REEDEMABLE NONCONTROLLING INTEREST - ALTUS

6 Months Ended

Jun. 30, 2019

REEDEMABLE NONCONTROLLING INTEREST - ALTUS

Preferred Units Issuance

On June 12, 2019, Altus Midstream LP, an indirectly controlled subsidiary of Apache, issued and sold Series A Cumulative Redeemable Preferred Units (the Preferred Units) for an aggregate issue price of $625 million in a private offering exempt from the registration requirements of the Securities Act of 1933 (the Closing). Altus Midstream LP received approximately $611 million in cash proceeds from the sale after deducting transaction costs and discounts to certain purchasers. Pursuant to the partnership agreement of Altus Midstream LP:


•	The Preferred Units bear quarterly distributions at a rate of 7 percent per annum, increasing after the fifth anniversary of Closing and upon the occurrence of specified events. Altus Midstream LP may pay distributions in-kind for the first six quarters after the Preferred Units are issued.

•

The Preferred Units are redeemable at Altus Midstream LP’s option at any time in cash at a redemption price (the Redemption Price) equal to the greater of an 11.5 percent internal rate of return (increasing after the fifth anniversary of Closing to 13.75 percent) and a 1.3x multiple of invested capital. The Preferred Units will be redeemable at the holder’s option upon a change of control or liquidation of Altus Midstream LP and certain other events, including certain asset dispositions.

•

The Preferred Units will be exchangeable for shares of ALTM’s Class A common stock at the holder’s election 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 ALTM’s Class A common stock equal to the Redemption Price divided by the volume-weighted average trading price of ALTM’s Class A common stock on the NASDAQ Capital 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 LP’s common units and any other units that rank junior to the Preferred Units with respect to distributions or distributions upon liquidation.


•	Preferred Units holders have rights to approve certain partnership business, financial, and governance-related matters.

•

Altus Midstream LP 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, Altus Midstream LP’s common units are limited to $650 million of cash from ordinary course operations if permitted under its credit facility. Cash distributions on, and redemptions of, Altus Midstream LP’s common units also are subject to satisfaction of leverage ratio requirements specified in its partnership agreement.

Classification

The Preferred Units are accounted for on the Company’s consolidated balance sheets as a redeemable noncontrolling interest classified as temporary equity based on the terms of the Preferred Units, including the redemption rights with respect thereto.

Initial Measurement

Altus recorded the net transaction price of $611 million, calculated as the negotiated transaction price of $625 million, less issue discounts of $4 million and transaction costs totaling $10 million.

Certain redemption features embedded within the terms of the Preferred Units require bifurcation and measurement at fair value. Altus bifurcated and recognized at fair value an embedded derivative related to the Preferred Units of $94 million for a redemption option of the Preferred Unit holders. The derivative is reflected in “Other” within “Deferred Credits and Other Noncurrent Liabilities” on the Company’s consolidated balance sheet. The fair value of the embedded derivative, a Level 3 fair value measurement, was based on numerous factors including expected future interest rates using the Black-Karasinski model, imputed interest rate of Altus, the timing of periodic cash distributions, and dividend yields of the Preferred Units. See Note 4—Derivative Instruments and Hedging Activities for more detail.

The net transaction price was allocated to the preferred redeemable noncontrolling interest and the embedded features according to the associated initial fair value measurements as follows:



	June 12, 2019
	(In millions)
Redeemable noncontrolling interest - Altus Preferred Unit Limited Partners	$	517
Preferred Units embedded derivative	94
	$	611

Subsequent Measurement

Altus applies a two-step approach to subsequent measurement of the redeemable noncontrolling interest related to the Preferred Units by first allocating a portion of the net income of Altus Midstream LP in accordance with the terms of the partnership agreement. An additional adjustment to the carrying value of the Preferred Unit redeemable noncontrolling interest at each period end may be recorded, if applicable. The amount of such adjustment is determined based upon the accreted value method to reflect the passage of time until the Preferred Units are exchangeable at the option of the holder. Pursuant to this method, the net transaction price is accreted using the effective interest method to the Redemption Price calculated at the seventh anniversary of Closing. The total adjustment is limited to an amount such that the carrying amount of the Preferred Unit redeemable noncontrolling interest at each period end is equal to the greater of (a)(i) the carrying amount of the Preferred Units, plus (ii) the fair value of the embedded derivative liability or (b) the accreted value of the net transaction price.

Activity related to the Preferred Units during the six months ended June 30, 2019 is as follows:



	Units Outstanding	Financial Position⁽²⁾
	(In millions, except unit data)
Redeemable noncontrolling interest - Altus Preferred Unit Limited Partners: beginning of period	—	$	—
Issuance of Preferred Units, net	625,000	517
Allocation of Altus Midstream LP net income⁽¹⁾	N/A	3
Accreted value adjustment	N/A	1
Redeemable noncontrolling interest - Altus Preferred Unit Limited Partners: end of period	625,000	521
Preferred Units embedded derivative		94
		$	615

(1)

Subsequent to the balance sheet date, Altus Midstream LP provided notice to the Preferred Unit holders of record at June 30, 2019 of the amount of the initial distribution on the Preferred Units for the period from Closing to June 30, 2019. The holders also were notified that Altus Midstream LP elected to pay the entire amount of the approximate $2 million distribution in-kind in additional Preferred Units (PIK Units) on August 14, 2019. In total, 2,187.5 PIK Units will be issued in satisfaction of the initial required distribution.


(2)	As at June 30, 2019, the aggregate Redemption Price was $628 million, based on an internal rate of return of 11.5 percent.

N/A - not applicable.

CAPITAL STOCK

Net Income (Loss) per Common Share

A reconciliation of the components of basic and diluted net income (loss) per common share for the quarters and six months ended June 30, 2019 and 2018, is presented in the table below.



	For the Quarter Ended June 30,
	2019							2018
	Loss			Shares	Per Share			Income		Shares	Per Share
	(In millions, except per share amounts)
Basic:
Income (loss) attributable to common stock	$	(360	)	377	$	(0.96	)	$	195	382	$	0.51
Effect of Dilutive Securities:
Stock options and other	—			—	—			—		3	—
Diluted:
Income (loss) attributable to common stock	$	(360	)	377	$	(0.96	)	$	195	385	$	0.51



	For the Six Months Ended June 30,
	2019							2018
	Loss			Shares	Per Share			Income		Shares	Per Share
	(In millions, except per share amounts)
Basic:
Income (loss) attributable to common stock	$	(407	)	376	$	(1.08	)	$	340	382	$	0.89
Effect of Dilutive Securities:
Stock options and other	—			—	—			—		2	(0.01		)
Diluted:
Income (loss) attributable to common stock	$	(407	)	376	$	(1.08	)	$	340	384	$	0.88

The diluted earnings per share calculation excludes options and restricted stock units that were anti-dilutive totaling 5.0 million and 5.9 million for the quarters ended June 30, 2019 and 2018, respectively, and 5.3 million and 6.4 million for the six months ended June 30, 2019 and 2018, respectively. The impact to net income (loss) attributable to common stock of an assumed conversion of the redeemable noncontrolling Preferred Units interests in Altus Midstream LP were anti-dilutive for the three- and six-month periods ended June 30, 2019.

Common Stock Dividends

For the quarters ended June 30, 2019 and 2018, Apache paid $94 million and $96 million, respectively, in dividends on its common stock. For the six months ended June 30, 2019 and 2018, the Company paid $188 million and $191 million, respectively.

Stock Repurchase Program

In 2013 and 2014, Apache’s Board of Directors authorized the purchase of up to 40 million shares of the Company’s common stock. Shares may be purchased from time to time either in the open market or through privately negotiated transactions. The Company initiated the buyback program on June 10, 2013, and through June 30, 2019, had repurchased a total of 40 million shares at an average price of $79.18 per share. During the fourth quarter of 2018, the Company’s Board of Directors authorized the purchase of up to 40 million additional shares of the Company’s common stock. The Company is not obligated to acquire any specific number of shares and has not purchased any shares during 2019.