Annual report pursuant to Section 13 and 15(d)

Long-Term Incentive Plans

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Long-Term Incentive Plans
12 Months Ended
Dec. 31, 2018
Long-Term Incentive Plans  
Long-Term Incentive Plans

(5)  Long-Term Incentive Plans

As of December 31, 2018, IDR LLC has 98,600 Series B Units authorized and outstanding that entitle the holders to receive up to 6% of the amount of the distributions that Antero Midstream makes on its IDRs in excess of $7.5 million per quarter, subject to certain vesting conditions.  During the year ending December 31, 2017,  1,400 Series B Units were forfeited and there were no forfeitures during 2018.  The Series B Units vest ratably over a three year period. On December 31, 2018, 65,745 Series B Units were vested.  The holders of vested Series B Units have the right to convert the units to common shares with a value equal to their pro rata share of up to 6% of any increase in AMGP’s equity value in excess of $2.0 billion.  In no event will the aggregate number of newly issued common shares exceed 6% of the total number of AMGP’s issued and outstanding common shares.

AMGP recognizes expense for the grant date fair value of the awards over the vesting period of the awards.  Forfeitures are accounted for as they occur by reversing expense previously recognized for awards that were forfeited during the period.  For awards granted to common law employees, the grant date fair value of the Series B Unit awards was estimated using a Monte Carlo simulation using various assumptions including a floor equity value of $2.0 billion, expected volatility of 43% based on historical volatility of a peer group of publicly traded partnerships, a risk free rate of 2.45%, and expected IDR distributions based on internal estimates discounted based on a weighted average cost of capital assumption of 7.25%.  Based on these assumptions, the estimated value of each Series B Unit was $999 when they were issued.  The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.  For a discussion of the Series B Exchange in the event that the Transactions are consummated, see Note 1—Business and Organization.

Prior to October 1, 2018, certain of the awards made to non-common law employees were accounted for as liability awards.  On October 1, 2018, AMGP adopted ASU 2018-07, which allows these awards to be treated in the same manner as employee awards.  The remaining liability at September 30, 2018 of $3.0 million was reclassified to equity effective October 1, 2018.  The remaining unamortized expense related to these awards will be amortized from October 1, 2018 through December 31, 2019.  Forfeitures are accounted for as they occur by reversing expense previously recognized for awards that were forfeited during the period.  At September 30, 2018, the fair value of the Series B Unit awards was estimated using a Monte Carlo simulation using various assumptions including an equity value of $3.3 billion, expected volatility of 38% based on historical volatility of a peer group of publicly traded partnerships, a risk free rate of 3.00%, and expected IDR distributions based on internal estimates discounted based on a weighted average cost of capital assumption of 7.25%.  Based on these assumptions, the estimated value of each Series B Unit at September 30, 2018 was $1,673.  The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.

AMGP recognized expense related to the Series B Unit awards of $34.7 million and $34.4 million during the years ended December 31, 2017 and 2018, respectively.  As of December 31, 2018, there was $34.4 million of unamortized compensation expense related to unvested Series B Units that is expected to be recognized in 2019.

On April 17, 2017, AMGP also adopted the Antero Midstream GP LP Long-Term Incentive Plan (“AMGP LTIP”), pursuant to which certain non-employee directors of AMGP’s general partner and certain officers, employees and consultants of Antero Resources are eligible to receive awards representing equity interests in AMGP.  An aggregate of 930,851 common shares may be delivered pursuant to awards under the AMGP LTIP, subject to customary adjustments.  As of December 31, 2017 and 2018, 11,762 and 49,225 common shares were granted, respectively.  AMGP recognized related expense of $0.2 million and $0.7 million related to these awards for the years ended December 31, 2017 and 2018, respectively.  As of December 31, 2018,  881,626 common shares remain available for grant under the AMGP LTIP.