NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These condensed consolidated financial statements have been prepared by Kinetik Holdings Inc. (formerly known as Altus Midstream Company) (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). They reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for interim periods, on a basis consistent with the annual audited financial statements, with the exception of recently adopted accounting pronouncements. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10-Q should be read along with Kinetik Holdings Inc.’s audited financial statements and related notes thereto for the year ended December 31, 2021 filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on July 5, 2022 and the Company’s Quarterly Report on Form 10-Q for the first quarter of 2022 filed on May 10, 2022. Capitalized terms used but not defined herein shall have the meaning ascribed to such terms in the audited financial statements for the year ended December 31, 2021 filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on July 5, 2022 and the Company’s Quarterly Report on Form 10-Q filed on May 10, 2022.
1. DESCRIPTION OF THE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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 issued 50,000,000 common units representing limited partner interests in the Partnership (“Common Units”) and the Company issued 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share (“Class C Common Stock”), to Contributor.
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 retroactively restated elsewhere in this Form 10-Q 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-Q 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, “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.
Organization
BCP was formed on April 25, 2017 as a Delaware limited partnership to acquire and develop midstream oil and gas assets. BCP’s primary operating subsidiaries are EagleClaw Midstream Ventures, LLC (“EagleClaw”) and CR Permian Holdings, LLC (“CR Permian”). Both subsidiaries were formed to design, engineer, install, own and operate facilities and
provide services for produced natural gas gathering, compression, processing, treating and dehydration, and condensate separation, stabilization, and storage, crude oil gathering and storage, water gathering and disposal assets.
ALTM was originally incorporated on December 12, 2016 in Delaware under the name Kayne Anderson Acquisition Corp. (“KAAC”) for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. KAAC completed its initial public offering in the second quarter of 2017. On August 3, 2018, Altus Midstream LP was formed in Delaware as a limited partnership and wholly-owned subsidiary of KAAC and entered into a contribution agreement with certain affiliates of Apache Corporation (“Apache” and such affiliates the “Altus Midstream Entities”), 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, KAAC acquired all equity interests of the Altus Midstream Entities and changed its name to Altus Midstream Company.
On February 22, 2022, upon the Closing, BCP and its subsidiaries became wholly owned subsidiaries of the Partnership. The Transaction was accounted for as a reverse merger pursuant to ASC 805 Business Combination (“ASC 805”). Refer to Note 2—Business Combination in the Notes to our Condensed Consolidated Financial Statements for additional details. Nature of Operations
Through its consolidated subsidiaries, the Company provides comprehensive gathering, water disposal, transportation, compression, processing and treating services necessary to bring natural gas, NGLs and crude oil to market. Additionally, the Company owns equity interests in four separate Permian Basin pipeline entities that have access to various markets along the Texas Gulf Coast.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP. Certain reclassifications of prior year balances have been made to conform such amounts to current year presentation. These reclassifications have no impact on net income. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. All intercompany balances and transactions have been eliminated in consolidation.
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 as the accounting acquirer and ALTM was the legal acquirer. The accompanying Condensed Consolidated Financial Statements herein include (1) BCP’s net assets carried at historical value, (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 Condensed Consolidated Financial Statements from February 22, 2022 going forward. Refer to Note 2—Business Combination to our Condensed Consolidated Financial Statements in this Form 10-Q for additional discussion. The Company completed 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 retroactively restated in this Form 10-Q to reflect the two-for-one Stock Split, except for the number of Common Units and shares of Class C Common Stock described above in relation to the Transaction, which are presented at pre-Stock-Split amounts. This presentation election is consistent with our previous public filings and the terms of the Contribution Agreement.
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 condensed 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 condensed consolidated financial statements, and changes in these estimates are recorded when known. Significant items subject to such estimates and assumptions include the valuation of derivatives, tangible and intangible assets, share-based compensation, contingent liabilities, mandatorily redeemable Preferred Units (as defined below) and noncontrolling interests.
Variable Interest Entity
The Company uses a qualitative approach in assessing the 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 is 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 9—Equity Method Investments in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q. Redeemable Noncontrolling Interest — Common Units Limited Partners
Pursuant to the Contribution Agreement, in connection with the Closing, (i) Contributor contributed all of 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 Partnership and the Company issued 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share, to Contributor. Please refer to “The Transaction” above.
The Common Units are redeemable at the option of unit holders and accounted for in the Company’s Condensed 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 10—Equity and Warrants in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q. Redeemable Noncontrolling Interest — Preferred Unit Limited Partners
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 were assumed at Closing for accounting purposes. The Preferred Units are exchangeable for shares of the Company’s Class A Common Stock at the option of the Preferred Unit holders upon the occurrence of specified events, unless otherwise redeemed by the Company. In July 2022, the Company redeemed all outstanding redeemable noncontrolling interest Preferred Units. See Note 18—Subsequent Events in the Notes to our Condensed Consolidated Financial Statements for additional information.
The Preferred Units are accounted for on the Company’s Condensed 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 Condensed Consolidated Balance Sheet as a long-term liability embedded derivative. See discussion and additional detail in Note 11—Series A Cumulative Redeemable Preferred Units in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q. Equity Method Investments
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 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. Please refer to Note 9—Equity Method Investments in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q, for further details of the Company’s equity method investments. Equity method investments acquired in the Transaction were recorded at fair value upon Closing. See discussion and additional detail in Note 2—Business Combination in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for purchase price allocation of the Transaction.
Inventory
Other current assets include condensate, residue gas and NGLs inventories that are valued at the lower of cost or market. 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 $13.0 million and $2.1 million as of June 30, 2022 and December 31, 2021, respectively.
Impairment of Long-Lived Assets
In accordance with Financial Accounting Standards Board (“FASB”) ASC 360, Property, Plant and Equipment, long-lived assets, excluding goodwill, to be held and used by the Company are reviewed for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the 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 the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present.
The Company’s management assesses whether there has been an impairment trigger, and if a trigger is identified, then the Company would perform an undiscounted cash flow test at the lowest level for which identifiable cash flows are independent of cash flows from other assets. If the sum of the undiscounted future net cash flows is less than the net book value of the property, an impairment loss is recognized for any excess of the property’s net book value over its estimated fair value. The Company did not recognize impairment losses for long-lived assets during the three and six months ended June 30, 2022 and 2021.
Transactions with Affiliates
The accounts receivable from or payable to affiliates represent the net result of the Company’s monthly revenue, capital and operating expenditures, and other miscellaneous transactions to be settled with Apache and its subsidiaries, who controlled the Company prior to the Transaction. Accounts receivable from affiliates was $20.2 million as of June 30, 2022. Revenue from affiliates was $30.5 million and $46.2 million for the three and six months ended June 30, 2022, respectively. Accrued expense due to affiliates was $0.2 million as of June 30, 2022, and operating expenses for the three and six months ended June 30, 2022 were immaterial.
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 three and six months ended June 30, 2021, as no Class A Common Stock was outstanding with respect to BCP as the accounting acquirer as of June 30, 2021.
The 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, (ii) an assumed exercise of the outstanding public and private warrants for shares of Class A Common Stock and (iii) an assumed exchange of the outstanding Preferred Units 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 Pronouncement
Effective January 1, 2022, the Company adopted ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“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 acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. Generally, this new guidance will result in the 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 assumed contract liabilities at carrying value of $9.1 million upon Closing.
Effective January 1, 2022, the Company adopted ASU 2020-04, Reference Rate Reform (Topic 848) (“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 GAAP to contracts, hedging relationship, and other transactions affected by
reference rate reform if certain criteria are met. Interest rate applied to the Company’s new debt resulting from the comprehensive refinance is based on Secured Overnight Financing Rate (“SOFR”), which is a broad measure of the cost of borrowing cash overnight collateralized by treasury securities. Refer to Note 6—Debt and Financing Costs in the Notes to our Condensed Consolidated Financial Statements of this Form 10-Q for discussion of SOFR applicable to the Company’s debt structures. Recent Accounting Pronouncement Not Yet Adopted
In June 2022, the FASB issued ASU 2022-03, 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 sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments also require the following disclosures for equity securities subject to contractual sale restrictions: (1) The fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet; (2) The nature and remaining duration of the restriction(s); (3) The circumstances that could cause a lapse in the restriction(s). This guidance is effective for public business entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the effect that ASU 2022-03 will have on its Consolidated Financial Statements.
In March 2022, the FASB issued 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 to 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 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. The guidance is effective for public business entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted on any date on or after the issuance of ASU 2022-01 for any entity that has adopted the amendments in ASU 2017-02 for the corresponding period. The Company is currently evaluating the effect that ASU 2022-01 will have on its Consolidated Financial Statements.
2. 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 the Contribution Agreement, in connection with the Closing, (i) Contributor contributed all of 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 Partnership and the Company issued 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share, to Contributor. Please refer to ““—The Transaction” discussed above.
The Transaction was accounted for as a business combination 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 Condensed Consolidated Financial Statements from the Closing Date going forward.
The preliminary 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 goodwill of $4.1 million relates to operational synergies. The value of the Preferred Units and 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 11—Series A Cumulative Redeemable Preferred Units and contingent liabilities in Note 8—Commitments and Contingencies in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q. Certain data necessary to complete the purchase price allocation is not yet available, including, but not limited to, valuation of the underlying assets of the equity method investments and liabilities assumed. However, the Company is continuing its review of these matters during the measurement period, and if new information obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized, as well as any additional liabilities that existed at the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional amounts initially recognized. The Company will finalize the purchase price allocation during the 12-month period following the acquisition date. The following table summarizes the preliminary estimated fair value of assets acquired and liabilities assumed in the Transaction in accordance with ASC 805:
| | | | | | | | | | | | | | |
| (In thousands) | | Amount |
| Cash and cash equivalent | | $ | 13,401 | |
| Accounts receivable | | 1,919 | |
| Accounts receivable - affiliates | | 15,681 | |
| | |
| | |
| | |
| Property, plant, and equipment, net | | 634,923 | |
| Intangible assets, net | | 13,200 | |
| Investments in unconsolidated affiliates | | 1,755,000 | |
| Prepaid expense and other assets | | 8,225 | |
| Goodwill | | 4,081 | |
| Total assets acquired | | 2,446,430 | |
| | |
| 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 | | 4,010 | |
| Contingent liabilities | | 4,451 | |
| Total liabilities assumed | | 969,968 | |
| | |
| Redeemable noncontrolling interest - Preferred Unit limited partners | | 462,717 | |
| | |
| Total consideration transferred | | $ | 1,013,745 | |
The Company incurred acquisition-related costs of $0.7 million and $6.4 million for the three and six months ended June 30, 2022, respectively.
Supplemental Pro Forma Information
The unaudited supplemental pro forma financials are for informational purposes only and are not indicative of future results. The results below for the three and six months ended June 30, 2022 and 2021 combine the results of the Company and the Partnership, giving effect to the Transaction as if it had been completed on January 1, 2021.
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) | | Pro forma | | Pro forma | | Pro forma | | Pro forma |
| Revenues | | $ | 335,572 | | | $ | 171,359 | | | $ | 619,674 | | | $ | 353,608 | |
| Net income including noncontrolling interest | | $ | 132,159 | | | $ | 18,845 | | | $ | 145,627 | | | $ | 35,647 | |
| | | | | | | | |
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Given the assumed pro forma transaction date of January 1, 2021, we removed $0.7 million and $19.5 million of acquisition-related expenses for the three and six months ended June 30, 2022, respectively, and recognized $2.2 million and $31.1 million of total acquisition-related expenses for the three and six months ended June 30, 2021, respectively.
3. REVENUE RECOGNITION
Disaggregation of Revenue
The following table presents a disaggregation of the Company’s revenue.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | (In thousands) |
| Gathering and processing services | | $ | 102,080 | | | $ | 62,242 | | | $ | 182,525 | | | $ | 129,904 | |
| Natural gas, NGLs and condensate sales | | 229,651 | | | 71,099 | | | 404,579 | | | 151,092 | |
| Other revenue | | 3,841 | | | 2,425 | | | 5,717 | | | 2,873 | |
| | | | | | | | |
| | | | | | | | |
| Total revenues and other | | $ | 335,572 | | | $ | 135,766 | | | $ | 592,821 | | | $ | 283,869 | |
| | | | | | | | |
| | | | | | | | |
There have been no significant changes to the Company’s contracts with customers during the three and six months ended June 30, 2022. Contracts with customers acquired through the Transaction had similar structures as the Company’s existing contracts with customers. The Company recognized revenues from MVC deficiency payments of $0.3 million and nil for the three months ended June 30, 2022 and 2021, respectively, and $0.3 million and $2.5 million for the six months ended June 30, 2022 and 2021, respectively.
Remaining Performance Obligations
The following table presents our estimated revenue from contracts with customers for remaining performance obligations that has not yet been recognized, representing our contractually committed revenues as of June 30, 2022:
| | | | | | | | | | | | | | | | | |
| | Amount |
| Fiscal Year | | (In thousands) |
| Remaining of 2022 | | $ | 10,633 | |
| 2023 | | 43,177 | |
| 2024 | | 40,247 | |
| 2025 | | 49,182 | |
| 2026 | | 34,631 | |
| Thereafter | | 191,293 | |
| | $ | 369,163 | |
| | | | | |
Our contractually committed revenue, for purposes of the tabular presentation above, is generally limited to customer contracts that have fixed pricing and fixed volume terms and conditions, generally including contracts with payment obligations associated with MVCs.
Contract Liabilities
The following table provides information about contract liabilities from contracts with customers as of June 30, 2022:
| | | | | | | | | | | | | | | | | |
| | Amount |
| | | | | (In thousands) |
| Balance at December 31, 2021 | | $ | 14,756 | |
| Reclassification of beginning contract liabilities to revenue as a result of performance obligation being satisfied | | (3,224) | |
| Cash received and not recognized as revenue | | 17,517 | |
| Balance at June 30, 2022 | | 29,049 | |
| Less: Current portion | | 6,150 | |
| Non-current portion | | $ | 22,899 | |
| | | | | |
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 noncurrent contract liabilities are included in “Other Current Liabilities” and “Contract Liabilities,” respectively, of the Condensed Consolidated Balance Sheets.
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 June 30, 2022 and December 31, 2021, the Company had contract acquisition cost assets of $17.5 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 Condensed 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. The Company recognized cost of sales associated with these assets of $0.4 million and $0.4 million for the three months ended June 30, 2022 and 2021, respectively, and $0.9 million and $0.9 million for the six months ended June 30, 2022 and 2021, respectively.
4. 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:
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| | | | |
| | June 30, 2022 | | December 31, 2021 |
| | | | |
| | (In thousands) |
| Gathering, processing and transmission systems and facilities | | $ | 2,788,565 | | | $ | 2,121,434 | |
| Vehicles | | 7,194 | | | 6,090 | |
| Computers and equipment | | 3,796 | | | 4,271 | |
| Less: accumulated depreciation | | (402,994) | | | (337,030) | |
| Total depreciable assets, net | | 2,396,561 | | | 1,794,765 | |
| Construction in progress | | 64,332 | | | 24,888 | |
| Land | | 20,179 | | | 19,626 | |
| Total property, plant and equipment, net | | $ | 2,481,072 | | | $ | 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 reporting date. The Company recorded $36.6 million and $26.6 million of depreciation expense for the three months ended June 30, 2022 and 2021, respectively, and $67.5 million and $52.2 million of depreciation expense for the six months ended June 30, 2022 and 2021, respectively.
5. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The Company closed a business combination transaction on February 22, 2022, refer to the Transaction in Note 2—Business Combination in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q. The Transaction was accounted for as a business combination pursuant to ASC 805. In connection with the Transaction, the Company recorded excess of the purchase price over net assets acquired as goodwill. The Company recorded goodwill of $4.1 million as of June 30, 2022. Goodwill is tested at least annually as of December 31 of each year, or more frequently as events occur or circumstances change that would more-likely-than-not reduce fair value of 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 June 30, 2022.
Intangible Assets
Intangible assets, net are comprised of the following:
| | | | | | | | | | | | | |
| | | |
| June 30, 2022 | | December 31, 2021 |
| | | |
| (In thousands) |
| Customer contracts | $ | 1,136,728 | | | $ | 1,135,963 | |
| Right of way assets | 120,401 | | | 99,345 | |
| Less accumulated amortization | (509,408) | | | (449,259) | |
| Total amortizable intangible assets, net | $ | 747,721 | | | $ | 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 relate primarily to underground pipeline easements and have a useful life of ten years and are amortized using the straight-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 certain indices or up to 130% of the original consideration paid.
The Company recorded $30.0 million and $30.5 million of amortization expense for the three months ended June 30, 2022 and 2021, respectively, and $60.1 million and $60.9 million of amortization expense for the six months ended June 30, 2022 and 2021, respectively. There was no impairment recognized on intangible assets for the three and six months ended June 30, 2022 and 2021.
6. DEBT AND FINANCING COSTS
June 2030 Senior Notes
On June 8, 2022, the Partnership completed a private placement of $1.00 billion aggregate principal amount of its 5.875% Sustainability-Linked Senior Notes due 2030 (the “Notes”), which are fully and unconditionally guaranteed by the Company.
The Notes were issued at 99.588% of their face amount and will mature on June 15, 2030. Interest accrues from June 8, 2022 and is payable semi-annually 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 $21.6 million and were capitalized as debt issuance cost and included in the Condensed Consolidated 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.
On or after June 15, 2027, the interest rate accruing on the Notes will be increased by an additional 0.250% per annum unless the Partnership satisfies, and an independent external verifier confirms satisfaction of the Sustainability Performance Targets (“SPT”) for the three key performance indicators outlined in the Sustainability-Linked Financing Framework published by the Company on May 16, 2022: 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. The interest rate accruing on the Notes will be increased by an additional 0.083% per annum for each SPT which has not been satisfied and externally verified.
The Partnership may redeem some or all of the notes at any time or from time to time prior to maturity based on terms prescribed in the Notes. As of June 30, 2022, unamortized debt issuance costs associated with the Notes were $19.3 million.
Revolving Credit Facility
On June 8, 2022, the Partnership entered into a revolving credit agreement (the “Revolving Credit Agreement”) among Bank of America, N.A., as administrative agent (“Bank of America”), and the banks and other financial institutions party thereto, as lenders. The Revolving Credit Agreement 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 Revolving Credit Agreement 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 Revolving Credit Agreement, the Partnership incurred fees and expenses totaling $7.8 million, which was capitalized and included in the Condensed 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.
There were no outstanding borrowings under the Revolving Credit Facility as of June 30, 2022.
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%, that if the 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 fee and expenses totaled $7.6 million, which was capitalized as debt issuance cost and included in the Condensed Consolidated Balance Sheets as direct deduction to the Term Loan Credit Facility.
Both the Revolving Credit Agreement and the TLA contain a “Sustainability Adjustments” feature that could result in a 0.05% increase or reduction to the effective interest rate if the Company fails to meet 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 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.
“Sustainability Performance Targets” in the Revolving Credit Agreement 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; 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.
Both the Revolving Credit Agreement and the TLA contain customary covenants and restrictive provisions which may, among other things, limit 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 June 30, 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 three and six months ended June 30, 2022.
The fair value of the term loan credit facility approximates fair value and is not publicly traded. The fair value of the Company and its subsidiaries’ consolidated debt as of June 30, 2022 and December 31, 2021 was $2.95 billion and $2.34 billion, respectively.
The following table summarizes the Company’s debt obligations as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
| | | | |
| | June 30, 2022 | | December 31, 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 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 | | 3,000,000 | | | 2,346,187 | |
Less: Debt issuance costs, net(1) | | (28,730) | | | (38,485) | |
| | 2,971,270 | | | 2,307,702 | |
| Less: Current portion, net | | — | | | (54,280) | |
| Long-term portion of debt and finance lease obligations, net | | $ | 2,971,270 | | | $ | 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 $7.7 million and $2.2 million as of June 30, 2022 and December 31, 2021, respectively, and were included in the “Deferred charges and other assets” of the Condensed Consolidated Balance Sheets.
The table below presents the components of the Company’s financing costs, net of capitalized interest:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | (In thousands) |
| Capitalized interest | | $ | 197 | | | $ | 275 | | | $ | 301 | | | $ | 486 | |
| Debt issuance costs | | 3,149 | | | 3,332 | | | 6,538 | | | 6,637 | |
| Interest expense | | 22,001 | | | 29,000 | | | 45,282 | | | 50,794 | |
| Total financing costs, net of capitalized interest | | $ | 25,347 | | | $ | 32,607 | | | $ | 52,121 | | | $ | 57,917 | |
As of June 30, 2022 and December 31, 2021, unamortized debt issuance costs associated with the Notes and the Term Loan Credit Facility were $28.7 million and $38.5 million, respectively.
Debt issuance costs associated with the new and existing revolving credit facilities were $7.7 million and $2.2 million as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, the unamortized debt issuance costs associated with the new and existing revolving credit facilities were included in the “Deferred charges and other assets” of the Condensed Consolidated Balance Sheets as there were no borrowings on the new or existing revolving credit facilities. As of December 31, 2021, the current and non-current portion of the unamortized debt issuance costs were included in the “Other non-current assets” and “Deferred charges and other assets” of the Condensed Consolidated Balance Sheets.
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 $3.1 million and $3.3 million for the three months ended June 30, 2022 and 2021, respectively, and $6.5 million and $6.6 million for the six months ended June 30, 2022 and 2021, respectively.
7. ACCRUED EXPENSES
The following table provides detail of the Company’s accrued expenses at June 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| | | |
| | June 30, 2022 | | December 31, 2021 |
| | | |
| (In thousands) |
| Accrued product purchases | $ | 199,292 | | | $ | 118,364 | |
| Accrued taxes | 13,077 | | | 4,299 | |
| Accrued salaries, vacation, and related benefits | 4,799 | | | 2,113 | |
| Accrued capital expenditures | 11,255 | | | 2,995 | |
| Accrued interest expenses | 3,787 | | | — | |
| | | |
| Accrued other expenses | 13,741 | | | 7,872 | |
| | | |
| | | |
| Total accrued expenses | $ | 245,951 | | | $ | 135,643 | |
8. 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 June 30, 2022 and December 31, 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 June 30, 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
Permian Gas 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 June 30, 2022; therefore, the estimated fair value of the contingent consideration liability was nil as of June 30, 2022. The estimated fair value of the contingent consideration liability related to this acquisition was $0.8 million as of December 31, 2021.
The Transaction
As part of the Transaction, the Company assumed contingent liabilities of $4.5 million related to earn-out a consideration of up to 2,500,000 shares of Class A Common Stock as follows:
• 1,250,000 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 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 Nasdaq 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 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.
9. EQUITY METHOD INVESTMENTS
As of June 30, 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:
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
| Ownership | | June 30, 2022 | | December 31, 2021 |
| | | | | |
| | | (In thousands) |
| | | | | |
Permian Highway Pipeline LLC(1) | 53.3% | | $ | 1,416,318 | | | $ | 626,477 | |
| Breviloba, LLC (Shin Oak) | 33.0% | | 465,444 | | | — | |
| Gulf Coast Express Pipeline LLC | 16.0% | | 460,549 | | | — | |
| | | $ | 2,342,311 | | | $ | 626,477 | |
(1) Ownership for Permian Highway Pipeline LLC (“PHP”) was 53.3% and 26.7% as of June 30, 2022 and December 31, 2021, respectively.
Additionally, as of June 30, 2022, the Company owned 15.0% of Epic Crude Holdings, LP (“EPIC”). However, no dollar value was assigned through the purchase price allocation as 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 three and six months ended June 30, 2022.
As of June 30, 2022, the unamortized basis differences included in the EMI pipelines balances were $414.3 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 $12.2 million and $12.8 million as of June 30, 2022 and December 31, 2021, respectively. Capitalized interest is amortized on a straight-line basis into equity income.
The following table presents the activity in the Company’s EMIs for the six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Permian Highway Pipeline LLC | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC | | Total(2) |
| | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| | (In thousands) |
| Balance at December 31, 2021 | | | | | $ | 626,477 | | | $ | — | | | $ | — | | | $ | 626,477 | |
| Acquisitions | | | | | 815,000 | | | 470,000 | | | 470,000 | | | 1,755,000 | |
| Contributions | | | | | 2,675 | | | — | | | — | | | 2,675 | |
| Distributions | | | | | (79,508) | | | (16,868) | | | (21,168) | | | (117,544) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Equity income, net(1) | | | | | 51,674 | | | 12,312 | | | 11,717 | | | 75,703 | |
| | | | | | | | | | | |
| Balance at June 30, 2022 | | | | | $ | 1,416,318 | | | $ | 465,444 | | | $ | 460,549 | | | $ | 2,342,311 | |
(1)For the six months ended June 30, 2022, net of amortization of basis differences and capitalized interests, which represents undistributed earnings, the amortization was $3.3 million from Permian Highway Pipeline LLC, $0.3 million from Breviloba, LLC and $2.7 million from Gulf Coast Express Pipeline, LLC.
(2)The EMIs acquired in the Transaction are included in the results from February 22, 2022 to June 30, 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 financials prior to February 22, 2022. Refer to Note 1—Description of the Organization and Summary of Significant Accounting Policies in the Notes to our Condensed Consolidated Financial Statements of this Form 10-Q, for further information on the Company’s basis of presentation. Summarized Financial Information
The following tables represent selected statement of operations data for the Company’s EMI pipelines (on a 100 percent basis) for the three and six months ended June 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended June 30, |
| | | | | | 2022 | | | | 2021 |
| | | | | | | | | | | | | | | | | | |
| | | | | | Permian Highway Pipeline LLC | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC | | | | Permian Highway Pipeline LLC(1) | | Breviloba, LLC(1) | | Gulf Coast Express Pipeline LLC(1) |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | (In thousands) |
| Revenues | | | | | | $ | 98,808 | | | $ | 50,091 | | | $ | 90,769 | | | | | $ | 99,366 | | | $ | 47,447 | | | $ | 90,703 | |
| Operating income | | | | | | 61,294 | | | 25,359 | | | 64,816 | | | | | 62,444 | | | 28,002 | | | 60,766 | |
| Net income | | | | | | 61,307 | | | 25,284 | | | 64,461 | | | | | 62,329 | | | 27,645 | | | 60,551 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Six Months Ended June 30, |
| | | | | 2022 | | | | 2021 |
| | | | | | | | | | | | | | | | | |
| | | | | Permian Highway Pipeline LLC | | Breviloba, LLC | | Gulf Coast Express Pipeline LLC | | | | Permian Highway Pipeline LLC(1) | | Breviloba, LLC(1) | | Gulf Coast Express Pipeline LLC(1) |
| | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | (In thousands) |
| Revenues | | | | | $ | 196,664 | | | $ | 98,612 | | | 180,742 | | | | | $ | 197,214 | | | $ | 81,976 | | | $ | 179,072 | |
| Operating income | | | | | 120,770 | | | 51,672 | | | 128,259 | | | | | 105,024 | | 45,302 | | 120,874 | |
| Net income | | | | | 120,520 | | | 51,651 | | | 127,990 | | | | | 104,909 | | 45,004 | | 120,319 | |
| | | | | | | | | | | | | | | | | |
(1) For the three and six months ended June 30, 2021, the Company only had equity interest in Permian Highway Pipeline LLC.
10. 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 of 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 Partnership and the Company issued 50,000,000 shares of the Company’s Class C Common Stock, par value $0.0001 per share, to Contributor. 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 Condensed Consolidated Balance Sheet. During the first half of 2022, 5,550,000 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 94,450,000 Common Units and an equal number of Class C Common Stock issued and outstanding as of June 30, 2022. The Common Units fair value was approximately $3.25 billion as of June 30, 2022.
Redeemable Noncontrolling Interest — Preferred Unit Limited Partners
Upon Closing, the Company assumed certain Preferred Units that were issued and outstanding on acquisition date. The Preferred Units will be exchangeable for shares of the Company’s Class A Common Stock at the option of the Preferred Unit holders upon the occurrence of specified events, unless otherwise redeemed by the Company. Refer to Note 11—Series A Cumulative Redeemable Preferred Units for further discussion. In July 2022, the Company redeemed all outstanding redeemable noncontrolling interest Preferred Units. See Note 18—Subsequent Events in the Notes to our Condensed Consolidated Financial Statements for additional information. Public Warrants
As of June 30, 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 June 30, 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 $0.1 million for the Public Warrants and a fair value of $0.1 million for the Private Warrants as of June 30, 2022 on the Condensed Consolidated Balance Sheet in other non-current liabilities. Refer to Note 15—Fair Value Measurement in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q 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 and subsequently the Company’s Board of Directors (the “Board”) 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 Condensed 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.”
On May 17, 2022, the Company made cash dividend payments of $11.7 million to holders of Class A Common Stock and Common Units and $87.7 million was reinvested in shares of Class A Common Stock by each Reinvestment Holder.
On July 20, 2022, the Board 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 August 17, 2022. 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 for periods prior to June 8, 2022 have been retroactively restated in this Form 10-Q to reflect the Stock Split.
11. 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. 150,000 of these Preferred Units and a pro rata amount of the PIK units contain a mandatory redemption feature as further discussed below.
Mandatorily Redeemable Preferred Units
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 of 50,000 Preferred Units at or prior to each of the six-, twelve- and eighteen-month anniversaries of the effectiveness of the Partnership LPA, for an aggregate of 150,000 Preferred Units over the eighteen-month period. Given this mandatory redemption feature and pursuant to ASC 480, liability classification is required for these 150,000 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 Condensed Consolidated Statements of Operations.
During the first half of 2022, the Partnership declared and paid mandatorily redeemable Preferred Units holders distribution of $1.9 million and the Partnership redeemed 125,000 units along with 7,138 PIK units for an aggregate amount totaling $152.6 million. Gains of $5.1 million and $9.6 million were recorded for the redemption for the three and six months ended June 30, 2022, respectively. For the remaining 25,000 Preferred Units that contain the mandatory redemption feature, the Company recorded $30.7 million as liability in “Other Liabilities” of the Condensed Consolidated Balance Sheet as of June 30, 2022. These remaining units were subsequently redeemed in July 2022. See Note 18—Subsequent Events in the Notes to our Condensed Consolidated Financial Statements for additional information.
Redeemable Noncontrolling Interest Preferred Units
The remaining 375,000 Preferred Units assumed on the Closing Date do not contain a mandatory redemption feature, and are accounted for on the Company’s Condensed Consolidated Balance Sheets as a redeemable noncontrolling interest classified as temporary equity in accordance with the terms of the Preferred Units, including the redemption rights with respect thereto. The Preferred Units are exchangeable for shares of the Company’s Class A Common Stock at the option of the Preferred Unit holders upon the occurrence of specified events, unless otherwise redeemed by the Company.
The Company applies a two-step approach to measure the redeemable noncontrolling interest related to the Preferred Units, by first allocating a portion of the Company’s net income in accordance with the terms of the Partnership LPA.
After consideration of the foregoing, the Company records an additional adjustment to the carrying value of the Preferred Unit redeemable noncontrolling interest at each period end, if applicable. The amount of such adjustment is determined based upon the accreted value method to reflect the passage of time until the Preferred Units are exchangeable at the option of the holder. Pursuant to this method, the net transaction price is accreted using the effective interest method, to the Series A Redemption Price (as defined in the Partnership LPA) calculated at the seventh anniversary of the closing of the Preferred Unit Offering. 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.
Activities related to Preferred Units for the six months ended June 30, 2022 are as follows:
| | | | | | | | | | | | | | |
| | Units Outstanding | | Amount (3) |
| | | | |
| | (In thousands, except for unit data) |
Redeemable noncontrolling interest — Preferred Units, immediately upon Closing Date of Transaction(1) | | 396,417 | | | $ | 462,717 | |
| | | | |
| | | |
| | | | |
| Cash distribution paid to Preferred Unit limited partners | — | | | (6,937) | |
| Distribution payable to Preferred Unit limited partners | | | (6,937) | |
| Allocation of net income | — | | | 17,420 | |
| Accreted redemption value adjustment | — | | | 97,075 | |
| Redeemable noncontrolling interest — Preferred Units, as of June 30, 2022 | | 396,417 | | | 563,338 | |
Embedded derivative liability(2) | | | | 488 | |
| | | | $ | 563,826 | |
(1)Included 21,417 PIK units on a pro rata basis.
(2)Certain redemption features embedded within the terms of the Preferred Units require bifurcation and measurement at fair value. Refer to Note 15—Fair Value Measurements for discussion of the fair value changes in the embedded derivative liability during the period. (3)As of June 30, 2022, the Redemption Price would have been based on an 11.08% internal rate of return, which would equate to a redemption value of $700.0 million.
On July 8, 2022, the Company redeemed all outstanding redeemable noncontrolling interest Preferred Units. See Note 18—Subsequent Events in the Notes to our Condensed Consolidated Financial Statements for additional information.
12. SHARE-BASED COMPENSATION
The Company previously 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 two-for-one 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, they 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 two-for-one 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 two-for-one 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. With respect to these shares, the Company recorded compensation expenses of $12.2 million and $18.3 million for the three and six months ended June 30, 2022, respectively, based on a straight line amortization of the associated awards’ fair value over the respective vesting life of the shares. With respect to the incentive units, no compensation expenses were recorded for the three and six months ended June 30, 2021, as the incentive units were considered non-vested prior to their cancellation and exchange for Class A or Class C Common Stock.
13. INCOME TAXES
The Company is subject to U.S. federal income tax and the Texas margin tax. Income tax expense included in the Condensed Consolidated Financial Statements in this Form 10-Q is as follows:
| | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | |
| | | 2022 | | 2022 | | | | |
| | | | | | | | | |
| | | (In thousands) |
| | | | | | | | | |
| Income before income taxes | | | $ | 131,610 | | | $ | 153,675 | | | | | |
| Income tax expense | | | $ | 162 | | | $ | 838 | | | | | |
Effective tax rate (1) | | | 0.12 | % | | 0.55 | % | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) Prior to the Closing on February 22, 2022, BCP, the accounting acquirer, was organized as limited partnership and was not subject to the U.S. federal income tax for the three and six months ended June 30, 2021.
The effective tax rate for the three and six months ended June 30, 2022 was lower than the statutory rate mainly due to the impact of tax attributable to noncontrolling interests related to the Common Units and Preferred Units limited partners and valuation allowance.
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:
| | | | | | | | | | | | | | |
| | | | |
| (In thousands) | | | | Amount |
| Balance at December 31, 2021 | $ | — | |
| Increase related to ALTM acquisition | 5,238 | |
| Reduction related to current year activities | (2,455) | |
| Balance at June 30, 2022 | $ | 2,783 | |
14. NET INCOME PER SHARE
The computation of basic and diluted net income per share for the periods presented in the Condensed Consolidated Financial Statements is shown in the tables below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 |
| | | | | | | | | | | |
| Income | | Weighted-average shares(3) | | Per Share | | Income | | Weighted-average shares(3) | | Per Share |
| | | | | | | | | | | |
| (In thousands, except per share data) |
| Basic: | | | | | | | | | | | |
| Net income attributable to Class A common shareholders | $ | 6,438 | | | 39,297 | | | $ | 0.16 | | | $ | — | | | — | | | $ | — | |
Less: Net income available to participating unvested restricted Class A common shareholders(4) | (4,184) | | | — | | | $ | — | | | — | | | — | | | $ | — | |
| Total net income attributable to Class A common shareholders | $ | 2,254 | | | 39,297 | | | $ | 0.06 | | | $ | — | | | — | | | $ | — | |
| | | | | | | | | | | |
| Effect of dilutive securities: | | | | | | | | | | | |
| Unvested Class A common shares | — | | | 32 | | | $ | — | | | — | | | — | | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Diluted(1)(2): | | | | | | | | | | | |
| Net income attributable to Class A common shareholders | $ | 2,254 | | | 39,329 | | $ | 0.06 | | | $ | — | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| | | | | | | | | | | |
| Income | | Weighted-average shares(3) | | Per Share | | Income | | Weighted-average share (3) | | Per Share |
| | | | | | | | | | | |
| (In thousands, except per share data) |
| Basic: | | | | | | | | | | | |
| Net income attributable to Class A common shareholders | $ | 10,303 | | | 38,766 | | | $ | 0.27 | | | $ | — | | | — | | | $ | — | |
Less: Net income available to participating unvested restricted Class A common shareholders(4) | (4,184) | | | — | | | $ | — | | | — | | | — | | | $ | — | |
| Total net income attributable to Class A common shareholders | $ | 6,119 | | | 38,766 | | | $ | 0.16 | | | $ | — | | | — | | | $ | — | |
| | | | | | | | | | | |
| Effect of dilutive securities: | | | | | | | | | | | |
| Unvested Class A common shares | — | | | 30 | | | $ | — | | | — | | | — | | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Diluted(1)(2): | | | | | | | | | | | |
| Net income attributable to Class A common shareholders | $ | 6,119 | | | 38,796 | | | $ | 0.16 | | | $ | — | | | — | | | $ | — | |
(1)The effect of an assumed exchange of the outstanding Preferred Units and outstanding public and private warrants for shares of Class A Common Stock would have been anti-dilutive for all periods presented in which the Preferred Units and public and private warrants were outstanding.
(2)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.
(3)Share amounts have been retroactively restated to reflect the Company’s two-for-one Stock Split. Refer to Note 10—Equity and Warrants in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further information. (4)Represents dividends paid to unvested restricted Class A common shareholders.
15. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities measured at fair value on a recurring basis include cash and cash equivalents, accrued receivables, accounts receivable, accounts receivable from affiliates, dividends and distributions payable, interest rate and commodity swap derivatives, and Company’s private and public warrants and an embedded derivative liability related to the issuance of Preferred Units.
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 the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to 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, unrestricted assets or liabilities. An active 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: Inputs, other than quoted prices in active markets, that are either directly or indirectly observable for 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 that require unobservable inputs that are both significant to the fair value measurement and unobservable. 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 level 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 involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity.
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (In thousands) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Mandatorily redeemable Preferred Units | | $ | — | | | $ | — | | | $ | 30,717 | | | $ | 30,717 | |
| Embedded derivative | | — | | | — | | | 488 | | | 488 | |
| Public warrants | | 126 | | | — | | | — | | | 126 | |
| Private warrants | | — | | | — | | | 95 | | | 95 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total liabilities | | $ | 126 | | | $ | — | | | $ | 31,300 | | | $ | 31,426 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| | (In thousands) |
| Commodity swaps | | $ | — | | | $ | 205 | | | $ | — | | | $ | 205 | |
| Interest rate derivatives | | — | | | 2,662 | | | — | | | 2,662 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total liabilities | | $ | — | | | $ | 2,867 | | | $ | — | | | $ | 2,867 | |
The Company is exposed to certain risks arising from both its business operations and economic conditions, and the Company enters into certain derivative contracts to manage the exposures. Refer to Note 16—Derivatives and Hedging Activities in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for further discussion related to commodity swaps and interest rate derivatives. 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 Partnership LPA. The valuation of the embedded derivative, (using an income approach), was based on expected future interest rates using the Black-Karasinski model, the Company’s imputed interest rate of 5.88%, interest rate volatility of 39.51%, the expected timing of periodic cash distributions, the estimated timing for the potential exercise of the exchange option of 4.0 years and anticipated dividend yields of the Preferred Units. The Company recorded unrealized gains of $91.4 million and $88.6 million for the three and six months ended June 30, 2022, which was recorded as an “Unrealized gain on embedded derivative” in the Condensed Consolidated Statement of Operations. The Company has classified these recurring fair value measurements as Level 3 in the fair value hierarchy.
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 $0.2 million as of June 30, 2022. There was no change in fair value of the warrants since closing of the Transaction through reporting date.
The carrying amounts reported on the Condensed 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 three and six months ended June 30, 2022 and 2021.
16. DERIVATIVES 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. The Company did not elect to apply hedge accounting to these derivative contracts and recorded fair value of the derivatives on the Condensed Consolidated Balance Sheets as of June 30, 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 minimizes counterparty credit risk in derivative instruments by entering into transactions with high credit-rating counterparties.
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 June 2022, all of BCP PHP, LLC’s (“BCP PHP”) outstanding interest rate swaps were terminated as BCP PHP’s outstanding term loan credit facility was extinguished on June 8, 2022. Refer to Note 6—Debt and Financing Costs in the Notes to our Condensed Consolidated Financial Statements for additional information about the refinancing transactions.
The fair value or settlement value of the consolidated interest rate swaps outstanding are presented on a gross basis on the Condensed Consolidated Balance Sheets. Interest rate swap derivative liabilities were nil and $2.7 million as of June 30, 2022 and December 31, 2021, respectively. The Company recorded cash settlements on interest rate swap derivatives of $12.0 million and $0.7 million for the three months ended June 30, 2022 and 2021, respectively, and $11.3 and $1.5 million for the six months ended June 30, 2022 and 2021, respectively, in “Interest Expense” of the Condensed Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $2.4 million and $1.9 million for the change in fair value of the interest rate swap derivatives for the three months ended June 30, 2022 and 2021, respectively, and $14.0 million and $3.1 million for the six months ended June 30, 2022 and 2021, respectively, in “Interest Expense” of the Condensed Consolidated Statements of Operations.
Commodity Price Risk
Similarly, in 2020 and 2021 BCP Raptor, LLC (“BCP I”) and BCP Raptor II, LLC (“BCP II”) had WTI crude hedges at a specific notional that provides for a fixed price for crude in the Permian Basin and Waha basis hub hedges on various notional quantities of gas that either provided for a fixed price differential of natural gas in the Permian Basin relative to the NYMEX natural gas contract or provided for a fixed price for natural gas in the Permian Basin.
All of the Company’s commodity swaps had reached maturity as of December 31, 2021. The fair value or settlement value of the swaps outstanding are presented on a gross basis on the Condensed Consolidated Balance Sheet. Commodity swap derivative liability was nil and $0.2 million as of June 30, 2022 and December 31, 2021, respectively. The Company recorded cash settlements on commodity swap derivatives of nil and $14.1 million for the three months ended June 30, 2022 and 2021, respectively, and $0.2 million and $14.8 million for the six months ended June 30, 2022 and 2021, respectively, in “Interest Expense” of the Condensed Consolidated Statements of Operations. In addition, the Company recorded fair value adjustments of $1.0 million and $16.5 million for the change in fair value of commodity swap derivatives for the three and six months ended June 30, 2021, respectively, in “Interest Expense” of the Condensed Consolidated Statements of Operations. No fair value adjustment recognized for the three and six months ended June 30, 2022.
17. SEGMENTS
Our two operating segments represent the Company’s segments for which discrete financial information is available and is utilized on a regular basis by our chief operating decision maker (“CODM”) to make key operating decisions, assess performance and allocate 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 form the reportable segments. Therefore, our two operating segments represent our reportable segments. The activities of each of our reportable segments from which the Company earns revenues and incurs expenses are described below:
•Midstream Logistics: The Midstream Logistics segment operates under three streams, 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, and our Delaware Link Pipeline that is under development. The current operating pipelines transport crude oil, natural gas and NGLs to the Texas Gulf Coast.
Upon Closing, our CODM reviewed the Company and ALTM’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 name of the respective segment. There was no change in segment composition or structure for the three and six months ended June 30, 2022.
The following tables present the reconciliation of the segment profit measure as of and for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Midstream Logistics | | Pipeline Transportation | | Corporate and Other(1) | | Consolidated(2) |
| | | | | | | | | |
| For the three months ended June 30, 2022 | | (In thousands) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Segment net income including noncontrolling interests | | $ | 14,563 | | | $ | 46,277 | | | $ | 70,608 | | | $ | 131,448 | |
| Add back: | | | | | | | | |
| Interest expense | | 20,641 | | | 942 | | | 3,764 | | | 25,347 | |
| | | | | | | | |
| Income tax expense | | 162 | | | — | | | — | | | 162 | |
| Depreciation and amortization | | 66,459 | | | 122 | | | — | | | 66,581 | |
| Contract assets amortization | | 448 | | | — | | | — | | | 448 | |
| Proportionate EMI EBITDA | | — | | | 71,340 | | | — | | | 71,340 | |
| Share-based compensation | | — | | | — | | | 12,174 | | | 12,174 | |
| Loss (gain) on disposal of assets | | 8,580 | | | — | | | (34) | | | 8,546 | |
| (Gain) loss on debt extinguishment | | 27,983 | | | (8) | | | — | | | 27,975 | |
| | | | | | | | |
| | | | | | | | |
| Integration costs | | 579 | | | — | | | 4,707 | | | 5,286 | |
| Acquisition transaction costs | | — | | | — | | | 674 | | | 674 | |
| Other one-time costs or amortization | | 1,239 | | | — | | | 1,020 | | | 2,259 | |
| Deduct: | | | | | | | | |
| Gain on redemption of mandatorily redeemable Preferred units | | — | | | — | | | 5,087 | | | 5,087 | |
| Unrealized gain on embedded derivatives | | — | | | — | | | 91,448 | | | 91,448 | |
| Equity income from unconsolidated affiliates | | — | | | 47,786 | | | — | | | 47,786 | |
| Segment adjusted EBITDA | | $ | 140,654 | | | $ | 70,887 | | | $ | (3,622) | | | $ | 207,919 | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Midstream Logistics | | Pipeline Transportation | | Corporate and Other(1) | | Consolidated(2) |
| | | | | | | | | |
| For the three months ended June 30, 2021 | | (In thousands) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Segment net income (loss) including noncontrolling interests | | $ | (24,222) | | | $ | 11,310 | | | $ | (2,454) | | | $ | (15,366) | |
| Add back: | | | | | | | | |
| Interest expense | | 27,829 | | | 4,778 | | | — | | | 32,607 | |
| | | | | | | | |
| | | | | | | | |
| Depreciation and amortization | | 57,038 | | | 128 | | | — | | | 57,166 | |
| Contract assets amortization | | 448 | | | — | | | — | | | 448 | |
| Proportionate EMI EBITDA | | — | | | 21,717 | | | — | | | 21,717 | |
| | | | | | | | |
| Loss on disposal of assets | | 422 | | | — | | | — | | | 422 | |
| Gain on debt extinguishment | | (60) | | | — | | | — | | | (60) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Other one-time costs or amortization | | 485 | | | 13 | | | 17 | | | 515 | |
| Producer settlement | | | 6,827 | | | — | | | — | | | 6,827 | |
| Deduct: | | | | | | | | |
| Interest and other income | | 24 | | | — | | | — | | | 24 | |
| Equity income from unconsolidated affiliates | | — | | | 16,511 | | | — | | | 16,511 | |
| | | | | | | | |
| Segment adjusted EBITDA | | $ | 68,743 | | | $ | 21,435 | | | $ | (2,437) | | | $ | 87,741 | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Midstream Logistics | | Pipeline Transportation | | Corporate and Other(1) | | Consolidated(2) |
| | | | | | | | | |
| For the six months ended June 30, 2022 | | (In thousands) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Segment net income including noncontrolling interests | | $ | 23,749 | | | $ | 75,412 | | | $ | 53,676 | | | $ | 152,837 | |
| Add back: | | | | | | | | |
| Interest expense | | 47,412 | | | (672) | | | 5,381 | | | 52,121 | |
| | | | | | | | |
| Income tax expense (benefit) | | 457 | | | (39) | | | 420 | | | 838 | |
| Depreciation and amortization | | 127,352 | | | 252 | | | — | | | 127,604 | |
| Contract assets amortization | | 896 | | | — | | | — | | | 896 | |
| Proportionate EMI EBITDA | | — | | | 112,081 | | | — | | | 112,081 | |
| Share-based compensation | | — | | | — | | | 18,304 | | | 18,304 | |
| Loss (gain) on disposal of assets | | 8,690 | | | — | | | (34) | | | 8,656 | |
| Loss on debt extinguishment | | 27,983 | | | (8) | | | — | | | 27,975 | |
| | | | | | | | |
| | | | | | | | |
| Integration costs | | 4,683 | | | — | | | 6,755 | | | 11,438 | |
| Acquisition transaction costs | | 4 | | | — | | | 6,346 | | | 6,350 | |
| Other one-time costs or amortization | | 2,157 | | | — | | | 1,297 | | | 3,454 | |
| Deduct: | | | | | | | | |
| Interest and other income | | — | | | — | | | — | | | — | |
| Gain on redemption of mandatorily redeemable Preferred units | | — | | | — | | | 9,580 | | | 9,580 | |
| Unrealized gain on embedded derivatives | | — | | | — | | | 88,562 | | | 88,562 | |
| Equity income from unconsolidated affiliates | | — | | | 75,703 | | | — | | | 75,703 | |
| Segment adjusted EBITDA | | $ | 243,383 | | | $ | 111,323 | | | $ | (5,997) | | | $ | 348,709 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Midstream Logistics | | Pipeline Transportation | | Corporate and Other(1) | | Consolidated(2) |
| | | | | | | | | |
| For the six months ended June 30, 2021 | | (In thousands) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Segment net income (loss) including noncontrolling interests | | $ | (16,027) | | | $ | 23,739 | | | $ | (4,942) | | | $ | 2,770 | |
| Add back: | | | | | | | | |
| Interest expense | | 55,285 | | | 2,632 | | | — | | | 57,917 | |
| | | | | | | | |
| | | | | | | | |
| Depreciation and amortization | | 112,880 | | | 257 | | | — | | | 113,137 | |
| Contract assets amortization | | 896 | | | — | | | — | | | 896 | |
| Proportionate EMI EBITDA | | — | | | 37,973 | | | — | | | 37,973 | |
| | | | | | | | |
| Loss on disposal of assets | | 454 | | | — | | | — | | | 454 | |
| Gain on debt extinguishment | | (60) | | | — | | | — | | | (60) | |
| | | | | | | | |
| Derivatives loss due to Winter Storm Uri | | 13,456 | | | — | | | — | | | 13,456 | |
| | | | | | | | |
| | | | | | | | |
| Other one-time costs or amortization | | 874 | | | 21 | | | (52) | | | 843 | |
| Producer settlement | | 6,827 | | | — | | | — | | | 6,827 | |
| Deduct: | | | | | | | | |
| Interest and other income | | 41 | | | — | | | — | | | 41 | |
| Equity income from unconsolidated affiliates | | — | | | 27,866 | | | — | | | 27,866 | |
| | | | | | | | |
| Segment adjusted EBITDA | | $ | 174,544 | | | $ | 36,756 | | | $ | (4,994) | | | $ | 206,306 | |
(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 purpose of evaluating their performance, including certain general and administrative expense items.
(2) Results do not include legacy ALTM prior to February 22, 2022. Refer to Note 1 —Description of the Organization and Summary of Significant Accounting Policies in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q, for further information on the Company’s basis of presentation. Adjusted EBITDA is a non-GAAP measure; please see Key Performance Metrics in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q, for a definition and reconciliation to the GAAP measure.
The following tables present the revenue for individual operating segment for the three and six months ended June 30, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Midstream Logistics | | Pipeline Transportation | | | | Consolidated |
| | | | | | | | | |
| For the three months ended June 30, 2022 | | (In thousands) |
| Revenue | | $ | 331,731 | | | $ | — | | | | | $ | 331,731 | |
| Other revenue | | 3,839 | | | 2 | | | | | 3,841 | |
| Total segment operating revenue | | $ | 335,570 | | | $ | 2 | | | | | $ | 335,572 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Midstream Logistics | | Pipeline Transportation | | | | Consolidated |
| | | | | | | | | |
| For the three months ended June 30, 2021 | | (In thousands) |
| Revenue | | $ | 133,341 | | | $ | — | | | | | $ | 133,341 | |
| Other revenue | | 2,423 | | | 2 | | | | | 2,425 | |
| Total segment operating revenue | | $ | 135,764 | | | $ | 2 | | | | | $ | 135,766 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Midstream Logistics | | Pipeline Transportation | | | | Consolidated |
| | | | | | | | | |
| For the six months ended June 30, 2022 | | (In thousands) |
| Revenue | | $ | 587,104 | | | $ | — | | | | | $ | 587,104 | |
| Other revenue | | 5,713 | | | 4 | | | | | 5,717 | |
| Total segment operating revenue | | $ | 592,817 | | | $ | 4 | | | | | $ | 592,821 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Midstream Logistics | | Pipeline Transportation | | | | Consolidated |
| | | | | | | | | |
| For the six months ended June 30, 2021 | | (In thousands) |
| Revenue | | $ | 280,996 | | | $ | — | | | | | $ | 280,996 | |
| Other revenue | | 2,869 | | | 4 | | | | | 2,873 | |
| Total segment operating revenue | | $ | 283,865 | | | $ | 4 | | | | | $ | 283,869 | |
The following table presents total assets for each operating segment as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
| | | | |
| | June 30, 2022 | | December 31, 2021 |
| | | | |
| (In thousands) |
| Midstream Logistics | $ | 3,619,400 | | | $ | 2,916,774 | |
| Pipeline Transportation | 2,362,248 | | | 635,784 | |
| Segment total assets | 5,981,648 | | | 3,552,558 | |
| Corporate and other | 14,700 | | | 648 | |
| Total assets | $ | 5,996,348 | | | $ | 3,553,206 | |
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18. SUBSEQUENT EVENTS
In July 2022, the Company redeemed the remaining 400,000 Preferred Units along with 22,845 PIK units for an aggregate redemption price of $492.2 million. Following the July redemptions, there were no outstanding Preferred Units or PIK units.
On July 12, 2022, the Company filed a registration statement on Form S-3 with the SEC to register up to a maximum offering price of $400,000,000 of shares of Class A Common Stock, shares of preferred stock, depositary shares and warrants of the Company and debt securities of the Partnership and to register 107,580,912 shares of Class A Common Stock that may be offered and sold by the selling stockholders named in the registration statement Form S-3 filed from time to time on any exchange on which the shares of Class A Common Stock are listed.
On July 20, 2022, the Board declared a cash dividend of $0.75 per share on the Company’s Class A Common Stock which will be payable to stockholders on August 17, 2022. The Company, through its ownership of the general partner of the Partnership, declared a distribution of $0.75 per Common Unit from the Partnership to the holders of Common Units. Please refer to Note 10—Equity and Warrants in the Notes to our Condensed Consolidated Financial Statements in this Form 10-Q for additional information.