INCOME TAXES

12 Months Ended

Dec. 31, 2019

As a result of the Business Combination, our wholly owned subsidiary, SRII Opco GP, is the general partner of SRII Opco, which became the sole managing member of Alta Mesa GP and KFM, and as a result, we began consolidating the financial results of Alta Mesa and KFM. SRII Opco is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SRII Opco is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SRII Opco is passed through to and included in the taxable income or loss of its limited partners, including the Company, on a pro rata basis. The Company is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to its allocable share of any taxable income or loss of SRII Opco, as well as any stand-alone income or loss generated by the Company.

Income tax expense (benefit) included in the statements of operations is detailed below:

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(in thousands)	Year Ended December 31, 2019		February 9, 2018 Through December 31, 2018
Current taxes:
Federal	$	—	$	(69	)
State	—		—
	—		(69		)
Deferred taxes:
Federal	—		—
State	—		—
	—		—
Income tax expense (benefit)	$	—	$	(69	)

A reconciliation of the statutory federal income tax expense to the income tax expense from continuing operations is as follows:



(Amounts in thousands)	Year Ended December 31, 2019					February 9, 2018 Through December 31, 2018
Federal income tax expense (benefit) - at statutory rate	$	(195,221	)	21.00	%	$	(682,378	)	21.00%
State income taxes - net of federal income tax benefit	(44,064		)	4.74		(154,022		)	4.74
Non-controlling interest	123,316			(13.27	)	833,239			(25.64	)
Return to provision	(1,690		)	0.18		(71		)	—
Change in valuation allowance	136,568			(14.69	)	3,135			(0.1	)
Permanent items	—			—		25			—
Other	(18,909		)	2.04		3			—
Income tax expense (benefit)	$	—		—	%	$	(69	)	—	%

The tax effects of temporary differences that give rise to significant positions of the deferred income tax assets and liabilities are presented below:



(in thousands)	December 31, 2019			December 31, 2018
Deferred tax asset:
Investment in SRII Opco, LP	$	424,086		$	269,846
59(e) capitalized IDC	53,814			—
NOL carryforward	29,866			101,337
Organizational/startup costs	144			154
Other	7			11
Total deferred tax assets	507,917			371,348
Less: valuation allowance	(507,917		)	(371,348		)
Net deferred tax assets	—			—

Deferred tax liability	—			—
Total net deferred tax assets/(liabilities)	$	—		$	—

The change in our valuation allowance during the year ended December 31, 2019 was $136.6 million.

In connection with the Business Combination, we entered into the Tax Receivable Agreement with SRII Opco, High Mesa, and the Riverstone Contributor. This agreement generally provides for the payment by us of 85% of the amount of net cash savings, if any, in income tax that we actually realize (or are deemed to realize in certain circumstances) in periods after the Business Combination as a result of (i) tax basis increases resulting from the exchange of SRII Opco Common Units for AMR Class A Common Stock and (ii) interest paid or deemed to be paid by us as a result of, and additional tax basis arising from, any payments we make under the Tax Receivable Agreement. We will retain the benefit of the remaining 15% of these cash savings.

The payment obligations under the Tax Receivable Agreement are obligations of the Company and not obligations of SRII Opco, and the payments required could have been substantial. For purposes of the Tax Receivable Agreement, cash savings in tax generally are calculated by comparing our actual tax liability to the amount we would have been required to pay had we not been entitled to any of the tax benefits subject to the Tax Receivable Agreement. In other words, we would calculate our federal, state and local income tax liabilities as if no tax attributes arising from a redemption or direct exchange of SRII Opco Common Units had been transferred to us. The term of the Tax Receivable Agreement continues until all such tax benefits have been utilized or have expired, unless we exercise our right to terminate the Tax Receivable Agreement or the Tax Receivable Agreement is otherwise terminated.

As of December 31, 2019, there has been one exchange of SRII Common Units which would trigger a payment under the TRA. This exchange occurred in November 2018 when 2,752,312 SRII Opco Common Units were converted into the same number of shares of AMR Class A Common Stock. We have calculated the tax basis increase resulting from this exchange, and the resulting potential future net cash income tax savings multiplied by 85% to arrive at a potential Tax Receivable Agreement liability. This amount would be due and payable by us if we actually realized these future cash tax savings. However, as of December 31, 2019 we have recorded a full valuation allowance on our other deferred tax assets determined in accordance with GAAP, and therefore we have not realized any savings and have recorded no liability for such at this time. We believe there is a very low likelihood that we will utilize these attributes in 2020 or future years, due to the expected outcome of our bankruptcy filing.