Antero Midstream Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Although the request references 2022 Q4, this filing reports full-year results, with year-end balance-sheet figures. Antero Midstream owns gathering, compression and water-handling infrastructure, primarily serving Antero Resources in the Appalachian Basin.
Financial results and liquidity
- Revenue: $920.0 million, up 2.4% from $898.2 million in 2021. Water-handling revenue rose 15% to $213.8 million; gathering and processing revenue declined 1% to $706.2 million. Substantially all revenue was from Antero Resources.
- Profit: Operating income was $539.5 million versus $555.3 million; net income was $326.2 million, down 1.6% from $331.6 million. Diluted EPS was $0.68 versus $0.69. Reported operating and net margins were approximately 58.6% and 35.5%, respectively.
- Adjusted EBITDA: $884.2 million, up 1% from $876.4 million. This is a non-GAAP measure; the company cautions it is not a substitute for GAAP results.
- Cash flow: Operating cash flow was $699.6 million, versus $709.8 million. Investing cash use was $493.8 million, including $216.7 million for acquired assets. Financing cash use was $205.8 million. Cash was zero at year-end.
- Capital spending and distributions: The company reported 2022 capital expenditures of $265 million, net of a $17 million Joint Venture return of capital. It paid $433.4 million in common and preferred dividends, including $0.90 per common share. The board declared a further $0.225-per-share quarterly dividend, paid in February 2023.
- Debt and liquidity: Total debt principal was $3.382 billion, including $782 million drawn on the $1.25 billion revolving facility; $468 million remained available. The company was in compliance with applicable credit-facility covenants at year-end. Management said available resources were expected to cover needs for at least the next 12 months.
- Interest and tax: Net interest expense increased 8% to $189.9 million. The revolver’s year-end weighted-average rate was 6.17%, compared with 1.81% a year earlier. Income tax expense was $117.5 million. Federal and state NOL carryforwards were approximately $415 million and $478 million, respectively.
Material changes versus 2021
- Water-handling revenue increased with higher fresh-water and other-fluid-handling volumes and CPI-related fee increases. Operating costs also rose: direct operating expenses increased 15% to $180.3 million, reflecting higher volumes, labor, fuel, chemicals, maintenance and other inflation-related costs.
- Gathering and processing revenue was pressured by $48 million of low-pressure gathering fee rebates, versus $12 million in 2021. The rebate program expires at the end of 2023.
- The company acquired Marcellus gathering and compression assets from Crestwood for $205 million and Utica compression assets from EnLink for $10 million, before closing adjustments. The acquisitions were funded with revolver borrowings and added approximately 1.08 Bcf/d of compression capacity; acquired-asset throughput was about 300 MMcf/d at year-end.
- Depreciation rose 21% to $131.8 million, including costs associated with phased retirement of an underutilized compressor station. Interest expense increased as benchmark rates and revolver borrowings rose.
- Common dividends paid declined to $433 million from $472 million. The $2022 share-repurchase program had no open-market repurchases in the fourth quarter; reported share purchases were for employee tax withholding.
Outlook, risks and unusual items
- Capital outlook: The 2023 capital budget is $195 million to $215 million. Management says spending may be adjusted for Antero Resources’ plans, commodity prices, financing availability, costs and other conditions. Antero Resources announced a 2023 drilling and completion budget of $875 million to $925 million and plans for 75 to 80 gross Appalachian wells.
- Customer concentration: Antero Resources owns 29.1% of Antero Midstream and accounts for substantially all revenue. Its production, development plans, financial condition and ability to perform under contracts are key drivers of Antero Midstream’s volumes and cash flows.
- Contract and operating risks: Most gathering and compression agreements extend to 2038, and the water-services agreement to 2035, but not all services have minimum volume commitments. Other risks include inflation, rising rates, weather and operational disruptions, third-party infrastructure availability, regulation, environmental compliance and potential climate-related costs or lower demand.
- Veolia litigation: In January 2023, after the fiscal year-end, the court entered a $309.2 million judgment for Antero Treatment, including prejudgment interest, and ruled in Antero Defendants’ favor on Veolia’s affirmative claims. The award also includes costs and attorneys’ fees to be determined separately. The judgment remained subject to appeal and post-judgment proceedings. The filing states that no litigation, environmental or other contingency liabilities were recorded at year-end; investors should not assume the judgment was recognized as 2022 income.
- Other unusual items: The Clearwater wastewater facility remains idled and incurred $4.2 million of care-and-maintenance costs in 2022. The filing describes prior impairment charges related to the facility and reports no material environmental-compliance or remediation expenditures in 2022.
- Audit and controls: KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified lease classification for ongoing modifications to gathering and compression assets as a critical audit matter involving significant judgment.
Important facts for investors to verify
- Whether Antero Resources’ 2023 drilling and completion activity sustains gathering throughput and water-service demand, and whether the acquired assets’ spare capacity is utilized.
- The effect of the gathering-fee rebate program’s expiration after 2023 on realized fees and revenue.
- Debt costs, revolver availability, covenant headroom and refinancing requirements, particularly the facility’s potential November 2025 maturity if 2026 notes remain outstanding.
- The appeal and collection status of the Veolia judgment, and any subsequent accounting treatment, legal costs or cash proceeds.
- Whether the 2023 capital budget and quarterly dividends remain supportable from operating cash flow after debt service and investment needs.