Kinetik (KNTK) - 2019 Q1 - Quarterly Report

Preliminary Information This section provides essential introductory details, including forward-looking statement disclaimers, risk factors, and a glossary of industry-specific terms Forward-Looking Statements and Risk This section outlines the nature of forward-looking statements and lists important factors that could cause actual results to differ materially from expectations - The report includes 'forward-looking statements' based on historical operating trends, production, and growth forecasts of Apache Corporation's Alpine High field development[9] - Important factors that could cause actual results to differ materially include market prices of oil, natural gas, and NGLs; pipeline and gathering system capacity; production rates; economic and competitive conditions; availability of capital; and legislative, regulatory, or policy changes[10][11] Glossary of Terms This section defines key abbreviations and terms used in the oil and natural gas industry, noting the name change of Alpine High Entities to Altus Midstream - Effective February 14, 2019, each of the Alpine High Entities' names were changed to replace 'Alpine High' with 'Altus Midstream'[14] - Key terms defined include Bbl (barrel), Bcf (billion cubic feet), Btu (British thermal unit), Field, Formation, MBbl (thousand barrels), Mcf (thousand cubic feet), MMcf (million cubic feet), and NGLs (natural gas liquids)[15] PART I — FINANCIAL INFORMATION This part presents the company's unaudited consolidated financial statements, management's discussion and analysis, and disclosures on market risk and controls ITEM 1. FINANCIAL STATEMENTS This section presents Altus Midstream Company's unaudited consolidated financial statements, including statements of operations, balance sheet, cash flows, and equity - The consolidated financial statements are unaudited and prepared in accordance with GAAP, with certain information and disclosures omitted as permitted by SEC rules[34] - Altus Midstream Company operates through its consolidated subsidiaries, owning gas gathering, processing, and transmission assets in the Permian Basin and equity interests in five Permian Basin pipelines[36][131] Statement of Consolidated Operations This statement details the company's revenues, costs, operating income, and net income for the three months ended March 31, 2019 and 2018 | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | Change (YoY) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------- | | Total Revenues | $33,847 | $12,099 | +$21,748 | | Total Costs and Expenses | $29,616 | $19,669 | +$9,947 | | Operating Income (Loss) | $4,231 | $(7,570) | +$11,801 | | Net Income (Loss) including NCI | $5,728 | $(12,607) | +$18,335 | | Net Income (Loss) Attributable to Class A Common Shareholders | $1,100 | $(12,607) | +$13,707 | | Basic EPS | $0.01 | $(0.09) | +$0.10 | | Diluted EPS | $0.01 | $(0.09) | +$0.10 | Consolidated Balance Sheet This balance sheet provides a snapshot of the company's assets, liabilities, and equity as of March 31, 2019, and December 31, 2018 | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | Change | | :----------------------------------- | :-------------------------------- | :--------------------------------- | :----- | | Total Current Assets | $226,042 | $468,030 | $(241,988) | | Property, Plant and Equipment, net | $1,359,733 | $1,226,897 | +$132,836 | | Total Assets | $1,868,008 | $1,857,319 | +$10,689 | | Total Current Liabilities | $101,046 | $98,521 | +$2,525 | | Total Liabilities | $135,494 | $130,533 | +$4,961 | | Redeemable Noncontrolling Interest | $1,504,500 | $1,940,500 | $(436,000) | | Total Equity | $228,014 | $(213,714) | +$441,728 | Statement of Consolidated Cash Flows This statement outlines the company's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2019 | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net Cash Provided by Operating Activities | $10,054 | $0 | | Net Cash Used in Investing Activities | $(282,551) | $0 | | Net Decrease in Cash and Cash Equivalents | $(272,497) | $0 | | Cash and Cash Equivalents at End of Period | $177,438 | $0 | - Capital expenditures for the three months ended March 31, 2019, were $164.5 million, and contributions to equity method interests totaled $66.2 million, with an additional $51.8 million for the acquisition of an equity method interest[27] Statement of Consolidated Changes in Equity and Noncontrolling Interest This statement details changes in the company's equity and redeemable noncontrolling interest from December 31, 2018, to March 31, 2019 | Metric | Balance at Dec 31, 2018 (in thousands) | Net Income (in thousands) | Change in Redemption Value of NCI (in thousands) | Balance at Mar 31, 2019 (in thousands) | | :----------------------------------- | :------------------------------------- | :------------------------ | :----------------------------------------------- | :------------------------------------- | | Redeemable Noncontrolling Interest | $1,940,500 | $4,628 | $(440,628) | $1,504,500 | | Total Equity | $(213,714) | $1,100 | $440,628 | $228,014 | Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies, transactions, and specific accounts Note 1. Summary of Significant Accounting Policies This note details the company's accounting policies, including consolidation principles, VIE treatment, reverse recapitalization, and new lease accounting standards - Altus Midstream Company consolidates Altus Midstream because it is the primary beneficiary of this variable interest entity (VIE), having the power to direct its activities and the right to receive benefits or absorb losses[42][45] - The Business Combination was accounted for as a reverse recapitalization, treating Altus Midstream Company as the acquired company for financial reporting purposes, with the historical operations of the Altus Midstream Entities deemed those of the Company[46][47] - The Company adopted ASU 2016-02, 'Leases (Topic 842),' on January 1, 2019, recognizing right-of-use (ROU) assets and lease liabilities for most operating leases[53] | Lease Type | Weighted Average Remaining Lease Term | Weighted Average Discount Rate | | :--------------- | :------------------------------------ | :----------------------------- | | Operating Leases | 3.4 years | 4.2% | | Finance Lease | 0.8 years | 4.2% | Note 2. Recapitalization Transaction This note describes the Business Combination where KAAC acquired Altus Midstream Entities, resulting in Altus Midstream Company holding a 23.1% controlling interest - On November 9, 2018, KAAC acquired the entire equity interests of the Altus Midstream Entities and Pipeline Options from Apache, referred to as the Business Combination[64][69] - Following the Business Combination, Altus Midstream Company holds an approximate 23.1% controlling interest in Altus Midstream, and Apache holds the remaining 76.9% noncontrolling interest[65] - Apache is the largest single holder of the Company's voting common stock, comprising 100% of newly-created Class C Common Stock and approximately 9.8% of economic Class A Common Stock[66] Note 3. Transactions with Affiliates This note outlines significant related-party transactions with Apache Corporation, which serves as the company's sole customer and primary service provider - Apache Corporation is the Company's only customer for midstream services revenue, which includes gas gathering, compression, processing, and transportation[75] - The Company has no employees and contracts with Apache for operational, maintenance, and management services under the COMA, incurring G&A and operations and maintenance expenses[77][80] | Expense Type | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | | :--------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Operations and maintenance | $2,900 | $2,300 | | General and administrative | $1,600 | $1,600 | Note 4. Revenue Recognition This note details the company's revenue recognition policies under ASC 606, disaggregating midstream services revenue by type and recognition over time - The Company adopted Accounting Standard Update (ASU) 2014-09, 'Revenue from Contracts with Customers (ASC 606),' on January 1, 2018[84] - Revenues are generated from fee-based midstream service agreements with Apache, which have no minimum volume commitments but are underpinned by acreage dedications, and are recognized over time as services are consumed[85][86] | Midstream Service Revenue — Affiliate | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | Change (YoY) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :------------- | | Gas gathering | $3,613 | $609 | +$3,004 | | Gas processing | $25,286 | $7,705 | +$17,581 | | Transmission | $4,853 | $3,785 | +$1,068 | | NGL transmission | $95 | $0 | +$95 | | Total | $33,847 | $12,099 | +$21,748 | Note 5. Property, Plant and Equipment This note provides a detailed breakdown of the company's property, plant, and equipment, including gathering, processing, and transmission systems, and construction in progress | Asset Category | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | Change | | :-------------------------------------------- | :------------------------------ | :------------------------------- | :----- | | Gathering, processing and transmission systems and facilities | $824,687 | $729,585 | +$95,102 | | Construction in progress | $528,837 | $521,609 | +$7,228 | | Finance lease asset | $34,749 | $0 | +$34,749 | | Total property, plant and equipment, net | $1,359,733 | $1,226,897 | +$132,836 | - Construction in progress includes capitalized interest of $5.4 million at March 31, 2019, and these costs are excluded from depreciation until assets are placed into productive service[90][91] Note 6. Debt and Financing Costs This note describes Altus Midstream's revolving credit facility, including its maturity, interest rate options, restrictive covenants, and components of financing costs - Altus Midstream entered into a $450.0 million revolving credit facility in November 2018, maturing in November 2023, with no borrowings or letters of credit outstanding as of March 31, 2019[92][168] - The credit facility contains restrictive covenants, including a debt-to-capital ratio not greater than 30.0% during the Initial Period, and Altus Midstream was in compliance as of March 31, 2019[95][96][171][172] | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Interest income | $2,161 | $0 | | Interest expense | $709 | $2,490 | | Capitalized interest | $(394) | $(2,490) | | Financing costs, net of capitalized interest | $508 | $0 | Note 7. Other Current Liabilities This note details the company's other current liabilities, including accrued capital costs, operations and maintenance expense, and current operating lease liability | Liability Category | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :------------------------------------- | :------------------------------ | :------------------------------- | | Accrued capital costs | $63,001 | $80,696 | | Accrued operations and maintenance expense | $2,583 | $2,863 | | Accrued taxes other than income | $2,528 | $69 | | Accrued interest | $493 | $232 | | Current operating lease liability | $586 | $0 | | Other | $2,855 | $1,066 | | Total other current liabilities | $72,046 | $84,926 | Note 8. Asset Retirement Obligation This note describes changes in the company's Asset Retirement Obligation liability, reflecting estimated future costs for dismantlement and site reclamation | Metric | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Asset retirement obligation at Dec 31, 2018 | $29,369 | | Liabilities incurred during the period | $483 | | Accretion expense | $364 | | Asset retirement obligation at Mar 31, 2019 | $30,216 | - ARO reflects the estimated present value of costs for dismantlement, removal, site reclamation, and similar activities associated with the Company's central processing facilities, gathering systems, and pipelines[100] Note 9. Commitments and Contingencies This note outlines the company's contractual obligations, including midstream service agreements, G&A support services, lease agreements, and future capital expenditures - Altus Midstream has fee-based midstream service agreements with Apache, obligating it to perform services on all volumes produced from dedicated acreage in Alpine High[104] - Under the COMA with Apache, Altus Midstream will pay fixed annual fees for G&A support services: $3.0 million for 2019, $5.0 million for 2020, $7.0 million for 2021, and $9.0 million annually thereafter[105] - The company has an operating lease agreement with Apache for office and storage facilities in Reeves County, Texas, with an initial term of four years[106] - Exercising Pipeline Options to acquire equity interests in third-party pipeline projects may require funding future capital expenditures for their equity share[107] Note 10. Equity Method Interests This note details the company's equity method interests in Permian Basin pipelines, including Gulf Coast Express Pipeline LLC and EPIC Crude Holdings, LP - As of March 31, 2019, the Company owns 15.0% equity method interests in Gulf Coast Express Pipeline LLC and EPIC Crude Holdings, LP, having exercised two of its five Pipeline Options[110][111] | Equity Method Interest | Balance at Dec 31, 2018 (in thousands) | Acquisitions (in thousands) | Contributions (in thousands) | Income (in thousands) | Balance at Mar 31, 2019 (in thousands) | | :--------------------- | :------------------------------------- | :-------------------------- | :--------------------------- | :-------------------- | :------------------------------------- | | Gulf Coast Express Pipeline LLC | $91,100 | $0 | $66,224 | $270 | $157,594 | | EPIC Crude Holdings, LP | $0 | $51,809 | $0 | $0 | $51,809 | | Total | $91,100 | $51,809 | $66,224 | $270 | $209,403 | Note 11. Income Taxes This note clarifies the company's income tax structure, deferred tax assets and liabilities, and factors impacting the effective income tax rate - Altus Midstream Company is subject to U.S. federal income tax and Texas Margin tax; Altus Midstream LP is a partnership for federal income tax purposes but records a state income tax provision[113] - As of March 31, 2019, Altus Midstream Company had a net deferred tax asset of $67.3 million, and Altus Midstream LP had a net deferred state income tax liability of $2.8 million[113] - The effective income tax rate for Q1 2019 was primarily impacted by net income attributable to the noncontrolling interest and state income taxes[114] Note 12. Equity This note details the company's equity structure, including Class A and Class C Common Stock, warrants, and the redeemable noncontrolling interest held by Apache - As of March 31, 2019, there were 74,929,305 shares of Class A Common Stock and 250,000,000 shares of Class C Common Stock issued and outstanding[116] - Apache holds 250,000,000 common units, representing an approximate 76.9% limited partner interest in Altus Midstream, which is reflected as a redeemable noncontrolling interest valued at $1.5 billion as of March 31, 2019[122][123] - Apache has the right to cause Altus Midstream to redeem all or a portion of its common units for Class A Common Stock or an equivalent amount of cash at any time subsequent to May 8, 2019[122] Note 13. Net Income (Loss) Per Share This note explains the methodology for calculating basic and diluted net income (loss) per share, including the treatment of Class C Common Stock and warrants - Basic net income (loss) per share is calculated by dividing net income (loss) available to Class A Common shareholders by the weighted average shares outstanding, excluding Class C Common Stock[124] - The 'if-converted method' is used to determine the potential dilutive effect of exchanges of common units and Class C Common Stock, and earn-out consideration, while the treasury stock method is used for outstanding warrants[125] | Metric | 3 Months Ended March 31, 2019 | 3 Months Ended March 31, 2018 | | :-------------------------------------------- | :---------------------------- | :---------------------------- | | Net income (loss) attributable to Class A Common shareholders | $1,100 (in thousands) | $(12,607) (in thousands) | | Basic EPS | $0.01 | $(0.09) | | Diluted EPS | $0.01 | $(0.09) | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's analysis of Altus Midstream Company's financial condition, operational results, and liquidity, including key performance metrics - Altus Midstream Company owns gas gathering, processing, and transmission assets in the Permian Basin, servicing Apache's Alpine High production, and holds options for equity interests in five Permian Basin pipelines[131] - The Business Combination was accounted for as a reverse recapitalization, with Altus Midstream Company treated as the acquired company for financial reporting purposes[136] - Key performance metrics used to assess operations and growth include Adjusted EBITDA, throughput volumes, and costs and expenses[140] Overview This overview describes Altus Midstream Company's operations in the Permian Basin, its assets, and its equity interests in Permian Basin pipelines - Altus Midstream Company operates gas gathering, processing, and transmission assets in the Permian Basin of West Texas, anchored by midstream service agreements with Apache Corporation for its Alpine High resource play[131] - The company also owns, or has options to own, equity interests in a total of five Permian Basin pipelines, providing access to fully integrated, wellhead-to-water connectivity[131] - As of March 31, 2019, Altus Midstream's assets include approximately 111 miles of natural gas gathering pipelines, 52 miles of residue gas pipelines, 26 miles of NGL Pipelines, 380 MMcf/d of rich gas processing capacity, and 400 MMcf/d of lean gas treating capacity[132] Altus Midstream Operational Assessment This section assesses Altus Midstream's operational performance, highlighting Adjusted EBITDA as a key non-GAAP financial measure for evaluation - Adjusted EBITDA is a key non-GAAP financial measure used by management to evaluate operating performance and compare results, excluding financing costs, interest income, income taxes, depreciation, and accretion[137] | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | Change (YoY) | | :-------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------- | | Net income (loss) including noncontrolling interest | $5,728 | $(12,607) | +$18,335 | | Adjusted EBITDA | $12,109 | $(3,865) | +$15,974 | Results of Operations This section analyzes the company's financial performance, detailing changes in midstream services revenue, operating expenses, and net income | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | Change (YoY) | | :-------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------- | | Midstream services revenue — affiliate | $33,847 | $12,099 | +$21,748 | | Operations and maintenance | $16,399 | $10,992 | +$5,407 | | General and administrative | $2,991 | $1,617 | +$1,374 | | Depreciation and accretion | $7,651 | $3,705 | +$3,946 | | Taxes other than income | $2,575 | $3,355 | $(780) | | Operating Income (Loss) | $4,231 | $(7,570) | +$11,801 | | Average throughput volumes of natural gas (MMcf/d) | 564 | 206 | +358 | - Midstream services revenue from affiliate increased by $21.7 million (YoY) to $33.8 million, primarily driven by increased throughput volumes as Apache increased production from Alpine High[146] - Net income before income taxes increased by $13.7 million and Adjusted EBITDA increased by $16.0 million for the three months ended March 31, 2019, primarily due to the increase in midstream services revenue, partially offset by higher operations and maintenance and G&A expenses[157] Capital Resources and Liquidity This section discusses the company's future capital expenditure requirements for infrastructure development and pipeline options, and its funding strategies - Future infrastructure development and the exercise of outstanding Pipeline Options will require significant capital expenditures, expected to be funded by current cash, revolving credit facility borrowing capacity, and reinvested operating cash flow[158][159] - Anticipated total annual investments in Altus Midstream's assets are approximately $325 million in 2019, $185 million in 2020, and $200 million in 2021, primarily for gathering, compression, processing, and transportation facilities[161] - The company exercised an option for a 15% ownership stake in the EPIC crude oil pipeline project for $51.8 million in Q1 2019, and expects to exercise the remaining three Pipeline Options for approximately $1.6 billion in total anticipated capital spending[162] | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :------------------------------------ | :------------------------------ | :------------------------------- | | Cash and cash equivalents | $177,438 | $449,935 | | Total debt | $29,000 | $0 | | Available committed borrowing capacity | $450,000 | $450,000 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section addresses the company's exposure to market risks, including indirect commodity price risk and direct credit risk from customers - The company's midstream service agreements are fee-based, but it is indirectly exposed to commodity price risk through Apache's and potential third-party customers' economic decisions to develop and produce oil and natural gas[175] - Fluctuations in commodity prices also indirectly impact operating cost elements such as power and fuel, and affect industry activity and demand[176] - The company is subject to credit risk resulting from nonpayment or nonperformance by, or the insolvency or liquidation of, Apache or potential third-party customers[177] ITEM 4. CONTROLS AND PROCEDURES This section reports on the effectiveness of the company's disclosure controls and procedures and any changes in internal control over financial reporting - The company's Chief Executive Officer and President, and Chief Financial Officer and Treasurer, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2019, and concluded they were effective[179] - There were no material changes in the company's internal control over financial reporting during the quarter ended March 31, 2019[181] PART II — OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, exhibits, and official signatures, completing the quarterly report ITEM 1. LEGAL PROCEEDINGS This section confirms that Altus Midstream Company is not currently involved in any pending or threatened material legal proceedings - The Company is not aware of any pending or threatened legal proceedings against it at the time of the filing of this Quarterly Report on Form 10-Q[183] ITEM 1A. RISK FACTORS This section refers to the Annual Report for a comprehensive discussion of risk factors and confirms no material changes since the last filing - Readers are referred to Part I, Item 1A — Risk Factors of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018[184] - There have been no material changes to the company's risk factors since its Annual Report on Form 10-K for the fiscal year ended December 31, 2018[184] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including key agreements, corporate governance documents, and officer certifications - Exhibits include the Contribution Agreement, Second Amended and Restated Certificate of Incorporation, Bylaws, and certifications from the Principal Executive Officer and Principal Financial Officer[186] SIGNATURES This section contains the official signatures of the company's authorized officers, certifying the accuracy and completeness of the report - The report is signed by Ben C. Rodgers, Chief Financial Officer and Treasurer, and Rebecca A. Hoyt, Senior Vice President, Chief Accounting Officer, and Controller, on May 2, 2019[191]