Antero Midstream GP LP — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. The supplied filing is for Antero Midstream GP LP (NYSE: AMGP), not a company named Antero Midstream Corporation. The filing describes AMGP’s proposed conversion into Antero Midstream Corporation as part of a transaction announced after quarter-end.
Business context and financial performance
AMGP’s income comes solely from incentive distribution rights (IDRs) in Antero Midstream Partners LP (NYSE: AM). It does not consolidate the partnership; its reported “equity in earnings” reflects IDR distributions earned. Accordingly, AMGP’s income statement is not a conventional operating-company revenue or margin profile.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| IDR equity earnings / total income | $37.8m | $19.1m | $99.4m | $45.9m |
| Operating expenses | $10.8m | $8.9m | $31.9m | $32.2m |
| Operating income | $27.0m | $10.1m | $67.5m | $13.8m |
| Net income (loss) | $18.0m | $3.0m | $45.2m | $(3.6)m |
| Net income attributable to common shareholders | $17.4m | $3.0m | $43.7m | $1.4m |
| Basic and diluted EPS | $0.09 | $0.02 | $0.23 | $0.01 |
Q3 IDR earnings increased 98%; nine-month earnings increased 116%, principally because Antero Midstream raised its per-unit distribution. Q3 2018 general and administrative expense rose to $2.2m from $0.6m, mainly due to conflicts-committee work on potential transactions. The nine-month comparison also reflects the 2017 IPO and a lower U.S. federal corporate tax rate in 2018 (21%, versus 35% in 2017).
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $57.5m, up from $13.5m, supported by $85.4m of cash distributions received from Antero Midstream, versus $34.4m in the prior-year period.
- Financing cash outflow was $59.3m, including $57.3m of shareholder distributions and $1.7m of Series B distributions. Cash declined $1.7m to $4.2m. No investing cash flows were reported.
- At September 30, cash was $4.2m, current assets $4.4m, current liabilities $14.2m, and total assets $42.3m. The resulting working-capital deficit was approximately $9.7m, primarily reflecting income taxes payable of $13.2m. Management said expected IDR receipts were expected before the related tax payment was due.
- AMGP had no borrowings under its $12m credit facility at quarter-end. The facility matures May 6, 2019, carries a variable rate, and requires outstanding borrowings to be fully repaid at least once each fiscal quarter. AMGP reported compliance with its covenants.
- AMGP’s board declared a $0.144-per-share distribution for Q3, payable November 21, 2018. Antero Midstream separately declared a $0.44-per-unit distribution, including $37.8m attributable to IDRs.
For context, Antero Midstream’s summarized Q3 results (the investee, not AMGP) included revenue of $266.2m, operating income of $126.0m, and net income of $119.8m. Its nine-month revenue was $746.8m and net income was $337.3m.
Outlook, transaction and risks
- On October 9, 2018, AMGP and affiliates signed a simplification agreement. It provides for AMGP’s conversion to a corporation and acquisition of Antero Midstream, with the latter becoming a wholly owned subsidiary. Closing was expected in Q1 2019, subject to approvals and other customary conditions.
- The merger’s aggregate cash consideration was set at approximately $598m, with the cash portion expected to be funded through borrowings under Antero Midstream’s revolving credit facility. Consideration for public unitholders includes election and proration provisions. The Series B units are to be exchanged for approximately 17.35m shares of the new corporation, subject to vesting terms.
- Management expected IDR income and potential credit-facility borrowings to meet working-capital needs and expected quarterly distributions for at least the next 12 months. No specific earnings or cash-flow guidance was provided.
- AMGP is highly dependent on Antero Midstream distributions, and Antero Midstream in turn is substantially dependent on Antero Resources’ production, drilling plans and financial condition. Risks include commodity-price volatility, access to capital, operating and regulatory risks, and failure or delay of the proposed transaction.
- Transaction-related risks include costs if the deal does not close, interim operating restrictions, potential litigation, and possible adverse market reaction or management distraction. The filing reported no material litigation and no material change to previously disclosed risks other than transaction-related risks.
- AMGP reported effective disclosure controls as of September 30, 2018 and no material third-quarter change in internal control over financial reporting. It reported no off-balance-sheet arrangements.
Investor verification priorities
- Confirm the transaction’s approval, closing timetable, final consideration elections and proration, and the resulting share count and debt funding.
- Review Antero Midstream’s standalone 10-Q and Antero Resources’ operating and financial disclosures, given AMGP’s dependence on distributions from the partnership.
- Track IDR distributions, AMGP’s shareholder distributions, and whether receipts remain sufficient to cover taxes, expenses and distributions.
- Monitor liquidity and refinancing needs, including the AMGP credit facility’s May 2019 maturity and the proposed merger’s expected use of Antero Midstream’s revolver.
- Assess Series B exchange dilution and vesting, and the effects of transaction costs or failure to complete the simplification.