Antero Midstream GP LP — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The filing reports the pre-IPO results of Antero Resources Midstream Management LLC, converted to Antero Midstream GP LP on May 4, 2017. The IPO closed May 9, 2017. The company is a holding entity whose income comes solely from incentive distribution rights (IDRs) in Antero Midstream Partners LP (NYSE: AM); it is not the midstream operating partnership.
Financial results and position
Amounts below are in millions unless stated otherwise. The company’s income reflects IDR distributions earned, rather than revenue from operating midstream assets.
| Metric | Q1 2016 | Q1 2017 |
|---|---|---|
| Equity in earnings of Antero Midstream / total income | $1.85 | $11.55 |
| General and administrative expense | $0.04 | $2.10 |
| Equity-based compensation expense | — | $8.32 |
| Income before income taxes | $1.81 | $1.13 |
| Income tax provision | $0.70 | $4.43 |
| Net income (loss) | $1.11 | $(3.30) |
| Cash from operating activities | $0.85 | $7.15 |
- Cash and liquidity: Cash was $16.76 million at March 31, 2017, versus $9.61 million at December 31, 2016. Current assets were $17.04 million and current liabilities $13.30 million. The balance sheet reports no debt for this entity.
- Other balance sheet items: Investment in Antero Midstream was $11.55 million; members’ equity was $14.65 million. Current liabilities included $11.10 million of income taxes payable.
- Margins: The filing does not present operating margins for the holding entity. For the investee, Antero Midstream reported Q1 2017 revenue of $174.77 million, operating income of $81.70 million, and net income of $75.09 million; its operating margin was approximately 46.7% and net margin approximately 43.0%.
Changes versus the prior comparable period
- IDR-related income rose to $11.55 million from $1.85 million, reflecting Antero Midstream’s per-unit distribution increasing to $0.30 for Q1 2017 from $0.235 for Q1 2016.
- Despite the increase in income, the company moved from $1.11 million net income to a $3.30 million net loss, primarily because of $8.32 million of equity-based compensation, higher IPO-related G&A, and increased income tax expense.
- Operating cash flow increased to $7.15 million from $0.85 million, primarily due to higher IDR distributions received. No investing or financing cash flows were reported in either period.
- Antero Midstream’s own Q1 revenue increased to $174.77 million from $136.07 million, and net income increased to $75.09 million from $42.92 million.
Outlook, risks and unusual items
- The filing provides no specific financial guidance. Management cautions that Q1 results are not necessarily indicative of full-year results and that historical trends may not predict future performance.
- The company says it receives at least 94% of cash distributions paid on Antero Midstream’s IDRs. Its cash generation therefore depends on Antero Midstream’s distributions, which in turn depend substantially on Antero Resources’ production, drilling and development activity.
- Key stated risks include commodity-price volatility, production and development uncertainty, access to capital, operating and environmental risks, regulation, and Antero Midstream’s ability to execute its plans. Antero Midstream’s report is incorporated by reference for additional operating, market-risk and risk-factor detail.
- The $8.32 million Q1 equity-compensation charge was noncash. The filing reports $91.5 million of unamortized compensation cost expected to be recognized over the next 2.75 years. The awards include Series B interests tied to future IDR distributions and company equity value.
- IDR distributions earned through May 9, 2017 were or would be distributed to the former owner, Antero Investment, net of applicable taxes and IPO expenses. All Q1 2017 cash distributions had been made to Antero Investment.
- The company reported no material litigation, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. It stated that disclosure controls were effective as of March 31, 2017.
Important facts for investors to verify
- Review Antero Midstream’s Q1 2017 filing, incorporated by reference, for its debt, liquidity, capital spending, operating performance and risks; those factors drive this entity’s IDR income.
- Confirm the post-IPO distribution policy and the timing and amount of cash distributions actually available to AMGP shareholders, given that pre-IPO distributions went to Antero Investment.
- Assess the expected expense and dilution implications of the $91.5 million unamortized Series B compensation balance and the separate 2017 LTIP.
- Evaluate the sustainability of IDR distributions against Antero Midstream’s distribution thresholds and Antero Resources’ production and development plans.
- Review tax liabilities and the effects of nondeductible equity compensation and IPO expenses on the unusually high Q1 tax provision.