UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
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(State or other jurisdiction of | (IRS Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) |
(
(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 | ||
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. ⌧
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files). ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or 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.
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 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. ◻
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The registrant had
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 35 | |||
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1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition, or forecasts of future events. 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. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. 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 ability to meet its drilling and development plan; |
● | 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; |
● | our ability to complete the construction of or purchase new gathering and compression, processing, water handling and treatment 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 successfully complete our share repurchase program; |
● | competition and government regulations; |
● | actions taken by third-party producers, operators, processors and transporters; |
● | legal or environmental matters; |
● | costs of conducting our operations; |
● | 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 |
● | plans, objectives, expectations and intentions contained in this Quarterly Report on Form 10-Q that are not historical. |
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, the uncertainty inherent in projecting Antero Resources’ future rates of production, cash flows and access to capital, the timing of development expenditures, and the other risks described under the heading “Risk Factors” in our and Antero Midstream Partners LP’s (“Antero Midstream Partners”) Annual Reports on Form 10-K, each for the year ended December 31, 2018
2
(the “2018 Forms 10-K”), and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, each of which is on file with the Securities and Exchange Commission (“SEC”).
Should one or more of the risks or uncertainties described in this Quarterly Report on Form 10-Q or our 2018 Forms 10-K 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.
3
PART I—FINANCIAL INFORMATION
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Balance Sheets
December 31, 2018 and September 30, 2019
(In thousands)
(Unaudited) | |||||||
December 31, | September 30, | ||||||
| 2018 |
| 2019 |
| |||
Assets | |||||||
Current assets: |
| ||||||
Cash and cash equivalents | $ | | — | ||||
Accounts receivable–Antero Resources | — | | |||||
Accounts receivable–third party | — | | |||||
Other current assets | | | |||||
Total current assets | | | |||||
Property and equipment, net | — | | |||||
Investments in unconsolidated affiliates | | | |||||
Deferred tax asset | | | |||||
Customer relationships | — | | |||||
Goodwill | — | | |||||
Other assets, net | — | | |||||
Total assets | $ | | | ||||
Liabilities and Equity | |||||||
Current liabilities: | |||||||
Accounts payable–Antero Resources | $ | | | ||||
Accounts payable–third party | | | |||||
Accrued liabilities | | | |||||
Contingent acquisition consideration | — | | |||||
Asset retirement obligations | — | | |||||
Taxes payable | | — | |||||
Other current liabilities | — | | |||||
Total current liabilities | | | |||||
Long-term liabilities: | |||||||
Long-term debt | — | | |||||
Asset retirement obligations | — | | |||||
Other | — | | |||||
Total liabilities | | | |||||
Partners' Capital and Stockholders' Equity: | |||||||
Common shareholders— | ( | — | |||||
IDR LLC Series B units ( | | — | |||||
Preferred stock, $ | |||||||
Series A non-voting perpetual preferred stock; | — | — | |||||
Common stock, $ | — | | |||||
Additional paid-in capital | — | | |||||
Accumulated earnings (loss) | — | ( | |||||
Total partners' capital and stockholders' equity | | | |||||
Total liabilities and partners' capital and stockholders' equity | $ | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
4
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Income
Three Months Ended September 30, 2018 and 2019
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended September 30, | |||||||
| 2018 |
| 2019 |
| |||
Revenue: |
| ||||||
Gathering and compression–Antero Resources | $ | — | | ||||
Water handling and treatment–Antero Resources | — | | |||||
Amortization of customer relationships | — | ( | |||||
Total revenue | — | | |||||
Operating expenses: | |||||||
Direct operating | — | | |||||
General and administrative (including $ | | | |||||
Facility idling | — | | |||||
Impairment of property and equipment | — | | |||||
Impairment of goodwill | — | | |||||
Impairment of customer relationships | — | | |||||
Depreciation | — | | |||||
Accretion and change in fair value of contingent acquisition consideration | — | | |||||
Accretion of asset retirement obligations | — | | |||||
Total operating expenses | | | |||||
Operating loss | ( | ( | |||||
Interest expense, net | ( | ( | |||||
Equity in earnings of unconsolidated affiliates | | | |||||
Income (loss) before income taxes | | ( | |||||
Provision for income tax benefit (expense) | ( | | |||||
Net income (loss) and comprehensive income (loss) | $ | | ( | ||||
Net income (loss) per share–basic and diluted | $ | | ( | ||||
Weighted average common shares outstanding: | |||||||
Basic | | | |||||
Diluted | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
5
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Income
Nine Months Ended September 30, 2018 and 2019
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended September 30, | ||||||
2018 |
| 2019 |
| |||
Revenue: | ||||||
Gathering and compression–Antero Resources | $ | — | | |||
Water handling and treatment–Antero Resources | — | | ||||
Water handling and treatment–third party | — | | ||||
Amortization of customer relationships | — | ( | ||||
Total revenue | — | | ||||
Operating expenses: | ||||||
Direct operating | — | | ||||
General and administrative (including $ | | | ||||
Facility idling | — | | ||||
Impairment of property and equipment | — | | ||||
Impairment of goodwill | — | | ||||
Impairment of customer relationships | — | | ||||
Depreciation | — | | ||||
Accretion and change in fair value of contingent acquisition consideration | — | | ||||
Accretion of asset retirement obligations | — | | ||||
Total operating expenses | | | ||||
Operating loss | ( | ( | ||||
Interest expense, net | ( | ( | ||||
Equity in earnings of unconsolidated affiliates | | | ||||
Income (loss) before income taxes | | ( | ||||
Provision for income tax benefit (expense) | ( | | ||||
Net income (loss) and comprehensive income (loss) | $ | | ( | |||
Net income (loss) per share–basic and diluted | $ | | ( | |||
Weighted average common shares outstanding: | ||||||
Basic | | | ||||
Diluted | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
6
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Partners’ Capital
Three and Nine Months Ended September 30, 2018
(Unaudited)
(In thousands)
Common | ||||||||||
| Shares |
|
|
| ||||||
Representing | Total | |||||||||
Limited Partner | Series B | Partners' | ||||||||
Interests | Unitholders | Capital | ||||||||
Balance at December 31, 2017 | $ | ( | | | ||||||
Net income and comprehensive income | | | | |||||||
Equity-based compensation | | — | | |||||||
Distributions to shareholders | ( | ( | ( | |||||||
Balance at March 31, 2018 | ( | | | |||||||
Net income and comprehensive income | | | | |||||||
Equity-based compensation | | — | | |||||||
Distributions to shareholders | ( | ( | ( | |||||||
Balance at June 30, 2018 | ( | | | |||||||
Net income and comprehensive income | | | | |||||||
Equity-based compensation | | — | | |||||||
Distributions to shareholders | ( | ( | ( | |||||||
Balance at September 30, 2018 | $ | ( | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
7
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Partners’ Capital and Stockholders’ Equity
Three and Nine Months Ended September 30, 2019
(Unaudited)
(In thousands)
Common | ||||||||||||||||||||||
| Shares |
|
|
|
|
|
|
| ||||||||||||||
Representing | ||||||||||||||||||||||
Limited | Additional | |||||||||||||||||||||
Partner | Series B | Common | Paid-In | Preferred | Accumulated | Total | ||||||||||||||||
Interests | Unitholders | Stock | Capital | Stock | Earnings | Equity | ||||||||||||||||
Balance at December 31, 2018 | $ | ( | | — | — | — | — | | ||||||||||||||
Distributions to unitholders | ( | ( | — | — | — | — | ( | |||||||||||||||
Net (loss) and comprehensive (loss) pre-acquisition | ( | — | — | — | — | — | ( | |||||||||||||||
Equity-based compensation pre-acquisition | | — | — | — | — | — | | |||||||||||||||
Exchange of common shares for shares of common stock and cash consideration paid | | ( | | | — | — | | |||||||||||||||
Issuance of Series A non-voting perpetual preferred stock | — | — | — | — | — | — | — | |||||||||||||||
Equity-based compensation | — | — | — | | — | — | | |||||||||||||||
Net income and comprehensive income | — | — | — | — | — | | | |||||||||||||||
Balance at March 31, 2019 | — | — | | | — | | | |||||||||||||||
Dividends to shareholders | — | — | — | ( | — | — | ( | |||||||||||||||
Equity-based compensation | — | — | — | | — | — | | |||||||||||||||
Issuance of common stock upon vesting of equity-based compensation awards, net of common stock withheld for income taxes | — | — | | ( | — | — | ( | |||||||||||||||
Net income and comprehensive income | — | — | — | — | — | | | |||||||||||||||
Balance at June 30, 2019 | — | — | | | — | | | |||||||||||||||
Dividends to shareholders | — | — | — | ( | — | — | ( | |||||||||||||||
Equity-based compensation | — | — | — | | — | — | | |||||||||||||||
Issuance of common stock upon vesting of equity-based compensation awards, net of common stock withheld for income taxes | — | — | | ( | — | — | ( | |||||||||||||||
Repurchases and retirement of common stock | — | — | ( | ( | — | — | ( | |||||||||||||||
Net loss and comprehensive loss | — | — | — | — | — | ( | ( | |||||||||||||||
Balance at September 30, 2019 | $ | — | — | | | — | ( | |
See accompanying notes to unaudited condensed consolidated financial statements.
8
ANTERO MIDSTREAM CORPORATION
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2018 and 2019
(Unaudited)
(In thousands)
Nine Months Ended September 30, | |||||||
| 2018 |
| 2019 |
| |||
Cash flows provided by (used in) operating activities: |
| ||||||
Net income (loss) | $ | | ( | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Distributions received from Antero Midstream Partners LP, prior to the Transactions | | | |||||
Depreciation | — | | |||||
Accretion and change in fair value of contingent acquisition consideration | — | | |||||
Accretion of asset retirement obligations | — | | |||||
Impairment of property and equipment | — | | |||||
Impairment of goodwill | — | | |||||
Impairment of customer relationships | — | | |||||
Deferred income benefit | — | ( | |||||
Equity-based compensation | | | |||||
Equity in earnings of unconsolidated affiliates | ( | ( | |||||
Distributions from unconsolidated affiliates | — | | |||||
Amortization of customer relationships | — | | |||||
Amortization of deferred financing costs | | | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable–Antero Resources | — | | |||||
Accounts receivable–third party | — | | |||||
Other current assets | ( | ( | |||||
Accounts payable–Antero Resources | — | ( | |||||
Accounts payable–third party | — | ( | |||||
Accrued liabilities | | ( | |||||
Income taxes payable | ( | ( | |||||
Net cash provided by operating activities | | | |||||
Cash flows provided by (used in) investing activities: | |||||||
Additions to gathering systems and facilities | — | ( | |||||
Additions to water handling and treatment systems | — | ( | |||||
Investments in unconsolidated affiliates | — | ( | |||||
Cash received on acquisition of Antero Midstream Partners LP | — | | |||||
Cash consideration paid to Antero Midstream Partners LP unitholders | — | ( | |||||
Change in other assets | — | | |||||
Change in other liabilities | — | ( | |||||
Net cash used in investing activities | — | ( | |||||
Cash flows provided by (used in) financing activities: | |||||||
Distributions to shareholders | ( | ( | |||||
Distributions to Series B unitholders | ( | ( | |||||
Distributions to preferred shareholders | — | ( | |||||
Repurchases of common stock | — | ( | |||||
Issuance of senior notes | — | | |||||
Payments of deferred financing costs | ( | ( | |||||
Payments on bank credit facilities, net | — | ( | |||||
Employee tax withholding for settlement of equity compensation awards | — | ( | |||||
Other | — | ( | |||||
Net cash used in financing activities | ( | ( | |||||
Net decrease in cash and cash equivalents | ( | ( | |||||
Cash and cash equivalents, beginning of period | | | |||||
Cash and cash equivalents, end of period | $ | | — | ||||
Supplemental disclosure of cash flow information: | |||||||
Cash paid during the period for interest | $ | — | | ||||
Cash paid during the period for income taxes | $ | | | ||||
Increase in accrued capital expenditures and accounts payable for property and equipment | $ | — | |
See accompanying notes to unaudited condensed consolidated financial statements.
9
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements
December 31, 2018 and September 30, 2019
(1) Organization
Antero Midstream Corporation was originally formed as Antero Resources Midstream Management LLC in 2013 to become the general partner of Antero Midstream Partners LP (“Antero Midstream Partners”). On May 4, 2017, Antero Resources Midstream Management LLC converted from a limited liability company to a limited partnership under the laws of the State of Delaware (the “Conversion”), and changed its name to Antero Midstream GP LP (“AMGP”) in connection with its initial public offering. On March 12, 2019, pursuant to the Simplification Agreement, dated as of October 9, 2018, by and among AMGP, Antero Midstream Partners and certain of their affiliates (the “Simplification Agreement”), (i) AMGP was converted from a limited partnership to a corporation under the laws of the State of Delaware and changed its name to Antero Midstream Corporation, (ii) an indirect, wholly owned subsidiary of Antero Midstream Corporation was merged with and into Antero Midstream Partners, with Antero Midstream Partners surviving the merger as an indirect, wholly owned subsidiary of Antero Midstream Corporation (the “Merger”), and (iii) Antero Midstream Corporation exchanged (the “Series B Exchange” and, together with the Conversion, the Merger and the other transactions pursuant to by the Simplification Agreement, the “Transactions”) each issued and outstanding Series B Unit (the “Series B Units”) representing a membership interest in Antero IDR Holdings LLC (“IDR Holdings”) for
We are a growth-oriented midstream company formed to own, operate and develop midstream energy infrastructure primarily to service Antero Resources and its production and completion activity in the Appalachian Basin’s Marcellus Shale and Utica Shale located in West Virginia and Ohio. Our assets consist of gathering pipelines, compressor stations, interests in processing and fractionation plants, and water handling and treatment assets. The Company, through Antero Midstream Partners and its affiliates, provides midstream services to Antero Resources under long-term contracts. The Company’s corporate headquarters are 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 U.S. Securities and Exchange Commission (the “SEC”) applicable to interim financial information and should be read in the context of the Company’s December 31, 2018 consolidated financial statements and notes thereto for a more complete understanding of the Company’s operations, financial position, and accounting policies, which have been 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 the Company, these unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of December 31, 2018 and September 30, 2019, and the results the Company’s operations for the three and nine months ended September 30, 2018 and 2019 and its cash flows for the nine months ended September 30, 2018 and 2019. The Company has no items of other comprehensive income (loss); therefore, net income (loss) is equal to its comprehensive income (loss).
10
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and September 30, 2019
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 6—Transactions with Affiliates).
As of the date these unaudited condensed consolidated financial statements were filed with the SEC, the Company completed its evaluation of potential subsequent events for disclosure and no items requiring disclosure were identified other than as disclosed in Note 13—Cash Distributions and Dividends.
(b) | Principles of Consolidation |
The accompanying unaudited condensed consolidated financial statements include (i) for the period prior to March 13, 2019, the accounts of AMGP and its consolidated subsidiaries, which did not include Antero Midstream Partners and its subsidiaries, and (ii) for the period beginning on March 13, 2019, the accounts of Antero Midstream Corporation and its consolidated subsidiaries, including Antero Midstream Partners and its subsidiaries, which were acquired in the Transactions. See Note 3—Business Combination.
(c) | Revenue Recognition |
The Company, through Antero Midstream Partners and its affiliates, provides gathering and compression and water handling and treatment services under fee-based contracts primarily based on throughput or at cost plus a margin. Certain of these contracts contain operating leases of the Company’s assets under GAAP. Under these arrangements, the Company receives fees for gathering gas products, compression services, and water handling and treatment services. The revenue the Company earns from these arrangements is directly related to (1) in the case of natural gas gathering and compression, the volumes of metered natural gas that it gathers, compresses, and delivers to natural gas compression sites or other transmission delivery points, (2) in the case of fresh water services, the quantities of fresh water delivered to its customers for use in their well completion operations, (3) in the case of wastewater treatment services performed by the Company prior to idling of the Clearwater Facility (as defined below) in September 2019, the quantities of wastewater treated for our customers, or (4) in the case of wastewater services provided by third parties, the third-party costs the Company incurs plus
(d) | Use of Estimates |
The preparation of the unaudited condensed consolidated financial statements and notes in conformity with GAAP requires that management formulate estimates and assumptions that affect revenues, expenses, assets, liabilities, and the disclosure of contingent liabilities. Items subject to estimates and assumptions include the useful lives of property and equipment, the valuation of assets and liabilities acquired from Antero Midstream Partners, as well as the valuation of accrued liabilities, among others. Although management believes these estimates are reasonable, actual results could differ from these estimates.
11
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and September 30, 2019
(e) | Cash and Cash Equivalents |
The Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the short-term nature of these instruments. From time to time, the Company may be in the position of a “book overdraft” in which outstanding checks exceed cash and cash equivalents. The Company classifies book overdrafts in accounts payable within its consolidated balance sheets, and classifies the change in accounts payable associated with book overdrafts as an operating activity within its consolidated statements of cash flows. The Company classified $
(f) | Property and Equipment |
Property and equipment primarily consists of gathering pipelines, compressor stations, the wastewater treatment facility and related landfill (collectively, the “Clearwater Facility”) used for the disposal of salt therefrom and fresh water delivery pipelines and facilities stated at historical cost less accumulated depreciation, amortization and impairment. The Company capitalizes construction-related direct labor and material costs. Maintenance and repair costs are expensed as incurred.
Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives and salvage values of assets. The depreciation of fixed assets recorded under operating lease agreements is included in depreciation expense. Uncertainties that may impact these estimates of useful lives include, among others, changes in laws and regulations relating to environmental matters, including air and water quality, restoration and abandonment requirements, economic conditions, and supply and demand for the Company’s services in the areas in which it operates. When assets are placed into service, management makes estimates with respect to useful lives and salvage values that management believes are reasonable.
Amortization of landfill airspace consists of the amortization of landfill capital costs, including those that have been incurred and capitalized and estimated future costs for landfill development and construction, as well as the amortization of asset retirement costs arising from landfill final capping, closure, and post-closure obligations. Amortization expense is recorded on a units-of-consumption basis, applying cost as a rate per-cubic yard. The rate per-cubic yard is calculated by dividing each component of the amortizable basis of the landfill by the number of cubic yards needed to fill the corresponding asset’s airspace. Landfill capital costs and closure and post-closure asset retirement costs are generally incurred to support the operation of the landfill over its entire operating life and are, therefore, amortized on a per-cubic yard basis using a landfill’s total airspace capacity. Estimates of disposal capacity and future development costs are created using input from independent engineers and internal technical teams and are reviewed at least annually.
The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying values of the assets may not be recoverable. Generally, the basis for making such assessments is undiscounted future cash flow projections for the assets being assessed. If the carrying values of the assets are deemed not recoverable, the carrying values are reduced to the estimated fair values, which are based on discounted future cash flows using assumptions as to revenues, costs, and discount rates typical of third-party market participants, which is a Level 3 fair value measurement. The Company recognized an impairment with respect to the Clearwater Facility during the three months ended September 30, 2019. See Note 4— Clearwater Facility Impairment.
(g) | Asset Retirement Obligations |
The Company’s asset retirement obligations include its obligation to close, maintain, and monitor landfill cells and support facilities. After the entire landfill reaches capacity and is certified closed, the Company must continue to maintain and monitor the landfill for a post-closure period, which generally extends for
12
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and September 30, 2019
balance at the weighted average credit-adjusted risk-free rate that is used to calculate the recorded liability, with accretion charged to direct costs. Actual cash expenditures to perform closure and post-closure activities reduce the retirement obligation liabilities as incurred. After initial measurement, asset retirement obligations are adjusted at the end of each period to reflect changes, if any, in the estimated future cash flows underlying the obligation. Landfill retirement assets are capitalized as the related retirement obligations are incurred, and are amortized on a units-of-consumption basis as the disposal capacity is consumed.
Asset retirement obligations are recorded for fresh water impoundments and waste water pits when an abandonment date is identified. The Company records the fair value of its freshwater impoundment and waste water pit retirement obligations as liabilities in the period in which the regulatory obligation to retire a specific asset is triggered. The fair value is based on the total reclamation costs of the assets. Retirement obligations are increased each year to reflect the passage of time by accreting the balance at the weighted average credit-adjusted risk-free rate that is used to calculate the recorded liability, with accretion charged to direct costs. Actual cash expenditures to perform remediation activities reduce the retirement obligation liabilities as incurred. After initial measurement, asset retirement obligations are adjusted at the end of each period to reflect changes, if any, in the estimated future cash flows underlying the obligation. Fresh water impoundments and wastewater pit retirement assets are capitalized as the related retirement obligations are incurred, and are amortized on a straight-line basis until reclamation.
The Company is under no legal obligations, neither contractually nor under the doctrine of promissory estoppel, to restore or dismantle its gathering pipelines, compressor stations, water delivery pipelines and facilities and the wastewater treatment facility upon abandonment. See Note 4—Clearwater Facility Impairment. The Company’s gathering pipelines, compressor stations, fresh water delivery pipelines and facilities and wastewater treatment facility have an indeterminate life, if properly maintained. Accordingly, the Company is not able to make a reasonable estimate of when future dismantlement and removal dates of its pipelines, compressor stations and the wastewater treatment facility will occur.
(h) | Income Taxes |
Antero Midstream Corporation recognizes deferred tax assets and liabilities for temporary differences resulting from net operating loss carryforwards for income tax purposes and the differences between the financial statement and tax basis of assets and liabilities. The effect of changes in tax laws or tax rates is recognized in income during the period such changes are enacted. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Antero Midstream Corporation regularly reviews its tax positions in each significant taxing jurisdiction during the process of evaluating its tax provision. Antero Midstream Corporation makes adjustments to its tax provision when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; and/or (ii) a tax position is effectively settled with a tax authority at a differing amount.
(i) | Fair Value Measures |
The Financial Accounting Standards Board (the “FASB”) ASC Topic 820, Fair Value Measurements and Disclosures, clarifies the definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance also relates to all nonfinancial assets and liabilities that are not recognized or disclosed on a recurring basis (e.g., the initial recognition of asset retirement obligations and impairments of long-lived assets). The fair value is the price that the Company estimates would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to prioritize inputs to valuation techniques used to estimate fair value. An asset or liability subject to the fair value requirements is categorized within the hierarchy based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The highest priority (Level 1) is given to unadjusted quoted market prices in active markets for identical assets or liabilities, and the lowest priority (Level 3) is given to unobservable inputs. Level 2 inputs are data, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.
The carrying values on the balance sheet of the Company’s cash and cash equivalents, accounts receivable—Antero Resources, accounts receivable—third party, other current assets, accounts payable—Antero Resources, accounts payable—third
13
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and September 30, 2019
party, accrued liabilities, other current liabilities, other liabilities and the Credit Facility (as defined in Note 9—Long-Term Debt) approximate fair values due to their short-term maturities. The assets and liabilities of Antero Midstream Partners were recorded at fair value as of the acquisition date, March 12, 2019 (see Note 3—Business Combination).
(j) | Investments in Unconsolidated Affiliates |
The Company uses the equity method to account for its investments in companies if the investment provides the Company with the ability to exercise significant influence over, but not control of, the operating and financial policies of the investee. The Company’s consolidated net income includes the Company’s proportionate share of the net income or loss of such companies. The Company’s judgment regarding the level of influence over each equity method investee includes considering key factors such as the Company’s ownership interest, representation on the board of directors and participation in policy-making decisions of the investee and material intercompany transactions. See Note 16—Investments in Unconsolidated Affiliates.
(k) | Business Combinations |
The Company recognizes and measures the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date, with any remaining difference recorded as goodwill. For acquisitions, management engages an independent valuation specialist to assist with the determination of fair value of the assets acquired, liabilities assumed, and goodwill, based on recognized business valuation methodologies. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to the acquisition, and not later than one year from the acquisition date, the Company will record any material adjustments to the initial estimate based on new information obtained that would have existed as of the acquisition date. An adjustment that arises from information obtained that did not exist as of the date of the acquisition will be recorded in the period of the adjustment. Acquisition-related costs are expensed as incurred in connection with each business combination. See Note 3—Business Combination.
(l) | Goodwill and Intangible Assets |
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized, but rather is tested for impairment annually and when events or changes in circumstances indicate that the fair value of a reporting unit with goodwill has been reduced below its carrying value. The impairment test requires allocating goodwill and other assets and liabilities to reporting units. The fair value of each reporting unit is determined and compared to the carrying value of the reporting unit. The fair value is calculated using the expected present value of future cash flows method. Significant assumptions used in the cash flow forecasts include future net operating margins, future volumes, discount rates, and future capital requirements. If the fair value of the reporting unit is less than the carrying value, including goodwill, the excess of the book value over the fair value of goodwill is charged to net income as an impairment expense.
Amortization of intangible assets with definite lives is calculated using the straight-line method which is reflective of the benefit pattern in which the estimated economic benefit is expected to be received over the estimated useful life of the intangible asset. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible may not be recoverable. If the sum of the expected undiscounted future cash flows related to the asset is less than the carrying amount of the asset, an impairment loss is recognized based on the fair value of the asset. See Note 4—Clearwater Facility Impairment and Note 5—Goodwill and Intangibles.
(m) | Treasury Share Retirement |
The Company periodically retires treasury shares acquired through share repurchases and returns those shares to the status of authorized but unissued. When treasury shares are retired, the Company’s policy is to allocate the excess of the repurchase price over the par value of shares acquired first, to additional paid-in capital, and then to accumulated earnings. The portion allocable to additional paid-in capital is determined by applying a percentage, determined by dividing the number of shares to be retired by the number of shares outstanding, to the balance of additional paid-in capital as of retirement.
14
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and September 30, 2019
(n) | Adoption of New Accounting Principle |
On February 25, 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-02, Leases, which requires lessees to record lease liabilities and right-of-use assets as of the date of adoption and was incorporated into GAAP as ASC Topic 842. The new lease standard does not substantially change accounting by lessors. The Company adopted the new standard prospectively effective January 1, 2019. The Company is not a party to material contracts as a lessee. The Company determined that Antero Midstream Partners’ contractual arrangement with Antero Resources to provide gathering and compression services is an operating lease of certain of the Company’s assets, which are accounted for under the new ASU (see Note 7—Revenue for information on this arrangement).
(3) Business Combination
On March 12, 2019, AMGP and Antero Midstream Partners completed the Transactions. The Transactions have been accounted for using the acquisition method of accounting with Antero Midstream Corporation identified as the acquirer of Antero Midstream Partners.
The components of the fair value of consideration transferred are as follows (in thousands):
Fair value of shares of AMC common stock issued(1) | $ | | ||
Cash | | |||
Total fair value of consideration transferred | $ | |
(1) | The fair value of each share of AMC common stock issued in connection with the Transactions was determined to be $ |
15
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and September 30, 2019
The preliminary purchase price allocation of the Transactions, and preliminary adjustments thereto, are summarized in the table below. As of September 30, 2019, the Company was still completing its analysis of the final purchase price allocation. The estimated fair value of assets acquired and liabilities assumed at March 12, 2019, are as follows (in thousands):
As Originally | As | |||||||||
Reported | Adjustments | Adjusted | ||||||||
Cash and cash equivalents | $ | | — | | ||||||
Accounts receivable–Antero Resources | | — | | |||||||
Accounts receivable–third party | | — | | |||||||
Other current assets | | — | | |||||||
Property and equipment, net | | ( | | |||||||
Investments in unconsolidated affiliates | | ( | | |||||||
Customer relationships | | | | |||||||
Other assets, net | | — | | |||||||
Total assets acquired | | | | |||||||
Accounts payable–Antero Resources | | — | | |||||||
Accounts payable–third party | | — | | |||||||
Accrued liabilities | | — | | |||||||
Other current liabilities | | — | | |||||||
Long-term debt | | — | | |||||||
Contingent acquisition consideration | | — | | |||||||
Asset retirement obligations | | — | | |||||||
Other liabilities | | — | | |||||||
Total liabilities assumed | | — | | |||||||
Net assets acquired, excluding goodwill | | | | |||||||
Goodwill | | ( | | |||||||
Net assets acquired | $ | | $ | — | $ | |
Adjustments to the preliminary purchase price allocation stem mainly from additional information obtained by the Company in the second and third quarters of 2019 about facts and circumstances that existed as of the date of the Transactions, including updates to the completion of certain valuations to determine the underlying fair value of certain assets. The decrease in the fair value of the property and equipment resulted in a $
The purchase price allocation resulted in the recognition of $
The Company’s financial statements include $
(4) Clearwater Facility Impairment
On September 18, 2019, the Company commenced a strategic evaluation of the Clearwater Facility at which time, such facility was idled. Based on the preliminary results of the evaluation and ongoing discussions with the facility’s contractor, the Company determined that the facility is expected to be idled for the foreseeable future. Accordingly, the Company performed an
16
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and September 30, 2019
interim impairment analysis of the facility and determined: (i) to reduce the carrying value of the facility to its estimated salvage value, which included the land associated with the Clearwater Facility; (ii) the fair value of the goodwill assigned to the wastewater treatment reporting unit was less than its carrying value resulting in an impairment charge to goodwill; and (iii) the customer relationships intangible asset was impaired. The following table shows the impairment charges for the three months ended September 30, 2019 related to the Clearwater Facility (in thousands):
Impairment of property and equipment | $ | | ||
Impairment of goodwill | | |||
Impairment of customer relationships | | |||
Total impairment expense | $ | |
The Company incurred $
(5) Goodwill and Intangible Assets
The Company evaluates goodwill for impairment annually during the fourth quarter and whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit with goodwill is less than its carrying amount. Significant assumptions used to estimate the reporting units’ fair value include the discount rate as well as estimates of future cash flows, which are impacted primarily by commodity prices and producer customers’ development plans (which impact volumes and capital requirements).
During the third quarter of 2019, the Company performed an interim impairment analysis of the goodwill recorded in connection with the Transactions due to the Company’s strategic evaluation of the Clearwater Facility. As a result of this evaluation, the Company incurred impairment charges to the goodwill and customer relationships intangible asset associated with the Clearwater Facility. See Note 4—Clearwater Facility Impairment.
The changes in the carrying amount in goodwill for the nine months ended September 30, 2019 were as follows (in thousands):
Water | ||||||||||
| Gathering and |
| Handling and |
| Consolidated | |||||
|
| Processing |
| Treatment |
| Total |
| |||
Goodwill as of December 31, 2018 | $ | — | — | — | ||||||
Goodwill acquired(1) | | | | |||||||
Impairment of goodwill | — | ( | ( | |||||||
Goodwill as of September 30, 2019 | $ | | | |
(1) | See Note 3—Business Combination. |
17
ANTERO MIDSTREAM CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
December 31, 2018 and September 30, 2019
All customer relationships are subject to amortization and will be amortized over a weighted-average period of
Customer relationships as of December 31, 2018 | $ | — | ||
Customer relationships acquired(1) | | |||
Accumulated amortization | ( | |||
Impairment |
| ( |
| |
Customer relationships as of September 30, 2019 | $ | |