Antero Midstream Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are included below where useful. Antero Midstream provides gathering, compression, processing-related and water-handling services, primarily in Appalachia. Substantially all revenue comes from Antero Resources, which owned 29.2% of the company at year-end.
Key financial results
| Metric | FY2020 | Comparable period and change |
|---|---|---|
| Revenue | $900.7 million | Down 10% from FY2019 pro forma revenue of $997.1 million |
| Net loss | $122.5 million; $(0.26) per share | FY2019 pro forma net loss was $285.1 million; comparisons are affected by large impairment charges |
| Adjusted EBITDA | $850.2 million | Up 2% from FY2019 pro forma $829.6 million; non-GAAP |
| Cash from operating activities | $753.4 million | Up from reported FY2019 $622.4 million; reported FY2019 includes only results after the March 2019 merger, so it is not directly comparable |
| Cash used in investing activities | $219.2 million | Compared with $525.7 million in FY2019 |
| Capital spending | $182 million: $141 million expansion and $41 million maintenance | Additionally invested $25 million in unconsolidated affiliates |
| Debt | $3.114 billion principal; $3.092 billion carrying value | Up from $2.910 billion principal at year-end 2019 |
| Cash and liquidity | $0.6 million cash; $93.9 million current assets and $94.0 million current liabilities | $613.5 million drawn on a $2.13 billion revolving facility, leaving approximately $1.52 billion of commitments undrawn before other availability conditions |
Reported operating loss was $117.6 million, including $673.6 million of impairment charges. Adjusted EBITDA was approximately 94% of revenue, a derived ratio that should be interpreted cautiously because Adjusted EBITDA is a non-GAAP measure that includes distributions from affiliates. The filing does not present this ratio as a company-reported margin.
In the fourth quarter of 2020, revenue was $203.9 million, operating income was $115.0 million, net income was $76.5 million and diluted earnings per share were $0.16. In fourth-quarter 2019, revenue was $239.1 million, operating loss was $192.6 million and net loss was $144.6 million. The year-over-year earnings comparison reflects the timing and size of impairment charges.
Changes versus the prior comparable period
- On a pro forma basis, gathering and processing revenue increased 6% to $674.4 million, while water-handling revenue declined 39% to $226.3 million. Total revenue fell 10%.
- Gathering throughput increased: average low-pressure volumes rose 11% to 2,923 MMcf/d, high-pressure volumes rose 11% to 2,891 MMcf/d and compression volumes rose 14% to 2,710 MMcf/d.
- Fresh-water delivery volumes declined 23% to 109 MBbl/d, and serviced wells fell from 118 to 91. Treated-water volumes were zero after the Clearwater Facility was idled in 2019.
- Direct operating expenses declined to $165.4 million from $260.6 million pro forma, principally due to water-handling operating efficiencies. General and administrative expense, excluding equity compensation, declined 13% to $39.4 million.
- Goodwill impairment was $575.5 million in 2020, compared with $340.4 million in 2019. Property and equipment impairment was $98.2 million in 2020, compared with $416.7 million pro forma in 2019. The 2020 goodwill charge related to gathering and processing; property impairments principally involved Utica fresh-water assets.
- Interest expense increased to $147.0 million from $130.5 million pro forma, reflecting borrowing levels and debt issuances. Equity earnings from unconsolidated affiliates rose to $86.4 million from $62.4 million pro forma.
The company cautions that historical reported 2019 results are not fully comparable with 2020 because Antero Midstream began consolidating Antero Midstream Partners in March 2019. Pro forma 2019 figures are more useful for operating comparisons but remain illustrative.
Cash returns, debt and liquidity
- The company paid $590.2 million of common-stock dividends in 2020, or $1.23 per share for the year, and $0.6 million of preferred dividends. The board declared a $0.3075-per-share dividend for the fourth quarter, payable in February 2021.
- It repurchased approximately 8 million shares for about $25 million under its repurchase program during 2020. Approximately $150 million of the $300 million authorization remained; the board extended the program through June 30, 2023.
- The revolving facility matures October 26, 2022. The company reported compliance with applicable debt covenants at December 31, 2020. Senior notes include $650 million due in 2024, $550 million due in 2026, $650 million due in 2027 and $650 million due in 2028. The 2026 notes carry a 7.875% coupon; the other listed notes carry coupons of 5.375% or 5.75%.
- Management said operating cash flows, cash, facility borrowings and capital-market transactions should be adequate for working capital, capital expenditures and expected dividends and repurchases for at least the next 12 months. Actual access to credit and capital remains subject to market and covenant conditions.
- A 1-percentage-point increase in the revolving facility interest rate would have increased 2020 interest expense by an estimated $11 million. The company had no off-balance-sheet arrangements.
Outlook, risks and unusual items
- The company budgeted $240 million to $260 million of 2021 capital spending, including approximately $65 million of additional growth capital. Antero Resources planned three drilling rigs and 65 to 70 horizontal wells, substantially all on acreage dedicated to Antero Midstream. The filing gives Antero Resources’ 2021 budget as $590 million in its outlook discussion but refers to $625 million in a risk discussion; investors should verify the applicable budget figure.
- Antero Resources achieved the 2020 low-pressure gathering volume incentive targets, producing $48 million in fee reductions. Further incentive reductions may apply in 2021–2023 if volume thresholds are met. The gathering agreement runs to 2038 and the water services agreement to 2035, but water services have no minimum volume commitment.
- Customer concentration is a central risk: Antero Resources generates substantially all revenue, and its drilling, production, finances, ability to sell or store production, and creditworthiness affect Antero Midstream’s volumes and cash flows. The company’s Appalachian assets and water-handling revenue also expose it to regional, operational and regulatory risks.
- COVID-19 and commodity-market disruption contributed to uncertainty and Antero Resources reduced its 2020 drilling and completion budget. Management reported no significant supply-chain interruption or material throughput reduction from its COVID-19 protocols, but warned that future production shut-ins, storage constraints or reduced drilling could lower revenue.
- The Clearwater Facility remained idled for the foreseeable future after failing to meet intended specifications. The company incurred $15.2 million of 2020 idling costs and a further $6.7 million impairment relating to the landfill. It had paid Antero Resources $125 million in January 2020 under one water-delivery threshold; the second threshold was not met, and no further contingent consideration was expected.
- A consolidated lawsuit with Veolia concerns the Clearwater Facility. Antero Treatment seeks at least $457 million in damages, while Veolia seeks unspecified damages; certain claims were dismissed, but the remaining claims were scheduled for trial beginning November 29, 2021. No litigation, environmental or other contingency liability was recorded at year-end.
- Other material risks include future pipeline-safety and environmental requirements, climate-related policy and capital-market changes, potential impairment estimates, joint-venture dependence on MarkWest, and conflicts arising from shared directors, employees and commercial ties with Antero Resources. The auditor identified lease classification for gathering-system modifications and impairment valuation of Utica fresh-water assets as critical audit matters. Management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Antero Resources’ 2021 drilling plan and budget support the planned midstream investment, and whether the $590 million versus $625 million budget references can be reconciled.
- Current Antero Resources payment capacity, production outlook and dedicated acreage exposure, including third-party commitments and possible acreage dispositions.
- Liquidity, covenant headroom and refinancing plans ahead of the October 2022 revolving-facility maturity, particularly given total debt and the company’s dividend and repurchase commitments.
- The sustainability of cash returns relative to operating cash flow, capital spending, affiliate investment needs and any further debt issuance.
- The outcome and potential financial effect of the Veolia litigation, and the remaining operating and cash costs associated with the idled Clearwater Facility.
- The assumptions behind goodwill and asset impairment valuations and the continuing performance of the MarkWest joint venture and Stonewall investment.