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 nine months ended September 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 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.
36
Table of Contents
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.
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
continue to operate in 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.
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 and Europe, coupled with lower refinery liquefied
petroleum gas ("LPG") production from refineries in the U.S., Europe, and Asia
during the second quarter, provided support for international LPG prices
relative to oil. Further, reductions in OPEC+ and North American oil production
and the associated NGL volumes are expected to have a supportive effect on
propane and butane prices through the remainder of 2020 and into 2021. During
the three and nine months ended September 30, 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 experienced any significant
interruptions. The industry continues to experience storage capacity constraints
for 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
thereof, 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. For example, Antero
Resources has indicated that it has the ability to shut-in rich gas wells and
still produce from its 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 its condensate storage capacity within the basin.
However, any production curtailments or shut-ins by Antero Resources or our
other customers will reduce throughput for our gathering and processing systems.
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.
37
Table of Contents
In addition, Antero Resources announced in April 2020 that it had reduced its
drilling and completion capital budget for 2020 by approximately 34% since the
beginning of the year. Antero Resources continues to monitor its five-year
drilling plan and has indicated it will make further revisions as appropriate.
Reducing its 2020 capital budget may impact production levels in 2021 and
forward to the extent fewer wells are brought online, which will directly impact
our throughput and cash flows for the same time periods.
During the first quarter of 2020 and the two preceding quarters, we recognized
various impairment charges related to certain freshwater delivery system assets
and fully impaired our Clearwater Facility and goodwill. 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.
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES
Act") was enacted. The CARES Act allows corporations with net operating losses
("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,
we were able to recognize an income tax refund receivable in March 2020 of $55
million, including $11 million in income tax benefit for the current year and
$44 million of previously recognized deferred income tax benefit. As of
September 30, 2020, we had received $39 million of this refund.
The COVID-19 pandemic, commodity market volatility and resulting financial
market instability are variables beyond our control and may adversely impact our
generation of funds from operating cash flows, distributions from unconsolidated
affiliates, available borrowings under our Credit Facility and our ability to
access the capital markets.
Financial Results as Reported
The financial results of the Company for the nine months ended September 30,
2020 are not comparative to the nine months ended September 30, 2019 due to the
closing of the Transactions on March 12, 2019. The results for the nine months
ended September 30, 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 September 30, 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 nine
months ended September 30, 2019, 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."
For the three months ended September 30, 2019, we recognized net loss of $289
million. For the three months ended September 30, 2020, we recognized net income
of $106 million. For the three months ended September 30, 2019 and 2020, we
generated cash flows provided by operations of $178 million and $185 million,
respectively.
For the nine months ended September 30, 2019 and 2020, we recognized net loss of
$211 million and $199 million, respectively. For the nine months ended
September 30, 2019 and 2020, we generated cash flows provided by operations of
$430 million and $547 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 September 30, 2020. The dividend will
be payable on November 12, 2020 to stockholders of record as of October 29,
2020. Our Board of Directors also declared a $138 thousand cash dividend on our
shares of Series A Preferred Stock to be paid on November 16, 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. We announced a reduction to our
2020 capital budget to a range of $200 million to $210 million from our
previously revised budget range of $200 million to $215 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.
38
Table of Contents
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 COVID-19 global health 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. In light of the uncertain market conditions
impacting the energy industry, Antero 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 nine months ended September 30, 2020, our capital expenditures were
approximately $190 million, including $130 million of expansion capital, $35
million of maintenance capital and $25 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 $19
For the three months ended September 30, 2020, Antero Resources delivered low
pressure gathering volumes of 3,051 MMcf/d, which resulted in a fee reduction of
$12 million during the period. For the nine months ended September 30, 2020, we
provided Antero Resources an aggregate of $36 million in fee reductions.
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 September 30,
2020, lender commitments under the Credit Facility were $2.13 billion, with a
letter of credit sublimit of $150 million. At September 30, 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 nine months ended September 30, 2020 discussed
below are not comparable to our financial results for the nine months ended
September 30, 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 nine months ended
at September 30, 2020 includes the results of Antero Midstream Partners for the
entire period. The historical unaudited condensed consolidated statements of
39
Table of Contents
operations and comprehensive income and cash flows for the nine months ended
September 30, 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.
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
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30,
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) decreased 8% from $32 million for
the nine months ended September 30, 2019 to $29 million for the nine months
ended September 30, 2020 primarily due to cost reduction efforts, partially
offset by the inclusion of general and administrative expenses of Antero
Midstream Partners after the completion of the Transactions on March 12, 2019.
Equity-based compensation decreased from $53 million for the nine months ended
September 30, 2019 to $10 million for the nine months ended September 30, 2020
due to the Exchanged B Units that were fully vested on December 31, 2019.
Impairment of goodwill expense. Impairment of goodwill expense of $44 million
for the nine months ended September 30, 2019 was for goodwill associated with
the Clearwater Facility. Impairment of goodwill expense of $575 million for the
nine months ended September 30, 2020 was for goodwill that was associated with
our gathering system as a result of declines in commodity prices and the
industry environment.
Impairment of property and equipment expense. Impairment of property and
equipment expense of $408 million for the nine months ended September 30, 2019
was primarily due to the idling of the Clearwater Facility. Impairment of
property and equipment expense of $90 million for the nine months ended
September 30, 2020 was primarily due to the impairment of fresh water delivery
assets in the Utica Shale region.
Impairment of customer relationship expense. Impairment of customer relationship
expense of $6 million for the nine months ended September 30, 2019 reflects an
impairment of the customer relationships associated with the idled Clearwater
Facility.
Depreciation expense. Depreciation expense increased from $69 million for the
nine months ended September 30, 2019 to $82 million for the nine months ended
September 30, 2020 as a result of our acquisition of Antero Midstream Partners
on March 12, 2019.
Interest expense. Interest expense increased from $74 million for the nine
months ended September 30, 2019 to $107 million for the nine months ended
September 30, 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 loss. Total operating loss was $206 million for the nine months ended
September 30, 2019 and $233 million for the nine months ended September 30,
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, partially offset by higher gathering and processing revenues and
lower equity-based compensation charges.
40
Table of Contents
Equity in earnings of unconsolidated affiliates. Equity in earnings of
unconsolidated affiliates increased from $35 million for the nine months ended
September 30, 2019 to $63 million for the nine months ended September 30, 2020
as a result of our acquisition of Antero Midstream Partners on March 12, 2019
and an increase in the level of operations at the Joint Venture in 2020.
Income tax benefit. Income tax benefit for the nine months ended September 30,
2019 was $34 million. Income tax benefit for the nine months ended
September 30, 2020 was $78 million primarily due to the loss before income taxes
for the nine months ended September 30, 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, of which $39 million had been
received as of September 30, 2020. This carryback is a result of a provision
included in the CARES Act that 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 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.
Segment Results of Operations
Actual segment results of operations and operations data have been presented for
the three months ended September 30, 2019 and 2020 and the nine months ended
September 30, 2020. We have also provided pro forma segment results of
operations and pro forma operations data for the nine months ended September 30,
2019, which have been prepared to give pro forma effect to the Transactions as
if they had occurred on January 1, 2019. 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.
41
Table of Contents
© Edgar Online, source Glimpses