SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

Principles of Consolidation

The consolidated financial results of Altus Midstream are included in Altus Midstream Company’s consolidated financial statements due to Altus Midstream Company’s 100 percent ownership interest in Altus Midstream GP, and Altus Midstream GP’s control of Altus Midstream. Altus Midstream Company has no independent operations or material assets other than its partnership interests in Altus Midstream and related deferred tax asset. Altus Midstream Company’s financial statements differ from those of Altus Midstream primarily as a result of the presentation of noncontrolling interest ownership attributable to the limited partner interests in Altus Midstream held by Apache (refer to Note 10 — Income Taxes and Note 11 — Equity for further information).

Variable interest entity

Altus Midstream is a variable interest entity (“VIE”) because the partners in Altus Midstream with equity at risk lack the power, through voting or similar rights, to direct the activities that most significantly impact Altus Midstream’s economic performance.

A reporting entity that concludes it has a variable interest in a VIE must evaluate whether it has a controlling financial interest in the VIE, such that it is the VIE’s primary beneficiary and should consolidate. Altus Midstream Company is the primary beneficiary of, and therefore should consolidate Altus Midstream because (i) Altus Midstream Company has the power to direct the activities of Altus Midstream that most significantly affect its economic performance and (ii) Altus Midstream Company has the right to receive benefits or the obligation to absorb losses that could be potentially significant to Altus Midstream.

Redeemable noncontrolling interest

Altus Midstream Company’s redeemable noncontrolling interest presented in the consolidated financial statements consist of common units representing limited partner interests in Altus Midstream held by Apache. Pursuant to certain provisions of the partnership agreement of Altus Midstream (as amended in connection with the Business Combination, the “LPA”), the limited partner interests held by Apache are equal to the number of shares of the Company’s Class C common stock, $0.0001 par value (“Class C Common Stock”) held by Apache (see Note 2 — Recapitalization Transaction for further information).

The Company initially recorded the redeemable noncontrolling interest upon the issuance of the common units to Apache as part of the Business Combination and based on the recapitalization value ascribed at the Closing Date to the limited partner interest. All, or a portion of the common units may be redeemed at Apache’s option. The Company has the ability to settle the redemption option either (i) in shares of Class A Common Stock on a one-for-one basis or (ii) in cash (based on the fair market value of the Class A Common Stock as determined pursuant to the Contribution Agreement), subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Upon the future redemption or exchange of common units held by Apache, a corresponding number of shares of Class C Common Stock will be cancelled.

The Company’s policy is to record the redeemable noncontrolling interest represented by the common units held by Apache at the higher of (1) its initial fair value plus accumulated earnings/losses associated with the noncontrolling interest or (2) the redemption value as of the balance sheet date.

See discussion and additional detail further discussed in Note 2 — Recapitalization Transaction and Note 11 — Equity.

Joint venture equity interests

The Company follows the equity method of accounting when it does not exercise control over the joint venture, but can exercise significant influence over the operating and financial policies of the joint venture. Under this method, joint venture equity interests are carried originally at acquisition cost, increased by the proportionate share of the joint venture’s net income and by contributions made, and decreased by the proportionate share of the joint venture’s net losses and by distributions received. Please refer to Note 9 — Joint Venture Equity Interest, for further details of our equity interests.

Financial statement presentation

While Altus Midstream Company (formerly KAAC) was the surviving legal entity, the Business Combination was accounted for as a reverse recapitalization. As such, Altus Midstream Company was treated as the acquired company for financial reporting purposes. This determination was primarily based on the following facts and circumstances, immediately following the Closing Date:

•Alpine High Midstream operations comprise the ongoing operations of the combined entity;


•	Alpine High Midstream’s ultimate parent company immediately preceding the Business Combination (Apache) is the largest single owner of Altus Midstream Company voting common stock (see Note 11 — Equity); and

•Apache-nominated directors comprise a majority of the board of directors of the combined entity.

In accordance with guidance applicable to these circumstances, the Business Combination was considered to be a capital transaction in substance. Accordingly, for accounting purposes, the transaction was treated as the equivalent of the Alpine High Entities issuing stock for the net assets of Altus Midstream Company, accompanied by a recapitalization.

As a result of Alpine High Midstream being the accounting acquirer, the historical operations of Alpine High Midstream are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of Alpine High Midstream prior to the Business Combination; (ii) the net assets of Alpine High Midstream at their historical cost; (iii) the consolidated results of the Company and Alpine High Midstream following the closing of the Business Combination; and (iv) the Company’s equity structure for all periods presented. No step-up in basis of the contributed assets and no intangible assets or goodwill was recorded in the Business Combination.

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 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. Altus evaluates its estimates and assumptions on a regular basis. Actual results may differ from these estimates and assumptions used in preparation of its financial statements and changes in these estimates are recorded when known.

Fair Value Measurements

The Company’s redeemable noncontrolling interest, as presented in the consolidated financial statements, is reported at fair value on a recurring basis on the Company’s Consolidated Balance Sheet. Accounting Standards Codification (“ASC”) 820-10-35 - Fair Value Measurement (“ASC 820”), provides a hierarchy that prioritizes and defines the types of inputs used to measure fair value. The fair value hierarchy gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable; hence, these valuations have the lowest priority.

The valuation techniques that may be used to measure fair value include a market approach, an income approach and a cost approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company utilizes the market approach in recurring fair value measurement of the redeemable noncontrolling interest. The Company has classified this fair value assessment as Level 1 in the fair value hierarchy. For further detail, please refer to Note 11 — Equity.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value. As of December 31, 2018, Altus Midstream had $449.9 million of cash and cash equivalents. Altus Midstream had no cash and cash equivalents as of December 31, 2017.

Revenue Receivable

For each period presented and upon commencement of operations, all revenues were generated from midstream services provided to Apache, which included gathering, processing and transmission of natural gas. Revenue receivables represents revenues accrued which have been earned by Altus Midstream but not yet invoiced to Apache.

Pursuant to the terms of the Contribution Agreement, all accounts receivable from Apache (including revenue receivables) on or prior to September 30, 2018 are for the account of Apache. No cash settlement of such balances was contemplated prior to September 30, 2018 and as such, revenue receivables generated prior to this date were treated as a reduction to additional paid-in capital within equity.

Inventories

Inventories consist principally of equipment and material, stated at the lower of cost or net realizable value.

Property, Plant and Equipment

Property, plant and equipment consists of the costs incurred to acquire and construct midstream assets including capitalized interest. Property, plant and equipment is stated at the lower of historical cost less accumulated depreciation, or fair value, if impaired.

Depreciation

Depreciation is computed over each asset’s estimated useful life using the straight-line method based on estimated useful lives and estimated asset salvage values. Determination of depreciation expense requires judgment regarding the estimated useful lives and salvage values of property, plant and equipment. As circumstances warrant, depreciation estimates are reviewed to determine if any changes in the underlying assumptions are necessary. The estimated lives are 30 years for plants and facilities and 40 years for pipelines. For the twelve months ended December 31, 2018 and 2017 depreciation expense totaled $18.7 million and $5.6 million, respectively. No depreciation expense was recorded during 2016 as the assets had not yet been placed in service.

Asset Retirement Obligations and Accretion

The initial estimated asset retirement obligation related to property, plant and equipment and subsequent revisions are recorded as a liability at fair value, with an offsetting asset retirement cost recorded as an increase to the associated property, plant and equipment on the consolidated balance sheet. Revisions in estimated liabilities can result from changes in estimated inflation rates, changes in service and equipment costs, and changes in the estimated timing of an asset’s retirement. Asset retirement costs are depreciated using a systematic and rational method similar to that used for the associated property, plant and equipment. Accretion expense on the liability is recognized over the estimated productive life of the related assets and is included on the Consolidated Statements of Operations under “Depreciation and accretion.” For the twelve months ended December 31, 2018 and 2017 accretion expense totaled $1.3 million and $0.4 million, respectively.

Capitalized Interest

Interest is capitalized as part of the historical cost of developing and constructing assets. Significant midstream development assets that have not commenced operations qualify for interest capitalization. Capitalized interest is determined by multiplying Altus Midstream’s weighted-average borrowing cost of debt by the average amount of qualifying midstream assets. The amount of capitalized interest cannot be greater than actual interest incurred. Once an asset is placed into service, the associated capitalization of interest ceases and is expensed through depreciation over the asset’s useful life. Subsequent to the Closing Date, the Company incurred approximately $0.2 million of interest expense, which was capitalized.

Accounts Payable to Apache Corporation

The accounts payable to Apache Corporation represents the net result of Altus Midstream’s monthly revenue, operating expenditures and other transactions to be settled with Apache as provided under the Construction, Operations and Maintenance Agreement (the “COMA”). Generally, cash in this amount will be transferred to Apache in the month after the Company’s transactions are processed and the net results of operations are determined. See discussion and additional detail in Note 3 — Transactions with Affiliates.

Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (ASC 606),” using the modified retrospective method. The Company elected to evaluate all contracts at the date of initial application. There was no impact to the opening balance of retained earnings as a result of the adoption.

The following table presents a disaggregation of the Company’s midstream services revenue by service type.



	For the Year Ended December 31,				Period from May 26, 2016 (Inception) through December 31,
	2018		2017		2016
	(In thousands)
MIDSTREAM SERVICES REVENUE — AFFILIATE:
Gas gathering	$	7,656	$	820	$	—
Gas processing	53,108		11,037		—
Transmission	15,848		3,285		—
NGL transmission	138		—		—
	$	76,750	$	15,142	$	—

The Company currently generates all its revenues by providing the above services, pursuant to separate agreements entered into with Apache. These agreements have no minimum volume commitments or firm transportation commitments, instead they are underpinned by acreage dedications covering Alpine High. Pursuant to these agreements, Altus Midstream is obligated to perform services on all volumes produced from the dedicated acreage, so long as Apache has the right to market such gas. In exchange for the above services and in accordance with the terms of the services agreements, the Company charges a fixed fee on a per unit basis.

These performance obligations are satisfied over time as Apache simultaneously receives and consumes the benefits of the services performed. Service revenues are recognized when the right to invoice has been met, since the amount that we have the right to invoice (based upon the fixed fee and throughput volumes) corresponds directly with the value received by Apache.

Pursuant to the terms of the Contribution Agreement, all accounts receivable from Apache (including revenue receivable) on or prior to September 30, 2018 are for the account of Apache. No cash settlement of such balances was contemplated prior to September 30, 2018 and as such, revenue receivables generated prior to this date were treated as a reduction to additional paid-in capital within equity. In conjunction with the Business Combination, service revenue invoices are provided to Apache on a monthly basis, pursuant to the terms of the COMA. Amounts owing to Apache under the terms of the COMA are reduced by the amounts of these invoices. Net cash settlement is performed on a monthly basis. The net amount owing to Apache as of December 31, 2018 was $13.6 million. Additionally, the Company recognized services revenue earned but not yet invoiced to Apache of $10.9 million as of December 31, 2018.

Costs to obtain a contract with expected amortization periods of greater than one year will be recorded as an asset and will be recognized in accordance with ASC 340, “Other Assets and Deferred Costs.” Currently, Altus Midstream does not have contract assets related to incremental costs to obtain a contract. In addition, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less or contracts for which variable consideration is allocated entirely to a wholly unsatisfied performance obligation.

General and Administrative Expense

General and administrative (“G&A”) expense represents indirect costs and overhead expenditures incurred by the Company, associated with managing the midstream assets.

In connection with the closing of the Business Combination, the Company entered into the COMA, as described above, pursuant to which Apache will provide certain services related to the design, development, construction, operation, management and maintenance of Altus Midstream assets, on the Company’s behalf.

See discussion and additional detail further discussed in Note 3 — Transactions with Affiliates.

Income Taxes

The Company is subject to federal income tax and recognizes deferred tax assets and liabilities based on the difference between the financial statement carrying value and tax basis of its investment in Altus Midstream. For federal income tax purposes, Altus Midstream is regarded as a partnership and not subject to income tax. Income and deductions associated with Altus Midstream and the Alpine High Entities flow through to the Company. As such, Altus Midstream and the Alpine High Entities do not record a federal income tax provision.

The Company, Altus Midstream, and the Alpine High Entities are also subject to the Texas margins tax. The Texas margins tax is assessed on corporations, limited liability companies, and limited partnerships. As such, each entity recognizes state deferred tax assets and liabilities based on the differences between the financial statement carrying value and tax basis of assets and liabilities on the balance sheet.

Prior to the Closing Date, the Alpine High Entities were treated as disregarded subsidiaries of Apache Corporation, a C-corporation, for federal income tax purpose. The Alpine High Entities recognized deferred tax assets and liabilities based on the differences between the financial statement carrying value and tax basis of assets and liabilities on the balance sheet.

The Company routinely assesses the ability to realize its deferred tax assets. If the Company concludes that it is more likely than not that some or all of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions and changing tax laws.

Maintenance and Repairs

Routine maintenance and repairs are charged to expense as incurred.

Recently Issued Accounting Standards Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases (Topic 842),” requiring lessees to recognize lease assets and lease liabilities for most leases classified as operating leases under previous GAAP. The guidance is effective for fiscal years beginning after December 15, 2018. In January 2018, the FASB issued ASU 2018-01, which permits an entity an optional election to not evaluate under ASU 2016-02 those existing or expired land easements that were not previously accounted for as leases prior to the adoption of ASU 2016-02. In July 2018, the FASB issued ASU 2018-11, which adds a transition option permitting entities to apply the provisions of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. Under this transition option, comparative reporting would not be required, and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. The Company elected both transitional practical expedients. As allowed under the standard, the Company also applied practical expedients to carry forward our historical assessments of whether existing agreements contain a lease, classification of existing lease agreements, and treatment of initial direct lease costs. The Company also elected to exclude short-term leases (those with terms of 12 months or less) from the balance sheet presentation and will account for non-lease and lease components as a single lease component for all asset classes.

The Company adopted this guidance as of January 1, 2019. In the normal course of business, Altus Midstream enters into various lease agreements for real estate and equipment related to midstream activities that are accounted for as operating leases. To track these lease arrangements and facilitate compliance with this ASU, the Company implemented a third-party lease accounting software solution and designed processes and internal controls to identify, track and record applicable leases. The Company trained departments affected by the standard, implemented changes to the relevant business processes, and continues to evaluate contracts. The Company’s adoption and implementation of this ASU resulted in an increase in both right of use assets and liabilities related to leasing activities; however, the amount was immaterial upon adoption. Right of use assets and associated liabilities are expected to change subsequent to adoption of this ASU for new leases entered into subsequent to year-end and amortization on existing lease assets. There was no impact to the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows upon adoption.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses.” The standard changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. We do not expect to adopt the guidance early. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is evaluating the new guidance and does not believe this standard will have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework: Changes to the Disclosure Requirements for Fair Value Measurement,” which changes the disclosure requirements for fair value measurements by removing, adding, and modifying certain disclosures. ASU 2018-13 is effective for financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of adoption of this ASU on its related disclosures and does not expect it to have a material impact on its financial statements.