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OFFON

ALTUS MIDSTREAM COMPANY

(ALTM)
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ALTUS MIDSTREAM : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

02/26/2021 | 06:29am EDT
The following discussion and analysis should be read together with the
Consolidated Financial Statements and the Notes to Consolidated Financial
Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K, and
the risk factors and related information set forth in Part I, Item 1A and Part
II, Item 7A of this Annual Report on Form 10-K. This section of this Annual
Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year
comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year
comparisons between 2019 and 2018 that are omitted in this Annual Report on Form
10-K are incorporated by reference to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II, Item 7 of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2019, filed on March 16, 2020.
Overview
Altus Midstream Company (the Company or Altus), through its ownership interest
in Altus Midstream LP (Altus Midstream), owns gas gathering, processing, and
transmission assets in the Permian Basin of West Texas, anchored by midstream
service agreements to service Apache Corporation's (Apache) production from its
Alpine High resource play and surrounding areas (Alpine High). Additionally, the
Company owns equity interests in four intrastate Permian Basin pipelines (the
Equity Method Interest Pipelines) that have access to various points along the
Texas Gulf Coast. The Company's operations consist of one reportable segment.
The Company has no independent operations or material assets outside its
ownership interest in Altus Midstream, which is reported on a consolidated
basis. As of December 31, 2020, Altus Midstream's assets included approximately
182 miles of in-service natural gas gathering pipelines, approximately 46 miles
of residue gas pipelines with four market connections, and approximately 38
miles of NGL pipelines. Three cryogenic processing trains, each with nameplate
capacity of 200 MMcf/d, were placed into service during 2019. Other assets
include an NGL truck loading terminal with six Lease Automatic Custody Transfer
units and eight NGL bullet tanks with 90,000 gallon capacity per tank. The
Company's existing gathering, processing, and transmission infrastructure is
expected to provide capacity levels capable of fulfilling its midstream
contracts to service Apache's production from Alpine High and potential
third-party customers.
As of December 31, 2020, the Company owns the following Equity Method Interest
Pipelines:
•A 16 percent equity interest in the Gulf Coast Express Pipeline Project (GCX),
which is owned and operated by Kinder Morgan Texas Pipeline, LLC (Kinder
Morgan). GCX transports natural gas from the Waha area in West Texas to Agua
Dulce near the Texas Gulf Coast. GCX was placed in service during 2019, with the
total capacity of 2.0 Bcf/d fully subscribed under long-term contracts.
•A 15 percent equity interest in the EPIC crude oil pipeline (EPIC), which is
operated by EPIC Consolidated Operations, LLC. EPIC transports crude oil from
Orla, Texas in Northern Reeves County to the Port of Corpus Christi, Texas. EPIC
was placed in service early 2020, with initial throughput capacity of
approximately 600 MBbl/d.
•An approximate 26.7 percent equity interest in the Permian Highway Pipeline
(PHP), which is also owned and operated by Kinder Morgan. PHP transports natural
gas from the Waha area in northern Pecos County, Texas to the Katy, Texas area
with connections to Texas Gulf Coast and Mexico markets. PHP was placed in
service January 2021, with the total capacity of 2.1 Bcf/d fully subscribed
under long-term contracts.
•A 33 percent equity interest in the Shin Oak NGL Pipeline (Shin Oak), which is
owned by Breviloba, LLC, and operated by Enterprise Products Operating LLC. Shin
Oak transports NGLs from the Permian Basin to Mont Belvieu, Texas. Shin Oak was
placed in service during 2019, with total capacity of up to 550 MBbl/d.
The global economy and the energy industry have been deeply impacted by the
effects of the coronavirus disease 2019 (COVID-19) pandemic and related
governmental actions. Uncertainty in the oil markets and the negative demand
implications of the COVID-19 pandemic continue to impact oil supply and demand.
Altus management continues to monitor natural gas throughput volumes from Apache
and capacity utilization of the Equity Method Interest Pipelines. During the
second quarter of 2020, Apache shut in approximately 70 MMcf/d of production in
response to low commodity prices, which fell as a result of lower demand and
higher uncertainty associated with the COVID-19 pandemic. These volumes came
back online during the third quarter of 2020 after prices began to recover. The
Company remains focused on increasing third-party processing opportunities in
addition to Alpine High; however, the current market situation has slowed the
pace of this activity. Altus has no upcoming debt maturities, and the term of
its revolving credit facility extends through November of 2023.
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The Company is projected to be cash flow positive in 2021 following the start-up
of PHP in January of 2021, with minimal expected future capital requirements. As
such, the Company believes it has sufficient operating cash flows and liquidity
to fund its future capital expenditures and its quarterly dividend declared by
the Board of Directors in December of 2020.
The current crisis, however, is still evolving and may become more severe and
complex. As a result, the COVID-19 pandemic may still materially and adversely
affect Altus' results in a manner that is either not currently known or that the
Company does not currently consider to be a significant risk to its
business. For additional information about the business risks relating to the
COVID-19 pandemic, please refer to Part II,   Item 1A-Risk Factors   of this
Annual Report on Form 10-K.
Altus Midstream Operational Metrics
The Company uses a variety of financial and operational metrics to assess the
performance of its operations and growth compared to expected plan estimates.
These metrics include:
•Throughput volumes and associated revenues;
•Costs and expenses; and
•Adjusted EBITDA (as defined below).
Throughput Volumes and Associated Revenues
The Company's results are driven primarily by the volume of natural gas
gathered, processed, compressed, and/or transmitted. For the periods presented,
substantially all revenues were generated through fee-based agreements with
Apache, a related party. The volumes of natural gas that Altus gathers or
processes in future periods will depend on the production level of Apache's
assets in areas Altus services and any additional third-party service contracts.
The Company's assets were initially constructed to serve Apache's anticipated
development of Alpine High and its surrounding areas. As such, the amount and
pace of upstream development activity by Apache will directly impact Altus'
aggregate gathering and processing volumes because the production rate of
natural gas wells declines over time.
Apache, as part of its fourth quarter 2019 capital planning review, notified
Altus of its intention to materially reduce its planned investment in the Alpine
High play. This notification prompted Altus management to assess its long-lived
infrastructure assets for impairment given the expected reduction to future
throughput volumes. Altus subsequently recorded impairments on its gathering,
processing, and transmission assets in the fourth quarter of 2019. For further
discussion of these impairments, please see   Note 1-Summary of Significant
Accounting Policies   and   Note 5-Property, Plant and Equipment   in the Notes
to Consolidated Financial Statements included in Part IV, Item 15 of this Annual
Report on Form 10-K.
In the second quarter of 2020, shut-ins and unplanned downtime, among other
events, had a negative impact on throughput volumes and associated revenues.
Apache shut in approximately 70 MMcf/d of production in response to low
commodity prices, which fell as a result of lower demand and higher uncertainty
associated with the COVID-19 pandemic. In addition, unplanned downtime to
address moisture in the residue pipeline reduced throughput by approximately 40
MMcf/d. These volumes were back on-line at the beginning of the third quarter.
In the fourth quarter of 2020, voluntary, price-related volume curtailments
reduced throughput by approximately 26 MMcf/d.
The Company remains focused on increasing third-party processing opportunities
in addition to Alpine High, and other producers are developing oil and gas plays
in surrounding areas that may provide Altus opportunities to enter into
third-party processing and gathering agreements. Producers' willingness to
engage in new drilling is determined by a number of factors, all of which are
affected by the COVID-19 pandemic, the most important of which are the
prevailing and projected prices of oil, natural gas, and NGLs, the cost to drill
and operate a well, the availability and cost of capital, and environmental and
government regulations. Company management believes that its midstream assets
are positioned in one of the most active regions for oil and gas exploration and
development activities in the United States, and the Company is actively
pursuing new supplies of natural gas and processing arrangements with third
parties to increase throughput volumes in its systems.
For more information about the Company's relationship with Apache, please see
the section entitled Altus' Relationship with Apache in Part I, Items 1 and 2 of
this Annual Report on Form 10-K.

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Costs and Expenses
Costs of product sales
Costs of product sales represent purchases of NGLs from a third party, which the
Company then owns, controls and processes, prior to ultimate sale to customers.
These costs are directly associated with the volume and amount of third-party
contracts entered into and could fluctuate depending on market conditions and
product prices.
Operations and maintenance
Operations and maintenance expenses primarily comprise those costs that are
directly associated with the operations of the Company's assets. The most
significant of these costs are associated with direct labor and supervision,
power, repair and maintenance expenses, and equipment rentals. Fluctuations in
commodity prices impact operating cost elements both directly and indirectly.
For example, commodity prices directly impact costs such as power and fuel,
which are expenses that increase (or decrease) in line with changes in commodity
prices. Commodity prices also affect industry activity and demand, thus
indirectly impacting the cost of items such as labor and equipment rentals.
Depreciation and accretion
Depreciation on the capitalized costs incurred to acquire and develop the
Company's midstream assets is computed based on estimated useful lives and
estimated salvage values. Also included within this expense is the accretion
associated with estimated asset retirement obligations (ARO). Depreciation and
accretion expense would be expected to increase during future periods in-line
with additional infrastructure costs incurred; however, any future asset sales
or long-lived asset impairments would decrease expected depreciation expense to
commensurate levels.
General and administrative
General and administrative (G&A) expense represents indirect costs and overhead
expenditures incurred by the Company associated with managing the midstream
assets. These expenses primarily comprise fixed fees set forth in the
Construction, Operations and Maintenance Agreement (COMA) entered into with
Apache. Refer to   Note     3    -Transactions with Affiliates   in the Notes to
Consolidated Financial Statements set forth in Part IV of this Annual Report on
Form 10-K for further information.
Taxes other than income
Taxes other than income are primarily related to ad valorem taxes on the
Company's midstream assets.
Adjusted EBITDA
The Company defines Adjusted EBITDA as net income (loss) including
noncontrolling interests before financing costs (net of capitalized interest),
interest income, income taxes, depreciation, and accretion and adjusts such
items, as applicable, from income from the Equity Method Interest Pipelines.
Altus also excludes (when applicable) impairments, unrealized gains or losses on
derivative instruments, and other items affecting comparability of results to
peers. Company management believes Adjusted EBITDA is useful for evaluating
operating performance and comparing results of operations from period-to-period
and against peers without regard to financing or capital structure. Adjusted
EBITDA should not be considered as an alternative to, or more meaningful than,
net income (loss) including noncontrolling interests or any other measure
determined in accordance with accounting principles generally accepted in the
United States (GAAP) or as an indicator of the Company's operating performance
or liquidity. Certain items excluded from Adjusted EBITDA are significant
components in understanding and assessing Altus' financial performance, such as
cost of capital and tax structure, as well as the historic costs of depreciable
assets, none of which are components of Adjusted EBITDA. The presentation of
Adjusted EBITDA should not be construed as an inference that the Company's
results will be unaffected by unusual or non-recurring items. Additionally, the
Company's computation of Adjusted EBITDA may not be comparable to other
similarly titled measures of other companies.
Adjusted EBITDA is not defined in GAAP
The GAAP measure used by the Company that is most directly comparable to
Adjusted EBITDA is net income (loss) including noncontrolling interests.
Adjusted EBITDA should not be considered as an alternative to the GAAP measure
of net income (loss) including noncontrolling interests or any other measure of
financial performance presented in accordance with GAAP. Adjusted EBITDA has
important limitations as an analytical tool because it excludes some, but not
all, items that affect net income (loss) including noncontrolling interests.
Adjusted EBITDA should not be considered in isolation or as a substitute for
analysis of the Company's results as reported under GAAP. The Company's
definition of Adjusted EBITDA may not be comparable to similarly titled measures
of other companies in the industry, thereby diminishing its utility.
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Reconciliation of non-GAAP financial measure
Company management compensates for the limitations of Adjusted EBITDA as an
analytical tool by reviewing the comparable GAAP measure, understanding the
differences between Adjusted EBITDA as compared to net income (loss) including
noncontrolling interests, and incorporating this knowledge into its
decision-making processes. Management believes that investors benefit from
having access to the same financial measure that the Company uses in evaluating
operating results.
The following table presents a reconciliation of the GAAP financial measure of
net income (loss) including noncontrolling interests to the non-GAAP financial
measure of Adjusted EBITDA.
                                                                             Year Ended December 31,
                                                                            2020                 2019

                                                                                  (In thousands)
Reconciliation of net income (loss) including noncontrolling
interests to Adjusted EBITDA
Net income (loss) including noncontrolling interests                   $    80,484          $ (1,338,900)
Add:
Financing costs, net of capitalized interest                                 2,190                 1,792
Income tax expense                                                               -                64,900
Depreciation and accretion                                                  15,945                41,480
Impairments                                                                  1,643             1,300,719
Unrealized derivative instrument loss                                       36,080                 8,470
Equity method interests Adjusted EBITDA                                    111,675                29,251
Loss on sale of assets, net                                                  2,234                   605
Other                                                                          348                   676
Less:
Interest income                                                                  9                 3,606
Income from equity method interests, net                                    58,739                19,069
Income tax benefit                                                             696                     -

Adjusted EBITDA                                                        $   191,155          $     86,318



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Results of Operations


The following table presents the Company's results of operations for the periods
presented:
                                                                              Year Ended December 31,
                                                                             2020                   2019

                                                                                  (In thousands)
REVENUES:
Midstream services revenue - affiliate                                $    144,714             $   135,798
Product sales - third parties                                                3,695                       -
Total revenues                                                             148,409                 135,798
COSTS AND EXPENSES:
Costs of product sales                                                       2,988                       -
Operations and maintenance                                                  37,993                  55,858
General and administrative                                                  13,155                  10,301
Depreciation and accretion                                                  15,945                  41,480
Impairments                                                                  1,643               1,300,719
Taxes other than income                                                     15,069                  13,231
Total costs and expenses                                                    86,793               1,421,589
OPERATING INCOME (LOSS)                                                     61,616              (1,285,791)
Unrealized derivative instrument loss                                      (36,080)                 (8,470)
Interest income                                                                  9                   3,606
Income from equity method interests, net                                    58,739                  19,069
Other                                                                       (2,306)                   (622)
Total other income                                                          20,362                  13,583
Financing costs, net of capitalized interest                                 2,190                   1,792
NET INCOME (LOSS) BEFORE INCOME TAXES                                       79,788              (1,274,000)
Current income tax benefit                                                    (696)                    (15)
Deferred income tax expense                                                      -                  64,915
NET INCOME (LOSS) INCLUDING NONCONTROLLING INTERESTS                        80,484              (1,338,900)
Net income attributable to Preferred Unit limited partners                  75,906                  38,809
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS                        4,578              (1,377,709)
Net income (loss) attributable to Apache limited partner                     2,987              (1,008,039)

NET INCOME (LOSS) ATTRIBUTABLE TO CLASS A COMMON SHAREHOLDERS $

  1,591             $  (369,670)
KEY PERFORMANCE METRICS:
Adjusted EBITDA(1)                                                    $    191,155             $    86,318
OPERATING DATA:
Average throughput volumes of natural gas (MMcf/d)                             499                     509


(1)Adjusted EBITDA is not defined by GAAP and should not be considered an
alternative to, or more meaningful than, net income (loss), operating income
(loss), net cash provided by (used in) operating activities, or any other
measures prepared under GAAP. For the definition and reconciliation of Adjusted
EBITDA to its most directly comparable GAAP measure, see the section titled
Altus Midstream Operational Metrics-Adjusted EBITDA above.
Since the Company commenced operations in the second quarter of 2017, its most
significant customer has been Apache. Altus Midstream is pursuing similar
long-term commercial service contracts with third-parties that could be
accommodated by existing capacity. Altus' midstream service agreements with
Apache contain no minimum volume commitments and as such, future results of
operations may be materially impacted by Apache's production volumes from Alpine
High and Altus' ability to contract third-party business. Refer to Part I,

Item 1A-Risk Factors of this Annual Report on Form 10-K for further discussion.

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Revenues

The following table summarizes the Company's revenues for the periods presented:
                                                   Year Ended December 31,
                                                     2020               2019

                                                       (In thousands)
REVENUES:
Midstream services revenue - affiliate       $     144,714           $ 

135,798

Product sales - third parties                        3,695                   -
Total revenues                               $     148,409           $ 135,798


Midstream services revenue was primarily generated from fee-based midstream
services provided under the terms of separate commercial midstream service
agreements with Apache for the gas gathering, processing, and transmission of
volumes from the dedicated area in the Alpine High field. Altus receives a
per-unit fee based on the quantity of natural gas and natural gas liquid volumes
that flow through its systems. During the periods presented, Altus did not own
or take title to the affiliate volumes that were processed through its systems.
Additionally, during 2020 the Company began providing compressor operations,
maintenance, and related services to Apache in exchange for a fixed monthly fee
per compressor unit serviced. For more details, please refer to   Note
    4    -    Revenue Recognition   in the Notes to Consolidated Financial
Statements included within Part IV, Item 15 of this Annual Report on Form 10-K.
Midstream services revenue from affiliate increased by $8.9 million to $144.7
million for the year ended December 31, 2020, as compared to $135.8 million for
the year ended December 31, 2019. The increase was primarily driven by higher
throughput of rich natural gas volumes due to increased capacity as a result of
the three cryogenic processing trains coming on line starting in the second
quarter of 2019, partially offset by lower throughput of lean natural gas
volumes.
Beginning in 2020, product sales revenues, which totaled $3.7 million during the
year, were generated from NGLs and condensates purchased and processed by Altus
from a third party and subsequently sold to non-affiliated customers.
Costs and Expenses
The following table summarizes the Company's costs and expenses for the periods
presented:
                                     Year Ended December 31,
                                      2020               2019

                                          (In thousands)
Costs of product sales          $     2,988          $         -
Operations and maintenance           37,993               55,858
General and administrative           13,155               10,301
Depreciation and accretion           15,945               41,480
Impairments                           1,643            1,300,719
Taxes other than income              15,069               13,231
Total costs and expenses        $    86,793          $ 1,421,589


Costs of product sales
The $3.0 million in costs of product sales represent purchases of NGLs from a
third party starting in 2020, which were used to support the product sales to
third parties discussed above.
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Operations and maintenance
Operations and maintenance expenses decreased by approximately $17.9 million to
$38.0 million for the year ended December 31, 2020, as compared to $55.9 million
for the year ended December 31, 2019, primarily driven by increased operational
efficiency as a result of transitioning from mechanical refrigeration units to
the Company's centralized Diamond cryogenic complex starting in the second
quarter of 2019. The transition resulted in decreases in employee-related costs,
contract labor, lower supplies expenses, and lower equipment rentals. These
savings are coupled with an overall decrease in Company labor from headcount
reductions, partially offset by higher electricity power usage.
General and administrative

G&A expense increased by $2.9 million to $13.2 million for the year ended
December 31, 2020, as compared to $10.3 million for the year ended December 31,
2019, primarily driven by higher fees paid under the COMA, which escalate on an
annual basis per the terms of the COMA Agreement. Refer to   Note
  3    -    Transactions with Affiliates   within Part IV, Item 15 of this
Annual Report on Form 10-K for more information related to this agreement,
including future fee increases.
Depreciation and accretion
Depreciation and accretion expense decreased by $25.6 million to $15.9 million
for the year ended December 31, 2020, as compared to $41.5 million for the year
ended December 31, 2019. The decrease was primarily a result of the impairments
recorded on the carrying value of the property, plant, and equipment at the end
of 2019.
Impairments
During the fourth quarter of 2020, the Company sold certain of its power
generators to a third party and, as a result, the remaining power generators
owned by the Company were remeasured at fair value calculated based on the
proceeds of such sale. This remeasurement resulted in an impairment of $1.6
million on these assets.
Apache, as part of its fourth quarter 2019 capital planning review, notified
Altus that it had materially reduced its investment and future drilling plans at
Alpine High. This notification prompted Altus management to assess its
long-lived infrastructure assets for impairment, and as a result of this
assessment, Altus recorded impairments of $1.3 billion on its gathering,
processing, and transmission assets in the fourth quarter of 2019. Altus also
recorded an impairment charge of $9.3 million in the third quarter of 2019
related to the cancellation of construction on a previously planned compressor
station.
For further discussion of these impairments, please see   Note 1-Summary of
Significant Accounting Policies   and   Note 5-Property, Plant and Equipment
in the Notes to Consolidated Financial Statements included within Part IV, Item
15 of this Annual Report on Form 10-K.
Taxes other than income
The increase in taxes other than income was driven by changes related to ad
valorem taxes, which increased by $1.8 million to $14.7 million for the year
ended December 31, 2020, as compared to $12.9 million for the year ended
December 31, 2019. The $1.8 million increase reflects higher tax assessments
related to the completion and timing of assets placed in service during the
prior year.

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Other Income (Loss) and Financing Costs, Net of Capitalized Interest The components of other income, other loss, and financing costs, net of capitalized interest are presented below:

                                                                Year Ended December 31,
                                                                  2020                2019

                                                                    (In thousands)
Unrealized derivative instrument loss                     $     (36,080)           $ (8,470)
Interest income                                                       9     

3,606

Income from equity method interests, net                         58,739              19,069
Other                                                            (2,306)               (622)
Total other income                                        $      20,362            $ 13,583

Interest expense                                          $       9,775            $  6,384
Amortization of deferred facility fees                            1,148                 889
Capitalized interest                                             (8,733)    

(5,481)

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

$ 1,792



Unrealized derivative instrument loss
During the year ending December 31, 2020, the Company recognized an unrealized
derivative instrument loss of $36.1 million in relation to an embedded exchange
option identified upon the issuance and sale of Series A Cumulative Redeemable
Preferred Units (the Preferred Units) in the second quarter of 2019. The
recognized unrealized loss related to this embedded feature was $8.5 million for
the year ended December 31, 2019. The associated derivative liability is
recorded on the consolidated balance sheet at fair value. The fair value of the
embedded derivative is determined (using an income approach) by a range of
factors including expected future interest rates using the Black-Karasinski
model, interest rate volatility, the Company's imputed interest rate, the
expected timing of periodic cash distributions, the estimated timing for the
potential exercise of the exchange option, and anticipated dividend yields of
the Preferred Units. The value of the derivative during the year ending December
31, 2020 was primarily impacted by the decrease in the expected timing to
exercise the exchange option feature. Refer to   Note 12-Series A Cumulative
Redeemable Preferred Units   within Part IV, Item 15 of this Annual Report on
Form 10-K for further discussion.
Interest Income
Interest income decreased $3.6 million for the year ended December 31, 2020, as
compared to the year ended December 31, 2019, as a result of a decrease in the
average cash and cash equivalents balance maintained by the Company throughout
the year.
Income from equity method interests, net
As of December 31, 2020, the Company holds equity interests in four pipelines.
Income from the Equity Method Interest Pipelines was primarily driven by the
Company's proportionate share of net income from GCX and Shin Oak, partially
offset by net losses attributable to EPIC. GCX and Shin Oak were placed into
service during 2019, and 2020 reflected the first full year of earnings for
these pipelines. EPIC was placed into service in early 2020 and operated at a
net loss during 2020. PHP was in the commissioning phase and flowing partial
volumes as of December 31, 2020, and was placed into service on January 1, 2021.
Refer to   Note 10-Equity Method Interests   within Part IV, Item 15 of this
Annual Report on Form 10-K for more information.
Financing costs, net of capitalized interest
Financing costs incurred, net of capitalized interest, includes increases in
interest expense related to higher balances drawn on the Company's credit
facility throughout the current year as compared to 2019; however, most of the
interest expense on the Company's credit facility was eligible to have interest
capitalized in all periods presented.

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Provisions for income taxes
Current income tax benefit for the years ended December 31, 2020 and 2019 were a
benefit of $696.0 thousand and $15.0 thousand, respectively. On March 27, 2020,
the President signed into law the Coronavirus Aid, Relief and Economic Security
Act (CARES Act) in response to the COVID-19 pandemic. Under the CARES Act, 100
percent of net operating losses arising in tax years beginning after December
31, 2017, and before January 1, 2021 may be carried back to each of the five
preceding tax years of such loss. For the year ended December 31, 2020, the
Company recorded a current income tax benefit of $696.0 thousand associated with
a net operating loss carryback claim.
The Company recorded no deferred income tax expense for the year ended December
31, 2020, as compared to $64.9 million for the year ended December 31, 2019. The
reduction to deferred income tax expense during the year ended December 31, 2020
as compared to the year ended December 31, 2019 was the result of an increase in
valuation allowance against the Company's deferred tax assets.
Please refer to   Note 13-Income Taxes   set forth in Part IV, Item 15 of this
Annual Report on Form 10-K for further discussion.
Key Performance Metric-EBITDA
Net income before income taxes was $79.8 million for the year ended December 31,
2020, an increase of $1.4 billion from a net loss before income taxes of $1.3
billion for the year ended December 31, 2019. The increase in net income before
income taxes was primarily driven by an increase of $12.6 million in total
revenues, $39.7 million of higher income from the Equity Method Interest
Pipelines, a $17.9 million decrease in operations and maintenance expenses, a
$1.3 billion decrease in impairment expense, and a $25.5 million decrease in
depreciation and accretion expense compared to the prior year period (as
discussed above). The increases to net income were offset by a $27.6 million
increase to expense related to the fair value measurement of an embedded
derivative at December 31, 2020, a $3.6 million decrease to interest income, a
$3.0 million increase to costs of product sales, a $2.9 million increase to
general administrative expenses, and $3.9 million of various other costs of the
Company.
Adjusted EBITDA increased by $104.8 million for the year ended December 31, 2020
compared to the prior year period. Adjusted EBITDA, which excludes the impacts
of depreciation, accretion, impairments, and the changes to the embedded
derivative, benefited from an incremental $42.8 million increase related to
excluding depreciation, and interest in the Company's proportionate share of
EBITDA from the Equity Method Interest Pipelines. This amount was further
benefited by a decrease of $5.3 million, in aggregate, of various other
insignificant costs of the Company.
For additional information, see the section titled Altus Midstream Operational
Metrics-Adjusted EBITA above.
Capital Resources and Liquidity
The Company's primary use of capital since inception has been for the initial
construction of gathering and processing assets, as well as the acquisition of
the Equity Method Interest Pipelines and associated subsequent construction
costs. For 2021, the Company's primary capital spending requirements are related
to equity contributions associated with its proportionate share of remaining
construction, commissioning, and maintenance costs relating to the Equity Method
Interest Pipelines.
During 2020, the Company's primary sources of cash were borrowings under the
revolving credit facility, cash generated from operations, distributions from
the Equity Method Interest Pipelines, and proceeds from the sale of assets.
Based on Altus' current financial plan and related assumptions, the Company
believes that cash from operations, a reduced capital program for its midstream
infrastructure, and distributions from the Equity Method Interest Pipelines will
generate cash flows in excess of capital expenditures that will provide
sufficient cash to fund the Company's planned quarterly dividend during 2021.
Given the recent crude oil price collapse on lower demand and economic activity
resulting from the COVID-19 pandemic and related governmental actions, the
Company continues to monitor expected natural gas throughput volumes from Apache
and capacity utilization of the Equity Method Interest Pipelines. Projections
for 2021 remain dynamic. Altus' results, including projections related to
capital resources and liquidity, could be materially affected by the continuing
COVID-19 pandemic.
                                       34
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Altus Midstream Capital Requirements
During 2020 and 2019, capital spending for midstream infrastructure assets
totaled $30.0 million and $342.7 million, respectively. Management believes its
existing gathering, processing, and transmission infrastructure capacity is
capable of fulfilling its midstream contracts to service Apache's production
from Alpine High and any potential third-party customers. As such, the Company
expects remaining capital requirements for its existing infrastructure assets
during 2021 to be minimal.
Additionally, during the years ended December 31, 2020 and 2019, the Company
made cash contributions totaling $327.3 million and $501.4 million,
respectively, for the Equity Method Interest Pipelines, which includes the
following equity interest ownership stakes:
•a 16.0 percent interest in GCX;
•a 15.0 percent interest in EPIC;
•an approximate 26.7 percent interest in PHP; and
•a 33.0 percent interest in Shin Oak.
The Company estimates it will incur approximately $30 million of additional
capital contributions during 2021 for its equity interest associated with the
commissioning and remaining construction costs in these joint venture pipelines,
primarily associated with PHP. The Company anticipates its existing capital
resources will be sufficient to fund the Company's future capital expenditures
for the Equity Method Interest Pipelines and the Company' existing
infrastructure assets. For further information on the Equity Method Interest
Pipelines, refer to   Note     10    -Equity Method Interests   in the Notes to
Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual
Report on Form 10-K.
Altus Midstream Class A Common Stock Dividend and Common Units Distributions
On December 10, 2020, the Company announced that its Board of Directors declared
a cash dividend of $1.50 per share on the Company's Class A Common Stock,
totaling $5.6 million to be paid to stockholders in the first quarter of 2021.
The Class A Common Stock dividend will be funded by a distribution from Altus
Midstream to its common unitholders of $1.50 per Common Unit, totaling $24.4
million, of which $5.6 million is payable to the Company and the balance is
payable to Apache. For more information please refer to   Note
3    -    Transactions with Affiliates   and   Note 1    1    -    Equity   in
the Notes to the Consolidated Financial Statements set forth in Part IV, Item 15
of this Annual Report on Form 10-K.
With PHP, Shin Oak, GCX, and EPIC in service, the Company anticipates that its
existing capital resources will be sufficient to fund the Company's continuing
obligations, including future distribution payments required to fund the
Company's planned quarterly dividend.

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Sources and Uses of Cash
The following table presents the sources and uses of the Company's cash and cash
equivalents for the periods presented.
                                                                                 For the Year Ended December 31,
                                                                                    2020                   2019

                                                                                         (In thousands)

Sources of cash and cash equivalents: Redeemable noncontrolling interest - Preferred Unit limited partners, net

                                                                          $             -          $   611,249
Proceeds from revolving credit facility                                              228,000              396,000
Proceeds from sale of assets                                                          10,240               13,309
Capital distributions from equity method interests                                    17,419                    -
Net cash provided by operating activities                                            164,294               76,273
                                                                                     419,953            1,096,831
Uses of cash and cash equivalents:
Capital expenditures(1)                                                              (29,981)            (342,650)
Distributions paid to Preferred Unit limited partners                                (23,124)                   -
Contributions to and acquisition of equity method interests                         (327,305)          (1,171,977)
Finance lease payments                                                               (11,789)             (22,994)
Deferred facility fees                                                                  (816)                (792)
Capitalized interest paid                                                             (8,733)              (2,370)
                                                                                    (401,748)          (1,540,783)
Increase (decrease) in cash and cash equivalents                            

$ 18,205 $ (443,952)



(1)The table presents capital expenditures on a cash basis; therefore, the
amounts may differ from those discussed elsewhere in this document, which
include accruals.
Liquidity
The following table presents a summary of the Company's key financial indicators
at the dates presented:
                                             December 31, 2020       December 31, 2019

                                                           (In thousands)
Cash and cash equivalents                   $           24,188      $            5,983
Total debt                                             624,000                 405,767
Available committed borrowing capacity                 176,000              

404,000



Cash and cash equivalents
At December 31, 2020 and December 31, 2019, the Company had $24.2 million and
$6.0 million, respectively, in cash and cash equivalents. The majority of the
cash is invested in highly liquid, investment-grade instruments with maturities
of three months or less at the time of purchase.
Debt
As of December 31, 2020 and December 31, 2019, the Company had debt outstanding
totaling $624.0 million and $405.8 million, respectively. At December 31, 2019,
$9.8 million of debt outstanding was related to a finance lease obligation for
which the term ended in the first quarter of 2020.

                                       36
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Available credit facilities
In November 2018, Altus Midstream entered into a revolving credit facility for
general corporate purposes that matures in November 2023 (subject to Altus
Midstream's two, one year extension options). The agreement for this revolving
credit facility, as amended (the Amended Credit Agreement), provides aggregate
commitments from a syndicate of banks of $800.0 million. The aggregate
commitments include a letter of credit subfacility of up to $100.0 million and a
swingline loan subfacility of up to $100.0 million. Altus Midstream may increase
commitments up to an aggregate $1.5 billion by adding new lenders or obtaining
the consent of any increasing existing lenders. As of December 31, 2020 and
2019, total outstanding borrowings were $624.0 million and $396.0 million,
respectively, and no letters of credit were outstanding under this facility.
Altus Midstream's revolving credit facility is unsecured and is not guaranteed
by the Company, Apache, or any of their respective subsidiaries.
At Altus Midstream's option, the interest rate per annum for borrowings under
this amended credit facility is either a base rate, as defined, plus a margin,
or the London Interbank Offered Rate (LIBOR), plus a margin. Altus Midstream
also pays quarterly a facility fee at a rate per annum on total commitments. The
margins and the facility fee vary based upon (i) the Leverage Ratio (as defined
below) until Altus Midstream has a senior long-term debt rating and (ii) such
senior long-term debt rating once it exists. The Leverage Ratio is the ratio of
(1) the consolidated indebtedness of Altus Midstream and its restricted
subsidiaries to (2) EBITDA (as defined in the Amended Credit Agreement) of Altus
Midstream and its restricted subsidiaries for the 12-month period ending
immediately before the determination date. At December 31, 2020, the base rate
margin was 0.05 percent, the LIBOR margin was 1.05 percent, and the facility fee
was 0.20 percent. In addition, a commission is payable quarterly to the lenders
on the face amount of each outstanding letter of credit at a per annum rate
equal to the LIBOR margin then in effect. Customary letter of credit fronting
fees and other charges are payable to issuing banks.
The Amended Credit Agreement contains restrictive covenants that may limit the
ability of Altus Midstream and its restricted subsidiaries to, among other
things, incur additional indebtedness or guaranty indebtedness, sell assets,
make investments in unrestricted subsidiaries, enter into mergers, make certain
payments and distributions, incur liens on certain property securing
indebtedness, and engage in certain other transactions without the prior consent
of the lenders. Altus Midstream also is subject to a financial covenant under
the Amended Credit Agreement, which requires it to maintain a Leverage Ratio not
exceeding 5.00:1.00 at the end of any fiscal quarter, starting with the quarter
ended December 31, 2019, except that during the period of up to one year
following a qualified acquisition, the Leverage Ratio cannot exceed 5.50:1.00 at
the end of any fiscal quarter. Unless the Leverage Ratio is less than or equal
to 4.00:1.00, the Amended Credit Agreement limits distributions in respect of
Altus Midstream LP's capital to $30 million per calendar year until either (i)
the consolidated net income of Altus Midstream LP and its restricted
subsidiaries, as adjusted pursuant to the Amended Credit Agreement, for three
consecutive calendar months equals or exceeds $350.0 million on an annualized
basis or (ii) Altus Midstream LP has a specified senior long-term debt rating;
in addition, before the occurrence of one of those two events, the Leverage
Ratio must be less than or equal to 5.00:1.00. In no event can any distribution
be made that would, after giving effect to it on a pro forma basis, result in a
Leverage Ratio greater than (i) 5.00:1.00 or (ii) for a specified period after a
qualifying acquisition, 5.50:1.00. The Leverage Ratio as of December 31, 2020
was less than 4.00:1.00.
The terms of Altus Midstream's Preferred Units also contain certain restrictions
on distributions on Altus Midstream LP's Common Units, including the Common
Units held by the Company, and any other units that rank junior to the Preferred
Units with respect to distributions or distributions upon liquidation. Refer to
  Note 12-Series A Cumulative Redeemable Preferred Units   in the Notes to
Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual
Report on Form 10-K for further information. In addition, the amount of any cash
distributions to Altus Midstream LP by any entity in which it has an interest
accounted for by the equity method is subject to such entity's compliance with
the terms of any debt or other agreements by which it may be bound, which in
turn may impact the amount of funds available for distribution by Altus
Midstream LP to its partners.
There are no clauses in the Amended Credit Agreement that permit the lenders to
accelerate payments or refuse to lend based on unspecified material adverse
changes. The Amended Credit Agreement has no drawdown restrictions or prepayment
obligations in the event of a decline in credit ratings. However, the agreement
allows the lenders to accelerate payment maturity and terminate lending and
issuance commitments for nonpayment and other breaches, and if Altus Midstream
or any of its restricted subsidiaries defaults on other indebtedness in excess
of the stated threshold, is insolvent, or has any unpaid, non-appealable
judgment against it for payment of money in excess of the stated threshold.
Lenders may also accelerate payment maturity and terminate lending and issuance
commitments if Altus Midstream undergoes a specified change in control or has
specified pension plan liabilities in excess of the stated threshold. Altus
Midstream was in compliance with the terms of the Amended Credit Agreement as of
December 31, 2020.
                                       37
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There is no assurance that the financial condition of banks with lending
commitments to Altus Midstream will not deteriorate. Altus closely monitors the
ratings of the banks in the Company's bank group. Having a large bank group
allows the Company to mitigate the potential impact of any bank's failure to
honor its lending commitment.
Series A Cumulative Redeemable Preferred Units
On June 12, 2019, Altus Midstream issued and sold the Preferred Units in a
private offering exempt from the registration requirements of the Securities Act
of 1933, as amended (the Closing). The Closing occurred pursuant to a Preferred
Unit Purchase Agreement among Altus Midstream, the Company, and the purchasers
party thereto, dated as of May 8, 2019. A total of 625,000 Preferred Units were
sold at a price of $1,000 per Preferred Unit, for an aggregate issue price of
$625.0 million. Altus Midstream received approximately $611.2 million in cash
proceeds from the sale after deducting transaction costs and discounts to
certain purchasers. These proceeds were used to fund ongoing capital
contributions related to Altus' Equity Method Interest Pipelines and repayment
of outstanding principal on the revolving credit facility (discussed above).
At the Closing, the partners of Altus Midstream entered into a second amended
and restated agreement of limited partnership of Altus Midstream LP (the Amended
LPA). The Amended LPA provides the terms of the Preferred Units, including the
distribution rate, redemption rights, and rights to exchange the Preferred Units
for shares of the Company's Class A Common Stock, as well as rights of holders
of the Preferred Units to approve certain partnership business, financial, and
governance-related matters. The Preferred Units have a perpetual term, unless
redeemed or exchanged as described below. Pursuant to the Amended LPA:
•The Preferred Units entitle the holders thereof to receive quarterly
distributions at a rate of 7 percent per annum, commencing with the quarter
ended June 30, 2019. The rate increases to 10 percent per annum after the fifth
anniversary of Closing and upon the occurrence of specified events. For any
quarter ending on or prior to December 31, 2020, Altus Midstream could elect to
pay distributions on the Preferred Units in-kind and did so in respect of
quarters ended on and before March 31,2020.
•The Preferred Units are redeemable at Altus Midstream's option at any time in
cash at a redemption price (the Redemption Price) equal to (a) the greater of
(i) an 11.5 percent internal rate of return (increasing to 13.75 percent after
the fifth anniversary of Closing), and (ii) a 1.3x multiple of invested capital
plus (b) if applicable, the value of any accrued and unpaid distributions. The
Preferred Units will be redeemable at the holder's option upon a change of
control or liquidation of Altus Midstream and certain other events, including
certain asset dispositions. Subject to compliance with minimum ownership
requirements and redemption restrictions of the Amended LPA, Apache's election
to cause its Common Units in Altus Midstream to be redeemed for shares of the
Company's Class A Common Stock or cash (as further discussed in   Note
11-Equity   in the Notes to Consolidated Financial Statements set forth in Part
IV, Item 15 of this Annual Report on Form 10-K) would not be a change of
control.
•The Preferred Units will be exchangeable for shares of the Company's Class A
Common Stock at the option of the Preferred Unit holders after the seventh
anniversary of Closing or upon the occurrence of specified events. Each
Preferred Unit will be exchangeable for a number of shares of Class A Common
Stock equal to the Redemption Price divided by the volume-weighted average
trading price of the Class A Common Stock on the Nasdaq Global Select Market for
the 20 trading days immediately preceding the second trading day prior to the
applicable exchange date, less a 6 percent discount.
•Each outstanding Preferred Unit has a liquidation preference equal to the
Redemption Price payable before any amounts are paid in respect of Altus
Midstream's Common Units and any other units that rank junior to the Preferred
Units with respect to distributions or distributions upon liquidation.
•Altus Midstream is restricted from declaring or making cash distributions on
its Common Units until all required distributions on the Preferred Units have
been paid. In addition, before the fifth anniversary of Closing, aggregate cash
distributions on, and redemptions of, Common Units are limited to $650.0 million
of cash from ordinary course of operations if permitted under Altus Midstream's
Amended Credit Agreement. Cash distributions on, and redemptions of, Common
Units also are subject to satisfaction of leverage ratio requirements specified
in the Amended LPA.
Distributions not paid in accordance with the terms of the Amended LPA attract
an additional percentage per annum, cumulative to the distribution rates noted
above. Altus Midstream's ability to exercise or satisfy redemption options in
cash or pay quarterly distributions is predicated upon Altus Midstream's ability
to generate sufficient cash from operations in addition to the availability of
borrowing capacity under its existing revolving credit facility.
                                       38
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Since the Preferred Units could be exchangeable for a number of shares of Class
A Common Stock equal to 20 percent or more of the Company's outstanding voting
power, the Company submitted the potential issuance of such shares for approval
of its stockholders (the Stockholder Approval) at its annual stockholder meeting
in 2020 and obtained Stockholder Approval.
Off-Balance Sheet Arrangements
Other than the arrangements described herein, the Company has not entered into
any transactions, agreements, or other contractual arrangements with
unconsolidated entities that are reasonably likely to materially affect its
liquidity or capital resource positions.
At the close of the Business Combination, Apache was granted the right to
receive contingent consideration of up to 1,8750,00 shares of Class A Common
Stock as follows:
•625,000 shares if, during the calendar year 2021, the aggregate gathered gas
from an area of dedication in Reeves, Pecos, Culberson, and Jeff Davis Counties
in Texas that are assessed a low pressure gathering fee pursuant to that certain
Amended and Restated Gas Gathering Agreement, dated August 8, 2018, between
Apache and Altus Midstream Gathering, LP is equal to or greater than 574,380
million cubic feet.
•625,000 shares if the per share closing price of the Class A Common Stock as
reported by Nasdaq during any 30-day-trading period ending prior to the fifth
anniversary of the Closing Date is equal to or greater than $280.00 for any 20
trading days within such 30-trading-day period.
•625,000 shares if the per share closing price of the Class A Common Stock as
reported by Nasdaq during any 30-trading-day period ending prior to the fifth
anniversary of the Closing Date is equal to or greater than $320.00 for any 20
trading days within such 30-trading-day period.
All share amounts referenced above have been retrospectively restated to reflect
the Company's reverse stock split, which was effected June 30, 2020. For
additional information regarding these arrangements, please see   Note
    11    -Equity   in the Notes to the Consolidated Financial Statements set
forth in Part IV, Item 15 of this Annual Report on Form 10-K.
Contractual Obligations
Altus Midstream exercised four of the Company's five Pipeline Options acquired
from Apache at the closing of the Business Combination. The fifth option to
acquire interest in the Salt Creek NGL pipeline was not exercised, and expired
during 2020. The Company may be required to fund its proportionate share of
future capital expenditures for its equity interest share in the development of
the pipelines as referenced. The Company estimates it will incur approximately
$30 million during 2021 of additional capital contributions for its equity
interests.
The Company's midstream assets service Altus Midstream's existing fee-based
revenue agreements, which are underpinned by acreage dedications covering Alpine
High. There are no minimum volume or firm transportation commitments. Pursuant
to these agreements, Altus Midstream is obligated to perform low and high
pressure gathering, processing, dehydration, compression, treating,
conditioning, and transmission on all volumes produced from the dedicated
acreage, so long as Apache has the right to market such gas. Although Altus
believes its existing gathering, processing, and transmission infrastructure is
expected to provide capacity levels capable of fulfilling its midstream
contracts to service Apache's production and additional third-party customers,
current capital spending may be increased in future periods if additional
cryogenic processing capacity is needed, commensurate with any forecasted
throughput increases.
During the fourth quarter of 2020, the Company entered into a three year
fixed-rate power contract with a third-party. The Company estimates its minimum
obligation will be $5.4 million, $4.7 million, and $3.6 million for 2021, 2022,
and 2023, respectively. The actual amount incurred will vary based on usage.
Altus Midstream may also be subject to various contingent obligations that
become payable only if certain events or rulings were to occur. The inherent
uncertainty surrounding the timing of and monetary impact associated with these
events or rulings prevents any meaningful accurate measurement, which is
necessary to assess settlements resulting from litigation, regulatory, or
environmental matters. As of December 31, 2020, there were no accruals or loss
contingencies related to such matters. For a detailed discussion of the
Company's environmental and legal contingencies, please see   Note

9 -Commitments and Contingencies in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.

                                       39
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For additional information regarding the Company's obligations, please see

  Note     3    -Transactions with Affiliates  ,   Note     6    -Debt and
Financing Costs  , and   Note     9    -Commitments and Contingencies   in the
Notes to the Consolidated Financial Statements set forth in Part IV, Item 15 of
this Annual Report on Form 10-K.
Insurance Program
The Company has the benefit of insurance policies that include coverage for
physical damage to assets, general liabilities, business interruption insurance,
sudden and accidental pollution, and other risks. Altus' insurance coverage is
subject to deductibles or retentions that Altus must satisfy prior to recovering
on insurance. Additionally, the insurance coverage is subject to policy
exclusions and limitations. There is no assurance that insurance coverage will
adequately protect the Company against liability from all potential consequences
and damages.
Future insurance coverage for the industry could increase in cost and may
include higher deductibles or retentions. In addition, some forms of insurance
may become unavailable.
Critical Accounting Estimates
Altus prepares its financial statements and the accompanying notes in conformity
with GAAP, which require management to make estimates and assumptions about
future events that affect the reported amounts in the financial statements and
the accompanying notes. Altus identifies certain accounting policies involving
estimation as critical based on, among other things, their impact on the
portrayal of Altus' financial condition, results of operations, or liquidity and
the degree of difficulty, subjectivity, and complexity in their deployment.
Critical accounting estimates cover accounting matters that are inherently
uncertain because the future resolution of such matters is unknown. Management
routinely discusses the development, selection, and disclosure of each of the
critical accounting policies. The following is a discussion of Altus' most
critical accounting estimates.
Property, Plant, and Equipment
When assets are placed into service, management makes estimates with respect to
useful lives and salvage values that management believes are reasonable.
However, subsequent events could cause a change in estimates, thereby impacting
future depreciation amounts. Uncertainties that may impact these estimates
include, among others, changes in laws and regulations relating to environmental
matters, including air and water quality, restoration and abandonment
requirements, economic conditions, and supply and demand in the area.
Depreciation is computed over the asset's estimated useful life using the
straight-line method based on estimated useful lives and asset salvage values.
Impairment of Long-lived Assets
Long-lived assets used in operations, including gathering, processing, and
transmission facilities, are evaluated for potential impairment when events or
changes in circumstances indicate a possible significant deterioration in future
cash flows expected to be generated by an asset group. Individual assets are
grouped for impairment purposes based on a judgmental assessment of the lowest
level for which there are identifiable cash flows that are largely independent
of the cash flows of other groups of assets. If there is an indication that the
carrying amount of an asset may not be recovered, the asset is assessed for
impairment through an established process in which changes to significant
assumptions such as service prices, throughput volumes, and future development
plans are reviewed. If, upon review, the sum of the undiscounted pre-tax cash
flows is less than the carrying value of the asset group, the carrying value is
written down to estimated fair value. Because there is usually a lack of quoted
market prices for long-lived assets, the fair value of the impaired assets is
assessed by management using the income approach.
Under the income approach, the fair value of each asset group is estimated based
on the present value of expected future cash flows. The income approach is
dependent on a number of key factors and assumptions including estimates of
forecasted throughput volumes, operating expenses, commercial development and
capital costs, inflation expectations, discount rates, and other variables.
Management also evaluates changes in Altus' business and economic conditions and
their implications on future development plans and ultimate disposition of the
assets. Global and regional economic conditions, including commodity prices and
drilling activity by third party customers, may also affect estimated future
cash flows.
                                       40
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The final measure of impairment to be recognized, if any, depends upon
management's calculation using the income approach; however, management does
consider other factors in determining the asset's fair value including
indicative values at which similar assets were transferred in recent market
transactions, if such data is available. Although the Company bases its fair
value measurement of each asset group on assumptions it believes to be
reasonable, those assumptions are inherently unpredictable and uncertain, and
actual results could differ from the estimates. Negative revisions in throughput
estimates, increases in future operating and capital costs, divestitures of
significant components of an asset group, or sustained market deterioration in
the oil and gas industry could lead to further reductions in expected future
cash flows and possibly additional impairments in future periods.
Altus recorded impairments on its gathering, processing, and transmission assets
and other fixed assets during 2020 and 2019. For discussion of these
impairments, see   Note 1-Summary of Significant Accounting Policies   and
  Note 5-Property, Plant and Equipment   in the Notes to Consolidated Financial
Statements included in within Part IV, Item 15 of this Annual Report on Form
10-K.
Income Taxes
Altus' operations are subject to U.S. federal and state taxation on income. The
Company records deferred tax assets and liabilities to account for the expected
future tax consequences of events that have been recognized in the Company's
financial statements and tax returns. Altus routinely assesses the ability to
realize its deferred tax assets. If Altus concludes that it is more likely than
not that some portion or all of the deferred tax assets will not be realized
under accounting standards, the tax asset would be reduced by a valuation
allowance. The Company recorded a full valuation allowance against its deferred
tax asset as of December 31, 2020 and December 31, 2019.

The Company regularly assesses and, if required, establishes accruals for
uncertain tax positions that could result from assessments of additional tax by
taxing jurisdictions where the Company operates. The Company recognizes a tax
benefit from an uncertain tax position when it is more likely than not that the
position will be sustained upon examination, based on the technical merits of
the position. These accruals for uncertain tax positions are subject to a
significant amount of judgment and are reviewed and adjusted on a periodic basis
in light of changing facts and circumstances considering the progress of ongoing
tax audits, case law, and any new legislation. There was no material change in
the Company's uncertain tax positions in the period.
Fair Value Measurements - Preferred Units Embedded Derivative
As noted in the discussion related to the Preferred Units above, the fair value
of the embedded derivative is determined by a range of factors, including
expected future interest rates using the Black-Karasinski model, the Company's
imputed interest rate, interest rate volatility, the expected timing of periodic
cash distributions, the estimated timing for the potential exercise of the
exchange option, and anticipated dividend yields of the Preferred Units. The
value of the unrealized derivative liability during the year end December 31,
2020 increased by $36.1 million, as compared to the year end December 31, 2019,
primarily driven by a decrease in the expected timing to exercise of the
exchange option. Absent any changes to interest rate assumptions
period-over-period, the value of the embedded derivative would be expected to
increase significantly due to a further decrease in the expected timing to
exercise of the exchange option. In general, a one percent increase in the
expected imputed interest rate assumption would significantly increase the value
of the embedded derivative liability at any period end, while a one percent
decrease would lead a similar decrease in value.
A summary of key assumptions used to value this instrument at December 31, 2020
and 2019 is included below:
                                                                December 31, 2020                  December 31, 2019

Range of Altus Midstream Company's Imputed Interest Rate

                                                               7.32-11.73%                         9.6-12.68%
Interest Rate Volatility(1)                                           37.08%                             21.89%
Expected Time to Exercise of the Exchange Option                    5.45 Years                         6.45 Years


(1)A 1% change in either direction of the interest rate volatility assumption in
any period would not have a significant effect on the valuation of the embedded
feature.

Refer to Note 12-Series A Cumulative Redeemable Preferred Units within Part IV, Item 15 of this Annual Report on Form 10-K for further discussion.

                                       41

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