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REDEMABLE NONCONTROLLING INTEREST - ALTUS

12 Months Ended

Dec. 31, 2019

REDEMABLE NONCONTROLLING INTEREST - ALTUS

REDEEMABLE NONCONTROLLING INTEREST - ALTUS

Preferred Units Issuance

On June 12, 2019, Altus Midstream LP 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 at inception 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 at its current fair value of $103 million. 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 for the year ended December 31, 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
Distribution of in-kind additional Preferred Units⁽¹⁾	13,163	—
Allocation of Altus Midstream LP net income	N/A	38
Redeemable noncontrolling interest - Altus Preferred Unit Limited Partners: end of period	638,163	555
Preferred Units embedded derivative		103
		$	658

(1)

Subsequent to the balance sheet date, Altus Midstream LP provided notice to the Preferred Unit holders of record at December 31, 2019 of the amount of the distribution on the Preferred Units for the quarter ended December 31, 2019. The holders also were notified that Altus Midstream LP elected to pay the entire amount of the approximate $11 million distribution in-kind in additional Preferred Units (PIK Units) on February 14, 2020. In total, 11,168 PIK Units were issued in satisfaction of the required distribution.


(2)	As at December 31, 2019, the aggregate Redemption Price was $664 million, based on an internal rate of return of 11.5 percent.

N/A - not applicable.

CAPITAL STOCK

Common Stock Outstanding

A summary of the shares issued and outstanding for the years ended December 31, 2019, 2018, and 2017 is presented in the table below.



	2019	2018		2017
Balance, beginning of year	374,696,222	380,954,864		379,439,676
Shares issued for stock-based compensation plans:
Treasury shares issued	31,701	2,454		1,411
Common shares issued	1,334,747	1,566,237		1,513,777
Treasury shares acquired	—	(7,827,333	)	—
Balance, end of year	376,062,670	374,696,222		380,954,864

Net Income (Loss) per Common Share

A reconciliation of the components of basic and diluted net income (loss) per common share for the years ended December 31, 2019, 2018, and 2017 is presented in the table below.



	2019							2018					2017
	Loss			Shares	Per Share			Income		Shares	Per Share		Income		Shares	Per Share
	(In millions, except per share amounts)
Basic:
Income (loss) attributable to common stock	$	(3,553	)	377	$	(9.43	)	$	40	382	$	0.11	$	1,304	381	$	3.42
Effect of Dilutive Securities:
Stock options and other	$	—		—	$	—		$	—	2	$	—	$	—	2	$	(0.01	)
Diluted:
Income (loss) attributable to common stock	$	(3,553	)	377	$	(9.43	)	$	40	384	$	0.11	$	1,304	383	$	3.41

The diluted EPS calculation excludes options and restricted shares that were anti-dilutive totaling 5.0 million, 5.6 million, and 7.3 million for the years ended December 31, 2019, 2018, and 2017, respectively. The impact to net income (loss) attributable to common stock on an assumed conversion of the redeemable noncontrolling Preferred Units interest in Altus Midstream LP were anti-dilutive for the year ended December 31, 2019.

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 either in the open market or through privately held negotiated transactions. The Company initiated the buyback program on June 10, 2013, and through December 31, 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 did not purchase any shares during 2019.

Common Stock Dividend

For each of the years ended December 31, 2019, 2018, and 2017, the Company paid common stock dividends of $1.00 per share.

Stock Compensation Plans

The Company has several stock-based compensation plans, which include stock options, restricted stock, and conditional restricted stock unit plans. On May 12, 2016, the Company’s shareholders approved the 2016 Omnibus Compensation Plan (the 2016 Plan), which is intended to provide eligible employees with equity-based incentives. The 2016 Plan provides for the granting of Incentive Stock Options, Non-Qualified Stock Options, Performance Awards, Restricted Stock Awards, Restricted Stock Units, Stock Appreciation Rights, Cash Awards, or any combination of the foregoing. A total of 14.4 million shares were authorized and available for grant under the 2016 Plan as of December 31, 2019. Previously approved plans remain in effect solely for the purpose of governing grants still outstanding that were issued prior to approval of the 2016 Plan. All new grants are issued from the 2016 Plan. In 2018, the Company began issuing cash-settled awards (phantom units) under the restricted stock and conditional restricted stock unit plans. The phantom units represent a hypothetical interest in the Company’s stock and, once vested, are settled in cash.

Costs related to the plans are capitalized or expensed to “Lease operating expenses,” “Exploration,” or “General and administrative” in the Company’s statement of consolidated operations based on the nature of each employee’s activities. A description of the Company’s stock-settled and cash-settled units compensation plans and related costs follows:



	For the Year Ended December 31,
	2019		2018		2017
	(In millions)
Stock-settled and cash-settled compensation expensed	$	110	$	157	$	142
Stock-settled and cash-settled compensation capitalized	28		37		41
Total stock-settled and cash-settled compensation costs	$	138	$	194	$	183

Stock Options

As of December 31, 2019, the Company had issued options to purchase shares of the Company’s common stock under the 2007 Omnibus Equity Compensation Plan, the 2011 Omnibus Equity Compensation Plan (2011 Plan), and the 2016 Plan (together, the Omnibus Plans). New shares of Company stock will be issued for employee stock option exercises. Under the Omnibus Plans, the exercise price of each option equals the closing price of Apache’s common stock on the date of grant. Options issued prior to 2016 generally become exercisable ratably over a four-year period and expire 10 years after granted. Options granted in or after 2016 become exercisable ratably over a three-year period and expire 10 years after granted. The Omnibus Plans were submitted to and approved by the Company’s shareholders.

A summary of stock options issued and outstanding under the Omnibus Plans is presented in the table below for the years ended December 31, 2019, 2018, and 2017 (shares in thousands):



	2019				2018				2017
	Shares Under Option		Weighted Average Exercise Price		Shares Under Option		Weighted Average Exercise Price		Shares Under Option		Weighted Average Exercise Price
Outstanding, beginning of year	4,872		$	75.95	4,593		$	83.36	5,113		$	84.89
Granted	—		—		812		45.93		490		63.25
Exercised	—		—		(29	)	41.79		(15	)	41.24
Forfeited	(80	)	34.58		(121	)	74.58		(691	)	84.65
Expired	(494	)	88.82		(383	)	104.21		(304	)	76.09
Outstanding, end of year⁽¹⁾	4,298		75.24		4,872		75.95		4,593		83.36
Expected to vest⁽²⁾	495		49.11		1,274		48.74		947		51.83
Exercisable, end of year⁽³⁾	3,803		78.64		3,598		85.59		3,646		91.56


(1)	As of December 31, 2019, options outstanding had a weighted average remaining contractual life of 4.1 years and no intrinsic value.


(2)	As of December 31, 2019, options expected to vest had a weighted average remaining contractual life of 7.8 years and no intrinsic value.


(3)	As of December 31, 2019, options exercisable had a weighted average remaining contractual life of 3.6 years and no intrinsic value.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model, a Level 2 fair value measurement. Assumptions used in the valuation are disclosed in the following table. Expected volatilities are based on historical volatility of the Company’s common stock and other factors. The expected dividend yield is based on historical yields on the date of grant. The expected term of stock options granted represents the period of time that the stock options are

expected to be outstanding and is derived from historical exercise behavior, current trends, and values derived from lattice-based models. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.



	2019	2018			2017
Expected volatility	N/A	33.47		%	34.58		%
Expected dividend yields	N/A	2.16		%	1.58		%
Expected term (in years)	N/A	6			6
Risk-free rate	N/A	2.42		%	2.02		%
Weighted-average grant-date fair value	N/A	$	13.15		$	19.38

N/A - not applicable.

There were no options issued and no options exercised during 2019. The intrinsic values of options exercised during 2018 and 2017 were approximately $0.1 million and $0.2 million, respectively. As of December 31, 2019, the total compensation cost related to non-vested options not yet recognized was $2 million, which will be recognized over the remaining vesting period of the options.

Restricted Stock Units and Restricted Stock Phantom Units

The Company has restricted stock unit and restricted stock phantom unit (cash-settled) plans for eligible employees including officers. The programs created under the Omnibus Plans have been approved by Apache’s Board of Directors. The value of the stock-settled awards issued is established by the market price on the date of grant and is being recorded as compensation expense ratably over the vesting terms. The cash-settled awards compensation expense is recorded as a liability and remeasured at the end of each reporting period over the vesting terms. The restricted stock phantom units represent a hypothetical interest in either the Company’s stock or in ALTM’s common stock, as applicable, and, once vested, are settled in cash. The cash-settled awards compensation expense is recorded as a liability and remeasured at the end of each reporting period over the vesting terms. During 2019, 2018, and 2017, compensation-expense related to restricted stock units and cash-based units was $104 million, $101 million, and $108 million, respectively. In 2019, 2018, and 2017, $24 million, $29 million, and $35 million were capitalized, respectively.

The following table is a summary of stock-settled restricted stock unit activity for the years ended December 31, 2019, 2018, and 2017 (shares in thousands):



	2019				2018				2017
Stock-settled Restricted Stocks Units	Shares		Weighted- Average Grant- Date Fair Value		Shares		Weighted- Average Grant- Date Fair Value		Shares		Weighted- Average Grant- Date Fair Value
Non-vested, beginning of year	3,153		$	55.54	4,920		$	56.67	6,062		$	55.11
Granted	1,479		36.81		608		45.59		1,948		62.74
Vested⁽³⁾	(1,899	)	53.99		(2,023	)	55.10		(2,288	)	58.77
Forfeited	(285	)	45.06		(352	)	56.69		(802	)	55.54
Non-vested, end of year⁽¹⁾⁽²⁾	2,448		46.65		3,153		55.54		4,920		56.67


(1)	As of December 31, 2019, there was $18 million of total unrecognized compensation cost related to 2,447,910 unvested stock-settled restricted stock units.


(2)	As of December 31, 2019, the weighted-average remaining life of unvested stock-settled restricted stock units is approximately 0.7 years.


(3)	The grant date fair values of the stock-settled awards vested during 2019, 2018, and 2017 were approximately $103 million, $111 million, and $135 million, respectively.

The following table is a summary of cash-settled restricted stock phantom unit activity for the years ended December 31, 2019 and 2018 (in thousands):



Cash-settled Restricted Stock Phantom Units⁽¹⁾	2019		2018
Non-vested, beginning of year	1,818		59
Granted⁽²⁾	4,831		1,973
Vested	(616	)	(38	)
Forfeited	(649	)	(176	)
Non-vested, end of year⁽³⁾	5,384		1,818


(1)	The Company issued no cash-settled restricted stock phantom units in 2017.


(2)	The 2019 restricted stock phantom units included 3,401,477 awards based on the per-share market price of Apache’s common stock and 1,429,135 awards based on the per-share market price of ALTM’s common stock.


(3)	The outstanding liability for the unvested cash-settled restricted stock phantom units that has not been recognized as of December 31, 2019 was approximately $52 million.

In January 2020, the Company awarded 961,368 restricted stock units and 3,340,495 restricted stock phantom units based on Apache’s weighted-average per-share market price of $25.69 under the 2016 Plan to eligible employees. Total compensation cost for restricted stock units and restricted stock phantom units absent any forfeitures, is estimated to be $25 million and $86 million, respectively, and was calculated based on the fair market value of a share of the Company’s common stock as of the grant date. Compensation cost will be recognized over a three-year vesting period for both plans. The phantom units will be classified as a liability and remeasured at the end of each reporting period based on the change in fair value of one share of the Company’s common stock.

Also during January 2020, the Company awarded 1,425,513 restricted stock phantom units based on ALTM’s weighted-average per-share market price of $2.70. The restricted stock phantom units represent a hypothetical interest in ALTM’s common stock and, once vested, are settled in cash. Total compensation cost for these restricted stock phantom units, absent any forfeitures, is estimated to be $4 million and was calculated based on the fair market value of ALTM’s common stock as of the grant date. The restricted stock phantom units will be classified as a liability and remeasured at the end of each reporting period based on the change in fair value of one share of ALTM’s common stock.

Performance Program

To provide long-term incentives for Apache employees to deliver competitive returns to the Company’s stockholders, the Company has granted conditional restricted stock units to eligible employees. Apache has a performance program for certain eligible employees with payout for 50 percent of the shares based upon measurement of total shareholder return (TSR) of Apache common stock as compared to a designated peer group during a three-year performance period. Payout for the remaining 50 percent of the shares is based on performance and financial objectives as defined in the plan. The overall results of the objectives are calculated at the end of the award’s stated performance period and, if a payout is warranted, applied to the target number of restricted stock units awarded. The performance shares will immediately vest 50 percent at the end of the three-year performance period, with the remaining 50 percent vesting at the end of the following year. Grants from the performance programs outstanding at December 31, 2019, are as described below:

•

In January 2016, the Company’s Board of Directors approved the 2016 Performance Program, pursuant to the 2011 Plan. Eligible employees received initial stock-settled conditional restricted stock unit awards totaling 871,369. The results for the performance period ending December 31, 2018, yielded a payout of 100 percent of target. A total of 325,008 units were outstanding as of December 31, 2019.


•	In January 2017, the Company’s Board of Directors approved the 2017 Performance Program, pursuant to the 2016 Plan. Eligible employees received initial stock-settled conditional restricted stock unit awards totaling 620,885 units. A total of 455,499 units were outstanding as of December 31, 2019. The results for the performance period yielded a payout of 54 percent of target.

•

In January 2018, the Company’s Board of Directors approved the 2018 Performance Program, pursuant to the 2016 Plan. Eligible employees received initial cash-settled conditional phantom units totaling 931,049 units. The actual amount of shares awarded will be between zero and 200 percent of target. A total of 796,829 phantom units were outstanding as of December 31, 2019, from which a minimum of zero to a maximum of 1,593,658 phantom units could be awarded.

•

In January 2019, the Company’s Board of Directors approved the 2019 Performance Program, pursuant to the 2016 Plan. Eligible employees received initial cash-settled conditional phantom units totaling 1,679,832 units. The actual amount of shares awarded will be between zero and 200 percent of target. A total of 1,523,360 phantom units were outstanding as of December 31, 2019, from which a minimum of zero to a maximum of 3,046,720 phantom units could be awarded.

The fair value cost of the stock-settled awards was estimated on the date of grant and is being recorded as compensation expense ratably over the vesting terms. The fair value of the cash-settled awards are remeasured at the end of each reporting period over the vesting terms. During 2019, 2018, and 2017, $24 million, $38 million, and $23 million, respectively, were charged to expense. During 2019, 2018, and 2017, $3 million, $7 million, and $4 million were capitalized, respectively.

A summary of stock-settled conditional restricted stock unit activity for the year ended December 31, 2019, is presented below:



Stock-settled Conditional Restricted Stock Units	Shares		Weighted Average Grant- Date Fair Value⁽¹⁾
	(In thousands)
Non-vested, beginning of year	1,347		$	49.58
Granted	345		32.75
Vested	(510	)	45.62
Forfeited	(71	)	53.96
Expired	(330	)	29.78
Non-vested, end of year⁽²⁾⁽³⁾	781		52.69

(1)

The fair value of each conditional restricted stock unit award is estimated as of the date of grant using a Monte Carlo simulation with the following assumptions used for all grants made under the plan: (i) a three-year continuous risk-free interest rate; (ii) a constant volatility assumption based on the historical realized stock price volatility of the Company and the designated peer group; and (iii) the historical stock prices and expected dividends of the common stock of the Company and its designated peer group.


(2)	As of December 31, 2019, there was $2 million of total unrecognized compensation cost related to 780,507 unvested stock-settled conditional restricted stock units.


(3)	As of December 31, 2019, the weighted-average remaining life of the unvested stock-settled conditional restricted stock units is approximately 0.3 years.

A summary of cash-settled conditional restricted stock unit activity for the year ended December 31, 2019, is presented below:



Cash-settled Conditional Restricted Stock Phantom Units	Phantom Units
	(In thousands)
Non-vested, beginning of year	890
Granted	1,680
Vested	(2	)
Forfeited	(248	)
Non-vested, end of year⁽¹⁾	2,320


(1)	As of December 31, 2019, the outstanding liability for the unvested cash-settled conditional restricted stock units that has not been recognized was approximately $26 million.

In January 2020, the Company’s Board of Directors approved the 2020 Performance Program, pursuant to the 2016 Plan. Payout for 50 percent of the shares is based upon measurement of total shareholder return (TSR) of Apache common stock as compared to a designated peer group and the S&P 500 Index during a three-year performance period. Payout for the remaining 50 percent of the shares is based on performance and financial objectives as defined in the plan. Eligible employees received the initial cash-settled conditional phantom units totaling 1,658,781 units, with the ultimate number of phantom units to be awarded ranging from zero to a maximum of 3,317,562 units. These phantom units represent a hypothetical interest in the Company’s stock, and, once vested, are settled in cash. The TSR component of the award had a grant date fair value per award of $33.77 based on a Monte Carlo simulation. The grant date fair value per award for the remaining 50 percent was $25.69 based on the weighted-average fair market value of a share of common stock of the Company as of the grant date. These phantom units will be classified as a liability and remeasured at the end of each reporting period.