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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-26 · 150 added, 114 removed, 336 unchanged (44% of the section changed)

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This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 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 Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed on March 16, 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 99.1 of the Company’s Current Report on Form 8-K, filed on December 14, 2021.

Altus Midstream Company (the Company or Altus), through its ownership interest in Altus Midstream LP (Altus Midstream), owns gas gathering, processing, and transmission assets in the Permian Basin of West Texas, anchored by midstream service agreements to service Apache Corporation’s (Apache) production from its Alpine High resource play and surrounding areas (Alpine High).

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EPIC transports crude oil from Orla, Texas in Northern Reeves County to the Port of Corpus Christi, Texas.

EPIC was placed in service early 2020, with initial throughput capacity of approximately 600 MBbl/d.

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), 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 January 2021, with the total capacity of 2.1 Bcf/d fully subscribed under long-term contracts.

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 percent equity interest in the Shin Oak NGL Pipeline (Shin Oak), which is owned by Breviloba, LLC, and operated by Enterprise Products Operating LLC.

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Shin Oak was placed in service during 2019, with total capacity of up to 550 MBbl/d.

On October 21, 2021, the Company announced that it will combine with privately-owned BCP Raptor Holdco LP (BCP) in an all-stock transaction (the BCP Business Combination).

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.

As consideration for the transaction, the Company will issue 50 million shares of Class C Common Stock (and Altus Midstream 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.

The global economy and the energy industry have been deeply impacted by the effects of 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.

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.

During the second quarter of 2020, Apache shut in approximately 70 MMcf/d of production in response to low commodity prices, which fell as a result of lower demand and higher uncertainty associated with the COVID-19 pandemic.

These volumes came back online during the third quarter of 2020 after prices began to recover.

The Company remains focused on increasing third-party processing opportunities in addition to Alpine High;

however, the current market situation has slowed the pace of this activity.

Altus has no upcoming debt maturities, and the term of its revolving credit facility extends through November of 2023.

The Company is projected to be cash flow positive in 2021 following the start-up of PHP in January of 2021, with minimal expected future capital requirements.

As such, the Company believes it has sufficient operating cash flows and liquidity to fund its future capital expenditures and its quarterly dividend declared by the Board of Directors in December of 2020.

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.

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Throughput Volumes and Associated Revenues

The Company’s results are driven primarily by the volume of natural gas gathered, processed, compressed, and/or transmitted.

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 will directly impact Altus’ aggregate gathering and processing volumes because the production rate of natural gas wells declines over time.

Apache, as part of its fourth quarter 2019 capital planning review, notified Altus of its intention to materially reduce its planned investment in the Alpine High play.

This notification prompted Altus management to assess its long-lived infrastructure assets for impairment given the expected reduction to future throughput volumes.

Altus subsequently recorded impairments on its gathering, processing, and transmission assets in the fourth quarter of 2019.

For further discussion of these impairments, please see Note 1—Summary of Significant Accounting Policies and Note 5—Property, Plant and Equipment in the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

In the second quarter of 2020, shut-ins and unplanned downtime, among other events, had a negative impact on throughput volumes and associated revenues.

Apache shut in approximately 70 MMcf/d of production in response to low commodity prices, which fell as a result of lower demand and higher uncertainty associated with the COVID-19 pandemic.

In addition, unplanned downtime to address moisture in the residue pipeline reduced throughput by approximately 40 MMcf/d.

These volumes were back on-line at the beginning of the third quarter.

In the fourth quarter of 2020, voluntary, price-related volume curtailments reduced throughput by approximately 26 MMcf/d.

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 Company entered into a new Gas Processing Agreement with Apache in October 2021, which superseded the prior agreement.

The updated processing agreement contains modified gas processing fees for new volumes from future Apache drilling activities at Alpine High that are more consistent with current market practices.

Part of the modified fee structure 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 volumes 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, and the Company is actively pursuing new supplies of natural gas and processing arrangements with third parties to increase throughput volumes in its systems.

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.

Costs and Expenses

Costs of product sales

Costs of product sales represent purchases of NGLs from a third party, which the Company then owns, controls and processes, prior to ultimate sale to customers.

These costs are directly associated with the volume and amount of third-party contracts entered into and could fluctuate depending on market conditions and product prices.

Costs of product sales — affiliate

Costs of product sales — affiliate represent the cost of excess recovery volumes of residue gas the Company receives from Apache under the terms of the new Gas Processing Agreement, which the Company then owns and controls prior to ultimate sale 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

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(In thousands)

Reconciliation of net income (loss) including noncontrolling interests to Adjusted EBITDA

Net income (loss) including noncontrolling interests $ 80,484 $ (1,338,900)

Reconciliation of net income including noncontrolling interests to Adjusted EBITDA

Net income including noncontrolling interests $ 99,221 $ 81,684

Financing costs, net of capitalized interest 10,598 2,190

Income tax expense — 64,900

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

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

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Midstream services revenue — affiliate $ 142,727 $ 144,714

Product sales — affiliate 9,754 —

Product sales — third parties 8,136 3,695

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COSTS AND EXPENSES:

Costs of product sales 2,988 —

Costs of product sales — affiliate 9,754 —

Costs of product sales — third parties 7,793 2,988

Operations and maintenance 32,748 37,993

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Total costs and expenses 95,005 86,793

OPERATING INCOME (LOSS) 61,616 (1,285,791)

Unrealized derivative instrument loss (36,080) (8,470)

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)

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Financing costs, net of capitalized interest 10,598 2,190

NET INCOME (LOSS) BEFORE INCOME TAXES 79,788 (1,274,000)

NET INCOME BEFORE INCOME TAXES 99,221 80,988

Current income tax benefit — (696)

Deferred income tax expense — 64,915

NET INCOME (LOSS) INCLUDING NONCONTROLLING INTERESTS 80,484 (1,338,900)

NET INCOME INCLUDING NONCONTROLLING INTERESTS 99,221 81,684

Net income attributable to Preferred Unit limited partners 161,906 75,906

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Midstream services revenue — affiliate $ 142,727 $ 144,714

Product sales — affiliate 9,754 —

Product sales — third parties 8,136 3,695

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Midstream services revenue was primarily generated from fee-based midstream services provided under the terms of separate commercial midstream service agreements with Apache for the gas gathering, processing, and transmission of volumes from the dedicated area in the Alpine High field.

Altus receives a per-unit fee based on the quantity of natural gas and natural gas liquid volumes that flow through its systems.

During the periods presented, Altus did not own or take title to the affiliate volumes that were processed through its systems.

Altus receives a per-unit fee based on the quantity of natural gas and NGL volumes that flow through its systems.

The Company entered into a new Gas Processing Agreement with Apache in October 2021, which superseded the prior agreement.

In addition to per unit service fees described 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 and contractually fixed volumetric recovery rates.

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 to Note 3—Revenue Recognition in the Notes to Consolidated Financial Statements included within Part IV, Item 15 of this Annual Report on Form 10-K.

Midstream services revenue from affiliate increased by $8.9 million to $144.7 million for the year ended December 31, 2020, as compared to $135.8 million for the year ended December 31, 2019.

The increase was primarily driven by higher throughput of rich natural gas volumes due to increased capacity as a result of the three cryogenic processing trains coming on line starting in the second quarter of 2019, partially offset by lower throughput of lean natural gas volumes.

Beginning in 2020, product sales revenues, which totaled $3.7 million during the year, were generated from NGLs and condensates purchased and processed by Altus from a third party and subsequently sold to non-affiliated customers.

Midstream services revenue — affiliate

Midstream services revenue — affiliate decreased by $2.0 million to $142.7 million for the year ended December 31, 2021, as compared to $144.7 million for the year ended December 31, 2020.

The decrease was primarily driven by lower throughput of natural gas volumes from Apache, which reduced revenues, offset by approximately $13.4 million of revenues 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 solely due to the sale of excess recovery volumes of residue gas received as consideration under the new Gas Processing Agreement, which were subsequently sold 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

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(In thousands)

Costs of product sales $ 2,988 $ —

Costs of product sales — affiliate $ 9,754 $ —

Costs of product sales — third parties 7,793 2,988

Operations and maintenance 32,748 37,993

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Total costs and expenses $ 95,005 $ 86,793

Costs of product sales

The $3.0 million in costs of product sales represent purchases of NGLs from a third party starting in 2020, which were used to support the product sales to third parties discussed above.

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 $17.9 million to $38.0 million for the year ended December 31, 2020, as compared to $55.9 million for the year ended December 31, 2019, primarily driven by increased operational efficiency as a result of transitioning from mechanical refrigeration units to the Company’s centralized Diamond cryogenic complex starting in the second quarter of 2019.

The transition resulted in decreases in employee-related costs, contract labor, lower supplies expenses, and lower equipment rentals.

These savings are coupled with an overall decrease in Company labor from headcount reductions, partially offset by higher electricity power usage.

General and administrative

G&A expense increased by $2.9 million to $13.2 million for the year ended December 31, 2020, as compared to $10.3 million for the year ended December 31, 2019, primarily driven by higher fees paid under the COMA, which escalate on an annual basis per the terms of the COMA Agreement.

Refer to Note 3 — Transactions with Affiliates within Part IV, Item 15 of this Annual Report on Form 10-K for more information related to this agreement, including future fee increases.

Depreciation and accretion

Depreciation and accretion expense decreased by $25.6 million to $15.9 million for the year ended December 31, 2020, as compared to $41.5 million for the year ended December 31, 2019.

The decrease was primarily a result of the impairments recorded on the carrying value of the property, plant, and equipment at the end of 2019.

Operations and maintenance expenses decreased by approximately $5.2 million to $32.7 million for the year ended December 31, 2021, as compared to $38.0 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 completed in the first half of 2020.

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.

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.

Apache, as part of its fourth quarter 2019 capital planning review, notified Altus that it had materially reduced its investment and future drilling plans 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.

Impairments in 2021 were insignificant.

For further discussion of these impairments, please see Note 1—Summary of Significant Accounting Policies and Note 4—Property, Plant and Equipment in the Notes to Consolidated Financial Statements included within Part IV, Item 15 of this Annual Report on Form 10-K.

Taxes other than income

The increase in taxes other than income was driven by changes related to ad valorem taxes, which increased by $1.8 million to $14.7 million for the year ended December 31, 2020, as compared to $12.9 million for the year ended December 31, 2019.

The $1.8 million increase reflects higher tax assessments related to the completion and timing of assets placed in service during the prior year.

The decrease in taxes other than income was driven by changes related to ad valorem taxes, which decreased by $1.2 million to $13.5 million for 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

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(In thousands)

Unrealized derivative instrument loss $ (36,080) $ (8,470)

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)

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Total Financing costs, net of capitalized interest $ 10,598 $ 2,190

Unrealized derivative instrument loss

During the year ending December 31, 2020, the Company recognized an unrealized derivative instrument loss of $36.1 million in relation to an embedded exchange option identified upon the issuance and sale of Series A Cumulative Redeemable Preferred Units (the Preferred Units) in the second quarter of 2019.

Unrealized derivative instrument gain (loss)

During the year ending December 31, 2021, the Company recognized an unrealized derivative instrument gain of $82.1 million 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 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, 2020 was primarily impacted by the decrease in the expected timing to exercise the exchange option feature.

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.

Interest Income

Interest income decreased $3.6 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019, as a result of a decrease in the average cash and cash equivalents balance maintained by the Company throughout the year.

Income from equity method interests, net

As of December 31, 2020, the Company holds equity interests in four pipelines.

Income from the Equity Method Interest Pipelines was primarily driven by the Company’s proportionate share of net income from GCX and Shin Oak, partially offset by net losses attributable to EPIC.

GCX and Shin Oak were placed into service during 2019, and 2020 reflected the first full year of earnings for these pipelines.

EPIC was placed into service in early 2020 and operated at a net loss during 2020.

PHP was in the commissioning phase and flowing partial volumes as of December 31, 2020, and was placed into service on January 1, 2021.

Refer to Note 10—Equity Method Interests within Part IV, Item 15 of this Annual Report on Form 10-K for more information.

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 I nterests within Part IV, Item 15 of this Annual Report on Form 10-K for further discussion.

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 related to higher balances drawn on the Company’s credit facility throughout the current year as compared to 2019;

however, most of the interest expense on the Company’s credit facility was eligible to have interest capitalized in all periods presented.

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, 2020 and 2019 were a benefit of $696.0 thousand and $15.0 thousand, respectively.

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 $696.0 thousand associated with a net operating loss carryback claim.

The Company recorded no deferred income tax expense for the year ended December 31, 2020, as compared to $64.9 million for the year ended December 31, 2019.

The reduction to deferred income tax expense during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was the result of an increase in valuation allowance against the Company’s deferred tax assets.

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 $79.8 million for the year ended December 31, 2020, an increase of $1.4 billion from a net loss before income taxes of $1.3 billion for the year ended December 31, 2019.

The increase in net income before income taxes was primarily driven by an increase of $12.6 million in total revenues, $39.7 million of higher income from the Equity Method Interest Pipelines, a $17.9 million decrease in operations and maintenance expenses, a $1.3 billion decrease in impairment expense, and a $25.5 million decrease in depreciation and accretion expense compared to the prior year period (as discussed above).

The increases to net income were offset by a $27.6 million increase to expense related to the fair value measurement of an embedded derivative at December 31, 2020, a $3.6 million decrease to interest income, a $3.0 million increase to costs of product sales, a $2.9 million increase to general administrative expenses, and $3.9 million of various other costs of the Company.

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 $5.3 million, in aggregate, of various other insignificant costs of the Company.

For additional information, see the section titled Altus Midstream Operational Metrics—Adjusted EBITA above.

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 Pipelines and associated subsequent construction costs.

For 2021, the Company’s primary capital spending requirements are related to equity contributions associated with its proportionate share of remaining construction, commissioning, and maintenance costs relating to the Equity Method Interest Pipelines.

During 2020, the Company’s primary sources of cash were borrowings under the revolving credit facility, cash generated from operations, distributions from the Equity Method Interest Pipelines, and proceeds from the sale of assets.

Based on Altus’ current financial plan and related assumptions, the Company believes that cash from operations, a reduced capital program for its midstream infrastructure, and distributions from the Equity Method Interest Pipelines will generate cash flows in excess of capital expenditures that will provide sufficient cash to fund the Company’s planned quarterly dividend during 2021.

Given the recent crude oil price collapse on lower demand and 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.

Projections for 2021 remain dynamic.

Altus' results, including projections related to capital resources and liquidity, could be materially affected by the continuing COVID-19 pandemic.

For 2022, the Company’s primary spending requirements are anticipated to be related to the Company’s payment of a quarterly cash dividend on its Class A Common Stock as may be declared by its board of directors and payment of the Company’s quarterly distribution to the Preferred Unit limited partners.

During 2021, the Company’s primary sources of cash were distributions from the Equity Method Interest Pipelines, borrowings under the revolving credit facility, and cash generated from operations.

Based on Altus’ current financial plan and related assumptions, the Company believes that cash from operations, a reduced capital program for its midstream infrastructure, and distributions from the Equity Method Interest Pipelines will generate cash flows in excess of capital expenditures and the amount required to fund the Company’s planned quarterly dividend and quarterly payments to the Preferred Unit limited partners during 2022.

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

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• a 33.0 percent interest in Shin Oak.

The Company estimates it will incur approximately $30 million of additional capital contributions during 2021 for its equity interest associated with the commissioning and remaining construction costs in these joint venture pipelines, primarily associated with PHP.

The Company anticipates its existing capital resources will be sufficient to fund the Company’s future capital expenditures for the Equity Method Interest Pipelines and the Company’ existing infrastructure assets.

The Company estimates it will incur minimal capital contributions during 2022 for its equity interest in these joint venture pipelines.

For further information on the Equity Method Interest Pipelines, refer to Note 9—Equity Method Interests in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.

Altus Midstream Class A Common Stock Dividend and Common Units Distributions

On December 10, 2020, the Company announced that its Board of Directors declared a cash dividend of $1.50 per share on the Company’s Class A Common Stock, totaling $5.6 million to be paid to stockholders in the first quarter of 2021.

The Class A Common Stock dividend will be funded by a distribution from Altus Midstream to its common unitholders of $1.50 per Common Unit, totaling $24.4 million, of which $5.6 million is payable to the Company and the balance is payable to Apache.

For more information please refer to Note 3 — Transactions with Affiliates and Note 1 1 — Equity in the Notes to the Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.

With PHP, Shin Oak, GCX, and EPIC in service, the Company anticipates that its existing capital resources will be sufficient to fund the Company’s continuing obligations, including future distribution payments required to fund the Company’s planned quarterly dividend.

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.

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 15 of this Annual Report on Form 10-K.

Sources and Uses of Cash

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Sources of cash and cash equivalents:

Redeemable noncontrolling interest - Preferred Unit limited partners, net $ — $ 611,249

Proceeds from revolving credit facility $ 33,000 $ 228,000

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Distributions paid to Preferred Unit limited partners (46,249) (23,124)

Contributions to and acquisition of equity method interests (327,305) (1,171,977)

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)

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(176,736) (401,748)

Increase (decrease) in cash and cash equivalents $ 18,205 $ (443,952)

Increase in cash and cash equivalents $ 107,775 $ 18,205

(1) The table presents capital expenditures on a cash basis;

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As of December 31, 2021 and December 31, 2020, the Company had debt outstanding totaling $657.0 million and $624.0 million, respectively.

At December 31, 2019, $9.8 million of debt outstanding was related to a finance lease obligation for which the term ended in the first quarter of 2020.

Available credit facilities

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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, 2020 and 2019, total outstanding borrowings were $624.0 million and $396.0 million, respectively, and no letters of credit were outstanding under this facility.

Altus Midstream’s revolving credit facility is unsecured and is not guaranteed by the Company, Apache, or any of their respective subsidiaries.

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.

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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).

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 (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.

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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.

Subject to compliance with minimum ownership requirements and redemption restrictions of the Amended LPA, Apache’s election to cause its Common Units in Altus Midstream to be redeemed for shares of the Company’s Class A Common Stock or cash (as further discussed in Note 11—Equity in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K) would not be a change of control.

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 Warrant s in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K).

• The Preferred Units will be exchangeable for shares of the Company’s Class A Common Stock at the option of the Preferred Unit holders after the seventh anniversary of Closing or upon the occurrence of specified events.

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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 close of the Business Combination, Apache was granted the right to receive contingent consideration of up to 1,8750,00 shares of Class A Common Stock as follows:

• 625,000 shares if, during the calendar year 2021, the aggregate gathered gas from an area of dedication in Reeves, Pecos, Culberson, and Jeff Davis Counties in Texas that are assessed a low pressure gathering fee pursuant to that certain Amended and Restated Gas Gathering Agreement, dated August 8, 2018, between Apache and Altus Midstream Gathering, LP is equal to or greater than 574,380 million cubic feet.

At the close 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:

• 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.

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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 11 —Equity in the Notes to the Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.

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 Business Combination.

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 acquire 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 approximately $30 million during 2021 of additional capital contributions for its equity interests.

The Company’s midstream assets service Altus Midstream’s existing fee-based revenue agreements, which are underpinned by acreage dedications covering Alpine High.

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.

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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 $5.4 million, $4.7 million, and $3.6 million for 2021, 2022, and 2023, respectively.

During the fourth quarter of 2020, t he 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.

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For discussion of these impairments, see Note 1—Summary of Significant Accounting Policies and Note 4—Property, Plant , and Equipment in the Notes to Consolidated Financial Statements included in within Part IV, Item 15 of this Annual Report on Form 10-K.

Impairment of Equity Method Interests

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.

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 the 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.

Altus’ operations are subject to U.S.

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Fair Value Measurements — Preferred Units Embedded Derivative

As noted in the discussion related to the Preferred Units above, the fair value of the embedded derivative is determined by a range of factors, including expected future interest rates using the Black-Karasinski model, the Company’s imputed interest rate, interest rate volatility, the expected timing of periodic cash distributions, the estimated timing for the potential exercise of the exchange option, and anticipated dividend yields of the Preferred Units.

The value of the unrealized derivative liability during the year end December 31, 2020 increased by $36.1 million, as compared to the year end December 31, 2019, primarily driven by a decrease in the expected timing to exercise of the exchange option.

Absent any changes to interest rate assumptions period-over-period, the value of the embedded derivative would be expected to increase significantly due to a further decrease in the expected timing to exercise of the exchange option.

In general, a one percent increase in the expected imputed interest rate assumption would significantly increase the value of the embedded derivative liability at any period end, while a one percent decrease would lead a similar decrease in value.

As noted in the discussion related to the Preferred Units above, the fair value of the embedded derivative is determined by a range of factors, including expected future interest rates using the Black-Karasinski model, the Company’s imputed interest rate, interest rate volatility, the expected timing of periodic cash distributions, the estimated timing for the potential exercise of the exchange option, any anticipated early redemptions of the Preferred Units, and anticipated dividend yields of the Preferred Units.

The value of the unrealized derivative liability during the year ended December 31, 2021 decreased by $82.1 million, primarily driven by a current year assumption that a portion 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 increase in the expected imputed interest rate assumption would significantly increase the

value of the embedded derivative liability at any period end, while a one percent decrease would lead a similar decrease in value.

A summary of key assumptions used to value this instrument at December 31, 2021 and 2020 is included below:

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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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis