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Table of Contents

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, 2019

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

Graphic

ANTERO MIDSTREAM CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

61-1748605

(State or other jurisdiction of
incorporation or organization)

(IRS Employer Identification No.)

1615 Wynkoop Street
Denver, Colorado

80202

(Address of principal executive offices)

(Zip Code)

(303357-7310

(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 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).  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 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 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 503,419,919 shares of common stock outstanding as of October 25, 2019.

Table of Contents

TABLE OF CONTENTS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

    

2

PART I—FINANCIAL INFORMATION

4

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

35

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

56

Item 4.

Controls and Procedures

57

PART II—OTHER INFORMATION

58

Item 1.

Legal Proceedings

58

Item 1A.

Risk Factors

58

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 6.

Exhibits

59

SIGNATURES

60

1

Table of Contents

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

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(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.

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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

$

2,822

Accounts receivable–Antero Resources

105,182

Accounts receivable–third party

940

Other current assets

87

3,102

Total current assets

2,909

109,224

Property and equipment, net

3,215,978

Investments in unconsolidated affiliates

43,492

672,310

Deferred tax asset

1,304

35,530

Customer relationships

1,496,951

Goodwill

902,777

Other assets, net

12,734

Total assets

$

47,705

6,445,504

Liabilities and Equity

Current liabilities:

Accounts payable–Antero Resources

$

731

4,745

Accounts payable–third party

28

32,569

Accrued liabilities

407

96,944

Contingent acquisition consideration

122,247

Asset retirement obligations

2,630

Taxes payable

15,678

Other current liabilities

493

Total current liabilities

16,844

259,628

Long-term liabilities:

Long-term debt

2,657,750

Asset retirement obligations

3,441

Other

1,655

Total liabilities

16,844

2,922,474

Partners' Capital and Stockholders' Equity:

Common shareholders—186,219 shares issued and outstanding at December 31, 2018; none issued and outstanding at September 30, 2019

(41,969)

IDR LLC Series B units (66 units vested at December 31, 2018; none issued and outstanding at
September 30, 2019)

72,830

Preferred stock, $0.01 par value: none authorized or issued at December 31, 2018; 100,000 authorized at September 30, 2019

Series A non-voting perpetual preferred stock; none designated, issued or outstanding at
December 31, 2018; 12 designated and 10 issued and outstanding at September 30, 2019

Common stock, $0.01 par value; none authorized, issued or outstanding at December 31, 2018; 2,000,000 authorized and 503,378 issued and outstanding at September 30, 2019

5,034

Additional paid-in capital

3,715,002

Accumulated earnings (loss)

(197,006)

Total partners' capital and stockholders' equity

30,861

3,523,030

Total liabilities and partners' capital and stockholders' equity

$

47,705

6,445,504

See accompanying notes to the unaudited condensed consolidated financial statements.

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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

$

175,719

Water handling and treatment–Antero Resources

96,939

Amortization of customer relationships

(28,863)

Total revenue

243,795

Operating expenses:

Direct operating

61,808

General and administrative (including $8,574 and $20,129 of equity-based compensation in 2018 and 2019, respectively)

10,803

30,595

Facility idling

1,512

Impairment of property and equipment

407,848

Impairment of goodwill

43,759

Impairment of customer relationships

5,871

Depreciation

24,460

Accretion and change in fair value of contingent acquisition consideration

1,977

Accretion of asset retirement obligations

54

Total operating expenses

10,803

577,884

Operating loss

(10,803)

(334,089)

Interest expense, net

(68)

(36,134)

Equity in earnings of unconsolidated affiliates

37,816

18,478

Income (loss) before income taxes

26,945

(351,745)

Provision for income tax benefit (expense)

(8,917)

62,268

Net income (loss) and comprehensive income (loss)

$

18,028

(289,477)

Net income (loss) per share–basic and diluted

$

0.09

(0.57)

Weighted average common shares outstanding:

Basic

186,208

506,419

Diluted

186,208

506,419

See accompanying notes to the unaudited condensed consolidated financial statements.

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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

$

378,178

Water handling and treatment–Antero Resources

214,471

Water handling and treatment–third party

50

Amortization of customer relationships

(39,178)

Total revenue

553,521

Operating expenses:

Direct operating

140,788

General and administrative (including $26,319 and $53,095 of equity-based compensation in 2018 and 2019, respectively)

31,876

85,026

Facility idling

1,512

Impairment of property and equipment

408,442

Impairment of goodwill

43,759

Impairment of customer relationships

5,871

Depreciation

68,557

Accretion and change in fair value of contingent acquisition consideration

5,323

Accretion of asset retirement obligations

133

Total operating expenses

31,876

759,411

Operating loss

(31,876)

(205,890)

Interest expense, net

(82)

(73,872)

Equity in earnings of unconsolidated affiliates

99,414

34,981

Income (loss) before income taxes

67,456

(244,781)

Provision for income tax benefit (expense)

(22,236)

34,226

Net income (loss) and comprehensive income (loss)

$

45,220

(210,555)

Net income (loss) per share–basic and diluted

$

0.23

(0.50)

Weighted average common shares outstanding:

Basic

186,199

423,296

Diluted

186,199

423,296

See accompanying notes to the unaudited condensed consolidated financial statements.

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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

$

(19,866)

35,474

15,608

Net income and comprehensive income

12,392

413

12,805

Equity-based compensation

7,777

7,777

Distributions to shareholders

(13,964)

(783)

(14,747)

Balance at March 31, 2018

(13,661)

35,104

21,443

Net income and comprehensive income

13,881

506

14,387

Equity-based compensation

7,777

7,777

Distributions to shareholders

(20,109)

(414)

(20,523)

Balance at June 30, 2018

(12,112)

35,196

23,084

Net income and comprehensive income

17,430

598

18,028

Equity-based compensation

7,795

7,795

Distributions to shareholders

(23,276)

(505)

(23,781)

Balance at September 30, 2018

$

(10,163)

35,289

25,126

See accompanying notes to the unaudited condensed consolidated financial statements.

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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

$

(41,969)

72,830

30,861

Distributions to unitholders

(30,543)

(3,720)

(34,263)

Net (loss) and comprehensive (loss) pre-acquisition

(13,549)

(13,549)

Equity-based compensation pre-acquisition

7,034

7,034

Exchange of common shares for shares of common stock and cash consideration paid

79,027

(69,110)

5,066

4,002,898

4,017,881

Issuance of Series A non-voting perpetual preferred stock

Equity-based compensation

4,389

4,389

Net income and comprehensive income

23,197

23,197

Balance at March 31, 2019

5,066

4,007,287

23,197

4,035,550

Dividends to shareholders

(152,180)

(152,180)

Equity-based compensation

21,543

21,543

Issuance of common stock upon vesting of equity-based compensation awards, net of common stock withheld for income taxes

2

(1,830)

(1,828)

Net income and comprehensive income

69,274

69,274

Balance at June 30, 2019

5,068

3,874,820

92,471

3,972,359

Dividends to shareholders

(154,284)

(154,284)

Equity-based compensation

20,129

20,129

Issuance of common stock upon vesting of equity-based compensation awards, net of common stock withheld for income taxes

1

(179)

(178)

Repurchases and retirement of common stock

(35)

(25,484)

(25,519)

Net loss and comprehensive loss

(289,477)

(289,477)

Balance at September 30, 2019

$

5,034

3,715,002

(197,006)

3,523,030

See accompanying notes to unaudited condensed consolidated financial statements.

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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)

$

45,220

(210,555)

Adjustments to reconcile net income to net cash provided by operating activities:

Distributions received from Antero Midstream Partners LP, prior to the Transactions

85,371

43,492

Depreciation

68,557

Accretion and change in fair value of contingent acquisition consideration

5,323

Accretion of asset retirement obligations

133

Impairment of property and equipment

408,442

Impairment of goodwill

43,759

Impairment of customer relationships

5,871

Deferred income benefit

(34,226)

Equity-based compensation

26,319

53,095

Equity in earnings of unconsolidated affiliates

(99,414)

(34,981)

Distributions from unconsolidated affiliates

42,570

Amortization of customer relationships

39,178

Amortization of deferred financing costs

90

2,123

Changes in assets and liabilities:

Accounts receivable–Antero Resources

38,331

Accounts receivable–third party

12

Other current assets

(56)

(1,788)

Accounts payable–Antero Resources

(503)

Accounts payable–third party

(3,635)

Accrued liabilities

646

(19,648)

Income taxes payable

(636)

(15,678)

Net cash provided by operating activities

57,540

429,872

Cash flows provided by (used in) investing activities:

Additions to gathering systems and facilities

(170,921)

Additions to water handling and treatment systems

(91,144)

Investments in unconsolidated affiliates

(117,339)

Cash received on acquisition of Antero Midstream Partners LP

619,532

Cash consideration paid to Antero Midstream Partners LP unitholders

(598,709)

Change in other assets

3,338

Change in other liabilities

(1,050)

Net cash used in investing activities

(356,293)

Cash flows provided by (used in) financing activities:

Distributions to shareholders

(57,349)

(336,772)

Distributions to Series B unitholders

(1,702)

(3,720)

Distributions to preferred shareholders

(235)

Repurchases of common stock

(25,519)

Issuance of senior notes

650,000

Payments of deferred financing costs

(230)

(8,523)

Payments on bank credit facilities, net

(349,500)

Employee tax withholding for settlement of equity compensation awards

(2,008)

Other

(124)

Net cash used in financing activities

(59,281)

(76,401)

Net decrease in cash and cash equivalents

(1,741)

(2,822)

Cash and cash equivalents, beginning of period

5,987

2,822

Cash and cash equivalents, end of period

$

4,246

Supplemental disclosure of cash flow information:

Cash paid during the period for interest

$

75,071

Cash paid during the period for income taxes

$

22,871

16,001

Increase in accrued capital expenditures and accounts payable for property and equipment

$

34,667

See accompanying notes to unaudited condensed consolidated financial statements.

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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 176.0041 shares of its common stock, par value $0.01 per share (“AMC common stock”). As a result of the Transactions, Antero Midstream Partners is now a wholly owned subsidiary of Antero Midstream Corporation and former shareholders of AMGP, unitholders of Antero Midstream Partners, including Antero Resources Corporation (“Antero Resources”), and holders of Series B Units now own AMC common stock. Unless the context otherwise requires, references to the “Company,” “we,” “us” or “our” refer to (i) for the period prior to March 13, 2019, 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, Antero Midstream Corporation and its consolidated subsidiaries, including Antero Midstream Partners and its subsidiaries Antero Midstream LLC, Antero Water LLC (“Antero Water”), Antero Treatment LLC, and Antero Midstream Finance Corporation (“Finance Corp”).

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).

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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 3%. The Company recognizes revenue when it satisfies a performance obligation by delivering a service to a customer or the use of leased assets to a customer. See Note 7—Revenue for the Company’s required disclosures under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The Company includes lease revenue within revenues by service.

(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.

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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 $1.7 million of book overdrafts within accounts payable as of September 30, 2019.

(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 30 years. The Company records the fair value of its landfill retirement obligations as a liability in the period in which the regulatory obligation to retire a specific asset is triggered. For the Company’s individual landfill cells, the required closure and post-closure obligations under the terms of its permits and its intended operation of the landfill cell are triggered and recorded when the cell is placed into service and salt is initially disposed in the landfill cell. The fair value is based on the total estimated costs to close the landfill cell and perform post-closure activities once the landfill cell has reached capacity and is no longer accepting salt. Retirement obligations are increased each year to reflect the passage of time by accreting the

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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

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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.

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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)

$

4,017,881

Cash

598,709

Total fair value of consideration transferred

$

4,616,590

(1)The fair value of each share of AMC common stock issued in connection with the Transactions was determined to be $12.54, the closing price of AMGP common shares on March 12, 2019.

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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

$

619,532

619,532

Accounts receivable–Antero Resources

142,312

142,312

Accounts receivable–third party

117

117

Other current assets

1,150

1,150

Property and equipment, net

3,639,148

(267,721)

3,371,427

Investments in unconsolidated affiliates

1,090,109

(527,549)

562,560

Customer relationships

558,000

984,000

1,542,000

Other assets, net

42,887

42,887

Total assets acquired

6,093,255

188,730

6,281,985

Accounts payable–Antero Resources

3,316

3,316

Accounts payable–third party

30,674

30,674

Accrued liabilities

87,021

87,021

Other current liabilities

537

537

Long-term debt

2,364,935

2,364,935

Contingent acquisition consideration

116,924

116,924

Asset retirement obligations

5,715

5,715

Other liabilities

2,809

2,809

Total liabilities assumed

2,611,931

2,611,931

Net assets acquired, excluding goodwill

3,481,324

188,730

3,670,054

Goodwill

1,135,266

(188,730)

946,536

Net assets acquired

$

4,616,590

$

$

4,616,590

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 $10 million reversal of Depreciation in the unaudited condensed consolidated statement of operations. The increase in the fair value of customer relationships resulted in a $21 million increase in Amortization of customer relationships in the unaudited condensed consolidated statement of operations. All customer relationships are subject to amortization, which will be recognized over a weighted-average period of 22 years.

The purchase price allocation resulted in the recognition of $588 million of goodwill in three reporting units within the Company’s gathering and processing segment and $359 million of goodwill in two reporting units within its water handling and treatment segment. Substantially all of goodwill is expected to be deductible for tax purposes. Goodwill represents the efficiencies realized with simplifying our corporate structure to own, operate and develop midstream energy infrastructure primarily to service Antero Resources.

The Company’s financial statements include $6 million of acquisition-related costs associated with the Transactions. These costs were expensed as general and administrative costs.

(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

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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

$

407,848

Impairment of goodwill

43,759

Impairment of customer relationships

5,871

Total impairment expense

$

457,478

The Company incurred $2 million in facility idling costs for the care and maintenance of the Clearwater Facility during the period from September 18, 2019 through September 30, 2019.

(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)

587,629

358,907

946,536

Impairment of goodwill

(43,759)

(43,759)

Goodwill as of September 30, 2019

$

587,629

315,148

902,777

(1)See Note 3—Business Combination.

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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 22 years. The changes in the carrying amount of customer relationships for the nine months ended September 30, 2019 were as follows (in thousands):

Customer relationships as of December 31, 2018

$

—    

Customer relationships acquired(1)

1,542,000

Accumulated amortization

(39,178)

Impairment

    

(5,871)

Customer relationships as of September 30, 2019

$