Antero Midstream GP LP
Antero Midstream GP LP details
Provides natural gas transmission services
Ticker:AMGP
Employees:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-38075
ANTERO MIDSTREAM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 61-1748605
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1615 Wynkoop Street
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
(303) 357-7310
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 AM New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒ Accelerated Filer ☐
Non-accelerated Filer ☐ Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ Yes ☒ No
The registrant had 478,484,564 shares of common stock outstanding as of October 21 , 2022.
Table of Contents
TABLE OF CONTENTS
Page
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 1
PART I—FINANCIAL INFORMATION 3
Item 1. Condensed Consolidated Financial Statements (Unaudited) 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
Item 4. Controls and Procedures 40
PART II—OTHER INFORMATION 41
Item 1. Legal Proceedings 41
Item 1A. Risk Factors 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 6. Exhibits 43
SIGNATURES 44
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements, although not all forward-looking statements contain such identifying words. When considering these forward-looking statements, investors should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q. These forward-looking statements are based on management’s current beliefs, based on currently available information, as to the outcome and timing of future events. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
● Antero Resources Corporation’s (“Antero Resources”) expected production and development plan;
● impacts to producer customers of insufficient storage capacity;
● our ability to execute our business strategy;
● our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;
● our ability to realize the anticipated benefits of our investments in unconsolidated affiliates;
● natural gas, natural gas liquids (“NGLs”), and oil prices;
● impacts of geopolitical events and world health events, including the coronavirus (“COVID-19”) pandemic;
● our ability to complete the construction of or purchase new gathering and compression, processing, water handling or other assets on schedule, at the budgeted cost or at all, and the ability of such assets to operate as designed or at expected levels;
● our ability to execute our share repurchase program;
● competition;
● government regulations and changes in laws;
● actions taken by third-party producers, operators, processors and transporters;
● pending legal or environmental matters;
● costs of conducting our operations;
● our ability to achieve our greenhouse gas reduction targets and the costs associated therewith;
● general economic conditions;
● credit markets;
● operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;
● uncertainty regarding our future operating results; and
● our other plans, objectives, expectations and intentions contained in this Quarterly Report on Form 10-Q.
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We caution investors that these forward-looking statements are subject to all of the risks and uncertainties incidental to our business, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility, inflation, environmental risks, Antero Resources’ drilling and completion and other operating risks, regulatory changes or changes in law, the uncertainty inherent in projecting Antero Resources’ future rates of production, cash flows and access to capital, the timing of development expenditures, impacts of world health events (including the COVID-19 pandemic), cybersecurity risks, the state of markets for, and availability of, verified quality carbon offsets and the other risks described or referenced under the heading “1A. Risk Factors” herein, including the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), which is on file with the Securities and Exchange Commission (“SEC”).
Should one or more of the risks or uncertainties described or referenced in this Quarterly Report on Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
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PART I—FINANCIAL INFORMATION
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
December 31, September 30,
2021 2022
Assets
Current assets:
Accounts receivable–Antero Resources $ 81,197 77,301
Accounts receivable–third party 747 1,988
Income tax receivable 940 940
Other current assets 920 556
Total current assets 83,804 80,785
Property and equipment, net 3,394,746 3,508,008
Investments in unconsolidated affiliates 696,009 659,006
Customer relationships 1,356,775 1,303,771
Other assets, net 12,667 12,251
Total assets $ 5,544,001 5,563,821
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable–Antero Resources $ 4,956 2,648
Accounts payable–third party 23,592 24,125
Accrued liabilities 80,838 72,952
Other current liabilities 4,623 6,657
Total current liabilities 114,009 106,382
Long-term liabilities:
Long-term debt 3,122,910 3,143,169
Deferred income tax liability 13,721 98,519
Other 6,663 3,896
Total liabilities 3,257,303 3,351,966
Stockholders' Equity:
Preferred stock, $0.01 par value: 100,000 authorized as of December 31, 2021 and September 30, 2022
Series A non-voting perpetual preferred stock; 12 designated and 10 issued and outstanding as of December 31, 2021 and September 30, 2022 — —
Common stock, $0.01 par value; 2,000,000 authorized; 477,495 and 478,462 issued and outstanding as of December 31, 2021 and September 30, 2022, respectively 4,775 4,784
Additional paid-in capital 2,414,398 2,123,057
Retained earnings (accumulated deficit) (132,475) 84,014
Total stockholders' equity 2,286,698 2,211,855
Total liabilities and stockholders' equity $ 5,544,001 5,563,821
See accompanying notes to unaudited condensed consolidated financial statements.
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ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands, except per share amounts)
Three Months Ended September 30,
2021 2022
Revenue:
Gathering and compression–Antero Resources $ 188,716 185,640
Water handling–Antero Resources 53,511 61,411
Water handling–third party 245 1,651
Amortization of customer relationships (17,668) (17,668)
Total revenue 224,804 231,034
Operating expenses:
Direct operating 39,499 46,648
General and administrative (including $3,255 and $5,553 of equity-based compensation in 2021 and 2022, respectively) 14,810 13,587
Facility idling 870 865
Depreciation 27,487 34,206
Impairment of property and equipment 203 —
Accretion of asset retirement obligations 114 50
Gain on asset sale — (2,092)
Total operating expenses 82,983 93,264
Operating income 141,821 137,770
Other income (expense):
Interest expense, net (44,544) (47,835)
Equity in earnings of unconsolidated affiliates 24,088 24,411
Total other expense (20,456) (23,424)
Income before income taxes 121,365 114,346
Income tax expense (32,038) (30,332)
Net income and comprehensive income $ 89,327 84,014
Net income per share–basic $ 0.19 0.18
Net income per share–diluted $ 0.19 0.17
Weighted average common shares outstanding:
Basic 477,442 478,460
Diluted 479,695 480,318
See accompanying notes to unaudited condensed consolidated financial statements.
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ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands, except per share amounts)
Nine Months Ended September 30,
2021 2022
Revenue:
Gathering and compression–Antero Resources $ 566,544 552,154
Water handling–Antero Resources 167,832 176,994
Water handling–third party 340 2,288
Amortization of customer relationships (53,004) (53,004)
Total revenue 681,712 678,432
Operating expenses:
Direct operating 118,368 131,959
General and administrative (including $10,326 and $14,026 of equity-based compensation in 2021 and 2022, respectively) 46,991 47,597
Facility idling 3,033 3,198
Depreciation 80,956 98,181
Impairment of property and equipment 1,582 3,702
Accretion of asset retirement obligations 347 178
Loss on settlement of asset retirement obligations — 539
Loss (gain) on asset sale 3,628 (2,242)
Total operating expenses 254,905 283,112
Operating income 426,807 395,320
Other income (expense):
Interest expense, net (130,915) (137,540)
Equity in earnings of unconsolidated affiliates 66,347 70,467
Loss on early extinguishment of debt (20,701) —
Total other expense (85,269) (67,073)
Income before income taxes 341,538 328,247
Income tax expense (88,547) (84,798)
Net income and comprehensive income $ 252,991 243,449
Net income per share–basic $ 0.53 0.51
Net income per share–diluted $ 0.53 0.51
Weighted average common shares outstanding:
Basic 477,196 478,144
Diluted 479,501 480,342
See accompanying notes to unaudited condensed consolidated financial statements.
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ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(In thousands)
Retained
Additional Earnings
Preferred Common Stock Paid-In (Accumulated Total
Stock Shares Amount Capital Deficit) Equity
Balance at December 31, 2020 $ — 476,639 $ 4,766 2,877,612 (464,092) 2,418,286
Dividends to stockholders — — — (147,332) — (147,332)
Equity-based compensation — — — 4,012 — 4,012
Issuance of common stock upon vesting of equity-based compensation awards, net of common stock withheld for income taxes — 268 3 (1,544) — (1,541)
Net income and comprehensive income — — — — 83,441 83,441
Balance at March 31, 2021 — 476,907 4,769 2,732,748 (380,651) 2,356,866
Dividends to stockholders — — — (108,936) — (108,936)
Equity-based compensation — — — 3,059 — 3,059
Issuance of common stock upon vesting of equity-based compensation awards, net of common stock withheld for income taxes — 451 5 (2,781) — (2,776)
Net income and comprehensive income — — — — 80,223 80,223
Balance at June 30, 2021 — 477,358 4,774 2,624,090 (300,428) 2,328,436
Dividends to stockholders — — — (107,857) — (107,857)
Equity-based compensation — — — 3,255 — 3,255
Issuance of common stock upon vesting of equity-based compensation awards, net of common stock withheld for income taxes — 102 1 (569) — (568)
Net income and comprehensive income — — — — 89,327 89,327
Balance at September 30, 2021 $ — 477,460 $ 4,775 2,518,919 (211,101) 2,312,593
Balance at December 31, 2021 $ — 477,495 $ 4,775 2,414,398 (132,475) 2,286,698
Dividends to stockholders — — — (108,287) — (108,287)
Equity-based compensation — — — 2,832 — 2,832
Issuance of common stock upon vesting of equity-based compensation awards, net of common stock withheld for income taxes — 188 2 (1,331) — (1,329)
Net income and comprehensive income — — — — 80,040 80,040
Balance at March 31, 2022 — 477,683 4,777 2,307,612 (52,435) 2,259,954
Dividends to stockholders — — — (109,433) — (109,433)
Equity-based compensation — — — 5,641 — 5,641
Issuance of common stock upon vesting of equity-based compensation awards, net of common stock withheld for income taxes — 754 7 (5,445) — (5,438)
Net income and comprehensive income — — — — 79,395 79,395
Balance at June 30, 2022 — 478,437 4,784 2,198,375 26,960 2,230,119
Dividends to stockholders — — — (80,853) (26,960) (107,813)
Equity-based compensation — — — 5,553 — 5,553
Issuance of common stock upon vesting of equity-based compensation awards, net of common stock withheld for income taxes — 25 — (18) — (18)
Net income and comprehensive income — — — — 84,014 84,014
Balance at September 30, 2022 $ — 478,462 $ 4,784 2,123,057 84,014 2,211,855
See accompanying notes to unaudited condensed consolidated financial statements.
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ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended September 30,
2021 2022
Cash flows provided by (used in) operating activities:
Net income $ 252,991 243,449
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 80,956 98,181
Accretion of asset retirement obligations 347 178
Impairment 1,582 3,702
Deferred income tax expense 88,547 84,798
Equity-based compensation 10,326 14,026
Equity in earnings of unconsolidated affiliates ( 66,347 ) ( 70,467 )
Distributions from unconsolidated affiliates 87,115 90,470
Amortization of customer relationships 53,004 53,004
Amortization of deferred financing costs 4,152 4,268
Settlement of asset retirement obligations ( 814 ) ( 1,395 )
Loss on settlement of asset retirement obligations — 539
Loss (gain) on asset sale 3,628 ( 2,242 )
Loss on early extinguishment of debt 20,701 —
Changes in assets and liabilities:
Accounts receivable–Antero Resources ( 11,429 ) 5,596
Accounts receivable–third party 594 ( 822 )
Income tax receivable 16,311 —
Other current assets 810 242
Accounts payable–Antero Resources ( 705 ) ( 2,006 )
Accounts payable–third party 11,058 12,228
Accrued liabilities ( 7,337 ) ( 2,773 )
Net cash provided by operating activities 545,490 530,976
Cash flows provided by (used in) investing activities:
Additions to gathering systems and facilities ( 120,727 ) ( 190,407 )
Additions to water handling systems ( 36,221 ) ( 45,747 )
Investments in unconsolidated affiliates ( 2,070 ) —
Return of investment in unconsolidated affiliate — 17,000
Cash received in asset sale 1,653 4,026
Change in other assets — ( 24 )
Change in other liabilities — ( 804 )
Net cash used in investing activities ( 157,365 ) ( 215,956 )
Cash flows provided by (used in) financing activities:
Dividends to stockholders ( 363,712 ) ( 325,120 )
Dividends to preferred stockholders ( 413 ) ( 413 )
Issuance of senior notes 750,000 —
Redemption of senior notes ( 667,472 ) —
Payments of deferred financing costs ( 9,449 ) ( 302 )
Borrowings (repayments) on bank credit facilities, net ( 92,800 ) 17,600
Employee tax withholding for settlement of equity compensation awards ( 4,885 ) ( 6,785 )
Other ( 34 ) —
Net cash used in financing activities ( 388,765 ) ( 315,020 )
Net decrease in cash and cash equivalents ( 640 ) —
Cash and cash equivalents, beginning of period 640 —
Cash and cash equivalents, end of period $ — —
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 132,360 130,236
Cash received during the period for income taxes $ 16,913 —
Increase (decrease) in accrued capital expenditures and accounts payable for property and equipment $ 22,675 ( 17,130 )
See accompanying notes to unaudited condensed consolidated financial statements.
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ANTERO MIDSTREAM CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(1 ) Organization
Antero Midstream Corporation (together with its consolidated subsidiaries, “Antero Midstream,” “AM” or the “Company”) is a growth-oriented midstream company formed to own, operate and develop midstream energy infrastructure primarily to service Antero Resources Corporation (“Antero Resources”) and its production and completion activity in the Appalachian Basin. The Company’s assets consist of gathering pipelines, compressor stations, interests in processing and fractionation plants and water handling assets. Antero Midstream provides midstream services to Antero Resources under long-term contracts. The Company’s corporate headquarters is located in Denver, Colorado.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information and should be read in the context of the Company’s December 31, 2021 consolidated financial statements and notes thereto for a more complete understanding of the Company’s operations, financial position, and accounting policies. The Company’s December 31, 2021 consolidated financial statements were included in the Company’s 2021 Annual Report on Form 10-K, which was filed with the SEC.
These unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, and, accordingly, do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary to present fairly the Company’s financial position as of December 31, 2021 and September 30, 2022, the results of the Company’s operations for the three and nine months ended September 30, 2021 and 2022, and the Company’s cash flows for the nine months ended September 30, 2021 and 2022. The Company has no items of other comprehensive income; therefore, net income is equal to comprehensive income.
Certain costs of doing business incurred and charged to the Company by Antero Resources have been reflected in the accompanying unaudited condensed consolidated financial statements. These costs include general and administrative expenses provided to the Company by Antero Resources in exchange for:
● business services, such as payroll, accounts payable and facilities management;
● corporate services, such as finance and accounting, legal, human resources, investor relations and public and regulatory policy; and
● employee compensation, including equity-based compensation.
Transactions between the Company and Antero Resources have been identified in the unaudited condensed consolidated financial statements (see Note 4—Transactions with Affiliates).
(b) Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Antero Midstream Corporation and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated in the Company’s unaudited condensed consolidated financial statements.
(c) Dividends
Preferred and common dividends declared are recorded as a reduction of retained earnings to the extent that retained earnings were available at the close of the quarter prior to the dividend declaration date, with any excess recorded as a reduction of additional paid-in capital.
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(d) Recently Adopted Accounting Standard
In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Simplifying the Accounting for Income Taxes. This ASU removes certain exceptions to the general principles in Accounting Standard Codifications Topic 740, Income Taxes (“ASC 740”), and also simplifies portions of ASC 740 by clarifying and amending existing guidance. It is effective for interim and annual reporting periods after December 15, 2020. The Company adopted this ASU on January 1, 2021, and it did not have a material impact on the Company's consolidated financial statements .
(3) Intangibles
All customer relationships are subject to amortization and are amortized over a weighted average period of 19 years, which reflects the remaining economic life of the relationships as of September 30, 2022. The changes in the carrying amount of customer relationships were as follows (in thousands):
Customer relationships as of December 31, 2021 $ 1,356,775
Amortization of customer relationships (53,004)
Customer relationships as of September 30, 2022 $ 1,303,771
Future amortization expense is as follows (in thousands):
Remainder of year ending December 31, 2022 $ 17,668
Year ending December 31, 2023 70,672
Year ending December 31, 2024 70,672
Year ending December 31, 2025 70,672
Year ending December 31, 2026 70,672
Thereafter 1,003,415
Total $ 1,303,771
(4) Transactions with Affiliates
(a) Revenues
Substantially all revenues earned in the three and nine months ended September 30, 2021 and 2022 were earned from Antero Resources, under various agreements for gathering and compression and water handling services. Revenues earned from gathering and compression services consists of lease income.
(b) Accounts receivable—Antero Resources and Accounts payable—Antero Resources
Accounts receivable—Antero Resources represents amounts due from Antero Resources, primarily related to gathering and compression services and water handling services. Accounts payable—Antero Resources represents amounts due to Antero Resources for general and administrative and other costs.
(c) Allocation of Costs Charged by Antero Resources
The employees supporting the Company’s operations are concurrently employed by Antero Resources and the Company. Direct operating expense includes costs charged to the Company of $2 million and $3 million during the three months ended September 30, 2021 and 2022, respectively, and $7 million and $10 million during the nine months ended September 30, 2021 and 2022, respectively. These costs were for services provided by employees associated with the operation of the Company’s gathering lines, compressor stations, and water handling assets. General and administrative expense includes costs charged to the Company by Antero Resources of $8 million and $6 million during the three months ended September 30, 2021 and 2022, respectively, and $24 million and $22 million during the nine months ended September 30, 2021 and 2022, respectively. These costs relate to (i) various business services, including payroll processing, accounts payable processing and facilities management, (ii) various corporate services, including legal, accounting, treasury, information technology and human resources and (iii) compensation,
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
including certain equity-based compensation. These expenses are charged to the Company based on the nature of the expenses and are apportioned based on a combination of the Company’s proportionate share of gross property and equipment, capital expenditures and labor costs, as applicable. The Company reimburses Antero Resources directly for all general and administrative costs charged to it, except costs attributable to noncash equity-based compensation. For further information on equity-based compensation, see Note 9—Equity-Based Compensation and Cash Awards.
(5) Revenue
All of the Company’s gathering and compression revenues are derived from an operating lease agreement, and all of the Company’s water handling revenues are derived from service contracts with customers. The Company currently earns substantially all of its revenues from Antero Resources.
(a) Gathering and Compression
Pursuant to the gathering and compression agreement with Antero Resources, Antero Resources has dedicated substantially all of its current and future acreage in West Virginia, Ohio and Pennsylvania to the Company for gathering and compression services except for acreage subject to third-party commitments or pre-existing dedications. The Company also has an option to gather and compress natural gas produced by Antero Resources on any additional acreage it acquires during the term of the agreement outside of West Virginia, Ohio and Pennsylvania on the same terms and conditions. In December 2019, the Company and Antero Resources agreed to extend the initial term of the gathering and compression agreement to 2038 and established a growth incentive fee program whereby low pressure gathering fees will be reduced from 2020 through 2023 to the extent Antero Resources achieves certain quarterly volumetric targets during such time. Antero Resources did not earn any rebates from the Company for the three and nine months ended September 30, 2021 since Antero Resources did not achieve any volumetric targets during the first, second and third quarters of 2021. For the three and nine months ended September 30, 2022, Antero Resources earned rebates of $ 12 million and $36 million, respectively, from the Company by achieving the first level volumetric target during the first, second and third quarters of 2022. Upon completion of the initial contract term, the gathering and compression agreement will continue in effect from year to year until such time as the agreement is terminated, effective upon an anniversary of the effective date of the agreement, by either the Company or Antero Resources on or before the 180th day prior to the anniversary of such effective date.
Under the gathering and compression agreement, the Company receives a low pressure gathering fee, a high pressure gathering fee and a compression fee, in each case subject to annual Consumer Price Index (“CPI”)-based adjustments, or a cost of service fee, at the Company’s election when such assets are placed in-service. In addition, the agreement stipulates that the Company receives a reimbursement for the actual cost of (i) electricity used at its compressor stations where the compression services are provided based on a compression fee and (ii) operating expenses for all services provided for a cost of service fee.
The Company determined that the gathering and compression agreement is an operating lease as Antero Resources obtains substantially all of the economic benefit of the asset and has the right to direct the use of the asset. The gathering system is an identifiable asset within the gathering and compression agreement, and it consists of underground low pressure pipelines that generally connect and deliver gas from specific well pads to compressor stations to compress the gas before delivery to underground high pressure pipelines that transport the gas to a third-party pipeline, third-party plant or Joint Venture (as defined in Note 13— Investments in Unconsolidated Affiliates) plant. The gathering system is considered a single lease due to the interrelated network of the assets. When a modification to the gathering and compression agreement occurs, the Company reassesses the classification of this lease. The Company accounts for its lease and non-lease components as a single lease component as the lease component is the predominant component. The non-lease components consist of operating, oversight and maintenance of the gathering system, which are performed on time-elapsed measures.
The gathering and compression agreement includes certain fixed fee provisions. If and to the extent Antero Resources requests that the Company construct new low pressure lines, high pressure lines and/or compressor stations, the gathering and compression agreement contains options at the Company’s election for either (i) minimum volume commitments that require Antero Resources to utilize or pay for 75% of the high pressure gathering capacity and 70% of the compression capacity of such new construction for 10 years or (ii) a cost of service fee that allows the Company to earn a 13% rate of return on such new construction over seven years , which election is made individually for each piece of equipment placed in service. All lease payments under the
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
minimum volume commitments and cost of service fees are considered to be in-substance fixed lease payments under the gathering and compression agreement.
The Company recognizes lease income from its minimum volume commitments and cost of service fees under its gathering and compression agreement on a straight-line basis. Additional variable operating lease income is earned when volumes in excess of the minimum commitments are delivered under the contract. The Company recognizes variable lease income when low pressure volumes are delivered to a compressor station, compression volumes are delivered to a high pressure line and high pressure volumes are delivered to a processing plant or transmission pipeline. Minimum volume commitments for high pressure gathering capacity and compression capacity are aggregated such that there is a single minimum volume commitment for the respective service each year. The Company invoices the customer the month after each service is performed, and payment is due in the same month. The Company is not party to any leases that have not commenced.
Minimum future lease cash flows to be received by the Company under the gathering and compression agreement as of September 30, 2022 are as follows (in thousands):
Remainder of year ending December 31, 2022 $ 45,492
Year ending December 31, 2023 298,655
Year ending December 31, 2024 299,473
Year ending December 31, 2025 285,175
Year ending December 31, 2026 271,762
Thereafter 562,414
Total $ 1,762,97 1
(b) Water Handling
The Company is party to a water services agreement with Antero Resources, whereby the Company provides certain water handling services to Antero Resources within an area of dedication in defined service areas in West Virginia and Ohio. The initial term of the water services agreement runs to 2035. Upon completion of the initial term in 2035, the water services agreement will continue in effect from year to year until such time as the agreement is terminated, effective upon an anniversary of the effective date of the agreement, by either the Company or Antero Resources on or before the 180th day prior to the anniversary of such effective date. Under the agreement, the Company receives a fixed fee for fresh water deliveries by pipeline directly to the well site, subject to annual CPI-based adjustments. In addition, the Company also provides other fluid handling services. These operations, along with the Company’s fresh water delivery systems, support well completion and production operations for Antero Resources. These services are provided by the Company directly or through third-parties with which the Company contracts. For these other fluid handling services provided by third-parties, Antero Resources reimburses the Company’s third-party out-of-pocket costs plus 3% . For these other fluid handling services provided by the Company, the Company charges Antero Resources a cost of service fee.
The Company satisfies its performance obligations and recognizes revenue when (i) the fresh water volumes have been delivered to the hydration unit of a specified well pad or (ii) other fluid handling services have been completed . The Company invoices the customer the month after water services are performed, and payment is due in the same month. For services contracted through third-party providers, the Company’s performance obligation is satisfied when the service to be performed by the third-party provider has been completed. The Company invoices the customer after the third-party provider billing is received, and payment is due in the same month.
Transaction Price Allocated to Remaining Performance Obligations
The Company’s water service agreement with Antero Resources has a term greater than one year. The Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under the Company’s service contracts, each unit of product delivered to the customer represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
The remainder of the Company’s water service contracts, which relate to contracts with third parties, are short-term in nature with a contract term of one year or less. Accordingly, the Company is exempt from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
Contract Balances
Under the Company’s water service contracts, the Company invoices customers after the performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s water service contracts do not give rise to contract assets or liabilities.
(c) Disaggregation of Revenue
In the following table, revenue is disaggregated by type of service and type of fee and is identified by the reportable segment to which such revenues relate. For more information on reportable segments, see Note 14—Reportable Segments.
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2021 2022 2021 2022 Reportable Segment
Type of service
Gathering—low pressure $ 87,139 92,091 265,206 273,188 Gathering and Processing (1)
Gathering—low pressure rebate — (12,000) — (36,000) Gathering and Processing (1)
Compression 49,765 52,364 147,273 155,462 Gathering and Processing (1)
Gathering—high pressure 51,812 53,185 154,065 159,504 Gathering and Processing (1)
Fresh water delivery 33,004 38,445 108,113 111,609 Water Handling
Other fluid handling 20,752 24,617 60,059 67,673 Water Handling
Amortization of customer relationships (9,271) (9,271) (27,813) (27,814) Gathering and Processing
Amortization of customer relationships (8,397) (8,397) (25,191) (25,190) Water Handling
Total $ 224,804 231,034 681,712 678,432
Type of contract
Per Unit Fixed Fee $ 188,716 197,640 566,544 588,154 Gathering and Processing (1)
Gathering—low pressure rebate — (12,000) — (36,000) Gathering and Processing (1)
Per Unit Fixed Fee 33,004 38,921 108,113 112,722 Water Handling
Cost plus 3% 16,952 19,346 48,727 51,384 Water Handling
Cost of service fee 3,800 4,795 11,332 15,176 Water Handling
Amortization of customer relationships (9,271) (9,271) (27,813) (27,814) Gathering and Processing
Amortization of customer relationships (8,397) (8,397) (25,191) (25,190) Water Handling
Total $ 224,804 231,034 681,712 678,432
(1) Revenue related to the gathering and processing segment is classified as lease income related to the gathering system.
The Company’s receivables from its contracts with customers and operating leases as of December 31, 2021 and September 30, 2022, were $81 million and $79 million, respectively .
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(6) Property and Equipment
(a) Summary of Property and Equipment
Property and equipment, net consisted of the following items:
(Unaudited)
Estimated December 31, September 30,
(in thousands) Useful Lives 2021 2022
Land n/a $ 23,369 26,682
Gathering systems and facilities 40-50 years (1) 2,817,918 3,052,459
Permanent buried pipelines and equipment 7-20 years 582,481 602,343
Surface pipelines and equipment 1-7 years 54,542 67,520
Heavy trucks and equipment 3-5 years 5,157 5,157
Above ground storage tanks 5-10 years 2,946 2,953
Construction-in-progress n/a 174,271 114,582
Total property and equipment 3,660,684 3,871,696
Less accumulated depreciation (265,938) (363,688)
Property and equipment, net $ 3,394,746 3,508,008
(1) Gathering systems and facilities are recognized as a single-leased asset with no residual value.
(b) Subsequent Event
On October 25, 2022, the Company acquired certain Marcellus gas gathering and compression assets from Crestwood Equity Partners LP (NYSE: CEQP) for $205 million in cash, before closing adjustments, which was funded by borrowings under the Company’s Credit Facility (as defined in Note 7─Long-Term Debt). These assets include 72 miles of dry gas gathering pipelines and nine compressor stations with approximately 700 MMcf/d of compression capacity.
(7) Long-Term Debt
Long-term debt consisted of the following items:
(Unaudited)
December 31, September 30,
(in thousands) 2021 2022
Credit Facility (a) $ 547,200 564,800
7.875% senior notes due 2026 (c) 550,000 550,000
5.75% senior notes due 2027 (d) 650,000 650,000
5.75% senior notes due 2028 (e) 650,000 650,000
5.375% senior notes due 2029 (f) 750,000 750,000
Total principal 3,147,200 3,164,800
Unamortized debt premiums 2,106 1,801
Unamortized debt issuance costs (26,396) (23,432)
Total long-term debt $ 3,122,910 3,143,169
(a) Credit Facility
Antero Midstream Partners LP (“Antero Midstream Partners”), an indirect, wholly owned subsidiary of Antero Midstream Corporation, as borrower (the “Borrower”), has a senior secured revolving credit facility with a consortium of banks. On October 26, 2021, the Company entered into an amended and restated senior secured revolving credit facility (the “Credit Facility”). As of December 31, 2021 and September 30, 2022, the Credit Facility had lender commitments of $1.25 billion and matures on October 26,
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
2026; provided that if on November 17, 2025 any of the 2026 Notes (as defined below) are outstanding, the Credit Facility will mature on such date. As of September 30, 2022, the Credit Facility had an available borrowing capacity of $685 million.
The Credit Facility contains certain covenants including restrictions on indebtedness, and requirements with respect to leverage and interest coverage ratios. The Credit Facility permits distributions to the holders of the Borrower’s equity interests in accordance with the cash distribution policy, provided that no event of default exists or would be caused thereby, and only to the extent permitted by the Borrower’s organizational documents. The Borrower was in compliance with all of the financial covenants under the Credit Facility as of December 31, 2021 and September 30, 2022.
The senior secured revolving credit facility agreement in effect prior to October 26, 2021 provided for borrowing under either the Base Rate or the Eurodollar Rate (as each term is defined in the agreement), and the Credit Facility provides for borrowing under either Adjusted Term Secured Overnight Financing Rate (“SOFR”) or the Base Rate (as each term is defined in the Credit Facility). Principal amounts borrowed are payable on the maturity date with such borrowings bearing interest that is payable with respect to (i) base rate loans, quarterly and (ii) SOFR Loans at the end of the applicable interest period if three months (or shorter, if applicable), or every three months if the applicable interest period is longer than three months. Interest was payable at a variable rate based on LIBOR or the base rate, determined by election at the time of borrowing, plus an applicable margin rate under the senior secured revolving credit facility agreement in effect prior to October 26, 2021. Interest is payable at a variable rate based on SOFR or the base rate, determined by election at the time of borrowing, plus an applicable margin rate under the Credit Facility. Interest at the time of borrowing is determined with reference to the Borrower’s then-current leverage ratio subject to certain exceptions. Commitment fees on the unused portion of the Credit Facility are due quarterly at rates ranging from 0.25% to 0.375% subject to certain exceptions based on the leverage ratio then in effect.
As of December 31, 2021, the Borrower had outstanding borrowings under the Credit Facility of $547 million with a weighted average interest rate of 1.81 %. As of September 30, 2022, the Borrower had outstanding borrowings under the Credit Facility of $565 million with a weighted average interest rate of 4.81 %. No letters of credit under the Credit Facility were outstanding as of December 31, 2021 or September 30, 2022.
(b) 5.375 % Senior Notes Due 2024
On September 13, 2016, Antero Midstream Partners and its wholly owned subsidiary, Antero Midstream Finance Corporation (“Finance Corp” and together with Antero Midstream Partners, the “Issuers”), issued $650 million in aggregate principal amount of 5.375% senior notes due September 15, 2024 (the “2024 Notes”) at par. The 2024 Notes were recorded at their fair value of $652.6 million as of March 12, 2019, and the related premium of $2.6 million was amortized into interest expense over the life of the 2024 Notes. The Issuers redeemed all $650 million of the 2024 Notes at 102.688% of par on June 8, 2021, and recognized a loss of $21 million on the early extinguishment of debt during the second quarter of 2021, which includes the write-off of all unamortized debt premium and issuance costs. Interest on the 2024 Notes was payable on March 15 and September 15 of each year.
(c) 7.875 % Senior Notes Due 2026
On November 10, 2020, the Issuers issued $550 million in aggregate principal amount of 7.875% senior notes due May 15, 2026 (the “2026 Notes”) at par. The 2026 Notes are unsecured and effectively subordinated to the Credit Facility to the extent of the value of the collateral securing the Credit Facility. The 2026 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by Antero Midstream Corporation, Antero Midstream Partners’ wholly owned subsidiaries (other than Finance Corp) and certain of its future restricted subsidiaries. Interest on the 2026 Notes is payable on May 15 and November 15 of each year. Antero Midstream Partners may redeem all or part of the 2026 Notes at any time on or after May 15, 2023 at redemption prices ranging from 103.938% on or after May 15, 2023 to 100.00% on or after May 15, 2025. In addition, prior to May 15, 2023, Antero Midstream Partners may redeem up to 35% of the aggregate principal amount of the 2026 Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 107.875% of the principal amount of the 2026 Notes, plus accrued and unpaid interest. At any time prior to May 15, 2023, Antero Midstream Partners may also redeem the 2026 Notes, in whole or in part, at a price equal to 100% of the principal amount of the 2026 Notes plus a “make-whole” premium and accrued and unpaid interest. If Antero Midstream Partners undergoes a change of control followed by a rating decline, the holders of the 2026 Notes will have the right to require Antero Midstream Partners to repurchase all or a portion of the 2026 Notes at a price equal to 101% of the principal amount of the 2026 Notes, plus accrued and unpaid interest.
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(d) 5.75 % Senior Notes Due 2027
On February 25, 2019, the Issuers issued $650 million in aggregate principal amount of 5.75% senior notes due March 1, 2027 (the “2027 Notes”) at par. The 2027 Notes were recorded at their fair value of $653.3 million as of March 12, 2019, and the related premium of $3.3 million will be amortized into interest expense over the life of the 2027 Notes. The 2027 Notes are unsecured and effectively subordinated to the Credit Facility to the extent of the value of the collateral securing the Credit Facility. The 2027 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by Antero Midstream Corporation, Antero Midstream Partners’ wholly owned subsidiaries (other than Finance Corp) and certain of its future restricted subsidiaries. Interest on the 2027 Notes is payable on March 1 and September 1 of each year. Antero Midstream Partners may redeem all or part of the 2027 Notes at any time on or after March 1, 2022 at redemption prices ranging from 102.875% currently to 100.00% on or after March 1, 2025. If Antero Midstream Partners undergoes a change of control followed by a rating decline, the holders of the 2027 Notes will have the right to require Antero Midstream Partners to repurchase all or a portion of the 2027 Notes at a price equal to 101% of the principal amount of the 2027 Notes, plus accrued and unpaid interest.
(e) 5.75 % Senior Notes Due 2028
On June 28, 2019, the Issuers issued $650 million in aggregate principal amount of 5.75% senior notes due January 15, 2028 (the “2028 Notes”) at par. The 2028 Notes are unsecured and effectively subordinated to the Credit Facility to the extent of the value of the collateral securing the Credit Facility. The 2028 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by Antero Midstream Corporation, Antero Midstream Partners’ wholly owned subsidiaries (other than Finance Corp) and certain of its future restricted subsidiaries. Interest on the 2028 Notes is payable on January 15 and July 15 of each year. Antero Midstream Partners may redeem all or part of the 2028 Notes at any time on or after January 15, 2023 at redemption prices ranging from 102.875% on or after January 15, 2023 to 100.00% on or after January 15, 2026. In addition, prior to January 15, 2023, Antero Midstream Partners may redeem up to 35% of the aggregate principal amount of the 2028 Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 105.75% of the principal amount of the 2028 Notes, plus accrued and unpaid interest. At any time prior to January 15, 2023, Antero Midstream Partners may also redeem the 2028 Notes, in whole or in part, at a price equal to 100% of the principal amount of the 2028 Notes plus a “make-whole” premium and accrued and unpaid interest. If Antero Midstream Partners undergoes a change of control followed by a rating decline, the holders of the 2028 Notes will have the right to require Antero Midstream Partners to repurchase all or a portion of the 2028 Notes at a price equal to 101% of the principal amount of the 2028 Notes, plus accrued and unpaid interest.
(f) 5.375 % Senior Notes Due 2029
On June 8, 2021, the Issuers issued $750 million in aggregate principal amount of 5.375% senior notes due June 15, 2029 (the “2029 Notes”) at par. The 2029 Notes are unsecured and effectively subordinated to the Credit Facility to the extent of the value of the collateral securing the Credit Facility. The 2029 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by Antero Midstream Corporation, Antero Midstream Partners’ wholly owned subsidiaries (other than Finance Corp) and certain of its future restricted subsidiaries. Interest on the 2029 Notes is payable on June 15 and December 15 of each year. Antero Midstream Partners may redeem all or part of the 2029 Notes at any time on or after June 15, 2024 at redemption prices ranging from 102.688% on or after June 15, 2024 to 100.00% on or after June 15, 2026. In addition, prior to June 15, 2024, Antero Midstream Partners may redeem up to 35% of the aggregate principal amount of the 2029 Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 105.375% of the principal amount of the 2029 Notes, plus accrued and unpaid interest. At any time prior to June 15, 2024, Antero Midstream Partners may also redeem the 2029 Notes, in whole or in part, at a price equal to 100% of the principal amount of the 2029 Notes plus a “make-whole” premium and accrued and unpaid interest. If Antero Midstream Partners undergoes a change of control followed by a rating decline, the holders of the 2029 Notes will have the right to require Antero Midstream Partners to repurchase all or a portion of the 2029 Notes at a price equal to 101% of the principal amount of the 2029 Notes, plus accrued and unpaid interest.
(g) Senior Notes Guarantors
The Company and each of the Company’s wholly owned subsidiaries (except for the Issuers) has fully and unconditionally guaranteed the 2024 Notes, 2026 Notes, 2027 Notes, 2028 Notes and 2029 Notes (collectively the “Senior Notes”). In the event a guarantor is sold or disposed of (whether by merger, consolidation, the sale of a sufficient amount of its capital stock so that it no
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
longer qualifies as a Restricted Subsidiary (as defined in the applicable indenture governing the series of Senior Notes) of the Issuer or the sale of all or substantially all of its assets) and whether or not the guarantor is the surviving entity in such transaction to a person that is not an Issuer or a Restricted Subsidiary of an Issuer, such guarantor will be released from its obligations under its guarantee if the sale or other disposition does not violate the covenants set forth in the indentures governing the applicable Senior Notes.
In addition, a guarantor will be released from its obligations under the applicable indenture and its guarantee, upon the release or discharge of the guarantee of other indebtedness under a credit facility that resulted in the creation of such guarantee, except a release or discharge by or as a result of payment under such guarantee; if the Issuers designate such subsidiary as an unrestricted subsidiary and such designation complies with the other applicable provisions of the indenture governing the applicable Senior Notes or in connection with any covenant defeasance, legal defeasance or satisfaction and discharge of the applicable Senior Notes.
During the three and nine months ended September 30, 2021 and 2022, all of the Company’s assets and operations are attributable to the Issuers and its guarantors.
(8) Accrued Liabilities
Accrued liabilities consisted of the following items:
(Unaudited)
December 31, September 30,
(in thousands) 2021 2022
Capital expenditures $ 24,900 19,465
Operating expenses 10,417 8,716
Interest expense 36,794 39,831
Ad valorem taxes 5,400 2,265
Other 3,327 2,675
Total accrued liabilities $ 80,838 72,952
(9) Equity-Based Compensation and Cash Awards
(a) Summary of Equity-Based Compensation
The Company’s equity-based compensation includes (i) costs allocated to Antero Midstream by Antero Resources for grants made prior to March 12, 2019 pursuant to the Antero Resources Corporation Long-Term Incentive Plan (the “AR LTIP”) and (ii) costs related to the Antero Midstream Corporation Long-Term Incentive Plan (the “AM LTIP”). Antero Midstream’s equity-based compensation expense is included in general and administrative expenses, and recorded as a credit to the applicable classes of equity.
AR LTIP
Equity-based compensation expense allocated to Antero Midstream from Antero Resources was $0.3 million and $0.1 million for the three months ended September 30, 2021 and 2022, respectively, and $1.8 million and $0.4 million for the nine months ended September 30, 2021 and 2022, respectively, which includes expense related to the Converted AM RSU Awards (as defined below). For grants made prior to March 12, 2019, Antero Resources has total unamortized expense related to its various equity-based compensation plans that can be allocated to the Company of less than $0.1 million as of September 30, 2022, which includes the Converted AM RSU Awards (as defined below). A portion of this unamortized cost will be allocated to Antero Midstream as it is amortized over the remaining service period of the related awards. The Company does not reimburse Antero Resources for noncash equity compensation allocated to it for awards issued under the AR LTIP.
AM LTIP
The Company is authorized to grant up to 15,398,901 shares of AM common stock to employees and directors under the AM LTIP. The AM LTIP provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), dividend equivalents, other stock-based awards, cash awards and substitute awards. The terms and conditions of the
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
awards granted are established by the compensation committee of the Board of Directors (the “Board”). As of September 30, 2022, a total of 7,410,734 shares were available for future grant under the AM LTIP.
The Company’s equity-based compensation expense, by type of award, is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2022 2021 2022
Restricted stock units (1) $ 2,905 4,525 8,608 11,438
Performance share units (1) 123 833 1,036 1,938
Equity awards issued to directors 227 195 682 650
Total expense $ 3,255 5,553 10,326 14,026
(1) Amounts include equity-based compensation expense allocated to the Company by Antero Resources.
(b) Restricted Stock Unit Awards
As of March 19, 2019, each of the unvested outstanding phantom units granted under the Antero Midstream Partners Long Term Incentive Plan was assumed by the Company and converted into 1.8926 RSUs under the AM LTIP representing a right to receive shares of the Company’s common stock for each converted phantom unit (all such RSUs, the “Converted AM RSU Awards”). The Converted AM RSU Awards are accounted for as if they are distributed by Antero Midstream Partners to Antero Resources. Therefore, the expense related to the Converted AM RSU Awards is subject to allocation by Antero Resources.
A summary of the RSU awards activity, which includes the Converted AM RSU Awards, is as follows:
Weighted Average
Number Grant Date
of Units Fair Value
Total AM LTIP RSUs awarded and unvested—December 31, 2021 3,573,377 $ 8.11
Granted 2,750,896 11.28
Vested (1,243,878) 8.40
Forfeited (159,119) 9.37
Total AM LTIP RSUs awarded and unvested—September 30, 2022 4,921,276 $ 9.77
As of September 30, 2022, unamortized expense of $39.2 million related to the unvested RSUs, which includes less than $0.1 million related to the Converted AM RSU Awards, is expected to be recognized over a weighted average period of approximately 2.4 years. The Company’s proportionate share of the Converted AM RSU Awards will be allocated to it as it is recognized.
(c) Performance Share Unit Awards
2019 Performance Share Unit Awards
In 2019, the Company granted performance share units (“PSUs”) to certain of its employees and executive officers that vest based on the Company’s actual return on invested capital (“ROIC”) (as defined in the award agreement) over a three-year period as compared to a targeted ROIC (“2019 ROIC PSUs”). The number of shares of the Company’s common stock that could be earned with respect to the 2019 ROIC PSUs ranged from zero to 200% of the target number of 2019 ROIC PSUs originally granted. During the second quarter of 2022, the performance condition for the 2019 ROIC PSUs was met at 200% of target and 137,712 target 2019 ROIC PSUs converted into 275,424 shares of the Company’s common stock. As of September 30, 2022, there were no 2019 ROIC PSUs outstanding.
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
2022 Performance Share Unit Awards
In April 2022, the Company granted PSUs to certain of its executive officers that vest based on the Company’s actual ROIC (as defined in the award agreement) over a three-year period concluding on December 31, 2024 as compared to a targeted ROIC (“2022 ROIC PSUs”). The number of shares of the Company’s common stock that can be earned with respect to the 2022 ROIC PSUs ranges from zero to 200% of the target number of 2022 ROIC PSUs originally granted. The grant date fair value of these awards was based on the closing price of the Company’s common stock on the date of the grant, assuming target achievement of the performance condition. Expense related to the 2022 ROIC PSUs is recognized based on the number of shares of the Company’s common stock that are expected to be issued at the end of the measurement period, and such expense is reversed if the likelihood of achieving the performance condition decreases. The likelihood of achieving the performance conditions related to 2022 ROIC PSU awards was probable as of September 30, 2022.
Summary Information for Performance Share Unit Awards
A summary of the PSU awards activity is as follows:
Weighted Average
Number Grant Date
of Units Fair Value
Total AM LTIP PSUs awarded and unvested—December 31, 2021 116,526 $ 6.32
Granted 461,121 11.05
Vested (1) (137,712) 6.32
Forfeited — —
Total AM LTIP PSUs awarded and unvested—September 30, 2022 439,935 $ 11.28
(1) The performance condition for these vested PSUs was met at 200 % of target and as such, they converted into 275,424 shares of the Company’s common stock during the second quarter of 2022.
As of September 30, 2022, unamortized expense of $8.4 million related to unvested PSUs is expected to be recognized over a weighted average period of approximately 2.5 years.
(d) Cash Awards
In January 2020, the Company granted cash awards of $2.2 million to certain executives under the AM LTIP that vest ratably over a period of up to three years . In July 2020, the Company granted additional cash awards of $0.7 million to certain non-executive employees under the AM LTIP that vest ratably over a period of four years . The compensation expense for these awards is recognized ratably over the applicable vesting period. As of December 31, 2021 and September 30, 2022, the Company has recorded $1.1 million and $0.5 million, respectively, in other liabilities in the condensed consolidated balance sheets related to unvested cash awards.
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(10) Cash Dividends
The Company paid cash dividends for the quarter indicated as follows (in thousands, except per share data):
Dividends
Period Record Date Dividend Date Dividends per Share
Q4 2020 February 3, 2021 February 11, 2021 $ 147,194 $ 0.3075
* February 16, 2021 February 16, 2021 138 *
Q1 2021 April 28, 2021 May 12, 2021 108,799 0.2250
* May 17, 2021 May 17, 2021 137 *
Q2 2021 July 28, 2021 August 11, 2021 107,719 0.2250
* August 16, 2021 August 16, 2021 138 *
Q3 2021 October 27, 2021 November 10, 2021 107,459 0.2250
* November 15, 2021 November 15, 2021 137 *
Total 2021 $ 471,721
Q4 2021 January 26, 2022 February 9, 2022 $ 108,149 $ 0.2250
* February 14, 2022 February 14, 2022 138 *
Q1 2022 April 27, 2022 May 11, 2022 109,296 0.2250
* May 16, 2022 May 16, 2022 137 *
Q2 2022 July 27, 2022 August 10, 2022 107,675 0.2250
* August 15, 2022 August 15, 2022 138 *
Total 2022 $ 325,533
* Dividends are paid in accordance with the terms of the Series A Preferred Stock (as defined below) as discussed in Note 11—Equity and Earnings Per Common Share .
On October 12, 2022, the Board announced the declaration of a cash dividend on the shares of AM common stock of $0.2250 per share for the quarter ended September 30, 2022. The dividend will be payable on November 9, 2022 to stockholders of record as of October 26, 2022. The Company pays dividends (i) out of surplus or (ii) if there is no surplus, out of the net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year, as provided under Delaware law.
The Board also declared a cash dividend of $138 thousand on the shares of Series A Preferred Stock of Antero Midstream to be paid on November 14, 2022 in accordance with the terms of the Series A Preferred Stock, which are discussed in Note 11—Equity and Earnings Per Common Share. As of September 30, 2022, there were dividends in the amount of $ 69 thousand accumulated in arrears on the Company’s Series A Preferred Stock.
(11) Equity and Earnings Per Common Share
(a) Preferred Stock
The Board authorized 100,000,000 shares of preferred stock on March 12, 2019, and issued 10,000 shares of preferred stock designated as "5.5% Series A Non-Voting Perpetual Preferred Stock" (the "Series A Preferred Stock"), to The Antero Foundation on that date. Dividends on the Series A Preferred Stock are cumulative from the date of original issue and payable in cash on the 45th day following the end of each fiscal quarter, or such other dates as the Board will approve, at a rate of 5.5% per annum on (i) the liquidation preference per share of Series A Preferred Stock (as described below) and (ii) the amount of accrued and unpaid dividends for any prior dividend period on such share of Series A Preferred Stock, if any . At any time following the date of issue, in the event of a change of control, or at any time on or after March 12, 2029, the Company may redeem the Series A Preferred Stock at a price equal to $1,000 per share, plus any accrued and unpaid dividends, payable in cash; provided that if any shares of the Series A Preferred Stock are held by The Antero Foundation at the time of such redemption, the price for redemption of each share of Series A Preferred Stock will be the greater of (i) $1,000 per share, plus any accrued but unpaid dividends, and (ii) the fair market value of the Series A Preferred Stock. On or after March 12, 2029, the holder of each share of Series A Preferred Stock (other than The Antero Foundation) may convert such shares, at any time and from time to time, at the option of the holder into a number of shares of AM common stock
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
equal to the conversion ratio in effect on the applicable conversion date, subject to certain limitations. The Series A Preferred Stock ranks senior to the AM common stock as to dividend rights, as well as with respect to rights upon liquidation, winding-up or dissolution of the Company. Holders of the Series A Preferred Stock do not have any voting rights in the Company, except as required by law, or any preemptive rights.
(b) Weighted Average Shares Outstanding
The following is a reconciliation of the Company’s basic weighted average shares outstanding to diluted weighted average shares outstanding:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2022 2021 2022
Basic weighted average number of shares outstanding 477,442 478,460 477,196 478,144
Add: Dilutive effect of RSUs 1,093 769 1,113 1,003
Add: Dilutive effect of PSUs 200 — 232 106
Add: Dilutive effect of Series A Preferred Stock 960 1,089 960 1,089
Diluted weighted average number of shares outstanding 479,695 480,318 479,501 480,342
Weighted average number of outstanding equity awards excluded from calculation of diluted earnings per common share (1):
RSUs 235 2,685 283 1,662
PSUs — 880 — 545
(1) The potential dilutive effects of these awards were excluded from the computation of earnings (loss) per common shares—assuming dilution because the inclusion of these awards would have been anti-dilutive.
(c) Earnings Per Common Share
Earnings per common share—basic for each period is computed by dividing the net income or loss attributable to the Company by the basic weighted average number of shares outstanding during the period. Earnings per common share—assuming dilution for each period is computed after giving consideration to the potential dilution from outstanding equity awards, calculated using the treasury stock method. During periods in which the Company incurs a net loss, diluted weighted average shares outstanding are equal to basic weighted average shares outstanding because the effect of all equity awards is anti-dilutive.
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share amounts) 2021 2022 2021 2022
Net income $ 89,327 84,014 252,991 243,449
Less preferred stock dividends (138) (138) (413) (413)
Net income available to common shareholders $ 89,189 83,876 252,578 243,036
Net income per share–basic $ 0.19 0.18 0.53 0.51
Net income per share–diluted $ 0.19 0.17 0.53 0.51
Weighted average common shares outstanding–basic 477,442 478,460 477,196 478,144
Weighted average common shares outstanding–diluted 479,695 480,318 479,501 480,342
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(12) Fair Value Measurement
(a) Senior Unsecured Notes
The fair value and carrying value of the Company’s Senior Notes is as follows:
(Unaudited)
December 31, 2021 September 30, 2022
(in thousands) Fair Value (1) Carrying Value (2) Fair Value (1) Carrying Value (2)
2026 Notes $ 604,450 544,294 551,430 545,128
2027 Notes 672,750 645,970 601,120 646,444
2028 Notes 680,225 643,902 591,500 644,554
2029 Notes 783,750 741,544 657,375 742,243
Total $ 2,741,175 2,575,710 2,401,425 2,578,369
(1) Fair values are based on Level 2 market data inputs.
(2) Carrying values are presented net of unamortized debt issuance costs and debt premiums.
(b) Other Assets and Liabilities
The carrying values of accounts receivable and accounts payable as of December 31, 2021 and September 30, 2022 approximated fair value because of their short-term nature. The carrying value of the amounts under the Credit Facility as of December 31, 2021 and September 30, 2022 approximated fair value because the variable interest rates are reflective of current market conditions.
(13) Investments in Unconsolidated Affiliates
The Company has a 15% equity interest in a gathering system of Stonewall Gas Gathering LLC (“Stonewall”), which operates a 67-mile pipeline on which Antero Resources is an anchor shipper.
The Company has a 50% equity interest in the joint venture to develop processing and fractionation assets with MarkWest Energy Partners, L.P. (“MarkWest”), a wholly owned subsidiary of MPLX, LP (the “Joint Venture”). The Joint Venture was formed to develop processing and fractionation assets in Appalachia. MarkWest operates the Joint Venture assets, which consist of processing plants in West Virginia and a one -third interest in two MarkWest fractionators in Ohio.
The Company’s net income includes its proportionate share of the net income of the Joint Venture and Stonewall. When the Company records its proportionate share of net income, it increases equity income in the unaudited condensed consolidated statements of operations and comprehensive income and the carrying value of that investment on its balance sheet. When distributions on the Company’s proportionate share of net income are received, they are recorded as reductions to the carrying value of the investment on the condensed consolidated balance sheet and are classified as cash inflows from operating activities in accordance with the nature of the distribution approach under FASB ASC Topic 230, Statement of Cash Flows . The Company uses the equity method of accounting to account for its investments in Stonewall and the Joint Venture because it exercises significant influence, but not control, over the entities. The Company’s judgment regarding the level of influence over its equity investments includes considering key factors such as its ownership interest, representation on the applicable Board of Directors and participation in policy-making decisions of Stonewall and the Joint Venture.
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
The following table is a reconciliation of the Company’s investments in these unconsolidated affiliates:
Total Investment
MarkWest in Unconsolidated
(in thousands) Stonewall Joint Venture Affiliates
Balance as of December 31, 2021 $ 130,572 565,437 696,009
Equity in earnings of unconsolidated affiliates (1) 5,367 65,100 70,467
Distributions from unconsolidated affiliates (9,000) (81,470) (90,470)
Return of investment in unconsolidated affiliate — (17,000) (17,000)
Balance as of September 30, 2022 $ 126,939 532,067 659,006
(1) As adjusted for the amortization of the difference between the cost of the equity investments in Stonewall and the Joint Venture and the amount of the underlying equity in the net assets of Stonewall and the Joint Venture as of March 12, 2019.
(14) Reportable Segments
(a) Summary of Reportable Segments
The Company’s operations, which are located in the United States, are organized into two reportable segments: (i) gathering and processing and (ii) water handling. These segments are monitored separately by management for performance and are consistent with internal financial reporting. These segments have been identified based on the differing products and services, regulatory environment and the expertise required for these operations. Management evaluates the performance of the Company’s business segments based on operating income. Interest expense is primarily managed and evaluated on a consolidated basis.
Gathering and Processing
The gathering and processing segment includes a network of gathering pipelines and compressor stations that collect and process production from Antero Resources’ wells in West Virginia and Ohio. The gathering and processing segment also includes equity in earnings from the Company’s investments in the Joint Venture and Stonewall.
Water Handling
The Company’s water handling segment includes two independent systems that deliver water from sources including the Ohio River, local reservoirs and several regional waterways. Portions of these water handling systems are also utilized to transport flowback and produced water. The water handling systems consist of permanent buried pipelines, surface pipelines and water storage facilities, as well as pumping stations, blending facilities and impoundments to transport water throughout the systems used to deliver water for Antero Resources’ well completions.
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(b) Reportable Segments Financial Information
The summarized operating results of the Company’s reportable segments are as follows:
Three Months Ended September 30, 2021
Gathering and Water Consolidated
(in thousands) Processing Handling Unallocated (1) Total
Revenues:
Revenue–Antero Resources $ 188,716 53,511 — 242,227
Revenue–third-party — 245 — 245
Amortization of customer relationships (9,271) (8,397) — (17,668)
Total revenues 179,445 45,359 — 224,804
Operating expenses:
Direct operating 16,161 23,338 — 39,499
General and administrative 9,076 4,554 1,180 14,810
Facility idling — 870 — 870
Depreciation 15,151 12,336 — 27,487
Impairment of property and equipment — 203 — 203
Accretion of asset retirement obligations — 114 — 114
Total operating expenses 40,388 41,415 1,180 82,983
Operating income $ 139,057 3,944 (1,180) 141,821
Equity in earnings of unconsolidated affiliates $ 24,088 — — 24,088
Additions to property and equipment $ 69,069 13,514 — 82,583
(1) Certain expenses that are not directly attributable to gathering and processing and water handling are managed and evaluated on a consolidated basis.
Three Months Ended September 30, 2022
Gathering and Water Consolidated
(in thousands) Processing Handling Unallocated (1) Total
Revenues:
Revenue–Antero Resources $ 185,640 61,411 — 247,051
Revenue–third-party — 1,651 — 1,651
Amortization of customer relationships (9,271) (8,397) — (17,668)
Total revenues 176,369 54,665 — 231,034
Operating expenses:
Direct operating 19,813 26,835 — 46,648
General and administrative 9,890 2,425 1,272 13,587
Facility idling — 865 — 865
Depreciation 21,177 13,029 — 34,206
Accretion of asset retirement obligations — 50 — 50
Gain on asset sale (2,056) (36) — (2,092)
Total operating expenses 48,824 43,168 1,272 93,264
Operating income $ 127,545 11,497 (1,272) 137,770
Equity in earnings of unconsolidated affiliates $ 24,411 — — 24,411
Additions to property and equipment, net $ 58,742 15,378 — 74,120
(1) Certain expenses that are not directly attributable to gathering and processing and water handling are managed and evaluated on a consolidated basis.
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Nine Months Ended September 30, 2021
Gathering and Water Consolidated
(in thousands) Processing Handling Unallocated (1) Total
Revenues:
Revenue–Antero Resources $ 566,544 167,832 — 734,376
Revenue–third-party — 340 — 340
Amortization of customer relationships (27,813) (25,191) — (53,004)
Total revenues 538,731 142,981 — 681,712
Operating expenses:
Direct operating 50,409 67,959 — 118,368
General and administrative 26,459 17,107 3,425 46,991
Facility idling — 3,033 — 3,033
Depreciation 44,268 36,688 — 80,956
Impairment of property and equipment 1,218 364 — 1,582
Accretion of asset retirement obligations — 347 — 347
Loss on asset sale 3,628 — — 3,628
Total operating expenses 125,982 125,498 3,425 254,905
Operating income $ 412,749 17,483 (3,425) 426,807
Equity in earnings of unconsolidated affiliates $ 66,347 — — 66,347
Additions to property and equipment $ 120,727 36,221 — 156,948
(1) Certain expenses that are not directly attributable to gathering and processing and water handling are managed and evaluated on a consolidated basis.
Nine Months Ended September 30, 2022
Gathering and Water Consolidated
(in thousands) Processing Handling Unallocated (1) Total
Revenues:
Revenue–Antero Resources $ 552,154 176,994 — 729,148
Revenue–third-party — 2,288 — 2,288
Amortization of customer relationships (27,814) (25,190) — (53,004)
Total revenues 524,340 154,092 — 678,432
Operating expenses:
Direct operating 56,338 75,621 — 131,959
General and administrative 30,081 13,015 4,501 47,597
Facility idling — 3,198 — 3,198
Depreciation 59,838 38,343 — 98,181
Impairment of property and equipment 1,130 2,572 — 3,702
Accretion of asset retirement obligations — 178 — 178
Loss on settlement of asset retirement obligations — 539 — 539
Gain on asset sale (2,119) (123) — (2,242)
Total operating expenses 145,268 133,343 4,501 283,112
Operating income $ 379,072 20,749 (4,501) 395,320
Equity in earnings of unconsolidated affiliates $ 70,467 — — 70,467
Additions to property and equipment, net $ 190,407 45,747 — 236,154
(1) Certain expenses that are not directly attributable to gathering and processing and water handling are managed and evaluated on a consolidated basis.
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ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
The summarized total assets of the Company’s reportable segments are as follows:
(Unaudited)
December 31, September 30,
(in thousands) 2021 2022
Gathering and Processing $ 4,450,939 4,489,750
Water Handling 1,092,122 1,073,000
Unallocated (1) 940 1,071
Total assets $ 5,544,001 5,563,821
(1) Certain assets that are not directly attributable to gathering and processing and water handling are managed and evaluated on a consolidated basis .
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The information provided below supplements, but does not form part of, our unaudited condensed consolidated financial statements. This discussion contains forward-looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, see “Item 1A. Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. In this section, references to “Antero Midstream,” “AM,” the “Company,” “we,” “us,” and “our” refer to Antero Midstream Corporation and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.
Overview
We are a growth-oriented midstream energy company formed to own, operate and develop midstream energy assets to primarily service Antero Resources’ production and completion activity. We believe that our strategically located assets and our relationship with Antero Resources have allowed us to become a leading midstream energy company serving the Appalachian Basin and present opportunities to expand our midstream services to other operators in the Appalachian Basin. Our assets consist of gathering pipelines, compressor stations and interests in processing and fractionation plants that collect and process production from Antero Resources’ wells in the Appalachian Basin in West Virginia and Ohio. Our assets also include two independent water handling systems that deliver water from the Ohio River and several regional waterways. These water handling systems consist of permanent buried pipelines, surface pipelines and water storage facilities, as well as pumping stations, blending facilities and impoundments. Portions of these water handling systems are also utilized to transport flowback and produced water. These services are provided by us directly or through third-parties with which we contract.
Marcellus Bolt-On Acquisition
On October 25, 2022, we acquired certain Marcellus gas gathering and compression assets from Crestwood Equity Partners LP (NYSE: CEQP) (“Crestwood”) for $205 million in cash, before closing adjustments, which was funded by borrowings under our senior secured revolving credit facility (“Credit Facility”). These assets include 72 miles of dry gas gathering pipelines and nine compressor stations with approximately 700 MMcf/d of compression capacity. Current throughput of the assets is approximately 200 MMcf/d, resulting in significant available capacity for growth.
Market Conditions and Business Trends
Commodity Markets
Prices for natural gas, NGLs and oil have increased significantly during the nine months ended September 30, 2022 as compared to same period of 2021. While substantially all of our revenues are based on fixed-fee contracts that are not directly impacted by changes in commodity prices, commodity price changes do impact the revenues and cash flows of Antero Resources, and Antero Resources’ drilling and development plan does have a direct impact on our gathering, compression and water handling service throughput, revenues and cash flows. In the current economic environment, we expect that commodity prices for some or all of the commodities produced by Antero Resources could remain volatile. However, to the extent Antero Resources maintains a maintenance capital program as it has done in recent years, we do not expect to experience substantial variability in our throughput volumes resulting from volatile commodity prices.
Growth Incentive Fee Program with Antero Resources
Our gathering and compression agreement with Antero Resources includes a growth incentive fee progra m whereby we agreed to provide quarterly fee reductions to Antero Resources through 2023, contingent upon Antero Resources achieving volumetric growth targets on low pressure gathering. Antero Resources’ throughput on the assets acquired from Crestwood will be gathered under an existing agreement that will not be considered in the low pressure gathering rebate volumes with Antero Resources. If actual low pressure volumes are below the lowest threshold for the respective period, Antero Resources will not earn a reduction in low pressure gathering fees.
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The following table summarizes the remaining low pressure gathering growth incentive targets through 2023:
Low Pressure Gathering Quarterly Fee
Volume Growth Incentive Reduction
Targets (MMcf/d) (in millions)
Threshold 1 >2,900 and <3,150 $12.0
Threshold 2 >3,150 and <3,400 $15.5
Threshold 3 >3,400 $19.0
During the three months ended September 30, 2022, Antero Resources delivered low pressure gathering volumes of 2,952 MMcf/d and as a result, earned a quarterly fee reduction of $12 million during the period. During the nine months ended September 30, 2022, Antero Resources earned an aggregate of $36 million in fee reductions. Antero Resources did not earn any quarterly fee reductions during the three and nine months ended September 30, 2021.
Economic Indicators
The economy is experiencing elevated inflation levels as a result of global supply and demand imbalances, where global demand continues to outpace current supplies. For example, the BLS Consumer Price Index (“CPI”) for all urban consumers increased 8% from September 2021 to September 2022 as compared to the average annual increase of 3% over the previous 10 years. Despite inflationary pressures, our 2022 capital budget remains unchanged as of September 30, 2022. See “—Capital Resources and Liquidity—2022 Capital Investment” for more information. In order to manage the inflation risk currently present in the United States’ economy, the Federal Reserve has utilized monetary policy in the form of interest rate increases in an effort to bring the inflation rate in line with its stated goal of 2% on a long-term basis.
The global economy also continues to be impacted by the effects of the COVID-19 pandemic and global events, among other factors. These events have often caused global supply chain disruptions with additional pressure due to trade sanctions on Russia and other global trade restrictions, among others. However, neither our nor Antero Resources’ supply chain has experienced any significant interruptions due to the COVID-19 pandemic or global supply and demand imbalances.
Inflationary pressures and supply chain disruptions could result in increases to our operating and capital costs that are not fixed or renegotiation of contracts and/or supply agreements, among others. These economic variables are beyond our control and may adversely impact our business, financial condition, results of operations and future cash flows.
COVID-19 Pandemic
We have continued to operate throughout the COVID-19 pandemic, in some cases subject to federal, state and local regulations, and we are taking steps to protect the health and safety of our workers. We have implemented protocols to reduce the risk of an outbreak within our field operations and offices, and these protocols have not impacted Antero Resources’ production, our throughput or our business activities. During the third quarter of 2022, we transitioned from a hybrid working arrangement for non-field level employees , which involved a combination of in-office and remote work-from-home arrangements, to an in-office working arrangement for all non-field level employees. We have been able to maintain a consistent level of effectiveness through these arrangements, including maintaining our day-to-day operations, our financial reporting systems and our internal control over financial reporting. We continue to monitor the COVID-19 environment in order to protect the health and safety of our employees.
Results of Operations
We have two operating segments: (i) gathering and processing and (ii) water handling. The gathering and processing segment includes a network of gathering pipelines and compressor stations that collect and process production from Antero Resources’ wells in the Appalachian Basin, as well as equity in earnings from our investments in the joint venture to develop processing and fractionation assets with MarkWest Energy Partners, L.P., a wholly owned subsidiary of MPLX, LP (the “Joint Venture”) and Stonewall Gas Gathering LLC. The water handling segment includes (i) two independent systems that deliver water from sources including the Ohio River, local reservoirs and several regional waterways and (ii) other fluid handling services, which include high rate transfer, wastewater transportation, disposal and blending.
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Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2022
The operating results of our reportable segments are as follows:
Three Months Ended September 30, 2021
Gathering and Water Consolidated
(in thousands) Processing Handling Unallocated (1) Total
Revenues:
Revenue–Antero Resources $ 188,716 53,511 — 242,227
Revenue–third-party — 245 — 245
Amortization of customer relationships (9,271) (8,397) — (17,668)
Total revenues 179,445 45,359 — 224,804
Operating expenses:
Direct operating 16,161 23,338 — 39,499
General and administrative (excluding equity-based compensation) 6,533 4,069 953 11,555
Equity-based compensation 2,543 485 227 3,255
Facility idling — 870 — 870
Depreciation 15,151 12,336 — 27,487
Impairment of property and equipment — 203 — 203
Accretion of asset retirement obligations — 114 — 114
Total operating expenses 40,388 41,415 1,180 82,983
Operating income 139,057 3,944 (1,180) 141,821
Other income (expense):
Interest expense, net — — (44,544) (44,544)
Equity in earnings of unconsolidated affiliates 24,088 — — 24,088
Total other income (expense) 24,088 — (44,544) (20,456)
Income before income taxes 163,145 3,944 (45,724) 121,365
Income tax expense — — (32,038) (32,038)
Net income and comprehensive income $ 163,145 3,944 (77,762) 89,327
Adjusted EBITDA (2) $ 219,478
(1) Corporate expenses that are not directly attributable to either the gathering and processing or water handling segments.
(2) Adjusted EBITDA is a non-GAAP financial measure. For a discussion of this measure, including a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
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Three Months Ended September 30, 2022
Gathering and Water Consolidated
(in thousands) Processing Handling Unallocated (1) Total
Revenues:
Revenue–Antero Resources $ 197,640 61,411 — 259,051
Revenue–third-party — 1,651 — 1,651
Gathering—low pressure rebate (12,000) — — (12,000)
Amortization of customer relationships (9,271) (8,397) — (17,668)
Total revenues 176,369 54,665 — 231,034
Operating expenses:
Direct operating 19,813 26,835 — 46,648
General and administrative (excluding equity-based compensation) 5,657 1,300 1,077 8,034
Equity-based compensation 4,233 1,125 195 5,553
Facility idling — 865 — 865
Depreciation 21,177 13,029 — 34,206
Accretion of asset retirement obligations — 50 — 50
Gain on asset sale (2,056) (36) — (2,092)
Total operating expenses 48,824 43,168 1,272 93,264
Operating income 127,545 11,497 (1,272) 137,770
Other income (expense):
Interest expense, net — — (47,835) (47,835)
Equity in earnings of unconsolidated affiliates 24,411 — — 24,411
Total other income (expense) 24,411 — (47,835) (23,424)
Income before income taxes 151,956 11,497 (49,107) 114,346
Income tax expense — — (30,332) (30,332)
Net income and comprehensive income $ 151,956 11,497 (79,439) 84,014
Adjusted EBITDA (2) $ 223,120
(1) Corporate expenses that are not directly attributable to either the gathering and processing or water handling segments.
(2) Adjusted EBITDA is a non-GAAP financial measure. For a discussion of this measure, including a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
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The operating data for Antero Midstream is as follows:
Three Months Ended Amount of
September 30, Increase Percentage
2021 2022 or Decrease Change
Operating Data:
Gathering—low pressure (MMcf) 264,999 271,569 6,570 2 %
Compression (MMcf) 251,555 257,025 5,470 2 %
Gathering—high pressure (MMcf) 258,585 257,757 (828) *
Fresh water delivery (MBbl) 8,335 9,515 1,180 14 %
Other fluid handling (MBbl) 4,325 5,280 955 22 %
Wells serviced by fresh water delivery 18 18 — *
Gathering—low pressure (MMcf/d) 2,880 2,952 72 3 %
Compression (MMcf/d) 2,734 2,794 60 2 %
Gathering—high pressure (MMcf/d) 2,811 2,802 (9) *
Fresh water delivery (MBbl/d) 91 103 12 13 %
Other fluid handling (MBbl/d) 47 57 10 21 %
Average Realized Fees:
Average gathering—low pressure fee ($/Mcf) $ 0.33 0.34 0.01 3 %
Average compression fee ($/Mcf) $ 0.20 0.21 0.01 3 %
Average gathering—high pressure fee ($/Mcf) $ 0.20 0.21 0.01 3 %
Average fresh water delivery fee ($/Bbl) $ 3.96 4.04 0.08 2 %
Joint Venture Operating Data:
Processing—Joint Venture (MMcf) 141,580 135,611 (5,969) (4) %
Fractionation—Joint Venture (MBbl) 3,408 3,287 (121) (4) %
Processing—Joint Venture (MMcf/d) 1,539 1,474 (65) (4) %
Fractionation—Joint Venture (MBbl/d) 37 36 (1) (3) %
* Not meaningful or applicable.
Revenues. Total revenues increased by 3%, from $225 million, including amortization of customer relationships of $18 million, for the three months ended September 30, 2021, to $231 million, including amortization of customer relationships of $18 million, for the three months ended September 30, 2022. Gathering and processing revenues decreased by 2%, from $180 million for the three months ended September 30, 2021 to $176 million for the three months ended September 30, 2022. Water handling revenues increased by 21%, from $45 million for the three months ended September 30, 2021 to $55 million for the three months ended September 30, 2022. These fluctuations primarily resulted from the following:
Gathering and Processing
● Low pressure gathering revenue decreased $7 million period over period primarily due to $12 million in higher rebates to Antero Resources during the three months ended September 30, 2022. Low pressure gathering volumes increased between periods primarily as a result of 70 additional wells being connected to our system since September 30, 2021.
● Compression revenue increased $3 million period over period primarily due to a 3% increase in the compression rate as a result of the annual CPI-based adjustment and increased throughput volumes of 5 Bcf, or 60 MMcf/d. Compression volumes increased between periods primarily due to (i) 70 additional wells being connected to our system since September 30, 2021, (ii) one compressor that came online in the fourth quarter of 2021 and (iii) one compressor that came online during the second quarter of 2022.
● High pressure gathering revenue increased $1 million period over period primarily due to a 3% increase in the high pressure gathering rate as a result of the annual CPI-based adjustment. High pressure gathering volumes decreased slightly period over period by 1 Bcf, or 9 MMcf /d due to higher production from Antero Resources that was attributable to third-party high pressure gathering acreage dedications, offset by 70 additional wells being connected to our system since September 30, 2021.
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Water Handling
● Fresh water delivery revenue increased $5 million period over period primarily due to (i) increased fresh water volumes of 1 MMBbl or 12 MBbl/d and (ii) a 3% increase to the fresh water delivery rate for our long-term contract with Antero Resources as a result of the annual CPI-based adjustment.
● Other fluid handling services revenue increased $4 million period over period primarily due to (i) increased rates on our wastewater handling, blending and high-rate transfer services during the three months ended September 30, 2022 and (ii) higher other fluid handling volumes between periods.
Direct operating expenses. Total direct operating expenses increased by 18%, from $39 million for the three months ended September 30, 2021 to $47 million for the three months ended September 30, 2022. Gathering and processing direct operating expenses increased by 23%, from $16 million for the three months ended September 30, 2021 to $20 million for the three months ended September 30, 2022 primarily due to (i) higher throughput volumes between periods, (ii) two compressors that came online between periods and (iii) higher chemical, fuel, labor and heavy maintenance expense. Water handling direct operating expenses increased by 15%, from $23 million for the three months ended September 30, 2021 to $27 million for the three months ended September 30, 2022 primarily due to the increase in cost plus 3% service costs, including higher fuel expense, and higher fresh water and blending volumes between periods.
General and administrative (excluding equity-based compensation) expenses. General and administrative expenses (excluding equity-based compensation expense) decreased by 30%, from $12 million for the three months ended September 30, 2021 to $8 million for three months ended September 30, 2022 primarily due to (i) lower costs allocated to us from Antero Resources and (ii) lower legal costs associated with the Veolia legal matter between periods. See “Item 1. Legal Proceedings” below for additional information.
Equity-based compensation expenses. Equity-based compensation expenses increased by 71%, from $3 million for the three months ended September 30, 2021 to $5 million for the three months ended September 30, 2022 primarily due to an increase in the annual equity awards granted during the second quarter of 2022 as compared to prior years.
Facility idling expenses. Facility idling expenses remained consistent at $1 million for the three months ended September 30, 2021 and 2022.
Depreciation expense. Total depreciation expense increased by 24% from $27 million for the three months ended September 30, 2021 to $34 million for the three months ended September 30, 2022. This increase is primarily a result of a phased early retirement of an underutilized compressor station beginning in the second quarter of 2022 through the first half of 2023, which allows us to relocate and reuse the compressor units and equipment to (i) expand an existing compressor station and (ii) contribute to a new compressor station. There are certain costs associated with the underutilized compressor station that cannot be relocated or reused that will be depreciated over the remaining period of use. During the three months ended September 30, 2022, we recognized depreciation expense associated with assets that are subject to early retirement in the future of $5 million.
Gain on asset sale. There were no asset sales during the three months ended September 30, 2021. Gain on asset sale of $2 million for the three months ended September 30, 2022 was primarily due to (i) the sale of four compressor engines and (ii) reimbursement of certain cancelled project costs.
Interest expense. Interest expense increased by 7%, from $45 million for the three months ended September 30, 2021 to $48 million for the three months ended September 30, 2022 primarily due to the increased interest rates on our Credit Facility as a result of higher benchmark rates during the three months ended September 30, 2022 and higher Credit Facility borrowings between periods.
Equity in earnings of unconsolidated affiliates. Equity in earnings in unconsolidated affiliates remained consistent at $24 million for the three months ended September 30, 2021 and 2022 primarily due to higher Joint Venture earnings as a result of annual CPI-based adjustments for processing and fractionation fees, partially offset by lower processed volumes at the Joint Venture between periods.
Income tax expense. Income tax expense for the three months ended September 30, 2021 and 2022 was $32 million and $30 million, respectively, which reflects effective tax rates of 26.4% and 26.5% , respectively.
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Net income. Net income decreased by 6%, from $89 million for the three months ended September 30, 2021 to $84 million for the three months ended September 30, 2022. The decrease was primarily due to decreased low pressure gathering revenues, higher direct operating costs and higher depreciation expense between periods, partially offset higher compression, high pressure gathering and water handling revenues.
Adjusted EBITDA. Adjusted EBITDA increased by 2%, from $219 million for the three months ended September 30, 2021 to $223 million for the three months ended September 30, 2022. The increase was primarily due to higher compression, high pressure gathering and water handling revenues and lower general and administrative costs between periods, partially offset by decreased low pressure gathering revenues and higher direct operating costs between periods. For a discussion of the non-GAAP financial measure Adjusted EBITDA, including a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, read “—Non-GAAP Financial Measures” below.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2022
The operating results of our reportable segments are as follows:
Nine Months Ended September 30, 2021
Gathering and Water Consolidated
(in thousands) Processing Handling Unallocated (1) Total
Revenues:
Revenue–Antero Resources $ 566,544 167,832 — 734,376
Revenue–third-party — 340 — 340
Amortization of customer relationships (27,813) (25,191) — (53,004)
Total revenues 538,731 142,981 — 681,712
Operating expenses:
Direct operating 50,409 67,959 — 118,368
General and administrative (excluding equity-based compensation) 18,869 15,053 2,743 36,665
Equity-based compensation 7,590 2,054 682 10,326
Facility idling — 3,033 — 3,033
Depreciation 44,268 36,688 — 80,956
Impairment of property and equipment 1,218 364 — 1,582
Accretion of asset retirement obligations — 347 — 347
Loss on asset sale 3,628 — — 3,628
Total operating expenses 125,982 125,498 3,425 254,905
Operating income 412,749 17,483 (3,425) 426,807
Other income (expense):
Interest expense, net — — (130,915) (130,915)
Equity in earnings of unconsolidated affiliates 66,347 — — 66,347
Loss on early extinguishment of debt — — (20,701) (20,701)
Total other income (expense) 66,347 — (151,616) (85,269)
Income before income taxes 479,096 17,483 (155,041) 341,538
Income tax expense — — (88,547) (88,547)
Net income and comprehensive income $ 479,096 17,483 (243,588) 252,991
Adjusted EBITDA (2) $ 663,765
(1) Corporate expenses that are not directly attributable to either the gathering and processing or water handling segments.
(2) Adjusted EBITDA is a non-GAAP financial measure. For a discussion of this measure, including a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
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Nine Months Ended September 30, 2022
Gathering and Water Consolidated
(in thousands) Processing Handling Unallocated (1) Total
Revenues:
Revenue–Antero Resources $ 588,154 176,994 — 765,148
Revenue–third-party — 2,288 — 2,288
Gathering—low pressure rebate (36,000) — — (36,000)
Amortization of customer relationships (27,814) (25,190) — (53,004)
Total revenues 524,340 154,092 — 678,432
Operating expenses:
Direct operating 56,338 75,621 — 131,959
General and administrative (excluding equity-based compensation) 19,490 10,230 3,851 33,571
Equity-based compensation 10,591 2,785 650 14,026
Facility idling — 3,198 — 3,198
Depreciation 59,838 38,343 — 98,181
Impairment of property and equipment 1,130 2,572 — 3,702
Accretion of asset retirement obligations — 178 — 178
Loss on settlement of asset retirement obligations — 539 — 539
Gain on asset sale (2,119) (123) — (2,242)
Total operating expenses 145,268 133,343 4,501 283,112
Operating income 379,072 20,749 (4,501) 395,320
Other income (expense):
Interest expense, net — — (137,540) (137,540)
Equity in earnings of unconsolidated affiliates 70,467 — — 70,467
Total other income (expense) 70,467 — (137,540) (67,073)
Income before income taxes 449,539 20,749 (142,041) 328,247
Income tax expense — — (84,798) (84,798)
Net income and comprehensive income $ 449,539 20,749 (226,839) 243,449
Adjusted EBITDA (2) $ 653,178
(1) Corporate expenses that are not directly attributable to either the gathering and processing or water handling segments.
(2) Adjusted EBITDA is a non-GAAP financial measure. For a discussion of this measure, including a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
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The operating data for Antero Midstream is as follows:
Nine Months Ended Amount of
September 30, Increase Percentage
2021 2022 or Decrease Change
Operating Data:
Gathering—low pressure (MMcf) 787,993 805,598 17,605 2 %
Compression (MMcf) 744,798 763,143 18,345 2 %
Gathering—high pressure (MMcf) 768,869 773,336 4,467 1 %
Fresh water delivery (MBbl) 27,234 27,437 203 1 %
Other fluid handling (MBbl) 12,657 14,182 1,525 12 %
Wells serviced by fresh water delivery 59 54 (5) (8) %
Gathering—low pressure (MMcf/d) 2,886 2,951 65 2 %
Compression (MMcf/d) 2,728 2,795 67 2 %
Gathering—high pressure (MMcf/d) 2,816 2,833 17 1 %
Fresh water delivery (MBbl/d) 100 101 1 1 %
Other fluid handling (MBbl/d) 46 52 6 13 %
Average Realized Fees:
Average gathering—low pressure fee ($/Mcf) $ 0.33 0.34 0.01 3 %
Average compression fee ($/Mcf) $ 0.20 0.21 0.01 3 %
Average gathering—high pressure fee ($/Mcf) $ 0.20 0.21 0.01 3 %
Average fresh water delivery fee ($/Bbl) $ 3.97 4.07 0.10 3 %
Joint Venture Operating Data:
Processing—Joint Venture (MMcf) 402,030 404,517 2,487 1 %
Fractionation—Joint Venture (MBbl) 10,256 9,732 (524) (5) %
Processing—Joint Venture (MMcf/d) 1,473 1,482 9 1 %
Fractionation—Joint Venture (MBbl/d) 38 36 (2) (5) %
* Not meaningful or applicable.
Revenues. Total revenues decreased by 1%, from $682 million, including amortization of customer relationships of $53 million, for the nine months ended September 30, 2021, to $678 million, including amortization of customer relationships of $53 million, for the nine months ended September 30, 2022. Gathering and processing revenues decreased by 3%, from $539 million for the nine months ended September 30, 2021 to $524 million for the nine months ended September 30, 2022. Water handling revenues increased by 8%, from $143 million for the nine months ended September 30, 2021 to $154 million for the nine months ended September 30, 2022. These fluctuations primarily resulted from the following:
Gathering and Processing
● Low pressure gathering revenue decreased $28 million period over period primarily due to the $36 million rebate earned by Antero Resources during the nine months ended September 30, 2022, partially offset by increased throughput volumes of 18 Bcf, or 65 MMcf/d, and a 3% increase in the low pressure gathering rate as a result of the annual CPI-based adjustment. Low pressure gathering volumes increased between periods primarily due to 70 additional wells being connected to our system since September 30, 2021 .
● Compression revenue increased $8 million period over period primarily due to increased throughput volumes of 18 Bcf, or 67 MMcf/d, and a 3% increase in the compression rate as a result of the annual CPI-based adjustment. Compression volumes increased between periods primarily due to (i) 70 additional wells being connected to our system since September 30, 2021, (ii) one compressor that came online in the fourth quarter of 2021 and (iii) one compressor that came online during the second quarter of 2022.
● High pressure gathering revenue increased $5 million period over period due to increased throughput volumes of 4 Bcf, or 17 MMcf /d, and a 3% increase to the high pressure gathering rate as a result of the annual CPI-based adjustment. The high pressure gathering volumes increased period over period primarily due to 70 additional wells being connected to our system since September 30, 2021.
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Water Handling
● Fresh water delivery revenue increased $3 million period over period primarily due to a 3% increase to the fresh water delivery rate for our long-term contract with Antero Resources as a result of the annual CPI-based adjustment.
● Other fluid handling services revenue increased $8 million period over period primarily due to (i) increased rates on our wastewater handling, blending and high-rate transfer services during the nine months ended September 30, 2022 and (ii) higher other fluid handling volumes between periods.
Direct operating expenses. Total direct operating expenses increased by 11%, from $118 million for the nine months ended September 30, 2021 to $132 million for the nine months ended September 30, 2022. Gathering and processing direct operating expenses increased by 12%, from $50 million for the nine months ended September 30, 2021 to $56 million for the nine months ended September 30, 2022 primarily due to (i) higher throughput volumes between periods, (ii) two compressors that came online between periods and (iii) higher chemical, labor, fuel and heavy maintenance expense. Water handling direct operating expenses increased by 11%, from $68 million for the nine months ended September 30, 2021 to $76 million for the nine months ended September 30, 2022 primarily due to the higher water blending volumes between periods and higher fresh water deliveries in the Utica for Antero Resources’ development program between periods.
General and administrative (excluding equity-based compensation) expenses. General and administrative expenses (excluding equity-based compensation expense) decreased by 8%, from $37 million for the nine months ended September 30, 2021 to $34 million for nine months ended September 30, 2022 primarily due to (i) lower costs allocated to us from Antero Resources and (ii) lower legal costs associated with the Veolia legal matter between periods. See “Item 1. Legal Proceedings” below for additional information.
Equity-based compensation expenses. Equity-based compensation expenses increased by 36%, from $10 million for the nine months ended September 30, 2021 to $14 million for the nine months ended September 30, 2022 primarily due to an increase in the annual equity awards granted during the second quarter of 2022 as compared to prior years.
Facility idling expenses. Facility idling expenses remained consistent at $3 million for the nine months ended September 30, 2021 and 2022.
Depreciation expense. Total depreciation expense increased by 21%, from $81 million for the nine months ended September 30, 2021 to $98 million for the nine months ended September 30, 2022. This increase is primarily a result of a phased early retirement of an underutilized compressor station beginning in the second quarter of 2022 through the first half of 2023, which allows us to relocate and reuse the compressor units and equipment to (i) expand an existing compressor station and (ii) contribute to a new compressor station. There are certain costs associated with the underutilized compressor station that cannot be relocated or reused that will be depreciated over the remaining period of use. During the nine months ended September 30, 2022, we recognized depreciation expense associated with assets that were retired early during the period and assets that are subject to early retirement in the future of $5 million and $6 million, respectively.
Impairment of property and equipment expense. Impairment of property and equipment expense of $2 million for the nine months ended September 30, 2021 was primarily a lower of cost or net realizable value adjustment for pipe inventory. Impairments of property and equipment expense of $4 million during the nine months ended September 30, 2022 was primarily due to (i) a write-down of the Clearwater Facility related to the retirement obligation for the facility and (ii) cancelled projects.
Loss (gain) on asset sale. Loss on asset sale of $4 million for the nine months ended September 30, 2021 primarily relates to the sale of excess pipe inventory during the period. Gain on asset sale for the nine months ended September 30, 2022 primarily relates to (i) the sale of four compressor engines, (ii) reimbursement of certain cancelled project costs and (iii) sale of miscellaneous equipment and excess pipe inventory.
Interest expense. Interest expense increased by 5%, from $131 million for the nine months ended September 30, 2021 to $138 million for the nine months ended September 30, 2022 primarily due to the issuance of $750 million of 2029 Notes on June 8, 2021 and increased interest rates on our Credit Facility due to higher benchmark rates during the nine months ended September 30, 2022, partially offset by the redemption of all $650 million of the 2024 Notes on June 8, 2021 and lower borrowings on our Credit Facility between periods.
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Equity in earnings of unconsolidated affiliates. Equity in earnings in unconsolidated affiliates increased by 6%, from $66 million for the nine months ended September 30, 2021 to $70 million for the nine months ended September 30, 2022 primarily due to an increase in processed volumes at the Joint Venture between periods, including one new Joint Venture processing plant with nameplate capacity of 200 MMcf/d being placed in service during July 2021, as well as higher processing and fractionation fees due to annual CPI-based adjustments .
Loss on early extinguishment of debt. Loss on early extinguishment of debt for the nine months ended September 30, 2021 of $21 million relates to the redemption of all $650 million principal amount of the 2024 Notes at a premium to par of $17 million as well as the write-off of $6 million of unamortized deferred financing costs, partially offset by $2 million of unamortized premium. There was no loss on early extinguishment of debt for the nine months ended September 30, 2022.
Income tax expense. Income tax expense remained relatively consistent for the nine months ended September 30, 2021 and 2022 at $89 million and $85 million, respectively, which reflects effective tax rates of 25.9% and 25.8%, respectively.
Net income. Net income decreased by 4%, from $253 million for the nine months ended September 30, 2021 to $243 million for the nine months ended September 30, 2022 primarily due to (i) a decrease in low pressure gathering revenues, (ii) higher direct operating expenses, (iii) higher depreciation expense and (iv) higher interest expense, partially offset by higher equity in earnings of unconsolidated affiliates and increased compression, high pressure gathering and water handling revenues. In addition, the nine months ended September 30, 2021 included a loss on early extinguishment of debt for the redemption of the 2024 Notes, and there was no loss on early extinguishment of debt during the nine months ended September 30, 2022.
Adjusted EBITDA. Adjusted EBITDA decreased by 2%, from $664 million for the nine months ended September 30, 2021 to $653 million for the nine months ended September 30, 2022. The decrease between periods was primarily due to a decrease in low pressure gathering revenues and higher direct operating expenses, partially offset by higher other fluid handling and fresh water delivery revenues and lower general and administrative costs, excluding equity-based compensation expense. For a discussion of the non-GAAP financial measure Adjusted EBITDA, including a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures” below.
Capital Resources and Liquidity
Sources and Uses of Cash
Capital resources and liquidity are provided by operating cash flows and available borrowings under our Credit Facility and capital market transactions. See Note 7—Long-Term Debt to the unaudited condensed consolidated financial statements. We expect that the combination of these capital resources will be adequate to meet our working capital requirements, capital expenditures program, expected quarterly cash dividends and share repurchases under our share repurchases program for at least the next 12 months.
Our Board of Directors (the “Board”) declared a cash dividend on the shares of our common stock of $0.2250 per share for the quarter ended September 30, 2022. The dividend will be payable on November 9, 2022 to stockholders of record as of October 26, 2022. Our Board also declared a cash dividend of $138 thousand on the shares of Series A Preferred Stock, which will be paid on November 14, 2022 in accordance with their terms, which are discussed in Note 11—Equity and Earnings Per Common Share. As of September 30, 2022, there were dividends in the amount of $69 thousand accumulated in arrears on our Series A Preferred Stock.
We expect our future cash requirements relating to working capital, capital expenditures, acquisitions and quarterly cash dividends to our stockholders will be funded from cash flows internally generated from our operations or borrowings under the Credit Facility.
On October 25, 2022, we acquired certain Marcellus gas gathering and compression assets from Crestwood for $205 million in cash, before closing adjustments, which was funded by borrowings under our Credit Facility. See “—Marcellus Bolt-On Acquisition” for more information.
As of September 30, 2022, we did not have any off-balance sheet arrangements.
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Cash Flows
The following table summarizes our cash flows for the nine months ended September 30, 2021 and 2022:
Nine Months Ended September 30,
(in thousands) 2021 2022
Net cash provided by operating activities $ 545,490 530,976
Net cash used in investing activities (157,365) (215,956)
Net cash used in financing activities (388,765) (315,020)
Net decrease in cash and cash equivalents $ (640) —
Operating Activities. Net cash provided by operating activities was $545 million and $531 million for the nine months ended September 30, 2021 and 2022, respectively. The decrease in cash flows provided by operations between periods was primarily the result of decreased low pressure gathering revenues and higher direct operating expenses, partially offset by changes in working capital, excluding income tax receivable, and higher other fluid handling and fresh water delivery revenues between periods. Additionally, we received income tax refunds during the nine months ended September 30, 2021 of $17 million from certain net operating loss carryback provisions included in the Coronavirus Aid, Relief, and Economic Security Act that was enacted in March 2020 . We did not receive any income tax refunds during the nine months ended September 30, 2022.
Investing Activities. Net cash flows used in investing activities was $157 million and $216 million for the nine months ended September 30, 2021 and 2022, respectively. The increase in cash flows used in investing activities between periods was primarily due to a $70 million increase in capital spending for expansion of our gathering system and a $10 million increase in capital spending for expansion of our water handling system, partially offset by a $17 million return of capital distribution from the Joint Venture for a processing plant held in inventory that was sold by the Joint Venture during the third quarter of 2022 and a $2 million increase in asset sale proceeds between periods.
Financing Activities. Net cash used in financing activities was $389 million and $315 million for the nine months ended September 30, 2021 and 2022, respectively. The decrease in cash flows used in financing activities between periods was primarily due to no redemptions of our senior notes or net repayments on our Credit Facility, and reduced dividends to stockholders of $39 million. During the nine months ended September 30, 2021, we issued $750 million principal amount of 2029 Notes, redeemed $650 million principal amount of 2024 Notes at 102.688% of par and repaid $93 million on our Credit Facility. During the nine months ended September 30, 2022, we incurred net borrowings of $18 million on our Credit Facility.
2022 Capital Investment
The Board approved a 2022 capital budget with a range of $275 million to $300 million, which includes growth capital supporting the increased volumes expected from Antero Resources’ drilling partnership. Our capital budgets may be adjusted as business conditions warrant. If natural gas, NGLs and oil prices decline to levels below acceptable levels or costs increase to levels above acceptable levels, Antero Resources could choose to defer a significant portion of its budgeted capital expenditures until later periods. As a result, we may also defer a significant portion of our budgeted capital expenditures to achieve the desired balance between sources and uses of liquidity and prioritize capital projects that we believe have the highest expected returns. We routinely monitor and adjust our capital expenditures in response to changes in Antero Resources’ development plans, changes in prices, availability of financing, acquisition costs, industry conditions, the timing of regulatory approvals, success or lack of success in Antero Resources’ drilling activities, contractual obligations, internally generated cash flows and other factors both within and outside our control. Additionally, we monitor our existing assets and look for opportunities to reuse or otherwise repurpose assets in an effort to maintain our capital efficiency.
For the three months ended September 30, 2022, our capital expenditures were $37 million, including $41 million for our gathering and compression system and $13 million for our water handling facilities, partially offset by a $17 million return of capital from the Joint Venture for a processing plant held in inventory that was sold by the Joint Venture during the third quarter of 2022. For the nine months ended September 30, 2022, our capital expenditures were $202 million, including $172 million for our gathering and compression system and $47 million for our water handling facilities, partially offset by a $17 million return of capital distribution from the Joint Venture for a processing plant held in inventory that was sold by the Joint Venture during the third quarter of 2022.
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Debt Agreements
See Note 7—Long-Term Debt to the unaudited condensed consolidated financial statements and to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2021 Form 10-K for information on our debt agreements.
Non-GAAP Financial Measures
We use Adjusted EBITDA as an important indicator of our performance. We define Adjusted EBITDA as net income before net interest expense, income tax expense, depreciation, impairment, accretion of asset retirement obligations, equity-based compensation, excluding equity in earnings of unconsolidated affiliates, amortization of customer relationships, loss on early extinguishment of debt, loss on settlement of asset retirement obligations, loss (gain) on asset sale and including distributions from unconsolidated affiliates.
We use Adjusted EBITDA to assess:
● the financial performance of our assets, without regard to financing methods, capital structure or historical cost basis;
● our operating performance and return on capital as compared to other publicly traded companies in the midstream energy sector, without regard to financing or capital structure; and
● the viability of acquisitions and other capital expenditure projects.
Adjusted EBITDA is a non-GAAP financial measure. The GAAP measure most directly comparable to Adjusted EBITDA is net income. The non-GAAP financial measure of Adjusted EBITDA should not be considered as an alternative to the GAAP measure of net income. Adjusted EBITDA presentations are not made in accordance with GAAP and have important limitations as an analytical tool because they include some, but not all, items that affect net income. You should not consider Adjusted EBITDA in isolation or as a substitute for analyses of results as reported under GAAP. Our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other corporations.
The following table represents a reconciliation of our Adjusted EBITDA to the most directly comparable GAAP financial measure for the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2022 2021 2022
Net income $ 89,327 84,014 252,991 243,449
Interest expense, net 44,544 47,835 130,915 137,540
Income tax expense 32,038 30,332 88,547 84,798
Depreciation expense 27,487 34,206 80,956 98,181
Amortization of customer relationships 17,668 17,668 53,004 53,004
Equity-based compensation 3,255 5,553 10,326 14,026
Impairment 203 — 1,582 3,702
Accretion of asset retirement obligations 114 50 347 178
Equity in earnings of unconsolidated affiliates (24,088) (24,411) (66,347) (70,467)
Distributions from unconsolidated affiliates 28,930 29,965 87,115 90,470
Loss on early extinguishment of debt — — 20,701 —
Loss on settlement of asset retirement obligations — — — 539
Loss (gain) on asset sale — (2,092) 3,628 (2,242)
Adjusted EBITDA $ 219,478 223,120 663,765 653,178
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related
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disclosure of contingent liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our financial statements. We provide expanded discussion of our more significant accounting policies, estimates and judgments in the 2021 Form 10-K. We believe these accounting policies reflect our more significant estimates and assumptions used in preparation of our financial statements.
New Accounting Pronouncements
See Note 2—Summary of Significant Accounting Policies to the unaudited condensed consolidated financial statements for information on new accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The primary objective of the following information is to provide forward- looking quantitative and qualitative information about our potential exposure to market risk. The term “market risk” refers to the risk of loss arising from adverse changes in commodity prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.
Commodity Price Risk
Our gathering and compression and water services agreements with Antero Resources provide for fixed-fee and cost of service fee structures, and we intend to continue to pursue additional fixed- fee or cost of service fee opportunities with Antero Resources and third parties in order to avoid direct commodity price exposure. However, to the extent that our future contractual arrangements with Antero Resources or third parties do not provide for fixed- fee or cost of service fee structures, we may become subject to commodity price risk. We are subject to commodity price risks to the extent that they impact Antero Resources’ development program and production and therefore our gathering, compression, and water handling volumes. We cannot predict to what extent our business would be impacted by lower commodity prices and any resulting impact on Antero Resources’ operations.
Interest Rate Risk
Our primary exposure to interest rate risk results from outstanding borrowings under the Credit Facility, which has a floating interest rate. We do not currently, but may in the future, hedge the interest on portions of our borrowings under the Credit Facility from time-to- time in order to manage risks associated with floating interest rates. At September 30, 2022, we had $565 million of borrowings and no letters of credit outstanding under the Credit Facility. A 1.0% increase in the Credit Facility interest rate would have resulted in an estimated $4 million increase in interest expense for the nine months ended September 30, 2022.
Credit Risk
We are dependent on Antero Resources as our primary customer, and we expect to derive substantially all of our revenues from Antero Resources for the foreseeable future. As a result, any event, whether in our area of operations or otherwise, that adversely affects Antero Resources’ production, drilling schedule, financial condition, leverage, market reputation, liquidity, results of operations or cash flows may adversely affect our revenues and operating results.
Further, we are subject to the risk of non-payment or non- performance by Antero Resources, including with respect to our gathering and compression and water handling services agreements. We cannot predict the extent to which Antero Resources’ business would be impacted if conditions in the energy industry were to deteriorate, nor can we estimate the impact such conditions would have on Antero Resources’ ability to execute its drilling and development program or to perform under our agreements. Any material non-payment or non-performance by Antero Resources could adversely affect our revenues and operating results and our ability to return capital to stockholders.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d- 15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2022 at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
Our operations are subject to a variety of risks and disputes normally incident to our business. As a result, we may, at any given time, be a defendant in various legal proceedings and litigation arising in the ordinary course of business.
We maintain insurance policies with insurers in amounts and with coverage and deductibles that we, with the advice of our insurance advisors and brokers, believe are reasonable and prudent. We cannot, however, assure you that this insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices.
Veolia
The Company is currently involved in a consolidated lawsuit with Veolia Water Technologies, Inc. (“Veolia”) relating to the Clearwater Facility.
On March 13, 2020, Antero Treatment LLC (“Antero Treatment”), a wholly owned subsidiary of the Company, filed suit against Veolia in the district court of Denver County, Colorado, asserting claims of fraud, breach of contract and other related claims. Antero Treatment alleges that Veolia failed to meet its contractual obligations to design and build a “turnkey” wastewater disposal facility under a Design/Build Agreement dated August 18, 2015 (the “DBA”), and that Veolia fraudulently concealed certain miscalculations and design flaws during contract negotiations and continued to conceal and fraudulently misrepresent the impact of certain design changes post-execution of the DBA. On March 13, 2020, Veolia filed a separate suit against the Company, Antero Resources, and certain of the Company’s wholly owned subsidiaries (collectively, the “Antero Defendants”) in Denver County, Colorado. In its lawsuit, Veolia asserted breach of contract and equitable claims against the Antero Defendants for alleged failures under the DBA. Veolia’s suit was consolidated into the action filed by Antero Treatment.
Veolia and the Antero Defendants each filed partial motions to dismiss and motions for summary judgment directed at certain claims asserted by the opposing party. A bench trial on the remaining claims was held from January 24 through February 10, 2022 and concluded on February 24, 2022. At trial, Antero Treatment sought damages from Veolia of approximately $450 million, which represents the Company’s out-of-pocket costs associated with the Clearwater Facility project. In the alternative, Antero Treatment sought damages related to multiple breaches of the DBA, totaling approximately $370 million. Also at trial, Veolia sought monetary damages of approximately $118 million, including alleged delay and extra-contractual costs and a contract balance relating to an allegation that Antero Defendants improperly terminated the DBA. The Antero Defendants vigorously deny Veolia’s claims. A final judgment on the claims has not yet been rendered.
Item 1A. Risk Factors.
We are subject to certain risks and hazards due to the nature of the business activities we conduct. For a discussion of these risks, see “Item 1A. Risk Factors” in the 2021 Form 10-K. There have been no material changes to the risks described in such report. We may experience additional risks and uncertainties not currently known to us. Furthermore, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect us.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table sets forth our common stock share purchase activity for each period presented:
Approximate
Total Number of Dollar Value of
Total Number Average Price Shares Purchased Shares that May
of Shares Paid per as Part of Publicly Yet be Purchased
Period Purchased (1) Share Announced Plans (2) Under the Plan
July 1, 2022 – July 31, 2022 1,965 $ 9.26 — $ 149,767,409
August 1, 2022 – August 31, 2022 — — — N/A
September 1, 2022 – September 30, 2022 — — — N/A
Total 1,965 $ 9.26 — $ 149,767,409
(1) The total number of shares purchased includes shares of our common stock transferred to us in order to satisfy tax withholding obligations incurred upon the vesting of restricted stock units held by our employees.
(2) In August 2019, the Board authorized a $300 million share repurchase program, which was extended through June 30, 2023 during the first quarter of 2021. During the three months ended September 30, 2022, we did not make any repurchases under this program.
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Item 6. Exhibits
Exhibit Number
Description of Exhibit
3.1 Certificate of Conversion of Antero Midstream Corporation, dated March 12, 2019 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (Commission File No. 001-38075) filed on March 12, 2019).
3.2 Certificate of Incorporation of Antero Midstream Corporation, dated March 12, 2019 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K (Commission File No. 001-38075) filed on March 12, 2019).
3.3 Bylaws of Antero Midstream Corporation, dated March 12, 2019 (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K (Commission File No. 001-38075) filed on March 12, 2019).
3.4 Certificate of Designations of Antero Midstream Corporation, dated March 12, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (Commission File No. 001-38075) filed on March 12, 2019).
31.1 * Certification of the Company’s Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241).
31.2 * Certification of the Company’s Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241).
32.1 * Certification of the Company’s Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
32.2 * Certification of the Company’s Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
101 * The following financial information from this Quarterly Report on Form 10-Q of Antero Midstream Corporation for the quarter ended September 30, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
The exhibits marked with the asterisk symbol (*) are filed or furnished with this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ANTERO MIDSTREAM CORPORATION
By: /s/ Brendan E. Krueger
BRENDAN E. KRUEGER
Chief Financial Officer, Treasurer and Vice President of Finance
Date: October 26, 2022
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