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 "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.
On March 12, 2019, pursuant to the Simplification Agreement, dated as of October
9, 2018, by and among Antero Midstream Partners GP LP ("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 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 ("AM 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 statements of operations and comprehensive income and cash flows
for the three months ended March 31, 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 primarily service Antero Resources'
production and completion activity. We believe that our 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.
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. 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. These
services are provided by us directly or through third-parties with which we
contract. Our assets also include other flowback and produced water treatment
facilities that we use to provide water treatment services to Antero Resources.
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Recent Developments and Highlights
COVID-19 Pandemic
In March 2020, the World Health Organization declared the COVID-19 outbreak a
pandemic. Governments have tried to slow the spread of the virus by imposing
social distancing guidelines, travel restrictions and stay-at-home orders, which
have caused a significant decrease in activity in the global economy and the
demand for oil and to a lesser extent natural gas and NGLs. Also in March 2020,
Saudi Arabia and Russia failed to agree to cut production of oil along with the
Organization of the Petroleum Exporting Countries ("OPEC"), and Saudi Arabia
significantly reduced the price at which it sells oil and announced plans to
increase production, which contributed to a sharp drop in the price of oil.
While OPEC, Russia and other allied producers reached an agreement in April 2020
to reduce production, oil prices have remained low. The imbalance between the
supply of and demand for oil, as well as the uncertainty around the extent and
timing of an economic recovery, have caused extreme market volatility and a
substantial adverse effect on commodity prices in March and April.
As a midstream energy company, we are recognized as an essential business under
various federal, state and local regulations related to the COVID-19 pandemic.
We have continued to operate as permitted under these regulations while taking
steps to protect the health and safety of our workers. We have implemented
protocols to reduce the risk of an outbreak within our field operations, and
these protocols have not reduced Antero Resources' production and our throughput
in a significant manner. A substantial portion of our non-field level employees
have transitioned temporarily to remote work from home arrangements, and we have
been able to maintain a consistent level of effectiveness through these
arrangements, including maintaining our day-to-day operations, our financial
reporting systems and our internal control over financial reporting. To date, we
have had no confirmed cases of COVID-19 within our employee group at any of our
locations. Our midstream assets are located in West Virginia and Ohio to serve
the production of natural gas, NGLs and oil in the Appalachian Basin, primarily
by Antero Resources. Our operations support well completion and production
operations for Antero Resources and as such, we are directly impacted by changes
in Antero Resources' operations. While Antero Resources has seen a decrease in
the overall demand for its products, demand for natural gas and NGLs has not
declined as much as demand for oil, and there has not been as substantial an
oversupply of natural gas and NGLs as there has been of oil. Furthermore, the
decrease in demand for oil has significantly reduced the number of rigs drilling
for oil in the continental U.S. and, as a result, estimates of future gas supply
associated with oil production have declined. Additionally, the restart of
economic activity in Asia, coupled with lower refinery liquefied petroleum gas
("LPG") production in the U.S., Europe, and other markets such as India, has led
to strengthening prices for international LPG. The expected decline in
associated gas supply is expected be beneficial to Antero Resources, as
approximately 4% its revenue in 2019 was derived from oil production while 51%
of its revenues were derived from natural gas sales. During the three months
ended March 31, 2020, all of our gathering, compression and processing revenues
were derived from the production of natural gas.
Neither our nor Antero Resources' supply chain has thus far experienced any
significant interruptions. The industry overall is experiencing storage capacity
constraints with respect to oil and certain NGL products, and Antero Resources
may become subject to those constraints if it is not able to sell its
production, or certain components of its production, or enter into additional
storage arrangements. The lack of a market or available storage for any one NGL
product or oil could result in Antero Resources having to delay or discontinue
well completions and commercial production or shut in production for other
products as it has disclosed that it cannot curtail the production of individual
products in a meaningful way without reducing the production of other products.
Antero Resources has indicated that the potential impacts of these constraints
may include partial shut-in of production, although it is not able to determine
the extent of or for how long any shut-ins may occur. Antero Resources has also
indicated that because some of its wells produce rich gas, which is processed,
and some produce dry gas, which does not require processing, it has the ability
to change the mix of products that it produces and wells that it completes to
adjust its production to address takeaway capacity constraints for certain
products better than if it had only rich gas or dry gas wells. Antero Resources
has indicated that it has the ability to shut-in rich gas wells and still
produce from the dry gas wells if processing or storage capacity of NGL products
becomes further limited or constrained. Also, prior to the COVID-19 pandemic,
Antero Resources had developed a diverse set of buyers and destinations, as well
as in-field and off-site storage capacity for its condensate volumes. Since the
outbreak of the pandemic, Antero Resources has expanded its customer base and
doubled its condensate storage capacity within the basin. However, production
curtailments or shut-ins by our producer customers will reduce throughput for
our gathering and processing system. In addition, if our customers delay or
discontinue drilling or completion activities, it will reduce the volumes of
water that we handle and therefore revenues for our water distribution and
handling business.
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In addition, Antero Resources has reduced its drilling and completion capital
budget for 2020 by approximately 34% since the beginning of the year. Antero
Resources has indicated that reductions in its 2020 capital budget may impact
production levels in 2021 and forward to the extent fewer wells will be brought
online, which will directly impact our throughput and cash flows for the same
time periods.
During the three months ended March 31, 2020 and the two previous quarters, we
have recognized various impairment charges related to our Clearwater Facility,
goodwill and certain freshwater delivery system assets. Additional impairment
charges related to our assets may occur if we experience disruptions in
operations, decreases in our revenues or other adverse effects of the COVID-19
pandemic. However, at this time we do not anticipate any further impairment
charges as the Clearwater Facility and our goodwill have been fully impaired as
of March 31, 2020.
In March 2020, the CARES Act was enacted. The CARES Act allows corporations with
NOLs incurred in 2018, 2019 and 2020 to carry back such NOLs to each of the five
years preceding the year of the NOLs, beginning with the earliest year in which
there was taxable income, and claim an income tax refund in the applicable
carryback years. As a result of this NOLs carryback provision in the CARES Act,
the Company was able to recognize an income tax refund receivable as of March
31, 2020 of $55 million, including $11 million in current income tax benefit and
$44 million of previously recognized deferred income tax benefit.
Financial Results as Reported
The financial results of the Company for the three months ended March 31, 2020
are not comparative to the three months ended March 31, 2019 due to the closing
of the Transactions on March 12, 2019. The results for the three months ended
March 31, 2019 are not reflective of the ongoing operations and financial
results of the Company because 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 months
ended March 31, 2019 and 2020, which give pro forma effect to the Transactions
as if they had occurred on January 1, 2019. See additional discussion below
regarding "-Items Affecting Comparability of our Financial Results."
We recognized net income of $10 million for the three months ended March 31,
2019 and net loss of $393 million for the three months ended March 31, 2020. For
the three months ended March 31, 2019 and 2020, we generated cash flows from
operations of $70 million and $121 million, respectively.
Dividends Declared
Our Board of Directors declared a cash dividend on the shares of AM common stock
of $0.3075 per share for the quarter ended March 31, 2020. The dividend will be
payable on May 12, 2020 to stockholders of record as of April 30, 2020. Our
Board of Directors also declared a $138 thousand cash dividend on our shares of
Series A Preferred Stock to be paid on May 15, 2020 in accordance with their
terms, which are discussed in Note 13-Equity and Earnings Per Common Share.
2020 Capital Budget and Capital Spending
During 2020, we plan to expand our existing West Virginia and Ohio gathering,
processing, water handling and fresh water delivery infrastructure to
accommodate Antero Resources' development plans. Antero Resources has revised
its 2020 drilling and completion capital budget from $1.15 billion to $750
million, driven by a combination of increased drilling and completion
efficiencies, service cost deflation and reduced activity. As a result, our
revised 2020 capital budget has been reduced to a range of $210 million to $240
million from an original budget range of $300 million to $325 million and a
previously revised budget of $250 million to $275 million. Antero Resources
periodically reviews its capital expenditures and adjusts its budget and budget
allocation based on commodity prices, operating cash flow and liquidity. Any
additional adjustments to Antero Resources' budget could result in further
adjustments or reductions to our capital budget.
Our budget assumes there will not be any material curtailments to Antero
Resources' production as a result of basin-wide condensate storage constraints
or any other unforeseen events arising from the global COVID-19 pandemic. A
curtailment could result in a temporary reduction in throughput volumes and
revenues for Antero Midstream. Antero Resources and Antero Midstream continue
to work together to find solutions to mitigate the potential impacts of the
decline in demand for oil and NGLs including additional storage capacity in the
northeast U.S. In light of the uncertain market conditions impacting the energy
industry, Antero
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Midstream will continue to evaluate its capital budget as well as the
appropriate amount of capital that is returned to shareholders through dividends
and share repurchases in order to maintain its financial profile.
For the three months ended March 31, 2020, our capital expenditures were
approximately $80 million, including $53 million of expansion capital, $15
million of maintenance capital and $12 million of capital investment in the
Joint Venture.
Growth Incentive Fee Program With Antero Resources
On December 8, 2019, we and Antero Resources amended the existing gathering and
compression agreement to establish a growth incentive fee program whereby we
agreed to provide quarterly fee reductions to Antero Resources from 2020 through
2023, contingent upon Antero Resources achieving volumetric growth targets on
low pressure gathering. The compression, high pressure gathering and fresh water
delivery fees payable to us were unchanged. In addition, we and Antero Resources
agreed to extend the primary term of such agreement by an additional four years
to November 10, 2038. The following table summarizes the low pressure gathering
growth incentive targets through 2023. If actual low pressure volumes are below
the lowest threshold for the respective period, Antero Resources will not
receive a reduction in low pressure gathering fees.
Low Pressure Gathering Quarterly Fee
Volume Growth Incentive Reduction
Targets (MMcf/d) (in millions)
Calendar Year 2020
First Quarter >2,700 $12
Second Quarter >2,700 $12
Third Quarter >2,800 $12
Fourth Quarter >2,900 $12
Calendar Years 2021-2023
Threshold 1 >2,900 and <3,150 $12
Threshold 2 >3,150 and <3,400 $15.5
Threshold 3 >3,400 $19For the three months ended March 31, 2020, Antero Resources delivered low
pressure gathering volumes of 2,717 MMcf/d, which resulted in a fee reduction of
$12 million during the period.
Credit Facility
We expect to fund our operations through borrowings under the Credit Facility,
our operating cash flows and cash on our balance sheet. As of March 31, 2020,
lender commitments under the Credit Facility were $2.13 billion, with a letter
of credit sublimit of $150 million. At March 31, 2020, we had borrowings of $1.2
billion 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.
Items Affecting Comparability of Our Financial Results
Our financial results for the three months ended March 31, 2020 discussed below
are not comparable to our financial results for the three months ended March 31,
2019 primarily as a result of the Merger. The Merger was 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 their estimated
fair value. As such, effective March 12, 2019, Antero Midstream Corporation
commenced consolidating Antero Midstream Partners and its subsidiaries in its
condensed consolidated financial statements. As a result, the unaudited
condensed consolidated statements of operations and comprehensive income and
cash flows of Antero Midstream Corporation for the three months ended at
March 31, 2020 includes the results of Antero Midstream Partners for the entire
period. The historical unaudited condensed consolidated statements of operations
and comprehensive income and cash flows for the three months ended March 31,
2019 only include the results of operations of Antero Midstream Partners and its
subsidiaries for the period after March 12, 2019, prior to which they only
included AMGP's income from distributions made on the IDRs of Antero Midstream
Partners and AMGP's expenses, which were limited to general and administrative
expenses and equity-based compensation of AMGP.
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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 in Exhibit 99.1 to this Quarterly
Report on Form 10-Q. 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 March 31, 2019 Compared to Three Months Ended March 31, 2020
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 $8 million for the
three months ended March 31, 2019 to $10 million for the three months ended
March 31, 2020. 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, partially offset by cost reduction efforts.
Equity-based compensation decreased from $11 million for the three months ended
March 31, 2019 to $3 million for the three months ended March 31, 2020 due to
the Series B Exchange.
Impairment of goodwill expense. Impairment of goodwill expense of $575 million
for the three months ended March 31, 2020 reflects an impairment of the goodwill
that was associated with our gathering system due to declines in commodity
prices and the industry environment.
Impairment of property and equipment expense. Impairment of property and
equipment expense of $89 million for the three months ended March 31, 2020 was
for the impairment of fresh water delivery assets in the Utica Shale region.
Depreciation expense. Depreciation expense increased from $8 million for the
three months ended March 31, 2019 to $27 million for the three months ended
March 31, 2020 as a result of our acquisition of Antero Midstream Partners on
March 12, 2019.
Interest expense. Interest expense increased from $6 million for the three
months ended March 31, 2019 to $38 million for the three months ended March 31,
2020 as a result of the acquisition of Antero Midstream Partners on March 12,
2019, which included the assumption of approximately $2.4 billion of debt, and
Antero Midstream Partners' issuance of $650 million of 5.75% senior unsecured
notes in June 2019.
Operating income (loss). Total operating income was $11 million for the three
months ended March 31, 2019. Operating loss was $519 million for the three
months ended March 31, 2020. The change is primarily due to impairment of
goodwill and property and equipment and as a result of our acquisition of Antero
Midstream Partners on March 12, 2019.
Equity in earnings of unconsolidated affiliates. Equity in earnings of
unconsolidated affiliates increased from $3 million for the three months ended
March 31, 2019 to $19 million for the three months ended March 31, 2020 as a
result of our acquisition of Antero Midstream Partners on March 12, 2019.
Income tax benefit. Income tax benefit increased from income tax benefit of $2
million for the three months ended March 31, 2019 to $145 million for the three
months ended March 31, 2020. The income tax benefit for the three months ended
March 31, 2020 was primarily due to the loss before income taxes for the three
months ended March 31, 2020 coupled with an $11 million benefit related to the
carryback of NOLs to prior tax years. This carryback generated a federal income
tax receivable of $55 million. This receivable is a result of a provision
included in the CARES Act that allows corporations with NOLs incurred in 2018,
2019 and 2020 to carryback such NOLs to each of the five years preceding the
year of the NOLs, beginning with the earliest year in which there is taxable
income, and claim an income tax refund in the applicable carryback years. The
income tax receivable account is classified as a current asset on the balance
sheet.
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Segment 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, 2019.
The pro forma segment results of operations and the pro forma operations data
for the three months ended March 31, 2019 have been prepared to give pro forma
effect to the Transactions as if they had occurred on January 1, 2019. For the
three months ended March 31, 2020, 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
the finalized purchase price allocation for the acquisition of Antero Midstream
Partners. 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, 2019, 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, 2019. 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 March 31,
2019
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