Item 7. Management’s Discussion and Analysis
Item 7. 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 consolidated financial statements and related notes included elsewhere in this report. The information provided below supplements, but does not form part of, our 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.
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 consolidated balance sheets of Antero Midstream Corporation as of December 31, 2019 and 2020 include the financial position of Antero Midstream Partners and its subsidiaries and the consolidated statements of operations
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and comprehensive income and cash flows for the three years ended December 31, 2020 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 Appalachian Basin and present opportunities to expand our midstream services to other operators in the Appalachian Basin. 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 Appalachian Basin in West Virginia and Ohio. Our assets also include two independent water handling systems that deliver fresh water from the Ohio River and several regional waterways, which portions of these systems are also utilized to transport flowback and produced water. These water handling systems consist of permanent buried pipelines, surface pipelines and fresh water storage facilities, 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.
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 into 2021. During the year ended December 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 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
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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.
In addition, Antero Resources announced in April 2020 that it had reduced its drilling and completion capital budget for 2020 by approximately 34%. 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 years ended December 31, 2019 and 2020, 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 December 31, 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.
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 volumes. We cannot predict to what extent our business would be impacted by lower commodity prices and any resulting impact on Antero Resources’ operations.
2021 Capital Investment
During 2021, we plan to expand our existing Appalachian Basin gathering, compression and water handling infrastructure to accommodate Antero Resources’ announced development plans. Antero Resources’ announced 2021 consolidated drilling and completion budget of $590 million. Antero Resources announced that it plans to operate three drilling rigs and complete between 65 and 70 horizontal wells, substantially all of which are located on acreage dedicated to us. A further or extended decline in commodity prices could cause some of the development and production projects of Antero Resources or third parties to be uneconomic or less profitable, which could reduce gathering and water handling volumes in our current and future potential areas of operation. Those reductions in gathering and water handling volumes could reduce our revenue and cash flows and adversely affect our ability to return capital to holders of our common stock.
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Return of Capital Program
On August 12, 2019, our Board authorized a share repurchase program to opportunistically repurchase up to $300 million of shares of our outstanding common stock. On February 10, 2021, our Board extended this program through June 30, 2023. During the year ended December 31, 2020, we repurchased 8 million shares for approximately $25 million under this program. We currently have approximately $150 million of share repurchase capacity remaining under this program.
On January 20, 2021, the Board declared a cash dividend on the shares of our common stock of $0.3075 per share for the quarter ended December 31, 2020. The dividend will be payable on February 11, 2021 to stockholders of record as of February 3, 2021.
The Board also declared a cash dividend of $138 thousand on the Series A Preferred Stock to be paid on February 16, 2021 in accordance with the terms of the Series A Preferred Stock, which are discussed in Note 14—Equity and Earnings Per Common Share to our consolidated financial statements
Sources of Our Revenues
Our gathering and compression revenues are driven by the volumes of natural gas we gather and compress, and our water handling revenues are driven by quantities of fresh water delivered to our customers to support their well completion operations and produced water treated. Pursuant to our long-term contracts with Antero Resources, we have secured long-term dedications covering a significant portion of Antero Resources’ current and future acreage for gathering and compression services. We have also entered into a long-term water services agreement covering Antero Resources’ 515,000 net acres in West Virginia and Ohio, with a right of first offer on all future areas of operation. Under the agreement, we receive a fixed fee for all fresh water deliveries by pipeline directly to the well site, subject to annual CPI adjustments. In addition, we also provide fluid handling services for flowback and produced water, including blending, storage and transportation operations. These operations, along with our fresh water delivery systems, support well completion and production operations for Antero Resources. These services are provided by us directly or through third-parties with which we contract. For flowback and produced water services provided by third-parties, Antero Resources reimburses our third-party out-of-pocket costs plus 3%. For flowback and produced water services provided by us, we charge Antero Resources a cost of service fee . The initial term of the water services agreement runs to 2035. All of Antero Resources’ existing acreage is dedicated to us for gathering and compression services except for existing third-party commitments. Approximately 135,000 gross leasehold acres characterized by dry gas and liquids-rich production have been previously dedicated to third-party gatherers.
Our gathering and compression operations are substantially dependent upon natural gas and oil production from Antero Resources’ upstream activity in its areas of operation. In addition, there is a natural decline in production from existing wells that are connected to our gathering systems. Although we expect that Antero Resources will continue to devote substantial resources to the development of oil and gas reserves, we have no control over this activity and Antero Resources has the ability to reduce or curtail such development at its discretion.
Our water handling operations are substantially dependent upon the number of wells drilled and completed by Antero Resources, as well as Antero Resources’ production. As of December 31, 2020, Antero Resources had disclosed estimated net proved reserves 17.6 Tcfe, of which 57% was natural gas, 42% were NGLs and 1% was oil. As of December 31, 2020, Antero Resources’ drilling inventory consisted of 2,133 identified potential horizontal well locations, approximately 1,531 of which were located on acreage dedicated to us, providing us with significant opportunity for growth as Antero Resources’ drilling program continues and its production increases.
How We Evaluate Our Operations
We use a variety of financial and operational metrics to evaluate our performance. These metrics help us identify factors and trends that impact our operating results, profitability and financial condition. The key metrics we use to evaluate our business are provided below.
Adjusted EBITDA
We use Adjusted EBITDA as a performance measure to assess the ability of our assets to generate cash sufficient to pay interest costs, support indebtedness and return capital to stockholders. Adjusted EBITDA is a non-GAAP financial measure. See “ Item 6. Selected Financial Data— Non-GAAP Financial Measures” below for more information regarding this financial measure, including a reconciliation to its most directly comparable GAAP measure.
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Gathering and Compression Throughput
We must continually obtain additional supplies of natural gas and oil to maintain or increase throughput on our systems. Our ability to maintain existing supplies of natural gas and oil and obtain additional supplies is primarily impacted by our acreage dedication and the level of successful drilling activity by Antero Resources and the potential for acreage dedications with and successful drilling by third-party producers. Any increase in our throughput volumes over the near term will likely be driven by Antero Resources continuing its drilling and development activities on its Appalachian Basin acreage.
Water Handling Volumes
Our fresh water volumes are primarily driven by hydraulic fracturing activities conducted as part of well completions. Our treatment volumes are primarily driven by produced water volumes, which are a function of Antero Resources’ production. Other fluid handling volumes are driven by hydraulic fracturing activities and produced water volumes. Antero Resources’ consolidated acreage positions allow us to provide fresh water and other fluid handling services for Antero Resources’ completion activities in a more efficient manner. However, to the extent that Antero Resources’ drilling and completion schedule is not met, or Antero Resources uses less fresh water and other fluid handling services in its well completion operations than expected (for example, due to a reduction in completions), and production declines, our water volumes may decline.
Principal Components of Our Cost Structure
The following items are the primary components of our operating expenses.
● Direct Operating. We seek to maximize the profitability of our operations in part by minimizing, to the extent appropriate, expenses directly tied to operating and maintaining our assets. We schedule and conduct maintenance over time to avoid significant variability in our direct operating expense and minimize the impact on our cash flow. Gathering and compression operating costs consist primarily of labor, water disposal, pigging, fuel, monitoring, repair and maintenance, utilities and contract services. Gathering and compression operating costs vary with the miles of pipeline and number of compressor stations in our gathering and compression system. Fresh water operating expenses consist primarily of labor, pigging, monitoring, repair and maintenance and contract services. Fresh water operating costs vary with the miles of pipeline, number of pumping stations and to a lesser extent the number of well completions in the Appalachian Basin for which we deliver fresh water and number of impoundments in our fresh water system. Other water handling costs, which include the costs related to water blending, relate to contract services performed by us and third parties. Our other water handling costs consist of labor, monitoring and repair and maintenance costs. Wastewater treatment costs vary directly with the water volumes treated, and the operating efficiency of the Clearwater Facility which was idled in September 2019 for the foreseeable future. The other primary drivers of our direct operating expense include maintenance and contract services, regulatory and compliance expense and ad valorem taxes.
● General and Administrative. Our general and administrative expenses include direct charges and costs charged by Antero Resources. These costs relate to: (i) various business services, including payroll processing, accounts payable processing and facilities management, (ii) various corporate services, including legal, accounting, treasury, information technology and human resources and (iii) compensation, including certain equity-based compensation. These expenses are charged to the Company based on the nature of the expenses and are apportioned based on a combination of the Company’s proportionate share of gross property and equipment, capital expenditures and labor costs, as applicable. Management believes these allocation methodologies are reasonable.
Our general and administrative expenses also 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 “AM LTIP”) and (iii) Series B Exchange. As of December 31, 2020, there were no unvested awards related to the AMGP LTIP or Series B Exchange.
● Impairment . We evaluate our long- lived assets for impairment when events or changes in circumstances indicate that the related carrying values of the assets may not be recoverable. If the carrying values of the assets are deemed not recoverable, the carrying values are reduced to their estimated fair value. In 2019, our impairment expense primarily related to (i) the Clearwater Facility, which was idled in the third quarter of 2019 and (ii) the impairment of goodwill associated with the fresh water delivery and services reporting unit. In 2020, our impairment expense primarily related to (i) the impairment of
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goodwill associated with our gathering and processing reporting unit and (ii) the fresh water delivery assets in the Utica Shale region.
● Depreciation. Depreciation consists of our estimate of the decrease in value of the assets capitalized in property and equipment as a result of using the assets throughout the applicable year. Depreciation is computed over the asset’s estimated useful life using the straight-line basis. See Note 8 — Property and Equipment to our consolidated financial statements for additional information on our asset classes and estimated lives of our assets.
● Interest. From January 1, 2019 through March 12, 2019, interest expense related to interest incurred on borrowings under AMGP’s credit facility, which was terminated on March 12, 2019 in connection with the Transactions. Following the closing of the Transactions on March 12, 2019, interest expense represented interest related to: (i) borrowings under our revolving credit facility, (ii) borrowings of $650 million under our 5.375% senior notes due September 15, 2024 (the “2024 Notes”), (iii) borrowings of $550 million of our 7.875% senior notes due May 15, 2026 (the “2026 Notes”), (iv) borrowings of $650 million of our 5.75% senior notes due March 1, 2027 (the “2027 Notes”), (v) borrowings of $650 million of our 5.75% senior notes due January 15, 2028 (the “2028 Notes”), (vi) operating leases and (vii) amortization of deferred financing costs incurred in connection with the revolving credit facility and the issuance of the 2024 Notes, 2026 Notes, 2027 Notes and 2028 Notes.
● Income tax expense . We are subject to state and federal income taxes but are currently not in a cash tax paying position with respect to state and federal income taxes. The difference between our financial statement income tax expense and our federal income tax liability is primarily due to the differences in the tax and financial statement treatment of our investment in Antero Midstream Partners. We have recorded deferred income tax benefit to the extent our deferred tax assets exceed our deferred tax liabilities. Our deferred tax assets result from temporary differences between tax and financial statement income primarily from goodwill impairment and net operating loss carryforwards. At December 31, 2020, we had approximately $211 million of U.S. federal net operating loss carryforwards (“NOLs”), and approximately $315 million of state NOLs. The amount of deferred tax assets considered realizable, however, could change in the near term as we generate taxable income or as estimates of future taxable income are reduced. See Note 9 — Income Taxes to our consolidated financial statements for a discussion of our deferred tax position and income tax expense.
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 fair value. Effective March 12, 2019, Antero Midstream commenced consolidating Antero Midstream Partners and its subsidiaries in the consolidated financial statements of Antero Midstream. As a result, our consolidated balance sheet as of December 31, 2019 includes the financial position of Antero Midstream Partners and its subsidiaries, and our consolidated statements of operations and comprehensive income and cash flows for the year ended December 31, 2019 include the results of operations of Antero Midstream Partners and its subsidiaries beginning on March 13, 2019.
The historical consolidated financial statements included herein are the financial statements of Antero Midstream, 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 consolidated financial statements for the year ended December 31, 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 in Exhibit 99.1 to this Annual Report on Form 10-K. The pro forma information presented below should be read in conjunction with the unaudited pro forma combined financial statements, which are filed as Exhibit 99.1 to this Annual Report on Form 10-K 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 .
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Results of Operations as Reported
Year Ended December 31, 2019 Compared to Year Ended December 31, 2020
Revenue and Direct Operating Expenses. Revenues from Antero Resources and direct operating expenses for the year ended December 31, 2019 reflect 294 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) decreased 12% from $45 million for the year ended December 31, 2019 to $39 million for the year ended December 31, 2020. The decrease was primarily due to cost reduction efforts, partially offset by 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 $74 million for the year ended December 31, 2019 to $13 million for the year ended December 31, 2020 due to the 17,353,999 shares of Antero Midstream common stock that were issued in exchange for the 98,600 Series B Units then outstanding (the “Exchanged B Units”) that were fully vested on December 31, 2019.
Impairment of goodwill expense. Impairment of goodwill expense of $340 million for the year ended December 31, 2019 reflects (i) $42 million of impairment of goodwill expense associated with the Clearwater Facility and (ii) $298 million of impairment of goodwill expense associated with our fresh water delivery and services reporting unit. Impairment of goodwill expense of $575 million for the year ended December 31, 2020 was associated with our gathering system due to declines in commodity prices and the general industry environment.
Impairment of property and equipment expense. Impairment of property and equipment expense of $410 million for the year ended December 31, 2019 was primarily due to the idling of the Clearwater Facility. Impairment of property and equipment expense of $98 million for the year ended December 31, 2020 was primarily due to the impairment of fresh water delivery assets in the Utica Shale region.
Impairment of customer relationships expense. Impairment of customer relationships expense of $12 million for the year ended December 31, 2019 reflects an impairment of the customer relationships that were associated with the idled Clearwater Facility.
Depreciation expense. Depreciation expense increased from $96 million for the year ended December 31, 2019 to $109 million for the year ended December 31, 2020 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 expense of $8 million for the year ended December 31, 2019 relates to the contingent consideration payment that was made in January 2020. No additional contingent consideration is expected to be paid.
Interest expense. Interest expense increased $37 million from $110 million for the year ended December 31, 2019 to $147 million for the year ended December 31, 2020 as a result of the acquisition of Antero Midstream Partners (which included the assumption of approximately $2.4 billion of debt) and Antero Midstream Partners’ issuance of the 2028 Notes in June 2019 and 2026 Notes in November 2020 .
Operating loss. Total operating loss decreased from a loss of $398 million for the year ended December 31, 2019 to $118 million for the year ended December 31, 2020. The decrease was due to (i) higher revenue and lower direct operating expenses and general and administrative expenses between periods as a result of the acquisition of Antero Midstream Partners on March 12, 2019 and cost reduction efforts and (ii) lower impairment of property and equipment and impairment of customer relationships for the year ended December 31, 2020 as compared to the same period in 2019, partially offset by higher impairment of goodwill expense for the year ended December 31, 2020 as compared to the same period in 2019.
Equity in earnings of unconsolidated affiliates. Equity in earnings of unconsolidated affiliates for the year ended December 31, 2019 represents AMGP’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 December 31, 2019. Equity in earnings in unconsolidated affiliates increased by $35 million from $51 million for the year ended December 31, 2019 to $86 million for the year ended December 31, 2020 primarily attributable to an increase in the level of operations at the Joint Venture during the year ended December 31, 2020.
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Income tax benefit (expense). Income tax benefit for the year ended December 31, 2019 was $102 million. Income tax benefit for the year ended December 31, 2020 was $56 million primarily due to the loss before taxes for the year ended December 31, 2020 coupled with an $11 million rate 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 December 31, 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 .
Year Ended December 31, 2018 Compared to Year Ended December 31, 2019
Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations” in our 2019 Annual Report on Form 10-K for a discussion of the results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2019.
Pro Forma 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 year ended December 31, 2019 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 final purchase price allocation for the acquisition of Antero Midstream Partners. 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, 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 combined financial statements, which are filed as Exhibit 99.1 to this Annual Report on Form 10-K.
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Pro Forma Segment Results of Operations for the year ended December 31, 2019
Pro Forma
Gathering and
Water
Pro Forma
Consolidated
(in thousands)
Processing
Handling
Adjustments
Unallocated (1)
Total
Year ended December 31, 2019
Revenues:
Revenue–Antero Resources
$
668,311
399,547
—
—
1,067,858
Revenue–third-party
—
101
—
—
101
Amortization of customer contracts
(29,850)
(27,160)
(13,864)
—
(70,874)
Total revenues
638,461
372,488
(13,864)
—
997,085
Operating expenses:
Direct operating
52,719
207,917
—
—
260,636
General and administrative (excluding equity-based compensation)
30,553
17,321
(15,345)
13,038
45,567
Equity-based compensation
7,105
3,063
—
65,826
75,994
Facility idling
—
11,401
—
—
11,401
Impairment of goodwill
—
340,350
—
—
340,350
Impairment of property and equipment
7,182
409,539
—
—
416,721
Impairment of customer relationships
—
11,871
—
—
11,871
Depreciation
47,974
69,259
3,130
—
120,363
Accretion and change in fair value of contingent acquisition consideration
—
10,004
—
—
10,004
Accretion of asset retirement obligations
—
250
—
—
250
Total operating expenses
145,533
1,080,975
(12,215)
78,864
1,293,157
Operating income (loss)
492,928
(708,487)
(1,649)
(78,864)
(296,072)
Other income (expenses):
Interest expense, net
—
—
(3,301)
(127,217)
(130,518)
Equity in earnings of unconsolidated affiliates
63,579
—
(1,185)
—
62,394
Income (loss) before taxes
556,507
(708,487)
(6,135)
(206,081)
(364,196)
Provision for income tax (expense) benefit
—
—
(23,346)
102,466
79,120
Net income (loss) and comprehensive income (loss)
$
556,507
(708,487)
(29,481)
(103,615)
(285,076)
Adjusted EBITDA (2)
$
829,558
(1) Corporate expenses that are not directly attributable to either the gathering and processing or water handling segments.
(2) Adjusted EBITDA is a non-GAAP financial measure. For a discussion of this measure, including a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, see “Item 6. Selected Financial Data— Non-GAAP Financial Measures ”.
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Segment Results of Operations for the year ended December 31, 2020
Gathering and
Water
Consolidated
(in thousands)
Processing
Handling
Unallocated (1)
Total
Year ended December 31, 2020
Revenues:
Revenue–Antero Resources
$
759,459
259,932
—
1,019,391
Gathering—low pressure rebate
(48,000)
—
—
(48,000)
Amortization of customer relationships
(37,086)
(33,586)
—
(70,672)
Total revenues
674,373
226,346
—
900,719
Operating expenses:
Direct operating
56,508
108,878
—
165,386
General and administrative (excluding equity-based compensation)
20,410
11,796
7,229
39,435
Equity-based compensation
9,489
2,388
901
12,778
Facility idling
—
15,219
—
15,219
Impairment of goodwill
575,461
—
—
575,461
Impairment of property and equipment
947
97,232
—
98,179
Depreciation
57,300
51,490
—
108,790
Accretion of asset retirement obligations
—
180
—
180
Loss on asset sale
2,689
240
—
2,929
Total operating expenses
722,804
287,423
8,130
1,018,357
Operating loss
(48,431)
(61,077)
(8,130)
(117,638)
Other income (expenses):
Interest expense, net
—
—
(147,007)
(147,007)
Equity in earnings of unconsolidated affiliates
86,430
—
—
86,430
Income (loss) before taxes
37,999
(61,077)
(155,137)
(178,215)
Provision for income tax benefit
—
—
55,688
55,688
Net income (loss) and comprehensive income (loss)
$
37,999
(61,077)
(99,449)
(122,527)
Adjusted EBITDA (2)
$
850,209
(1) Corporate expenses that are not directly attributable to either the gathering and processing or water handling segments.
(2) Adjusted EBITDA is a non-GAAP financial measure. For a discussion of this measure, including a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, see “Item 6. Selected Financial Data— Non-GAAP Financial Measures ”.
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The operating data below represents the operating data of Antero Midstream Corporation and its subsidiaries, including Antero Midstream Partners and its subsidiaries, for the years ended December 31, 2019 and 2020.
Year Ended
Amount of
December 31,
Increase
Percentage
2019 (1)
2020
or Decrease
Change
Operating Data:
Gathering—low pressure (MMcf)
963,799
1,069,822
106,023
11
%
Gathering—high pressure (MMcf)
948,496
1,058,119
109,623
12
%
Compression (MMcf)
866,912
991,726
124,814
14
%
Fresh water delivery (MBbl)
51,426
40,076
(11,350)
(22)
%
Treated water (MBbl)
7,137
—
(7,137)
*
Other fluid handling (MBbl)
19,495
20,945
1,450
7
%
Wells serviced by fresh water delivery
118
91
(27)
(23)
%
Gathering—low pressure (MMcf/d)
2,641
2,923
282
11
%
Gathering—high pressure (MMcf/d)
2,599
2,891
292
11
%
Compression (MMcf/d)
2,375
2,710
335
14
%
Fresh water delivery (MBbl/d)
141
109
(32)
(23)
%
Treated water (MBbl/d)
20
—
(20)
*
Other fluid handling (MBbl/d)
53
57
4
8
%
Average realized fees:
Average gathering—low pressure fee ($/Mcf)
$
0.33
0.33
—
*
Average gathering—high pressure fee ($/Mcf)
$
0.20
0.20
—
*
Average compression fee ($/Mcf)
$
0.19
0.20
0.01
5
%
Average fresh water delivery fee ($/Bbl)
$
3.89
3.96
0.07
2
%
Average treatment fee ($/Bbl)
$
4.51
—
(4.51)
*
Joint Venture Operating Data:
Processing—Joint Venture (MMcf)
385,402
523,739
138,337
36
%
Fractionation—Joint Venture (MBbl)
10,285
13,200
2,915
28
%
Processing—Joint Venture (MMcf/d)
1,056
1,431
375
36
%
Fractionation—Joint Venture (MBbl/d)
28
36
8
29
%
(1) Pro Forma.
Discussion of Results of Operations for the Year Ended December 31, 2019 (Pro Forma) Compared to Year Ended December 31, 2020
Revenues. Revenues decreased by 10% from $997 million, including the amortization of customer relationships of $71 million, for the year ended December 31, 2019 to $901 million, including the amortization of customer relationships of $71 million, for the year ended December 31, 2020. Gathering and processing revenues increased by 6%, from $638 million for the year ended December 31, 2019 to $674 million for the year ended December 31, 2020. Water handling revenues decreased by 39%, from $372 million for the year ended December 31, 2019 to $226 million for the year ended December 31, 2020. These fluctuations primarily resulted from the following:
Gathering and Processing
● low pressure gathering revenue decreased $8 million year over year due to $48 million in rebates to Antero Resources for achieving certain volumetric targets, partially offset by an increase in throughput volumes of 282 MMcf/d, which was due to 108 additional wells connected to our system during the year ended December 31, 2020;
● high pressure gathering revenue increased $25 million year over year due to an increase in throughput volumes of 292 MMcf/d, primarily as a result of the addition of one new high pressure gathering line placed in service and additional wells connected to our system during the year ended December 31, 2020; and
● compression revenue increased $26 million year over year due to an increase in throughput volumes of 335 MMcf/d, primarily due to the addition of one new compressor station that was placed in service and additional wells connected to our system during the year ended December 31, 2020.
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Water Handling
● fresh water delivery revenue decreased $42 million year over year due to a decrease in fresh water delivery of 32 MBbl/d, as a result of a decrease in the number of wells completed by Antero Resources due to its reduced drilling and completion program during the year ended December 31, 2020;
● revenue from the Clearwater Facility decreased $32 million year-over-year from $32 million for the year ended December 31, 2019 to zero during the year ended December 31, 2020 due to the idling of the Clearwater Facility in September 2019; and
● other fluid handling services revenue decreased $66 million primarily due to a $76 million decrease in services that are billed at cost plus 3% as a result of operational efficiencies associated with our flowback and produced wastewater services, which commenced in the fourth quarter of 2019, and cost reductions, partially offset by a $10 million increase in water blending services .
Direct operating expenses. Total direct operating expenses decreased from $261 million for the year ended December 31, 2019 to $165 million for the year ended December 31, 2020. Gathering and processing direct operating expenses increased by 7% from $53 million for the year ended December 31, 2019 to $57 million for the year ended December 31, 2020. The increase was primarily due to the cost associated with the new compressor station that came online in 2020 as well as higher throughput volumes between periods . Water handling direct operating expenses decreased 48% from $208 million for the year ended December 31, 2019 to $109 million for the year ended December 31, 2020. The decrease was primarily due to operational efficiencies associated with flowback and produced wastewater services .
General and administrative (excluding equity-based compensation) expenses. General and administrative expenses (excluding equity-based compensation expense) decreased by 13% from $46 million for the year ended December 31, 2019 to $39 million for the year ended December 31, 2020 primarily due to cost reduction efforts, partially offset by legal costs associated with the Clearwater Facility .
Equity-based compensation expenses. Equity-based compensation expenses decreased from $76 million for the year ended December 31, 2019 to $13 million for the year ended December 31, 2020 due to the Exchanged B Units that were fully vested on December 31, 2019 .
Impairment of goodwill expense. Impairment of goodwill expense of $340 million for the year ended December 31, 2019 reflects an impairment of the goodwill that was associated with the Clearwater Facility and the fresh water delivery and services reporting unit. Impairment of goodwill expense of $575 million for the year ended December 31, 2020 reflects an impairment of the goodwill that was associated with our gathering system due to declines in commodity prices and the general industry environment.
Impairment of property and equipment expense. Impairment of property and equipment expense of $417 million for the year ended December 31, 2019 was primarily for the idling of the Clearwater Facility and the decommissioning of assets related to a third-party compressor station. Impairment of property and equipment expense of $98 million for the year ended December 31, 2020 was primarily for the impairment of fresh water delivery assets in the Utica Shale region.
Impairment of customer relationships expense. Impairment of customer relationships expense of $12 million for the year ended December 31, 2019 reflects an impairment of the customer relationships that were associated with the Clearwater Facility.
Depreciation expense. Total depreciation expense decreased by 10%, from $120 million for the year ended December 31, 2019 to $109 million for the year ended December 31, 2020. The decrease was primarily due to assets that were impaired during the third quarter of 2019 and the first quarter of 2020, partially offset by additional gathering, compression and water handling assets placed in service in 2020.
Accretion and change in fair value of contingent acquisition consideration. Accretion expense of $10 million for the year ended December 31, 2019 relates to the contingent consideration payment that was made in January 2020. No additional contingent consideration is expected to be paid .
Interest expense. Interest expense increased by 13%, from $131 million for the year ended December 31, 2019 to $147 million for the year ended December 31, 2020 primarily due to an increase in interest expense incurred on (i) higher borrowings under the Credit Facility during 2020, (ii) the 2027 Notes that were issued during the first quarter of 2019, (iii) the 2028 Notes that were issued during the second quarter of 2019 and (iv) the 2026 Notes that were issued during the fourth quarter of 2020.
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Operating income (loss). Total operating loss was $296 million and $118 million the year ended December 31, 2019 and 2020, respectively. Gathering and processing operating income was $493 million for the year ended December 31, 2019. Gathering and processing operating loss was $48 million for the year ended December 31, 2020 primarily due to an impairment of goodwill. Water handling operating loss was $708 million for the year ended December 31, 2019 and $61 million for the year ended December 31, 2020 primarily due to impairment charges related to the Clearwater Facility and fresh water delivery assets in the Utica Shale region in 2019 and 2020, respectively.
Equity in earnings of unconsolidated affiliates. Equity in earnings in unconsolidated affiliates increased by 39%, from $62 million for the year ended December 31, 2019 to $86 million for the year ended December 31, 2020. 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 for the year ended December 31, 2020.
Net income (loss). Net loss was $285 million for the year ended December 31, 2019 primarily due to the impairments of property and equipment, goodwill and customer relationship for the Clearwater Facility. Net loss was $123 million for the year ended December 31, 2020 primarily due to impairment of goodwill associated with our gathering system and impairment of property and equipment of our freshwater delivery assets in the Utica Shale region .
Pro Forma Adjusted EBITDA. Pro Forma Adjusted EBITDA increased by 2%, from $830 million for the year ended December 31, 2019 to $850 million for the year ended December 31, 2020. The increase was primarily due to increased throughput and decreased direct operating expenses. 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 “ Item 6. Selected Financial Data— Non-GAAP Financial Measures.”
Capital Resources and Liquidity as Reported
Sources and Uses of Cash
Capital resources and liquidity are provided by operating cash flows, 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, expected quarterly cash dividends and share repurchases under our share repurchases program for at least the next 12 months.
In the year ended December 31, 2020, we paid dividends of $1.23 per share, or a total of $590 million, to holders of our common shares or common stock, as applicable, and we paid $550 thousand of dividends on our Series A Preferred Stock. On January 20, 2021, the Board declared a cash dividend on the shares of our common stock of $0.3075 per share for the quarter ended December 31, 2020 to be paid on February 11, 2021 to stockholders of record as of February 3, 2021. The Board also declared an aggregate cash dividend of $138 thousand on our Series A Preferred Stock to be paid on February 16, 2021. As of December 31, 2020, there were dividends in the amount of $69 thousand accumulated in arrears on our Series A Preferred Stock.
Cash Flows
The following table and discussion presents a summary of our net cash provided by operating activities, investing activities and financing activities for the periods indicated:
Year Ended December 31, 2020
(in thousands)
2018
2019
2020
Net cash provided by operating activities
$
83,531
622,387
753,382
Net cash used in investing activities
—
(525,675)
(219,231)
Net cash used in financing activities
(86,696)
(98,299)
(534,746)
Net decrease in cash and cash equivalents
$
(3,165)
(1,587)
(595)
Year Ended December 31, 2019 Compared to Year Ended December 31, 2020
Operating Activities. Net cash provided by operating activities was $622 million and $753 million for the years ended December 31, 2019 and 2020, respectively. The increase in net cash provided by operating activities for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily the result of higher gathering and processing revenues, lower
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direct operating and general and administrative costs and increased cash flows associated with the Merger between periods, partially offset by an increase in Clearwater Facility idling costs in 2020.
Investing Activities. Net cash flows used in investing activities was $526 million and $219 million for the years ended December 31, 2019 and 2020, respectively. The decrease in cash flows used in investing activities was due to a (i) $129 million decrease in investments made in unconsolidated affiliates, (ii) $109 million decrease in additions to our gathering system and (iii) $86 million decrease in additions to our water handling system. Additionally, cash flows provided by investing activities for the year ended December 31, 2019 included $620 million of cash received upon the acquisition of Antero Midstream Partners LP, which amount was borrowed by Antero Midstream Partners under the Credit Facility to fund, in part, $599 million of cash paid to Antero Midstream Partners unitholders as consideration in the Merger.
Financing Activities. Net cash used in financing activities was $98 million and $535 million for the years ended December 31, 2019 and 2020, respectively. Net cash used in financing activities for the year ended December 31, 2020 included: (i) issuance of the 2026 Notes of $550 million; (ii) total dividends to our common stockholders and preferred stockholders of $590 million; (iii) $346 million in net payments on the Credit Facility; (iv) $125 million (net of $8 million reflected in the cash flows provided by operating activities related to the accretion of fair value) paid to Antero Resources for the fair value of contingent acquisition consideration at the date of acquisition; (v) $25 million of common stock repurchases; and (vi) $6 million in deferred financing costs payments associated with the issuance of the 2026 Notes. Net cash used in financing activities for the year ended December 31, 2019 included: (i) issuance of the 2028 Notes of $650 million; (ii); total distributions or dividends to our common stockholders, holders of Series B Units and preferred stockholders of $496 million; (iii) $125 million in repurchases of common stock; (iv) net payments on the Credit Facility of $116 million and (v) $9 million of payments for deferred financing.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2019
Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Capital Resources and Liquidity” in our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of the cash flows for the year ended December 31, 2018 compared to the year ended December 31, 2019.
2020 Capital Investments and 2021 Capital Budget
Antero Midstream Partners’ capital spending for the year ended December 31, 2020 included investing activities of (i) $141 million to our gathering system, (ii) $41 million to our water handling system and (iii) $25 million invested in our Joint Venture.
The Board approved a 2021 capital budget with a range of $240 million to $260 million, which includes approximately $65 million of additional growth capital supporting the increased volumes expected from Antero Resources’ drilling partnership in addition to its previously disclosed maintenance capital program for 2021. 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.
Debt Agreements
Credit Facility
Antero Midstream Partners, as borrower (the “Borrower”), entered into a senior secured revolving credit facility (the “Credit Facility”) with a consortium of banks on October 26, 2017. 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 defined in the Credit Facility). The Credit Facility provides for borrowing under either the Eurodollar Rate or the Base Rate (as each term is defined in the Credit Facility).
The Credit Facility has lender commitments of $2.13 billion and matures on October 26, 2022. As of December 31, 2020, we had $614 million of borrowings and no letters of credit outstanding under the Credit Facility.
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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 125 to 225 basis points (subject to certain exceptions), depending on the leverage ratio 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 25 to 125 basis points (subject to certain exceptions) depending on the leverage ratio then in effect.
The Credit Facility is guaranteed by our subsidiaries and is secured by mortgages on substantially all of Antero Midstream Partners’ and its subsidiaries’ properties. 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;
● 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 (subject to certain exceptions):
● 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;
● 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, 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, 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 December 31, 2020.
Senior Notes
The following table summarizes the material terms of our senior unsecured notes as of December 31, 2020:
2024 Notes
2026 Notes
2027 Notes
2028 Notes
Outstanding principal (in thousands)
$
650,000
$
550,000
$
650,000
$
650,000
Interest rate
5.375
%
7.875
%
5.75
%
5.75
%
Maturity date
September 15, 2024
May 15, 2026
March 1, 2027
January 15, 2028
Interest payment dates
Mar. 15, Sept. 15
May 15, Nov. 15
Mar. 1, Sept. 1
Jan. 15, July 15
Make-whole redemption date (1)
September 15, 2022
May 15, 2025
March 1, 2025
January 15, 2026
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(1) On or after these dates, we may redeem the applicable series of senior notes, in whole or in part, at a redemption price equal to 100% of the principal amount redeemed, together with accrued and unpaid interest up to the redemption date. Prior to such date, we may, in certain circumstances, redeem the notes at a redemption price that includes an applicable premium as defined in the indentures to such notes.
Please refer to Note 10—Long-term Debt to the consolidated financial statements for more information on our senior notes.
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 December 31, 2020 is provided in the following table.
Year Ending December 31,
(in millions)
2021
2022
2023
2024
2025
Thereafter
Total
Credit Facility (1)
$
—
614
—
—
—
—
614
Senior notes—principal
—
—
—
650
—
1,850
2,500
Senior notes—interest
154
153
153
153
118
171
902
Asset retirement obligations
5
—
2
—
—
3
10
Total
$
159
767
155
803
118
2,024
4,026
(1) Includes outstanding principal amounts on the Credit Facility as of December 31, 2020. 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.
Critical Accounting Policies and Estimates
The following discussion relates to the critical accounting policies and estimates for both the Company and our Predecessor. 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 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 below. We believe these accounting policies reflect our more significant estimates and assumptions used in preparation of our financial statements. See Note 2—Summary of Significant Accounting Policies to our consolidated financial statements for a discussion of additional accounting policies and estimates made by management.
Fair Value Measurement
The FASB ASC Topic 820, Fair Value Measurements and Disclosures , clarifies the definition of fair value, establishes a framework for measuring fair value, and sets forth disclosure requirements 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 we estimate 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. Our 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.
Business Combination
We recognize and measure 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
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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, we 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.
We accounted for the Transactions under the acquisition method of accounting and estimated the fair value of assets acquired and liabilities assumed at March 12, 2019. In connection with the Transactions, the Company, among other things, issued shares of common stock valued at the closing market price of the common shares at the effective time of the Transactions, which was a Level 1 measurement.
We used the discounted cash flow approach, which is an income statement technique, to estimate the fair value of the customer relationships and investments in unconsolidated affiliates using a weighted-average cost of capital of 14.1%, which is based on significant inputs not observable in the market, and thus represents a Level 3 measurement within the fair value hierarchy. We also used this approach in combination with the cost approach to estimate the fair value of property and equipment whereby certain property and equipment was adjusted for recent purchases of similar items, economic and functional obsolescence, location, normal useful lives and capacity (if applicable). To estimate the fair value of the long-term debt, we used Level 2 market data inputs.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. We test goodwill for impairment annually in the fourth quarter and when events or changes in circumstances indicate that the fair value of a reporting unit with goodwill has been reduced below its 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 excess of the book value over the fair value of goodwill is charged to net income as an impairment expense.
We utilized a combination of approaches to estimate the fair value of our assets including the discounted cash flow approach, comparable company method and the cost approach, whereby certain property and equipment was adjusted for recent purchases of similar items, economic and functional obsolescence, location, normal useful lives and capacity (if applicable). We performed our fourth quarter of 2019 and first quarter of 2020 quantitative analysis using a weighted-average cost of capital of 10.0% and 18.0%, respectively, which is based on significant inputs not observable in the market, and thus represents a Level 3 measurement within the fair value hierarchy.
Property and Equipment
Property and equipment primarily consists of gathering pipelines, compressor stations and the Clearwater Facility. We evaluate our 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 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.
We utilized a discounted cash flow approach to estimate the fair value of our assets. We performed our first quarter of 2020 quantitative analysis using a weighted-average cost of capital of 19.0%, which is based on significant inputs not observable in the market, and thus represents a Level 3 measurement within the fair value hierarchy.
Contingent Acquisition Consideration
In connection with our September 2015 acquisition of certain water treatment assets, we agreed to pay Antero Resources (a) $125 million in cash if we delivered 176 million barrels or more of fresh water during the period between January 1, 2017 and December 31, 2019 and (b) 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. This contingent consideration liability is valued based on Level 3 inputs related to the expected average volumes and weighted average cost of capital and was recorded at the time of such acquisition in
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accordance with accounting guidance for business combinations. In January 2020, Antero Midstream Partners paid Antero Resources $125 million and, as of December 31, 2020, no additional contingent acquisition consideration was earned.
General and Administrative and Equity-Based Compensation Costs
General and administrative costs are charged or allocated to us based on the nature of the expenses and are allocated based on our proportionate share of Antero Resources’ gross property and equipment, capital expenditures and labor costs, as applicable. These allocations are based on estimates and assumptions that management believes are reasonable.
Equity-based compensation grants are measured at their grant date fair value and related compensation cost is recognized over the vesting period of the grant. Compensation cost for awards with graded vesting provisions is recognized on a straight-line basis over the requisite service period of each separately vesting portion of the award. Estimating the fair value of each award requires management to apply judgment.
Equity-based compensation expenses that are subject to allocation as described in “—Principal Components of our Cost Structure,” are allocated to us based on our proportionate share of Antero Resources’ labor costs. These allocations are based on estimates and assumptions that management believes are reasonable.
New Accounting Pronouncements
There were no new accounting pronouncements issued during the year ended December 31, 2020 that had or are expected to have a material effect on the Company’s financial reporting.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not have any off-balance sheet arrangements.
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