UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
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(State or other jurisdiction of | (IRS Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: | ||||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ⌧
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Accelerated Filer ◻ | ||
Non-accelerated Filer ◻ | Smaller Reporting Company | |
Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
The registrant had
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 33 | |||
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1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition, or forecasts of future events. Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
● | Antero Resources Corporation’s (“Antero Resources”) expected production and ability to meet its drilling and development plan; |
● | our ability to execute our business strategy; |
● | our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness; |
● | our ability to realize the anticipated benefits of our investments in unconsolidated affiliates; |
● | natural gas, natural gas liquids (“NGLs”) and oil prices; |
● | our ability to complete the construction of or purchase new gathering and compression, processing, water handling and treatment or other assets on schedule, at the budgeted cost or at all, and the ability of such assets to operate as designed or at expected levels; |
● | competition and government regulations; |
● | actions taken by third-party producers, operators, processors and transporters; |
● | legal or environmental matters; |
● | costs of conducting our operations; |
● | general economic conditions; |
● | credit markets; |
● | operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control; |
● | uncertainty regarding our future operating results; and |
● | plans, objectives, expectations and intentions contained in this Quarterly Report on Form 10-Q that are not historical. |
We caution investors that these forward-looking statements are subject to all of the risks and uncertainties incidental to our business, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility, inflation, environmental risks, Antero Resources’ drilling and completion and other operating risks, regulatory changes, the uncertainty inherent in projecting Antero Resources’ future rates of production, cash flows and access to capital, the timing of development expenditures, and the other risks described under the heading “Risk Factors” in our and Antero Midstream Partners LP’s (“Antero Midstream Partners”) Annual Reports on Form 10-K, each for the year ended December 31, 2018 (the “2018 Forms 10-K”), and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, each of which is on file with the Securities and Exchange Commission (“SEC”).
2
Should one or more of the risks or uncertainties described in this Quarterly Report on Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
3
PART I—FINANCIAL INFORMATION
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Balance Sheets
December 31, 2018 and June 30, 2019
(Unaudited)
(In thousands)
| December 31, 2018 |
| June 30, 2019 |
| |||
Assets | |||||||
Current assets: |
| ||||||
Cash and cash equivalents | $ | | | ||||
Accounts receivable–Antero Resources | — | | |||||
Accounts receivable–third party | — | | |||||
Other current assets | | | |||||
Total current assets | | | |||||
Property and equipment, net | — | | |||||
Investments in unconsolidated affiliates | | | |||||
Deferred tax asset | | — | |||||
Customer relationships | — | | |||||
Goodwill | — | | |||||
Other assets, net | — | | |||||
Total assets | $ | | | ||||
Liabilities and Equity | |||||||
Current liabilities: | |||||||
Accounts payable–Antero Resources | $ | | | ||||
Accounts payable–third party | | | |||||
Accrued liabilities | | | |||||
Contingent acquisition consideration | — | | |||||
Asset retirement obligations | — | | |||||
Taxes payable | | — | |||||
Other current liabilities | — | | |||||
Total current liabilities | | | |||||
Long-term liabilities: | |||||||
Long-term debt | — | | |||||
Asset retirement obligations | — | | |||||
Deferred tax liability | — | | |||||
Other | — | | |||||
Total liabilities | | | |||||
Partners' Capital and Stockholders' Equity: | |||||||
Common shareholders— | ( | — | |||||
IDR LLC Series B units ( | | — | |||||
Preferred stock, $ | |||||||
Series A non-voting perpetual preferred stock; | — | — | |||||
Common stock, $ | — | | |||||
Additional paid-in capital | — | | |||||
Accumulated earnings | — | | |||||
Total partners' capital and stockholders' equity | | | |||||
Total liabilities and partners' capital and stockholders' equity | $ | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
4
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Income
Three Months Ended June 30, 2018 and 2019
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended June 30, | |||||||
| 2018 |
| 2019 |
| |||
Revenue: |
| ||||||
Gathering and compression–Antero Resources | $ | — | | ||||
Water handling and treatment–Antero Resources | — | | |||||
Water handling and treatment–third party | — | | |||||
Amortization of customer relationships | — | ( | |||||
Total revenue | — | | |||||
Operating expenses: | |||||||
Direct operating | — | | |||||
General and administrative (including $ | | | |||||
Impairment of property and equipment | — | | |||||
Depreciation | — | | |||||
Accretion and change in fair value of contingent acquisition consideration | — | | |||||
Accretion of asset retirement obligations | — | | |||||
Total operating expenses | | | |||||
Operating income (loss) | ( | | |||||
Interest expense, net | ( | ( | |||||
Equity in earnings of unconsolidated affiliates | | | |||||
Income before taxes | | | |||||
Provision for income tax expense | ( | ( | |||||
Net income and comprehensive income | $ | | | ||||
Net income per share–basic and diluted | $ | | | ||||
Weighted average common shares outstanding: | |||||||
Basic | | | |||||
Diluted | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
5
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Income
Six Months Ended June 30, 2018 and 2019
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended June 30, | ||||||
2018 |
| 2019 |
| |||
Revenue: | ||||||
Gathering and compression–Antero Resources | $ | — | | |||
Water handling and treatment–Antero Resources | — | | ||||
Water handling and treatment–third party | — | | ||||
Amortization of customer relationships | — | ( | ||||
Total revenue | — | | ||||
Operating expenses: | ||||||
Direct operating | — | | ||||
General and administrative (including $ | | | ||||
Impairment of property and equipment | — | | ||||
Depreciation | — | | ||||
Accretion and change in fair value of contingent acquisition consideration | — | | ||||
Accretion of asset retirement obligations | — | | ||||
Total operating expenses | | | ||||
Operating income | ( | | ||||
Interest expense, net | ( | ( | ||||
Equity in earnings of unconsolidated affiliates | | | ||||
Income before taxes | | | ||||
Provision for income tax expense | ( | ( | ||||
Net income and comprehensive income | $ | | | |||
Net income per share–basic and diluted | $ | | | |||
Weighted average common shares outstanding: | ||||||
Basic | | | ||||
Diluted | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
6
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Partners’ Capital
Three and Six Months Ended June 30, 2018
(Unaudited)
(In thousands)
Common | ||||||||||
| Shares |
|
|
| ||||||
Representing | Total | |||||||||
Limited Partner | Series B | Partners' | ||||||||
Interests | Unitholders | Capital | ||||||||
Balance at December 31, 2017 | $ | ( | | | ||||||
Net income and comprehensive income | | | | |||||||
Equity-based compensation | | — | | |||||||
Distributions to shareholders | ( | ( | ( | |||||||
Balance at March 31, 2018 | ( | | | |||||||
Net income and comprehensive income | | | | |||||||
Equity-based compensation | | — | | |||||||
Distributions to shareholders | ( | ( | ( | |||||||
Balance at June 30, 2018 | $ | ( | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
7
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Partners’ Capital and Stockholders’ Equity
Three and Six Months Ended June 30, 2019
(Unaudited)
(In thousands)
Common | ||||||||||||||||||||||
| Shares |
|
|
|
|
|
|
| ||||||||||||||
Representing | ||||||||||||||||||||||
Limited | Additional | |||||||||||||||||||||
Partner | Series B | Common | Paid-In | Preferred | Accumulated | Total | ||||||||||||||||
Interests | Unitholders | Stock | Capital | Stock | Earnings | Equity | ||||||||||||||||
Balance at December 31, 2018 | $ | ( | | — | — | — | — | | ||||||||||||||
Distributions to unitholders | ( | ( | — | — | — | — | ( | |||||||||||||||
Net (loss) and comprehensive (loss) pre-acquisition | ( | — | — | — | — | — | ( | |||||||||||||||
Equity-based compensation pre-acquisition | | — | — | — | — | — | | |||||||||||||||
Exchange of common shares for shares of common stock and cash consideration paid | | ( | | | — | — | | |||||||||||||||
Issuance of Series A non-voting perpetual preferred stock | — | — | — | — | — | — | — | |||||||||||||||
Equity-based compensation | — | — | — | | — | — | | |||||||||||||||
Net income and comprehensive income | — | — | — | — | — | | | |||||||||||||||
Balance at March 31, 2019 | — | — | | | — | | | |||||||||||||||
Dividends to shareholders | — | — | — | ( | — | — | ( | |||||||||||||||
Equity-based compensation | — | — | — | | — | — | | |||||||||||||||
Issuance of common stock upon vesting of equity-based compensation awards, net of common stock withheld for income taxes | — | — | | ( | — | — | ( | |||||||||||||||
Net income and comprehensive income | — | — | — | — | — | | | |||||||||||||||
Balance at June 30, 2019 | $ | — | — | | | — | | |
See accompanying notes to unaudited condensed consolidated financial statements.
8
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2018 and 2019
(Unaudited)
(In thousands)
Six Months Ended June 30, | |||||||
| 2018 |
| 2019 |
| |||
Cash flows provided by (used in) operating activities: |
| ||||||
Net income | $ | | | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Distributions received from Antero Midstream Partners LP, prior to the Transactions | | | |||||
Depreciation | — | | |||||
Accretion and change in fair value of contingent acquisition consideration | — | | |||||
Accretion of asset retirement obligations | — | | |||||
Impairment of property and equipment | — | | |||||
Deferred income taxes | — | | |||||
Equity-based compensation | | | |||||
Equity in earnings of unconsolidated affiliates | ( | ( | |||||
Distributions from unconsolidated affiliates | — | | |||||
Amortization of customer relationships | — | | |||||
Amortization of deferred financing costs | | | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable–Antero Resources | — | | |||||
Accounts receivable–third party | — | | |||||
Other current assets | ( | ( | |||||
Accounts payable–Antero Resources | ( | | |||||
Accounts payable–third party | | ( | |||||
Accrued liabilities | | ( | |||||
Income taxes payable | ( | ( | |||||
Net cash provided by operating activities | | | |||||
Cash flows provided by (used in) investing activities: | |||||||
Additions to gathering systems and facilities | — | ( | |||||
Additions to water handling and treatment systems | — | ( | |||||
Investments in unconsolidated affiliates | — | ( | |||||
Cash received on acquisition of Antero Midstream Partners LP | — | | |||||
Cash consideration paid to Antero Midstream Partners LP unitholders | — | ( | |||||
Change in other assets | — | | |||||
Net cash used in investing activities | — | ( | |||||
Cash flows provided by (used in) financing activities: | |||||||
Distributions to shareholders | ( | ( | |||||
Distributions to Series B unitholders | ( | ( | |||||
Distributions to preferred shareholders | — | ( | |||||
Issuance of senior notes | — | | |||||
Payments of deferred financing costs | ( | ( | |||||
Payments on bank credit facilities, net | — | ( | |||||
Employee tax withholding for settlement of equity compensation awards | — | ( | |||||
Other | — | ( | |||||
Net cash used in financing activities | ( | ( | |||||
Net increase (decrease) in cash and cash equivalents | ( | | |||||
Cash and cash equivalents, beginning of period | | | |||||
Cash and cash equivalents, end of period | $ | | | ||||
Supplemental disclosure of cash flow information: | |||||||
Cash paid during the period for interest | $ | | | ||||
Cash paid during the period for income taxes | $ | | | ||||
Increase in accrued capital expenditures and accounts payable for property and equipment | $ | — | |
See accompanying notes to unaudited condensed consolidated financial statements.
9
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements
December 31, 2018 and June 30, 2019
(1) Organization
Antero Midstream Corporation was originally formed as Antero Resources Midstream Management LLC in 2013 to become the general partner of Antero Midstream Partners LP (“Antero Midstream Partners”). On May 4, 2017, Antero Resources Midstream Management LLC converted from a limited liability company to a limited partnership under the laws of the State of Delaware (the “Conversion”), and changed its name to Antero Midstream GP LP (“AMGP”) in connection with its initial public offering. On March 12, 2019, pursuant to the previously announced Simplification Agreement, dated as of October 9, 2018, by and among AMGP, Antero Midstream Partners and certain of their affiliates (the “Simplification Agreement”), (i) AMGP was converted from a limited partnership to a corporation under the laws of the State of Delaware and changed its name to Antero Midstream Corporation, (ii) an indirect, wholly owned subsidiary of Antero Midstream Corporation was merged with and into Antero Midstream Partners, with Antero Midstream Partners surviving the merger as an indirect, wholly owned subsidiary of Antero Midstream Corporation (the “Merger”), and (iii) Antero Midstream Corporation exchanged (the “Series B Exchange” and, together with the Conversion, the Merger and the other transactions pursuant to by the Simplification Agreement, the “Transactions”) each issued and outstanding Series B Unit (the “Series B Units”) representing a membership interest in Antero IDR Holdings LLC (“IDR Holdings”) for
We are a growth-oriented midstream company formed to own, operate and develop midstream energy infrastructure primarily to service Antero Resources and its increasing production and completion activity in the Appalachian Basin’s Marcellus Shale and Utica Shale located in West Virginia and Ohio. Our assets consist of gathering pipelines, compressor stations, interests in processing and fractionation plants, and water handling and treatment assets. The Company, through Antero Midstream Partners and its affiliates, provides midstream services to Antero Resources under long-term contracts. The Company’s corporate headquarters are located in Denver, Colorado.
(2) Summary of Significant Accounting Policies
(a) | Basis of Presentation |
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) applicable to interim financial information and should be read in the context of the Company’s December 31, 2018 consolidated financial statements and notes thereto for a more complete understanding of the Company’s operations, financial position, and accounting policies, which have been filed with the SEC.
These unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, and, accordingly, do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of the Company, these unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of December 31, 2018 and June 30, 2019, and the results the Company’s operations and its cash flows for the three and six months ended June 30, 2018 and 2019. The Company has no items of other comprehensive income; therefore, net income is equal to its comprehensive income.
10
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
Certain costs of doing business incurred and charged to the Company by Antero Resources have been reflected in the accompanying unaudited condensed consolidated financial statements. These costs include general and administrative expenses provided to the Company by Antero Resources in exchange for:
● | business services, such as payroll, accounts payable and facilities management; |
● | corporate services, such as finance and accounting, legal, human resources, investor relations and public and regulatory policy; and |
● | employee compensation, including equity-based compensation. |
Transactions between the Company and Antero Resources have been identified in the unaudited condensed consolidated financial statements (see Note 4—Transactions with Affiliates).
As of the date these unaudited condensed consolidated financial statements were filed with the SEC, the Company completed its evaluation of potential subsequent events for disclosure and no items requiring disclosure were identified other than as disclosed in Note 12—Dividends.
(b) | Principles of Consolidation |
The accompanying unaudited condensed consolidated financial statements include (i) for the period prior to March 13, 2019, the accounts of AMGP and its consolidated subsidiaries, which did not include Antero Midstream Partners and its subsidiaries, and (ii) for the period beginning on March 13, 2019, the accounts of Antero Midstream Corporation and its consolidated subsidiaries, including Antero Midstream Partners and its subsidiaries, which were acquired in the Transactions. See Note 3—Business Combination.
(c) | Revenue Recognition |
The Company, through Antero Midstream Partners and its affiliates, provides gathering and compression and water handling and treatment services under fee-based contracts primarily based on throughput or at cost plus a margin. Certain of these contracts contain operating leases of the Company’s assets under GAAP. Under these arrangements, the Company receives fees for gathering gas products, compression services, and water handling and treatment services. The revenue the Company earns from these arrangements is directly related to (1) in the case of natural gas gathering and compression, the volumes of metered natural gas that it gathers, compresses, and delivers to natural gas compression sites or other transmission delivery points, (2) in the case of fresh water services, the quantities of fresh water delivered to its customers for use in their well completion operations, (3) in the case of wastewater treatment services performed by the Company, the quantities of wastewater treated for our customers, or (4) in the case of flowback and produced water services provided by third parties, the third-party costs the Company incurs plus
(d) | Use of Estimates |
The preparation of the unaudited condensed consolidated financial statements and notes in conformity with GAAP requires that management formulate estimates and assumptions that affect revenues, expenses, assets, liabilities, and the disclosure of contingent liabilities. Items subject to estimates and assumptions include the useful lives of property and equipment, the valuation of assets and liabilities acquired from Antero Midstream Partners, as well as the valuation of accrued liabilities, among others. Although management believes these estimates are reasonable, actual results could differ from these estimates.
11
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
(e) | Cash and Cash Equivalents |
The Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the short-term nature of these instruments.
(f) | Property and Equipment |
Property and equipment primarily consists of gathering pipelines, compressor stations, fresh water delivery pipelines and facilities, and the wastewater treatment facility and related landfill used for the disposal of salt therefrom, stated at historical cost less accumulated depreciation and amortization. The Company capitalizes construction-related direct labor and material costs. Maintenance and repair costs are expensed as incurred.
Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives and salvage values of assets. The depreciation of fixed assets recorded under operating lease agreements is included in depreciation expense. Uncertainties that may impact these estimates of useful lives 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 for the Company’s services in the areas in which it operates. When assets are placed into service, management makes estimates with respect to useful lives and salvage values that management believes are reasonable.
Amortization of landfill airspace consists of the amortization of landfill capital costs, including those that have been incurred and capitalized and estimated future costs for landfill development and construction, as well as the amortization of asset retirement costs arising from landfill final capping, closure, and post-closure obligations. Amortization expense is recorded on a units-of-consumption basis, applying cost as a rate per-cubic yard. The rate per-cubic yard is calculated by dividing each component of the amortizable basis of the landfill by the number of cubic yards needed to fill the corresponding asset’s airspace. Landfill capital costs and closure and post-closure asset retirement costs are generally incurred to support the operation of the landfill over its entire operating life and are, therefore, amortized on a per-cubic yard basis using a landfill’s total airspace capacity. Estimates of disposal capacity and future development costs are created using input from independent engineers and internal technical teams and are reviewed at least annually.
The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying values of the assets may not be recoverable. Generally, the basis for making such assessments is undiscounted future cash flow projections for the assets being assessed. If the carrying values of the assets are deemed not recoverable, the carrying values are reduced to the estimated fair values, which are based on discounted future cash flows using assumptions as to revenues, costs, and discount rates typical of third-party market participants, which is a Level 3 fair value measurement.
(g) | Asset Retirement Obligations |
The Company’s asset retirement obligations include its obligation to close, maintain, and monitor landfill cells and support facilities. After the entire landfill reaches capacity and is certified closed, the Company must continue to maintain and monitor the landfill for a post-closure period, which generally extends for
12
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
Asset retirement obligations are recorded for fresh water impoundments and waste water pits when an abandonment date is identified. The Company records the fair value of its freshwater impoundment and waste water pit retirement obligations as liabilities in the period in which the regulatory obligation to retire a specific asset is triggered. The fair value is based on the total reclamation costs of the assets. Retirement obligations are increased each year to reflect the passage of time by accreting the balance at the weighted average credit-adjusted risk-free rate that is used to calculate the recorded liability, with accretion charged to direct costs. Actual cash expenditures to perform remediation activities reduce the retirement obligation liabilities as incurred. After initial measurement, asset retirement obligations are adjusted at the end of each period to reflect changes, if any, in the estimated future cash flows underlying the obligation. Fresh water impoundments and wastewater pit retirement assets are capitalized as the related retirement obligations are incurred, and are amortized on a straight-line basis until reclamation.
The Company is under no legal obligations, neither contractually nor under the doctrine of promissory estoppel, to restore or dismantle its gathering pipelines, compressor stations, water delivery pipelines and facilities and wastewater treatment facility upon abandonment. The Company’s gathering pipelines, compressor stations, fresh water delivery pipelines and facilities and wastewater treatment facility have an indeterminate life, if properly maintained. Accordingly, the Company is not able to make a reasonable estimate of when future dismantlement and removal dates of its pipelines, compressor stations and facilities will occur.
(h) | Income Taxes |
Antero Midstream Corporation recognizes deferred tax assets and liabilities for temporary differences resulting from net operating loss carryforwards for income tax purposes and the differences between the financial statement and tax basis of assets and liabilities. The effect of changes in tax laws or tax rates is recognized in income during the period such changes are enacted. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Antero Midstream Corporation regularly reviews its tax positions in each significant taxing jurisdiction during the process of evaluating its tax provision. Antero Midstream Corporation makes adjustments to its tax provision when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; and/or (ii) a tax position is effectively settled with a tax authority at a differing amount.
(i) | Fair Value Measures |
The Financial Accounting Standards Board (the “FASB”) ASC Topic 820, Fair Value Measurements and Disclosures, clarifies the definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance also relates to all nonfinancial assets and liabilities that are not recognized or disclosed on a recurring basis (e.g., the initial recognition of asset retirement obligations and impairments of long-lived assets). The fair value is the price that the Company estimates would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to prioritize inputs to valuation techniques used to estimate fair value. An asset or liability subject to the fair value requirements is categorized within the hierarchy based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The highest priority (Level 1) is given to unadjusted quoted market prices in active markets for identical assets or liabilities, and the lowest priority (Level 3) is given to unobservable inputs. Level 2 inputs are data, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.
The carrying values on the balance sheet of the Company’s cash and cash equivalents, accounts receivable—Antero Resources, accounts receivable—third party, other current assets, accounts payable—Antero Resources, accounts payable, accrued liabilities, other current liabilities, other liabilities and the Credit Facility (as defined in Note 7—Long-Term Debt) approximate fair values due to their short-term maturities. The assets and liabilities of Antero Midstream Partners were recorded at fair value as of the acquisition date, March 12, 2019 (see Note 3—Business Combination).
13
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
(j) | Investments in Unconsolidated Affiliates |
The Company uses the equity method to account for its investments in companies if the investment provides the Company with the ability to exercise significant influence over, but not control of, the operating and financial policies of the investee. The Company’s consolidated net income includes the Company’s proportionate share of the net income or loss of such companies. The Company’s judgment regarding the level of influence over each equity method investee includes considering key factors such as the Company’s ownership interest, representation on the board of directors and participation in policy-making decisions of the investee and material intercompany transactions. See Note 15—Investments in Unconsolidated Affiliates.
(k) | Business Combinations |
The Company recognizes and measures the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date, with any remaining difference recorded as goodwill. For acquisitions, management engages an independent valuation specialist to assist with the determination of fair value of the assets acquired, liabilities assumed, and goodwill, based on recognized business valuation methodologies. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to the acquisition, and not later than one year from the acquisition date, the Company will record any material adjustments to the initial estimate based on new information obtained that would have existed as of the acquisition date. An adjustment that arises from information obtained that did not exist as of the date of the acquisition will be recorded in the period of the adjustment. Acquisition-related costs are expensed as incurred in connection with each business combination. See Note 3—Business Combination.
(l) | Goodwill and Intangible Assets |
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized, but rather is tested for impairment annually and when events or changes in circumstances indicate that the fair value of a reporting unit with goodwill has been reduced below carrying value. The impairment test requires allocating goodwill and other assets and liabilities to reporting units. The fair value of each reporting unit is determined and compared to the carrying value of the reporting unit. The fair value is calculated using the expected present value of future cash flows method. Significant assumptions used in the cash flow forecasts include future net operating margins, future volumes, discount rates, and future capital requirements. If the fair value of the reporting unit is less than the carrying value, including goodwill, the implied fair value of goodwill is calculated. The excess, if any, of the book value over the implied fair value of goodwill is charged to net income as an impairment expense.
Amortization of intangible assets with definite lives is calculated using the straight-line method which is reflective of the benefit pattern in which the estimated economic benefit is expected to be received over the estimated useful life of the intangible asset. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible may not be recoverable. If the sum of the expected undiscounted future cash flows related to the asset is less than the carrying amount of the asset, an impairment loss is recognized based on the fair value of the asset.
14
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
(k) | Adoption of New Accounting Principle |
On February 25, 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-02, Leases, which requires lessees to record lease liabilities and right-of-use assets as of the date of adoption and was incorporated into GAAP as ASC Topic 842. The new lease standard does not substantially change accounting by lessors. The Company adopted the new standard prospectively effective January 1, 2019. The Company is not a party to material contracts as a lessee. The Company determined that Antero Midstream Partners’ contractual arrangement with Antero Resources to provide gathering and compression services is an operating lease of certain of the Company’s assets, which are accounted for under the new ASU (see Note 5—Revenue for information on this arrangement).
(3) Business Combination
On March 12, 2019, AMGP and Antero Midstream Partners completed the Transactions. The Transactions have been accounted for using the acquisition method of accounting with Antero Midstream Corporation identified as the acquirer of Antero Midstream Partners.
The components of the fair value of consideration transferred are as follows (in thousands):
Fair value of shares of AMC common stock issued(1) | $ | | ||
Cash | | |||
Total fair value of consideration transferred | $ | |
(1) | The fair value of each share of AMC common stock issued in connection with the Transactions was determined to be $ |
15
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
The following table summarizes the preliminary purchase price allocation. Due to the proximity of the Transactions to June 30, 2019, the Company is still completing its analysis of the final purchase price allocation.
Cash and cash equivalents | $ | | ||
Accounts receivable–Antero Resources | | |||
Accounts receivable–third party | | |||
Other current assets | | |||
Property and equipment, net | | |||
Investments in unconsolidated affiliates | | |||
Customer relationships | | |||
Other assets, net | | |||
Total assets acquired | | |||
Accounts payable–Antero Resources | | |||
Accounts payable–third party | | |||
Accrued liabilities | | |||
Other current liabilities | | |||
Long-term debt | | |||
Contingent acquisition consideration | | |||
Asset retirement obligations | | |||
Other liabilities | | |||
Total liabilities assumed | | |||
Net assets acquired, excluding goodwill | | |||
Goodwill | | |||
Net assets acquired | $ | |
The Company’s financial statements include $
(4) Transactions with Affiliates
(a) | Revenues |
Substantially all revenues earned in the three and six months ended June 30, 2019 were earned from Antero Resources, under various agreements for gathering and compression and water handling and treatment services. Revenues earned from gathering and processing services consists of lease income. There were no such revenues earned by AMGP for the three and six months ended June 30, 2018.
(b) | Accounts receivable—Antero Resources and Accounts payable—Antero Resources |
“Accounts receivable—Antero Resources” represents amounts due from Antero Resources, primarily related to gathering and compression services and water handling and treatment services. “Accounts payable—Antero Resources” represents amounts due to Antero Resources for general and administrative and other costs.
(c) | Costs charged by Antero Resources |
The employees supporting the Company’s operations are employees of Antero Resources. Direct operating expense includes costs charged to the Company of $
16
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
months ended June 30, 2018. General and administrative expense includes costs charged to the Company by Antero Resources of $
(5) Revenue
(a) Revenue from Contracts with Customers
All of the Company’s revenues are derived from service contracts with customers and are recognized when the Company satisfies a performance obligation by delivering a service to a customer. The Company derives substantially all of its revenues from Antero Resources. The following sets forth the nature, timing of satisfaction of performance obligations, and significant payment terms of the Company’s contracts with Antero Resources.
Gathering and Compression Agreement
Pursuant to the Company’s
The Company also has an option to gather and compress natural gas produced by Antero Resources on any acreage it acquires in the future outside of West Virginia, Ohio and Pennsylvania on the same terms and conditions. Under the gathering and compression agreement, the Company receives a low pressure gathering fee, a high pressure gathering fee and a compression fee, in each case subject to CPI-based adjustments. In addition, the agreement stipulates that the Company receives a reimbursement for the actual cost of electricity used at its compressor stations.
The Company determined that the gathering and compression agreement is an operating lease as Antero Resources obtains substantially all of the economic benefit of the asset and has the right to direct the use of the asset. The gathering system is an identifiable asset within the gathering and compression agreement, and it consists of underground low pressure pipelines that generally connect and deliver gas from specific well pads to compressor stations to compress the gas before delivery to underground high pressure pipelines that transport the gas to a third-party pipeline or plant. The gathering system is considered a single lease due to the interrelated network of the assets. The Company accounts for its lease and non-lease components as a single lease component as the lease component is the predominant component. The non-lease components consist of operating, oversight and maintenance of the gathering system, which are performed on time-elapsed measures. All lease payments, under the future Minimum Volume Commitments discussed below, are considered to be in-substance fixed lease payments under the gathering and compression agreement.
The Company recognizes revenue when low pressure volumes are delivered to a compressor station, compression volumes are delivered to a high pressure line and high pressure volumes are delivered to a processing plant or transmission pipeline. The Company invoices the customer the month after each service is performed, and payment is due in the same month.
17
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
Water Services Agreement
Antero Midstream Partners is party to a Water Services Agreement with Antero Resources whereby Antero Midstream Partners agreed to provide certain water handling and treatment services to Antero Resources within an area of dedication in defined service areas in Ohio and West Virginia. Antero Resources agreed to pay Antero Midstream Partners for all water handling and treatment services provided by Antero Midstream Partners in accordance with the terms of the water services agreement. The initial term of the water services agreement is
Under the water services agreement, the Company may also contract with third parties to provide water services to Antero Resources. Antero Resources reimburses the Company for third-party out-of-pocket costs plus a
The Company satisfies its performance obligations and recognizes revenue when the fresh water volumes have been delivered to the hydration unit of a specified well pad and the wastewater volumes have been delivered to the Company’s wastewater treatment facility. The Company invoices the customer the month after water services are performed, and payment is due in the same month. For services contracted through third-party providers, the Company’s performance obligation is satisfied when the service to be performed by the third-party provider has been completed. The Company invoices the customer after the third-party provider billing is received, and payment is due in the same month.
Minimum Volume Commitments
Both the gathering and compression and water services agreements include certain minimum volume commitment provisions. If and to the extent Antero Resources requests that the Company construct new high pressure lines and compressor stations, the gathering and compression agreement contains minimum volume commitments that require Antero Resources to utilize or pay for
18
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
Minimum revenue amounts under the minimum volume commitments are as follows:
Remainder of | Year Ended December 31, | ||||||||||||||||||||||
(in thousands) |
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 |
| Thereafter |
| Total |
| |||||||||||
Minimum revenue under the Gathering and Compression Agreement (1) | $ | | | | | | | | | ||||||||||||||
Minimum revenue under the Water Services Agreement | | — | — | — | — | — | — | | |||||||||||||||
Total |
| $ | | | | | | | | |
(1) | Minimum volume commitments under the Gathering and Compression Agreement are recognized on a straight-line basis and additional operating lease income is earned when excess volumes are delivered under the contract. The Company is not party to any leases that have not commenced. |
(b) Disaggregation of Revenue
In the following table, revenue is disaggregated by type of service and type of fee. The table also identifies the reportable segment to which the disaggregated revenues relate. For more information on reportable segments, see Note 16—Reporting Segments.
Three Months | Six Months | ||||||||
Ended | Ended | ||||||||
June 30, | June 30, | Segment to which | |||||||
(in thousands) |
| 2019 |
| 2019 |
| revenues relate |
| ||
Revenue from contracts with customers | |||||||||
Type of service | |||||||||
Gathering—low pressure | $ | | | Gathering and Processing(1) | |||||
Gathering—high pressure | | | Gathering and Processing(1) | ||||||
Compression | | | Gathering and Processing(1) | ||||||
Fresh water delivery | | | Water Handling and Treatment | ||||||
Wastewater treatment | | | Water Handling and Treatment | ||||||
Other fluid handling | | | Water Handling and Treatment | ||||||
Amortization of customer relationships(2) | ( | ( | Gathering and Processing | ||||||
Amortization of customer relationships(2) | ( | ( | Water Handling and Treatment | ||||||
Total | $ | | | ||||||
Type of contract | |||||||||
Per Unit Fixed Fee | $ | | | Gathering and Processing(1) | |||||
Per Unit Fixed Fee | | | Water Handling and Treatment | ||||||
Cost plus | | | Water Handling and Treatment | ||||||
Amortization of customer relationships | ( | ( | Gathering and Processing | ||||||
Amortization of customer relationships | ( | ( | Water Handling and Treatment | ||||||
Total | $ | | |
(1) | Revenue related to the gathering and processing segment is classified as lease income related to the gathering system. |
(2) | Fair value of customer contracts acquired as part of the Transactions discussed in Note 3—Business Combination. |
19
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
(c) Transaction Price Allocated to Remaining Performance Obligations
The majority of the Company’s service contracts have a term greater than one year. As such, the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under the Company’s service contracts, each unit of product delivered to the customer represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
The remainder of our service contracts, which relate to contracts with third parties, are short-term in nature with a contract term of one year or less. Accordingly, the Company is exempt from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of
(d) Contract Balances
Under the Company’s service contracts, the Company invoices customers after its performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s service contracts do not give rise to contract assets or liabilities. At June 30, 2019, the Company’s receivables with customers were $
(6) Property and Equipment
The Company’s investment in property and equipment for the periods presented is as follows:
Estimated | ||||||
(in thousands) |
| useful lives |
| June 30, 2019 |
| |
Land | n/a | $ | | |||
Gathering systems and facilities | | |||||
Fresh water permanent buried pipelines and equipment | | |||||
Wastewater treatment facility | | |||||
Fresh water surface pipelines and equipment | | |||||
Landfill | n/a(2) | | ||||
Heavy trucks and equipment | | |||||
Above ground storage tanks | | |||||
Construction-in-progress | n/a | | ||||
Total property and equipment | | |||||
Less accumulated depreciation | ( | |||||
Property and equipment, net | $ | |
(1) | Gathering systems and facilities are recognized as a single-leased asset with |
(2) | Amortization of landfill costs is recorded over the life of the landfill on a units-of-consumption basis. |
20
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
(7) | Long-Term Debt |
On May 9, 2018, AMGP entered into a credit facility (the “AMGP Credit Facility”) with a bank, which provided for a line of credit of up to $
AMGP had
(in thousands) | June 30, 2019 | |||
Credit Facility (a) | $ | | ||
| ||||
| ||||
| ||||
Net unamortized debt issuance costs | ( | |||
Total long-term debt | $ | |
(a) | Antero Midstream Partners Revolving Credit Facility |
Antero Midstream Partners, an indirect, wholly owned subsidiary of Antero Midstream Corporation, as borrower (the “Borrower”), has a senior secured revolving credit facility (the “Credit Facility”) with a consortium of banks. Lender commitments under the Credit Facility are $
Under the Credit Facility, “Investment Grade Period” is a period that, as long as no event of default has occurred and the Borrower is in pro forma compliance with the financial covenants under the Credit Facility, commences when the Borrower elects to give notice to the Administrative Agent that the Borrower has received at least one of either (i) a BBB- or better rating from Standard and Poor’s or (ii) a Baa3 or better from Moody’s (provided that the non-investment grade rating from the other rating agency is at least either Ba1 if Moody’s or BB+ if Standard & Poor’s (an “Investment Grade Rating”)). An Investment Grade Period can end at the Borrower’s election.
During a period that is not an Investment Grade Period, the Credit Facility is ratably secured by mortgages on substantially all of the Borrower’s properties, including the properties of its subsidiaries, and guarantees from its subsidiaries. During an Investment Grade Period, the liens securing the obligations thereunder shall be automatically released (subject to the provisions of the Credit Facility).
The Credit Facility contains certain covenants including restrictions on indebtedness, and requirements with respect to leverage and interest coverage ratios; provided, however, that during an Investment Grade Period, such covenants become less restrictive on the Borrower. The Credit Facility permits distributions to the holders of the Borrower’s equity interests in accordance with the cash distribution policy previously adopted by the board of directors of the general partner of the Borrower, provided that no event of default exists or would be caused thereby, and only to the extent permitted by our organizational documents. The Borrower was in compliance with all of the financial covenants under the Credit Facility as of June 30, 2019.
Principal amounts borrowed are payable on the maturity date with such borrowings bearing interest that is payable quarterly or, in the case of Eurodollar Rate Loans, at the end of the applicable interest period if shorter than six months. Interest is payable at a variable rate based on LIBOR or the base rate, determined by election at the time of borrowing, plus an applicable margin rate. Interest at the time of borrowing is determined with reference to (i) during any period that is not an Investment Grade Period, the Borrower’s then-current leverage ratio and (ii) during an Investment Grade Period, with reference to the rating given to the Borrower by Moody’s or Standard and Poor’s. During an Investment Grade Period, the applicable margin rates are reduced by
21
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
Commitment fees on the unused portion of the Credit Facility are due quarterly at rates ranging from
(b)
On September 13, 2016, Antero Midstream Partners and its wholly owned subsidiary, Finance Corp together with Antero Midstream Partners, (the “Issuers”), issued $
(c) |
On February 25, 2019, the Issuers issued $
22
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
(d) | 5.75% Senior Notes Due 2028 |
On June 28, 2019, the Issuers issued $
(8) Accrued Liabilities
Accrued liabilities as of December 31, 2018 and June 30, 2019 consisted of the following items:
December 31, | June 30, | ||||||
(in thousands) |
| 2018 |
| 2019 |
| ||
Capital expenditures | $ | — | | ||||
Operating expenses | — | | |||||
Interest expense | — | | |||||
Other | | | |||||
Total accrued liabilities | $ | | |
(9) Asset Retirement Obligations
The following is a reconciliation of our asset retirement obligations for the period shown below (in thousands):
Asset retirement obligations—December 31, 2018 |
| $ | — |
|
Antero Midstream Partners asset retirement obligation assumed—March 12, 2019 | | |||
Obligations incurred | | |||
Accretion expense | | |||
Asset retirement obligations—June 30, 2019 | $ | |
(10) Equity-Based Compensation
The Company’s general and administrative expenses include equity-based compensation costs related to the Antero Midstream GP LP Long-Term Incentive Plan (“AMGP LTIP”) and the Series B Units prior to the Transactions. Equity-based compensation after the Transactions include (i) costs allocated to Antero Midstream Partners by Antero Resources for grants made prior to the Transactions pursuant to Antero Resources’ long-term incentive plan, (ii) costs due to Antero Midstream Corporation LTIP (the “AMC LTIP”) and (iii) the Exchanged B Units (as defined below). Antero Midstream Partners’ portion of the equity-based compensation expense is included in general and administrative expenses, and recorded as a credit to the applicable classes of equity. Equity-based compensation expense allocated to Antero Midstream Partners was $
23
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
this will be allocated to Antero Midstream Partners as it is amortized over the remaining service period of the related awards. Antero Midstream Partners does not reimburse Antero Resources for noncash equity compensation allocated to it for awards issued under the Antero Resources long-term incentive plan.
Exchanged B Units
As of December 31, 2018, IDR Holdings had
Upon Closing of the Transactions, each Series B Unit, vested and unvested, was exchanged for
The Company accounted for the Series B Exchange as a share-based payment modification under ASC 718, Stock Compensation. On March 12, 2019, which is the modification date, the Company determined the estimated fair value of the Series B Unit awards using a Monte Carlo simulation using various assumptions including a floor equity value of $
The Company recognized $
For the three and six months ended June 30, 2018, the Company recognized $
AMGP LTIP
On April 17, 2017, Antero Midstream GP LP adopted the AMGP LTIP pursuant to which certain non-employee directors of Antero Midstream GP LP’s general partner and certain officers, employees and consultants of Antero Resources were eligible to receive awards representing equity interests in Antero Midstream GP LP. The Company recognized expense of $
AMC LTIP
Effective March, 12, 2019, the Board of Directors of Antero Midstream Corporation (the “Board”) adopted the AMC LTIP under which awards may be granted to employees, directors and other service providers of the Company and its affiliates. The AMC LTIP provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents,
24
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
other stock-based awards, cash awards and substitute awards. The terms and conditions of the awards granted are established by the compensation committee of the Board. The Company is authorized to grant up to
As part of the Transactions, each of the unvested outstanding phantom units in the Antero Midstream Partners Long Term Incentive Plan (“AMP LTIP”) was assumed by Antero Midstream Corporation and converted into
A summary of the restricted stock unit awards activity during the six months ended June 30, 2019 is as follows:
Weighted | |||||||||
Average | Aggregate | ||||||||
Number of | grant date | intrinsic value | |||||||
| units |
| fair value |
| (in thousands) |
| |||
Total AMC LTIP units awarded and unvested—December 31, 2018 | — | $ | — | $ | — | ||||
AMP LTIP Awards converted into AMC LTIP Awards(1) | | $ | | ||||||
Granted | | $ | | ||||||
Vested | ( | $ | | ||||||
Forfeited | ( | $ | | ||||||
Total AMC LTIP units awarded and unvested—June 30, 2019 | | $ | | $ | |
(1) | Effective as of March 12, 2019, all unvested outstanding phantom units in the AMP LTIP were assumed by the Company and converted into restricted stock units under the AMC LTIP at a conversion rate of |
Intrinsic values are based on the closing price of the Company’s common shares on the referenced dates. AMC LTIP unamortized expense of $
Performance Share Unit Awards Based on Return on Invested Capital (“ROIC”)
In 2019, the Company granted PSUs to certain of its employees and executive officers, a portion of which vest based on the Company’s actual ROIC (as defined in the award agreement) over a
25
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
Summary Information for Performance Share Unit Awards
A summary of PSU activity for the six months ended June 30, 2019 is as follows:
Weighted | ||||||
Average | ||||||
Number of | grant date | |||||
| units |
| fair value | |||
Total awarded and unvested—December 31, 2018 | — | $ | — | |||
Granted | | $ | | |||
Vested | — | $ | — | |||
Forfeited | — | $ | — | |||
Total awarded and unvested—June 30, 2019 | | $ | |
The grant-date fair value for the ROIC PSUs is based on the closing price of the Company’s common stock on the date of the grant, assuming the achievement of the performance condition.
As of June 30, 2019, there was $
(11) Cash Distributions and Dividends Paid
The following table details the amount of distributions and dividends paid with respect to the quarter indicated (in thousands, except per share data):
Common | |||||||||||
Quarter | shareholders | Distributions |
| ||||||||
and Year |
| Record Date |
| Distribution Date |
| distributions |
| per share | |||
Q4 2017 | February 1, 2018 | February 20, 2018 | $ | | $ | ||||||
Q1 2018 | May 3, 2018 | May 23, 2018 | | $ | |||||||
Q2 2018 | August 2, 2018 | August 22, 2018 | | $ | |||||||
Q3 2018 | November 2, 2018 | November 21, 2018 | | $ | |||||||
Total 2018 | $ | | |||||||||
Q4 2018 | February 1, 2019 | February 21, 2019 | $ | | $ | ||||||
Q1 2019 | April 26, 2019 | May 8, 2019 | | $ | |||||||
Q1 2019 | May 15, 2019 | May 15, 2019 | | * | |||||||
Total 2019 | $ | |
* | Dividends are paid in accordance with the terms of the Series A Preferred Stock as discussed in Note 13—Equity and Earnings Per Common Share. |
(12) | Dividends |
On July 10, 2019 the Board declared a cash dividend on the shares of AMC common stock of $
The Board also declared a cash dividend of $
26
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
13—Equity and Earnings Per Common Share. As of June 30, 2019, there were dividends in the amount $
(13) Equity and Earnings Per Common Share
(a) Preferred Stock
The Board authorized
(b) Weighted Average Shares Outstanding
The following is a reconciliation of the Company’s basic weighted average shares outstanding to diluted weighted average shares outstanding during the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
(in thousands) |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| ||||
Basic weighted average number of shares outstanding | | | | | |||||||||
Add: Dilutive effect of restricted stock units | — | | — | | |||||||||
Add: Dilutive effect of Series A preferred stock | — | | — | | |||||||||
Diluted weighted average number of shares outstanding | | | | |
(c) Earnings Per Common Share
Earnings per common share—basic for (i) the three and six months ended June 30, 2018 is computed by dividing net income (loss) attributable to AMGP by the basic weighted average number of common shares representing limited partner interest in AMGP outstanding during the period and (ii) the three and six months ended June 30, 2019 is computed by dividing net income (loss) attributable to Antero Midstream Corporation by the basic weighted average number of shares of AMC common stock outstanding during the period. Earnings per common share—assuming dilution for each period is computed after giving consideration to the potential dilution from outstanding equity awards, calculated using the treasury stock method. During periods in which the Company incurs a net loss, diluted weighted average shares outstanding are equal to basic weighted average shares outstanding because the effect of all equity awards is anti-dilutive.
27
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands, except per share amounts) |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| ||||
Net income | $ | | | $ | | | |||||||
Less net income attributable to Series B Units | ( | — | ( | — | |||||||||
Less preferred stock dividends | — | ( | — | ( | |||||||||
Net income available to common shareholders | $ | | | $ | | | |||||||
Net income per share–basic and diluted | $ | | | $ | | | |||||||
Weighted average common shares outstanding–basic | | | | | |||||||||
Weighted average common shares outstanding–diluted | | | | |
(14) Fair Value Measurement
In connection with Antero Resources’ contribution of Antero Water and certain wastewater treatment assets to Antero Midstream Partners in September 2015 (the “Water Acquisition”), Antero Midstream Partners agreed to pay Antero Resources (a) $
The following table provides a reconciliation of changes in Level 3 financial liabilities measured at fair value on a recurring basis for the period shown below (in thousands):
Contingent acquisition consideration—December 31, 2018 |
| $ | — |
|
Contingent acquisition consideration assumed from Antero Midstream Partners | | |||
Accretion and change in fair value of contingent acquisition consideration | | |||
Contingent acquisition consideration—June 30, 2019 | $ | |
The Company accounts for contingent consideration in accordance with applicable accounting guidance pertaining to business combinations. Antero Midstream Partners is contractually obligated to pay Antero Resources contingent consideration in connection with the Water Acquisition, and therefore recorded this contingent consideration liability at the time of the Water Acquisition. The Company updates its assumptions each reporting period based on new developments and adjusts such amounts to fair value based on revised assumptions, if applicable, until such consideration is satisfied through payment upon achievement of the specified objectives or it is eliminated upon failure to achieve the specified objectives.
As of June 30, 2019, Antero Midstream Partners expects to pay the entire amount of the contingent consideration for the
The carrying values of accounts receivable and accounts payable at December 31, 2018 and June 30, 2019 approximated fair value because of their short-term nature. The carrying value of the amounts under the Credit Facility at December 31, 2018 and June 30, 2019 approximated fair value because the variable interest rates are reflective of current market conditions.
As of June 30, 2019, the fair value of the Company’s 2024 Notes, 2027 Notes and 2028 Notes was approximately $
28
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
(15) Investments in Unconsolidated Affiliates
Investment in Antero Midstream Partners
Prior to the closing of the Transactions, AMGP did not consolidate Antero Midstream Partners, and AMGP’s share of Antero Midstream Partners’ earnings as a result of AMGP’s ownership of the IDRs was accounted for using the equity method of accounting. AMGP recognized distributions earned from Antero Midstream Partners as “Equity in earnings of unconsolidated affiliates” on its statement of operations in the period in which they were earned and were allocated to AMGP’s capital account. AMGP’s long-term interest in the IDRs on the balance sheet is recorded in “Investment in unconsolidated affiliates.” The ownership of the general partner interests and IDRs did not provide AMGP with any claim to the assets of AMGP other than the balance in its Antero Midstream Partners capital account. Income related to the IDRs was recognized as earned and increased AMGP’s capital account and equity investment. When these distributions were paid to AMGP, they reduced its capital account and its equity investment in Antero Midstream Partners. As a result of the Transactions, Antero Midstream Corporation assumed financial control of Antero Midstream Partners and Antero Midstream Partners is now consolidated (see Note 3—Business Combination).
Investment in Stonewall and MarkWest Joint Venture
The Company has a
Antero Midstream Partners has a
The Company’s net income includes its proportionate share of the net income of the Joint Venture and Stonewall. When the Company records its proportionate share of net income, it increases equity income in the unaudited condensed consolidated statements of operations and comprehensive income and the carrying value of that investment on its balance sheet. When distributions on the Company’s proportionate share of net income are received, they are recorded as reductions to the carrying value of the investment on the balance sheet and are classified as cash inflows from operating activities in accordance with the nature of the distribution approach under ASU No. 2016-15. The Company uses the equity method of accounting to account for its investments in Stonewall and the Joint Venture because it exercises significant influence, but not control, over the entities. The Company’s judgment regarding the level of influence over its equity investments includes considering key factors such as its ownership interest, representation on the Board and participation in policy-making decisions of Stonewall and the Joint Venture.
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
The following table is a reconciliation of our investments in these unconsolidated affiliates:
Antero | Total Investment | ||||||||||||
Midstream | MarkWest | in Unconsolidated | |||||||||||
(in thousands) | Partners LP | Stonewall | Joint Venture | Affiliates | |||||||||
Balance at December 31, 2018 | $ | | — | — | | ||||||||
Distributions from unconsolidated affiliates | ( | — | — | ( | |||||||||
Balance at March 12, 2019 | — | — | — | — | |||||||||
Investments in unconsolidated affiliates acquired from Antero Midstream Partners | — | | | | |||||||||
Additional investments | — | — | | | |||||||||
Equity in net income of unconsolidated affiliates(1) | — | | | | |||||||||
Distributions from unconsolidated affiliates | — | ( | ( | ( | |||||||||
Balance at June 30, 2019 | $ | — | | | |
(1) | As adjusted for the amortization of the difference between the cost of the equity investments in Stonewall and the Joint Venture and the amount of the underlying equity in the net assets of Stonewall and the Joint Venture as of the date of the acquisition of Antero Midstream Partners. |
(16) Reporting Segments
Prior to the closing of the Transactions, AMGP had no reporting segment results. Following the completion of the Transactions, the Company’s operations, which are located in the United States, are organized into
Gathering and Processing
The gathering and processing segment includes a network of gathering pipelines and compressor stations that collect and process production from Antero Resources’ wells in West Virginia and Ohio. The gathering and processing segment also includes equity in earnings from the Company’s investments in the Joint Venture and Stonewall.
Water Handling and Treatment
The Company’s water handling and treatment segment includes
These segments are monitored separately by management for performance and are consistent with internal financial reporting. These segments have been identified based on the differing products and services, regulatory environment and the expertise required for these operations. Management evaluates the performance of the Company’s business segments based on operating income. Interest expense is primarily managed and evaluated on a consolidated basis.
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
Summarized financial information concerning the Company’s segments for the periods indicated is shown in the following table (in thousands):
Water | |||||||||||||
| Gathering and |
| Handling and |
|
| Consolidated | |||||||
|
| Processing |
| Treatment |
| Unallocated (1) |
| Total |
| ||||
Three months ended June 30, 2019 | |||||||||||||
Revenues: | |||||||||||||
Revenue–Antero Resources | $ | | | — | | ||||||||
Revenue–third-party | — | | — | | |||||||||
Amortization of customer contracts | ( | ( | — | ( | |||||||||
Total revenues | | | — | | |||||||||
Operating expenses: | |||||||||||||
Direct operating | | | — | | |||||||||
General and administrative (excluding equity-based compensation) | | | | | |||||||||
Equity-based compensation | | | | | |||||||||
Impairment of property and equipment | | | — | | |||||||||
Depreciation | | | — | | |||||||||
Accretion and change in fair value of contingent acquisition consideration | — | | — | | |||||||||
Accretion of asset retirement obligations | — | | — | | |||||||||
Total expenses | | | | | |||||||||
Operating income | $ | | | ( | | ||||||||
Equity in earnings of unconsolidated affiliates | $ | | — | — | | ||||||||
Total assets | $ | | | | | ||||||||
Additions to property and equipment | $ | | | — | |
(1) | Certain expenses that are not directly attributable to gathering and processing and water handling and treatment are managed and evaluated on a consolidated basis. |
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and June 30, 2019
Water | |||||||||||||
| Gathering and |
| Handling and |
| Consolidated | ||||||||
|
| Processing |
| Treatment |
| Unallocated (1) |
| Total |
| ||||
Six months ended June 30, 2019 | |||||||||||||
Revenues: | |||||||||||||
Revenue–Antero Resources | $ | | | — | | ||||||||
Revenue–third-party | — | | — | | |||||||||
Amortization of customer contracts | ( | ( | — | ( | |||||||||
Total revenues | | | — | | |||||||||
Operating expenses: | |||||||||||||
Direct operating | | | — | | |||||||||
General and administrative (excluding equity-based compensation) | | | | | |||||||||
Equity-based compensation | | | | | |||||||||
Impairment of property and equipment | | | — | | |||||||||
Depreciation | | | — | | |||||||||
Accretion and change in fair value of contingent acquisition consideration | — | | — | | |||||||||
Accretion of asset retirement obligations | — | | — | | |||||||||
Total expenses | | | | | |||||||||
Operating income | $ | | | ( | | ||||||||
Equity in earnings of unconsolidated affiliates | $ | | — | — | | ||||||||
Total assets | $ | | | | | ||||||||
Additions to property and equipment | $ | | | — | |
(1) | Certain expenses that are not directly attributable to gathering and processing and water handling and treatment are managed and evaluated on a consolidated basis. |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The information provided below supplements, but does not form part of, our unaudited condensed consolidated financial statements. This discussion contains forward-looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, please see “Item 1A. Risk Factors.” and the section entitled “Cautionary Statement Regarding Forward-Looking Statements.” We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. For more information please refer to our Annual Report on Form 10-K for the year ended December 31, 2018 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, each on file with the SEC.
On March 12, 2019, pursuant to the previously announced Simplification Agreement, dated as of October 9, 2018, by and among Antero Midstream Partners GP LP (“AMGP”), Antero Midstream Partners LP (“Antero Midstream Partners”) and certain of their affiliates (the “Simplification Agreement”), (i) AMGP was converted from a limited partnership to a corporation under the laws of the State of Delaware and changed its name to Antero Midstream Corporation, (ii) an indirect, wholly owned subsidiary of Antero Midstream Corporation was merged with and into Antero Midstream Partners, with Antero Midstream Partners surviving the merger as an indirect, wholly owned subsidiary of Antero Midstream Corporation (the “Merger”), and (iii) Antero Midstream Corporation exchanged (the “Series B Exchange” and, together with the Conversion, the Merger and the other transactions pursuant to the Simplification Agreement, the “Transactions”) each issued and outstanding Series B Unit (the “Series B Units”) representing a membership interest in Antero IDR Holdings LLC (“IDR Holdings”) for 176.0041 shares of its common stock, par value $0.01 per share (“AMC common stock”).
The Merger has been accounted for as an acquisition by AMGP of Antero Midstream Partners under ASC 805 – Business Combinations and accounted for as a business combination, with the assumed assets and liabilities of Antero Midstream Partners recorded at fair value. As a result, the unaudited condensed consolidated balance sheet of Antero Midstream Corporation at June 30, 2019 includes the financial position of Antero Midstream Partners and its subsidiaries and the unaudited condensed consolidated statements of operations and comprehensive income and cash flows for the three and six months ended June 30, 2019 include the results of operations of Antero Midstream Partners and its subsidiaries commencing on March 13, 2019. Unless the context otherwise requires, references to the “Company,” “we,” “us,” or “our” refer to (i) for the period prior to March 13, 2019, AMGP and its consolidated subsidiaries, which did not include Antero Midstream Partners and its subsidiaries, and (ii) for the period beginning and after March 13, 2019, Antero Midstream Corporation and its consolidated subsidiaries, including Antero Midstream Partners and its subsidiaries.
Overview
We are a growth-oriented midstream energy company formed to own, operate and develop midstream energy assets to service Antero Resources’ increasing production and completion activity. Our assets consist of gathering pipelines, compressor stations, and interests in processing and fractionation plants that collect and process production from Antero Resources’ wells in the Marcellus and Utica Shales in West Virginia and Ohio. Our assets also include two independent fresh water delivery systems that deliver fresh water from the Ohio River and several regional waterways and a wastewater treatment facility (referred to herein as our “wastewater treatment facility”) that was placed in service in 2018 and a related landfill used for the disposal of salt therefrom. These fresh water delivery systems consist of permanent buried pipelines, surface pipelines and fresh water storage facilitates, as well as pumping stations and impoundments to transport the fresh water throughout the pipelines. Other fluid handling services include third-party services for well completion and production operations in Antero Resources’ operating areas managed by Antero Midstream Partners. We believe that Antero Midstream Partners’ strategically located assets and our relationship with Antero Resources have allowed us to become a leading midstream energy company serving the Marcellus and Utica Shale plays.
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Recent Developments and Highlights
Closing of Previously Announced Simplification Transaction
On March 12, 2019, AMGP and Antero Midstream Partners completed the Transactions. The Merger has been accounted for as an acquisition by AMGP of Antero Midstream Partners under ASC 805, Business Combinations, and accounted for as a business combination, with the assumed assets and liabilities of Antero Midstream Partners recorded at fair value.
The financial results of the Company for the three months and six months ended June 30, 2019 are not comparative to the three and six months ended June 30, 2018 due to the closing of the Transactions on March 12, 2019, nor are they reflective of the ongoing operations and financial results of the Company as the operating and financial results of Antero Midstream Partners are only included for the period from March 13, 2019 to March 31, 2019. Accordingly, in addition to presenting a discussion of Antero Midstream Corporation’s results of operations, we are also presenting Antero Midstream Corporation’s pro forma results of operations for the three and six months ended June 30, 2018 and 2019, which give pro forma effect to the Transactions as if they had occurred on January 1, 2018. See additional discussion below regarding “—Items Affecting Comparability of our Financial Results.”
Financial Results as Reported
We recognized net income of $69 million and $14 million for the three months ended June 30, 2019 and 2018, respectively. For the three months ended June 30, 2018 and 2019, we generated cash flows from operations of $12 million and $183 million, respectively. For the three months ended June 30, 2019, we consolidated the results of Antero Midstream Partners and its subsidiaries, whereas in the three months ended June 30, 2018, our source of income and cash flow was from the incentive distribution rights of Antero Midstream Partners.
For the six months ended June 30, 2019, we generated cash flows from operations of $252 million and net income of $79 million. Cash flows from operations were $35 million and net income was $27 million for the six months ended June 30, 2018. From March 13, 2019 through June 30, 2019, we consolidated the results of Antero Midstream Partners and its subsidiaries, whereas in the six months ended June 30, 2018, our source of income and cash flow was from the incentive distribution rights of Antero Midstream Partners.
Dividends Declared
The Board declared a cash dividend on the shares of AMC common stock of $0.3075 per share for the quarter ended June 30, 2019. The dividend will be payable on August 7, 2019 to stockholders of record as of July 26, 2019. The Board also declared a $139 thousand cash dividend on the shares of Series A Preferred Stock of Antero Midstream Corporation to be paid on August 14, 2019 in accordance with the terms of the Series A Preferred Stock, which are discussed in Note 13—Equity and Earnings Per Common Share. As of June 30, 2019, there were dividends in the amount $70 thousand accumulated in arrears on the Company’s Series A Preferred Stock.
2019 Capital Budget and Capital Spending
Our full year 2019 capital spending will include Antero Midstream Partners capital spending beginning on March 13, 2019. Antero Midstream Partners’ full year 2019 capital budget is a range of $750 million to $800 million, which at the midpoint includes $710 million of expansion capital and $65 million of maintenance capital. The capital budget includes $400 million of capital for gathering and compression infrastructure primarily in the Marcellus Shale. We also expect to invest $135 million for fresh water delivery infrastructure including an additional withdrawal point and associated trunklines to support Antero Resources’ development in Tyler and Wetzel Counties, West Virginia. Antero Midstream Partner’s 2019 budget also includes $200 million for our investment in the Joint Venture primarily for the construction of two more processing plants to provide an additional 400 Mmcf/d of processing capacity.
Based on ongoing assessments of drilling and completion designs, Antero Resources announced that it expects to trend lower in water used in completion operations over time. Depending on the areas being developed, Antero Resources expects water use will be reduced by 5 to 7 barrels per foot from the current design of 40 to 45 barrels per foot in the Marcellus, beginning in January 2020. Importantly, Antero Resources has announced that the savings from completion optimization, combined with other savings initiatives is forecasted to allow Antero Resources to continue targeting its 10% production CAGR through 2023, despite the decline in overall commodity prices. In combination with the planned expansion in the scope of produced water services, the continued development
34
plan for Antero Resources is expected to offset a majority of the reduced cash flow from fewer barrels of water being used in completions.
For the six months ended June 30, 2019, Antero Midstream Partners’ full year to date capital expenditures were approximately $347 million, including $186 million of expansion capital, $33 million of maintenance capital and $128 million of capital investment in the Joint Venture.
Credit Facility
We will fund our operations through borrowings under the Credit Facility, our operating cash flows, cash on our balance sheet and capital market transactions. As of June 30, 2019, lender commitments under the Credit Facility were $2.0 billion, with a letter of credit sublimit of $150 million. At June 30, 2019, Antero Midstream Partners had borrowings of $595 million and no letters of credit outstanding under the Credit Facility. See “—Debt Agreements—Antero Midstream Partners Revolving Credit Facility” for a description of the Credit Facility. In conjunction with the closing of the Transactions, AMGP’s $12 million credit facility was terminated on March 12, 2019.
Items Affecting Comparability of Our Financial Results
Our historical financial results discussed below are not comparable to our future financial results primarily as a result of the Merger. The Merger has been accounted for as an acquisition by AMGP of Antero Midstream Partners under ASC 805, Business Combinations, and accounted for as a business combination with the acquired assets and liabilities of Antero Midstream Partners recorded at estimated preliminary fair value. As such, the condensed consolidated financial statements for the three and six months ended June 30, 2018 and as of December 31, 2018 are the condensed consolidated financial statements of AMGP and its consolidated subsidiaries, which does not include Antero Midstream Partners and its subsidiaries. Effective March 12, 2019, Antero Midstream Corporation commenced consolidating Antero Midstream Partners and its subsidiaries in the condensed consolidated financial statements of Antero Midstream Corporation. As a result, the condensed consolidated balance sheet of Antero Midstream Corporation at June 30, 2019 includes the financial position of Antero Midstream Partners and its subsidiaries, and the condensed consolidated statements of operations and comprehensive income and cash flows for the three and six months ended June 30, 2019 include the results of operations of Antero Midstream Partners and its subsidiaries beginning on March 13, 2019.
The historical condensed consolidated financial statements included herein are the financial statements of Antero Midstream Corporation, formerly AMGP, which prior to the Merger reflect that AMGP’s only income resulted from distributions made on the IDRs of Antero Midstream Partners and expenses were limited to general and administrative expenses and equity-based compensation. The condensed consolidated financial statements for the three and six months ended June 30, 2019 include the results of Antero Midstream Partners and its subsidiaries beginning on March 13, 2019.
Accordingly, in addition to presenting a discussion of our results of operations as reported, we are also presenting our pro forma results of operations, which give effect to the adjustments described below under “—Pro Forma Adjustments.” The pro forma information presented below should be read in conjunction with the unaudited pro forma condensed combined financial statements, which are filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q and describe the assumptions and adjustments used in preparing such information. The pro forma adjustments are based on currently available information and certain estimates and assumptions. Therefore, the actual adjustments may differ from the pro forma adjustments. However, management believes that the pro forma assumptions provide a reasonable basis for presenting the results of operations on a more meaningful basis.
Results of Operations as Reported
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2019
Revenue and Direct Operating Expenses. Revenues from Antero Resources and direct operating expenses reflect revenue and operating expenses generated by Antero Midstream Partners after the completion of the Transactions on March 12, 2019.
General and administrative expenses. General and administrative expenses (excluding equity-based compensation expense) increased from $2 million for the three months ended June 30, 2018 to $13 million for the three months ended June 30, 2019. The increase was primarily due to the inclusion of general and administrative expenses of Antero Midstream Partners after the completion of the Transactions on March 12, 2019. Equity-based compensation increased from $9 million for the three months ended June 30,
35
2018 to $22 million for the three months ended June 30, 2019 due to the Series B Exchange and the adoption of the AMC LTIP as result of the Transactions.
Depreciation expense. Depreciation expense increased from none for the three months ended June 30, 2018 to $36 million for the three months ended June 30, 2019 as a result of our acquisition of Antero Midstream Partners on March 12, 2019.
Accretion and change in fair value of contingent acquisition consideration. Accretion expenses increased from none for the three months ended June 30, 2018 to $2 million for the three months ended June 30, 2019 as a result of our acquisition of Antero Midstream Partners on March 12, 2019.
Interest expense. Interest expense increased from $18 thousand for the three months ended June 30, 2018 to $32 million for the three months ended June 30, 2019 as a result of the acquisition of Antero Midstream Partners, which included the assumption of approximately $2.4 billion of debt.
Operating income. Total operating income increased from a loss of $12 million for the three months ended June 30, 2018 to operating income of $118 million for the three months ended June 30, 2019. The increase was due to operating revenues and expenses as a result of the acquisition of Antero Midstream Partners on March 12, 2019.
Equity in earnings of unconsolidated affiliates. Equity in earnings of unconsolidated affiliates for the three months ended June 30, 2018 represents Antero Midstream GP LP’s equity investment in Antero Midstream Partners. Equity in earnings of unconsolidated affiliates for the three months ended June 30, 2019 represents the portion of the net income from Antero Midstream Partners’ investments in Stonewall and the Joint Venture, which is allocated to us based on our equity interests for the three months ended June 30, 2019.
Income tax expense. Income tax expense increased from $7 million for the three months ended June 30, 2018 to $30 million for the three months ended June 30, 2019 due to increased income before taxes.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2019
Revenue and Direct Operating Expenses. Revenues from Antero Resources and direct operating expenses reflect 110 days of revenue and operating expenses generated by Antero Midstream Partners after the completion of the Transactions on March 12, 2019.
General and administrative expenses. General and administrative expenses (excluding equity-based compensation expense) increased from $3 million for the six months ended June 30, 2018 to $21 million for the six months ended June 30, 2019. The increase was primarily due to the inclusion of general and administrative expenses of Antero Midstream Partners after the completion of the Transactions on March 12, 2019. Equity-based compensation increased from $18 million for the six months ended June 30, 2018 to $33 million for the six months ended June 30, 2019 due to the Series B Exchange and the adoption of the AMC LTIP as result of the Transactions.
Depreciation expense. Depreciation expense increased from none for the six months ended June 30, 2018 to $44 million for the six months ended June 30, 2019 as a result of our acquisition of Antero Midstream Partners on March 12, 2019.
Accretion and change in fair value of contingent acquisition consideration. Accretion expenses increased from none for the six months ended June 30, 2018 to $3 million for the six months ended June 30, 2019 as a result of our acquisition of Antero Midstream Partners on March 12, 2019.
Interest expense. Interest expense increased from $14 thousand for the six months ended June 30, 2018 to $38 million for the six months ended June 30, 2019 as a result of the acquisition of Antero Midstream Partners, which included the assumption of approximately $2.4 billion of debt.
Operating income. Total operating income increased from a loss of $21 million for the six months ended June 30, 2018 to operating income of $128 million for the six months ended June 30, 2019. The increase was due to operating revenues and expenses as a result of the acquisition of Antero Midstream Partners on March 12, 2019.
Equity in earnings of unconsolidated affiliates. Equity in earnings of unconsolidated affiliates for the six months ended June 30, 2018 represents Antero Midstream GP LP’s equity investment in Antero Midstream Partners. Equity in earnings of
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unconsolidated affiliates for the six months ended June 30, 2019 represents Antero Midstream GP LP’s equity investment in Antero Midstream Partners from January 1, 2019 through March 12, 2019 and the portion of the net income from Antero Midstream Partners’ investments in Stonewall and the Joint Venture, which is allocated to us based on our equity interests for the period from March 13, 2019 through June 30, 2019.
Income tax expense. Income tax expense increased from $13 million for the six months ended June 30, 2018 to $28 million for the six months ended June 30, 2019 due to increased income before taxes.
Pro Forma Results of Operations
Unless the context otherwise requires, references in this “Pro Forma Segment Results of Operations” to the “Company,” “we,” “us” or “our” refer to, and the results of operations discussed below relate to, the combined results of Antero Midstream Corporation and Antero Midstream Partners as if the Transactions had occurred on January 1, 2018.
The pro forma segment results of operations and the pro forma operations data for the three and six months ended June 30, 2018 and for the six months ended June 30, 2019 have been prepared to give pro forma effect to the Transactions as if they had occurred on January 1, 2018. For the three months ended June 30, 2019, actual segment results of operations and operations data has been presented. The pro forma adjustments are based on currently available information and certain estimates and assumptions, including preliminary purchase price allocation, which is subject to finalization. Therefore, the actual adjustments may differ from the pro forma adjustments. However, management believes that the pro forma assumptions provide a reasonable basis for presenting the significant effects of the Transactions.
The pro forma information is for illustrative purposes only. If the Transactions had occurred on January 1, 2018, operating results might have been materially different from those presented in the pro forma financial information. The pro forma financial information should not be relied upon as an indication of operating results that we would have achieved if the Transactions had taken place on January 1, 2018. In addition, future results may vary significantly from the pro forma results reflected herein and should not be relied upon as an indication of our future results. The pro forma information presented below should be read in conjunction with the unaudited pro forma condensed combined financial statements, which are filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q.
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Pro Forma Segment Results of Operations for the three months ended June 30, 2018 and actual results for the three months ended June 30, 2019
Water | Pro Forma | |||||||||||||||
| Gathering and |
| Handling and |
| Pro Forma |
|
| Consolidated | ||||||||
|
| Processing |
| Treatment |
| Adjustments |
| Unallocated (1) |
| Total |
| |||||
Three months ended June 30, 2018 |
| |||||||||||||||
Revenues: | ||||||||||||||||
Revenue–Antero Resources | $ | 118,136 | 132,231 | — | — | 250,367 | ||||||||||
Revenue–third-party | — | 25 | — | — | 25 | |||||||||||
Gain on sale of assets–Antero Resources | 583 | — | — | — | 583 | |||||||||||
Amortization of customer contracts | — | — | (8,533) | — | (8,533) | |||||||||||
Total revenues | 118,719 | 132,256 | (8,533) | — | 242,442 | |||||||||||
Operating expenses: | ||||||||||||||||
Direct operating | 12,405 | 63,218 | — | — | 75,623 | |||||||||||
General and administrative (excluding equity-based compensation) | 7,240 | 2,387 | — | 2,398 | 12,025 | |||||||||||
Equity-based compensation | 4,754 | 1,113 | — | 9,111 | 14,978 | |||||||||||
Impairment of property and equipment | 4,614 | — | — | — | 4,614 | |||||||||||
Depreciation | 24,258 | 12,175 | 8,387 | — | 44,820 | |||||||||||
Accretion and change in fair value of contingent acquisition consideration | — | 3,947 | — | — | 3,947 | |||||||||||
Accretion of asset retirement obligations | — | 34 | — | — | 34 | |||||||||||
Total expenses | 53,271 | 82,874 | 8,387 | 11,509 | 156,041 | |||||||||||
Operating income | 65,448 | 49,382 | (16,920) | (11,509) | 86,401 | |||||||||||
Other income (expenses): | ||||||||||||||||
Interest expense, net | — | — | (5,439) | (14,646) | (20,085) | |||||||||||
Equity in earnings of unconsolidated affiliates | 9,264 | — | (2,992) | — | 6,272 | |||||||||||
Income before taxes | 74,712 | 49,382 | (25,351) | (26,155) | 72,588 | |||||||||||
Provision for income tax expense | — | — | (12,743) | (7,231) | (19,974) | |||||||||||
Net income and comprehensive income | $ | 74,712 | 49,382 | (38,094) | (33,386) | 52,614 | ||||||||||
Pro Forma Adjusted EBITDA(2) | $ | 174,137 |
(1) | Corporate expenses that are not directly attributable to either the gathering and processing or water handling and treatment segments. |
(2) | For a reconciliation of Pro Forma Adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with GAAP, see the description below. |
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Water | Pro Forma | |||||||||||||||
| Gathering and |
| Handling and |
| Pro Forma |
|
| Consolidated | ||||||||
|
| Processing |
| Treatment |
| Adjustments |
| Unallocated (1) |
| Total |
| |||||
Three months ended June 30, 2019 | ||||||||||||||||
Revenues: | ||||||||||||||||
Revenue–Antero Resources | $ | 168,925 | 95,181 | — | — | 264,106 | ||||||||||
Revenue–third-party | — | 46 | — | — | 46 | |||||||||||
Amortization of customer contracts | (2,402) | (6,132) | — | — | (8,534) | |||||||||||
Total revenues | 166,523 | 89,095 | — | — | 255,618 | |||||||||||
Operating expenses: | ||||||||||||||||
Direct operating | 12,377 | 51,621 | — | — | 63,998 | |||||||||||
General and administrative (excluding equity-based compensation) | 7,335 | 3,958 | — | 1,786 | 13,079 | |||||||||||
Equity-based compensation | 2,285 | 927 | — | 18,331 | 21,543 | |||||||||||
Impairment of property and equipment | 592 | 2 | — | — | 594 | |||||||||||
Depreciation | 12,721 | 23,726 | — | — | 36,447 | |||||||||||
Accretion and change in fair value of contingent acquisition consideration | — | 2,297 | — | — | 2,297 | |||||||||||
Accretion of asset retirement obligations | — | 69 | — | — | 69 | |||||||||||
Total expenses | 35,310 | 82,600 | — | 20,117 | 138,027 | |||||||||||
Operating income | 131,213 | 6,495 | — | (20,117) | 117,591 | |||||||||||
Other income (expenses): | ||||||||||||||||
Interest expense, net | — | — | — | (31,521) | (31,521) | |||||||||||
Equity in earnings of unconsolidated affiliates | 13,623 | — | — | — | 13,623 | |||||||||||
Income before taxes | 144,836 | 6,495 | — | (51,638) | 99,693 | |||||||||||
Provision for income tax expense | — | — | — | (30,419) | (30,419) | |||||||||||
Net income and comprehensive income | $ | 144,836 | 6,495 | — | (82,057) | 69,274 | ||||||||||
Adjusted EBITDA(2) | $ | 206,160 |
(1) | Corporate expenses that are not directly attributable to either the gathering and processing or water handling and treatment segments. |
(2) | For a reconciliation of Adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with GAAP, see the description below. |
39
The operating data below represents (i) the operating data of Antero Midstream Partners and its subsidiaries for the three months ended June 30, 2018 and (ii) the operating data of Antero Midstream Corporation and its subsidiaries, including Antero Midstream Partners and its subsidiaries, for the three months ended June 30, 2019.
Amount of | |||||||||||||
Three Months Ended June 30, | Increase | Percentage | |||||||||||
2018(1) |
| 2019 | or Decrease | Change | |||||||||
Operating Data: | |||||||||||||
Gathering—low pressure (MMcf) | 180,268 | 242,266 | 61,998 | 34 | % | ||||||||
Gathering—high pressure (MMcf) | 175,818 | 238,406 | 62,588 | 36 | % | ||||||||
Compression (MMcf) | 141,819 | 218,020 | 76,201 | 54 | % | ||||||||
Fresh water delivery (MBbl) | 20,766 | 11,147 | (9,619) | (46) | % | ||||||||
Treated water (MBbl) | 700 | 2,658 | 1,958 | 280 | % | ||||||||
Other fluid handling (MBbl) | 4,382 | 5,086 | 704 | 16 | % | ||||||||
Wells serviced by fresh water delivery | 48 | 25 | (23) | (48) | % | ||||||||
Gathering—low pressure (MMcf/d) | 1,981 | 2,662 | 681 | 34 | % | ||||||||
Gathering—high pressure (MMcf/d) | 1,932 | 2,620 | 688 | 36 | % | ||||||||
Compression (MMcf/d) | 1,558 | 2,396 | 838 | 54 | % | ||||||||
Fresh water delivery (MBbl/d) | 228 | 122 | (106) | (46) | % | ||||||||
Treated water (MBbl/d) | 8 | 29 | 21 | 263 | % | ||||||||
Other fluid handling (MBbl/d) | 48 | 56 | 8 | 17 | % | ||||||||
Average realized fees: | |||||||||||||
Average gathering—low pressure fee ($/Mcf) | $ | 0.32 | 0.33 | 0.01 | 3 | % | |||||||
Average gathering—high pressure fee ($/Mcf) | $ | 0.19 | 0.20 | 0.01 | 5 | % | |||||||
Average compression fee ($/Mcf) | $ | 0.19 | 0.19 | — | — | % | |||||||
Average fresh water delivery fee ($/Bbl) | $ | 3.78 | 3.90 | 0.12 | 3 | % | |||||||
Average treatment fee ($/Bbl) | $ | 4.11 | 4.50 | 0.39 | 9 | % | |||||||
Joint Venture Operating Data: | |||||||||||||
Processing—Joint Venture (MMcf) | 51,921 | 89,770 | 37,849 | 73 | % | ||||||||
Fractionation—Joint Venture (MBbl) | 914 | 2,470 | 1,556 | 170 | % | ||||||||
Processing—Joint Venture (MMcf/d) | 571 | 986 | 415 | 73 | % | ||||||||
Fractionation—Joint Venture (MBbl/d) | 10 | 27 | 17 | 170 | % |
(1) | Represents pro forma operations data of Antero Midstream Partners as if the Transactions had occurred on January 1, 2018. |
40
Pro Forma Discussion of Results of Operations Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2019
Revenues. Total revenues, including the amortization of customer contracts of $9 million, increased by 5%, from $242 million for the three months ended June 30, 2018 to $256 million for the three months ended June 30, 2019. Gathering and processing revenues increased by 40%, from $119 million for the three months ended June 30, 2018 to $166 million for the three months ended June 30, 2019. Water handling and treatment revenues decreased by 33%, from $132 million for the three months ended June 30, 2018 to $89 million for the three months ended June 30, 2019. These fluctuations primarily resulted from the following:
Gathering and Processing
● | low pressure gathering revenue increased $21 million period over period due to an increase of throughput volumes of 62 Bcf, or 681 MMcf/d, which was due to 177 additional wells connected to our system since June 30, 2018; |
● | high pressure gathering revenue increased $14 million period over period due to an increase of throughput volumes of 63 Bcf, or 688 MMcf/d, primarily as a result of the addition of three new high pressure gathering lines placed in service since June 30, 2018; |
● | compression revenue increased $15 million period over period due to an increase of throughput volumes of 76 Bcf, or 838 MMcf/d, primarily due to the addition of two new compressor stations that were placed in service since June 30, 2018, and additional wells connected to our system; and |
● | amortization of customer contracts was $2 million due to the acquisition of Antero Midstream Partners on March 12, 2019. |
Water Handling and Treatment
● | fresh water delivery revenue decreased $35 million period over period due to a decrease in fresh water delivery of 9,619 MBbl, or 106 MBbl/d, as a result of a decrease in the number of wells serviced as Antero Resources reduced its drilling and completion program; |
● | water treatment services revenue provided at our wastewater treatment facility increased revenue by $9 million for the period with increased throughput volumes of 1,958 MBbl, or 21 MBbl/d, as the plant was placed into service in May 2018; |
● | other fluid handling services revenue decreased $11 million period over period due to overall operational efficiencies realized by the increased use of the wastewater treatment facility; and |
● | amortization of customer contracts was $6 million due to the acquisition of Antero Midstream Partners on March 12, 2019. |
Direct operating expenses. Total direct operating expenses decreased by 15%, from $76 million for the three months ended June 30, 2018 to $64 million for the three months ended June 30, 2019. Gathering and processing direct operating expenses remained relatively consistent for the three months ended June 30, 2018 and 2019 at $12 million for each period as operational efficiencies offset two new compressor stations. Water handling and treatment direct operating expenses decreased from $63 million for the three months ended June 30, 2018 to $52 million for the three months ended June 30, 2019. The decrease was primarily due to a decrease in freshwater delivery volumes and increased wastewater handling operational efficiencies partially offset by an increase in treatment volumes.
General and administrative (excluding equity-based compensation) expenses. General and administrative expenses (excluding equity-based compensation expense) remained relatively consistent for the three months ended June 30, 2018 and 2019 at $12 million and $13 million, respectively.
Equity-based compensation expenses. Equity-based compensation expenses increased from $15 million for the three months ended June 30, 2018 to $22 million for the three months ended June 30, 2019 primarily due to the revaluation of the Series B Units as result of the Transactions.
41
Impairment expense. Impairment expense of $5 million for the three months ended June 30, 2018 was due to the impairment of gathering assets acquired from Antero Resources at the time of Antero Midstream Partners’ initial public offering related to well pads Antero Resources no longer planned to drill and complete. Impairment expense of $0.6 million for three months ended June 30, 2019 was related to the costs of decommissioning of a compressor station.
Depreciation expense. Total depreciation expense decreased by 19%, from $45 million for the three months ended June 30, 2018 to $36 million for the three months ended June 30, 2019. The decrease was primarily due to the change in estimated useful lives of gathering and compression facilities, partially offset by additional assets placed into service.
Accretion and change in fair value of contingent acquisition consideration. Accretion of contingent acquisition consideration decreased from $4 million for the three months ended June 30, 2018 to $2 million for the three months ended June 30, 2019. In connection with the Water Acquisition, we agreed to pay Antero Resources $125 million in cash if we deliver 176 million barrels or more of fresh water during the period between January 1, 2017 and December 31, 2019. As of June 30, 2019, we have delivered 152 million of the 176 million barrels and we expect to pay the entire amount of the contingent consideration for the delivery of 176 million barrels or more of fresh water during the period between January 1, 2017 and December 31, 2019. We have agreed to pay an additional $125 million in cash if we deliver 219 million barrels or more of fresh water during the period between January 1, 2018 and December 31, 2020. As of June 30, 2019, we have delivered 96 million of the 219 million barrels or more of fresh water during the period between January 1, 2018 and December 31, 2020 and do not expect to deliver at least 219 million barrels based on Antero Resources’ 2019 budget and long-term outlook.
Interest expense. Interest expense increased by 57%, from $20 million, net of $1 million in capitalized interest, for the three months ended June 30, 2018 to $32 million for the three months ended June 30, 2019. No interest was capitalized for the three months ended June 30, 2019. Total interest costs increased from $21 million for the three months ended June 30, 2018 to $32 million for the three months ended June 30, 2019 primarily due to (i) an increase in interest expense incurred on increased borrowings under the Credit Facility during the period, (ii) increased interest rates, and (iii) the issuance of $650 million of 5.75% senior unsecured notes on February 25, 2019.
Operating income. Total operating income increased by 36%, from $86 million for the three months ended June 30, 2018 to $117 million for the three months ended June 30, 2019. Gathering and processing operating income increased by 100% from $65 million for the three months ended June 30, 2018 to $131 million for the three months ended June 30, 2019. The increase was primarily due to an increase in gathering and compression throughput volumes and lower depreciation on the gathering system in 2019. Water handling and treatment operating income decreased by 87%, from $49 million for the three months ended June 30, 2018 to $6 million for the three months ended June 30, 2019. The decrease was primarily due to a decrease in the number of wells serviced by freshwater delivery services and increase in depreciation expense.
Equity in earnings of unconsolidated affiliates. Equity in earnings in unconsolidated affiliates increased by 117%, from $6 million for the three months ended June 30, 2018 to $14 million for the three months ended June 30, 2019. Equity in earnings of unconsolidated affiliates represents the portion of the net income from our investments in Stonewall and the Joint Venture, which is allocated to us based on our equity interests. The increase is primarily attributable to an increase in the level of operations at the Joint Venture in 2019.
Net income. Net income increased by 32%, from $52 million for the three months ended June 30, 2018 to $69 million for the three months ended June 30, 2019. The increase was primarily due to increased revenues partially offset by increased expenses.
Pro Forma Adjusted EBITDA and Adjusted EBITDA. Pro Forma Adjusted EBITDA increased by 18%, from $174 million for the three months ended June 30, 2018 to Adjusted EBITDA of $206 million for the three months ended June 30, 2019. The increase was primarily due to an increase in revenue resulting from an increase in gathering and compression volumes. For a discussion of the non-GAAP financial measure Pro Forma Adjusted EBITDA and Adjusted EBITDA, including a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, read “—Non-GAAP Financial Measures” below.
42
Pro Forma Segment Results of Operations for the six months ended June 30, 2018 and 2019
Water | Pro Forma | |||||||||||||||
| Gathering and |
| Handling and |
| Pro Forma |
|
| Consolidated | ||||||||
|
| Processing |
| Treatment |
| Adjustments |
| Unallocated (1) |
| Total |
| |||||
Six months ended June 30, 2018 |
| |||||||||||||||
Revenues: | ||||||||||||||||
Revenue–Antero Resources | $ | 226,313 | 253,120 | — | — | 479,433 | ||||||||||
Revenue–third-party | — | 550 | — | — | 550 | |||||||||||
Gain on sale of assets–Antero Resources | 583 | — | — | — | 583 | |||||||||||
Amortization of customer contracts | — | — | (16,973) | — | (16,973) | |||||||||||
Total revenues | 226,896 | 253,670 | (16,973) | — | 463,593 | |||||||||||
Operating expenses: | ||||||||||||||||
Direct operating | 23,786 | 119,093 | — | — | 142,879 | |||||||||||
General and administrative (excluding equity-based compensation) | 12,945 | 4,926 | — | 3,328 | 21,199 | |||||||||||
Equity-based compensation | 9,412 | 2,666 | — | 17,745 | 29,823 | |||||||||||
Impairment of property and equipment | 4,614 | — | — | — | 4,614 | |||||||||||
Depreciation | 47,672 | 21,193 | 16,774 | — | 85,639 | |||||||||||
Accretion and change in fair value of contingent acquisition consideration | — | 7,821 | — | — | 7,821 | |||||||||||
Accretion of asset retirement obligations | — | 68 | — | — | 68 | |||||||||||
Total expenses | 98,429 | 155,767 | 16,774 | 21,073 | 292,043 | |||||||||||
Operating income | 128,467 | 97,903 | (33,747) | (21,073) | 171,550 | |||||||||||
Other income (expenses): | ||||||||||||||||
Interest expense, net | — | — | (10,880) | (25,939) | (36,819) | |||||||||||
Equity in earnings of unconsolidated affiliates | 17,126 | — | (5,952) | — | 11,174 | |||||||||||
Income before taxes | 145,593 | 97,903 | (50,579) | (47,012) | 145,905 | |||||||||||
Provision for income tax expense | — | — | (26,349) | (13,319) | (39,668) | |||||||||||
Net income and comprehensive income | $ | 145,593 | 97,903 | (76,928) | (60,331) | 106,237 | ||||||||||
Pro Forma Adjusted EBITDA(2) | $ | 334,383 |
(1) | Corporate expenses that are not directly attributable to either the gathering and processing or water handling and treatment segments. |
(2) | For a reconciliation of Pro Forma Adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with GAAP, see the description below. |
43
Water | Pro Forma | |||||||||||||||
Gathering and |
| Handling and |
| Pro Forma |
|
| Consolidated | |||||||||
Processing |
| Treatment |
| Adjustments |
| Unallocated (1) |
| Total | ||||||||
Six months ended June 30, 2019 | ||||||||||||||||
Revenues: | ||||||||||||||||
Revenue–Antero Resources | $ | 327,232 | 211,069 | — | — | 538,301 | ||||||||||
Revenue–third-party | — | 101 | — | — | 101 | |||||||||||
Amortization of customer contracts | (2,903) | (7,412) | (6,659) | — | (16,974) | |||||||||||
Total revenues | 324,329 | 203,758 | (6,659) | — | 521,428 | |||||||||||
Operating expenses: | ||||||||||||||||
Direct operating | 26,485 | 117,313 | — | — | 143,798 | |||||||||||
General and administrative (excluding equity-based compensation) | 18,247 | 10,956 | (15,345) | 8,578 | 22,436 | |||||||||||
Equity-based compensation | 4,248 | 2,031 | — | 29,164 | 35,443 | |||||||||||
Impairment of property and equipment | 7,183 | 393 | — | — | 7,576 | |||||||||||
Depreciation | 23,603 | 42,201 | 5,932 | — | 71,736 | |||||||||||
Accretion and change in fair value of contingent acquisition consideration | — | 5,274 | — | — | 5,274 | |||||||||||
Accretion of asset retirement obligations | — | 142 | — | — | 142 | |||||||||||
Total expenses | 79,766 | 178,310 | (9,413) | 37,742 | 286,405 | |||||||||||
Operating income | 244,563 | 25,448 | 2,754 | (37,742) | 235,023 | |||||||||||
Other income (expenses): | ||||||||||||||||
Interest expense, net | — | — | (3,301) | (54,553) | (57,854) | |||||||||||
Equity in earnings of unconsolidated affiliates | 28,767 | — | (2,335) | — | 26,432 | |||||||||||
Income before taxes | 273,330 | 25,448 | (2,882) | (92,295) | 203,601 | |||||||||||
Provision for income tax expense | — | — | (24,159) | (28,042) | (52,201) | |||||||||||
Net income and comprehensive income | $ | 273,330 | 25,448 | (27,041) | (120,337) | 151,400 | ||||||||||
Pro Forma Adjusted EBITDA(2) | $ | 408,633 |
(1) | Corporate expenses that are not directly attributable to either the gathering and processing or water handling and treatment segments. |
(2) | For a reconciliation of Pro Forma Adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with GAAP, see the description below. |
44
The operating data below represents (i) the operating data of Antero Midstream Partners and its subsidiaries for the six months ended June 30, 2018 and (ii) the operating data of Antero Midstream Corporation and its subsidiaries, including Antero Midstream Partners and its subsidiaries, for the six months ended June 30, 2019.
Amount of | |||||||||||||
Six Months Ended June 30, | Increase | Percentage | |||||||||||
2018 |
| 2019(1) | or Decrease | Change | |||||||||
Pro Forma Operating Data: | |||||||||||||
Gathering—low pressure (MMcf) | 345,460 | 472,806 | 127,346 | 37 | % | ||||||||
Gathering—high pressure (MMcf) | 334,680 | 463,192 | 128,512 | 38 | % | ||||||||
Compression (MMcf) | 269,013 | 420,958 | 151,945 | 56 | % | ||||||||
Fresh water delivery (MBbl) | 40,682 | 24,879 | (15,803) | (39) | % | ||||||||
Treated water (MBbl) | 700 | 4,805 | 4,105 | 586 | % | ||||||||
Other fluid handling (MBbl) | 8,362 | 10,152 | 1,790 | 21 | % | ||||||||
Wells serviced by fresh water delivery | 94 | 56 | (38) | (40) | % | ||||||||
Gathering—low pressure (MMcf/d) | 1,909 | 2,612 | 703 | 37 | % | ||||||||
Gathering—high pressure (MMcf/d) | 1,849 | 2,559 | 710 | 38 | % | ||||||||
Compression (MMcf/d) | 1,486 | 2,325 | 839 | 56 | % | ||||||||
Fresh water delivery (MBbl/d) | 225 | 137 | (88) | (39) | % | ||||||||
Treated water (MBbl/d) | 4 | 27 | 23 | 575 | % | ||||||||
Other fluid handling (MBbl/d) | 46 | 56 | 10 | 22 | % | ||||||||
Pro Forma Average realized fees: | |||||||||||||
Average gathering—low pressure fee ($/Mcf) | $ | 0.32 | 0.33 | 0.01 | 3 | % | |||||||
Average gathering—high pressure fee ($/Mcf) | $ | 0.19 | 0.20 | 0.01 | 5 | % | |||||||
Average compression fee ($/Mcf) | $ | 0.19 | 0.19 | — | — | % | |||||||
Average fresh water delivery fee ($/Bbl) | $ | 3.78 | 3.89 | 0.11 | 3 | % | |||||||
Average treatment fee ($/Bbl) | $ | 4.11 | 4.49 | 0.38 | 9 | % | |||||||
Pro Forma Joint Venture Operating Data: | |||||||||||||
Processing—Joint Venture (MMcf) | 98,646 | 179,422 | 80,776 | 82 | % | ||||||||
Fractionation—Joint Venture (MBbl) | 1,469 | 4,451 | 2,982 | 203 | % | ||||||||
Processing—Joint Venture (MMcf/d) | 545 | 991 | 446 | 82 | % | ||||||||
Fractionation—Joint Venture (MBbl/d) | 8 | 25 | 17 | 213 | % |
(1) | Includes actual operations data for Antero Midstream Corporation since March 12, 2019. |
Pro Forma Discussion of Results of Operations Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2019
Revenues. Total revenues, including the amortization of customer contracts of $17 million, increased by 12% from $464 million for the six months ended June 30, 2018 to $521 million for the six months ended June 30, 2019. Gathering and processing revenues increased by 43%, from $227 million for the six months ended June 30, 2018 to $324 million for the six months ended June 30, 2019. Water handling and treatment revenues decreased by 20%, from $254 million for the six months ended June 30, 2018 to $204 million for the six months ended June 30, 2019. These fluctuations primarily resulted from the following:
45
Gathering and Processing
● | low pressure gathering revenue increased $43 million period over period due to an increase of throughput volumes of 127 Bcf, or 703 MMcf/d, which was due to 177 additional wells connected to our system since June 30, 2018; |
● | high pressure gathering revenue increased $27 million period over period due to an increase of throughput volumes of 129 Bcf, or 710 MMcf/d, primarily as a result of the addition of three new high pressure gathering lines placed in service since six months ended June 30, 2018; |
● | compression revenue increased $30 million period over period due to an increase of throughput volumes of 152 Bcf, or 839 MMcf/d, primarily due to the addition of two new compressor stations that were placed in service since June 30, 2018, and additional wells connected to our system; |
● | amortization of customer contracts was $3 million due to the acquisition of Antero Midstream Partners on March 12, 2019. |
Water Handling and Treatment
● | fresh water delivery revenue decreased $57 million period over period due to a decrease in fresh water delivery of 15,803 MBbl, or 88 MBbl/d, as a result of a decrease in the number of wells serviced as Antero Resources reduced its drilling and completion program; |
● | we began recognizing revenues for water treatment services provided at our wastewater treatment facility when the facility was placed in service in May 2018, which increased revenue by $18 million for the period with increased throughput volumes of 4,105 MBbl, or 23 MBbl/d; |
● | other fluid handling services revenue decreased $3 million period over period due to overall operational efficiencies realized by the increased use of the wastewater treatment facility; volumes increased by 1,790 MBbl, or 10 MBbl/d; and |
● | amortization of customer contracts was $7 million due to the acquisition of Antero Midstream Partners on March 12, 2019. |
Direct operating expenses. Total direct operating expenses remained relatively the same at $143 million and $144 million for the six months ended June 30, 2018 and 2019, respectively. Gathering and processing direct operating expenses increased from $24 million for the six months ended June 30, 2018 to $27 million for the six months ended June 30, 2019. The increase was primarily due to an increase in the number of gathering pipelines and compressor stations. Water handling and treatment direct operating expenses decreased from $119 million for the six months ended June 30, 2018 to $117 million for the six months ended June 30, 2019. The decrease was primarily due to a decrease in freshwater delivery volumes and increased wastewater handling operational efficiencies partially offset by an increase in treatment volumes.
General and administrative (excluding equity-based compensation) expenses. General and administrative expenses (excluding equity-based compensation expense) remained relatively consistent at $21 million and $22 million for the six months ended June 30, 2018 and 2019, respectively.
Equity-based compensation expenses. Equity-based compensation expenses increased from $30 million for the six months ended June 30, 2018 to $35 million for the six months ended June 30, 2019 primarily due to the Series B Exchange as result of the Transactions.
Impairment expense. Impairment expense of $5 million for the six months ended June 30, 2018 was due to the impairment of gathering assets acquired from Antero Resources at the time of Antero Midstream Partners’ initial public offering related to well pads Antero Resources no longer planned to drill and complete. Impairment expense of $8 million for the six months ended June 30, 2019 was primarily for the decommissioning of assets related to a third-party compressor station.
Depreciation expense. Total depreciation expense decreased by 16%, from $86 million for the six months ended June 30, 2018 to $72 million for the six months ended June 30, 2019. The decrease was primarily due to the change in estimated useful lives of gathering and compression facilities, partially offset by additional assets placed into service.
46
Accretion and change in fair value of contingent acquisition consideration. Accretion of contingent acquisition consideration decreased from $8 million for the six months ended June 30, 2018 to $5 million for the six months ended June 30, 2019. In connection with the Water Acquisition, we agreed to pay Antero Resources $125 million in cash if we deliver 176 million barrels or more of fresh water during the period between January 1, 2017 and December 31, 2019. As of June 30, 2019, we have delivered 152 million of the 176 million barrels and we expect to pay the entire amount of the contingent consideration for the delivery of 176 million barrels or more of fresh water during the period between January 1, 2017 and December 31, 2019. We have agreed to pay an additional $125 million in cash if we deliver 219 million barrels or more of fresh water during the period between January 1, 2018 and December 31, 2020. As of June 30, 2019, we have delivered 96 million of the 219 million barrels or more of fresh water during the period between January 1, 2018 and December 31, 2020 and do not expect to deliver at least 219 million barrels based on Antero Resources’ 2019 budget and long-term outlook.
Interest expense. Interest expense increased by 57%, from $37 million, net of $4 million in capitalized interest, for the six months ended June 30, 2018 to $58 million for the six months ended June 30, 2019. No interest was capitalized for the six months ended June 30, 2019. Total interest costs increased from $41 million for the six months ended June 30, 2018 to $58 million for the six months ended June 30, 2019 primarily due to (i) an increase in interest expense incurred on increased borrowings under the Credit Facility during the period, (ii) increased interest rates, and (iii) this issuance of $650 million of 5.75% senior unsecured notes on February 25, 2019.
Operating income. Total operating income increased by 37%, from $172 million for the six months ended June 30, 2018 to $235 million for the six months ended June 30, 2019. Gathering and processing operating income increased by 90%, from $128 million for the six months ended June 30, 2018 to $245 million for the six months ended June 30, 2019. The increase was primarily due to an increase in gathering and compression throughput volumes and lower depreciation on the gathering system in 2019. Water handling and treatment operating income decreased by 74%, from $98 million for the six months ended June 30, 2018 to $25 million for the six months ended June 30, 2019. The decrease was primarily due to a decrease in the number of wells serviced by freshwater delivery services and increased depreciation expense.
Equity in earnings of unconsolidated affiliates. Equity in earnings in unconsolidated affiliates increased by 137%, from $11 million for the six months ended June 30, 2018 to $26 million for the six months ended June 30, 2019. Equity in earnings of unconsolidated affiliates represents the portion of the net income from our investments in Stonewall and the Joint Venture, which is allocated to us based on our equity interests. The increase is primarily attributable to an increase in the level of operations at the Joint Venture in 2019.
Net income. Net income increased by 43%, from $106 million for the six months ended June 30, 2018 to $151 million for the six months ended June 30, 2019. The increase was primarily due to increased revenues partially offset by increased income tax expense.
Pro Forma Adjusted EBITDA. Pro Forma Adjusted EBITDA increased by 22%, from $334 million for the six months ended June 30, 2018 to $409 million for the six months ended June 30, 2019. The increase was primarily due to an increase in revenue resulting from an increase in gathering and compression volumes. For a discussion of the non-GAAP financial measure Pro Forma Adjusted EBITDA, including a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, read “—Non-GAAP Financial Measures” below.
47
Capital Resources and Liquidity as Reported
Sources and Uses of Cash
Capital resources and liquidity are provided by operating cash flow, cash on our balance sheet, borrowings under the Credit Facility and capital market transactions. We expect that the combination of these capital resources will be adequate to meet our working capital requirements, capital expenditures program and expected quarterly cash distributions for at least the next twelve months.
The Board declared a cash dividend on the shares of AMC common stock of $0.3075 per share for the quarter ended June 30, 2019. The dividend will be payable on August 7, 2019 to stockholders of record as of July 26, 2019. The Board also declared a cash dividend of $139 thousand on the shares of Series A Preferred Stock of Antero Midstream Corporation, which will be paid on August 14, 2019 in accordance with the terms of the Series A Preferred Stock as discussed in Note 13—Equity and Earnings Per Common Share. As of June 30, 2019, there were dividends in the amount $70 thousand accumulated in arrears on the Company’s Series A Preferred Stock.
We expect our future cash requirements relating to working capital, maintenance capital expenditures and quarterly cash dividends to our stockholders will be funded from cash flows internally generated from our operations. Our expansion capital expenditures will be funded by borrowings under the Credit Facility or from potential capital markets transactions.
The following table summarizes our cash flows for the six months ended June 30, 2018 and 2019:
Six Months Ended June 30, | Increase | |||||||||
(in thousands) |
| 2018 |
| 2019 |
| (Decrease) | ||||
Net cash provided by operating activities | $ | 34,598 | 252,164 | 217,566 | ||||||
Net cash used in investing activities | — | (221,401) | 221,401 | |||||||
Net cash used in financing activities | (35,285) | (25,794) | (9,491) | |||||||
Net increase (decrease) in cash and cash equivalents | $ | (687) | 4,969 |
Cash Flows Provided by Operating Activities
Net cash provided by operating activities was $35 million and $252 million for the three months ended June 30, 2018 and 2019, respectively. The increase in cash flows from operations for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was primarily the result of increased cash flows associated with Antero Midstream Partners for the period March 13, 2019 through June 30, 2019 due to the Transactions.
Cash Flows Used in Investing Activities
During the six months ended June 30, 2019, we used cash flows in investing activities of $221 million while we had no cash flows from investing activities during the six months ended June 30, 2018. The increase was due to $599 million of cash paid to Antero Midstream Partners unitholders as consideration in the Merger, $103 million in investments in unconsolidated affiliates and $141 million in capital expenditures for gathering systems and facilities and water handling and treatment assets partially offset by cash received of $620 million, which was borrowed by Antero Midstream Partners on the Credit Facility primarily to pay the aforementioned $599 million of consideration in the Merger.
Our capital budget is $750 million to $800 million for 2019 (including capital expenditures by Antero Midstream Partners prior to March 13, 2019), which includes $710 million of expansion capital and $65 million of maintenance capital at the midpoint of the range. Our capital budgets may be adjusted as business conditions warrant. If natural gas, NGLs, and oil prices decline to levels below acceptable levels or costs increase to levels above acceptable levels, Antero Resources could choose to defer a significant portion of its budgeted capital expenditures until later periods. As a result, we may also defer a significant portion of our budgeted capital expenditures to achieve the desired balance between sources and uses of liquidity and prioritize capital projects that we believe have the highest expected returns and potential to generate near-term cash flows. We routinely monitor and adjust our capital expenditures in response to changes in Antero Resources’ development plans, changes in prices, availability of financing, acquisition costs, industry conditions, the timing of regulatory approvals, success or lack of success in Antero Resources’ drilling activities, contractual obligations, internally generated cash flows and other factors both within and outside our control.
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Cash Flows Used in Financing Activities
Net cash used in financing activities was $35 million and $26 million for the six months ended June 30, 2018 and 2019, respectively. Net cash used in financing activities for the six months ended June 30, 2019 included: (i) issuance of the 2028 Notes (as defined below) of $650 million; (ii); total distributions to shareholders, Series B unitholders and preferred shareholders of $186 million; (iii) net payments on the Credit Facility of $481 million and (iv) $7 million of payments for deferred financing. For the six months ended June 30, 2018, net cash used in financing activities consisted of $35 million in distributions to shareholders and Series B unitholders.
Debt Agreements and Contractual Obligations
Antero Midstream Partners Revolving Credit Facility
On October 26, 2017, Antero Midstream Partners entered into the Credit Facility. The Credit Facility includes fall away covenants and lower interest rates that are triggered if and when the Borrower elects to enter into an Investment Grade Period, as described below. Our Credit Facility provides for borrowing under either the London Inter-Bank Offered Rate or an Alternative Rate of Interest (as defined in the credit facility agreement).
The Credit Facility was amended on October 31, 2018 and February 26, 2019 to, among other things: (i) increase lender commitments from $1.5 billion to $2.0 billion, (ii) permit us, the Borrower and the guarantors under the facility to consummate the Transactions and (iii) to modify pricing to the levels described in more detail below. The maturity date of the facility is October 26, 2022. At June 30, 2019, we had $595 million of borrowings and no letters of credit outstanding under the Credit Facility.
Under the Credit Facility, “Investment Grade Period” is a period that, as long as no event of default has occurred and the Borrower is in pro forma compliance with the financial covenants under the Credit Facility, commences when the Borrower elects to give notice to the Administrative Agent that the Borrower has received at least one of either (i) a BBB- or better rating from Standard and Poor’s or (ii) a Baa3 or better from Moody’s (provided that the non-investment grade rating from the other rating agency is at least either Ba1 if Moody’s or BB+ if Standard and Poor’s (an “Investment Grade Rating”)). An Investment Grade Period can end at the Borrower’s election.
We have a choice of borrowing in Eurodollars or at the base rate. Principal amounts borrowed are payable on the maturity date with such borrowings bearing interest that is payable (i) with respect to base rate loans, quarterly and (ii) with respect to Eurodollar loans, the last day of each Interest Period (as defined below); provided that if any Interest Period for a Eurodollar loan exceeds three months, interest will be payable on the respective dates that fall every three months after the beginning of such Interest Period. Eurodollar loans bear interest at a rate per annum equal to the LIBOR Rate administered by the ICE Benchmark Administration for one, two, three, six or, if available to the lenders, twelve months (the “Interest Period”) plus an applicable margin ranging from (i) 125 to 225 basis points during any period that is not an Investment Grade Period, depending on the leverage ratio then in effect and (ii) 112.5 to 200 basis points during an Investment Grade Period, depending on the Borrower’s credit rating then in effect. Base rate loans bear interest at a rate per annum equal to the greatest of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus 50 basis points and (iii) the rate for one month Eurodollar loans plus 100 basis points, plus an applicable margin ranging from (i) 25 to 125 basis points during any period that is not an Investment Grade Period, depending on the leverage ratio then in effect and (ii) 12.5 to 100 basis points during an Investment Grade Period, depending on the Borrower’s credit rating then in effect.
During any period that is not an Investment Grade Period, the Credit Facility is guaranteed by our subsidiaries and is secured by mortgages on substantially all of Antero Midstream Partners’ and its subsidiaries’ properties; provided that the liens securing the Credit Facility shall be automatically released during an Investment Grade Period. The Credit Facility contains restrictive covenants that may limit our ability to, among other things:
● | incur additional indebtedness; |
● | sell assets; |
● | make loans to others; |
● | make investments; |
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● | enter into mergers; |
● | make certain restricted payments; |
● | incur liens; and |
● | engage in certain other transactions without the prior consent of the lenders. |
The Credit Facility also requires us to maintain the following financial ratios:
● | a consolidated interest coverage ratio, which is the ratio of our consolidated EBITDA to its consolidated current interest charges of at least 2.5 to 1.0 at the end of each fiscal quarter; provided that during an Investment Grade Period, the Borrower will not to be subject to such ratio; |
● | a consolidated total leverage ratio, which is the ratio of consolidated debt to consolidated EBITDA, of not more than 5.00 to 1.00 at the end of each fiscal quarter; provided that during an Investment Grade Period or at our election (the “Financial Covenant Election”), the consolidated total leverage ratio shall be no more than 5.25 to 1.0; and |
● | after a Financial Covenant Election (and up to the commencement of an Investment Grade Period), a consolidated senior secured leverage ratio covenant rather than the consolidated total leverage ratio covenant, which is the ratio of consolidated senior secured debt to consolidated EBITDA, of not more than 3.75 to 1.0. |
We were in compliance with the applicable covenants and ratios as of June 30, 2019. The actual borrowing capacity available to Antero Midstream Partners may be limited by the interest coverage ratio, consolidated total leverage ratio, and consolidated senior secured leverage ratio covenants.
5.375% Senior Notes Due 2024
On September 13, 2016, Antero Midstream Partners and its wholly owned subsidiary, Finance Corp together with Antero Midstream Partners, (the “Issuers”), issued $650 million in aggregate principal amount of 5.375% senior notes due September 15, 2024 (the “2024 Notes”) at par. The 2024 Notes are unsecured and effectively subordinated to the Credit Facility to the extent of the value of the collateral securing the Credit Facility. The 2024 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by Antero Midstream Corporation, Antero Midstream Partners’ wholly owned subsidiaries (other than Finance Corp) and certain of its future restricted subsidiaries. Interest on the 2024 Notes is payable on March 15 and September 15 of each year. Antero Midstream Partners may redeem all or part of the 2024 Notes at any time on or after September 15, 2019 at redemption prices ranging from 104.031% on or after September 15, 2019 to 100.00% on or after September 15, 2022. In addition, prior to September 15, 2019, Antero Midstream Partners may redeem up to 35% of the aggregate principal amount of the 2024 Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 105.375% of the principal amount of the 2024 Notes, plus accrued and unpaid interest. At any time prior to September 15, 2019, Antero Midstream Partners may also redeem the 2024 Notes, in whole or in part, at a price equal to 100% of the principal amount of the 2024 Notes plus a “make-whole” premium and accrued and unpaid interest. If Antero Midstream Partners undergoes a change of control, the holders of the 2024 Notes will have the right to require Antero Midstream Partners to repurchase all or a portion of the 2024 Notes at a price equal to 101% of the principal amount of the 2024 Notes, plus accrued and unpaid interest.
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5.75% Senior Notes Due 2027
On February 25, 2019, the Issuers issued $650 million in aggregate principal amount of 5.75% senior notes due March 1, 2027 (the “2027 Notes”) at par. The 2027 Notes are unsecured and effectively subordinated to the Credit Facility to the extent of the value of the collateral securing the Credit Facility. The 2027 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by Antero Midstream Corporation, Antero Midstream Partners’ wholly owned subsidiaries (other than Finance Corp) and certain of its future restricted subsidiaries. Interest on the 2027 Notes is payable on March 1 and September 1 of each year. Antero Midstream Partners may redeem all or part of the 2027 Notes at any time on or after March 1, 2022 at redemption prices ranging from 102.875% on or after March 1, 2022 to 100.00% on or after March 1, 2025. In addition, prior to March 1, 2022, Antero Midstream Partners may redeem up to 35% of the aggregate principal amount of the 2027 Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 105.75% of the principal amount of the 2027 Notes, plus accrued and unpaid interest. At any time prior to March 1, 2022, Antero Midstream Partners may also redeem the 2027 Notes, in whole or in part, at a price equal to 100% of the principal amount of the 2027 Notes plus a “make-whole” premium and accrued and unpaid interest. If Antero Midstream Partners undergoes a change of control, the holders of the 2027 Notes will have the right to require Antero Midstream Partners to repurchase all or a portion of the 2027 Notes at a price equal to 101% of the principal amount of the 2027 Notes, plus accrued and unpaid interest.
5.75% Senior Notes Due 2028
On June 28, 2019, the Issuers issued $650 million in aggregate principal amount of 5.75% senior notes due January 15, 2028 (the “2028 Notes”) at par. The 2028 Notes are unsecured and effectively subordinated to the Credit Facility to the extent of the value of the collateral securing the Credit Facility. The 2028 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by Antero Midstream Corporation, Antero Midstream Partners’ wholly owned subsidiaries (other than Finance Corp) and certain of its future restricted subsidiaries. Interest on the 2028 Notes is payable on January 15 and July 15 of each year. Antero Midstream Partners may redeem all or part of the 2028 Notes at any time on or after January 15, 2023 at redemption prices ranging from 102.875% on or after January 15, 2023 to 100.00% on or after January 15, 2026. In addition, prior to January 15, 2023, Antero Midstream Partners may redeem up to 35% of the aggregate principal amount of the 2028 Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 105.75% of the principal amount of the 2028 Notes, plus accrued and unpaid interest. At any time prior to January 15, 2023, Antero Midstream Partners may also redeem the 2028 Notes, in whole or in part, at a price equal to 100% of the principal amount of the 2028 Notes plus a “make-whole” premium and accrued and unpaid interest. If Antero Midstream Partners undergoes a change of control, the holders of the 2028 Notes will have the right to require Antero Midstream Partners to repurchase all or a portion of the 2028 Notes at a price equal to 101% of the principal amount of the 2028 Notes, plus accrued and unpaid interest.
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Contractual Obligations
Future capital contributions to unconsolidated affiliates are excluded from the table as neither the amounts nor the timing of the obligations can be determined in advance. A summary of our contractual obligations by maturity date as of June 30, 2019 is provided in the following table.
Remainder | Year Ended December 31, | ||||||||||||||||||||||||
(in millions) |
| of 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| Thereafter | Total | ||||||||||
Credit Facility (1) | $ | — | — | — | 595 | — | — | — | 595 | ||||||||||||||||
5.375% senior notes due 2024—principal | — | — | — | — | — | 650 | — | 650 | |||||||||||||||||
5.375% senior notes due 2024—interest | 17 | 35 | 35 | 35 | 35 | 35 | — | 192 | |||||||||||||||||
5.75% senior notes due 2027—principal | — | — | — | — | — | — | 650 | 650 | |||||||||||||||||
5.75% senior notes due 2027—interest | 19 | 37 | 37 | 37 | 37 | 37 | 93 | 297 | |||||||||||||||||
5.75% senior notes due 2028—principal | — | — | — | — | — | — | 650 | 650 | |||||||||||||||||
5.75% senior notes due 2028—interest | — | 39 | 37 | 37 | 37 | 37 | 131 | 318 | |||||||||||||||||
Water treatment (2) | 27 | — | — | — | — | — | — | 27 | |||||||||||||||||
Contingent acquisition consideration | — | 125 | — | — | — | — | — | 125 | |||||||||||||||||
Asset retirement obligations | 1 | 2 | — | — | 1 | — | 2 | 6 | |||||||||||||||||
Total |
| $ | 64 |
| 238 |
| 109 |
| 704 |
| 110 |
| 759 |
| 1,526 |
| 3,510 |
(1) | Includes outstanding principal amounts on the Credit Facility at June 30, 2019. This table does not include future commitment fees, interest expense or other fees on the Credit Facility because they are floating rate instruments and we cannot determine with accuracy the timing of future loan advances, repayments, or future interest rates to be charged. |
(2) | Includes obligations related to the construction of our wastewater treatment facility. |
Non-GAAP Financial Measures
We use Pro Forma Adjusted EBITDA and Adjusted EBITDA (for the three months ended June 30, 2019) as important indicators of our performance. Pro Forma Adjusted EBITDA is used to represent both Pro Forma Adjusted EBITDA and Adjusted EBITDA throughout the Non-GAAP Financial Measures discussion below. We define Pro Forma Adjusted EBITDA as net income before net interest expense, interest tax expense (benefit), depreciation, accretion and changes in fair value of contingent acquisition consideration, accretion of asset retirement obligations, equity-based compensation, excluding equity in earnings of unconsolidated affiliates, transaction expenses, amortization of customer relationships and including cash distributions from unconsolidated affiliates and including Antero Midstream Partners’ pre-acquisition: net income before interest expense, simplification expenses, depreciation, impairment, accretion and changes in fair value of contingent acquisition consideration, accretion of asset retirement obligations, equity-based compensation, amortization of customer relationships excluding equity in earnings of unconsolidated affiliates, including cash distributions from unconsolidated affiliates and excluding equity in earnings of Antero Midstream Partners.
We use Pro Forma Adjusted EBITDA to assess:
● the financial performance of our assets, without regard to financing methods capital structure or historical cost basis;
● our operating performance and return on capital as compared to other publicly traded companies in the midstream energy sector, without regard to financing or capital structure; and
● the viability of acquisitions and other capital expenditure projects.
Pro Forma Adjusted EBITDA is a non-GAAP financial measure. The GAAP measure most directly comparable to Pro Forma Adjusted EBITDA is net income. The non-GAAP financial measure of Pro Forma Adjusted EBITDA should not be considered as an alternative to the GAAP measure of net income. Pro Forma Adjusted EBITDA presentations are made in accordance with GAAP and have important limitations as an analytical tool because they include some, but not all, items that affect net income, Pro Forma Adjusted EBITDA. You should not consider Pro Forma Adjusted EBITDA in isolation or as a substitute for analyses of results as reported under GAAP. Our definition of Pro Forma Adjusted EBITDA may not be comparable to similarly titled measures of other corporations.
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The following table represents a reconciliation of our Pro Forma Adjusted EBITDA to the most directly comparable GAAP financial measure for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, |
| |||||||||||
(in thousands) |
| 2018 |
| 2019(1) |
| 2018 |
| 2019 |
| ||||
Reconciliation of Pro Forma Net Income to Pro Forma Adjusted EBITDA: | |||||||||||||
Pro Forma Net income | $ | 52,614 | 69,274 | 106,237 | 151,400 | ||||||||
Interest expense | 20,085 | 31,521 | 36,819 | 57,854 | |||||||||
Income tax expense | 19,974 | 30,419 | 39,668 | 52,201 | |||||||||
Amortization of customer relationships | 8,533 | 8,534 | 16,973 | 16,974 | |||||||||
Depreciation expense | 44,820 | 36,447 | 85,639 | 71,736 | |||||||||
Impairment | 4,614 | 594 | 4,614 | 7,576 | |||||||||
Accretion of contingent asset consideration | 3,947 | 2,297 | 7,821 | 5,274 | |||||||||
Accretion of asset retirement obligations | 34 | 69 | 68 | 142 | |||||||||
Equity-based compensation | 14,978 | 21,543 | 29,823 | 35,443 | |||||||||
Equity in earnings of unconsolidated affiliates | (6,272) | (13,623) | (11,174) | (26,432) | |||||||||
Distributions from unconsolidated affiliates | 10,810 | 19,085 | 17,895 | 36,465 | |||||||||
Pro Forma Adjusted EBITDA | $ | 174,137 | 206,160 | 334,383 | 408,633 |
(1) | Represents Adjusted EBITDA for the three months ended June 30, 2019. |
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our 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 the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our financial statements. We provide expanded discussion of our more significant accounting policies, estimates and judgments in the 2018 Forms 10-K. For acquisitions, management engages an independent valuation specialist to assist with the determination of fair value of the assets acquired, liabilities assumed, and goodwill, based on recognized business valuation methodologies. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to the acquisition, and not later than one year from the acquisition date, the Company will record any material adjustments to the initial estimate based on new information obtained that would have existed as of the acquisition date. An adjustment that arises from information obtained that did not exist as of the date of the acquisition will be recorded in the period of the adjustment. We believe these accounting policies reflect our more significant estimates and assumptions used in preparation of our financial statements.
New Accounting Pronouncements
On February 25, 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-02, Leases, which requires lessees to record lease liabilities and right-of-use assets as of the date of adoption and was incorporated into GAAP as Accounting Standards Codification (“ASC”) Topic 842. The new lease standard does not substantially change accounting by lessors. The Company adopted the new standard prospectively effective January 1, 2019. The Company is not a party to material contracts as a lessee. The Company determined that Antero Midstream Partners’ contractual arrangement with Antero Resources to provide gathering and compression services is an operating lease of certain of the Company’s assets, which are accounted for under the new ASU (see Note 5—Revenue for information on this arrangement).
Off-Balance Sheet Arrangements
As of June 30, 2019, we did not have any off-balance sheet arrangements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risk. The term “market risk” refers to the risk of loss arising from adverse changes in commodity prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.
Commodity Price Risk
Our gathering and compression and water services agreements with Antero Resources provide for fixed-fee structures, and we intend to continue to pursue additional fixed-fee opportunities with Antero Resources and third parties in order to avoid direct commodity price exposure. However, to the extent that our future contractual arrangements with Antero Resources or third parties do not provide for fixed-fee structures, we may become subject to commodity price risk. We are subject to commodity price risks to the extent that they impact Antero Resources’ development program and production and therefore our gathering, compression, and water handling and treatment volumes. We cannot predict to what extent our business would be impacted by lower commodity prices and any resulting impact on Antero Resources’ operations.
Interest Rate Risk
Our primary exposure to interest rate risk results from outstanding borrowings under the Credit Facility, which has a floating interest rate. We do not currently, but may in the future, hedge the interest on portions of our borrowings under the Credit Facility from time-to-time in order to manage risks associated with floating interest rates. At June 30, 2019, we had $595 million of borrowings and no letters of credit outstanding under the Credit Facility. A 1.0% increase in the Credit Facility interest rate would have resulted in an estimated $3 million increase in interest expense for the six months ended June 30, 2019.
Credit Risk
We are dependent on Antero Resources as our primary customer, and we expect to derive substantially all of our revenues from Antero Resources for the foreseeable future. As a result, any event, whether in our area of operations or otherwise, that adversely affects Antero Resources’ production, drilling schedule, financial condition, leverage, market reputation, liquidity, results of operations or cash flows may adversely affect our revenues and cash available for distribution.
Further, we are subject to the risk of non-payment or non-performance by Antero Resources, including with respect to our gathering and compression and water handling and treatment services agreements. We cannot predict the extent to which Antero Resources’ business would be impacted if conditions in the energy industry were to deteriorate, nor can we estimate the impact such conditions would have on Antero Resources’ ability to execute its drilling and development program or to perform under our agreement. Any material non-payment or non-performance by Antero Resources could reduce our ability to make distributions to our unitholders.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2019 at a reasonable assurance level.
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Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
Our operations are subject to a variety of risks and disputes normally incident to our business. As a result, we may, at any given time, be a defendant in various legal proceedings and litigation arising in the ordinary course of business. However, we are not currently subject to any material litigation.
We maintain insurance policies with insurers in amounts and with coverage and deductibles that we, with the advice of our insurance advisors and brokers, believe are reasonable and prudent. We cannot, however, assure you that this insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices.
Item 1A. Risk Factors.
We are subject to certain risks and hazards due to the nature of the business activities we conduct. For a discussion of these risks, see “Item 1A. Risk Factors” in the 2018 Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019. The risks described in such reports could materially and adversely affect our business, financial condition, cash flows, and results of operations. There have been no material changes to the risks described in such reports. We may experience additional risks and uncertainties not currently known to us. Furthermore, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, cash flows and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table sets forth our share purchase activity for each period presented:
Total Number of | Maximum Number | |||||||||
Number of | Average Price | Common Shares | of Common Shares | |||||||
Common | Paid per | Purchased as Part of | that May Yet be | |||||||
Shares | Common Share | Publicly Announced | Purchased Under | |||||||
Period |
| Purchased | Share | Plans | the Plan |
| ||||
April 1, 2019 – April 30, 2019 | 129,119 | $ | 14.15 | — | N/A | |||||
May 1, 2019 – May 31, 2019 | — | $ | — | — | N/A | |||||
June 1, 2019 – June 30, 2019 | — | $ | — | — | N/A |
Shares purchased represent shares of our common stock transferred to us in order to satisfy tax withholding obligations incurred upon the vesting of Antero Midstream Corporation equity awards held by our employees.
Item 5. Other Information.
On July 29, 2019, David A. Peters notified the Company of his intent to resign from the Board of Directors of the Company effective as of August 1, 2019 for personal reasons. The resignation was not the result of any disagreement with the Company or any of its affiliates on any matter relating to the Company’s operations, policies or practices.
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Item 6.Exhibits
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
10.1 | * | |
10.2 | * | |
31.1 | * | |
31.2 | * | |
32.1 | * | |
32.2 | * | |
99.1 | * | Unaudited pro forma condensed combined financial statements of Antero Midstream Corporation. |
101 | * | The following financial information from this Form 10-Q of Antero Midstream Corporation for the quarter ended June 30, 2019, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Partners’ Capital, (iv) Condensed Consolidated Statements of Partners’ Capital and Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text. |
The exhibits marked with the asterisk symbol (*) are filed or furnished with this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ANTERO MIDSTREAM CORPORATION | |
By: | /s/ Michael N. Kennedy |
MICHAEL N. KENNEDY | |
Chief Financial Officer | |
Date: | July 31, 2019 |
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