Antero Midstream GP LP (NYSE: AMGP) — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 13, 2019. Although the request identifies Antero Midstream Corp. and 2018 Q4, this filing is for Antero Midstream GP LP (AMGP), the publicly traded general partner and IDR holder—not Antero Midstream Partners LP (NYSE: AM), whose separate 2018 Form 10-K is incorporated by reference. Annual results are reported alongside some fourth-quarter data.
Business context
AMGP’s income and cash generation depend on distributions from Antero Midstream through incentive distribution rights (IDRs); it reports its investment using the equity method. Antero Midstream operates gathering, compression, processing and water infrastructure in the Appalachian Basin, primarily serving Antero Resources under long-term, largely fixed-fee agreements. Antero Resources owned 52.8% of Antero Midstream at year-end.
Financial performance and position
| AMGP metric | 2018 | 2017 |
|---|---|---|
| Equity-method income from Antero Midstream / total income | $142.9 million | $69.7 million |
| Operating expenses | $43.9 million | $41.1 million |
| Operating income | $99.1 million | $28.6 million |
| Net income | $66.6 million | $2.3 million |
| Net income per share | $0.33 | $0.03 |
| Operating cash flow | $83.5 million | $28.1 million |
| Financing cash flow | $(86.7) million | $(31.7) million |
| Cash at year-end | $2.8 million | $6.0 million |
- Equity-method income rose 105%, primarily as Antero Midstream increased its per-unit distribution to $0.47 for 2018 from $0.365 for 2017. The IDRs receive a higher marginal share above distribution thresholds.
- Net income increased substantially, partly reflecting the lower 21% federal corporate tax rate effective in 2018 versus 35% in 2017. 2017 results also included IPO-related costs and were affected by equity compensation.
- 2018 general and administrative expense was $8.7 million, including $6.9 million related to the conflicts committee and proposed transaction review. Equity-based compensation expense was $35.1 million.
- Year-end total assets were $47.7 million, including a $43.5 million investment in Antero Midstream; current liabilities were $16.8 million, including $15.7 million of taxes payable. Current assets were $2.9 million, implying a working capital deficit of approximately $13.9 million, which management attributed mainly to income taxes payable.
- AMGP’s $12 million credit facility, entered into in May 2018 and maturing May 6, 2019, had no borrowings at year-end. Its rate is variable; the facility is secured by specified ownership interests and requires outstanding amounts to be repaid at least once each fiscal quarter. The filing does not provide a clear summary of Antero Midstream’s total debt or leverage in the supplied financial statements; its separate Form 10-K is incorporated by reference.
- AMGP received $123.2 million of IDR distributions during 2018. It paid $84.2 million in distributions to shareholders during the year and declared $0.541 per share for the four 2018 quarters. The Q4 distribution of $0.164 per share, approximately $31 million in total, was payable February 21, 2019.
Underlying midstream business (summarized investee data)
Antero Midstream reported 2018 revenue of $1.029 billion, operating income of $607.6 million and net income of $585.9 million, compared with $772.5 million, $324.7 million and $307.3 million, respectively, in 2017. These are investee figures, not AMGP consolidated revenue. The filing text does not provide AMGP segment revenue or a company-reported margin measure.
Material changes, outlook and risks
- Proposed simplification: Under the October 2018 agreement, AMGP would convert into a corporation named Antero Midstream Corporation and acquire the publicly held Antero Midstream units, making Antero Midstream a wholly owned subsidiary. Series B unit holders would exchange their interests for approximately 17.35 million shares. The filing expected shareholder and unitholder votes on March 8, 2019 and anticipated closing shortly afterward, subject to conditions; completion was not assured as of the filing date.
- The merger consideration included a fixed cash component, with aggregate cash consideration expected to be approximately $598 million. The companies expected to fund it through borrowings under Antero Midstream’s revolving facility, whose lender commitments had been increased from $1.5 billion to $2.0 billion. The transaction could be delayed or fail, incur costs, face litigation, or increase debt and financing costs. The filing states the merger could be taxable to Antero Midstream unitholders.
- Management expected IDR distributions to cover working capital needs and anticipated quarterly shareholder distributions for at least the next 12 months. This depends on Antero Midstream’s ability and decision to maintain distributions; AMGP’s income is wholly dependent on those IDR distributions.
- Key exposures include Antero Midstream’s operating and financing performance, Antero Resources’ production and development activity, producer concentration, commodity-price and credit-market conditions, construction and operating risks, regulation, environmental and legal matters, and the pending transaction. Antero Midstream’s fixed-fee contracts limit its direct commodity-price exposure but do not remove these indirect risks to AMGP.
- No material litigation was reported. Management and KPMG concluded that internal control over financial reporting was effective as of December 31, 2018; KPMG gave an unqualified audit opinion on the financial statements and controls.
Important facts for investors to verify
- Review Antero Midstream’s incorporated 2018 Form 10-K for its debt, leverage, liquidity, capital spending, operating results and distribution coverage; these are central to AMGP’s cash flows.
- Confirm the outcome and final terms of the proposed simplification, including cash financing, consideration elections and any resulting share dilution.
- Assess whether Antero Midstream can sustain distributions and whether any changes to IDRs or Series B interests affect cash reaching AMGP shareholders.
- Track AMGP’s short-maturity credit facility, tax payable and working capital deficit, along with cash distributions received and paid.
- Consider the related-party and governance structure: AMGP has no employees, relies on Antero Resources for services, and its income is concentrated in its relationship with Antero Midstream.