Antero Midstream GP LP (NYSE: AMGP) — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is the filing of Antero Midstream GP LP, not Antero Midstream Partners LP (NYSE: AM); the latter’s 2017 Form 10-K is incorporated by reference. AMGP was formed from its predecessor and completed its IPO in May 2017. The IPO was a secondary offering: the selling shareholder received the proceeds, not AMGP.
Business context
AMGP’s principal assets are its general partner interest in Antero Midstream and its ownership of the entity holding Antero Midstream’s incentive distribution rights (IDRs). AMGP’s income and cash flows depend on IDR distributions from Antero Midstream; it receives at least 94% of those distributions. Antero Midstream’s operations primarily serve Antero Resources’ Appalachian production under long-term, largely fixed-fee contracts. AMGP is taxed as a corporation.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total income, principally equity earnings from Antero Midstream | $69.7 million | $16.9 million |
| Total expenses | $41.1 million | $0.8 million |
| Net income | $2.3 million | $9.7 million |
| Net cash from operating activities | $28.1 million | $9.5 million |
| Net cash used in financing activities | $31.7 million | None |
- FY 2017 expenses included $34.9 million of equity-based compensation and $6.2 million of general and administrative expense. Income tax provision was $26.3 million.
- AMGP reported $6.0 million of cash and $29.8 million of total assets at year-end. Current liabilities were $14.2 million, including $13.9 million of income taxes payable; the filing identifies a working-capital deficit. AMGP reported no off-balance-sheet arrangements and no debt of its own in the presented balance sheet.
- Cash received from Antero Midstream in 2017 was $53.5 million. The Q4 2017 IDR distribution of $23.8 million was recorded as an investment receivable at year-end and was expected in early 2018.
- For Q4 2017, cash available for distribution was $14.0 million after Series B reserves, G&A, and estimated taxes. AMGP declared $0.075 per share for the quarter, payable in February 2018. Total distributions declared per share for 2017 were approximately $0.16.
- For context, Antero Midstream’s summarized 2017 results were revenue of $772.5 million and net income of $307.3 million; its year-end non-current liabilities were $1.40 billion. These are investee figures, not AMGP consolidated debt.
Changes versus prior period
- Income rose substantially as Antero Midstream increased per-unit distributions and IDR distributions reached the highest 50% incentive tier in each 2017 quarter. AMGP’s reported equity earnings increased by $52.8 million year over year.
- Net income fell by $7.4 million despite higher income, primarily because of equity-based compensation, IPO-related costs, higher public-company expenses, and taxes.
- Operating cash flow increased by $18.5 million. Financing outflows included $15.7 million distributed to the predecessor’s former owner before its liquidation and $16.0 million of distributions to public shareholders.
- AMGP’s IPO and conversion to a limited partnership changed its reporting and public-company cost base. Its 2017 results include pre- and post-IPO periods and are not directly comparable in all respects.
Outlook, risks, and unusual items
- Management expected IDR income to cover working-capital needs and planned quarterly distributions for at least the next 12 months. No specific earnings or distribution-growth guidance was provided.
- The U.S. federal corporate tax rate was reduced from 35% to 21% effective in 2018; management said this should make future tax expense lower than historical results, all else equal.
- The central risk is dependence on Antero Midstream’s ability to generate cash and maintain distributions. A reduction in its per-unit distribution can disproportionately reduce AMGP’s IDR income. AMGP also depends indirectly on Antero Resources’ production plans and throughput.
- Other disclosed risks include Antero Midstream’s debt covenants and capital needs; commodity prices, operating and environmental hazards, regulation, and access to capital; tax treatment of publicly traded partnerships; and conflicts of interest, sponsor control, and potential dilution from Series B unit redemptions or other equity issuance.
- Series B units entitle holders, subject to vesting, to up to 6% of IDR distributions above $7.5 million per quarter. Their compensation expense was a significant 2017 item; $69.4 million of unamortized compensation remained at year-end.
- AMGP reported no material litigation. The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls were effective; no auditor attestation on internal control over financial reporting was required during the new-issuer transition period.
Important facts for investors to verify
- Review Antero Midstream’s incorporated 2017 10-K, especially its debt, capital spending, distribution coverage, operating results, and customer concentration.
- Confirm the timing and receipt of the $23.8 million Q4 IDR distribution and the related tax payment, and assess AMGP’s working-capital position.
- Evaluate the sustainability of Antero Midstream’s distribution and how changes in its per-unit distribution affect AMGP’s tiered IDR cash flows.
- Assess the potential dilution, vesting, and cash-distribution effects of Series B units, alongside AMGP’s substantial 2017 equity-compensation expense.
- Consider the related-party arrangements, sponsor control, and conflicts-of-interest provisions, as well as the tax assumptions underlying AMGP’s after-tax distributions.