | | (1,328,872) | |
| Comprehensive income attributable to Preferred Unit limited partners | | 161,906 | | | 75,906 | | | 38,809 | |
| Comprehensive income (loss) attributable to Apache limited partner | | (48,256) | | | 3,389 | | | (1,008,925) | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CLASS A COMMON SHAREHOLDERS | | $ | (13,799) | | | $ | 2,912 | | | $ | (358,756) | |
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2022 | | 2021 |
| | | | |
| | (In thousands, except per share data) |
| ASSETS | | | | |
| CURRENT ASSETS: | | | | |
| Cash and cash equivalents | | $ | 6,394 | | | $ | 18,729 | |
Accounts receivable, net of allowance for credit losses of $1,000 in 2022 and 2021(1) | | 204,036 | | | 178,107 | |
| Derivative assets | | 6,963 | | | — | |
| Prepaid and other current assets | | 24,474 | | | 20,683 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | 241,867 | | | 217,519 | |
| NONCURRENT ASSETS: | | | | |
| Property, plant and equipment, net | | 2,535,212 | | | 1,839,279 | |
| Intangible assets, net | | 695,389 | | | 786,049 | |
| | | | |
| Operating lease right-of-use assets | | 28,551 | | | 61,562 | |
| Deferred charges and other assets | | 32,275 | | | 22,320 | |
| Investment in unconsolidated affiliate | | 2,381,340 | | | 626,477 | |
| Goodwill | | 5,077 | | | — | |
| | 5,677,844 | | | 3,335,687 | |
| Total assets | | $ | 5,919,711 | | | $ | 3,553,206 | |
| | | | |
| LIABILITIES, NONCONTROLLING INTERESTS, AND EQUITY | | | | |
| CURRENT LIABILITIES: | | | | |
| Accounts payable | | $ | 17,899 | | | $ | 12,220 | |
| | | | |
| Accrued expenses | | 173,914 | | | 135,643 | |
| | | | |
| Derivative liabilities | | 5,718 | | | 2,667 | |
| | | | |
| Current portion of operating lease liabilities | | 22,810 | | | 31,776 | |
| Current portion of long-term debt, net | | — | | | 54,280 | |
| Other current liabilities | | 7,487 | | | 4,339 | |
| | 227,828 | | | 240,925 | |
| NONCURRENT LIABILITIES | | | | |
| Long term debt, net | | 3,368,510 | | | 2,253,422 | |
| Contract liabilities | | 22,693 | | | 11,674 | |
| Operating lease liabilities | | 6,023 | | | 29,889 | |
| | | | |
| Derivative liabilities | | 8,328 | | | 200 | |
| Other liabilities | | 2,677 | | | 2,219 | |
| Contingent liabilities | | — | | | 839 | |
| Deferred tax liabilities | | 11,018 | | | 7,190 | |
| | | | |
| | | | |
| | 3,419,249 | | | 2,305,433 | |
| Total liabilities | | 3,647,077 | | | 2,546,358 | |
| | | | |
| COMMITMENTS AND CONTINGENCIES (Note 18) | | | | |
| Redeemable noncontrolling interest — Common Unit limited partners | | 3,112,409 | | | 1,006,838 | |
| | | | |
| | | | |
| EQUITY: | | | | |
Class A Common Stock: $0.0001 par, 1,500,000,000 shares authorized, 45,679,447 and nil shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively(2) | | 5 | | | — | |
Class C Common Stock: $0.0001 par, 1,500,000,000 shares authorized, 94,270,000 and 100,000,000 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively(2) | | 9 | | | 10 | |
| Additional paid-in capital | | 118,840 | | | — | |
| Accumulated deficit | | (958,629) | | | — | |
| | | | |
| Total equity | | (839,775) | | | 10 | |
| Total liabilities, noncontrolling interests, and equity | | $ | 5,919,711 | | | $ | 3,553,206 | |
The accompanying notes to consolidated financial statements are an integral part of this statement.
ALTUS MIDSTREAM COMPANYKINETIK HOLDINGS INC.
CONSOLIDATED BALANCE SHEET
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2021 | | 2020 |
| | | | |
| | (In thousands, except per share data) |
| ASSETS | | | | |
| CURRENT ASSETS: | | | | |
| Cash and cash equivalents | | $ | 131,963 | | | $ | 24,188 | |
| Accounts receivable | | 2,249 | | | 1,033 | |
| Accounts receivable from Apache Corporation (Note 1) | | 9,875 | | | 446 | |
| Revenue receivables (Note 3) | | 13,717 | | | 11,378 | |
| Inventories | | 2,958 | | | 3,597 | |
| Prepaid assets and other | | 5,866 | | | 2,127 | |
| | 166,628 | | | 42,769 | |
| | | | |
| PROPERTY, PLANT, AND EQUIPMENT: | | | | |
| Property, plant, and equipment | | 211,700 | | | 208,870 | |
| Less: Accumulated depreciation and accretion | | (24,713) | | | (13,034) | |
| | 186,987 | | | 195,836 | |
| | | | |
| OTHER ASSETS: | | | | |
| Equity method interests | | 1,364,826 | | | 1,555,182 | |
| | | | |
| Deferred charges and other | | 6,229 | | | 5,843 | |
| | 1,371,055 | | | 1,561,025 | |
| Total assets | | $ | 1,724,670 | | | $ | 1,799,630 | |
| | | | |
| LIABILITIES, NONCONTROLLING INTERESTS, AND EQUITY | | | | |
| CURRENT LIABILITIES: | | | | |
| Distributions payable to Preferred Unit limited partners | | $ | 11,562 | | | $ | — | |
| Dividends payable | | — | | | 5,620 | |
| Distributions payable to Apache Corporation (Note 1) | | — | | | 18,750 | |
| Other current liabilities (Note 6) | | 15,682 | | | 5,613 | |
| | 27,244 | | | 29,983 | |
| LONG-TERM DEBT | | 657,000 | | | 624,000 | |
| DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: | | | | |
| Asset retirement obligation | | 68,331 | | | 64,062 | |
| | | | |
| Embedded derivative | | 56,895 | | | 139,009 | |
| Other noncurrent liabilities | | 10,118 | | | 6,424 | |
| | 135,344 | | | 209,495 | |
| Total liabilities | | 819,588 | | | 863,478 | |
| | | | |
| COMMITMENTS AND CONTINGENCIES (Note 8) | | 0 | | 0 |
| | | | |
| Redeemable noncontrolling interest — Apache limited partner | | 769,855 | | | 575,125 | |
| Redeemable noncontrolling interest — Preferred Unit limited partners | | 712,476 | | | 608,381 | |
| | | | |
| EQUITY: | | | | |
Class A Common Stock: $0.0001 par, 1,500,000,000 shares authorized, 3,746,460 shares issued and outstanding at December 31, 2021 and 2020(1) | | 1 | | | 1 | |
Class C Common Stock: $0.0001 par, 1,500,000,000 shares authorized, 12,500,000 shares issued and outstanding at December 31, 2021 and 2020(1) | | 1 | | | 1 | |
| Additional paid-in capital | | — | | | 122,222 | |
| Accumulated deficit | | (577,251) | | | (369,433) | |
| Accumulated other comprehensive loss | | — | | | (145) | |
| | (577,249) | | | (247,354) | |
| Total liabilities, noncontrolling interests, and equity | | $ | 1,724,670 | | | $ | 1,799,630 | |
(1)Share amounts have been retroactively restated to reflect the Company’s reverse stock split, which was effected June 30, 2020. Refer to Note 10—Equity and Warrants for further information.
The accompanying notes to consolidated financial statements are an integral part of this statement.
ALTUS MIDSTREAM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In thousands) |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income (loss) including noncontrolling interests | | $ | 99,221 | | | $ | 81,684 | | | $ | (1,327,720) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| Unrealized derivative instrument (gain) loss | | (82,114) | | | 36,080 | | | 8,470 | |
| Depreciation and accretion | | 16,201 | | | 15,945 | | | 41,480 | |
| Deferred income tax expense | | — | | | — | | | 64,915 | |
| Income from equity method interests, net | | (113,764) | | | (58,739) | | | (19,069) | |
| Distributions from equity method interests | | 133,974 | | | 80,747 | | | 25,316 | |
| Impairments | | 441 | | | 1,643 | | | 1,300,719 | |
| Impairment on equity method interests | | 160,441 | | | — | | | — | |
| Power credit, net | | (5,701) | | | — | | | — | |
| Warrants valuation adjustment | | (664) | | | (1,200) | | | (11,180) | |
| Other | | 2,741 | | | 3,368 | | | 907 | |
| Changes in operating assets and liabilities: | | | | | | |
| (Increase) decrease in inventories | | 356 | | | 430 | | | (620) | |
| (Increase) decrease in prepaid assets and other | | 217 | | | (56) | | | 3,877 | |
| Increase in accounts receivable | | (1,216) | | | (1,033) | | | — | |
| (Increase) decrease in revenue receivables (Note 2) | | (2,339) | | | 4,083 | | | (4,532) | |
| (Increase) decrease in account receivables from/payable to affiliate | | (8,174) | | | 1,043 | | | (6,361) | |
| | | | | | |
| Increase in accrued expenses | | 9,353 | | | 280 | | | 71 | |
| Increase in deferred charges, deferred credits and other noncurrent liabilities | | 746 | | | 19 | | | — | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | | 209,719 | | | 164,294 | | | 76,273 | |
| | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
| Capital expenditures | | (4,588) | | | (29,981) | | | (342,650) | |
| Proceeds from sale of assets | | 3,037 | | | 10,240 | | | 13,309 | |
| Contributions to equity method interests | | (28,420) | | | (327,305) | | | (501,352) | |
| Distributions from equity method interests | | 38,755 | | | 17,419 | | | — | |
| Acquisition of equity method interests | | — | | | — | | | (670,625) | |
| Capitalized interest paid | | — | | | (8,733) | | | (2,370) | |
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | | 8,784 | | | (338,360) | | | (1,503,688) | |
| | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
| Redeemable noncontrolling interest - Preferred Unit limited partners, net | | — | | | — | | | 611,249 | |
| Distributions paid to Preferred Unit limited partners | | (46,249) | | | (23,124) | | | — | |
| Distributions paid to Apache limited partner | | (75,000) | | | — | | | — | |
| Dividends paid | | (22,479) | | | — | | | — | |
| Proceeds from revolving credit facility | | 33,000 | | | 228,000 | | | 396,000 | |
| Finance lease | | — | | | (11,789) | | | (22,994) | |
| Deferred facility fees | | — | | | (816) | | | (792) | |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | (110,728) | | | 192,271 | | | 983,463 | |
| | | | | | |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | 107,775 | | | 18,205 | | | (443,952) | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | | 24,188 | | | 5,983 | | | 449,935 | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 131,963 | | | $ | 24,188 | | | $ | 5,983 | |
| SUPPLEMENTAL CASH FLOW DATA: | | | | | | |
Accrued capital expenditures(1) | | $ | 514 | | | $ | 834 | | | $ | 18,573 | |
Finance lease liability(2) | | — | | | — | | | 9,767 | |
| Interest paid, net of capitalized interest | | 9,540 | | | 1,013 | | | 903 | |
| Cash received for income tax refunds | | — | | | 696 | | | 527 | |
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands) |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income (loss) including noncontrolling interests | | $ | 250,721 | | | $ | 1,482 | | | $ | (1,155,789) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization expense | | 260,345 | | | 243,558 | | | 223,763 | |
| Amortization of deferred financing costs | | 9,569 | | | 13,369 | | | 11,917 | |
| Amortization of contract costs | | 1,807 | | | 1,792 | | | 1,805 | |
| Contingent liabilities remeasurement | | (839) | | | (661) | | | (2,668) | |
| Distributions from unconsolidated affiliate | | 256,764 | | | 68,335 | | | — | |
| Derivatives settlement | | 10,667 | | | (19,422) | | | (7,810) | |
| Derivative fair value adjustment | | (95,501) | | | 12,482 | | | 17,311 | |
| Warrants fair value adjustment | | (133) | | | — | | | — | |
| Gain on redemption of mandatorily redeemable Preferred Units | | (9,580) | | | — | | | — | |
| Loss on disposal of assets | | 12,611 | | | 382 | | | 3,454 | |
| Equity in (earnings) losses from unconsolidated affiliates | | (180,956) | | | (63,074) | | | 308 | |
| Loss (gain) on debt extinguishment | | 27,975 | | | (4) | | | (868) | |
| Share-based compensation | | 42,780 | | | — | | | — | |
| Deferred income taxes | | 2,094 | | | 1,865 | | | 968 | |
| Goodwill impairment | | — | | | — | | | 1,010,773 | |
| Changes in operating assets and liabilities: | | | | | | |
| Accounts receivable | | (8,329) | | | (88,487) | | | (7,293) | |
| Other assets | | (4,242) | | | (11,476) | | | (6,561) | |
| | | | | | |
| Accounts payable | | (1,598) | | | (2,721) | | | 4,228 | |
| Accrued liabilities | | 38,672 | | | 77,363 | | | 9,241 | |
| | | | | | |
| Operating leases | | 179 | | | 786 | | | (683) | |
| Net cash provided by operating activities | | 613,006 | | | 235,569 | | | 102,096 | |
| | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
| Property, plant and equipment expenditures | | (206,160) | | | (78,030) | | | (181,423) | |
| Intangible assets expenditures | | (15,419) | | | (4,682) | | | (17,631) | |
| Investments in unconsolidated affiliate | | (78,171) | | | (20,522) | | | (306,532) | |
| Cash proceeds from disposals | | 219 | | | 3,613 | | | — | |
| Net cash acquired in acquisition | | 13,401 | | | — | | | — | |
| Net cash used in investing activities | | (286,130) | | | (99,621) | | | (505,586) | |
| | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
| Proceeds from issuance of long-term debt | | 3,000,000 | | | 30,189 | | | 134,351 | |
| Principal payments on long-term debt | | (2,294,130) | | | (96,548) | | | (25,862) | |
| | | | | | |
| Payments on debt issuance cost | | (37,009) | | | (3,152) | | | (576) | |
| Proceeds from revolver | | 565,000 | | | 38,500 | | | 241,250 | |
| Payments on revolver | | (879,000) | | | (69,500) | | | (178,000) | |
| Redemption of mandatorily redeemable Preferred Units | | (183,297) | | | — | | | — | |
| Redemption of redeemable noncontrolling interest Preferred Units | | (461,460) | | | — | | | — | |
| Distributions paid to mandatorily redeemable Preferred Unit holders | | (1,850) | | | — | | | — | |
| Distributions paid to redeemable noncontrolling interest Preferred Unit limited partners | | (6,937) | | | — | | | — | |
| Cash dividends paid to Class A Common Stock shareholders | | (39,298) | | | — | | | — | |
| Consideration payable from acquisition | | — | | | — | | | (79,304) | |
| Distribution paid to Class C Common Unit limited partners | | (1,230) | | | (51,189) | | | — | |
| Equity contributions | | — | | | 14,890 | | | 280,915 | |
| Net cash (used in) provided by financing activities | | (339,211) | | | (136,810) | | | 372,774 | |
| Net change in cash | | $ | (12,335) | | | $ | (862) | | | $ | (30,716) | |
| | | | | | |
| CASH, BEGINNING OF PERIOD | | $ | 18,729 | | | $ | 19,591 | | | $ | 50,307 | |
| CASH, END OF PERIOD | | $ | 6,394 | | | $ | 18,729 | | | $ | 19,591 | |
| | | | | | |
| SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES | | | | | | |
| Cash paid for interest, net of amounts capitalized | | $ | 120,270 | | | $ | 108,392 | | | $ | 104,678 | |
| Property and equipment and intangible accruals in accounts payable and accrued liabilities | | $ | 17,274 | | | $ | 8,527 | | | $ | 7,125 | |
| Lease assets obtained in exchange for lease liabilities | | $ | 7,059 | | | $ | 43,580 | | | $ | 16,991 | |
| Class A Common Stock issued through dividend and distribution reinvestment plan | | $ | 263,285 | | | $ | — | | | $ | — | |
| | | | | | |
| Fair value of ALTM assets acquired | | $ | 2,444,450 | | | $ | — | | | $ | — | |
| Class A Common Stock issued in exchange | | 1,013,745 | | | — | | | — | |
| ALTM liabilities and mezzanine equity assumed | | $ | 1,430,705 | | | $ | — | | | $ | — | |
The accompanying notes to consolidated financial statements are an integral part of this statement.
KINETIK HOLDINGS INC.
STATEMENTS OF CONSOLIDATED CHANGES IN EQUITY AND NONCONTROLLING INTERESTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Noncontrolling Interest — Preferred Unit Limited Partners(1) | | Redeemable Noncontrolling Interest — Common Unit Limited Partner | | | Class A Common Stock | | Class C Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | | | Total Equity |
| | | | | Shares(2) | | Amount | | Shares(2) | | Amount | | | | |
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | | (In thousands) |
| | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2019 | $ | — | | | $ | 1,916,530 | | | | — | | | $ | — | | | 91,929 | | | $ | 9 | | | $ | — | | | $ | — | | | | | $ | 9 | |
| Contribution | — | | | 280,914 | | | | — | | | — | | | 9,269 | | | 1 | | | — | | | — | | | | | 1 | |
| Net loss | — | | | (1,155,789) | | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2020 | $ | — | | | $ | 1,041,655 | | | | — | | | $ | — | | | 101,198 | | | $ | 10 | | | $ | — | | | $ | — | | | | | $ | 10 | |
| Contribution | — | | | 14,890 | | | | — | | | — | | | 491 | | | — | | | — | | | — | | | | | — | |
| Distributions paid to Class Unit limited partners | — | | | (51,189) | | | | — | | | — | | | (1,689) | | | — | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| Net income | — | | | 1,482 | | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | $ | — | | | $ | 1,006,838 | | | | — | | | $ | — | | | 100,000 | | | $ | 10 | | | $ | — | | | $ | — | | | | | $ | 10 | |
| ALTM acquisition | 462,717 | | | — | | | | 32,493 | | | 3 | | | — | | | — | | | 1,013,742 | | | — | | | | | 1,013,745 | |
| Distributions paid to Preferred Unit limited partners | (6,937) | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Redemption of Preferred Units | (461,460) | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Redemption of Common Units | — | | | (179,323) | | | | 5,730 | | | 1 | | | (5,730) | | | (1) | | | 179,323 | | | — | | | | | 179,323 | |
| Excess of carrying amount over Preferred Units redemption price | (109,523) | | | 76,623 | | | | — | | | — | | | — | | | — | | | — | | | 32,900 | | | | | 32,900 | |
| Issuance of common stock through dividend and distribution reinvestment plan | — | | | — | | | | 7,452 | | | 1 | | | — | | | — | | | 263,284 | | | — | | | | | 263,285 | |
| Share-based compensation | — | | | — | | | | 4 | | | — | | | — | | | — | | | 42,780 | | | — | | | | | 42,780 | |
| Step up in tax basis for Common Unit conversion | — | | | — | | | | — | | | — | | | — | | | — | | | 297 | | | — | | | | | 297 | |
| Remeasurement of contingent consideration | — | | | — | | | | — | | | — | | | — | | | — | | | 4,451 | | | — | | | | | 4,451 | |
| Net income | 115,203 | | | 94,783 | | | | — | | | — | | | — | | | — | | | — | | | 40,735 | | | | | 40,735 | |
| Change in redemption value of noncontrolling interests | — | | | 2,325,918 | | | | — | | | — | | | — | | | — | | | (1,385,037) | | | (940,881) | | | | | (2,325,918) | |
| Distributions paid to Common Units limited partners | — | | | (212,430) | | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Cash dividends on Class A Common Stock ($2.25 per share) | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | (91,383) | | | | | (91,383) | |
| Balance at December 31, 2022 | $ | — | | | $ | 3,112,409 | | | | 45,679 | | | $ | 5 | | | 94,270 | | | $ | 9 | | | $ | 118,840 | | | $ | (958,629) | | | | | $ | (839,775) | |
(1)Includes $0.8 million due from ApacheCertain redemption features embedded within the Preferred Units require bifurcation and $0.4 million and $1.5 million duemeasurement at fair value. For further detail, refer to Apache of capital expenditures forNote 12—Series A Cumulative Redeemable Preferred Units in the years ended December 31, 2021, 2020, and 2019, respectively, pursuantNotes to the terms ofConsolidated Financial Statements in this Form 10-K. (2)Share amounts have been retrospectively restated to reflect the Construction, Operations, and Maintenance Agreement entered into at the closing of the Altus Combination.Company’s reverse stock split, which was effected June 8, 2022. Refer to Note 2—Transactions with Affiliates11—Equity and Warrants for more information. (2)The Company entered into a finance lease in the first quarter of 2019Notes to our Consolidated Financial Statements in this Form 10-K for power generators, which ended during the first quarter of 2020. The Company then exercised its option to purchase the generators.
The accompanying notes to consolidated financial statements are an integral part of this statement.
ALTUS MIDSTREAM COMPANYKINETIK HOLDINGS INC.
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY AND NONCONTROLLING INTERESTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Noncontrolling Interest — Preferred Unit Limited Partners(2) | | Redeemable Noncontrolling Interest — Apache Limited Partner | | | Class A Common Stock | | Class C Common Stock | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Total Equity (Deficit) |
| | | | | Shares(1) | | Amount | | Shares(1) | | Amount | | | | |
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | | (In thousands) |
| | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2018 | $ | — | | | $ | 1,940,500 | | | | 3,746 | | | $ | 1 | | | 12,500 | | | $ | 1 | | | $ | (22,464) | | | $ | (204,517) | | | $ | — | | | $ | (226,979) | |
| Issuance of Series A Cumulative Redeemable Preferred Units | 516,790 | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income (loss) | 38,809 | | | (1,008,039) | | | | — | | | — | | | — | | | — | | | — | | | (358,490) | | | — | | | (358,490) | |
| Change in redemption value of noncontrolling interest | — | | | (230,575) | | | | — | | | — | | | — | | | — | | | 39,792 | | | 190,783 | | | — | | | 230,575 | |
| Accumulated other comprehensive loss | — | | | (886) | | | | — | | | — | | | — | | | — | | | — | | | — | | | (266) | | | (266) | |
| Balance at December 31, 2019 | 555,599 | | | 701,000 | | | | 3,746 | | | 1 | | | 12,500 | | | 1 | | | 17,328 | | | (372,224) | | | (266) | | | (355,160) | |
| Distributions paid to Preferred Unit limited partners | (23,124) | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Distributions payable to Apache limited partner | — | | | (18,750) | | | | | | | | | | | | | | | | | | |
| Quarterly Common Dividends declared ($1.50 per share) | — | | | — | | | | — | | | — | | | — | | | — | | | (5,620) | | | — | | | — | | | (5,620) | |
| Net income | 75,906 | | | 2,987 | | | | — | | | — | | | — | | | — | | | — | | | 2,791 | | | — | | | 2,791 | |
| Change in redemption value of noncontrolling interest | — | | | (110,514) | | | | — | | | — | | | — | | | — | | | 110,514 | | | — | | | — | | | 110,514 | |
| Accumulated other comprehensive income | — | | | 402 | | | | — | | | — | | | — | | | — | | | — | | | — | | | 121 | | | 121 | |
| Balance at December 31, 2020 | 608,381 | | | 575,125 | | | | 3,746 | | | 1 | | | 12,500 | | | 1 | | | 122,222 | | | (369,433) | | | (145) | | | (247,354) | |
| Distributions paid to Preferred Unit limited partners | (46,249) | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Distributions payable to Preferred Unit limited partners | (11,562) | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Distributions paid to Apache limited partner | — | | | (56,250) | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Quarterly Common Dividends declared ($1.50 per share) | — | | | — | | | | — | | | — | | | — | | | — | | | (16,860) | | | — | | | — | | | (16,860) | |
| Net income (loss) | 161,906 | | | (48,741) | | | | — | | | — | | | — | | | — | | | — | | | (13,944) | | | — | | | (13,944) | |
| Change in redemption value of noncontrolling interests | — | | | 299,236 | | | | — | | | — | | | — | | | — | | | (105,362) | | | (193,874) | | | — | | | (299,236) | |
| Accumulated other comprehensive income | — | | | 485 | | | | — | | | — | | | — | | | — | | | — | | | — | | | 145 | | | 145 | |
| Balance at December 31, 2021 | $ | 712,476 | | | $ | 769,855 | | | | 3,746 | | | $ | 1 | | | 12,500 | | | $ | 1 | | | $ | — | | | $ | (577,251) | | | $ | — | | | $ | (577,249) | |
(1)Share amounts have been retroactively restated to reflect the Company’s reverse stock split, which was effected June 30, 2020. Refer to Note 10—Equity and Warrants for further information.
The accompanying notes to consolidated financial statements are an integral part of this statement.
ALTUS MIDSTREAM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The Transaction
On February 22, 2022 (the “Closing Date”), Kinetik Holdings Inc., a Delaware corporation (formerly known as Altus Midstream Company), consummated the previously announced business combination transactions contemplated by the Contribution Agreement, dated as of October 21, 2021 (the “Contribution Agreement”), by and among the Company, Altus Midstream LP (now known as Kinetik Holdings LP), a Delaware limited partnership and subsidiary of Altus Midstream Company (the “Partnership”), New BCP Raptor Holdco, LLC, a Delaware limited liability company (“Contributor”), and BCP Raptor Holdco, LP, a Delaware limited partnership (“BCP”). The transactions contemplated by the Contribution Agreement are referred to herein as the “Transaction.”
Pursuant to the Contribution Agreement, in connection with the closing of the Transaction (the “Closing”), (i) Contributor contributed all of the equity interests of BCP and BCP Raptor Holdco GP, LLC, a Delaware limited liability company and the general partner of BCP (“BCP GP” and, together with BCP, the “Contributed Entities”), to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 common units representing limited partner interests in the Partnership (“Common Units”) and 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share (“Class C Common Stock”).
The Company’s stockholders immediately prior to the Closing continued to hold their shares of the Company’s Class A Common Stock, par value $0.0001 per share (“Class A Common Stock,” and together with the Company’s Class C Common Stock, “Common Stock”). As a result of the Transaction, immediately following the Closing (i) Contributor held approximately 75% of the issued and outstanding Common Stock, (ii) Apache Midstream LLC, a Delaware limited liability company (“Apache Midstream”), held approximately 20% of the issued and outstanding Common Stock, and (iii) the Company’s remaining stockholders held approximately 5% of the issued and outstanding Common Stock.
The Company completed a two-for-one Stock Split in the form of a stock dividend on June 8, 2022. All corresponding per-share and share amounts for periods prior to June 8, 2022 have been retrospectively restated elsewhere in this Form 10-K to reflect the two-for-one Stock Split. However, the number of Common Units and shares of Class C Common Stock described in this Form 10-K in relation to the Transaction are presented at pre-Stock-Split amounts to be consistent with our previous public filings and the terms of the Contribution Agreement.
In connection with the Closing, the Company changed its name from “Altus Midstream Company” (“ALTM”) to “Kinetik Holdings Inc.” Unless the context otherwise requires, the “Company,” “ALTM” and “Altus” refers to Altus Midstream Companythe registrant prior to the Closing and “we,” “us,” “our,” and the “Company” refer to Kinetik Holdings Inc., the registrant and its consolidated subsidiaries. “Altus Midstream” referssubsidiaries following the Closing.
Organization
BCP was formed on April 25, 2017 as a Delaware limited partnership to
Altusacquire and develop midstream oil and gas assets. BCP’s primary operating subsidiaries were EagleClaw Midstream
LPVentures, LLC (“EagleClaw”) and
its consolidated subsidiaries. “Apache” refersCR Permian Holdings, LLC (“CR Permian”). Both subsidiaries were formed to
Apache Corporationdesign, engineer, install, own and
its consolidated subsidiaries. All references to the Company’s Class A common stock, $0.0001 par value (Class A Common Stock),operate facilities 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—10 Equity and Warrantsprovide services for further information. Nature of Operations
Through its consolidated subsidiaries, the Company ownsproduced natural gas gathering, compression, processing, treating and transmission assets in the Permian Basin of West Texas. Construction on the assets began in the fourth quarter of 2016,dehydration, and operations commenced in the second quarter of 2017. Additionally, the Company owns equity interests in 4 separate Permian Basin pipeline entities that have access to various points along the Texas Gulf Coast. The Company’s operations consist of 1 reportable segment.condensate separation, stabilization, and storage, crude oil gathering and storage, water gathering and disposal assets.
Organization
The CompanyALTM was originally incorporated on December 12, 2016 in Delaware under the name Kayne Anderson Acquisition Corp. (KAAC)(“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 Altus Contribution Agreement) with certain wholly-owned subsidiariesaffiliates of Apache including 4 Delaware limited partnerships (collectively, AltusCorporation (“Apache” and such affiliates the “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 wereEntities”), 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)(“Alpine High”).
On November 9, 2018, (the Closing Date) and pursuant to the terms of the Altus Contribution Agreement, KAAC acquired from Apache the entireall equity interests of the Altus Midstream Entities and options to acquire equity interests in 5 separate third-party pipeline projects (the Pipeline Options). The acquisition of the entities and the Pipeline Options is referred to herein as the Altus Combination. In exchange, the consideration provided to Apache included economic voting and non-economic voting shares in KAAC and partnership units representing limited partner interests in Altus Midstream LP (Common Units). Following the Closing Date and in connection with the completion of the Altus Combination, KAAC changed its name to Altus Midstream Company.
Ownership of Altus Midstream LP
As of and followingOn February 22, 2022, upon the Closing, Date and in connection with the completion of the Altus 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 LPBCP and its subsidiaries which include Altus Midstream Operating. Asbecame wholly owned subsidiaries of December 31, 2021,the Partnership. The Transaction was accounted for as a reverse merger pursuant to ASC 805 Business Combination (“ASC 805”). Refer to Note 3—Business Combination in the Notes to our Consolidated Financial Statements for further information.Nature of Operations
Through its consolidated subsidiaries, the Company
held approximately 23.1 percent of the outstanding Common Units,provides comprehensive gathering, water disposal, transportation, compression, processing and
a controlling interest, in Altus Midstreamtreating services necessary to bring natural gas, natural gas liquids (“NGL” or “NGLs”) and
Apache held the remaining 76.9 percent. As a result of a direct exchange by the Company of Class A Common Stock for Apache’s Common Units in January 2022,crude oil to market. Additionally, the Company owns
100% of the outstanding Common Units (see Note—10 Equityan NGL pipeline and Warrants). Business Combination with BCP
On October 21, 2021, the Company announced that it will combine with privately-owned BCP Raptor Holdco LP (BCP and, together with BCP Raptor Holdco GP, LLC, the Contributed Entities) in an all-stock transaction, pursuant to the Contribution Agreement dated as of that same date and entered into by and among Altus, Altus Midstream LP (the Partnership), New BCP Raptor Holdco, LLC (the Contributor), and BCP (the BCP 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 percent interest in the Permian Highway Pipeline. Pursuant to the BCP Contribution Agreement,
Contributor will contribute all of the equity interests ofin four separate Permian Basin pipeline entities that have access to various markets along the Contributed Entities (the Contributed Interests) to the Partnership, with each Contributed Entity becoming a wholly-owned subsidiary of the Partnership (the BCP Business Combination).
As consideration for the contribution of the Contributed Interests, the Company will issue 50 million shares of Class C Common Stock (and Altus Midstream LP will issue a corresponding number of 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 of 2022 following completion of customary closing conditions.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESTexas Gulf Coast.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP).
Principles of Consolidation
The consolidated financialAmerica (“U.S. GAAP”). All adjustments that, in the opinion of management, are necessary for a fair presentation of the results of Altus Midstreamoperations have been made and are includedof a recurring nature unless otherwise disclosed herein. All intercompany balances and transactions have been eliminated in consolidation.
Prior to the Closing, the Company’s consolidated financial statements duethat were filed with the Securities and Exchange Commission (“SEC”) were derived from ALTM’s accounting records. As the Transaction was determined to be a reverse merger, BCP was considered the accounting acquirer and ALTM was the legal acquirer. The accompanying Consolidated Financial Statements herein include (1) BCP’s net assets carried at historical value, (2) BCP’s historical results of operations prior 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. The Company’s only materialTransaction, (3) the ALTM’s net assets separate from Altus Midstream relate to deferred taxes and the current and deferred income tax expense (benefit) associated with its investment in Altus Midstream in 2018. In the fourth quarter of 2019, the Company recorded a full valuation allowance against its net deferred tax assets. Accordingly, the deferred tax asset balance was nilcarried at fair value as of the years ended December 31, 2021Closing Date and 2020. Additionally,(4) the combined results of operations with the Company’s balance sheet reflectsresults presented within 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).Consolidated Financial Statements from February 22, 2022 going forward. Refer to Note 12—Income Taxes3—Business Combination, Note 10—Equity and Warrants, and Note 11—Series A Cumulative Redeemable Preferred Unitsto our Consolidated Financial Statements in this Form 10-K 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 iscompleted a two-for-one Stock Split on June 8, 2022. All corresponding per-share and share amounts for periods prior to June 8, 2022 have been retrospectively restated in this Form 10-K to reflect the primary beneficiary of Altus Midstream, and therefore should consolidate Altus Midstream because (i)two-for-one Stock Split, except for 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
As of December 31, 2021, the Company’s redeemable noncontrolling interest presented in the consolidated financial statements consistednumber 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 Altus Combination, and subsequent issuance of Preferred Units, the Amended LPA), the limited partner interests held by Apache were 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 Altus 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 could be redeemed at Apache’s option, which it elected in January 2022 in respect of all such Common Units. The Company had the ability to settle the redemption option either (i) in shares of Class A Common Stock on a 1-for-one basis, which it did in January 2022, or (ii) in cash (based on the fair market value of the Class A Common Stock as determined pursuant to the Altus Contribution Agreement), subject to customary conversion rate adjustments for stock splits, stock dividends, and reclassifications. Upon the January 2022 exchange of Common Units held by Apache for Class A Common Stock, a corresponding number of shares of Class C Common Stock were cancelled.
The Company’s policydescribed above in relation to the Transaction, which are presented at pre-Stock-Split amounts. This presentation election is to recordconsistent with our previous public filings and 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 asterms of the balance sheet date.
Redeemable Noncontrolling Interest — Preferred Unit Limited Partners2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Equity method interests are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred, if the loss is deemed to be other than temporary. When the loss is deemed to be other than temporary, the carrying value of the equity method investment is written down to fair value, and the amount of the write-down is included in income. As part of its review of the fair value of its assets in relation to the announced BCP Business Combination, Altus determined the current fair value of its investment in EPIC was below carrying value. The Company subsequently determined that this loss in value was deemed to be other than temporary. As such, in the fourth quarter of 2021, Altus recorded an impairment charge of $160.4 million on its equity method interest in EPIC. The fair value of the impaired interest was determined using the income approach, which considered Altus’ estimates of future throughput volumes, tariff rates, and costs. These assumptions were applied to develop future operating cash flow projections that were then discounted to estimated fair value using a discount rate believed to be consistent with that which would be applied by market participants. The amount arrived at was then considered against EPIC’s debt and the carrying value of the Company’s interest in EPIC to determine the recoverability of Altus’ interest as of December 31, 2021, resulting in the fourth quarter impairment charge. Altus has classified this nonrecurring fair value measurements as Level 3 in the fair value hierarchy.
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 consolidated 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,Consolidated Financial Statements, and changes in these estimates are recorded when known. Significant items subject to such estimates and assumptions include the valuation of enterprise value, assets acquired and liabilities assumed in a business combination, derivatives, tangible and intangible assets and impairment of long-lived assets and equity method investments.
Segment Information
The Company applies Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting, in determining reportable segments for its financial statement disclosure. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. Our Chief Executive Officer is the CODM. The Company has determined it has two operating segments: (1) Midstream Logistics and (2) Pipeline Transportation.
Revenue Recognition
We provide gathering, processing, and disposal services and we sell commodities (including condensate, natural gas, and NGLs) under various contracts.
The Company recognizes revenue in accordance with the provisions of FASB Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”). We recognize revenues for services and products under revenue contracts as our obligations to perform services or deliver/sell products under the contracts are satisfied. A contract’s transaction price is allocated to each performance obligation in the contract and recognized as revenue when, or as, the performance obligation is satisfied. These contracts include:
a.Fee-based arrangements – Under fee-based contract arrangements, the Company provides gathering, processing and disposal services to producers and earns a net margin based on volumes. While transactions vary in form, the essential element of each transaction is the use of the Company’s assets to transport a product or provide a processed product to an end-user at the tailgate of the plant or pipeline. This revenue stream is generally directly related to the volume of water, natural gas, crude oil, NGLs, and condensate that flows through the Company’s systems and facilities and is not normally dependent on commodity prices. The Company primarily acts as an agent under these contracts selling the underlying commodities on behalf of the producer and remitting back to the producer the net proceeds. These such sales and remitted proceeds are presented net within revenue. However, in certain instances, the Company acts as the principal for processed residue gas and NGLs by purchasing them from the associated producer at the tailgate of the plant at index prices. This purchase and the associated 3rd party sale are presented gross within revenues and cost of sales.
b.Percent-of-proceeds arrangements – Under percentage-of-proceeds based contract arrangements, the Company will gather and process natural gas on behalf of producers and sell the outputs, including residue gas, NGLs and condensate at market prices. The Company remits an agreed-upon percentage of proceeds to the producer based on the market price received from 3rd parties or the index price defined in the contract. Under these arrangements, revenue is recognized net of the agreed-upon proceeds remitted to producers when the Company acts as an agent of the producer for the associated 3rd party sale. However, in certain instances the Company acts as the principal for processed residue gas and NGLs by purchasing these volumes from the associated producer at the tailgate of the plant at index prices. This purchase and the associated 3rd party sale are presented gross within revenues and cost of sales.
c.Percent-of-products arrangements – Under percent-of-products based contract arrangements, the Company will gather and process natural gas on behalf of producers. As partial compensation for services, the producer assigns to the Company, for no additional consideration, all right, title and interest to a set percentage, as defined in the contract, of the processed residue volumes. The Company recognizes the fair value of these products as revenue when the associated performance obligation has been met.
d.Product sales contracts –Under these contracts, we sell natural gas, NGLs or condensate to third parties. These sales are presented gross within revenues and cost of sales or net within revenues depending on whether the Company acts as the agent or the principal in the sale transaction as discussed above.
Our fee-based service contracts primarily have a single performance obligation to deliver a series of distinct goods or services that are substantially the same and have the same pattern of transfer to our producers. For performance obligations associated with these contracts, we recognize revenues over time utilizing the output method based on the actual volumes of products delivered/sold or services performed, because the single performance obligation is satisfied over time using the same performance measure of progress toward satisfaction of the performance obligation. The transaction price under our fee-based service contracts includes variable consideration that varies primarily based on actual volumes that are delivered under the contracts. Because the variable consideration specifically relates to our efforts to transfer the services and/or products under the contracts, we allocate the variable consideration entirely to the distinct service utilizing the allocation exception guidance under Topic 606, and accordingly recognize the variable consideration as revenues at the time the good or service is transferred to the producer.
We recognize revenues at a point in time for performance obligations associated with percent-of-proceeds contract elements, percent-of-products contract elements and product sale contracts, and these revenues are recognized because control of the underlying product is transferred to the customer or producer when the distinct good is provided to the customer or producer.
The evaluation of when performance obligations have been satisfied and the transaction price that is allocated to our performance obligations requires judgments and assumptions, including our evaluation of the timing of when control of the underlying good or service has transferred to our producers or customers. Actual results can vary from those judgments and assumptions.
Minimum Volume Commitments
The Company has certain agreements that provide for quarterly or annual minimum volume commitments (“MVCs”). Under these MVCs, our producers agree to ship and/or process a minimum volume of production on our gathering and processing systems or to pay a minimum monetary amount over certain periods during the term of the MVC. A producer must make a shortfall payment to us at the end of the contracted measurement period if its actual throughput volumes are less than its contractual MVC for that period. None of the Company’s MVC provisions allow for producers to make up past deficient volumes in a future period. However, certain MVC provisions allow producers to carryforward volumes delivered in excess of a current period MVC to future periods. The Company recognizes revenue associated with MVCs when a counterparty has not met the contractual MVC at the completion of the measurement period for the specific commitment or we determine that the counterparty cannot meet the contractual MVC by the end of the contracted measurement period.
Disaggregation of Revenue
The Company disaggregates revenue into categories that depict the nature, amount, and timing of revenue and cash flows based on differing economic risk profiles for each category. In concluding such disaggregation, the Company evaluated the nature of the products and services, consumer markets, sales terms, and sales channels which have similar characteristics such that the level of disaggregation provides an understanding of the Company’s business activities and historical performance. The level of disaggregation is evaluated annually and as appropriate for changes to the Company or its business, either from internal growth, acquisitions, divestitures, or otherwise. See Note 4—Revenue Recognitionin the Notes to our Consolidated Financial Statements in this Form 10-K for further information. Concentration Risk
All operations and efforts of the Company are focused in the oil and gas industry and are subject to the related risks of the industry. The Company’s assets are located in the Delaware Basin. Demand for the Company’s products and services may be influenced by various regional and global factors and may impact the value of the projects the Company is developing.
The Company’s concentration of customers may impact its overall business risk, either positively or negatively, in that these entities may be similarly affected by changes in the economy or other conditions. The Company’s operations involve a variety of counterparties, both investment grade and non-investment grade. The Company analyzes the counterparties’ financial condition prior to entering into an agreement, establishes credit limits and monitors the appropriateness of these limits on an ongoing basis within approved tolerances, with the primary focus on published credit ratings when available and inherent liquidity metrics to mitigate credit risk. Typically, through our customer contracts, the Company takes title to the rich gas and associated plant products (NGLs and residue gas). As such, the inherent risk with these types of contracts is mitigated as the Company receives funds for the disposition and sale of such products from downstream counterparties that are large investment grade entities and is able to deduct all fees owed to it by its customers and associated costs before remitting the balance of any funds back to the relevant customer. For those few counterparties’ that retain ownership of their plant products, the Company attempts to minimize credit risk exposure through its credit policies and monitoring procedures as well as through customer deposits, and letters of credit. The Company manages trade credit risk to mitigate credit losses and exposure to uncollectible trade receivables and generally receivables are collected within 30 days. Below is a summary of operating revenue by major customers that individually exceeded 10% of consolidated operating revenue:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands) |
| Customer 1 | | $ | 326,899 | | | $ | 184,967 | | | $ | 71,681 | |
| Customer 2 | | 93,286 | | | 111,742 | | | 29,512 | |
| Customer 3 | | 75,188 | | | 59,301 | | | 55,573 | |
| Customer 4 | | 40,187 | | | 43,599 | | | 52,149 | |
| Customer 5 | | 211,093 | | | 34,362 | | | 9,505 | |
| Others | | 466,837 | | | 228,073 | | | 191,756 | |
| Consolidated Operating Revenue | | $ | 1,213,490 | | | $ | 662,044 | | | $ | 410,176 | |
| | | | | | |
As of December 31, 2022 and 2021, approximately 58% and 72%, respectively, of accounts receivable were derived from the above customers. All operating revenue derived from above customers are included in the Midstream Logistics segment.
Major Producers are defined as our producers who we gather natural gas, crude and/or produced water and process gas and dispose of produced water from and account for 10% or more of our cost of sales as presented in the consolidated financial statements. For the year ended December 31, 2022, approximately 87% of the Company’s cost of sales were derived from five producers. For the year ended December 31, 2021, approximately 92% of the Company’s cost of sales were derived from five producers. For the year ended December 31, 2020, approximately 76% of the Company’s cost of sales were derived from three producers. This concentration of producers may impact the Company's overall business risk, either positively or negatively, in that these entities may be similarly affected by changes in the economy or other conditions. We do not believe that a loss of revenues from any single customer would have a material adverse effect on our business, financial position, results of operations or cash flows.
The Company regularly maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses with respect to the related risks to cash and does not believe its exposure to such risk is more than nominal.
Fair Value Measurements
Accounting Standards Codification (ASC) 820-10-35, “Fair Value Measurement” (ASC 820),ASC Topic 820 establishes a framework for measuring fair value in U.S. GAAP, clarifies the definition of fair value within that framework, and requires disclosures about the use of fair value measurements. Topic 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Topic 820 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.
Topic 820 establishes a fair value hierarchy that prioritizes and defines the types of inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices in active markets (Level 1 inputs). The three levels of the fair value hierarchy under Topic 820 are described below:
Level 1 inputs: Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, instruments inunrestricted assets or liabilities. An active markets. market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 inputs consist of: Inputs, other than quoted prices in active markets, that are either directly or indirectly observable for similar instruments. the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 inputs: Prices or valuations are derived fromthat require unobservable inputs that are both significant to the fair value measurement and unobservable; hence, these valuations haveunobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.
A financial instrument’s level within the fair value hierarchy is based on the lowest priority.
Thelevel of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or inventory parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques that may be used to measure fair value include ainvolve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or 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.the instrument’s complexity.
An income approach uses valuation techniques to convert future amounts toThe Company’s Consolidated Balance Sheets reflect a single present amount based on current market expectations, including present value techniques, option-pricing models,mixture of measurement methods for financial assets 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 agreementsliabilities. Public and private warrants, contingent liabilities and derivative financial instruments are bifurcated and measuredreported 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 invalue. See Note 14—13—Fair Value Measurements. The Company also uses fair value measurements on a nonrecurring basis when certain qualitative assessments of its assets indicate a potential impairment. During the years ended December 31, 2021, 2020, and 2019, the Company recorded an impairment charge of $0.4 million, $1.6 million, and $1.3 billion, respectively, on certain assets. Refer to Property, Plant and Equipment—Impairment within this Note below and Note 4—Property, Plant14—Derivative and EquipmentHedging Activities, in the Notes to our Consolidated Financial Statements in this Form 10-K for further detail. Duringinformation. Other financial instruments are reported at historical cost or amortized cost on our Consolidated Balance Sheets. Long-term debt is primarily the year ended December 31, 2021,other financial instrument for which carrying value could vary significantly from fair value. See Note 8—Debt and Financing Costs in the Notes to our Consolidated Financial Statements in this Form 10-K for further information.Derivative Instruments and Hedging Activities
ASC Topic 815, Derivatives and Hedging (“Topic 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by Topic 815, the Company separately recordedrecords all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.
For all hedging relationships for which hedge accounting is applied, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Partnership also formally assesses, both at the inception of the hedging relationship and on an impairmentongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of $160.4 millionhedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on its interestthe derivative is reported as a component of other comprehensive income and reclassified into earnings in EPIC. Referthe same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
When the Company does not elect to
Equity Method Interests within this Note aboveapply hedge accounting, the instruments are marked-to-market each period end and
Note 9—Equity Method Interests for further detail.changes in fair value, realized or unrealized, are recognized in earnings. Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value. As of December 31, 2022 and 2021, and 2020, Altus Midstreamthe Company had $132.0$6.4 million and $24.2$18.7 million, respectively, of cash and cash equivalents.
RevenueAccounts Receivable and Current Expected Credit Losses
For each period presentedAccounts receivable include amounts due from customers for gas, NGLs and upon commencement of operations, revenues were primarily generated from midstream services provided to Apache, which includedcondensate sales, pipeline transportation, and gathering, processing and transmissiondisposal fees, under normal trade terms, generally requiring payment within 30 days. The Company’s current expected credit losses are determined based upon reviews of natural gas. Revenue receivables represents revenues accrued that have been earned by Altus Midstream but not yet invoiced to Apache. There were no doubtfulindividual accounts, written off, nor have we providedexisting economics, and other pertinent factors. The Company had an allowance for doubtful accounts,credit losses of $1.0 million as of December 31, 2022 and 2021.
Gas Imbalance
Quantities of natural gas over-delivered or under-delivered related to imbalance agreements are recorded monthly as receivables or payables using weighted-average prices at the time of the imbalance. These imbalances are typically settled with deliveries of natural gas. We had imbalance receivables of $1.5 million and $1.5 million at December 31, 2022 and 2021, respectively, which are carried at the lower of cost or market value. We had imbalance payables of nil and 2020.$0.3 million at December 31, 2022 and 2021, respectively, which approximate the fair value of these imbalances. Imbalance receivables and imbalance payables are included in “Accounts Receivable” and “Accounts Payable”, respectively, on the Consolidated Balance Sheets.
InventoriesInventory
Inventories consist principally of equipmentOther current assets include condensate, residue gas and material, statedNGL inventories that are valued at the lower of cost or net realizable value. At the end of each reporting period, the Partnership assesses the carrying value of inventory and makes any adjustments necessary to reduce the carrying value to the applicable net realizable value. Inventory was valued at $4.8 million and $2.1 million as of December 31, 2022 and 2021, respectively.
Property, Plant, and Equipment
Property, plant and equipment consistsare carried at cost or fair market value at the date of acquisition less accumulated depreciation. The cost basis of constructed assets includes materials, labor, and other direct costs. Major improvements or betterments are capitalized, while repairs that do not improve the life of the costs incurred to acquirerespective assets are expensed as incurred. Depreciation and construct midstream assets including capitalized interest.
Depreciation
Depreciation isamortization are computed over each asset’s estimated useful life using the straight-line method based on estimated useful lives and estimated asset salvage values. The estimated lives are generally 30 years for plants and facilities and 40 years for pipelines and such estimated useful lives were used to depreciate the Company’s assets in 2019. The estimation of useful life also takes into consideration anticipated production lives from the fields serviced by these assets, whether operated by Apache or a third-party. Determination of depreciation expense requires judgment regardingover the estimated useful lives and salvage values of property, plant,the assets as follows:
| | | | | |
| Estimated Useful Life |
| Buildings | 30 years |
| Gathering and processing systems and facilities | 20 years |
| Furniture and fixtures | 7 years |
| Vehicles | 5 years |
| Computer hardware and software | 3 years |
Leases
The Company's lease portfolio includes certain real estate and equipment. As circumstances warrant, depreciation estimatesThe determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Operating leases are reviewedrecorded on the balance sheet with operating lease assets representing the right to determine if any changes inuse the underlying assumptionsasset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease. The Company has elected to account for the lease and non-lease components together as a single component for all classes of underlying assets. The Company excludes variable lease payments in measuring right-of-use (“ROU”) assets and lease liabilities, other than those that depend on an index, a rate or are necessary. Givenin-substance fixed payments.
ROU assets and lease liabilities are recognized at the
fourth quarter 2019 impairment discussed under Impairment below, andcommencement date based on the present value of lease payments over the lease term. In addition, ROU assets include initial direct costs incurred by the lessee as discussed further in Note 4—Property, Plant and Equipment,well as any lease payments made at or before the commencement date are reduced by lease incentives. As most of the Company's leases do not provide an implicit rate, the Company reassesseduses its incremental borrowing rate based on the usefulinformation available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is determined by using the rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments for a similar term and in a similar economic environment. Lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of one year or less are excluded from ROU assets and liabilities. Capitalized Interest
The Company’s policy is to capitalize interest cost incurred on debt during the construction of major projects.
Deferred Financing Costs
Deferred financing costs consist of fees incurred to secure debt financing and are amortized over the life of its assets in January of 2020. This assessment resulted inthe related debt using the effective interest rate method. Deferred financing costs associated with the Company’s unsecured term loans and senior note are presented with the related debt on the Consolidated Balance Sheets, as a changereduction to estimated useful livesthe carrying amounts. Deferred financing costs associated with the Company's revolving credit facilities are presented within “Other Current Assets” and “Deferred Charges and Other Assets” on its impaired assets to 12 years. For the years ended December 31, 2021, 2020, and 2019 depreciation expense totaled $11.9 million, $12.0 million, and $39.8 million, respectively.Consolidated Balance Sheets.
Asset Retirement ObligationsObligation
The Company follows the provisions of FASB ASC Topic 410, Asset Retirement and Accretion
Environmental Obligations, which require the fair value of a liability related to the retirement of long-lived assets to be recorded at the time a legal obligation is incurred if the liability can be reasonably estimated. The initial estimated assetliability is based on future retirement cost estimates and incorporates many assumptions, such as time to permanent removal, future inflation rates and the credit-adjusted risk-free rate of interest. The retirement obligation related to property, plant, and equipment and subsequent revisions areis recorded as a liability at fairits estimated present value with an offsetting asset retirement cost recorded as an increase to the associated property, plant, and equipmentrelated asset on the consolidated balance sheet. Revisions in estimated liabilities can result from changes in estimated inflation rates, changes in service and equipment costs, and changes in the estimated timing of an asset’s retirement. Asset retirement costs are depreciated using a systematic and rational method similar to that used for the associated property, plant, and equipment. Accretion expense onOver time, the liability is accreted to its future value, with the accretion recorded to expense.
The Company’s assets generally consist of gas processing plants, crude storage terminals, saltwater disposal wells, and underground gathering pipelines installed along rights-of-way acquired from landowners and related above-ground facilities. The majority of the rights-of-way agreements do not require the dismantling and removal of the pipelines and reclamation of the rights-of-way upon permanent removal of the pipelines from service. Further, we have in place a rigorous repair and maintenance program that keeps our gathering and processing systems in good working order. As a result, the ultimate dismantlement and removal dates of the Company’s assets are not determinable. As such, the fair value of the liability is not estimable and, therefore, no asset retirement obligation has been recognized in the Consolidated Financial Statements as of December 31, 2022 and 2021.
Environmental Costs
The Company is subject to extensive federal, state, and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites, if applicable.
Environmental costs that relate to current operations are expensed or capitalized as appropriate. Costs are expensed when they relate to an existing condition caused by past operations and will not contribute to current or future revenue generation. Liabilities related to environmental assessments and/or remedial efforts are accrued when property or services are probable or can reasonably be estimated. No environmental liabilities were recorded as of December 31, 2022.
Intangible Assets
Intangible assets consist of rights of way agreements and customer contracts. Intangible assets are amortized on a straight-line basis over their estimated economic life or remaining term of the contract and are assessed for impairment with the associated long-lived asset group whenever impairment indicators are present.
Goodwill
Goodwill represents the excess of cost over the estimated productive lifefair value of assets of businesses acquired. Goodwill is not amortized, but instead is tested for impairment in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”) at the related assetsreporting unit level at least annually. The Company’s reporting unit is subject to impairment testing annually, on November 30, or more frequently if events and is included oncircumstances change that would more likely than not reduce the consolidated statementsfair value of operations under “Depreciation and accretion.” For the years ended December 31, 2021, 2020, and 2019 accretion expense totaled $4.3 million, $4.0 million, and $1.6 million, respectively.a reporting unit below its carrying amount.
Capitalized Interest
InterestASC 350 provides the option to assess qualitative factors to determine whether it is capitalized as partmore likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company has the unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing a quantitative goodwill impairment test. If the assessment of all relevant qualitative factors indicates that it is more likely than not that the fair value of a reporting unit is more than its carrying amount, a quantitative goodwill impairment test is not necessary. If the assessment of all relevant qualitative factors indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will perform a quantitative goodwill impairment test. The quantitative impairment test for goodwill consists of a comparison of the historical costfair value of developinga reporting unit with its carrying value, including the goodwill allocated to that reporting unit. If the carrying value of a reporting unit exceeds its fair value, the Company will recognize an impairment loss equal to the amount of the excess, limited to the amount of goodwill allocated to that reporting unit. Application of the impairment test requires judgement, including the identification of reporting units, assignment of assets and constructing assets. Significant midstream developmentliabilities to reporting units and the determination of the fair value of each reporting unit.
Impairment of Long-Lived Assets
In accordance with FASB ASC 360, Property, Plant and Equipment (“ASC 360”), long-lived assets, including assets owned by Altus through its equity method interests, that have not commenced operations qualify for interest capitalization. Capitalized interest is determined by multiplying Altus Midstream’s weighted-average borrowing cost of debtexcluding goodwill, to be held and used by the average amountCompany are reviewed for impairment annually or on an interim basis if events or circumstances indicate that the fair value of qualifying midstream assets. The amountthe assets have decreased below their carrying value. For long-lived assets to be held and used, the Company bases their evaluation on impairment indicators such as the nature of capitalized interest cannotthe assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be greater than actual interest incurred. Once an asset is placed into service, the associated capitalization of interest ceases and is expensed through depreciation over the asset’s useful life.
Impairmentpresent.
The Company’s management assesses whether there has been an impairment trigger, and if a trigger is identified, then the Company assesses the carrying amount of its property, plant, and equipment whenever events or changes in circumstances indicate a possible significant deterioration in futurewould perform an undiscounted cash flows expected to be generated by an asset group. Individual assets are grouped for impairment purposes based onflow test at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows offrom other asset groups.assets. If upon review, the carrying amount of an asset group is greater than the sum of the undiscounted expectedfuture net cash flows is less than the net book value of the property, an impairment loss is recognized for theany excess of the carryingproperty’s net book value over its estimated fair value. The Company did not recognize impairment losses for long-lived assets during the years ended December 31, 2022 and 2021.
DuringVariable Interest Entity
The Company uses a qualitative approach in assessing the fourth quarter of 2020,consolidation requirement for variable interest entities. The approach focuses on identifying which enterprise has the power to direct the activities that most significantly impact the variable interest entity’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits from the variable interest entity. In the event that the Company sold certainis the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity would be consolidated in our financial statements. The Company has determined that it has significant influence over the operating and financial policies of the four pipeline entities in which it is invested but does not exercise control over them; and hence, it accounts for these investments using the equity method. Refer to Note 7—Equity Method Investmentsin the Notes to our Consolidated Financial Statements in this Form 10-K. Equity Method Investments
The Company follows the equity method of accounting when it does not exercise control over its power generatorsequity interests but can exercise significant influence over the operating and financial policies of the entity. Under this method, the equity investments are carried originally at acquisition cost, increased by the Company’s proportionate share of the equity interest’s net income and contributions made, and decreased by the Company’s proportionate share of the equity interest’s net losses and distributions received. The Company determines whether distributions are a return on or a return of the investment based on the nature of the distribution approach, under which the Company classifies distributions from an investee by evaluating the facts, circumstances and nature of each distribution. As distributions from the Company’s equity method investment (“EMI”) pipeline entities are generated from their respective normal course of business, the Company classifies the distributions as return on investments and as a result,cash flow from operating activities. Please refer to Note 7—Equity Method Investmentsin the remaining power generators owned byNotes to our Consolidated Financial Statements in this Form 10-K, for further information of the CompanyCompany’s equity method investments. Equity method investments acquired in the Transaction were remeasuredrecorded at fair value based on the proceeds from such sale. This remeasurement resultedupon Closing. See discussion and additional detail in an impairment of $1.6 million on these assets, and this nonrecurring fair value measurement is classified as Level 1 Note 3—Business Combinationin the fair value hierarchy based onNotes to our Consolidated Financial Statements in this Form 10-K for the negotiated sales price. Apache, as part of its fourth quarter 2019 review of its capital expenditure program, notified Altus that it had materially reduced its investment plans and had no plans to drill new wells at Alpine High. This notification prompted Altus management to assess its long-lived infrastructure assets for impairment, and as a result of this assessment, Altus recorded impairments of $1.3 billion on its gathering, processing, and transmission assets in the fourth quarter of 2019. Altus also recorded an impairment charge of $9.3 million in the third quarter of 2019 related to the cancellation of construction on a previously planned compressor station. The fair valuespurchase price allocation of the impaired assets were determined using a combinationTransaction.
Other Assets
The income approach considered several internal estimates of future throughput volumes, processing rates, and costs. The assumptions were appliedCompany’s accounting policy is to develop future cash flow projections that were then discounted to estimated fair value, using a discount rate believedclassify its line fill as an other long-term asset to be consistent with those applied by market participants. Altusindustry practices and given line fill is required on the 3rd party pipeline to properly flow the Company’s product. Additionally, this line fill is contractually required to be maintained through the life of the contract with our counterparty and therefore will not be settled within an operating period. Accordingly, the Company has classified these nonrecurring fair value measurementsNGL line fill of $10.6 million and $4.1 million within other assets as Level 3of December 31, 2022 and 2021, respectively.
Redeemable Noncontrolling Interest — Common Units Limited Partners
Pursuant to the Contribution Agreement, in connection with the Closing, (i) Contributor contributed all the equity interests of the Contributed Entities to the Partnership; and (ii) in exchange for such contribution, the Partnership issued 50,000,000 common units representing limited partner interests in the fairPartnership and the Company issued 50,000,000 shares of the Company’s Class C Common Stock, par value hierarchy.$0.0001 per share, to Contributor. Please refer to “The Transaction” above.
These asset impairmentsThe Common Units are recorded within “Impairments”redeemable at the option of unit holders and accounted for in the Company’s Consolidated Balance Sheet as a redeemable noncontrolling interest classified as temporary equity. The Company records the redeemable noncontrolling interest at the higher of (i) its initial value plus accumulated earnings/losses associated with the noncontrolling interest or (ii) the maximum redemption value as of the balance sheet date. The redemption value was determined based on a 5-day volume weighted-average closing price of the Class A Common Stock. See discussion and additional details in Note 11—Equity and Warrants in the Notes to our Consolidated Financial Statements in this Form 10-K.Mandatorily Redeemable Preferred Units
The Partnership issued Series A Cumulative Redeemable Preferred Units (“Preferred Units”) on June 12, 2019. As the Transaction was accounted for as a reverse merger, the Company assumed certain Preferred Units that were issued and outstanding at Closing for accounting purposes.
At the Close of the Transaction, the Company effectuated the Third Amended and Restated Agreement of Limited Partnership of the Partnership (“Partnership LPA”), which among other things, provides for mandatory pro-rata redemptions by the Partnership. Given this mandatory redemption feature and pursuant to ASC 480, liability classification is required for these Preferred Units and the pro rata PIK units. The Company values the liability as of each reporting date and records the change in valuation in the “Other income (expenses)” in the Consolidated Statements of Operations. During 2022, the Company redeemed all outstanding mandatorily redeemable preferred units.
Redeemable Noncontrolling Interest — Preferred Unit Limited Partners
The remaining Preferred Units assumed on the Closing Date do not contain a mandatory redemption feature and are accounted for on the Company’s consolidated statementConsolidated Balance Sheets as a redeemable noncontrolling interest classified as temporary equity in accordance with the terms of operations. Refer to Note 4—Property, Plant and Equipment, for further detail. 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 settledPreferred Units, including the redemption rights 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,respect thereto. During 2022, 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.redeemed all outstanding redeemable noncontrolling Preferred Units. See discussion and additional detail in Note 2—Transactions with Affiliates12—Series A Cumulative Redeemable Preferred Units.in the Notes to our Consolidated Financial Statements in this Form 10-K.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 remainder of 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 years ended December 31, 2020 and 2019. The Company has no remaining performance obligations related to these credits as of December 31, 2021.
Distributions to Apache
During 2021, the Company paid an aggregate $22.5 million in dividends on the Company’s Class A Common Stock, of which $5.6 million, or $1.50 per share, was paid in each quarter of 2021.Each quarterly Class A Common Stock dividend was funded by a distribution from Altus Midstream to its common unitholders of $1.50 per Common Unit, with each quarterly distribution totaling $24.4 million, of which $5.6 million was paid to the Company and the balance was paid to Apache due to its 76.9 percent ownership of outstanding Common Units. Please refer to Note 10—Equity and Warrants for further information.General and Administrative Expense
General and administrative (G&A) expense represents indirect costs and overhead expenditures incurred by the Company associated with managing the midstream assets.
In connection with the closing of the Altus Combination, the Company entered into the COMA, as described above, pursuant to which Apache will provide certain services related to the design, development, construction, operation, management, and maintenance of Altus Midstream’s assets, on the Company’s behalf. See discussion and additional detail further discussed in Note 2—Transactions with Affiliates.Maintenance and Repairs
Routine maintenance and repairs are charged to expense as incurred. The Company had no non-routine maintenance or repair costs in any period presented.
Income Taxes
The Company is subject to federal income tax and recognizes deferred tax assets and liabilities based on the difference between the financial statement carrying value and tax basis of its investment in Altus Midstream. For federal income tax purposes, Altus Midstream is regarded as a partnership and not subject to income tax. Income and deductions associated with Altus Midstream and the Altus Midstream Entities flow through to the Company. As such, Altus Midstream and the Altus Midstream Entities do not record a federal income tax provision.
The Company, Altus Midstream, and the Altus Midstream Entities are also subject to the Texas margin tax. The Texas margin tax is assessed on corporations, limited liability companies, and limited partnerships. As such, each entity recognizesthe Company accounts for state income taxes in accordance with the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the tax consequences of temporary differences, at enacted statutory rates, between the consolidated financial statement carrying amounts and the tax bases of existing assets and liabilities. Income tax or benefit represents the current tax payable or refundable for the period, plus or minus the tax effect of the net change in the deferred tax assets and liabilities based on the differences between the financial statement carrying value and tax basis of assets and liabilities on the balance sheet. liabilities.
The Company routinely assesses the ability to realize its deferred tax assets. If the Company concludes that it is more likely than not that some or all of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. In connection with this assessment, the Company maintained a full valuation allowance against its net deferred tax asset as of December 31, 2022 and 2021.
Net Income Per Share
Basic net income per share is calculated by dividing net income 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 per share, as holders of Class C Common Stock are not entitled to any dividends or liquidating distributions. No net income per share was computed for the twelve months ended December 31, 2021 and 2020, as no Class A Common Stock was outstanding with respect to BCP as the accounting acquirer as of December 31, 2021 and 2020.
ChangeThe Company uses the “if-converted method” to determine the potential dilutive effect of (i) an assumed exchange of outstanding Common Units (and the cancellation of a corresponding number of shares of outstanding Class C Common Stock) for shares of Class A Common Stock and (ii) an assumed exercise of the outstanding public and private warrants 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 are met.
Recently Adopted Accounting PolicyPronouncement
Historically,Effective January 1, 2021, the Company reportedadopted ASU 2017-12, Derivatives and Hedging(Topic 815):Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"),which simplifies the limitations on how an entity can designate the hedged risks in certain cash flow and fair value hedging relationships. The guidance better aligns the recognition and presentation of the effects of hedging instrument(s) and item(s) in the financial statements with an entity’s risk management strategies. The adoption of ASU 2017-12 did not have a material impact on the Company’s Consolidated Financial Statements as of December 31, 2021.
Effective January 1, 2021, the Company adopted ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement (CCA) That is a Service Contract (“ASU 2018-15”). The ASU provides guidance on how to determine whether an arrangement includes a software license or is solely a hosted CCA service. Under the new guidance, the same criteria for capitalizing implementation costs for an arrangement with a software license which falls within the scope of internal – use software guidance will be applied to a hosting arrangement. The new guidance also prescribes the balance sheet, income statement, and loss from equitycash flow classification of the capitalized implementation costs and related amortization expense. The adoption of ASU 2018-15 did not have a material impact on the Company’s Consolidated Financial Statements.
Effective January 1, 2022, the Company adopted ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method (“ASU 2022-01”). Current GAAP permits only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendments in ASU 2022-01 allow nonprepayable financial assets also to be included in a closed portfolio hedged using the portfolio layer method. That expanded scope permits an entity to apply the same portfolio hedging method intereststo both prepayable and nonprepayable financial assets, thereby allowing consistent accounting for similar hedges. The amendments in ASU 2022-01 also clarify the accounting for and promote consistency in the reporting of hedge basis adjustments applicable to both a single hedged layer and multiple hedged layers as follows: (1) an entity is required to maintain basis adjustments in an existing hedge on a one-month reporting lag. Effective October 1, 2019,closed portfolio basis (that is, not allocated to individual assets), (2) an entity is required to immediately recognize and present the basis adjustment associated with the amount of the designated layer that was breached in interest income. In addition, an entity is required to disclose that amount and the circumstances that led to the breach, (3) an entity is required to disclose the total amount of the basis adjustments in existing hedges as a reconciling amount if other areas of GAAP require the disaggregated disclosure of the amortized cost basis of assets included in the closed portfolio, and (4) an entity is prohibited from considering basis adjustments in an existing hedge when determining credit losses. As the Company eliminated this one-month reporting lag. In accordancedoes not currently elect to apply hedge accounting, the instruments are marked-to-market each period end and changes in fair value, realized or unrealized, are recognized in earnings. Therefore, adoption of ASU 2022-01 did not have a material impact on the Company’s Consolidated Financial Statements.
Effective January 1, 2022, the Company adopted ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with ASC 810-10-45-13, “A ChangeCustomers (“ASU 2021-08”), which requires contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination to be recognized and measured by the Fiscal Year-End Lag Between Subsidiary and Parent” (ASC 810),acquirer on the elimination of this previously existing reporting lag is considered a voluntary change in accounting principleacquisition date in accordance with ASC 250-10-50, “Change606, Revenue from Contracts with Customers. Generally, this new guidance will result in Accounting Principle.” The Company believes that this change in accounting principle is preferable as it providesthe acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. Historically, such amounts were recognized by the acquirer at fair value. With adoption of ASU 2021-08, the Company with the ability to present the resultsassumed contract liabilities at carrying value of its equity method interests for the same period as all other consolidated results$9.1 million upon Closing.
Effective January 1, 2022, the Company which improves overall financial reporting to investors by providing the most current information available. The Company has not retrospectively applied the change in accounting principle since its impact to the consolidated balance sheet and related statements of operations and cash flows was immaterial for all periods. For more information on equity method interests owned by the Company, please refer to Note 9—Equity Method Interests. New Pronouncements Issued But Not Yet Adopted
In March 2020, the FASB issuedadopted ASU 2020-04,
“ReferenceReference Rate Reform (Topic 848),” which provides (“ASU 2020-04”). ASU 2020-04 was issued to ease the potential accounting burden expected when global capital markets move away from LIBOR, the benchmark interest rate banks use to make short-term loans to each other. The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships,relationship, and other transactions affected by reference rate reform if certain criteria are met. Interest rate applied to the discontinuationCompany’s new debt resulting from the comprehensive refinance is based on Secured Overnight Financing Rate (“SOFR”), which is a broad measure of the London Interbank Offered Rate (LIBOR) orcost of borrowing cash overnight collateralized by another reference rate expectedtreasury securities. Refer to be discontinued. Note 8—Debt and Financing Costs in the Notes to our Consolidated Financial Statements of this Form 10-K for discussion of SOFR applicable to the Company’s debt structures.Recent Accounting Pronouncement Not Yet Adopted
In January 2021,June 2022, the FASB issued ASU 2021-01, which clarified2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”). The amendments in ASU 2022-03 clarify that a contractual restriction on the scope and applicationsale of an equity security is not considered part of the original guidance.unit of account of the equity security and, therefore, is not considered in measuring fair value. The guidance
was effective beginning March 12, 2020amendments also clarify that an entity cannot, as a separate unit of account, recognize and can be applied prospectively through December 31, 2022.measure a contractual sale restriction. The Company is evaluating whetheramendments also require the following disclosures for equity securities subject to apply anycontractual sale restrictions: (1) The fair value of these expedientsequity securities subject to contractual sale restrictions reflected in the balance sheet; (2) The nature and if elected, will adopt these standards when LIBOR is discontinued.
In August 2020,remaining duration of the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contractsrestriction(s); (3) The circumstances that could cause a lapse in Entity’s Own Equity (Subtopic 815-40)” to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.the restriction(s). This updateguidance is effective for the Companypublic business entities for fiscal years beginning in the first quarter of 2022, with earlyafter December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted using either the modified or fully retrospective method with a cumulative effect adjustment to the opening balance of retained earnings. The Company will adopt this ASU in the first quarter of 2022for both interim and does not believe it will have a material impact on itsannual financial statements.
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 and may receive excess recovery volumes based on the type and volume of product for which the services are provided. Additionally, beginning in 2020 Altus Midstream entered into 3 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 earnedstatements that have not yet been invoicedissued or made available for issuance. The Company is currently evaluating the effect that ASU 2022-03 will have on its Consolidated Financial Statements.
3. BUSINESS COMBINATION
On February 22, 2022, the Company consummated the previously announced business combination transactions contemplated by the Contribution Agreement, dated as of October 21, 2021. Pursuant to Apache are presented onthe Contribution Agreement, in connection with the Closing, (i) Contributor contributed all the equity interests of the Contributed Entities to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 shares of the Company’s consolidated balance sheetClass C Common Stock. Please refer to “The Transaction” discussed above.
The Transaction was accounted for as “Revenue receivables.” Refera reverse merger in accordance with ASC 805, which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair value. The Company also adopted ASU 2021-08, effective as of January 1, 2022, to record contract liabilities at their carrying value as of the acquisition date. Although the Company was the legal acquirer, BCP was determined to be the accounting acquirer and legal acquiree. As a result, BCP and its subsidiaries’ net assets were carried at historical value, acquired net assets were measured at fair value except contract liabilities being recorded at carrying value at the acquisition date, and results of operations of ALTM and its subsidiaries were included in the Company’s Consolidated Financial Statements from the Closing Date going forward.
The purchase price allocation is based on an assessment of the fair value of the assets acquired and liabilities assumed in the acquisition using inputs that are not observable in the market and thus level 3 inputs. The fair value of the processing plant, gathering system and related facilities and equipment are based on market and cost approaches. The initial value of the Preferred Units and associated embedded derivatives was based on expected future interest rates using the Black-Karasinski model and the assumed contingent liability was determined through a probability-weighted analysis of the expected future cash flows and other applicable valuation techniques. See additional details for Preferred Units in Note 3—Revenue Recognition12—Series A Cumulative Redeemable Preferred Units, for further discussion.and contingent liabilities inNote 18—Commitments and Contingenciesin the Notes to our Consolidated Financial Statements in this Form 10-K. In addition, the Company used an income approach by incorporation of discounted cash flow method, market approach through a guideline public company method and applied a weighting to the selected methods to estimate the fair values of the equity method investments, see additional details in Note 7—Equity Method Investmentsin the Notes to our Consolidated Financial Statements in this Form 10-K. During the 12-month measurement period following the acquisition date, the Company made necessary adjustments as information became available to the purchase price allocation, including, but not limited to, working capital and valuation of the underlying assets of the equity method investments. The Company recorded goodwill of $5.1 million relates to operational synergies as of December 31, 2022.
The following table summarizes the estimated fair value of assets acquired and Expensesliabilities assumed in the Transaction in accordance with ASC 805:
| | | | | | | | | | | | | | |
| (In thousands) | | Amount |
| Cash and cash equivalent | | $ | 13,401 | |
| Accounts receivable | | 2,115 | |
| Accounts receivable - affiliates | | 15,485 | |
| | |
| | |
| | |
| Property, plant, and equipment, net | | 634,923 | |
| Intangible assets, net | | 13,200 | |
| Investments in unconsolidated affiliates | | 1,752,500 | |
| Prepaid expense and other assets | | 7,749 | |
| Goodwill | | 5,077 | |
| Total assets acquired | | 2,444,450 | |
| | |
| Accrued expenses and other accrued liabilities | | 5,688 | |
| Long-term debt | | 657,000 | |
| Embedded derivative liabilities | | 89,050 | |
| Contract liabilities | | 9,102 | |
| Mandatory redeemable Preferred Units | | 200,667 | |
| | |
| Deferred tax liabilities | | 2,030 | |
| Contingent liabilities | | 4,451 | |
| Total liabilities assumed | | 967,988 | |
| | |
| Redeemable noncontrolling interest - Preferred Unit limited partners | | 462,717 | |
| | |
| Total consideration transferred | | $ | 1,013,745 | |
The Company has no employees, and prior to the Altus Combination, the Company had no banking or cash management facilities. As such, the Company has contracted with Apache to receive certain operational, maintenance, and management services. In accordance with the termsincurred acquisition-related costs of these agreements, the Company incurred operations and maintenance expenses of $5.6 million, $5.4$6.4 million and $8.8$5.7 million, which was included in the “General and administrative expenses” of the Consolidated Statements of Operations for the years ended December 31, 2022 and 2021, 2020, and 2019, respectively. The Company incurred general and administrative expenses
For the year ended December 31, 2022, the Company’s Consolidated Statement of $9.1 million, $7.0Operations included results of operations from ALTM starting from February 23, 2022, which recorded revenues of $129.4 million and $5.4net income of $44.8 million, excluding intercompany revenue and cost of sales.
The unaudited supplemental pro forma financials are for informational purposes only and are not indicative of future results. The results below for the years ended December 31, 2022 and 2021 2020,combine the results of the Company and 2019, respectively, including expenses relatedthe Partnership, giving effect to the operational services agreement and the COMA. Further informationTransaction as if it had been completed on the related-party agreements in place during the period is provided below.
Construction, Operations, and Maintenance Agreement
At the closing of the Altus 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) $3.0 million for the period beginning on the execution of the COMA at the closing of the Altus Combination through December 31, 2019, (ii) $5.0 million for the period of January 1, 2020 through December 31, 2020, (iii) $7.0 million for2021.
| | | | | | | | | | | | | | | | | | |
| | | | Pro Forma Financials For the Year Ended December 31, |
| | | | | | 2022 | | 2021 |
| | | | | | | | |
| | | | | | (In thousands) |
| Revenues | | | | | | $ | 1,240,343 | | | $ | 822,661 | |
| Net income (loss) including noncontrolling interest | | | | | | $ | 243,301 | | | $ | (52,172) | |
| | | | | | | | |
| | | | | | | | |
Given the periodassumed pro forma transaction date of January 1, 2021, through December 31, 2021 and (iv) $9.0we removed $21.0 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 Altus Combination to reimburse Apache for indirect costs of performing administrative corporate functionsacquisition-related expenses 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.
Lease Agreements
Concurrent with the closing of the Altus Combination, Altus Midstream entered into an operating lease agreement with Apache (the Lease Agreement) relating to the use of certain office buildings, warehouse and storage facilities located in Reeves County, Texas. Under the terms of the Lease Agreement, Altus Midstream shall pay to Apache on a monthly basis the sum of (i) a base rental charge of $44,500 and (ii) an amount based on Apache’s estimate of the annual costs it expects to incur in connection with the ownership, operation, repair, and/or maintenance of the facilities. The Company incurred total expenses of $0.6 million, $0.8 million and $1.1 million for the yearsyear ended months ended December 31, 2021, 20202022 and 2019, respectively, in relation to the Lease Agreement, which are included within operations and maintenance expenses. Unpaid amounts accrue interest until settled. The initial termrecognized $31.2 million of the Lease Agreement is four years and may be extended by Altus Midstream for 3 additional, consecutive periods of twenty-four months. To accommodate Altus Midstream’s desire to vacate the leased premises, the Lease Agreement was amended in July 2020 to provide for its termination with respect to all or any portion of the leased premises which Apache may sell, with a pro rata rent reduction if Apache sells less than all of the leased premises.
The Company classified this lease as an operating lease and elected to account for lessee-related lease and non-lease components as a single lease component. The right-of-use (ROU) asset related to this lease is reflected within “Deferred charges and other” on the Company’s consolidated balance sheet, and the associated operating lease liability is reflected within “Other current liabilities” and “Other noncurrent liabilities,” as applicable.
Operating lease expense associated with ROU assets is recognized on a straight-line basis over the lease term. Lease expense is reflected on the consolidated statement of operations commensurate with the leased activities and nature of the services performed. The remaining undiscounted future minimum lease payment as of December 31, 2021 is $0.4 million, which will be paid in 2022.
In 2020 and 2021, Altus Midstream entered into various operating lease agreements with Apache related to the use of certain of Altus Midstream’s compressors. Under the terms of the agreement, Apache pays Altus Midstream fixed monthly lease payments, which are recorded as “Other” in the Company’s consolidated statement of operations. Each of the lease agreements has an initial term of thirty months and automatically extends on a month-to-month basis unless either party cancels the agreement. The Company recorded income related to these agreements of $1.6 million and $0.4 milliontotal acquisition-related expenses for the yearsyear ended December 31, 2021 and 2020, respectively. Altus also earns a monthly fee to operate and maintain the compressors under lease. Refer to Note 3—Revenue Recognition for further discussion.2021.
During 2021, the Company paid an aggregate $22.5 million in dividends on the Company’s Class A Common Stock, of which $5.6 million, or $1.50 per share, was paid in each quarter of 2021.Each quarterly Class A Common Stock dividend was funded by a distribution from Altus Midstream to its common unitholders of $1.50 per Common Unit, with each quarterly distribution totaling $24.4 million, of which $5.6 million was paid to the Company and the balance was paid to Apache due to its 76.9 percent ownership of outstanding Common Units Please refer to Note 10—Equity and Warrants for further information.Altus Combination Agreements
Limited Partnership Agreement of Altus Midstream LP
In connection with the Altus Combination, Altus Midstream Company, Altus Midstream GP, Altus Midstream LP, and Apache entered into an amended and restated limited partnership agreement of Altus Midstream LP, which was further amended in connection with the subsequent issuance of Preferred Units. The Amended LPA sets forth, among other things, the rights and obligations of (i) Altus Midstream GP as general partner and (ii) Altus Midstream Company, Apache, and Preferred Unit holders as limited partners of Altus Midstream LP. Altus Midstream GP is not entitled to reimbursement for its services as general partner. Refer to Note 1—Summary of Significant Accounting Policies and Note 11—Series A Cumulative Redeemable Preferred Units, for further information.Purchase Rights and Restrictive Covenants Agreement
At the closing of the Altus Combination, the Company entered into a purchase rights and restrictive covenants agreement (the Purchase Rights and Restrictive Covenants Agreement) with Apache. Under the Purchase Rights and Restrictive Covenants Agreement, until the later of the five-year anniversary of the Closing and the date on which Apache and its affiliates cease to own a majority of the Company’s voting common stock, Apache is obligated to provide (i) the first right to pursue any opportunity (including any expansion opportunities) of Apache to acquire or invest, directly or indirectly (including equity investments), in any midstream assets or participate in any midstream opportunities located, in whole or part, within an area
covering approximately 1.7 million acres in Reeves, Pecos, Brewster, Culberson, and Jeff Davis Counties in Texas, and (ii) a right of first offer on certain retained midstream assets of Apache.
3.4. REVENUE RECOGNITION
The following table presents a disaggregation of the Company’s revenue.revenue:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In thousands) |
| Gas gathering and compression | | $ | 18,192 | | | $ | 20,060 | | | $ | 17,077 | |
| Gas processing | | 107,878 | | | 106,396 | | | 101,199 | |
| Transmission | | 12,572 | | | 14,548 | | | 15,942 | |
| NGL transmission | | 2,422 | | | 2,773 | | | 1,580 | |
| Other | | 1,663 | | | 937 | | | — | |
| Midstream services revenue — affiliate | | 142,727 | | | 144,714 | | | 135,798 | |
| | | | | | |
Product sales — affiliate | | 9,754 | | | — | | | — | |
Product sales — third parties | | 8,136 | | | 3,695 | | | — | |
| Total revenues | | $ | 160,617 | | | $ | 148,409 | | | $ | 135,798 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands) |
| Gathering and processing services | | $ | 393,954 | | | $ | 272,677 | | | $ | 272,829 | |
| Natural gas, NGLs and condensate sales | | 806,353 | | | 385,622 | | | 135,330 | |
| Other revenue | | 13,183 | | | 3,745 | | | 2,017 | |
| Total revenues and other | | $ | 1,213,490 | | | $ | 662,044 | | | $ | 410,176 | |
There have been no significant changes to the Company’s contracts with customers during the years ended December 31, 2022, 2021, and 2020. Contracts with customers acquired through the Transaction had similar structures as the Company’s existing contracts with customers. For the years ended December 31, 2022, 2021, and 2020 the Company recognized revenues from MVCs of $4.0 million, $2.5 million and $0.1 million, respectively.
Remaining Performance Obligations
The Company primarily generatesfollowing table presents our estimated revenue from its contracts with customers for the gathering, compression, processing, transmission, and sale of natural gas and NGLs in exchange for a fee per unit of volumes processed or delivered during a given month.
Midstream services revenue is primarily attributable to services performed for Apache pursuant to separate long-term commercial midstream agreements. As part of these agreements, substantially all of Apache’s natural gas production from its existing and future owned or controlled properties within the dedicated area of its entire Alpine High resource play is provided to the Company, so long as Apacheremaining performance obligations that has the right to market such product. Providing the related service on each volumetric unit represents a single, distinct performance obligation that is satisfied over time as services are rendered. Prior to the Company entering the new Gas Processing Agreement discussed below, the Company did not own or take title to the volumes it serviced under these agreements. Altus Midstream, in return for its performance, receives a fee per volumetric unit serviced during a given month. The related service fee charged per unit is set forth for each contract year, subject to yearly fee escalation recalculations.
As the amount of volumes serviced are not subject to minimum commitments and each midstream service agreement contains provisions for fee recalculations, substantially all of the transaction price is variable at inception of each contract term. Revenue is measured using the output method based on the amount of volumes serviced each month and the applicable service fee andyet been recognized, over time in the amount to which Altus Midstream has the right to invoice, as performance completed to date corresponds directly with the value to its customers. The transaction price is not constrained as variability is resolved prior to the recognition of revenue.
The Company entered into a new Gas Processing Agreement with Apache in October 2021, which superseded the prior agreement. In addition to the service fees discussed above, the new Gas Processing Agreement contains terms for Apache to provide the Company with excess recovery volumes as consideration under the contract. Excess recovery volumes represent the net difference between the actual recovery rate of processed volumes andrepresenting our contractually fixed volumetric recovery rates. The Company obtains control of excess recovery volumes, if any, on a monthly basis. Any product received is reflected as non-cash consideration and the associated value is included in the transaction price for gas processing services on a net basis. The associated revenue is valued using the market price of the relevant product during the month such product was processed. The subsequent sale of any excess recovery volumes to third parties is recorded as “Product sales — third parties” and the subsequent sale of any excess recovery volumes to Apache is recorded as “Product sales — affiliate” in the Company’s statement of operations.
The associated costs of excess recovery volumes sold are recorded based on the market price of the relevant product and are recorded as “Cost of product sales — third parties” or “Cost of product sales — affiliate” in the Company’s consolidated statement of operations. In 2021, the Company recorded $9.8 million ofcommitted revenues and costs related to sales of excess recovery volumes to Apache and $2.4 million of revenues and costs related to sales of excess recovery volumes to third parties.
In addition to the $2.4 million of revenue and costs related to the sales of excess recovery volumes to third parties under the new Gas Processing Agreement, the Company also purchased and processed NGL volumes for other third-party customers during 2021 and 2020. As part of these agreements, Altus Midstream purchases volumes from a third party, which Altus Midstream then owns, controls and services, prior to ultimate sale to the customer. The Company recorded revenue related to these contracts of $5.7 million and $3.7 million, respectively, in 2021 and 2020, with associated purchase costs of $5.4 million and $3.0 million, respectively. As it relates to product sales, the physical delivery of each unit of quantity represents a single, distinct performance obligation that is satisfied at a point in time when control transfers to the customer, generally determined as the point of delivery. Prices are determined based on market-indexed values, adjusted for quality and other market-reflective differentials. As there are no provisions for minimum volume commitments and pricing is variable based on index values, revenue is measured by allocating an entirely variable market price to each performance obligation and recognized at a point in time when control is transferred to the customer. The transaction price is not constrained as variability is resolved prior to the recognition of revenue.
Other Midstream Service Revenue — Affiliate
Beginning in 2020, Altus Midstream entered into various agreements with Apache to provide compressor maintenance, operations, and other related services for various compressors at compressor stations owned by Apache. Altus Midstream receives a fixed monthly fee under these contracts for each month that services are provided. Providing such services on each compressor unit represents a single, distinct performance obligation that is satisfied over time as services are rendered. Income generated from these contracts in 2021 and 2020 totaled $1.7 million and $0.9 million, respectively, and is classified as “Other” within Midstream Services Revenue — Affiliate in the table above.
Payment Terms and Contract Balances
Payments are generally due the month immediately following the month of service. Amounts settled with Apache each month are based on the net amount owed to either party. Revenue receivables from the Company’s contracts with Apache totaled $13.7 million and $11.4 million, as of December 31, 20212022:
| | | | | |
| Fiscal Year | Amount |
| (In thousands) |
| 2023 | $ | 38,382 | |
| 2024 | 39,750 | |
| 2025 | 45,535 | |
| 2026 | 34,631 | |
| 2027 | 35,405 | |
| Thereafter | 155,888 | |
| $ | 349,591 | |
Our contractually committed revenue, for purposes of the tabular presentation above, is generally limited to customer contracts that have fixed pricing and 2020, respectively, as presented on the Company’s consolidated balance sheet. Sales revenue receivables from the Company’sfixed volume terms and conditions, generally including contracts with third parties totaled $2.2 millionpayment obligations associated with MVCs.
Contract Liabilities
The following provides information about contract liabilities from contracts with customers:
| | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Balance as of January 1 | $ | 14,756 | | | $ | 11,085 | |
| Reclassification of beginning contract liabilities to revenue as a result of performance obligations being satisfied | (7,180) | | | (423) | |
| Cash received in advance and not recognized as revenue | 21,724 | | | 4,094 | |
| Balance as of December 31 | 29,300 | | | 14,756 | |
| Less: Current portion | 6,607 | | | 3,082 | |
| Non-current portion | $ | 22,693 | | | $ | 11,674 | |
Contract liabilities relate to payments received in advance of satisfying performance obligations under a contract, which result from contribution in aid of construction payments. Current and $1.0 millionnoncurrent contract liabilities are included in “Other Current Liabilities” and “Contract Liabilities”, respectively, of the Consolidated Balance Sheets.
Contract liabilities balance as of December 31, 2022 increased $14.5 million compared to that as of December 31, 2021. Higher contract liabilities balance reflected new projects assumed upon Closing of the Transaction and new projects started during 2022 with existing customers.
Contract Cost Assets
The Company has capitalized certain costs incurred to obtain a contract that would not have been incurred if the contract had not been obtained. These costs are recovered through the net cash flows of the associated contract. As of December 31, 2022 and 2021, the Company had contract acquisition cost assets of $17.8 million and $18.4 million, respectively. Current and noncurrent contract cost assets are included in “Prepaid and Other Current Assets” and “Deferred Charges and Other Assets”, respectively, of the Consolidated Balance Sheets. The Company amortizes these assets as cost of sales on a straight-line basis over the life of the associated long-term customer contract. For the years ended December 31, 2022, 2021 and 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,” a variable transaction price for each short-term sale is allocated 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 asrecognized cost of the endsales associated with these assets of the reporting period.
$1.8 million, $1.8 million and $1.8 million, respectively.
4.5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment are carried at cost or fair market value at the date of acquisition less accumulated depreciation. The cost basis of constructed assets includes materials, labor, and other direct costs. Major improvements or betterment are capitalized, while repairs that do not improve the life of the respective assets are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets.
Property, plant, and equipment, at carrying value, is as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| | | | |
| | (In thousands) |
Gathering, processing, and transmission systems and facilities(1) | | $ | 208,211 | | | $ | 204,643 | |
| Construction in progress | | 335 | | | 904 | |
| | | | |
| Other property and equipment | | 3,154 | | | 3,323 | |
| Total property, plant, and equipment | | 211,700 | | | 208,870 | |
| Less: accumulated depreciation and accretion | | (24,713) | | | (13,034) | |
| Total property, plant, and equipment, net | | $ | 186,987 | | | $ | 195,836 | |
(1)Included in Gathering, processing, and transmissions systems and facilities are compressors under lease to Apache totaling $10.0 million and $6.2 million, net as of December 31, 2021 and December 31, 2020, respectively. | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| Gathering, processing, and transmission systems and facilities | | $ | 2,904,084 | | | $ | 2,121,434 | |
| Vehicles | | 9,290 | | | 6,090 |
| Computers and equipment | | 4,289 | | | 4,271 |
| Less: accumulated depreciation and accretion | | (474,258) | | | (337,030) | |
| Total depreciable assets, net | | 2,443,405 | | | 1,794,765 | |
| Construction in progress | | 70,325 | | | 24,888 | |
| Land | | 21,482 | | | 19,626 | |
| Total property, plant, and equipment, net | | $ | 2,535,212 | | | $ | 1,839,279 | |
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 dates.reporting date. The Company recorded $139.6 million , $106.8 million and $97.4 million of depreciation expense for the years ended December 31, 2022, 2021 and 2020, respectively.
DuringCapitalized interest included in property, plant and equipment amounted to $1.4 million, $0.9 million and $16.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.
6. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The Company closed a business combination transaction on February 22, 2022, refer to the Transaction in Note 3—Business Combination in the Notes to our Consolidated Financial Statements in this Form 10-K. The Transaction was accounted for as a reverse merger pursuant to ASC 805. In connection with the Transaction, the Company sold various assets for total proceeds of $10.2 million. Included in these assets sales was the sale of 15 power generators. As a resultrecorded excess of the sale,purchase price over net assets acquired as goodwill. The Company recorded goodwill of $5.1 million in the remaining power generators owned by the Company were remeasuredMidstream Logistics segment as of December 31, 2022.
Goodwill is tested at fair value calculated based on the proceedsleast annually as of this sale. This remeasurement resulted in an impairmentNovember 30 of $1.6 million on these assets based on this fair value assessment, which were written down to theireach year, or more frequently as events occur or circumstances change that would more-likely-than-not reduce fair value of $2.3 million. a reporting unit below its carrying value. Company’s management assesses whether there have been events or circumstances that trigger the fair value of the reporting unit to be lower than its net carrying value since consummation of the Transaction and concluded that goodwill was not impaired as of December 31, 2022.
Intangible Assets
Intangible assets, net are comprised of the following:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| Customer contracts | | $ | 1,137,831 | | | $ | 1,135,963 | |
| Right of way assets | | 127,539 | | | 99,345 | |
| Less accumulated amortization | | (569,981) | | | (449,259) | |
| Total amortizable intangible assets, net | | $ | 695,389 | | | $ | 786,049 | |
The fair value of acquired customer contracts was capitalized as a result of acquiring favorable customer contracts as of the closing dates of certain past acquisitions and is being amortized using a straight-line method over the remaining term of the customer contracts, which range from one to twenty years. Right-of-way assets was determinedrelate primarily to underground pipeline easements and have a useful life of ten years and are amortized using the market approachstraight-line method. The right of way agreements are generally for an initial term of ten years with an option to renew for an additional ten years at agreed upon renewal rates based on the sales proceedscertain indices or up to 130% of the original consideration paid.
At December 31, 2022, remaining weighted average amortization periods for customer contracts and right of way assets were approximately 7.53 years and 7.07 years, respectively. Overall remaining weighted average amortization period for the intangible assets as of December 31, 2022 was approximately 7.47 years.
The Company recorded $120.7 million, $136.8 million and $126.4 million of amortization expense for the years ended December 31, 2022, 2021, and 2020, respectively. There was no impairment recognized on intangible assets for the years ended December 31, 2022, 2021 and 2020, respectively.
Estimated aggregate amortization expense for the remaining unamortized balance in years is as following:
| | | | | |
| Fiscal Year | Amount |
| (In thousands) |
| 2023 | $ | 119,321 | |
| 2024 | 118,538 | |
| 2025 | 117,709 | |
| 2026 | 111,400 | |
| 2027 | 77,441 | |
| Thereafter | 150,980 | |
| Total | $ | 695,389 | |
7. EQUITY METHOD INVESTMENTS
As of December 31, 2022, the Company owned investments in the following long-haul pipeline entities in the Permian Basin. These investments were accounted for using the equity method of accounting. For each equity method investment (“EMI”) pipeline entity, the Company has the ability to exercise significant influence based on certain governance provisions and its participation in the significant activities and decisions that impact the management and economic performance of the EMI pipeline. The table below presents the ownership percentages and investment balances held by the Company for each entity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| 2022 | | 2021 |
| | | | | | | | |
| In thousands, except for ownership percentages | Ownership | | Amount | | Ownership | | Amount |
| Permian Highway Pipeline LLC (“PHP”) | 53.3 | % | | $ | 1,474,800 | | | 26.7 | % | | $ | 626,477 | |
| Breviloba LLC (“Breviloba”) | 33.0 | % | | 455,057 | | | — | % | | — | |
| Gulf Coast Express Pipeline LLC (“GCX”) | 16.0 | % | | 451,483 | | | — | % | | — | |
| | | | | | | |
| | | $ | 2,381,340 | | | | | $ | 626,477 | |
Additionally, as of December 31, 2022, the Company owned 15.0% of Epic Crude Holdings, LP (“EPIC”). However, no dollar value was assigned through the purchase price allocation as an adjustment was made to eliminate equity in losses of EPIC. No additional contribution was made to EPIC and no distribution or equity income was received from EPIC during the twelve months ended December 31, 2022.
As of December 31, 2022, the unamortized basis differences included in the EMI pipelines balances were $363.2 million. There was no unamortized basis difference as of December 31, 2021. These amounts represent differences in the Company’s contributions to date and the Company’s underlying equity in the separate net assets within the financial statements of the respective entities. Unamortized basis differences will be amortized into equity income over the useful lives of the underlying pipeline assets. There was capitalized interest of $13.4 million and $12.8 million as of December 31, 2022 and 2021, respectively. Capitalized interest is amortized on a straight-line basis into equity income.
The following table presents the activities in the Company’s EMIs for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Permian Highway Pipeline LLC | | Breviloba LLC | | Gulf Coast Express Pipeline LLC | | | | Total(2) |
| | | |
| | | | | | | | | | |
| (In thousands) |
| Balance at December 31, 2020 | $ | 611,216 | | | $ | — | | | $ | — | | | | | $ | 611,216 | |
| | | | | | | | | |
| Contributions | 20,522 | | | — | | | — | | | | | 20,522 | |
| Distributions | (68,335) | | | — | | | — | | | | | (68,335) | |
| | | | | | | | | |
| Equity income, net | 63,074 | | | — | | | — | | | | | 63,074 | |
| | | | | | | | | |
| Balance at December 31, 2021 | $ | 626,477 | | | $ | — | | | $ | — | | | | | $ | 626,477 | |
| Acquisitions | 817,500 | | | 467,500 | | | 467,500 | | | | | 1,752,500 | |
| Contributions | 78,171 | | | — | | | — | | | | | 78,171 | |
| Distributions | (170,409) | | | (38,816) | | | (47,539) | | | | | (256,764) | |
| | | | | | | | | |
Equity income, net(1) | 123,061 | | | 26,373 | | | 31,522 | | | | | 180,956 | |
| | | | | | | | | |
| | | | | | | | | |
| Balance at December 31, 2022 | $ | 1,474,800 | | | $ | 455,057 | | | $ | 451,483 | | | | | $ | 2,381,340 | |
(1)For the year ended December 31, 2022, net of amortization of basis differences and capitalized interests, which represents undistributed earnings, the amortization was $6.8 million from PHP, $0.6 million from Breviloba and $5.3 million from GCX.
(2)The EMIs acquired in the Transaction are included in the results from February 22, 2022 to December 31, 2022, and this is also the case for the additional 26.67% of PHP that was acquired in the Transaction. The results of the legacy ALTM business are not included in the Company’s consolidated financial statements prior to February 22, 2022. Refer to Note 1—Description of Business and Basis of Presentationin the Notes to our Consolidated Financial Statements of this Form 10-K, for further information on the Company’s basis of presentation. Summarized Financial Information
The following represented selected income statement and balance sheet data for the Company’s EMI pipeline entities (on a 100 percent basis): | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2022 |
| | |
| | Permian Highway Pipeline LLC | | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC |
| | | | |
| | | | | | | | |
| Statements of Operations | | (In thousands) |
| Revenues | | $ | 396,846 | | | | | $ | 183,328 | | | $ | 364,223 | |
| | | | | | | | |
| Operating income | | 261,040 | | | | 98,119 | | 269,150 | |
| Net income | | 261,028 | | | | 97,834 | | 268,493 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | For the Year Ended December 31, 2021 |
| | | | | |
| | | | | | Permian Highway Pipeline LLC | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC |
| | | | | | |
| | | | | | | | | | |
| Statements of Operations | | | | | (In thousands) |
| Revenues | | | | | | $ | 397,237 | | | $ | 157,683 | | | $ | 362,399 | |
| | | | | | | | | | |
| Operating income | | | | | | 237,230 | | | 92,568 | | | 254,772 | |
| Net income | | | | | | 236,528 | | | 92,005 | | | 253,535 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 |
| | |
| | Permian Highway Pipeline LLC | | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC | |
| | | | | |
| | | | | | | | | |
| Statements of Operations | | (In thousands) |
| Revenues | | $ | 7,220 | | | | | $ | 167,784 | | | $ | 366,185 | | |
| | | | | | | | | |
| Operating income (loss) | | (1,798) | | | | 102,526 | | | 266,219 | |
| Net income (loss) | | (1,140) | | | | 102,048 | | | 264,956 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | Permian Highway Pipeline LLC | | | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC | | Permian Highway Pipeline LLC | | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance Sheets | | | | | | (In thousands) |
| Current assets | | $ | 94,771 | | | | | | $ | 30,541 | | | $ | 47,935 | | | $ | 69,995 | | | | | $ | 34,159 | | | $ | 74,408 | |
| Noncurrent assets | | 2,310,739 | | | | | | 1,308,087 | | | 1,594,623 | | | 2,267,940 | | | | | 1,344,178 | | | 1,655,941 | |
| Total assets | | $ | 2,405,510 | | | | | | $ | 1,338,628 | | | $ | 1,642,558 | | | $ | 2,337,935 | | | | | $ | 1,378,337 | | | $ | 1,730,349 | |
| | | | | | | | | | | | | | | | | |
| Current liabilities | | $ | 63,392 | | | | | | $ | 12,352 | | | $ | 16,103 | | | $ | 36,657 | | | | | $ | 11,244 | | | $ | 46,151 | |
| Noncurrent liabilities | | — | | | | | | 9,029 | | | 395 | | | — | | | | | 8,254 | | | 461 | |
| Equity | | 2,342,118 | | | | | | 1,317,247 | | | 1,626,060 | | | 2,301,278 | | | | | 1,358,839 | | | 1,683,737 | |
| Total liabilities and equity | | $ | 2,405,510 | | | | | | $ | 1,338,628 | | | $ | 1,642,558 | | | $ | 2,337,935 | | | | | $ | 1,378,337 | | | $ | 1,730,349 | |
8. DEBT AND FINANCING COSTS
June 2030 Sustainability-Linked Senior Notes
On June 8, 2022, the Partnership completed a private placement of $1.00 billion aggregate principal amount of its 5.875% Senior Notes due 2030 (the “Notes”), which are classifiedfully and unconditionally guaranteed by the Company. The Notes are issued under our Sustainability-Linked Financing Framework and include sustainability-linked features described below.
The Notes were issued at 99.588% of their face amount and will mature on June 15, 2030. Interest accrues from the most recent date to which interest has been paid on the Notes or, if no interest has been paid, from and including June 8, 2022 and is payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2022. The aggregate fees, expenses, and original issue discount paid to obtain the Notes totaled $21.5 million and were capitalized as Level 1 inputsdebt issuance cost and included in the fair value hierarchy.Condensed Balance Sheets as a direct deduction to the Notes as the Notes were transferred to third-party investors that pay the stated principal amount without deduction for the initial purchasers’ discount.
Property, plant,
From and equipment are evaluated for potential impairment when events or changes in circumstances indicate a possible significant deterioration in future cash flows expected toincluding June 15, 2027, the interest rate accruing on the Notes will be generatedincreased by an asset group.additional 0.250% per annum unless the Partnership delivers written notice to the trustee on or before the date that is 15 days prior to June 15, 2027 that the Partnership has satisfied, and an independent external verifier has confirmed satisfaction of the Sustainability Performance Targets (“SPT”) as defined in the indenture governing the Notes related to the three key performance indicators:(1) Reduction of Scope 1 and Scope 2 greenhouse gas emissions intensity, (2) Reduction of Scope 1 and Scope 2 methane gas emissions intensity and (3) female representation in corporate officer positions. If the conditions set forth above have only been satisfied for one or two of the SPTs rather than all three, the interest rate accruing on the Notes will be increased by an additional 0.0833% per annum for each SPT which has not been satisfied and externally verified on June 15, 2027. If the interest rate accruing on the Notes is increased in the manner set forth above and the Partnership subsequently delivers written notice to the trustee that it has satisfied the SPTs set forth in clause (1) and (2) above and such satisfaction has been confirmed by an independent external verifier, on or before the date that is 15 days prior to June 15, 2029, the interest rate accruing on the Notes will be reduced by 0.0833% per annum for each such SPT.
The Partnership may redeem some or all the Notes at any time or from time to time prior to maturity based on terms prescribed in the indenture governing the Notes and the Notes.
Revolving Credit Facility
On June 8, 2022, the Partnership entered into a revolving credit agreement (the “RCA”) among Bank of America, N.A., as administrative agent (“Bank of America”), and the banks and other financial institutions party thereto, as lenders. The RCA provides for a $1.25 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”).
The Partnership may prepay borrowings under the Revolving Credit Facility at any time without premium or penalty (other than customary SOFR breakage costs), subject to certain notice requirements. All borrowings under the Revolving Credit Facility mature on June 8, 2027. The obligations under the Revolving Credit Agreement are fully and unconditionally guaranteed by the Company.
The RCA provides for borrowings of either, at the Partnership’s option, base rate loans or term SOFR loans. Base rate loans bear interest at a rate per annum equal to the greatest of (a) the prime rate as announced from time to time by Bank of America, (b) the greater of (i) the federal funds effective rate and (ii) the overnight bank funding rate, plus 1/2 of 1.00% and (c) the adjusted term SOFR rate for an interest period of one month plus 1.00%, plus a margin that ranges between 0.25% and 1.00%, depending on the credit rating of the Partnership. SOFR loans bear interest at a rate per annum equal to the term SOFR rate for such interest periods plus 0.10%, plus a margin that ranges between 1.25% and 2.00%, depending on the credit rating of the Partnership. In obtaining the RCA, the Partnership incurred fees and expenses totaling $7.8 million, which was capitalized and included in the Consolidated Balance Sheets as “Prepaid and other current assets” and “Deferred charges and other assets.”
In addition, the Partnership is required to pay to each lender a commitment fee on the daily unfunded amount of such lender’s revolving commitment, which accrues at a rate that ranges between 0.15% and 0.35% depending on the credit rating of the Partnership.
Term Loan Credit Facility
On June 8, 2022, concurrently with the closing of the Revolving Credit Facility, the Partnership entered into a term loan credit agreement (the “TLA”) among PNC Bank, National Association, as administrative agent (“PNC Bank”), and the banks and other financial institutions party thereto, as lenders. The TLA provides for a $2.00 billion senior unsecured term loan credit facility (the “Term Loan Credit Facility”). The TLA matures on June 8, 2025. The obligations under the TLA are fully and unconditionally guaranteed by the Company.
The TLA provides for borrowings of either, at the Partnership’s option, base rate loans or term SOFR loans. Base rate loans bear interest at a rate per annum equal to the greatest of (a) the prime rate as announced from time to time by PNC Bank, (b) the greater of (i) the federal funds effective rate and (ii) the overnight bank funding rate, plus 1/2 of 1.00% and (c) the adjusted term SOFR rate for an interest period of one month plus 1.00%, plus a margin that ranges between 0.25% and 1.0%, depending on the credit rating of the Partnership. SOFR loans bear interest at a rate per annum equal to the term SOFR rate for such interest periods plus 0.10%, plus a margin that ranges between 1.25% and 2.0%, depending on the credit rating of the Partnership. In obtaining the TLA, the Partnership incurred fees and expenses totaling $7.7 million, which was capitalized as debt issuance cost and included in the Consolidated Balance Sheets as a direct deduction to the Term Loan Credit Facility.
Both the RCA and the TLA contain a “Sustainability Adjustments” feature that could result in a 0.05% increase or reduction to the effective interest rate, dependent upon the Company meeting certain sustainability targets after 2022. “Sustainability Rate Adjustment” means, with respect to any KPI Metrics Report, for any period between Sustainability Pricing Adjustment Dates, (a) positive 0.05%, if neither of the Sustainability Performance Targets (as defined in the RCA and TLA) as set forth in the KPI Metrics Report have been satisfied for the relevant calendar year, (b) 0.00% if only one of the Sustainability Performance Targets as set forth in the KPI Metrics Report has been satisfied for the relevant calendar year and (c) negative 0.05% if both of the Sustainability Performance Targets as set forth in the KPI Metrics Report have been satisfied for the relevant calendar year; provided that, in each case, if the Partnership subsequently issues a sustainability-linked debt instrument linked to the same KPI Metric and with an observation date for such calendar year, but with a higher percentage of representation or reduction, as the case may be, the relevant Sustainability Performance Target shall be automatically adjusted upward to equal the percentage of representation or reduction, as applicable, required by such subsequent sustainability-linked debt instrument.
“Sustainability Performance Targets” in the RCA and TLA mean, for any calendar year, with respect to (a) the Female Representation KPI, the target percentage of female representation in corporate officer positions for such calendar year and (b) the Methane Emissions KPI, the percentage reduction in methane gas emissions intensity relative to the baseline year for such calendar year.
Both the RCA and the TLA contain customary covenants and restrictive provisions which may, among other things, limit the Partnership’s ability to create liens, incur additional indebtedness, make restricted payments, or liquidate, dissolve, consolidate with, or merge into or with any other person. As of December 31, 2022, the Partnership is in compliance with all customary and financial covenants.
Repayment of Existing Credit Facilities
In June 2022, the Company used the net proceeds from the Notes, together with cash on hand and proceeds from the term loan credit facility, to repay all outstanding borrowings under its existing credit facilities and to pay certain related fees and expenses. In conjunction with Apache’s decisionthe extinguishment of existing outstanding borrowings, the Company recognized a loss on extinguishment of debt of approximately $28.0 million. In addition, the unamortized debt issuance costs related to the existing outstanding borrowings were fully amortized and included in the fourth quarter of 2019 to materially reduce funding to Alpine High, Altus management assessed its long-lived infrastructure assets for impairment given the expected reduction to future throughput volumes. As a result of this assessment, Altus recorded impairments totaling $1.3 billionloss on its gathering, processing, and transmission assets in the fourth quarter of 2019. The fair values of the impaired assets were determined to be $203.6 million as of the time of the impairment and were estimated using the income approach. Altus has classified these nonrecurring fair value measurements as Level 3 in the fair value hierarchy.
During 2019, the Company also elected to cancel construction on a compressor station, and, as a result, certain of its components were marketed for sale. Accordingly, these assets were measured at fair value less costs to sell. The Company recorded an impairment of $9.3 million on these assets, which were written down to their fair value of $18.2 million. The fair value of the assets was determined using the market approach based on estimated sales proceeds, classified as Level 1 inputs in the fair value hierarchy.
The Company entered into a finance lease during the first quarter of 2019 related to power generators leased on a one-year term with the right to purchase. The lease expired in January 2020, at which time the Company exercised its purchase option and purchased the power generators under lease for $9.8 million. Depreciation on the Company's finance lease asset was $5.0 milliondebt extinguishment calculation for the year ended December 31, 2019. Interest on2022.
The fair value of the Company's finance lease assets was $0.9 million for the year endedCompany and its subsidiaries’ consolidated debt as of December 31, 2019. No depreciation expense nor interest were recorded2022 and 2021 was $2.82 billion and $2.34 billion, respectively. At December 31, 2022, the Notes’ fair value was based on Level 1 inputs and the Term Loan Credit Facility and Revolver Credit Facility’s fair value was based on Level 3 inputs.
The following table summarizes the Company’s debt obligations as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| $2.0 billion unsecured term loan | | $ | 2,000,000 | | | $ | — | |
| $1.0 billion 2030 senior unsecured notes | | 1,000,000 | | | — | |
| $1.25 billion revolving line of credit | | 395,000 | | | — | |
| $1.25 billion term loan | | — | | | 1,175,417 | |
| $690 million term loan | | — | | | 639,393 | |
| $513 million term loan | | — | | | 479,377 | |
| $125 million revolving line of credit | | — | | | 52,000 | |
| Total Long-term debt | | 3,395,000 | | | 2,346,187 | |
Less: Debt issuance costs, net(1) | | (26,490) | | | (38,485) | |
| | 3,368,510 | | | 2,307,702 | |
| Less: Current portion, net | | — | | | (54,280) | |
| Long-term portion of debt, net | | $ | 3,368,510 | | | $ | 2,253,422 | |
(1)Excluded unamortized debt issuance cost related to this finance lease for the years endedRevolving Credit Facility. Unamortized debt issuance cost associated with the Revolving Credit Facility was $6.9 million and $2.2 million as of December 31, 2022 and 2021, and 2020.
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 2, 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.respectively. As of December 31, 2021, there were $657.0 million2022, the current and non-current portion 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 outstanding under this facility.
Altus Midstream’sthe unamortized debt issuance costs related to the 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 definedfacilities were included in the Amended Credit Agreement) of Altus Midstream and its restricted subsidiaries for the 12-month period ending immediately before the determination date. At December 31, 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“Prepaid and other current assets” and “Deferred 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 consentassets” 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 3 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 December 31, 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 Consolidated Balance Sheets.Note 11—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 December 31, 2021.
Interest Income and Financing Costs, Net of Capitalized Interest
The following table below presents the components of Altus Midstream’s interest income andthe Company’s financing costs, net of capitalized interest:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (in thousands) |
| Interest income | | $ | 4 | | | $ | 9 | | | $ | 3,606 | |
| Interest income | | $ | 4 | | | $ | 9 | | | $ | 3,606 | |
| | | | | | |
| Interest expense | | $ | 9,431 | | | $ | 9,775 | | | $ | 6,384 | |
| Amortization of deferred facility fees | | 1,167 | | | 1,148 | | | 889 | |
| Capitalized interest | | — | | | (8,733) | | | (5,481) | |
| Financing costs, net of capitalized interest | | $ | 10,598 | | | $ | 2,190 | | | $ | 1,792 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands) |
| Capitalized interest | | $ | (2,747) | | | $ | (868) | | | $ | (16,131) | |
| Debt issuance costs | | 9,569 | | | 13,369 | | | 11,917 | |
| Interest expense | | 142,430 | | | 104,864 | | | 139,730 | |
| Total financing costs, net of capitalized interest | | $ | 149,252 | | | $ | 117,365 | | | $ | 135,516 | |
As of December 31, 2022 and 2021, unamortized debt issuance costs associated with the Notes and the Term Loan Credit Facility were $26.5 million and $38.5 million, respectively. The amortization of the debt issuance costs was charged to interest expense for the periods presented. The amount of debt issuance costs included in interest expense was $9.6 million, $13.4 million and $11.9 million for the years ended December 31, 2022, 2021, and 2020, respectively.
The following table reflects future maturities of long-term debt for each of the next five years and thereafter. These amounts exclude approximately $26.5 million in unamortized deferred financing costs:
| | | | | |
| Fiscal Year | Amount |
| (In thousands) |
| 2023 | $ | — | |
| 2024 | — | |
| 2025 | 2,000,000 | |
| 2026 | — | |
| 2027 | 395,000 | |
| Thereafter | 1,000,000 | |
| Total | $ | 3,395,000 | |
6.9. OTHER CURRENT LIABILITIES
The following table provides detail of the Company’s other current liabilities at December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| Accrued product purchases | | $ | 115,773 | | | $ | 118,364 | |
| Accrued taxes | | 19,509 | | | 4,299 | |
| Accrued salaries, vacation, and related benefits | | 3,934 | | | 2,113 | |
| Accrued capital expenditures | | 3,892 | | | 2,995 | |
| Accrued interest | | 24,815 | | | — | |
| | | | |
| Accrued other expenses | | 5,991 | | | 7,872 | |
| Total other current liabilities | | $ | 173,914 | | | $ | 135,643 | |
Accrued product purchases mainly accrue the liabilities related to producer payments and any additional business-related miscellaneous fees we owe to third parties, such as transport or capacity fees as of December 31, 2022.
10. LEASES
Components of lease costs are presented on the Consolidated Statements of Operations as “General and administrative expense” for real-estate leases and operating expense for non-real estate leases. Total operating lease cost for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2021 | | 2020 |
| | | | |
| | (In thousands) |
| Accrued taxes other than income | | $ | 10,888 | | | $ | 165 | |
| Accrued capital costs | | 1,346 | | | 360 | |
| Accrued incentive compensation | | 1,585 | | | 1,466 | |
| Accrued operations and maintenance expense | | 645 | | | 926 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other | | 1,218 | | | 2,696 | |
| Total other current liabilities | | $ | 15,682 | | | $ | 5,613 | |
7. ASSET RETIREMENT OBLIGATION2020 were $37.7 million, $38.7 million, and $43.6 million, respectively. Short-term lease cost for the years ended December 31, 2022, 2021, and 2020 were $6.2 million, $4.8 million, and $2.8 million, respectively. For the years ended December 31, 2022, 2021, and 2020, the Company did not have material variable lease costs.
The following table describespresents other supplemental lease information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Year Ended December 31, |
| | | | | | | | | | | | | | | | | 2022 | | 2021 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | (In thousands) |
| Operating cash flows from operating lease | | | | | | | | | | | | | | | | | $ | 37,420 | | | $ | 38,355 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | | | | | | | | | | | | | | | | $ | 7,059 | | | $ | 43,580 | |
| Weighted-average remaining lease term — operating leases (in years) | | | | | | | | | | | | | | | | | 1.72 | | 1.89 |
| Weighted-average discount rate — operating leases | | | | | | | | | | | | | | | | | 6.62 | % | | 7.75 | % |
The following table presents future minimum lease payments under operating leases as of December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | | | | | | | | | | | | | | | | | Amount |
| | | | | | | | | | | | | | | | | (In thousands) |
| 2023 | | | | | | | | | | | | | | | | | $ | 23,554 | |
| 2024 | | | | | | | | | | | | | | | | | 3,458 | |
| 2025 | | | | | | | | | | | | | | | | | 1,070 | |
| 2026 | | | | | | | | | | | | | | | | | 740 | |
| 2027 | | | | | | | | | | | | | | | | | 651 | |
| Thereafter | | | | | | | | | | | | | | | | | 1,178 | |
| Total lease payments | | | | | | | | | | | | | | | | | 30,651 | |
| Less: interest | | | | | | | | | | | | | | | | | (1,818) | |
| Present value of lease liabilities | | | | | | | | | | | | | | | | | $ | 28,833 | |
11. EQUITY AND WARRANTS
Redeemable Noncontrolling Interest - Common Unit Limited Partners
On February 22, 2022, the Company consummated the previously announced business combination transactions contemplated by the Contribution Agreement, dated as of October 21, 2021. Pursuant to the Contribution Agreement, in connection with the Closing, (i) Contributor contributed all the equity interests of the Contributed Entities to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 common units representing limited partner interests in the Partnership and 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share. Please refer to “The Transaction” above.
The redemption option of the Common Unit is not legally detachable or separately exercisable from the instrument and is
non-transferable, and the Common Unit is redeemable at the option of the holder. Therefore, the Common Unit is accounted for
as redeemable noncontrolling interest and classified as temporary equity on the Company’s Consolidated Balance Sheet. During 2022, 5,730,000 common units were redeemed on a one-for-one basis for shares of Class A Common Stock and a corresponding number of shares of Class C Common Stock were cancelled. There were 94,270,000 Common Units and an equal number of Class C Common Stock issued and outstanding as of December 31, 2022. The Common Units fair value was approximately $3.11 billion as of December 31, 2022. Fair value of the Common Units is estimated based on a quoted market price.
Redeemable Noncontrolling Interest — Preferred Unit Limited Partners
Upon Closing, the Company assumed certain Preferred Units that were issued and outstanding on acquisition date. The Company has redeemed all assumed Preferred Units since the Closing. Refer to Note 12—Series A Cumulative Redeemable Preferred Units for further discussion. Public Warrants
As of December 31, 2022 there were 12,577,350 Public Warrants (as defined below) outstanding. Each whole public warrant entitles the holder to purchase one tenth of a share of Class A Common Stock at a price of $115.00 per share (the Public Warrants). The Public Warrants will expire on November 9, 2023 or upon redemption or liquidation. The Company may call the Public Warrants for redemption, in whole and not in part, at a price of $0.01 per warrant with not less than 30 days’ notice provided to the Public Warrant holders. However, this redemption right can only be exercised if the reported last sale price of the Class A Common Stock equals or exceeds $180.00 per share for any 20-trading days within a 30-trading day period ending three business days prior to sending the notice of redemption to the Public Warrant holders.
Private Placement Warrants
As of December 31, 2022 there were 6,364,281 Private Placement Warrants (as defined below) outstanding, of which Apache holds 3,182,140. The private placement warrants will expire on November 9, 2023 and are identical to the Public Warrants discussed above, except (i) they will not be redeemable by the Company so long as they are held by the initial holders or their respective permitted transferees and (ii) they may be exercised by the holders on a cashless basis (the “Private Placement Warrants” and, together with the Public Warrants, the “Warrants”).
The Company recorded a fair value of $50 thousand for the Public Warrants and a fair value of $38 thousand for the Private Warrants as of December 31, 2022 on the Consolidated Balance Sheet in “Other Current Liabilities”. Refer to Note 13—Fair Value Measurement in the Notes to our Consolidated Financial Statements in this Form 10-K for additional discussion regarding valuation of the Warrants. Dividend
On February 22, 2022, the Company entered into a Dividend and Distribution Reinvestment Agreement (the “Reinvestment Agreement”) with certain stockholders including BCP Raptor Aggregator, LP, BX Permian Pipeline Aggregator, LP, Buzzard Midstream LLC, APA Corporation Apache Midstream LLC, and certain individuals (each, a “Reinvestment Holder”). Under the Reinvestment Agreement, each Reinvestment Holder is obligated to reinvest at least 20% of all distributions on Common Units or dividends on shares of Class A Common Stock in the Company’s Class A Common Stock. Additionally, the Audit Committee resolved that for the calendar year 2022, 100% of all distributions or dividends received by each Reinvestment Holder would be reinvested in newly issued shares of Class A Common Stock. As described in these Consolidated Financial Statements, as the context requires, dividends paid to holders of Class A Common Stock and distributions paid to holders of Common Units may be referred to collectively as “dividends.”
During 2022, the Company made cash dividend payments of $40.5 million to holders of Class A Common Stock and Common Units and $263.3 million was reinvested in shares of Class A Common Stock by each Reinvestment Holder.
On January 17, 2023, the Company declared a cash dividend of $0.75 per share on the Company’s Class A Common Stock and a distribution of $0.75 per Common Unit from the Partnership to the holders of Common Units. Dividends are payable on February 16, 2023. Certain holders of Class A Common Stock and Class C Common Stock will receive a cash dividend with the balance receiving additional shares of Class A Common Stock under the Reinvestment Agreement.
Stock Split
On May 19, 2022, the Company announced that its Board approved and declared a two-for-one stock split with respect to its Class A Common Stock and Class C Common Stock, in the form of a stock dividend (the “Stock Split”). The Stock Split was accomplished by distributing one additional share of Class A Common Stock for each share of Class A Common Stock outstanding and one additional share of Class C Common Stock for each share of Class C Common Stock outstanding. The additional shares of Common Stock were issued on June 8, 2022 to holders of record at the close of business on May 31, 2022.
All corresponding per-share and share amounts, excluding the Transaction, for periods prior to June 8, 2022 have been retrospectively restated in this Form 10-K to reflect the Stock Split.
12. SERIES A CUMULATIVE REDEEMABLE PREFERRED UNITS
Prior to the Closing Date of the Transaction, the Partnership had 625,000 Preferred Units issued and outstanding. Immediately prior to the Closing, on February 22, 2022, the Partnership redeemed for cash, 100,000 Preferred Units in an amount equal to approximately $120.1 million. The Company assumed the remaining 525,000 Preferred Units as well as 29,983
paid-in-kind (“PIK”) Preferred Units that were issued and outstanding at the close of the acquisition. At the close, 150,000 preferred units and 8,567 associated PIK units became mandatorily redeemable and liability classified with the balance of preferred units remaining unchanged and classified as redeemable noncontrolling interest.
During 2022, the Company redeemed all mandatorily redeemable preferred units for an aggregate $183.3 million and recognized a gain of $9.6 million, and the Company redeemed all noncontrolling interest Preferred Units for an aggregate $461.5 million and recognized excess of carrying amount over redemption price of $109.5 million. In addition, the Company bifurcated and recognized the embedded derivative associated with the noncontrolling interest Preferred Units related to the exchange option provided to the Preferred Unit holders under the terms of the Partnership LPA. As the Company redeemed all outstanding noncontrolling interest Preferred Units in July 2022 the embedded derivative liabilities were written off. The Company recorded gains of $89.1 million for the year ended December 31, 2022, which was recorded as a “Gain on embedded derivative” in the Consolidated Statement of Operations.
Activities related to Preferred Units for the year ended December 31, 2022 are as follows:
| | | | | | | | | | | | | | |
| | Units Outstanding | | Amount |
| | (In thousands, except for unit data) |
Redeemable noncontrolling interest — Preferred Units, immediately upon Closing Date of Transaction(1) | | 396,417 | | | $ | 462,717 | |
| Redemption, including PIK units | | (396,417) | | | (461,460) | |
| Cash distribution paid to Preferred Unit limited partners | | — | | | (6,937) | |
| | | | |
| Allocation of net income | | — | | | 18,128 | |
| Accreted redemption value adjustment | | — | | | 97,075 | |
| Excess of carrying amount over redemption price | | — | | | (109,523) | |
| Redeemable noncontrolling interest — Preferred Units, as of December 31, 2022 | | — | | | $ | — | |
| | | | |
| | | | |
(1)Included 21,417 PIK units on a pro rata basis.
13. FAIR VALUE MEASUREMENTS
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (In thousands) |
| Commodity swap | | $ | — | | | $ | 4,288 | | | $ | — | | | $ | 4,288 | |
| Interest rate derivatives | | — | | | 2,675 | | | — | | | 2,675 | |
| Total assets | | $ | — | | | $ | 6,963 | | | $ | — | | | $ | 6,963 | |
| | | | | | | | |
| Commodity swaps | | $ | — | | | $ | 5,718 | | | $ | — | | | $ | 5,718 | |
| Interest rate derivatives | | — | | | 8,328 | | | — | | | 8,328 | |
| | | | | | | | |
| Public warrants | | 50 | | | — | | | — | | | 50 | |
| Private warrants | | — | | | — | | | 38 | | | 38 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total liabilities | | $ | 50 | | | $ | 14,046 | | | $ | 38 | | | $ | 14,134 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (In thousands) |
| Commodity swaps | | $ | — | | | $ | 205 | | | $ | — | | | $ | 205 | |
| Interest rate derivatives | | | | 2,662 | | | — | | | 2,662 | |
| Contingent liabilities | | — | | | — | | | 839 | | | 839 | |
| | | | | | | | |
| | | | | | | | |
| Total liabilities | | $ | — | | | $ | 2,867 | | | $ | 839 | | | $ | 3,706 | |
Our derivative contracts consist of an interest rate swap and commodity swaps. Valuation of these derivative contracts involved both observable publicly quoted price and certain inputs to the credit valuation that may not be readily observable in the marketplace. As such derivative contracts are classified as Level 2 in the hierarchy. Refer to Note 14—Derivatives and Hedging Activitiesin the Notes to our Consolidated Financial Statements in this Form 10-K for further discussion related to commodity swaps and interest rate derivatives. The carrying value of the Company’s Public Warrants are recorded at fair value based on quoted market prices, a Level 1 fair value measurement. The carrying value of the Company’s Private Placement Warrants are recorded at fair value determined using an option pricing model, a Level 3 fair value measurement, which is calculated based on key assumptions related to expected volatility of the Company’s common stock, an expected dividend yield, the remaining term of the warrants outstanding and the risk-free rate based on the U.S. Treasury yield curve in effect at the time of the valuation. These assumptions are estimated utilizing historical trends of the Company’s common stock, Public Warrants and other factors. The Company has recorded a liability of $0.1 million as of December 31, 2022. Change in fair value of the warrants since closing of the Transaction through reporting date was recorded in “Interest and other income” of the Consolidated Statement of Operations.
The carrying amounts reported on the Consolidated Balance Sheets for the Company’s remaining financial assets and liabilities approximate fair value due to their short-term nature. There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the year ended December 31, 2022 and 2021.
14. DERIVATIVE AND HEDGING ACTIVITIES
The Company is exposed to certain risks arising from both its business operations and economic conditions, and it enters into certain derivative contracts to manage exposure to these risks. To minimize counterparty credit risk in derivative instruments, the Company enters into transactions with high credit-rating counterparties. The Company did not elect to apply hedge accounting to these derivative contracts and recorded the fair value of the derivatives on the Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021.
Interest Rate Risk
The Company manages market risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and by using derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
The Company’s objectives in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract.
In September 2019, BCP PHP, LLC (“BCP PHP”) entered into two interest rate swaps on 75% of the outstanding $513.0 million term loan.These instruments were effective September 30, 2019 and included a mandatory termination date on November 19, 2024. The notional amounts of these swaps floated monthly such that 75% of the total outstanding term loan was covered by the notional of the two swaps over the life of the associated term facility. In June 2022, these two interest rate swaps were terminated as BCP PHP’s outstanding term loan credit facility was extinguished on June 8, 2022. Refer to Note 8—Debt and Financing Costs in the Notes to our Consolidated Financial Statements for further information about the refinancing transactions.
In November 2022, the Company entered into an interest rate swap with a notional amount of $1.00 billion effective on May 1, 2023 and maturing on May 31, 2025. The Company pays a fixed rate of 4.46% for the respective notional amount.
The fair value or settlement value of the consolidated interest rate swaps outstanding are presented on a gross basis on the Consolidated Balance Sheets. Interest rate swap derivative assets were $2.7 million and nil as of December 31, 2022 and 2021, respectively. Interest rate swap derivative liabilities were $8.3 million and $2.7 million as of December 31, 2022 and 2021, respectively. The Company recorded cash settlements on interest rate swap derivatives of $10.9 million, $2.9 million, and $9.2 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Interest Expense” of the Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $7.9 million, $4.5 million and $18.9 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Interest Expense” of the Consolidated Statements of Operations.
Commodity Price Risk
The results of the Company’s operations may be affected by the market prices of oil, natural gas and NGLs. A portion of the Company’s revenue is directly tied to local natural gas, natural gas liquids and condensate prices in the Permian Basin and the U.S. Gulf Coast. Fluctuations in commodity prices also impact operating cost elements both directly and indirectly. Management regularly reviews the Company’s potential exposure to commodity price risk and manages exposure of such risk through commodity hedge contracts.
During 2022, the Company entered into 11 commodity swap contracts based on the NGL-Mont Belvieu Purity Ethane-OPIS and Waha Basis index on various notional quantities of natural gas and NGLs. These index swaps are used to hedge against location price risk of the commodity resulting from supply and demand volatility and protect cash flows against price fluctuations. Table below presents detail information of commodity swaps outstanding as of December 31, 2022 (in thousands, except volumes):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 | | | | |
| Commodity | | Instruments | | Unit | | Volume | | Net Fair Value | | | | |
| Natural Gas (short contracts) | | Commodity Swap | | MMBtus | | 5,895,000 | | | $ | 4,737 | | | | | |
| NGL (short contracts) | | Commodity Swap | | Gallons | | 87,906,000 | | | (3,308) | | | | | |
| | | | | | | | $ | 1,429 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Similarly, in 2021 and 2020 BCP Raptor, LLC (“BCP I”) and BCP Raptor II, LLC (“BCP II”) had WTI crude hedges at a specific notional amount that provided for a fixed price for crude in the Permian Basin and Waha basis hub hedgeson various notional quantities of gas that either provided a fixed price differential of natural gas in the Permian Basin relative to the NYMEX natural gas contract or provided a fixed price for natural gas in the Permian Basin. These commodity swaps expired before December 31, 2021.
The fair value or settlement value of the swaps outstanding are presented on a gross basis on the Consolidated Balance Sheet. Commodity swap derivative assets were $4.3 million and nil as of December 31, 2022 and 2021, respectively. Commodity swap derivative liabilities were $5.7 million and $0.2 million as of December 31, 2022 and 2021, respectively. The Company recorded cash settlements on commodity swap derivatives of $0.2 million, $16.5 million, and $1.4 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Product Revenue” of the Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $1.4 million, $16.9 million and $1.6 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Product Revenue” of the Consolidated Statements of Operations.
15. SHARE-BASED COMPENSATION
Prior to the Closing, the Company issued incentive units, which included performance and service conditions, to certain employees and board members. The units consisted of Class A-1, Class A-2, and Class A-3 units. These units derived value from the Company’s certain wholly owned subsidiaries. Class A-1 and A-2 units would have vested upon either (i) the date of consummation of a change in control or (ii) the date that is 1-year following the consummation of the initial public offering (“IPO”) of the Company (or its successor) (collectively “Exit Events”). Class A-3 units would have vested upon a change in control, if the participants were employed at the time of the event, or upon termination of the participant by the Company.
Immediately upon Closing, all outstanding Class A-1 and Class A-2 units were cancelled and exchanged for 5,300,000 shares (the “Class A Shares”), post Stock Split, of the Company’s Class A Common Stock. These Class A Shares are issued and outstanding as they were distributed pro rata to all holders of Class A-1 and Class A-2 units by the Common Unit limited partners from the 50,000,000 common units, pre-Stock-Split, that such limited partners received upon the Closing. The Common Unit limited partners redeemed Common Units needed for the Class A shares distribution upon the Closing. The Class A Shares are held in escrow and will vest over three to four years. Similarly, the Class A-3 units were exchanged for approximately 326,000, post Stock Split, Class C Common Stock and Common Units (the “Class C Shares”) and will vest over four years. The Company also issued approximately 76,000, post Stock Split, replacement restricted share awards (“Replacement Awards”) to new employees that transitioned from ALTM as part of the merger. These changes for all three share types established a new measurement date. The Class A Shares, Class C Shares and Replacement Awards were valued based on the Company’s publicly quoted stock price on the measurement date, which was the Closing Date of the Transaction.
During 2022, pursuant to the Company’s asset retirement obligation (ARO) liability2019 Omnibus Compensation Plan, as amended from time to time (the “Plan”), the Company granted a total of 13,941 restricted stock units (“RSUs”) to certain members of the Board, which were valued based on the Company’s publicly quoted stock price on grant date and vested immediately on grant date, which will be settled in shares of Class A Common Stock at such time elected by each non-employee director’s deferral election form. The Company also granted a total of 46,858 RSUs to employees during 2022, which were valued based on the Company’s publicly quoted stock price on grant date and were subject to a vesting period between one and three years, subject to continued employment through the applicable vesting date. Once vested, the employee RSUs will be settled in shares of Class A Common Stock.
With respect to above shares and RSUs, the Company recorded compensation expenses of $42.8 million, in the “General and administrative expenses” of the Consolidated Statement of Operations, for year ended December 31, 2022 based on a straight-line amortization of the associated awards’ fair value over the respective vesting life of the shares. With respect to the above incentive units, no compensation expenses were recorded for the years ended December 31, 2021 and 2020:2020, as the incentive units were considered non-vested prior to their cancellation and exchange for Class A or Class C Common Stock, and no RSUs were granted during 2021 or 2020.
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| | | | |
| | (In thousands) |
| Asset retirement obligation, beginning balance | | $ | 64,062 | | | $ | 60,095 | |
| Liabilities incurred during the period | | — | | | — | |
| Accretion expense | | 4,269 | | | 3,967 | |
| Revisions in estimated liabilities | | — | | | — | |
| Asset retirement obligation, ending balance | | $ | 68,331 | | | $ | 64,062 | |
ARO reflects
16. INCOME TAXES
The total income tax provision consists of the estimated presentfollowing:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands) |
| Current income taxes: | | | | | | |
| | | | | | |
| State | | $ | 522 | | | $ | — | | | $ | — | |
| | 522 | | | — | | | — | |
| Deferred income taxes: | | | | | | |
| | | | | | |
| State | | 2,094 | | | 1,865 | | | 968 | |
| | 2,094 | | | 1,865 | | | 968 | |
| Total | | $ | 2,616 | | | $ | 1,865 | | | $ | 968 | |
The difference between the effective income tax rate and the U.S. statutory rate is reconciled below:
| | | | | | | | | | | | |
| | Year Ended | | | | |
| | December 31, 2022 | | | | |
| | | | | | |
| | | | | | |
U.S. statutory rate(1) | | 21.00 | % | | | | |
| Tax attributable to Noncontrolling interest | | (17.55) | % | | | | |
| | | | | | |
| State tax rate | | 1.03 | % | | | | |
| Other | | 1.22 | % | | | | |
| Valuation allowance | | (4.67) | % | | | | |
| Effective rate | | 1.03 | % | | | | |
| | | | | | |
| | | | | | |
(1)Prior to the Closing on February 22, 2022, the Company was organized as a limited partnership and was not subject to the U.S. federal income tax for the years ended December 31, 2021 and 2020.
The net deferred tax assets reflect the tax impact of temporary differences between the asset and liability amounts carried on the balance sheet under U.S. GAAP and amounts utilized for income tax purposes. The net deferred tax assets consist of the following:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| Deferred tax assets: | | | | |
| Investment in partnership | | $ | 156,763 | | | $ | — | |
| | | | |
| Net operating losses | | 61,555 | | | — | |
| | | | |
| | | | |
| Other | | 1,412 | | | — | |
| Total deferred tax assets | | 219,730 | | | — | |
| Valuation allowance | | (219,730) | | | — | |
| Net deferred tax assets | | — | | | — | |
| Deferred tax liabilities: | | | | |
| | | | |
| Property, plant, and equipment | | 11,018 | | | 7,190 | |
| Net deferred tax liabilities | | $ | (11,018) | | | $ | (7,190) | |
For state purposes, the Company records deferred tax assets and liabilities based on the differences between the carrying value and tax basis of assets and liabilities recorded on the Consolidated Balance Sheets. The deferred tax liabilities recorded as of December 31, 2022 and 2021 relate to these differences.
For federal purposes, the Company has a deferred tax asset related to our investment in the Partnership and net operating losses. The Company recorded a full allowance valuation on its deferred tax assets, as it has determined that more-likely-than-not that the benefit of the deferred tax assets will not be realized.
Internal Revenue Code (“IRC”) Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. The Company experienced an ownership change within the meaning of IRC Section 382 during 2022 (prior to the closing of the Transaction) that subjected certain of the Company’s tax attributes, including net operating losses ("NOLs"), to an IRC Section 382 limitation. Since the ownership change, the Company has generated additional NOLs and other tax attributes that are not currently subject to an IRC Section 382 limitation.
Upon Closing, the Company assumed certain uncertain tax positions from ALTM. The Company accounts for income taxes in accordance with ASC 740—Income Taxes, which prescribes a minimum recognition threshold a tax position must meet before being recognized in the financial statements. Tax positions generally refer to a position taken in a previously filed income tax return or expected to be included in a tax return to be filed in the future that is reflected in the measurement of current and deferred income tax assets and liabilities. Reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
| | | | | | | | | | | | |
| | December 31, 2022 | | | | |
| | | | | | |
| | | | | | |
| | (In thousands) | | | | |
| Balance at beginning of year | | $ | — | | | | | |
| Increased related to ALTM acquisition | | 5,238 | | | | | |
| | | | | | |
| Reductions related to current year activities | | (5,238) | | | | | |
| Balance at end of year | | $ | — | | | | | |
The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense. Each quarter the Company assesses the amounts provided for and, as a result, may increase (expense) or reduce (benefit) the amount of dismantlement, removal, site reclamation,interest and similar activitiespenalties. The Company has recorded no interest or penalties associated with its unrecognized tax benefit. Uncertain tax positions may change in the Company’s infrastructure assets which include central processing facilities, gathering systems,next twelve months; however, the Company does not expect any possible change to have a significant impact on the results of operations or financial position. If incurred, Company will record income tax interest and pipelines. Management utilizes independent valuation reports and estimatespenalties as a component of current costsincome tax expense. As of December 31, 2022, tax years 2018 through 2022 remain subject to project expected cash outflows for retirement obligations. Management estimates the ultimate productive life of the properties, a risk-adjusted discount rate, and an inflation factor in order to determine the current present value of this obligation. To the extent future revisions to these assumptions impact the present value of existing ARO, a corresponding adjustment is made to the property, plant, and equipment balance.examination by various taxing authorities.
8.17. EARNINGS PER SHARE (EPS)
Basic EPS is computed by dividing net income attributable to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed by dividing net income attributable to the Company by the weighted average number of shares of common stock outstanding and the assumed issuance of all potentially dilutive securities. Each issue of potential common shares is evaluated separately in sequence from the most dilutive to the least dilutive. The dilutive effect of share-based payment awards and stock options is calculated using the treasury stock method, which assumes share purchases are calculated using the average share price of Kinetik common stock during the applicable period. The Company uses the if-converted method to compute potential common shares from potentially dilutive convertible securities. Under the if-converted method, dilutive convertible securities are assumed to be converted from the date of the issuance and the resulting common shares are included in the denominator of the diluted EPS calculation for the period being presented.
The following table sets forth a reconciliation of net income and weighted average shares outstanding used in computing basic and diluted net income per common share:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands, except per share amounts) |
| Net income attributable to Class A common shareholders | | $ | 40,735 | | | $ | — | | | $ | — | |
Less: Net income available to participating unvested restricted Class A common shareholders(1) | | (12,530) | | | — | | | — | |
Excess preferred carrying amount over consideration paid(2) | | 32,900 | | | — | | | — | |
| Total net income attributable to Class A common shareholders | | $ | 61,105 | | | $ | — | | | $ | — | |
| | | | | | |
Weighted average shares outstanding - basic(3) | | 41,326 | | | — | | | — | |
Dilutive effect(4)(5) of unvested Class A common shares | | 35 | | | — | | | — | |
| Weighted average shares outstanding - diluted | | 41,361 | | | — | | | — | |
| | | | | | |
| Net income available per common share - basic | | $ | 1.48 | | | $ | — | | | $ | — | |
| Net income available per common share - diluted | | $ | 1.48 | | | $ | — | | | $ | — | |
(1)Represents dividends paid to unvested restricted Class A common shareholders.
(2)Represented excess of carrying value of redeemable noncontrolling interest Preferred Units over redemption price at redemption.
(3)Share amounts have been retrospectively restated to reflect the Company’s two-for-one Stock Split. Refer to Note 11—Equity and Warrantsin the Notes to our Consolidated Financial Statements for further information. (4)The effect of an assumed exchange of the outstanding public and private warrants for shares of Class A Common Stock would have been anti-dilutive for all periods presented in which the public and private warrants were outstanding.
(5)The effect of an assumed exchange of outstanding Common Units (and the cancellation of a corresponding number of shares of outstanding Class C Common Stock) would have been anti-dilutive for all periods presented in which the Common Units were outstanding.
18. 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 December 31, 20212022 and 2020,2021, there were no accruals for loss contingencies.
Litigation
The Company is subjecta party to governmental and regulatory controlsvarious legal actions arising in the ordinary course of business.its businesses. In accordance with ASC 450, Contingencies, the Company accrues reserves for outstanding lawsuits, claims, and proceedings when a loss contingency is probable and can be reasonably estimated. The Company is not awareestimates the amount of any pending or threatenedloss contingencies using current available information from legal proceedings, against it atadvice from legal counsel and available insurance coverage. Due to the timeinherent subjectivity of the filingassessments and unpredictability of the outcomes of the legal proceedings, any amounts accrued or included in this Annual Report on Form 10-Kaggregate amount may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s exposure and ultimate losses may be higher, and possibly significantly more, than the amounts accrued.
The Company has entered into litigation with two third parties to collect outstanding receivables totaling $19.6 million that wouldremain outstanding from the Winter Storm Uri during February of 2021. Given the counterparties’ sufficient creditworthiness and the valid claims that we hold, no allowance has currently been established for these items as we have a material impact on its financial position, results of operations, or liquidity.legally enforceable agreements with these parties.
Environmental MattersSummarized Financial Information
AsThe following represented selected income statement and balance sheet data for the Company’s EMI pipeline entities (on a 100 percent basis): | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2022 |
| | |
| | Permian Highway Pipeline LLC | | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC |
| | | | |
| | | | | | | | |
| Statements of Operations | | (In thousands) |
| Revenues | | $ | 396,846 | | | | | $ | 183,328 | | | $ | 364,223 | |
| | | | | | | | |
| Operating income | | 261,040 | | | | 98,119 | | 269,150 | |
| Net income | | 261,028 | | | | 97,834 | | 268,493 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | For the Year Ended December 31, 2021 |
| | | | | |
| | | | | | Permian Highway Pipeline LLC | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC |
| | | | | | |
| | | | | | | | | | |
| Statements of Operations | | | | | (In thousands) |
| Revenues | | | | | | $ | 397,237 | | | $ | 157,683 | | | $ | 362,399 | |
| | | | | | | | | | |
| Operating income | | | | | | 237,230 | | | 92,568 | | | 254,772 | |
| Net income | | | | | | 236,528 | | | 92,005 | | | 253,535 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 |
| | |
| | Permian Highway Pipeline LLC | | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC | |
| | | | | |
| | | | | | | | | |
| Statements of Operations | | (In thousands) |
| Revenues | | $ | 7,220 | | | | | $ | 167,784 | | | $ | 366,185 | | |
| | | | | | | | | |
| Operating income (loss) | | (1,798) | | | | 102,526 | | | 266,219 | |
| Net income (loss) | | (1,140) | | | | 102,048 | | | 264,956 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | Permian Highway Pipeline LLC | | | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC | | Permian Highway Pipeline LLC | | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance Sheets | | | | | | (In thousands) |
| Current assets | | $ | 94,771 | | | | | | $ | 30,541 | | | $ | 47,935 | | | $ | 69,995 | | | | | $ | 34,159 | | | $ | 74,408 | |
| Noncurrent assets | | 2,310,739 | | | | | | 1,308,087 | | | 1,594,623 | | | 2,267,940 | | | | | 1,344,178 | | | 1,655,941 | |
| Total assets | | $ | 2,405,510 | | | | | | $ | 1,338,628 | | | $ | 1,642,558 | | | $ | 2,337,935 | | | | | $ | 1,378,337 | | | $ | 1,730,349 | |
| | | | | | | | | | | | | | | | | |
| Current liabilities | | $ | 63,392 | | | | | | $ | 12,352 | | | $ | 16,103 | | | $ | 36,657 | | | | | $ | 11,244 | | | $ | 46,151 | |
| Noncurrent liabilities | | — | | | | | | 9,029 | | | 395 | | | — | | | | | 8,254 | | | 461 | |
| Equity | | 2,342,118 | | | | | | 1,317,247 | | | 1,626,060 | | | 2,301,278 | | | | | 1,358,839 | | | 1,683,737 | |
| Total liabilities and equity | | $ | 2,405,510 | | | | | | $ | 1,338,628 | | | $ | 1,642,558 | | | $ | 2,337,935 | | | | | $ | 1,378,337 | | | $ | 1,730,349 | |
8. DEBT AND FINANCING COSTS
June 2030 Sustainability-Linked Senior Notes
On June 8, 2022, the Partnership completed a private placement of $1.00 billion aggregate principal amount of its 5.875% Senior Notes due 2030 (the “Notes”), which are fully and unconditionally guaranteed by the Company. The Notes are issued under our Sustainability-Linked Financing Framework and include sustainability-linked features described below.
The Notes were issued at 99.588% of their face amount and will mature on June 15, 2030. Interest accrues from the most recent date to which interest has been paid on the Notes or, if no interest has been paid, from and including June 8, 2022 and is payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2022. The aggregate fees, expenses, and original issue discount paid to obtain the Notes totaled $21.5 million and were capitalized as debt issuance cost and included in the Condensed Balance Sheets as a direct deduction to the Notes as the Notes were transferred to third-party investors that pay the stated principal amount without deduction for the initial purchasers’ discount.
From and including June 15, 2027, the interest rate accruing on the Notes will be increased by an owneradditional 0.250% per annum unless the Partnership delivers written notice to the trustee on or before the date that is 15 days prior to June 15, 2027 that the Partnership has satisfied, and an independent external verifier has confirmed satisfaction of infrastructure assetsthe Sustainability Performance Targets (“SPT”) as defined in the indenture governing the Notes related to the three key performance indicators:(1) Reduction of Scope 1 and Scope 2 greenhouse gas emissions intensity, (2) Reduction of Scope 1 and Scope 2 methane gas emissions intensity and (3) female representation in corporate officer positions. If the conditions set forth above have only been satisfied for one or two of the SPTs rather than all three, the interest rate accruing on the Notes will be increased by an additional 0.0833% per annum for each SPT which has not been satisfied and externally verified on June 15, 2027. If the interest rate accruing on the Notes is increased in the manner set forth above and the Partnership subsequently delivers written notice to the trustee that it has satisfied the SPTs set forth in clause (1) and (2) above and such satisfaction has been confirmed by an independent external verifier, on or before the date that is 15 days prior to June 15, 2029, the interest rate accruing on the Notes will be reduced by 0.0833% per annum for each such SPT.
The Partnership may redeem some or all the Notes at any time or from time to time prior to maturity based on terms prescribed in the indenture governing the Notes and the Notes.
Revolving Credit Facility
On June 8, 2022, the Partnership entered into a revolving credit agreement (the “RCA”) among Bank of America, N.A., as administrative agent (“Bank of America”), and the banks and other financial institutions party thereto, as lenders. The RCA provides for a $1.25 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”).
The Partnership may prepay borrowings under the Revolving Credit Facility at any time without premium or penalty (other than customary SOFR breakage costs), subject to certain notice requirements. All borrowings under the Revolving Credit Facility mature on June 8, 2027. The obligations under the Revolving Credit Agreement are fully and unconditionally guaranteed by the Company.
The RCA provides for borrowings of either, at the Partnership’s option, base rate loans or term SOFR loans. Base rate loans bear interest at a rate per annum equal to the greatest of (a) the prime rate as announced from time to time by Bank of America, (b) the greater of (i) the federal funds effective rate and (ii) the overnight bank funding rate, plus 1/2 of 1.00% and (c) the adjusted term SOFR rate for an interest period of one month plus 1.00%, plus a margin that ranges between 0.25% and 1.00%, depending on the credit rating of the Partnership. SOFR loans bear interest at a rate per annum equal to the term SOFR rate for such interest periods plus 0.10%, plus a margin that ranges between 1.25% and 2.00%, depending on the credit rating of the Partnership. In obtaining the RCA, the Partnership incurred fees and expenses totaling $7.8 million, which was capitalized and included in the Consolidated Balance Sheets as “Prepaid and other current assets” and “Deferred charges and other assets.”
In addition, the Partnership is required to pay to each lender a commitment fee on the daily unfunded amount of such lender’s revolving commitment, which accrues at a rate that ranges between 0.15% and 0.35% depending on the credit rating of the Partnership.
Term Loan Credit Facility
On June 8, 2022, concurrently with the closing of the Revolving Credit Facility, the Partnership entered into a term loan credit agreement (the “TLA”) among PNC Bank, National Association, as administrative agent (“PNC Bank”), and the banks and other financial institutions party thereto, as lenders. The TLA provides for a $2.00 billion senior unsecured term loan credit facility (the “Term Loan Credit Facility”). The TLA matures on June 8, 2025. The obligations under the TLA are fully and unconditionally guaranteed by the Company.
The TLA provides for borrowings of either, at the Partnership’s option, base rate loans or term SOFR loans. Base rate loans bear interest at a rate per annum equal to the greatest of (a) the prime rate as announced from time to time by PNC Bank, (b) the greater of (i) the federal funds effective rate and (ii) the overnight bank funding rate, plus 1/2 of 1.00% and (c) the adjusted term SOFR rate for an interest period of one month plus 1.00%, plus a margin that ranges between 0.25% and 1.0%, depending on the credit rating of the Partnership. SOFR loans bear interest at a rate per annum equal to the term SOFR rate for such interest periods plus 0.10%, plus a margin that ranges between 1.25% and 2.0%, depending on the credit rating of the Partnership. In obtaining the TLA, the Partnership incurred fees and expenses totaling $7.7 million, which was capitalized as debt issuance cost and included in the Consolidated Balance Sheets as a direct deduction to the Term Loan Credit Facility.
Both the RCA and the TLA contain a “Sustainability Adjustments” feature that could result in a 0.05% increase or reduction to the effective interest rate, dependent upon the Company meeting certain sustainability targets after 2022. “Sustainability Rate Adjustment” means, with respect to any KPI Metrics Report, for any period between Sustainability Pricing Adjustment Dates, (a) positive 0.05%, if neither of the Sustainability Performance Targets (as defined in the RCA and TLA) as set forth in the KPI Metrics Report have been satisfied for the relevant calendar year, (b) 0.00% if only one of the Sustainability Performance Targets as set forth in the KPI Metrics Report has been satisfied for the relevant calendar year and (c) negative 0.05% if both of the Sustainability Performance Targets as set forth in the KPI Metrics Report have been satisfied for the relevant calendar year; provided that, in each case, if the Partnership subsequently issues a sustainability-linked debt instrument linked to the same KPI Metric and with rightsan observation date for such calendar year, but with a higher percentage of representation or reduction, as the case may be, the relevant Sustainability Performance Target shall be automatically adjusted upward to surface lands,equal the Company is subjectpercentage of representation or reduction, as applicable, required by such subsequent sustainability-linked debt instrument.
“Sustainability Performance Targets” in the RCA and TLA mean, for any calendar year, with respect to various local(a) the Female Representation KPI, the target percentage of female representation in corporate officer positions for such calendar year and federal laws(b) the Methane Emissions KPI, the percentage reduction in methane gas emissions intensity relative to the baseline year for such calendar year.
Both the RCA and regulations relating to discharge of materials into,the TLA contain customary covenants and protection of, the environment. These laws and regulationsrestrictive provisions which may, among other things, impose liability onlimit the Partnership’s ability to create liens, incur additional indebtedness, make restricted payments, or liquidate, dissolve, consolidate with, or merge into or with any other person. As of December 31, 2022, the Partnership is in compliance with all customary and financial covenants.
Repayment of Existing Credit Facilities
In June 2022, the Company used the net proceeds from the Notes, together with cash on hand and proceeds from the term loan credit facility, to repay all outstanding borrowings under its existing credit facilities and to pay certain related fees and expenses. In conjunction with the extinguishment of existing outstanding borrowings, the Company recognized a loss on extinguishment of debt of approximately $28.0 million. In addition, the unamortized debt issuance costs related to the existing outstanding borrowings were fully amortized and included in the loss on debt extinguishment calculation for the costyear ended December 31, 2022.
The fair value 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 existingand its subsidiaries’ consolidated debt as of December 31, 2022 and 2021 thatwas $2.82 billion and $2.34 billion, respectively. At December 31, 2022, the Notes’ fair value was based on Level 1 inputs and the Term Loan Credit Facility and Revolver Credit Facility’s fair value was based on Level 3 inputs.
The following table summarizes the Company’s debt obligations as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| $2.0 billion unsecured term loan | | $ | 2,000,000 | | | $ | — | |
| $1.0 billion 2030 senior unsecured notes | | 1,000,000 | | | — | |
| $1.25 billion revolving line of credit | | 395,000 | | | — | |
| $1.25 billion term loan | | — | | | 1,175,417 | |
| $690 million term loan | | — | | | 639,393 | |
| $513 million term loan | | — | | | 479,377 | |
| $125 million revolving line of credit | | — | | | 52,000 | |
| Total Long-term debt | | 3,395,000 | | | 2,346,187 | |
Less: Debt issuance costs, net(1) | | (26,490) | | | (38,485) | |
| | 3,368,510 | | | 2,307,702 | |
| Less: Current portion, net | | — | | | (54,280) | |
| Long-term portion of debt, net | | $ | 3,368,510 | | | $ | 2,253,422 | |
(1)Excluded unamortized debt issuance cost related to the Revolving Credit Facility. Unamortized debt issuance cost associated with the Revolving Credit Facility was $6.9 million and $2.2 million as of December 31, 2022 and 2021, respectively. As of December 31, 2022, the current and non-current portion of the unamortized debt issuance costs related to the revolving credit facilities were included in the “Prepaid and other current assets” and “Deferred charges and other assets” of the Consolidated Balance Sheets.
Interest Income and Financing Costs, Net of Capitalized Interest
The table below presents the components of the Company’s financing costs, net of capitalized interest:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands) |
| Capitalized interest | | $ | (2,747) | | | $ | (868) | | | $ | (16,131) | |
| Debt issuance costs | | 9,569 | | | 13,369 | | | 11,917 | |
| Interest expense | | 142,430 | | | 104,864 | | | 139,730 | |
| Total financing costs, net of capitalized interest | | $ | 149,252 | | | $ | 117,365 | | | $ | 135,516 | |
As of December 31, 2022 and 2021, unamortized debt issuance costs associated with the Notes and the Term Loan Credit Facility were $26.5 million and $38.5 million, respectively. The amortization of the debt issuance costs was charged to interest expense for the periods presented. The amount of debt issuance costs included in interest expense was $9.6 million, $13.4 million and $11.9 million for the years ended December 31, 2022, 2021, and 2020, respectively.
The following table reflects future maturities of long-term debt for each of the next five years and thereafter. These amounts exclude approximately $26.5 million in unamortized deferred financing costs:
| | | | | |
| Fiscal Year | Amount |
| (In thousands) |
| 2023 | $ | — | |
| 2024 | — | |
| 2025 | 2,000,000 | |
| 2026 | — | |
| 2027 | 395,000 | |
| Thereafter | 1,000,000 | |
| Total | $ | 3,395,000 | |
9. OTHER CURRENT LIABILITIES
The following table provides detail of the Company’s other current liabilities at December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| Accrued product purchases | | $ | 115,773 | | | $ | 118,364 | |
| Accrued taxes | | 19,509 | | | 4,299 | |
| Accrued salaries, vacation, and related benefits | | 3,934 | | | 2,113 | |
| Accrued capital expenditures | | 3,892 | | | 2,995 | |
| Accrued interest | | 24,815 | | | — | |
| | | | |
| Accrued other expenses | | 5,991 | | | 7,872 | |
| Total other current liabilities | | $ | 173,914 | | | $ | 135,643 | |
Accrued product purchases mainly accrue the liabilities related to producer payments and any additional business-related miscellaneous fees we owe to third parties, such as transport or capacity fees as of December 31, 2022.
10. LEASES
Components of lease costs are presented on the Consolidated Statements of Operations as “General and administrative expense” for real-estate leases and operating expense for non-real estate leases. Total operating lease cost for the years ended December 31, 2022, 2021, and 2020 were $37.7 million, $38.7 million, and $43.6 million, respectively. Short-term lease cost for the years ended December 31, 2022, 2021, and 2020 were $6.2 million, $4.8 million, and $2.8 million, respectively. For the years ended December 31, 2022, 2021, and 2020, the Company did not have not been provided for or would otherwise have a material impact on its financial position, resultsvariable lease costs.
The following table presents other supplemental lease information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Year Ended December 31, |
| | | | | | | | | | | | | | | | | 2022 | | 2021 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | (In thousands) |
| Operating cash flows from operating lease | | | | | | | | | | | | | | | | | $ | 37,420 | | | $ | 38,355 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | | | | | | | | | | | | | | | | $ | 7,059 | | | $ | 43,580 | |
| Weighted-average remaining lease term — operating leases (in years) | | | | | | | | | | | | | | | | | 1.72 | | 1.89 |
| Weighted-average discount rate — operating leases | | | | | | | | | | | | | | | | | 6.62 | % | | 7.75 | % |
The following table presents future minimum lease payments under operating leases as of operations, or liquidity.December 31, 2022.
Contractual Obligations | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | | | | | | | | | | | | | | | | | Amount |
| | | | | | | | | | | | | | | | | (In thousands) |
| 2023 | | | | | | | | | | | | | | | | | $ | 23,554 | |
| 2024 | | | | | | | | | | | | | | | | | 3,458 | |
| 2025 | | | | | | | | | | | | | | | | | 1,070 | |
| 2026 | | | | | | | | | | | | | | | | | 740 | |
| 2027 | | | | | | | | | | | | | | | | | 651 | |
| Thereafter | | | | | | | | | | | | | | | | | 1,178 | |
| Total lease payments | | | | | | | | | | | | | | | | | 30,651 | |
| Less: interest | | | | | | | | | | | | | | | | | (1,818) | |
| Present value of lease liabilities | | | | | | | | | | | | | | | | | $ | 28,833 | |
Altus Midstream’s existing fee-based midstream services agreements, which have no minimum volume commitments or firm transportation commitments, are underpinned
11. EQUITY AND WARRANTS
Redeemable Noncontrolling Interest - Common Unit Limited Partners
On February 22, 2022, the Company consummated the previously announced business combination transactions contemplated by acreage dedications covering Alpine High.the Contribution Agreement, dated as of October 21, 2021. Pursuant to these agreements, Altus Midstreamthe Contribution Agreement, in connection with the Closing, (i) Contributor contributed all the equity interests of the Contributed Entities to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 common units representing limited partner interests in the Partnership and 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share. Please refer to “The Transaction” above.
The redemption option of the Common Unit is obligated to perform low and high pressure gathering, processing, dehydration, compression, treating, conditioning, and transportation on all volumes producednot legally detachable or separately exercisable from the dedicated acreage, so long as Apache hasinstrument and is
non-transferable, and the right to market such gas.
AtCommon Unit is redeemable at the closingoption of the Altus Combination,holder. Therefore, the Common Unit is accounted for
as redeemable noncontrolling interest and classified as temporary equity on the Company’s Consolidated Balance Sheet. During 2022, 5,730,000 common units were redeemed on a one-for-one basis for shares of Class A Common Stock and a corresponding number of shares of Class C Common Stock were cancelled. There were 94,270,000 Common Units and an equal number of Class C Common Stock issued and outstanding as of December 31, 2022. The Common Units fair value was approximately $3.11 billion as of December 31, 2022. Fair value of the Common Units is estimated based on a quoted market price.
Redeemable Noncontrolling Interest — Preferred Unit Limited Partners
Upon Closing, the Company entered intoassumed certain Preferred Units that were issued and outstanding on acquisition date. The Company has redeemed all assumed Preferred Units since the COMA and the Lease Agreement with Apache, which include contractual obligations for the Company to pay certain management and lease rental fees, respectively, to Apache over the term of the agreements.Closing. Refer to Note 2—Transactions with Affiliates for further discussion. During the fourth quarter of 2020, the Company entered into a three year fixed-rate power contract with a third-party. The Company estimates its minimum obligation will be $4.7 million and $3.6 million for 2022 and 2023, respectively. The actual amount incurred will vary based on usage.
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 11—12—Series A Cumulative Redeemable Preferred Units for further discussion.Public Warrants
As of December 31, 2022 there were 12,577,350 Public Warrants (as defined below) outstanding. Each whole public warrant entitles the holder to purchase one tenth of a share of Class A Common Stock at a price of $115.00 per share (the Public Warrants). The Public Warrants will expire on November 9, 2023 or upon redemption or liquidation. The Company may call the Public Warrants for redemption, in whole and not in part, at a price of $0.01 per warrant with not less than 30 days’ notice provided to the Public Warrant holders. However, this redemption right can only be exercised if the reported last sale price of the Class A Common Stock equals or exceeds $180.00 per share for any 20-trading days within a 30-trading day period ending three business days prior to sending the notice of redemption to the Public Warrant holders.
Private Placement Warrants
As of December 31, 2022 there were 6,364,281 Private Placement Warrants (as defined below) outstanding, of which Apache holds 3,182,140. The private placement warrants will expire on November 9, 2023 and are identical to the Public Warrants discussed above, except (i) they will not be redeemable by the Company so long as they are held by the initial holders or their respective permitted transferees and (ii) they may be exercised by the holders on a cashless basis (the “Private Placement Warrants” and, together with the Public Warrants, the “Warrants”).
The Company recorded a fair value of $50 thousand for the Public Warrants and a fair value of $38 thousand for the Private Warrants as of December 31, 2022 on the Consolidated Balance Sheet in “Other Current Liabilities”. Refer to Note 13—Fair Value Measurement in the Notes to our Consolidated Financial Statements in this Form 10-K for additional discussion regarding valuation of the Warrants. Dividend
On February 22, 2022, the Company entered into a Dividend and Distribution Reinvestment Agreement (the “Reinvestment Agreement”) with certain stockholders including BCP Raptor Aggregator, LP, BX Permian Pipeline Aggregator, LP, Buzzard Midstream LLC, APA Corporation Apache Midstream LLC, and certain individuals (each, a “Reinvestment Holder”). Under the Reinvestment Agreement, each Reinvestment Holder is obligated to reinvest at least 20% of all distributions on Common Units or dividends on shares of Class A Common Stock in the Company’s Class A Common Stock. Additionally, the Audit Committee resolved that for the calendar year 2022, 100% of all distributions or dividends received by each Reinvestment Holder would be reinvested in newly issued shares of Class A Common Stock. As described in these Consolidated Financial Statements, as the context requires, dividends paid to holders of Class A Common Stock and distributions paid to holders of Common Units may be referred to collectively as “dividends.”
During 2022, the Company made cash dividend payments of $40.5 million to holders of Class A Common Stock and Common Units and $263.3 million was reinvested in shares of Class A Common Stock by each Reinvestment Holder.
On January 17, 2023, the Company declared a cash dividend of $0.75 per share on the Company’s Class A Common Stock and a distribution of $0.75 per Common Unit from the Partnership to the holders of Common Units. Dividends are payable on February 16, 2023. Certain holders of Class A Common Stock and Class C Common Stock will receive a cash dividend with the balance receiving additional shares of Class A Common Stock under the Reinvestment Agreement.
Stock Split
On May 19, 2022, the Company announced that its Board approved and declared a two-for-one stock split with respect to its Class A Common Stock and Class C Common Stock, in the form of a stock dividend (the “Stock Split”). The Stock Split was accomplished by distributing one additional share of Class A Common Stock for each share of Class A Common Stock outstanding and one additional share of Class C Common Stock for each share of Class C Common Stock outstanding. The additional shares of Common Stock were issued on June 8, 2022 to holders of record at the close of business on May 31, 2022.
All corresponding per-share and share amounts, excluding the Transaction, for periods prior to June 8, 2022 have been retrospectively restated in this Form 10-K to reflect the Stock Split.
12. SERIES A CUMULATIVE REDEEMABLE PREFERRED UNITS
Prior to the Closing Date of the Transaction, the Partnership had 625,000 Preferred Units issued and outstanding. Immediately prior to the Closing, on February 22, 2022, the Partnership redeemed for cash, 100,000 Preferred Units in an amount equal to approximately $120.1 million. The Company assumed the remaining 525,000 Preferred Units as well as 29,983
paid-in-kind (“PIK”) Preferred Units that were issued and outstanding at the close of the acquisition. At the close, 150,000 preferred units and 8,567 associated PIK units became mandatorily redeemable and liability classified with the balance of preferred units remaining unchanged and classified as redeemable noncontrolling interest.
During 2022, the Company redeemed all mandatorily redeemable preferred units for an aggregate $183.3 million and recognized a gain of $9.6 million, and the Company redeemed all noncontrolling interest Preferred Units for an aggregate $461.5 million and recognized excess of carrying amount over redemption price of $109.5 million. In addition, the Company bifurcated and recognized the embedded derivative associated with the noncontrolling interest Preferred Units related to the exchange option provided to the Preferred Unit holders under the terms of the Partnership LPA. As the Company redeemed all outstanding noncontrolling interest Preferred Units andin July 2022 the rightsembedded derivative liabilities were written off. The Company recorded gains of the holders thereof.
Additionally, the Company is required to fund its pro-rata portion of any future capital expenditures$89.1 million for the developmentyear ended December 31, 2022, which was recorded as a “Gain on embedded derivative” in the Consolidated Statement of Operations.
Activities related to Preferred Units for the pipeline projectsyear ended December 31, 2022 are as referencedfollows:
| | | | | | | | | | | | | | |
| | Units Outstanding | | Amount |
| | (In thousands, except for unit data) |
Redeemable noncontrolling interest — Preferred Units, immediately upon Closing Date of Transaction(1) | | 396,417 | | | $ | 462,717 | |
| Redemption, including PIK units | | (396,417) | | | (461,460) | |
| Cash distribution paid to Preferred Unit limited partners | | — | | | (6,937) | |
| | | | |
| Allocation of net income | | — | | | 18,128 | |
| Accreted redemption value adjustment | | — | | | 97,075 | |
| Excess of carrying amount over redemption price | | — | | | (109,523) | |
| Redeemable noncontrolling interest — Preferred Units, as of December 31, 2022 | | — | | | $ | — | |
| | | | |
| | | | |
(1)Included 21,417 PIK units on a pro rata basis.
13. FAIR VALUE MEASUREMENTS
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (In thousands) |
| Commodity swap | | $ | — | | | $ | 4,288 | | | $ | — | | | $ | 4,288 | |
| Interest rate derivatives | | — | | | 2,675 | | | — | | | 2,675 | |
| Total assets | | $ | — | | | $ | 6,963 | | | $ | — | | | $ | 6,963 | |
| | | | | | | | |
| Commodity swaps | | $ | — | | | $ | 5,718 | | | $ | — | | | $ | 5,718 | |
| Interest rate derivatives | | — | | | 8,328 | | | — | | | 8,328 | |
| | | | | | | | |
| Public warrants | | 50 | | | — | | | — | | | 50 | |
| Private warrants | | — | | | — | | | 38 | | | 38 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total liabilities | | $ | 50 | | | $ | 14,046 | | | $ | 38 | | | $ | 14,134 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (In thousands) |
| Commodity swaps | | $ | — | | | $ | 205 | | | $ | — | | | $ | 205 | |
| Interest rate derivatives | | | | 2,662 | | | — | | | 2,662 | |
| Contingent liabilities | | — | | | — | | | 839 | | | 839 | |
| | | | | | | | |
| | | | | | | | |
| Total liabilities | | $ | — | | | $ | 2,867 | | | $ | 839 | | | $ | 3,706 | |
Our derivative contracts consist of an interest rate swap and commodity swaps. Valuation of these derivative contracts involved both observable publicly quoted price and certain inputs to the credit valuation that may not be readily observable in the marketplace. As such derivative contracts are classified as Level 2 in the hierarchy. Refer to Note 9—Equity Method Interests14—Derivatives and Hedging Activities.in the Notes to our Consolidated Financial Statements in this Form 10-K for further discussion related to commodity swaps and interest rate derivatives. AtThe carrying value of the Company’s Public Warrants are recorded at fair value based on quoted market prices, a Level 1 fair value measurement. The carrying value of the Company’s Private Placement Warrants are recorded at fair value determined using an option pricing model, a Level 3 fair value measurement, which is calculated based on key assumptions related to expected volatility of the Company’s common stock, an expected dividend yield, the remaining term of the warrants outstanding and the risk-free rate based on the U.S. Treasury yield curve in effect at the time of the valuation. These assumptions are estimated utilizing historical trends of the Company’s common stock, Public Warrants and other factors. The Company has recorded a liability of $0.1 million as of December 31, 20212022. Change in fair value of the warrants since closing of the Transaction through reporting date was recorded in “Interest and 2020, thereother income” of the Consolidated Statement of Operations.
The carrying amounts reported on the Consolidated Balance Sheets for the Company’s remaining financial assets and liabilities approximate fair value due to their short-term nature. There were no other material contractual obligations relatedtransfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the year ended December 31, 2022 and 2021.
14. DERIVATIVE AND HEDGING ACTIVITIES
The Company is exposed to certain risks arising from both its business operations and economic conditions, and it enters into certain derivative contracts to manage exposure to these risks. To minimize counterparty credit risk in derivative instruments, the entities includedCompany enters into transactions with high credit-rating counterparties. The Company did not elect to apply hedge accounting to these derivative contracts and recorded the fair value of the derivatives on the Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021.
Interest Rate Risk
The Company manages market risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and by using derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from activities that result in the consolidated financial statements other thanpayment of future known and uncertain cash amounts, the performancevalue of asset retirement obligationswhich are determined by interest rates.
The Company’s objectives in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as referenced inpart of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract.
In September 2019, BCP PHP, LLC (“BCP PHP”) entered into two interest rate swaps on 75% of the outstanding $513.0 million term loan.These instruments were effective September 30, 2019 and included a mandatory termination date on November 19, 2024. The notional amounts of these swaps floated monthly such that 75% of the total outstanding term loan was covered by the notional of the two swaps over the life of the associated term facility. In June 2022, these two interest rate swaps were terminated as BCP PHP’s outstanding term loan credit facility was extinguished on June 8, 2022. Refer to Note 7—Asset Retirement Obligation and required credit facility fees discussed in Note 5—8—Debt and Financing Costs. in the Notes to our Consolidated Financial Statements for further information about the refinancing transactions.
In November 2022, the Company entered into an interest rate swap with a notional amount of $1.00 billion effective on May 1, 2023 and maturing on May 31, 2025. The Company pays a fixed rate of 4.46% for the respective notional amount.
The fair value or settlement value of the consolidated interest rate swaps outstanding are presented on a gross basis on the Consolidated Balance Sheets. Interest rate swap derivative assets were $2.7 million and nil as of December 31, 2022 and 2021, respectively. Interest rate swap derivative liabilities were $8.3 million and $2.7 million as of December 31, 2022 and 2021, respectively. The Company recorded cash settlements on interest rate swap derivatives of $10.9 million, $2.9 million, and $9.2 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Interest Expense” of the Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $7.9 million, $4.5 million and $18.9 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Interest Expense” of the Consolidated Statements of Operations.
Commodity Price Risk
The results of the Company’s operations may be affected by the market prices of oil, natural gas and NGLs. A portion of the Company’s revenue is directly tied to local natural gas, natural gas liquids and condensate prices in the Permian Basin and the U.S. Gulf Coast. Fluctuations in commodity prices also impact operating cost elements both directly and indirectly. Management regularly reviews the Company’s potential exposure to commodity price risk and manages exposure of such risk through commodity hedge contracts.
During 2022, the Company entered into 11 commodity swap contracts based on the NGL-Mont Belvieu Purity Ethane-OPIS and Waha Basis index on various notional quantities of natural gas and NGLs. These index swaps are used to hedge against location price risk of the commodity resulting from supply and demand volatility and protect cash flows against price fluctuations. Table below presents detail information of commodity swaps outstanding as of December 31, 2022 (in thousands, except volumes):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 | | | | |
| Commodity | | Instruments | | Unit | | Volume | | Net Fair Value | | | | |
| Natural Gas (short contracts) | | Commodity Swap | | MMBtus | | 5,895,000 | | | $ | 4,737 | | | | | |
| NGL (short contracts) | | Commodity Swap | | Gallons | | 87,906,000 | | | (3,308) | | | | | |
| | | | | | | | $ | 1,429 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Similarly, in 2021 and 2020 BCP Raptor, LLC (“BCP I”) and BCP Raptor II, LLC (“BCP II”) had WTI crude hedges at a specific notional amount that provided for a fixed price for crude in the Permian Basin and Waha basis hub hedgeson various notional quantities of gas that either provided a fixed price differential of natural gas in the Permian Basin relative to the NYMEX natural gas contract or provided a fixed price for natural gas in the Permian Basin. These commodity swaps expired before December 31, 2021.
The fair value or settlement value of the swaps outstanding are presented on a gross basis on the Consolidated Balance Sheet. Commodity swap derivative assets were $4.3 million and nil as of December 31, 2022 and 2021, respectively. Commodity swap derivative liabilities were $5.7 million and $0.2 million as of December 31, 2022 and 2021, respectively. The Company recorded cash settlements on commodity swap derivatives of $0.2 million, $16.5 million, and $1.4 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Product Revenue” of the Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $1.4 million, $16.9 million and $1.6 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Product Revenue” of the Consolidated Statements of Operations.
15. SHARE-BASED COMPENSATION
Prior to the Closing, the Company issued incentive units, which included performance and service conditions, to certain employees and board members. The units consisted of Class A-1, Class A-2, and Class A-3 units. These units derived value from the Company’s certain wholly owned subsidiaries. Class A-1 and A-2 units would have vested upon either (i) the date of consummation of a change in control or (ii) the date that is 1-year following the consummation of the initial public offering (“IPO”) of the Company (or its successor) (collectively “Exit Events”). Class A-3 units would have vested upon a change in control, if the participants were employed at the time of the event, or upon termination of the participant by the Company.
9. EQUITY METHOD INTERESTSImmediately upon Closing, all outstanding Class A-1 and Class A-2 units were cancelled and exchanged for 5,300,000 shares (the “Class A Shares”), post Stock Split, of the Company’s Class A Common Stock. These Class A Shares are issued and outstanding as they were distributed pro rata to all holders of Class A-1 and Class A-2 units by the Common Unit limited partners from the 50,000,000 common units, pre-Stock-Split, that such limited partners received upon the Closing. The Common Unit limited partners redeemed Common Units needed for the Class A shares distribution upon the Closing. The Class A Shares are held in escrow and will vest over three to four years. Similarly, the Class A-3 units were exchanged for approximately 326,000, post Stock Split, Class C Common Stock and Common Units (the “Class C Shares”) and will vest over four years. The Company also issued approximately 76,000, post Stock Split, replacement restricted share awards (“Replacement Awards”) to new employees that transitioned from ALTM as part of the merger. These changes for all three share types established a new measurement date. The Class A Shares, Class C Shares and Replacement Awards were valued based on the Company’s publicly quoted stock price on the measurement date, which was the Closing Date of the Transaction.
AsDuring 2022, pursuant to the Company’s 2019 Omnibus Compensation Plan, as amended from time to time (the “Plan”), the Company granted a total of 13,941 restricted stock units (“RSUs”) to certain members of the Board, which were valued based on the Company’s publicly quoted stock price on grant date and vested immediately on grant date, which will be settled in shares of Class A Common Stock at such time elected by each non-employee director’s deferral election form. The Company also granted a total of 46,858 RSUs to employees during 2022, which were valued based on the Company’s publicly quoted stock price on grant date and were subject to a vesting period between one and three years, subject to continued employment through the applicable vesting date. Once vested, the employee RSUs will be settled in shares of Class A Common Stock.
With respect to above shares and RSUs, the Company recorded compensation expenses of $42.8 million, in the “General and administrative expenses” of the Consolidated Statement of Operations, for year ended December 31, 2021, the Company owns the following equity method interests in Permian Basin long-haul pipeline entities. For each2022 based on a straight-line amortization of the equity method interests,associated awards’ fair value over 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 performancerespective vesting life of the equity method interests.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| In thousands, except for ownership percentages | Ownership | | Amount | | Ownership | | Amount |
| Gulf Coast Express Pipeline LLC | 16.0 | % | | $ | 273,940 | | | 16.0 | % | | $ | 283,530 | |
| EPIC Crude Holdings, LP | 15.0 | % | | — | | | 15.0 | % | | 176,640 | |
| Permian Highway Pipeline LLC | 26.7 | % | | 629,896 | | | 26.7 | % | | 615,186 | |
| Breviloba, LLC | 33.0 | % | | 460,990 | | | 33.0 | % | | 479,826 | |
| | | $ | 1,364,826 | | | | | $ | 1,555,182 | |
As of December 31, 2021 and 2020, unamortized basis differences included inshares. With respect to the equity method interest balancesabove incentive units, no compensation expenses were $34.0 million and $37.7 million, respectively. These amounts represent differences in the Company’s initial costs paid to acquire the equity method interests and Altus’ initial underlying equity in the respective entities, as well as capitalized interest related to Permian Highway Pipeline (PHP) construction costs. Unamortized basis differences are amortized into equity income (loss) over the useful lives of the underlying pipeline assets when they are placed into service.
The following table presents the activity in the Company’s equity method interestsrecorded for the years ended December 31, 2021 and 2020:2020, as the incentive units were considered non-vested prior to their cancellation and exchange for Class A or Class C Common Stock, and no RSUs were granted during 2021 or 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gulf Coast Express Pipeline LLC | | EPIC Crude Holdings, LP | | Permian Highway Pipeline LLC | | Breviloba, LLC | | |
| | | | | Total |
| (In thousands) |
| Balance at December 31, 2019 | $ | 291,628 | | | $ | 163,199 | | | $ | 310,421 | | | $ | 492,800 | | | $ | 1,258,048 | |
| | | | | | | | | |
| Contributions | 1,715 | | | 29,250 | | | 296,340 | | | — | | | 327,305 | |
| Distributions | (52,009) | | | — | | | — | | | (46,157) | | | (98,166) | |
Capitalized interest(1) | — | | | — | | | 8,733 | | | — | | | 8,733 | |
| Equity income (loss), net | 42,196 | | | (16,332) | | | (308) | | | 33,183 | | | 58,739 | |
| Other comprehensive loss | 0 | | 523 | | | — | | | — | | | 523 | |
| Balance at December 31, 2020 | $ | 283,530 | | | $ | 176,640 | | | $ | 615,186 | | | $ | 479,826 | | | $ | 1,555,182 | |
| | | | | | | | | |
| Contributions | 314 | | | 2,250 | | | 25,856 | | | — | | | 28,420 | |
| Distributions | (49,953) | | | — | | | (73,668) | | | (49,108) | | | (172,729) | |
| | | | | | | | | |
| Equity income (loss), net | 40,049 | | | (19,079) | | | 62,522 | | | 30,272 | | | 113,764 | |
| Other comprehensive income | — | | | 630 | | | — | | | — | | | 630 | |
Impairment(2) | — | | | (160,441) | | | — | | | — | | | (160,441) | |
| Balance at December 31, 2021 | $ | 273,940 | | | $ | — | | | $ | 629,896 | | | $ | 460,990 | | | $ | 1,364,826 | |
16. INCOME TAXES
The total income tax provision consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands) |
| Current income taxes: | | | | | | |
| | | | | | |
| State | | $ | 522 | | | $ | — | | | $ | — | |
| | 522 | | | — | | | — | |
| Deferred income taxes: | | | | | | |
| | | | | | |
| State | | 2,094 | | | 1,865 | | | 968 | |
| | 2,094 | | | 1,865 | | | 968 | |
| Total | | $ | 2,616 | | | $ | 1,865 | | | $ | 968 | |
The difference between the effective income tax rate and the U.S. statutory rate is reconciled below:
| | | | | | | | | | | | |
| | Year Ended | | | | |
| | December 31, 2022 | | | | |
| | | | | | |
| | | | | | |
U.S. statutory rate(1) | | 21.00 | % | | | | |
| Tax attributable to Noncontrolling interest | | (17.55) | % | | | | |
| | | | | | |
| State tax rate | | 1.03 | % | | | | |
| Other | | 1.22 | % | | | | |
| Valuation allowance | | (4.67) | % | | | | |
| Effective rate | | 1.03 | % | | | | |
| | | | | | |
| | | | | | |
(1)Altus’ proportionate sharePrior to the Closing on February 22, 2022, the Company was organized as a limited partnership and was not subject to the U.S. federal income tax for the years ended December 31, 2021 and 2020.
The net deferred tax assets reflect the tax impact of temporary differences between the asset and liability amounts carried on the balance sheet under U.S. GAAP and amounts utilized for income tax purposes. The net deferred tax assets consist of the PHP construction costs were fundedfollowing:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| Deferred tax assets: | | | | |
| Investment in partnership | | $ | 156,763 | | | $ | — | |
| | | | |
| Net operating losses | | 61,555 | | | — | |
| | | | |
| | | | |
| Other | | 1,412 | | | — | |
| Total deferred tax assets | | 219,730 | | | — | |
| Valuation allowance | | (219,730) | | | — | |
| Net deferred tax assets | | — | | | — | |
| Deferred tax liabilities: | | | | |
| | | | |
| Property, plant, and equipment | | 11,018 | | | 7,190 | |
| Net deferred tax liabilities | | $ | (11,018) | | | $ | (7,190) | |
For state purposes, the Company records deferred tax assets and liabilities based on the differences between the carrying value and tax basis of assets and liabilities recorded on the Consolidated Balance Sheets. The deferred tax liabilities recorded as of December 31, 2022 and 2021 relate to these differences.
For federal purposes, the Company has a deferred tax asset related to our investment in the Partnership and net operating losses. The Company recorded a full allowance valuation on its deferred tax assets, as it has determined that more-likely-than-not that the benefit of the deferred tax assets will not be realized.
Internal Revenue Code (“IRC”) Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. The Company experienced an ownership change within the meaning of IRC Section 382 during 2022 (prior to the closing of the Transaction) that subjected certain of the Company’s tax attributes, including net operating losses ("NOLs"), to an IRC Section 382 limitation. Since the ownership change, the Company has generated additional NOLs and other tax attributes that are not currently subject to an IRC Section 382 limitation.
Upon Closing, the Company assumed certain uncertain tax positions from ALTM. The Company accounts for income taxes in accordance with ASC 740—Income Taxes, which prescribes a minimum recognition threshold a tax position must meet before being recognized in the revolving credit facility. Accordingly, Altus capitalized $8.7 millionfinancial statements. Tax positions generally refer to a position taken in a previously filed income tax return or expected to be included in a tax return to be filed in the future that is reflected in the measurement of current and deferred income tax assets and liabilities. Reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
| | | | | | | | | | | | |
| | December 31, 2022 | | | | |
| | | | | | |
| | | | | | |
| | (In thousands) | | | | |
| Balance at beginning of year | | $ | — | | | | | |
| Increased related to ALTM acquisition | | 5,238 | | | | | |
| | | | | | |
| Reductions related to current year activities | | (5,238) | | | | | |
| Balance at end of year | | $ | — | | | | | |
The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense. Each quarter the Company assesses the amounts provided for and, as a result, may increase (expense) or reduce (benefit) the amount of interest expenseand penalties. The Company has recorded no interest or penalties associated with its unrecognized tax benefit. Uncertain tax positions may change in the next twelve months; however, the Company does not expect any possible change to have a significant impact on the results of operations or financial position. If incurred, Company will record income tax interest and penalties as a component of income tax expense. As of December 31, 2022, tax years 2018 through 2022 remain subject to examination by various taxing authorities.
17. EARNINGS PER SHARE (EPS)
Basic EPS is computed by dividing net income attributable to common shareholders by the weighted average number of shares of common stock outstanding during 2020,the period. Diluted EPS is computed by dividing net income attributable to the Company by the weighted average number of shares of common stock outstanding and the assumed issuance of all potentially dilutive securities. Each issue of potential common shares is evaluated separately in sequence from the most dilutive to the least dilutive. The dilutive effect of share-based payment awards and stock options is calculated using the treasury stock method, which isassumes share purchases are calculated using the average share price of Kinetik common stock during the applicable period. The Company uses the if-converted method to compute potential common shares from potentially dilutive convertible securities. Under the if-converted method, dilutive convertible securities are assumed to be converted from the date of the issuance and the resulting common shares are included in the basisdenominator of the PHP equity interest.diluted EPS calculation for the period being presented.
The following table sets forth a reconciliation of net income and weighted average shares outstanding used in computing basic and diluted net income per common share:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands, except per share amounts) |
| Net income attributable to Class A common shareholders | | $ | 40,735 | | | $ | — | | | $ | — | |
Less: Net income available to participating unvested restricted Class A common shareholders(1) | | (12,530) | | | — | | | — | |
Excess preferred carrying amount over consideration paid(2) | | 32,900 | | | — | | | — | |
| Total net income attributable to Class A common shareholders | | $ | 61,105 | | | $ | — | | | $ | — | |
| | | | | | |
Weighted average shares outstanding - basic(3) | | 41,326 | | | — | | | — | |
Dilutive effect(4)(5) of unvested Class A common shares | | 35 | | | — | | | — | |
| Weighted average shares outstanding - diluted | | 41,361 | | | — | | | — | |
| | | | | | |
| Net income available per common share - basic | | $ | 1.48 | | | $ | — | | | $ | — | |
| Net income available per common share - diluted | | $ | 1.48 | | | $ | — | | | $ | — | |
(1)Represents dividends paid to unvested restricted Class A common shareholders.
(2)The Company impaired its investment in EPIC inRepresented excess of carrying value of redeemable noncontrolling interest Preferred Units over redemption price at redemption.
(3)Share amounts have been retrospectively restated to reflect the fourth quarter of 2021.Company’s two-for-one Stock Split. Refer to Note 11—Equity and Warrants 1—Summaryin the Notes to our Consolidated Financial Statements for further information. (4)The effect of Sian assumed exchange of the outstanding public and private warrants for shares of Class A Common Stock would have been anti-dilutive for all periods presented in which the public and private warrants were outstanding.
(5)The effect of an assumed exchange of outstanding Common Units (and the cancellation of a corresponding number of shares of outstanding Class C Common Stock) would have been anti-dilutive for all periods presented in which the Common Units were outstanding.
18. 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 December 31, 2022 and 2021, there were no accruals for loss contingencies.
Litigation
The Company is a party to various legal actions arising in the ordinary course of its businesses. In accordance with ASC 450, Contingencies, the Company accrues reserves for outstanding lawsuits, claims, and proceedings when a loss contingency is probable and can be reasonably estimated. The Company estimates the amount of loss contingencies using current available information from legal proceedings, advice from legal counsel and available insurance coverage. Due to the inherent subjectivity of the assessments and unpredictability of the outcomes of the legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s exposure and ultimate losses may be higher, and possibly significantly more, than the amounts accrued.
The Company has entered into litigation with two third parties to collect outstanding receivables totaling $19.6 million that remain outstanding from the Winter Storm Uri during February of 2021. Given the counterparties’ sufficient creditworthiness and the valid claims that we hold, no allowance has currently been established for these items as we have legally enforceable agreements with these parties.
Summarized Financial Information
The following representsrepresented selected income statement and balance sheet data for the Company’s equity method interestsEMI pipeline entities (on a 100 percent basis): | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2022 |
| | |
| | Permian Highway Pipeline LLC | | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC |
| | | | |
| | | | | | | | |
| Statements of Operations | | (In thousands) |
| Revenues | | $ | 396,846 | | | | | $ | 183,328 | | | $ | 364,223 | |
| | | | | | | | |
| Operating income | | 261,040 | | | | 98,119 | | 269,150 | |
| Net income | | 261,028 | | | | 97,834 | | 268,493 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 |
| | Gulf Coast Express Pipeline LLC | | EPIC Crude Holdings, LP | | Permian Highway Pipeline LLC | | Breviloba, LLC |
| | | | |
| | | | | | | | |
| Statements of Income | | (In thousands) |
| Revenues | | $ | 362,399 | | | $ | 164,774 | | | $ | 397,237 | | | $ | 157,683 | |
| | | | | | | | |
| Operating income (loss) | | 254,772 | | | (36,488) | | | 237,230 | | | 92,568 | |
| Net income (loss) | | 253,535 | | | (114,519) | | | 236,528 | | | 92,005 | |
| Other comprehensive income | | — | | | 4,197 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2020 |
| | Gulf Coast Express Pipeline LLC | | EPIC Crude Holdings, LP | | Permian Highway Pipeline LLC | | Breviloba, LLC |
| | | | |
| | | | | | | | |
| Statements of Income | | (In thousands) |
| Revenues | | $ | 366,185 | | | $ | 165,970 | | | $ | 7,220 | | | $ | 167,784 | |
| | | | | | | | |
| Operating income (loss) | | 266,219 | | (35,566) | | (1,798) | | 102,526 | |
| Net income (loss) | | 264,956 | | (109,614) | | (1,140) | | 102,048 | |
| Other comprehensive income | | — | | 3,484 | | — | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | For the Year Ended December 31, 2021 |
| | | | | |
| | | | | | Permian Highway Pipeline LLC | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC |
| | | | | | |
| | | | | | | | | | |
| Statements of Operations | | | | | (In thousands) |
| Revenues | | | | | | $ | 397,237 | | | $ | 157,683 | | | $ | 362,399 | |
| | | | | | | | | | |
| Operating income | | | | | | 237,230 | | | 92,568 | | | 254,772 | |
| Net income | | | | | | 236,528 | | | 92,005 | | | 253,535 | |
| | | | | | | | | | |
| | | For the Year Ended December 31, | | For the Year Ended December 31, 2020 |
| | 2019(1) | |
| | Gulf Coast Express Pipeline LLC | | EPIC Crude Holdings, LP | | Permian Highway Pipeline LLC | | Breviloba, LLC | | Permian Highway Pipeline LLC | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC | |
| | | Statements of Income | | (In thousands) | |
| Statements of Operations | | Statements of Operations | | (In thousands) |
| Revenues | Revenues | | $ | 132,103 | | | $ | 40,756 | | | $ | — | | | $ | 129,559 | | Revenues | | $ | 7,220 | | | | $ | 167,784 | | | $ | 366,185 | | |
| | Operating income (loss) | Operating income (loss) | | 108,056 | | (67,763) | | (93) | | 81,369 | | Operating income (loss) | | (1,798) | | | 102,526 | | | 266,219 | |
| Net income (loss) | Net income (loss) | | 109,997 | | (72,535) | | 1,587 | | 81,469 | | Net income (loss) | | (1,140) | | | 102,048 | | | 264,956 | |
| Other comprehensive loss | | — | | (7,681) | | — | | — | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | Permian Highway Pipeline LLC | | | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC | | Permian Highway Pipeline LLC | | | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance Sheets | | | | | | (In thousands) |
| Current assets | | $ | 94,771 | | | | | | $ | 30,541 | | | $ | 47,935 | | | $ | 69,995 | | | | | $ | 34,159 | | | $ | 74,408 | |
| Noncurrent assets | | 2,310,739 | | | | | | 1,308,087 | | | 1,594,623 | | | 2,267,940 | | | | | 1,344,178 | | | 1,655,941 | |
| Total assets | | $ | 2,405,510 | | | | | | $ | 1,338,628 | | | $ | 1,642,558 | | | $ | 2,337,935 | | | | | $ | 1,378,337 | | | $ | 1,730,349 | |
| | | | | | | | | | | | | | | | | |
| Current liabilities | | $ | 63,392 | | | | | | $ | 12,352 | | | $ | 16,103 | | | $ | 36,657 | | | | | $ | 11,244 | | | $ | 46,151 | |
| Noncurrent liabilities | | — | | | | | | 9,029 | | | 395 | | | — | | | | | 8,254 | | | 461 | |
| Equity | | 2,342,118 | | | | | | 1,317,247 | | | 1,626,060 | | | 2,301,278 | | | | | 1,358,839 | | | 1,683,737 | |
| Total liabilities and equity | | $ | 2,405,510 | | | | | | $ | 1,338,628 | | | $ | 1,642,558 | | | $ | 2,337,935 | | | | | $ | 1,378,337 | | | $ | 1,730,349 | |
(1)
8. DEBT AND FINANCING COSTS
June 2030 Sustainability-Linked Senior Notes
Although
On June 8, 2022, the Company’s interestsPartnership completed a private placement of $1.00 billion aggregate principal amount of its 5.875% Senior Notes due 2030 (the “Notes”), which are fully and unconditionally guaranteed by the Company. The Notes are issued under our Sustainability-Linked Financing Framework and include sustainability-linked features described below.
The Notes were issued at 99.588% of their face amount and will mature on June 15, 2030. Interest accrues from the most recent date to which interest has been paid on the Notes or, if no interest has been paid, from and including June 8, 2022 and is payable semi-annually in EPIC Crude Holdings, LP, Permian Highway Pipeline LLC,arrears on June 15 and Breviloba, LLCDecember 15 of each year, commencing December 15, 2022. The aggregate fees, expenses, and original issue discount paid to obtain the Notes totaled $21.5 million and were acquiredcapitalized as debt issuance cost and included in March, May, and July of 2019, respectively, the financial results for all equity method interests are presentedCondensed Balance Sheets as a direct deduction to the Notes as the Notes were transferred to third-party investors that pay the stated principal amount without deduction for the entire twelve months of 2019 for comparability.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 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 |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
| Balance Sheets | | (In thousands) |
| Current assets | | $ | 74,408 | | | $ | 101,189 | | | $ | 69,995 | | | $ | 34,159 | | | $ | 59,910 | | | $ | 122,995 | | | $ | 23,734 | | | $ | 53,206 | |
| Noncurrent assets | | 1,655,941 | | | 2,177,616 | | | 2,267,940 | | | 1,344,178 | | | 1,714,062 | | | 2,272,805 | | | 2,316,176 | | | 1,375,155 | |
| Total assets | | $ | 1,730,349 | | | $ | 2,278,805 | | | $ | 2,337,935 | | | $ | 1,378,337 | | | $ | 1,773,972 | | | $ | 2,395,800 | | | $ | 2,339,910 | | | $ | 1,428,361 | |
| | | | | | | | | | | | | | | | |
| Current liabilities | | $ | 46,151 | | | $ | 58,729 | | | $ | 36,657 | | | $ | 11,244 | | | $ | 32,997 | | | $ | 67,073 | | | $ | 95,863 | | | $ | 10,326 | |
| Noncurrent liabilities | | 461 | | | 1,185,003 | | | — | | | 8,254 | | | 526 | | | 1,187,615 | | | — | | | 2,389 | |
| Equity | | 1,683,737 | | | 1,035,073 | | | 2,301,278 | | | 1,358,839 | | | 1,740,449 | | | 1,141,112 | | | 2,244,047 | | | 1,415,646 | |
| Total liabilities and equity | | $ | 1,730,349 | | | $ | 2,278,805 | | | $ | 2,337,935 | | | $ | 1,378,337 | | | $ | 1,773,972 | | | $ | 2,395,800 | | | $ | 2,339,910 | | | $ | 1,428,361 | |
initial purchasers’ discount.
From and including June 15, 2027, the interest rate accruing on the Notes will be increased by an additional 0.250% per annum unless the Partnership delivers written notice to the trustee on or before the date that is 15 days prior to June 15, 2027 that the Partnership has satisfied, and an independent external verifier has confirmed satisfaction of the Sustainability Performance Targets (“SPT”) as defined in the indenture governing the Notes related to the three key performance indicators:(1) Reduction of Scope 1 and Scope 2 greenhouse gas emissions intensity, (2) Reduction of Scope 1 and Scope 2 methane gas emissions intensity and (3) female representation in corporate officer positions. If the conditions set forth above have only been satisfied for one or two of the SPTs rather than all three, the interest rate accruing on the Notes will be increased by an additional 0.0833% per annum for each SPT which has not been satisfied and externally verified on June 15, 2027. If the interest rate accruing on the Notes is increased in the manner set forth above and the Partnership subsequently delivers written notice to the trustee that it has satisfied the SPTs set forth in clause (1) and (2) above and such satisfaction has been confirmed by an independent external verifier, on or before the date that is 15 days prior to June 15, 2029, the interest rate accruing on the Notes will be reduced by 0.0833% per annum for each such SPT.
The Partnership may redeem some or all the Notes at any time or from time to time prior to maturity based on terms prescribed in the indenture governing the Notes and the Notes.
Revolving Credit Facility
On June 8, 2022, the Partnership entered into a revolving credit agreement (the “RCA”) among Bank of America, N.A., as administrative agent (“Bank of America”), and the banks and other financial institutions party thereto, as lenders. The RCA provides for a $1.25 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”).
The Partnership may prepay borrowings under the Revolving Credit Facility at any time without premium or penalty (other than customary SOFR breakage costs), subject to certain notice requirements. All borrowings under the Revolving Credit Facility mature on June 8, 2027. The obligations under the Revolving Credit Agreement are fully and unconditionally guaranteed by the Company.
The RCA provides for borrowings of either, at the Partnership’s option, base rate loans or term SOFR loans. Base rate loans bear interest at a rate per annum equal to the greatest of (a) the prime rate as announced from time to time by Bank of America, (b) the greater of (i) the federal funds effective rate and (ii) the overnight bank funding rate, plus 1/2 of 1.00% and (c) the adjusted term SOFR rate for an interest period of one month plus 1.00%, plus a margin that ranges between 0.25% and 1.00%, depending on the credit rating of the Partnership. SOFR loans bear interest at a rate per annum equal to the term SOFR rate for such interest periods plus 0.10%, plus a margin that ranges between 1.25% and 2.00%, depending on the credit rating of the Partnership. In obtaining the RCA, the Partnership incurred fees and expenses totaling $7.8 million, which was capitalized and included in the Consolidated Balance Sheets as “Prepaid and other current assets” and “Deferred charges and other assets.”
In addition, the Partnership is required to pay to each lender a commitment fee on the daily unfunded amount of such lender’s revolving commitment, which accrues at a rate that ranges between 0.15% and 0.35% depending on the credit rating of the Partnership.
Term Loan Credit Facility
On June 8, 2022, concurrently with the closing of the Revolving Credit Facility, the Partnership entered into a term loan credit agreement (the “TLA”) among PNC Bank, National Association, as administrative agent (“PNC Bank”), and the banks and other financial institutions party thereto, as lenders. The TLA provides for a $2.00 billion senior unsecured term loan credit facility (the “Term Loan Credit Facility”). The TLA matures on June 8, 2025. The obligations under the TLA are fully and unconditionally guaranteed by the Company.
The TLA provides for borrowings of either, at the Partnership’s option, base rate loans or term SOFR loans. Base rate loans bear interest at a rate per annum equal to the greatest of (a) the prime rate as announced from time to time by PNC Bank, (b) the greater of (i) the federal funds effective rate and (ii) the overnight bank funding rate, plus 1/2 of 1.00% and (c) the adjusted term SOFR rate for an interest period of one month plus 1.00%, plus a margin that ranges between 0.25% and 1.0%, depending on the credit rating of the Partnership. SOFR loans bear interest at a rate per annum equal to the term SOFR rate for such interest periods plus 0.10%, plus a margin that ranges between 1.25% and 2.0%, depending on the credit rating of the Partnership. In obtaining the TLA, the Partnership incurred fees and expenses totaling $7.7 million, which was capitalized as debt issuance cost and included in the Consolidated Balance Sheets as a direct deduction to the Term Loan Credit Facility.
Both the RCA and the TLA contain a “Sustainability Adjustments” feature that could result in a 0.05% increase or reduction to the effective interest rate, dependent upon the Company meeting certain sustainability targets after 2022. “Sustainability Rate Adjustment” means, with respect to any KPI Metrics Report, for any period between Sustainability Pricing Adjustment Dates, (a) positive 0.05%, if neither of the Sustainability Performance Targets (as defined in the RCA and TLA) as set forth in the KPI Metrics Report have been satisfied for the relevant calendar year, (b) 0.00% if only one of the Sustainability Performance Targets as set forth in the KPI Metrics Report has been satisfied for the relevant calendar year and (c) negative 0.05% if both of the Sustainability Performance Targets as set forth in the KPI Metrics Report have been satisfied for the relevant calendar year; provided that, in each case, if the Partnership subsequently issues a sustainability-linked debt instrument linked to the same KPI Metric and with an observation date for such calendar year, but with a higher percentage of representation or reduction, as the case may be, the relevant Sustainability Performance Target shall be automatically adjusted upward to equal the percentage of representation or reduction, as applicable, required by such subsequent sustainability-linked debt instrument.
“Sustainability Performance Targets” in the RCA and TLA mean, for any calendar year, with respect to (a) the Female Representation KPI, the target percentage of female representation in corporate officer positions for such calendar year and (b) the Methane Emissions KPI, the percentage reduction in methane gas emissions intensity relative to the baseline year for such calendar year.
Both the RCA and the TLA contain customary covenants and restrictive provisions which may, among other things, limit the Partnership’s ability to create liens, incur additional indebtedness, make restricted payments, or liquidate, dissolve, consolidate with, or merge into or with any other person. As of December 31, 2022, the Partnership is in compliance with all customary and financial covenants.
Repayment of Existing Credit Facilities
In June 2022, the Company used the net proceeds from the Notes, together with cash on hand and proceeds from the term loan credit facility, to repay all outstanding borrowings under its existing credit facilities and to pay certain related fees and expenses. In conjunction with the extinguishment of existing outstanding borrowings, the Company recognized a loss on extinguishment of debt of approximately $28.0 million. In addition, the unamortized debt issuance costs related to the existing outstanding borrowings were fully amortized and included in the loss on debt extinguishment calculation for the year ended December 31, 2022.
The fair value of the Company and its subsidiaries’ consolidated debt as of December 31, 2022 and 2021 was $2.82 billion and $2.34 billion, respectively. At December 31, 2022, the Notes’ fair value was based on Level 1 inputs and the Term Loan Credit Facility and Revolver Credit Facility’s fair value was based on Level 3 inputs.
The following table summarizes the Company’s debt obligations as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| $2.0 billion unsecured term loan | | $ | 2,000,000 | | | $ | — | |
| $1.0 billion 2030 senior unsecured notes | | 1,000,000 | | | — | |
| $1.25 billion revolving line of credit | | 395,000 | | | — | |
| $1.25 billion term loan | | — | | | 1,175,417 | |
| $690 million term loan | | — | | | 639,393 | |
| $513 million term loan | | — | | | 479,377 | |
| $125 million revolving line of credit | | — | | | 52,000 | |
| Total Long-term debt | | 3,395,000 | | | 2,346,187 | |
Less: Debt issuance costs, net(1) | | (26,490) | | | (38,485) | |
| | 3,368,510 | | | 2,307,702 | |
| Less: Current portion, net | | — | | | (54,280) | |
| Long-term portion of debt, net | | $ | 3,368,510 | | | $ | 2,253,422 | |
(1)Excluded unamortized debt issuance cost related to the Revolving Credit Facility. Unamortized debt issuance cost associated with the Revolving Credit Facility was $6.9 million and $2.2 million as of December 31, 2022 and 2021, respectively. As of December 31, 2022, the current and non-current portion of the unamortized debt issuance costs related to the revolving credit facilities were included in the “Prepaid and other current assets” and “Deferred charges and other assets” of the Consolidated Balance Sheets.
Interest Income and Financing Costs, Net of Capitalized Interest
The table below presents the components of the Company’s financing costs, net of capitalized interest:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands) |
| Capitalized interest | | $ | (2,747) | | | $ | (868) | | | $ | (16,131) | |
| Debt issuance costs | | 9,569 | | | 13,369 | | | 11,917 | |
| Interest expense | | 142,430 | | | 104,864 | | | 139,730 | |
| Total financing costs, net of capitalized interest | | $ | 149,252 | | | $ | 117,365 | | | $ | 135,516 | |
As of December 31, 2022 and 2021, unamortized debt issuance costs associated with the Notes and the Term Loan Credit Facility were $26.5 million and $38.5 million, respectively. The amortization of the debt issuance costs was charged to interest expense for the periods presented. The amount of debt issuance costs included in interest expense was $9.6 million, $13.4 million and $11.9 million for the years ended December 31, 2022, 2021, and 2020, respectively.
The following table reflects future maturities of long-term debt for each of the next five years and thereafter. These amounts exclude approximately $26.5 million in unamortized deferred financing costs:
| | | | | |
| Fiscal Year | Amount |
| (In thousands) |
| 2023 | $ | — | |
| 2024 | — | |
| 2025 | 2,000,000 | |
| 2026 | — | |
| 2027 | 395,000 | |
| Thereafter | 1,000,000 | |
| Total | $ | 3,395,000 | |
9. OTHER CURRENT LIABILITIES
The following table provides detail of the Company’s other current liabilities at December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| Accrued product purchases | | $ | 115,773 | | | $ | 118,364 | |
| Accrued taxes | | 19,509 | | | 4,299 | |
| Accrued salaries, vacation, and related benefits | | 3,934 | | | 2,113 | |
| Accrued capital expenditures | | 3,892 | | | 2,995 | |
| Accrued interest | | 24,815 | | | — | |
| | | | |
| Accrued other expenses | | 5,991 | | | 7,872 | |
| Total other current liabilities | | $ | 173,914 | | | $ | 135,643 | |
Accrued product purchases mainly accrue the liabilities related to producer payments and any additional business-related miscellaneous fees we owe to third parties, such as transport or capacity fees as of December 31, 2022.
10. LEASES
Components of lease costs are presented on the Consolidated Statements of Operations as “General and administrative expense” for real-estate leases and operating expense for non-real estate leases. Total operating lease cost for the years ended December 31, 2022, 2021, and 2020 were $37.7 million, $38.7 million, and $43.6 million, respectively. Short-term lease cost for the years ended December 31, 2022, 2021, and 2020 were $6.2 million, $4.8 million, and $2.8 million, respectively. For the years ended December 31, 2022, 2021, and 2020, the Company did not have material variable lease costs.
The following table presents other supplemental lease information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Year Ended December 31, |
| | | | | | | | | | | | | | | | | 2022 | | 2021 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | (In thousands) |
| Operating cash flows from operating lease | | | | | | | | | | | | | | | | | $ | 37,420 | | | $ | 38,355 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | | | | | | | | | | | | | | | | $ | 7,059 | | | $ | 43,580 | |
| Weighted-average remaining lease term — operating leases (in years) | | | | | | | | | | | | | | | | | 1.72 | | 1.89 |
| Weighted-average discount rate — operating leases | | | | | | | | | | | | | | | | | 6.62 | % | | 7.75 | % |
The following table presents future minimum lease payments under operating leases as of December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | | | | | | | | | | | | | | | | | Amount |
| | | | | | | | | | | | | | | | | (In thousands) |
| 2023 | | | | | | | | | | | | | | | | | $ | 23,554 | |
| 2024 | | | | | | | | | | | | | | | | | 3,458 | |
| 2025 | | | | | | | | | | | | | | | | | 1,070 | |
| 2026 | | | | | | | | | | | | | | | | | 740 | |
| 2027 | | | | | | | | | | | | | | | | | 651 | |
| Thereafter | | | | | | | | | | | | | | | | | 1,178 | |
| Total lease payments | | | | | | | | | | | | | | | | | 30,651 | |
| Less: interest | | | | | | | | | | | | | | | | | (1,818) | |
| Present value of lease liabilities | | | | | | | | | | | | | | | | | $ | 28,833 | |
11. EQUITY AND WARRANTS
Reverse Stock SplitRedeemable Noncontrolling Interest - Common Unit Limited Partners
On June 30, 2020,February 22, 2022, the Company effected a reverse stock splitconsummated the previously announced business combination transactions contemplated by the Contribution Agreement, dated as of October 21, 2021. Pursuant to the Contribution Agreement, in connection with the Closing, (i) Contributor contributed all the equity interests of the Contributed Entities to the Partnership; and (ii) in exchange for such contribution, the Partnership transferred to Contributor 50,000,000 common units representing limited partner interests in the Partnership and 50,000,000 shares of the Company’s Class 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$0.0001 per share. Please refer to “The Transaction” above.
The redemption option of the reverse stock split. All corresponding per-shareCommon Unit is not legally detachable or separately exercisable from the instrument and share amounts have been retroactively restated in this Annual Report on Form 10-Kis
non-transferable, and the Common Unit is redeemable at the option of the holder. Therefore, the Common Unit is accounted for all periods presented to reflect the reverse stock split.
Common Stockas redeemable noncontrolling interest and Warrants
The Company’s second amended and restated certificate of incorporation authorizes the issuance of 1,500,000,000 shares of Class A Common Stock, $0.0001 par value, and 1,500,000,000 shares of Class C Common Stock, $0.0001 par value. The Company’s shares of Class A Common Stock are listedclassified as temporary equity on the Nasdaq under the symbol “ALTM.” As of December 31, 2021, thereCompany’s Consolidated Balance Sheet. During 2022, 5,730,000 common units were 3,746,460 and 12,500,000 issued and outstandingredeemed on a one-for-one basis for shares of Class A Common Stock and Class C Common Stock, respectively.
In January 2022, a direct exchange by the Company and Apache was effectuated under the Amended LPA, pursuant to which the Company succeeded to Apache’s 12,500,000 Common Units, issued an additional 12,500,000 sharescorresponding number of Class A Common Stock to Apache, and cancelled Apache’s 12,500,000 shares of Class C Common Stock, whereupon the Company and Altus Midstream remained subsidiaries of Apache.
Holders of each of the Class A Common Stock and Class C Common Stock vote together as a single class on all matters submitted to a vote of the Company’s stockholders, except as required by law. Only holders of Class A Common Stock are entitled to dividends or other liquidating distributions made by the Company. On December 10, 2020, the Company announced that its board of directors initiated a dividend program on the Company’s Class A Common Stock as further detailed below under the section titled “Common Stock Dividend.”
Shares of Class A Common Stock and certain warrants were originally issued in connection with the Company’s public offering, while shares of Class C Common Stock were newly-issued in connection withcancelled. There were 94,270,000 Common Units and an equal number of Class C Common Stock issued and outstanding as of December 31, 2022. The Common Units fair value was approximately $3.11 billion as of December 31, 2022. Fair value of the Altus Combination.Common Units is estimated based on a quoted market price.
Redeemable Noncontrolling Interest — Preferred Unit Limited Partners
Upon Closing, the Company assumed certain Preferred Units that were issued and outstanding on acquisition date. The Company has redeemed all assumed Preferred Units since the Closing. Refer to Note 12—Series A Cumulative Redeemable Preferred Units for further discussion. Public Warrants
As of December 31, 2021, 2020, and 20192022 there were 12,577,350 Public Warrants (as defined below) outstanding. Each whole public warrant entitles the holder to purchase one twentiethtenth of a share of Class A Common Stock at a price of $230.00$115.00 per share (the Public Warrants). The Public Warrants will expire five years after closing of the Altus Combinationon November 9, 2023 or earlier upon redemption or liquidation. The Company may call the Public Warrants for redemption, in whole and not in part, at a price of $0.01 per warrant with not less than 30 days’ notice provided to the Public Warrant holders. However, this redemption right can only be exercised if the reported last sale price of the Class A Common Stock equals or exceeds $360.00$180.00 per share for any 20 trading20-trading days within a 30-trading day period ending three business days prior to sending the notice of redemption to the Public Warrant holders.
Following the closing of the Altus Combination, the Public Warrants continued trading under the symbol “ALTMW.” On December 11, 2018, the Company received notice from the Staff of the Nasdaq of a delisting determination with respect to its Public Warrants for failure to satisfy the Nasdaq’s minimum round lot holder listing requirement. The Public Warrants ceased trading on the Nasdaq at the opening of business on December 20, 2018. The delisting of the Public Warrants did not impact the listing or trading of the Company’s Class A Common Stock.
Private Placement Warrants
As of December 31, 2021, 2020, and 2019 ,2022 there were 6,364,281 Private Placement Warrants (as defined below) outstanding, of which Apache holds 3,182,140. The private placement warrants will expire on November 9, 2023 and are identical to the Public Warrants discussed above, except (i) they will not be redeemable by the Company so long as they are held by the initial holders or their respective permitted transferees and (ii) they may be exercised by the holders on a cashless basis (the Private“Private Placement WarrantsWarrants” and, together with the Public Warrants, the Warrants)“Warrants”).
The Warrants areCompany recorded at a fair value of $0.2 million$50 thousand for the Public Warrants and $0.9 milliona fair value of $38 thousand for the Private Warrants as of December 31, 2021 and 2020, respectively,2022 on the consolidated balance sheetConsolidated Balance Sheet in other non-current liabilities.
Earn-Out Consideration
As partin the Notes to our Consolidated Financial Statements in this Form 10-K for additional discussion regarding valuation of the Altus Combination,Warrants.
Dividend
On February 22, 2022, the Company entered into a Dividend and Distribution Reinvestment Agreement (the “Reinvestment Agreement”) with certain stockholders including BCP Raptor Aggregator, LP, BX Permian Pipeline Aggregator, LP, Buzzard Midstream LLC, APA Corporation Apache was grantedMidstream LLC, and certain individuals (each, a “Reinvestment Holder”). Under the rightReinvestment Agreement, each Reinvestment Holder is obligated to receive earn-out considerationreinvest at least 20% of up to 1,250,000all distributions on Common Units or dividends on shares of Class A Common Stock in the Company’s Class A Common Stock. Additionally, the Audit Committee resolved that for the calendar year 2022, 100% of all distributions or dividends received by each Reinvestment Holder would be reinvested in newly issued shares of Class A Common Stock. As described in these Consolidated Financial Statements, as follows:
•625,000 shares if the per share closing pricecontext requires, dividends paid to holders of the Class A Common Stock and distributions paid to holders of Common Units may be referred to collectively as reported by Nasdaq during any 30-trading-day period ending prior“dividends.”
During 2022, the Company made cash dividend payments of $40.5 million to the fifth anniversaryholders of the Closing Date is equal to or greater than $280.00 for any 20 trading days within such 30-trading-day period.
•625,000 shares if the per share closing price of the Class A Common Stock as reported by Nasdaq during any 30-trading-day period ending prior to the fifth anniversaryand Common Units and $263.3 million was reinvested in shares of the Closing Date is equal to or greater than $320.00 for any 20 trading days within such 30-trading-day period.
Redeemable Noncontrolling Interest — Apache Limited Partner
As of December 31, 2021, in conjunction with its ownership of the Class CA Common Stock Apache owned 12,500,000 Altus Midstream Common Units, approximately 76.9 percentby each Reinvestment Holder.
On January 17, 2023, the Company declared a cash dividend 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.” As of December 31, 2021, Apache had 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$0.75 per share on the Company’s Class A Common Stock onand a 1-for-one basis or, at Altus Midstream’s option, an equivalent amountdistribution of cash; provided that$0.75 per Common Unit from the Company could, 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. UponPartnership to the future redemption or exchangeholders of Common Units held by Apache, a corresponding number of shares of Class C Common Stock held by Apache would be cancelled. In January 2022, a direct exchange by the Company and Apache was effectuated under the Amended LPA, pursuant to which the Company succeeded to Apache’s 12,500,000 Common Units, issued an additional 12,500,000 sharesUnits. Dividends are payable on February 16, 2023. Certain holders of Class A Common Stock to Apache, and cancelled Apache’s 12,500,000 shares of Class C Common Stock whereupon the Company and Altus Midstream remained subsidiaries of Apache.
As of December 31, 2021, Apache’s limited partner interest associatedwill receive a cash dividend 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 December 31, 2021 and 2020, the redeemable noncontrolling interest was recorded based on the redemption value as of the balance sheet date of $769.9 million and $575.1 million, respectively.
For further discussion of Apache’s right to receivereceiving additional shares of Class A Common Stock under the Reinvestment Agreement.
Stock Split
On May 19, 2022, the Company announced that its Board approved and otherdeclared a two-for-one stock split with respect to its Class A Common Stock and Class C Common Stock, in the form of a stock dividend (the “Stock Split”). The Stock Split was accomplished by distributing one additional share of Class A Common Stock for each share of Class A Common Stock outstanding equity instrumentsand one additional share of Class C Common Stock for each share of Class C Common Stock outstanding. The additional shares of Common Stock were issued on June 8, 2022 to holders of record at the close of business on May 31, 2022.
All corresponding per-share and share amounts, excluding the Transaction, for periods prior to June 8, 2022 have been retrospectively restated in this Form 10-K to reflect the Stock Split.
12. SERIES A CUMULATIVE REDEEMABLE PREFERRED UNITS
Prior to the Closing Date of the Transaction, the Partnership had 625,000 Preferred Units issued and outstanding. Immediately prior to the Closing, on February 22, 2022, the Partnership redeemed for cash, 100,000 Preferred Units in an amount equal to approximately $120.1 million. The Company assumed the remaining 525,000 Preferred Units as well as 29,983
paid-in-kind (“PIK”) Preferred Units that were issued and outstanding at the close of the acquisition. At the close, 150,000 preferred units and 8,567 associated PIK units became mandatorily redeemable and liability classified with the balance of preferred units remaining unchanged and classified as redeemable noncontrolling interest.
During 2022, the Company redeemed all mandatorily redeemable preferred units for an aggregate $183.3 million and recognized a gain of $9.6 million, and the Company redeemed all noncontrolling interest Preferred Units for an aggregate $461.5 million and recognized excess of carrying amount over redemption price of $109.5 million. In addition, the Company bifurcated and recognized the embedded derivative associated with the noncontrolling interest Preferred Units related to the exchange option provided to the Preferred Unit holders under the terms of the Partnership LPA. As the Company redeemed all outstanding noncontrolling interest Preferred Units in July 2022 the embedded derivative liabilities were written off. The Company recorded gains of $89.1 million for the year ended December 31, 2022, which was recorded as a “Gain on embedded derivative” in the Consolidated Statement of Operations.
Activities related to Preferred Units for the year ended December 31, 2022 are as follows:
| | | | | | | | | | | | | | |
| | Units Outstanding | | Amount |
| | (In thousands, except for unit data) |
Redeemable noncontrolling interest — Preferred Units, immediately upon Closing Date of Transaction(1) | | 396,417 | | | $ | 462,717 | |
| Redemption, including PIK units | | (396,417) | | | (461,460) | |
| Cash distribution paid to Preferred Unit limited partners | | — | | | (6,937) | |
| | | | |
| Allocation of net income | | — | | | 18,128 | |
| Accreted redemption value adjustment | | — | | | 97,075 | |
| Excess of carrying amount over redemption price | | — | | | (109,523) | |
| Redeemable noncontrolling interest — Preferred Units, as of December 31, 2022 | | — | | | $ | — | |
| | | | |
| | | | |
(1)Included 21,417 PIK units on a pro rata basis.
13. FAIR VALUE MEASUREMENTS
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (In thousands) |
| Commodity swap | | $ | — | | | $ | 4,288 | | | $ | — | | | $ | 4,288 | |
| Interest rate derivatives | | — | | | 2,675 | | | — | | | 2,675 | |
| Total assets | | $ | — | | | $ | 6,963 | | | $ | — | | | $ | 6,963 | |
| | | | | | | | |
| Commodity swaps | | $ | — | | | $ | 5,718 | | | $ | — | | | $ | 5,718 | |
| Interest rate derivatives | | — | | | 8,328 | | | — | | | 8,328 | |
| | | | | | | | |
| Public warrants | | 50 | | | — | | | — | | | 50 | |
| Private warrants | | — | | | — | | | 38 | | | 38 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total liabilities | | $ | 50 | | | $ | 14,046 | | | $ | 38 | | | $ | 14,134 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (In thousands) |
| Commodity swaps | | $ | — | | | $ | 205 | | | $ | — | | | $ | 205 | |
| Interest rate derivatives | | | | 2,662 | | | — | | | 2,662 | |
| Contingent liabilities | | — | | | — | | | 839 | | | 839 | |
| | | | | | | | |
| | | | | | | | |
| Total liabilities | | $ | — | | | $ | 2,867 | | | $ | 839 | | | $ | 3,706 | |
Our derivative contracts consist of an interest rate swap and commodity swaps. Valuation of these derivative contracts involved both observable publicly quoted price and certain inputs to the credit valuation that may impact ownership interests andnot be readily observable in the limited partner interests of Altus Midstreammarketplace. As such derivative contracts are classified as Level 2 in future periods, seethe hierarchy. Refer to Note 13—Net Income (Loss) Per Share14—Derivatives and Hedging Activities.in the Notes to our Consolidated Financial Statements in this Form 10-K for further discussion related to commodity swaps and interest rate derivatives. Redeemable Noncontrolling Interest — Preferred Unit Limited Partners
On June 12, 2019, Altus Midstream issued and soldThe carrying value of the Preferred Units inCompany’s Public Warrants are recorded at fair value based on quoted market prices, a private offering,Level 1 fair value measurement. The carrying value of the Company’s Private Placement Warrants are recorded at fair value determined using an option pricing model, a Level 3 fair value measurement, which is calculated based on key assumptions related to expected volatility of the Company’s common stock, an expected dividend yield, the remaining term of the warrants outstanding and the purchasersrisk-free rate based on the U.S. Treasury yield curve in effect at the time of the Preferred Unitsvaluation. 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 $0.1 million as of December 31, 2022. Change in fair value of the warrants since closing of the Transaction through reporting date was recorded in “Interest and other income” of the Consolidated Statement of Operations.
The carrying amounts reported on the Consolidated Balance Sheets for the Company’s remaining financial assets and liabilities approximate fair value due to their short-term nature. There were admittedno transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the year ended December 31, 2022 and 2021.
14. DERIVATIVE AND HEDGING ACTIVITIES
The Company is exposed to certain risks arising from both its business operations and economic conditions, and it enters into certain derivative contracts to manage exposure to these risks. To minimize counterparty credit risk in derivative instruments, the Company enters into transactions with high credit-rating counterparties. The Company did not elect to apply hedge accounting to these derivative contracts and recorded the fair value of the derivatives on the Consolidated Balance Sheets as limited partners of Altus Midstream. December 31, 2022 and December 31, 2021.
Interest Rate Risk
The Preferred Units willCompany manages market risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and by using derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
The Company’s objectives in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract.
In September 2019, BCP PHP, LLC (“BCP PHP”) entered into two interest rate swaps on 75% of the outstanding $513.0 million term loan.These instruments were effective September 30, 2019 and included a mandatory termination date on November 19, 2024. The notional amounts of these swaps floated monthly such that 75% of the total outstanding term loan was covered by the notional of the two swaps over the life of the associated term facility. In June 2022, these two interest rate swaps were terminated as BCP PHP’s outstanding term loan credit facility was extinguished on June 8, 2022. Refer to Note 8—Debt and Financing Costs in the Notes to our Consolidated Financial Statements for further information about the refinancing transactions.
In November 2022, the Company entered into an interest rate swap with a notional amount of $1.00 billion effective on May 1, 2023 and maturing on May 31, 2025. The Company pays a fixed rate of 4.46% for the respective notional amount.
The fair value or settlement value of the consolidated interest rate swaps outstanding are presented on a gross basis on the Consolidated Balance Sheets. Interest rate swap derivative assets were $2.7 million and nil as of December 31, 2022 and 2021, respectively. Interest rate swap derivative liabilities were $8.3 million and $2.7 million as of December 31, 2022 and 2021, respectively. The Company recorded cash settlements on interest rate swap derivatives of $10.9 million, $2.9 million, and $9.2 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Interest Expense” of the Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $7.9 million, $4.5 million and $18.9 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Interest Expense” of the Consolidated Statements of Operations.
Commodity Price Risk
The results of the Company’s operations may be exchangeableaffected by the market prices of oil, natural gas and NGLs. A portion of the Company’s revenue is directly tied to local natural gas, natural gas liquids and condensate prices in the Permian Basin and the U.S. Gulf Coast. Fluctuations in commodity prices also impact operating cost elements both directly and indirectly. Management regularly reviews the Company’s potential exposure to commodity price risk and manages exposure of such risk through commodity hedge contracts.
During 2022, the Company entered into 11 commodity swap contracts based on the NGL-Mont Belvieu Purity Ethane-OPIS and Waha Basis index on various notional quantities of natural gas and NGLs. These index swaps are used to hedge against location price risk of the commodity resulting from supply and demand volatility and protect cash flows against price fluctuations. Table below presents detail information of commodity swaps outstanding as of December 31, 2022 (in thousands, except volumes):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 | | | | |
| Commodity | | Instruments | | Unit | | Volume | | Net Fair Value | | | | |
| Natural Gas (short contracts) | | Commodity Swap | | MMBtus | | 5,895,000 | | | $ | 4,737 | | | | | |
| NGL (short contracts) | | Commodity Swap | | Gallons | | 87,906,000 | | | (3,308) | | | | | |
| | | | | | | | $ | 1,429 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Similarly, in 2021 and 2020 BCP Raptor, LLC (“BCP I”) and BCP Raptor II, LLC (“BCP II”) had WTI crude hedges at a specific notional amount that provided for a fixed price for crude in the Permian Basin and Waha basis hub hedgeson various notional quantities of gas that either provided a fixed price differential of natural gas in the Permian Basin relative to the NYMEX natural gas contract or provided a fixed price for natural gas in the Permian Basin. These commodity swaps expired before December 31, 2021.
The fair value or settlement value of the swaps outstanding are presented on a gross basis on the Consolidated Balance Sheet. Commodity swap derivative assets were $4.3 million and nil as of December 31, 2022 and 2021, respectively. Commodity swap derivative liabilities were $5.7 million and $0.2 million as of December 31, 2022 and 2021, respectively. The Company recorded cash settlements on commodity swap derivatives of $0.2 million, $16.5 million, and $1.4 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Product Revenue” of the Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $1.4 million, $16.9 million and $1.6 million for the years ended December 31, 2022, 2021 and 2020, respectively, in “Product Revenue” of the Consolidated Statements of Operations.
15. SHARE-BASED COMPENSATION
Prior to the Closing, the Company issued incentive units, which included performance and service conditions, to certain employees and board members. The units consisted of Class A-1, Class A-2, and Class A-3 units. These units derived value from the Company’s certain wholly owned subsidiaries. Class A-1 and A-2 units would have vested upon either (i) the date of consummation of a change in control or (ii) the date that is 1-year following the consummation of the initial public offering (“IPO”) of the Company (or its successor) (collectively “Exit Events”). Class A-3 units would have vested upon a change in control, if the participants were employed at the time of the event, or upon termination of the participant by the Company.
Immediately upon Closing, all outstanding Class A-1 and Class A-2 units were cancelled and exchanged for 5,300,000 shares (the “Class A Shares”), post Stock Split, of the Company’s Class A Common Stock. These Class A Shares are issued and outstanding as they were distributed pro rata to all holders of Class A-1 and Class A-2 units by the Common Unit limited partners from the 50,000,000 common units, pre-Stock-Split, that such limited partners received upon the Closing. The Common Unit limited partners redeemed Common Units needed for the Class A shares distribution upon the Closing. The Class A Shares are held in escrow and will vest over three to four years. Similarly, the Class A-3 units were exchanged for approximately 326,000, post Stock at the optionSplit, Class C Common Stock and Common Units (the “Class C Shares”) and will vest over four years. The Company also issued approximately 76,000, post Stock Split, replacement restricted share awards (“Replacement Awards”) to new employees that transitioned from ALTM as part of the 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 11—Seriesmerger. These changes for all three share types established a new measurement date. The Class A Cumulative Redeemable Preferred Units for further discussion. Common Stock Dividend
During 2021, the Company paid an aggregate $22.5 million in dividendsShares, Class C Shares and Replacement Awards were valued based on the Company’s Class A Common Stock,publicly quoted stock price on the measurement date, which was the Closing Date of which $5.6 million, or $1.50 per share, was paid in each quarter of 2021.the Transaction.
Each quarterly Class A Common Stock dividend was funded by a distribution from Altus Midstream to its common unitholders of $1.50 per Common Unit, with each quarterly distribution totaling $24.4 million, of which $5.6 million was paidDuring 2022, pursuant to the Company’s 2019 Omnibus Compensation Plan, as amended from time to time (the “Plan”), the Company and the balance was paidgranted a total of 13,941 restricted stock units (“RSUs”) to Apache due to its 76.9 percent ownership of outstanding Common Units.
11. 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 UnitsBoard, which 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.
At the Closing, the partners of Altus Midstream entered into the Amended LPA. The Amended LPA provides the terms of the Preferred Units, including the distribution rate, redemption rights, and rights to exchange the Preferred Units for shares ofvalued based on the Company’s Class A Common Stock, as well as rights of holders of the Preferred Units to approve certain partnership business, financial,publicly quoted stock price on grant date and governance-related matters. The Preferred Units have a perpetual term, unless redeemed or exchanged as described below. Pursuant to the Amended LPA:
•The Preferred Units entitle the holders thereof to receive quarterly distributions at a rate of 7 percent per annum, commencing with the quarter ended June 30, 2019. The rate increases to 10 percent per annum after the fifth anniversary of Closing and upon the occurrence of specified events. For any quarter endingvested immediately on or prior to December 31, 2020, Altus Midstream could elect to pay distributions in-kind and did so in respect of quarters ended on and before March 31, 2020.
•The Preferred Units are redeemable at Altus Midstream’s option at any time in cash at a redemption price (the Redemption Price) equal to (a) the greater of (i) an 11.5 percent internal rate of return (increasing to 13.75 percent after the fifth anniversary of Closing), and (ii) a 1.3x multiple of invested capital plus (b) if applicable, the value of any accrued and unpaid distributions. The Preferred Unitsgrant date, which will be redeemable at the holder’s option upon a change of control or liquidation of Altus Midstream and certain other events, including certain asset dispositions. The Company and Altus Midstream remained subsidiaries of Apache upon consummation of the January 2022 direct exchange by the Company and Apache under the Amended LPA, pursuant to which the Company succeeded to Apache’s 12.5 million Common Units, issued an additional 12.5 millionsettled in shares of Class A Common Stock at such time elected by each non-employee director’s deferral election form. The Company also granted a total of 46,858 RSUs to Apache,employees during 2022, which were valued based on the Company’s publicly quoted stock price on grant date and cancelled Apache’s 12.5 million shares of Class C Common Stock (as further discussed in were subject to a vesting period between oneNote 10—Equity and Warrants).•The Preferred Unitsthree years, subject to continued employment through the applicable vesting date. Once vested, the employee RSUs 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 or upon the occurrence of specified events. Each Preferred Unit will be exchangeable for a number ofsettled in shares of Class A Common Stock equalStock.
With respect to above shares and RSUs, the Company recorded compensation expenses of $42.8 million, in the “General and administrative expenses” of the Consolidated Statement of Operations, for year ended December 31, 2022 based on a straight-line amortization of the associated awards’ fair value over the respective vesting life of the shares. With respect to the Redemption Price divided byabove incentive units, no compensation expenses were recorded for the volume-weighted average trading priceyears ended December 31, 2021 and 2020, as the incentive units were considered non-vested prior to their cancellation and exchange for Class A or Class C Common Stock, and no RSUs were granted during 2021 or 2020.
16. INCOME TAXES
The total income tax provision consists of the Class A Common Stock on the Nasdaq Global Select Market for the 20 trading days immediately preceding the second trading day prior to the applicable exchange date, less a 6 percent discount.following:
•Each outstanding Preferred Unit has a liquidation preference equal to the Redemption Price payable before any amounts are paid in respect of Altus Midstream’s Common Units and any other units that rank junior to the Preferred Units with respect to distributions or distributions upon liquidation.
•Altus Midstream is restricted from declaring or making cash distributions on its Common Units until all required distributions on the Preferred Units have been paid. In addition, before the fifth anniversary of Closing, aggregate cash distributions on, and redemptions of, Common Units are limited to $650 million of cash from ordinary course of operations if permitted under the Amended Credit Agreement. Cash distributions on, and redemptions of, Common Units also are subject to satisfaction of leverage ratio requirements specified in the Amended LPA.
Since the Preferred Units could be exchangeable for a number of shares of Class A Common Stock equal to 20 percent or more of the Company’s outstanding voting power, the Company submitted the potential issuance of such shares for approval of its stockholders (the Stockholder Approval) at its annual stockholder meeting in 2020 and obtained Stockholder Approval.
Classification | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands) |
| Current income taxes: | | | | | | |
| | | | | | |
| State | | $ | 522 | | | $ | — | | | $ | — | |
| | 522 | | | — | | | — | |
| Deferred income taxes: | | | | | | |
| | | | | | |
| State | | 2,094 | | | 1,865 | | | 968 | |
| | 2,094 | | | 1,865 | | | 968 | |
| Total | | $ | 2,616 | | | $ | 1,865 | | | $ | 968 | |
The Preferred Units are accounted for ondifference between the Company’s consolidated balance sheet as a redeemable noncontrolling interest classified as temporary equity based oneffective income tax rate and the terms of the Preferred Units, including the redemption rights with respect thereto.
Initial Measurement
The net transaction price as shown below was based on the negotiated transaction price, less issue discounts and transaction costs.U.S. statutory rate is reconciled below:
| | | | | | | | | | | | |
| | June 12, 2019Year Ended | | | | |
| | (In thousands) |
Transaction price, grossDecember 31, 2022 | | $ | 625,000 | |
Issue discount | | (3,675) | |
Transaction costs to other third parties | | (10,076) | |
Transaction price, net | | $ | 611,249 | |
Certain redemption features embedded within the terms of the Preferred Units require bifurcation and measurement at fair value. As such, the net transaction price shown in the table above was allocated to the preferred redeemable noncontrolling interest and the embedded features according to the associated initial fair value measurements as follows:
| | | | | | | | |
| | June 12, 2019 |
| | (In thousands) |
Redeemable noncontrolling interest - Preferred Units | | $ | 516,790 | |
Long-term liability: Embedded derivativeU.S. statutory rate(1)
| | 94,45921.00 | % | | | | |
| Tax attributable to Noncontrolling interest | | (17.55) | % | | | | |
| | | | | | |
$State tax rate | | 1.03 | 611,249 % | | | | |
| Other | | 1.22 | % | | | | |
| Valuation allowance | | (4.67) | % | | | | |
| Effective rate | | 1.03 | % | | | | |
| | | | | | |
| | | | | | |
Subsequent Measurement
The Company applies a two-step approach to subsequently measure the redeemable noncontrolling interest relatedPrior to the Preferred Units, by first allocating a portion of the net income of Altus Midstream in accordance with the terms of the Amended LPA described above.
After consideration of the foregoing,Closing on February 22, 2022, the Company records an additional adjustmentwas organized as a limited partnership and was not subject 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 UnitsU.S. federal income tax for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | |
| | Units Outstanding | | Financial Position(1) |
| | | | |
| | (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 | | — | | | (46,249) | |
| Distributions payable to Preferred Unit limited partners | | — | | | (11,562) | |
| Allocation of Altus Midstream net income | | N/A | | 79,931 | |
| Accreted redemption value adjustment | | N/A | | 81,975 | |
| Redeemable noncontrolling interest — Preferred Units: at December 31, 2021 | | 660,694 | | | $ | 712,476 | |
Embedded derivative liability(2) | | | | 56,895 | |
| | | | $ | 769,371 | |
(1)The Preferred Units are redeemable at Altus Midstream’s option at a redemption price (the Redemption Price), which as of December 31, 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 December 31, 2021, the Redemption Price would have been based on an 11.5 percent internal rate of return, which would equate to a redemption value of $738.7 million.
(2)Certain redemption features embedded within the terms of the Preferred Units require bifurcation and measurement at fair value. Refer to Note 14—Fair Value Measurements for discussion of the fair value changes in the embedded derivative liability during the period.N/A - not applicable.
12. INCOME TAXES
The total income tax provision (benefit) consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In thousands) |
| Current income taxes: | | | | | | |
| Federal | | $ | — | | | $ | (696) | | | $ | (15) | |
| State | | — | | | — | | | — | |
| | — | | | (696) | | | (15) | |
| Deferred income taxes: | | | | | | |
| Federal | | — | | | — | | | 67,516 | |
| State | | — | | | — | | | (2,601) | |
| | — | | | — | | | 64,915 | |
| Total | | $ | — | | | $ | (696) | | | $ | 64,900 | |
The total income tax provision (benefit) differs from the amounts computed by applying the U.S. statutory income tax rate to net income (loss) before income taxes. A reconciliation of the tax on the Company’s net income (loss) before income taxes and total tax expense (benefit) is shown below:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In thousands) |
| Income tax expense (benefit) at U.S. statutory rate | | $ | 20,836 | | | $ | 17,008 | | | $ | (265,192) | |
| Income tax expense (benefit) attributable to Apache limited partner | | (15,932) | | | (12,892) | | | 205,844 | |
| Income tax benefit attributable to Preferred Unit limited partners | | (7,833) | | | (3,676) | | | (1,879) | |
State tax benefit(1) | | — | | | — | | | (2,610) | |
| CARES Act tax impact | | — | | | (266) | | | — | |
Valuation allowance(1) | | 3,068 | | | (620) | | | 130,988 | |
| Warrant valuation adjustment | | (139) | | | (252) | | | (2,348) | |
| All other, net | | — | | | 2 | | | 97 | |
| Income tax expense (benefit) | | $ | — | | | $ | (696) | | | $ | 64,900 | |
(1) The change in state valuation allowance is included as a component of state income tax.
The net deferred tax assets reflect the tax impact of temporary differences between the asset and liability amounts carried on the balance sheet under U.S. GAAP and amounts utilized for income tax purposes. The net deferred tax assets consist of the following: | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| | | | |
| | (In thousands) |
| Deferred tax assets: | | | | |
| Investment in partnership | | $ | 88,054 | | | $ | 92,881 | |
| Asset retirement obligation | | 512 | | | 480 | |
| Net operating losses | | 44,437 | | | 37,675 | |
| Property, plant, and equipment | | 3,358 | | | 4,471 | |
| | | | |
| Total deferred tax assets | | 136,361 | | | 135,507 | |
| Valuation allowance | | (135,263) | | | (133,077) | |
| Net deferred tax assets | | 1,098 | | | 2,430 | |
| Deferred tax liabilities: | | | | |
| | | | |
| Other | | 1,098 | | | 2,430 | |
| Net deferred tax assets | | $ | — | | | $ | — | |
In 2021, the Company recorded an increase in valuation allowance against its net deferred tax asset. The Company has assessed the future potential to realize these deferred tax assets and has concluded that it is more likely than not that these deferred tax assets will not be realized. | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| Deferred tax assets: | | | | |
| Investment in partnership | | $ | 156,763 | | | $ | — | |
| | | | |
| Net operating losses | | 61,555 | | | — | |
| | | | |
| | | | |
| Other | | 1,412 | | | — | |
| Total deferred tax assets | | 219,730 | | | — | |
| Valuation allowance | | (219,730) | | | — | |
| Net deferred tax assets | | — | | | — | |
| Deferred tax liabilities: | | | | |
| | | | |
| Property, plant, and equipment | | 11,018 | | | 7,190 | |
| Net deferred tax liabilities | | $ | (11,018) | | | $ | (7,190) | |
The Company reconciles its effective tax rate to its net income (loss) before income taxes. This includes net income (loss) before income taxes attributable to both the controlling and noncontrolling interests. As such, the Company’s effective tax rate includes adjustments to remove income (loss) attributed to the noncontrolling interests. In 2021, 2020, and 2019, the Company recorded tax benefit adjustments of $15.9 million and $12.9 million and a tax expense adjustment of $205.8 million, respectively, associated with income and losses allocated to Apache.
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. For the year ended December 31, 2020, the Company recorded a current income tax benefit of $0.7 million associated with a net operating loss carryback claim.
In the first quarter of 2020, the Company early adopted ASU 2019-12, “Simplifying the Accounting for Income Taxes.”The Company’s adoption of ASU 2019-12 did not result in a material impact on the consolidated financial statements.
On June 12, 2019, Altus Midstream issued and sold the Preferred Units in a private offering. Concurrently, the Preferred Units were established as a new class of partnership unit representing limited partner interests in Altus Midstream pursuant to the terms of the Amended LPA, and the purchasers were admitted as limited partners of Altus Midstream. In 2021, 2020 and 2019, the Company recorded a tax benefit adjustment of $7.8 million, $3.7 million, and $1.9 million, respectively, associated with income allocated to the noncontrolling Preferred Unit limited partners of Altus Midstream. For further details on the terms of the Preferred Units and the rights of the holders thereof, refer to Note 11—Series A Cumulative Redeemable Preferred Units.Altus is also subject to the Texas margin tax. Unlike federal income taxes, the Texas margin regime assesses tax on corporations, limited liability companies, limited partnerships, and disregarded entities. As such,state purposes, the Company records deferred tax assets and liabilities for Texas margin tax based on the differences between the financial statement carrying value and tax basis of assets and liabilities recorded on the balance sheet.Consolidated Balance Sheets. The Texas margindeferred tax associated with Apache's share of the liability isliabilities recorded as a component of the noncontrolling interest.December 31, 2022 and 2021 relate to these differences.
TheFor federal purposes, the Company has a federaldeferred tax asset related to our investment in the Partnership and net operating loss carryforward of $211.6 million, which has an indefinite carryforward period.losses. The Company has recorded a full allowance valuation allowance againston its deferred tax assets, as it has determined that more-likely-than-not that the federal net operating loss because it is more likely than not that this attributebenefit of the deferred tax assets will not be realized.
On January 14,Internal Revenue Code (“IRC”) Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. The Company experienced an ownership change within the meaning of IRC Section 382 during 2022 a direct exchange by(prior to the closing of the Transaction) that subjected certain of the Company’s tax attributes, including net operating losses ("NOLs"), to an IRC Section 382 limitation. Since the ownership change, the Company has generated additional NOLs and Apache Midstream LLC was effectuated under the Amended LPA, pursuantother tax attributes that are not currently subject to whichan IRC Section 382 limitation.
Upon Closing, the Company succeeded to Apache’s 12,500,000 Common Units, issued an additional 12,500,000 shares of Class A Common Stock to Apache, and cancelled Apache’s 12,500,000 shares of Class C Common Stock (as further discussed in Note 10—Equity and Warrants).For federal incomeassumed certain uncertain tax purposes, the Company is deemed to have acquired 12,500,000 Common Units and as a result, the tax basis of the assets held by Altus Midstream LP was increased to the market value of Class A Common Stock on the exchange date. positions from ALTM. The Company accounts for income taxes in accordance with ASC Topic 740, “Income740—Income Taxes”, which prescribes a minimum recognition threshold a tax position must meet before being recognized in the financial statements. Tax positions generally refer to a position taken in a previously filed income tax return or expected to be included in a tax return to be filed in the future that is reflected in the measurement of current and deferred income tax assets and liabilities. A reconciliationReconciliation of the beginning and ending amount of unrecognized tax benefitsbenefit is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In thousands) |
| Balance at beginning of year | | $ | 4,613 | | | $ | 2,057 | | | $ | — | |
| Additions based on tax positions related to the prior year | | — | | | — | | | — | |
| Additions based on tax positions related to the current year | | 1,622 | | | 2,556 | | | 2,057 | |
| Reductions for tax positions of prior years | | — | | | — | | | — | |
| Balance at end of year | | $ | 6,235 | | | $ | 4,613 | | | $ | 2,057 | |
| | | | | | | | | | | | |
| | December 31, 2022 | | | | |
| | | | | | |
| | | | | | |
| | (In thousands) | | | | |
| Balance at beginning of year | | $ | — | | | | | |
| Increased related to ALTM acquisition | | 5,238 | | | | | |
| | | | | | |
| Reductions related to current year activities | | (5,238) | | | | | |
| Balance at end of year | | $ | — | | | | | |
The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense. Each quarter the Company assesses the amounts provided for and, as a result, may increase (expense) or reduce (benefit) the amount of interest and penalties. The Company has recorded no interest or penalties associated with its unrecognized tax benefit. Uncertain tax positions may change in the next twelve months; however, the Company does not expect any possible change to have a significant impact on the results of operations or financial position. If incurred, AltusCompany will record income tax interest and penalties as a component of income tax expense. The contributorAs of Altus Midstream LP’s operating assets, Apache Corporation, is currently under IRS audit for the 2014December 31, 2022, tax years 2018 through 2017 tax years.2022 remain subject to examination by various taxing authorities.
13. NET INCOME (LOSS)17. EARNINGS PER SHARE (EPS)
Basic net income (loss) per shareEPS is calculatedcomputed by dividing net income (loss) attributable to Class A common shareholders by the weighted average number of shares of Class A Common Stockcommon stock outstanding during the period. Class C Common StockDiluted EPS is excludedcomputed by dividing net income attributable to the Company by the weighted average number of shares of common stock outstanding and the assumed issuance of all potentially dilutive securities. Each issue of potential common shares is evaluated separately in sequence from the most dilutive to the least dilutive. The dilutive effect of share-based payment awards and stock options is calculated using the treasury stock method, which assumes share purchases are calculated using the average share price of Kinetik common stock during the applicable period. The Company uses the if-converted method to compute potential common shares from potentially dilutive convertible securities. Under the if-converted method, dilutive convertible securities are assumed to be converted from the date of the issuance and the resulting common shares are included in the denominator of the diluted EPS calculation for the period being presented.
The following table sets forth a reconciliation of net income and weighted average shares outstanding for the calculation ofused in computing basic and diluted net income (loss) per share, as holderscommon share:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands, except per share amounts) |
| Net income attributable to Class A common shareholders | | $ | 40,735 | | | $ | — | | | $ | — | |
Less: Net income available to participating unvested restricted Class A common shareholders(1) | | (12,530) | | | — | | | — | |
Excess preferred carrying amount over consideration paid(2) | | 32,900 | | | — | | | — | |
| Total net income attributable to Class A common shareholders | | $ | 61,105 | | | $ | — | | | $ | — | |
| | | | | | |
Weighted average shares outstanding - basic(3) | | 41,326 | | | — | | | — | |
Dilutive effect(4)(5) of unvested Class A common shares | | 35 | | | — | | | — | |
| Weighted average shares outstanding - diluted | | 41,361 | | | — | | | — | |
| | | | | | |
| Net income available per common share - basic | | $ | 1.48 | | | $ | — | | | $ | — | |
| Net income available per common share - diluted | | $ | 1.48 | | | $ | — | | | $ | — | |
(1)Represents dividends paid to unvested restricted Class A common shareholders.
(2)Represented excess of Class C Commoncarrying value of redeemable noncontrolling interest Preferred Units over redemption price at redemption.
(3)Share amounts have been retrospectively restated to reflect the Company’s two-for-one Stock are not entitledSplit. Refer to any dividends or liquidating distributions.Note 11—Equity and Warrantsin the Notes to our Consolidated Financial Statements for further information. (4)The Company uses the “if-converted method” to determine the potential dilutive effect of (i) an assumed exchange of the outstanding Common Units of Altus Midstream (and the cancellation of a corresponding number of shares of outstanding Class C Common Stock)public and private warrants for shares of Class A Common Stock and (ii) an assumed exchange of the outstanding Preferred Units of Altus Midstreamwould have been anti-dilutive for shares of Class A Common Stock. The treasury stock method is used to determine the potential dilutive effect of its outstanding warrants. The dilutive effect of any earn-out consideration payable in shares is only included in periods for which the underlying conditions for the issuance are met.
The computation of basic and diluted net income (loss) per share for theall periods presented in which the consolidated financial statements is shown in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Loss | | Shares | | Per Share | | Income | | Shares | | Per Share | | Loss | | Shares(3) | | Per Share |
| | | | | | | | | | | | | | | | | |
| (In thousands, except per share data) |
| Basic: | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to Class A common shareholders | $ | (13,944) | | | 3,746 | | $ | (3.72) | | | $ | 2,791 | | | 3,746 | | $ | 0.75 | | | $ | (358,490) | | | 3,746 | | $ | (95.70) | |
| Effect of dilutive securities: | | | | | | | | | | | | | | | | | |
| Redeemable noncontrolling interest — Apache limited partner | $ | (48,741) | | | 12,500 | | | | $ | 2,987 | | | 12,500 | | | | $ | — | | | — | | |
| | | | | | | | | | | | | | | | | |
Diluted(1)(2): | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to Class A common shareholders | $ | (62,685) | | | 16,246 | | $ | (3.86) | | | $ | 5,778 | | | 16,246 | | $ | 0.36 | | | $ | (358,490) | | | 3,746 | | $ | (95.70) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
(1)(5)The effect of 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) would have been anti-dilutive for the year ended December 31, 2019.
(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 all periods presented in which the PreferredCommon Units were outstanding.
(3)Share and per share amounts have been retroactively restated to reflect the Company’s reverse stock split, which was effected June 30, 2020. Refer to Note 10—Equity and Warrants for further information.The diluted earnings per share calculation excludes the effects of the outstanding warrants of the Company to purchase an aggregate 947,082 shares of Class A Common Stock, since the associated impacts would have been anti-dilutive for all periods presented. Earn-out consideration granting Apache the right to receive additional shares of Class A Common Stock is also not included in the earnings per share calculation above, as the conditions for issuance were not satisfied as of the year ended December 31, 2021.
18. 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 December 31, 2022 and 2021, there were no accruals for loss contingencies.
Litigation
The Company is a party to various legal actions arising in the ordinary course of its businesses. In accordance with ASC 450, Contingencies, the Company accrues reserves for outstanding lawsuits, claims, and proceedings when a loss contingency is probable and can be reasonably estimated. The Company estimates the amount of loss contingencies using current available information from legal proceedings, advice from legal counsel and available insurance coverage. Due to the inherent subjectivity of the assessments and unpredictability of the outcomes of the legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s exposure and ultimate losses may be higher, and possibly significantly more, than the amounts accrued.
The Company has entered into litigation with two third parties to collect outstanding receivables totaling $19.6 million that remain outstanding from the Winter Storm Uri during February of 2021. Given the counterparties’ sufficient creditworthiness and the valid claims that we hold, no allowance has currently been established for these items as we have legally enforceable agreements with these parties.
Environmental Matters
As an owner of infrastructure assets with rights to surface lands, the Company is subject to various local and federal laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the Company for the cost of pollution clean-up resulting from operations and subject the Company to liability for pollution damages. The Company is not aware of any environmental claims existing as of December 31, 2022, that have not been provided for or would otherwise have a material impact on its financial position, results of operations, or liquidity.
Contingent Liabilities
2019 PDC Acquisition
As part of the acquisition of Permian Gas on June 11, 2019, consideration included a contingent liability arrangement with PDC Permian, Inc. (“PDC”). The arrangement requires additional monies to be paid by the Company to PDC on a per Mcf basis if the actual annual Mcf volume amounts exceed forecasted annual Mcf volume amounts starting in 2020 and continuing through 2029. The arrangement defines the incentive rate per Mcf for each qualifying year and the total monies paid under this arrangement are capped at $60.5 million. Amounts are payable on an annual basis over the earn-out period. The fair value of the contingent liability recognized on the acquisition date of $3.9 million was estimated utilizing the following key assumptions: (1) present value factors based on the Company’s weighted-average cost of capital, 2) a probability weighted payout based on an estimate of future volumes and (3) a discount period consistent with the arrangement’s life and the respective due dates of the potential future payments. Based on current forecasts and discussions with PDC, management revalued this contingent liability with updated assumptions at each reporting period. The Company did not expect PDC’s actual annual Mcf volume amounts to exceed forecasted amounts as of December 31, 2022; therefore, the estimated fair value of the contingent consideration liability was nil as of December 31, 2022. The estimated fair value of the contingent consideration liability related to this acquisition was $0.8 million as of December 31, 2021.
Original Altus Transaction
As part of the Transaction, the Company assumed contingent liabilities of $4.5 million related to earn-out consideration of up to 2,500,000 shares of Class A Common Stock, which was part of the original Altus transaction, as follows:
• 1,250,000 shares if the per share closing price of the Class A Common Stock as reported by the New York Stock Exchange (“NYSE”) during any 30-trading-day period ending prior to November 9, 2023 is equal to or greater than $140.00 for any 20 trading days within such 30-trading-day period.
• 1,250,000 shares if the per share closing price of the Class A Common Stock as reported by the NYSE during any 30-trading-day period ending prior to November 9, 2023 is equal to or greater than $160.00 for any 20 trading days within such 30-trading-day period.
Pursuant to ASC 805, this earn-out consideration was a pre-existing contingency and accounted for as an assumed liability to the acquirer on the acquisition date. Immediately subsequent to the Closing, the Company evaluated the earn-out consideration classification in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The Company determined the earn-out consideration to be classified as equity based on the settlement provision.
19. Related Party Transactions
Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB ASC Topic 850, Related Party Transactions (“Topic 850”), requires that transactions with related parties that would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance.
Upon the Closing of the Transaction on February 22, 2022, the following shareholders own more than 10% of the Company’s issued and outstanding Common Stock: BCP Raptor Aggregator LP, Blackstone Management Partners, LLC, BX Permian Pipeline Aggregator LP, Buzzard Midstream LLC and Apache Midstream, LLC. Out of these affiliates, the Company has product and service revenue contracts and operating expense contracts with Apache Midstream. In addition, Apache Midstream acquired Titus Oil and Gas, LLC (“Titus”) in October 2022, at which time Titus became a related party.
The Company identifies the below unconsolidated affiliates as related parties:
Also, upon Closing of the Transaction, the Company acquired initial equity interests in Breviloba, GCX and EPIC- and an additional equity interest in PHP. Investments in these EMIs are accounted for using the equity investment method and are considered unconsolidated affiliates. The Company makes contributions, receives distributions and records equity in earnings or losses from these EMIs. See Note 7—Equity Method Investments in the Notes to our Consolidated Financial Statements in this Form 10-K for further information. In addition to equity investment activities, the Company pays a demand fee to PHP and a capacity fee to Breviloba for certain volumes transported on the Shin Oak NGL Pipeline. Jetta Permian, LP (“Jetta”) and Primexx Energy Partners, Ltd. (“Primexx”) were affiliates of Blackstone under which we shared common control. Jetta became a related party effective with the Company’s purchase of EagleClaw on June 22, 2017. Effective July 1, 2021, Jetta was acquired by EOG Resources, Inc. and was no longer considered a related party as of December 31, 2021. Primexx became a related party effective October 1, 2017. Effective October 6, 2021, Primexx was no longer considered a related party as it was purchased by Callon Petroleum Company. The Company has commercial gas gathering and processing contracts with Jetta and Primexx.
The following table summarizes transactions with the above unconsolidated affiliates. Investment contributions, distributions and equity in earnings from EMIs are detailed in Note 7—Equity Method Investments in the Notes to our Consolidated Financial Statements in this Form 10-K, thus, not included in the table below. Apache Midstream, Titus, GCX, EPIC and Breviloba were not considered related parties during 2021 and 2020 and Jetta and Primexx were not considered related parties during 2022. | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | (In thousands) |
| | | | | | |
| | | | | | |
| Operating revenue | | $ | 107,662 | | | $ | 7,300 | | | $ | 13,300 | |
| Operating expense | | 632 | | | — | | | — | |
| Cost of sales | | 39,304 | | | 62,900 | | | 37,100 | |
As of December 31, 2022, accounts receivable due from Apache Midstream and Titus totaled $17.6 million and immaterial accounts payable were due to Apache Midstream or Titus. As of December 31, 2022, no accounts receivable or payable were due from or to PHP or Breviloba. As of December 31, 2021, no accounts receivable or payable were due from or to Jetta or Primexx.
14. FAIR VALUE MEASUREMENTS20. SEGMENTS
TheOur two operating segments represent the Company’s segments for which discrete financial assetsinformation is available and liabilities measured at fair valueis utilized on a recurringregular basis consist of: cashby our chief operating decision maker (“CODM”) to make key operating decisions, assess performance and cash equivalents; revenue receivables; accounts receivable from/payableallocate resources. Our Chief Executive Officer is the CODM. These segments are strategic business units with differing products and services. No operating segments have been aggregated to Apache,form the Company’s warrant liability,reportable segments. Therefore, our two operating segments represent our reportable segments. Upon Closing, our CODM reviewed the Company and an embedded derivative liability relatedALTM’s reporting segment activities. The Company then renamed its Gathering and Processing segment to Midstream Logistics and its Transmission segment to Pipeline Transportation. These name changes were made to better align segment activities with the issuance of Preferred Units. This embedded derivative liability is recorded on the Company’s consolidated balance sheet at fair value. 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 3name of the fair value hierarchy during the years ended December 31, 2021respective segment. There was no change in segment composition or 2020.
The Company bifurcated and recognized the 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) was 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, any anticipated early redemptions of the Preferred Units, 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 $82.1 million and unrealized losses of $36.1 million and $8.5 millionstructure for the years ended December 31, 2022 and 2021 2020 and 2019, respectively, which are recorded in “Unrealized derivative instrument loss” inaside from the consolidated statementadditions of operations. Altus has classified these recurring fair value measurementsnew operations as Level 3 in the fair value hierarchy.
As of the December 31, 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quantitative Information About Level 3 Fair Value Measurements |
| | Fair Value at December 31, 2021 | | Valuation Technique | | Significant Unobservable Inputs | | Range/Value |
| | | | | | | | |
| | (In thousands) | | | | | | |
Preferred Units Embedded Derivative | | $ | 56,895 | | | Option Model | | Altus Midstream Company’s Imputed Interest Rate | | 5.54-11.21% |
| | | | | | Interest Rate Volatility | | 40.08% |
In addition, no early redemptions of the Preferred Units were assumed for the December 31, 2020 valuation. As a result of the announced BCP Business CombinationTransaction.
The activities of each of our reportable segments from which the Company earns revenues, records equity earnings or losses and associated publicly filed information,incurs expenses are described below:
•Midstream Logistics: The Midstream Logistics segment operates under three service offerings, 1) gas gathering and processing, 2) crude oil gathering, stabilization and storage services and 3) water gathering and disposal.
•Pipeline Transportation: The Pipeline Transportation segment consists of equity investment interests in four Permian Basin pipelines that access various points along the Texas Gulf Coast, Brandywine NGL Pipeline and Delaware Link Pipeline that is under development. The current operating pipelines transport crude oil, natural gas and NGLs.
The following tables present the reconciliation of the segment profit measure as of and for the years ended December 31, 2022, 2021 valuation assumed 250,000 Preferred Units would be redeemed beforeand 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Midstream Logistics | | Pipeline Transportation | | Corporate and Other(1) | | Consolidated(2) |
| | | | | | | | | |
| For the year ended December 31, 2022 | | (In thousands) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Segment net income (loss) including noncontrolling interests | | $ | 150,957 | | | $ | 180,965 | | | $ | (81,201) | | | $ | 250,721 | |
| Add back: | | | | | | | | |
| Interest expense (income) | | 47,419 | | | (664) | | | 102,497 | | | 149,252 | |
| | | | | | | | |
| Income tax expense (benefit) | | 456 | | | (39) | | | 2,199 | | | 2,616 | |
| Depreciation and amortization | | 259,318 | | | 1,016 | | | 11 | | | 260,345 | |
| Contract assets amortization | | 1,807 | | | — | | | — | | | 1,807 | |
| Proportionate EMI EBITDA | | — | | | 268,826 | | | — | | | 268,826 | |
| Share-based compensation | | — | | | — | | | 42,780 | | | 42,780 | |
| Loss (gain) on disposal of assets | | 12,645 | | | — | | | (34) | | | 12,611 | |
| Loss (gain) on debt extinguishment | | 27,983 | | | (8) | | | — | | | 27,975 | |
| | | | | | | | |
| | | | | | | | |
| Integration costs | | 1,314 | | | 93 | | | 10,801 | | | 12,208 | |
| Acquisition transaction costs | | 9 | | | — | | | 6,403 | | | 6,412 | |
| Other one-time costs or amortization | | 14,137 | | | 4 | | | 2,214 | | | 16,355 | |
| Deduct: | | | | | | | | |
| Warrant valuation adjustment | | — | | | — | | | 133 | | | 133 | |
| Gain on redemption of mandatorily redeemable Preferred units | | — | | | — | | | 9,580 | | | 9,580 | |
| Gain on embedded derivative | | — | | | — | | | 89,050 | | | 89,050 | |
| Equity income from unconsolidated affiliates | | — | | | 180,956 | | | — | | | 180,956 | |
Segment adjusted EBITDA(3) | | $ | 516,045 | | | $ | 269,237 | | | $ | (13,093) | | | $ | 772,189 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Midstream Logistics | | Pipeline Transportation | | Corporate and Other(1) | | Consolidated(2) |
| | | | | | | | | |
| For the year ended December 31, 2021 | | (In thousands) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Segment net income (loss) including noncontrolling interests | | $ | (35,969) | | | $ | 53,318 | | | $ | (15,867) | | | $ | 1,482 | |
| Add back: | | | | | | | | |
| Interest expense | | 110,389 | | | 6,976 | | | — | | | 117,365 | |
| | | | | | | | |
| Income tax expense | | 1,535 | | | 330 | | | — | | | 1,865 | |
| Depreciation and amortization | | 243,045 | | | 513 | | | — | | | 243,558 | |
| Contract assets amortization | | 1,792 | | | — | | | — | | | 1,792 | |
| Proportionate EMI EBITDA | | — | | | 83,593 | | | — | | | 83,593 | |
| | | | | | | | |
| Loss on disposal of assets | | 359 | | | 23 | | | — | | | 382 | |
| | | | | | | | |
| | | | | | | | |
| Derivatives loss due to Winter Storm Uri | | 13,456 | | | — | | | — | | | 13,456 | |
| | | | | | | | |
| Acquisition transaction costs | | — | | | — | | | 5,730 | | | 5,730 | |
| Other one-time costs or amortization | | 2,494 | | | 182 | | | 180 | | | 2,856 | |
| Producer settlement | | 6,827 | | | — | | | — | | | 6,827 | |
| Deduct: | | | | | | | | |
| Interest income | | 115 | | | — | | | — | | | 115 | |
| Equity income from unconsolidated affiliates | | — | | | 63,074 | | | — | | | 63,074 | |
| Gain on debt extinguishment | | 4 | | | — | | | — | | | 4 | |
Segment adjusted EBITDA(3) | | $ | 343,809 | | | $ | 81,861 | | | $ | (9,957) | | | $ | 415,713 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Midstream Logistics | | Pipeline Transportation | | Corporate and Other(1) | | Consolidated(2) |
| | | | | | | | | |
| For the year ended December 31, 2020 | | (In thousands) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Segment loss including noncontrolling interests | | $ | (1,128,529) | | | $ | (17,644) | | | $ | (9,616) | | | $ | (1,155,789) | |
| Add back: | | | | | | | | |
| Interest expense | | 119,650 | | | 15,866 | | | — | | | 135,516 | |
| | | | | | | | |
| Income tax expense | | 968 | | | — | | | — | | | 968 | |
| Depreciation and amortization | | 223,763 | | | — | | | — | | | 223,763 | |
| Contract assets amortization | | 1,805 | | | — | | | — | | | 1,805 | |
| Proportionate EMI EBITDA | | — | | | 1,150 | | | — | | | 1,150 | |
| Goodwill impairment | | 1,010,773 | | | — | | | — | | | 1,010,773 | |
| Loss on disposal of assets | | 3,454 | | | — | | | — | | | 3,454 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Loss from unconsolidated affiliate | | — | | | 308 | | | — | | | 308 | |
| Deduct: | | | | | | | | |
| Interest income | | 1 | | | 1 | | | 1 | | | 3 | |
| | | | | | | | |
| Gain on debt extinguishment | | 868 | | | — | | | — | | | 868 | |
Segment adjusted EBITDA(3) | | $ | 231,015 | | | $ | (321) | | | $ | (9,617) | | | $ | 221,077 | |
(1)Corporate and Other represents those results that: (i) are not specifically attributable to a reportable segment; (ii) are not individually reportable or (iii) have not been allocated to a reportable segment for the Preferred Unit holders had the rightpurpose of evaluating their performance, including certain general and administrative expense items.
A one percent increaseBusiness and Basis of Presentation in the imputed interest rate assumption would significantly increaseNotes to our Consolidated Financial Statements in this Form 10-K, for further information on the valueCompany’s basis of presentation.
(3)Adjusted EBITDA is a non-GAAP measure; please see Key Performance Metrics in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K, for a definition and reconciliation to the embedded derivative liability atGAAP measure. The following tables present the revenue for each individual operating segment for the years ended December 31, 2022, 2021 while a one percent decrease would lead to a similar decrease in valueand 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Midstream Logistics | | Pipeline Transportation | | | | Consolidated |
| | | | | | | | | |
| For the year ended December 31, 2022 | | (In thousands) |
| Revenue | | $ | 1,198,474 | | | $ | 1,833 | | | | | $ | 1,200,307 | |
| Other revenue | | 13,175 | | | 8 | | | | | 13,183 | |
| Total segment operating revenue | | $ | 1,211,649 | | | $ | 1,841 | | | | | $ | 1,213,490 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Midstream Logistics | | Pipeline Transportation | | | | Consolidated |
| | | | | | | | | |
| For the year ended December 31, 2021 | | (In thousands) |
| Revenue | | $ | 658,299 | | | $ | — | | | | | $ | 658,299 | |
| Other revenue | | 3,737 | | | 8 | | | | | 3,745 | |
| Total segment operating revenue | | $ | 662,036 | | | $ | 8 | | | | | $ | 662,044 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Midstream Logistics | | Pipeline Transportation | | | | Consolidated |
| | | | | | | | | |
| For the year ended December 31, 2020 | | (In thousands) |
| Revenue | | $ | 408,159 | | | $ | — | | | | | $ | 408,159 | |
| Other revenue | | 2,012 | | | 5 | | | | | 2,017 | |
| Total segment operating revenue | | $ | 410,171 | | | $ | 5 | | | | | $ | 410,176 | |
The following table presents total capital expenditures, including property, plant and equipment and intangible assets, for each operating segment for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| (In thousands) |
| Midstream Logistics | $ | 195,346 | | | $ | 82,662 | | | $ | 199,054 | |
| Pipeline Transportation | 26,233 | | | 50 | | | — | |
| | | | | |
| Total capital expenditures | $ | 221,579 | | | $ | 82,712 | | | $ | 199,054 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
The following table presents total assets for each operating segment as of December 31, 2021. The assumed expected timing until exercise2022 and 2021:
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | | | |
| (In thousands) |
| Midstream Logistics | $ | 3,486,948 | | | $ | 2,916,774 | |
Pipeline Transportation(1) | 2,414,829 | | | 635,784 | |
| Segment total assets | 5,901,777 | | | 3,552,558 | |
| Corporate and other | 17,934 | | | 648 | |
| Total assets | $ | 5,919,711 | | | $ | 3,553,206 | |
(1)Includes investment in unconsolidated affiliates of the exchange option at December 31, 2021 was 4.45 years.
The Company has additional embedded derivatives in the Preferred Units related to the exchange option$2,381.3 million 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 fair value of the Company’s warrant liability was insignificant$626.5 million as of December 31, 2022 and 2021, respectively.
21. SUBSEQUENT EVENTS
In February 2023, the Board approved a share repurchase program (“Repurchase Program”), authorizing discretionary purchases of the Company’s Class A Common Stock up to $100 million in the aggregate. Repurchases may be made at management’s discretion from time to time, in accordance with applicable securities laws, on the open market or through privately negotiated transactions and 2020.may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act. Privately negotiated repurchases from affiliates are also authorized under the Repurchase Program, subject to such affiliates’ interest and other limitations. The repurchases will depend on market conditions and may be discontinued at any time without prior notice.
