Antero Midstream Corp quarterly report, Q2 FY2018

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Antero Midstream GP LP — Q2 2018 Form 10-Q

Entity note: The filing is for Antero Midstream GP LP (NYSE: AMGP), not Antero Midstream Corp. The period ended June 30, 2018; the filing was signed August 1, 2018. AMGP’s income comes solely from incentive distribution rights (IDRs) in Antero Midstream Partners LP (NYSE: AM), so its results depend on that partnership and Antero Resources.

Financial performance

  • Q2 2018: IDR-related equity earnings were $33.1 million, up 116% from $15.3 million. Operating income was $21.6 million; net income was $14.4 million, versus a $3.3 million net loss a year earlier. Net income attributable to common shareholders was $13.9 million, or $0.07 per share, versus a $1.6 million loss, or $0.01 per share.
  • First half 2018: Equity earnings were $61.6 million, up 129% from $26.9 million. Operating income was $40.5 million; net income was $27.2 million, versus a $6.6 million net loss. Net income attributable to common shareholders was $26.3 million, or $0.14 per share, versus a $1.6 million loss, or $0.01 per share.
  • Q2 general and administrative expense was $2.4 million, including $1.8 million for the special committee; equity-based compensation was $9.1 million. First-half amounts were $3.3 million and $17.7 million, respectively. Income tax expense was $7.2 million for Q2 and $13.3 million for the first half. The 2018 federal corporate tax rate fell to 21% from 35% in 2017.
  • Cash flow and distributions: First-half operating cash flow was $34.6 million, versus $1.8 million. Cash distributions received from Antero Midstream were $52.2 million, versus $19.1 million. AMGP paid $34.1 million to common shareholders and $1.2 million to Series B unitholders; cash ended at $5.3 million, down $0.7 million from year-end.
  • Liquidity and debt: June 30 cash was $5.3 million; current assets were $6.3 million and current liabilities $14.1 million, including $13.3 million of income taxes payable. Management reported a working capital deficit but expected IDR receipts and credit availability to cover needs and distributions for at least 12 months. A secured $12 million credit facility matures May 6, 2019; there were no borrowings at quarter-end, and AMGP reported covenant compliance. No debt balance was reported.

Underlying partnership and material changes

  • Antero Midstream reported Q2 revenue of $251.0 million, operating income of $114.8 million, and net income of $109.5 million. For the first half, revenue was $480.6 million, operating income $226.4 million, and net income $217.6 million. Q2 revenue and operating income increased from $193.8 million and $92.6 million, respectively, in 2017.
  • The increase in AMGP earnings chiefly reflected higher Antero Midstream per-unit distributions and the IDR tier structure. Antero Midstream’s distribution rose from $0.32 per unit for Q2 2017 to $0.415 for Q2 2018; the IDR distribution attributable to Q2 2018 was $33.1 million.
  • AMGP declared a $0.125-per-share distribution for Q2, payable August 22, 2018 to holders of record August 2. The $33.1 million IDR distribution was scheduled for payment August 17, 2018.
  • An independent special committee is evaluating potential transactions or other measures related to Antero Resources’ valuation that could involve AMGP. No decision or transaction had been reached, and completion was not assured. Special-committee costs were $2.3 million in the first half.

Outlook, risks, and other disclosures

  • AMGP’s cash generation depends on IDR distributions from Antero Midstream; Antero Midstream, in turn, depends substantially on Antero Resources’ production, drilling and development activity. This concentration exposes AMGP to operating, commodity-price, regulatory, environmental, financing, and other risks affecting those companies.
  • The filing provides no quantified earnings or distribution guidance. Management said IDR receipts and potential credit-facility borrowings should meet working-capital requirements and expected quarterly distributions for at least the next 12 months.
  • Management cautioned that interim results are not necessarily indicative of full-year results. It also noted that pre-IPO costs and the tax-rate change limit comparability with 2017.
  • No material litigation, material changes to previously disclosed risk factors, or off-balance-sheet arrangements were reported. Disclosure controls were deemed effective; no material change in internal control was reported.

Investor verification priorities

  1. Confirm the timing and receipt of the $33.1 million Q2 IDR distribution and whether subsequent distributions support the declared AMGP shareholder payout.
  2. Review the special committee’s continuing evaluation, related costs, and any announced transaction or strategic alternative.
  3. Assess Antero Resources’ operating and development plans and Antero Midstream’s distribution capacity, given AMGP’s dependence on IDRs.
  4. Track income-tax payments and liquidity against the reported working capital deficit, and review the credit facility’s maturity, covenants, and repayment requirements.
  5. Evaluate the Series B compensation awards, including the $52.3 million of unamortized compensation expense and the potential dilution described in the filing.