Table of Contents

Exhibit 99.1

 

 

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 March 31, 2017

 

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: 001-36719

 

ANTERO MIDSTREAM PARTNERS LP

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

46-4109058

(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)

 

(303) 357-7310

(Registrant’s telephone number, including area code)

 

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 and posted on its corporate Web site, if any, 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 ☐

(Do not check if a 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

 

As of May 4, 2017, there were 185,841,994 common units outstanding.

 

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 

    

2

PART I—FINANCIAL INFORMATION 

 

3

Item 1. 

   

Condensed Consolidated Financial Statements (Unaudited)

 

3

Item 2. 

 

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

 

19

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

30

Item 4. 

 

Controls and Procedures

 

31

PART II—OTHER INFORMATION 

 

32

Item 1. 

 

Legal Proceedings

 

32

Item 1A. 

 

Risk Factors

 

32

Item 5. 

 

Disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934

 

33

Item 6. 

 

Exhibits

 

33

SIGNATURES 

 

34

 

 

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Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some of the information in this report 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 report. 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 expected production and ability to meet its drilling and development plan;

·

our ability to execute our business strategy;

·

our ability to realize the anticipated benefits of our processing and fractionation joint venture with MarkWest Energy Partners, L.P.;

·

natural gas, natural gas liquids (“NGLs”) and oil prices;

·

competition and government regulations;

·

actions taken by third-party producers, operators, processors and transporters;

·

legal or environmental matters;

·

costs of conducting our gathering and compression 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 in this Form 10-Q that are not historical.

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incidental to our business. These risks include, but are not limited to, commodity price volatility, inflation, environmental risks, drilling and completion and other operating risks, regulatory changes, the uncertainty inherent in projecting future rates of production, cash flow and access to capital, the timing of development expenditures, and the other risks described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”) on file with the Securities and Exchange Commission (“SEC”) and in “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.

Should one or more of the risks or uncertainties described in this report 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 report 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, all of which are expressly qualified by the statements in this section, 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 PARTNERS LP

Condensed Consolidated Balance Sheets

December 31, 2016 and March 31, 2017

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2016

    

March 31, 2017

Assets

Current assets:

    

 

 

 

  

 

Cash and cash equivalents

 

$

14,042

 

 

 —

Accounts receivable–Antero Resources

 

 

64,139

 

 

71,500

Accounts receivable–third party

 

 

1,240

 

 

1,200

Prepaid expenses

 

 

529

 

 

498

Total current assets

 

 

79,950

 

 

73,198

Property and equipment:

 

 

 

 

 

 

Gathering systems and facilities

 

 

1,705,839

 

 

1,767,741

Water handling and treatment systems

 

 

744,682

 

 

771,239

 

 

 

2,450,521

 

 

2,538,980

Less accumulated depreciation

 

 

(254,642)

 

 

(282,178)

Property and equipment, net

 

 

2,195,879

 

 

2,256,802

Investment in unconsolidated affiliates

 

 

68,299

 

 

230,419

Other assets, net

 

 

5,767

 

 

11,274

Total assets

 

$

2,349,895

 

 

2,571,693

Liabilities and Partners' Capital

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

16,979

 

 

13,512

Accounts payable–Antero Resources

 

 

3,193

 

 

2,428

Accrued liabilities

 

 

61,641

 

 

47,083

Other current liabilities

 

 

200

 

 

187

Total current liabilities

 

 

82,013

 

 

63,210

Long-term liabilities:

 

 

 

 

 

 

Long-term debt

 

 

849,914

 

 

840,179

Contingent acquisition consideration

 

 

194,538

 

 

198,064

Other

 

 

620

 

 

567

Total liabilities

 

 

1,127,085

 

 

1,102,020

 

 

 

 

 

 

 

Partners' capital:

 

 

 

 

 

 

Common unitholders - public (70,020 units and 76,924 units issued and outstanding at December 31, 2016 and March 31, 2017, respectively)

 

 

1,458,410

 

 

1,689,681

Common unitholder - Antero Resources (32,929 units and 108,870 units issued and outstanding at December 31, 2016 and March 31, 2017, respectively)

 

 

26,820

 

 

(231,561)

Subordinated unitholder - Antero Resources (75,941 and zero units issued and outstanding at December 31, 2016 and March 31, 2017, respectively)

 

 

(269,963)

 

 

 —

General partner

 

 

7,543

 

 

11,553

Total partners' capital

 

 

1,222,810

 

 

1,469,673

Total liabilities and partners' capital

 

$

2,349,895

 

 

2,571,693

 

See accompanying notes to condensed consolidated financial statements.

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ANTERO MIDSTREAM PARTNERS LP

Condensed Consolidated Statements of Operations and Comprehensive Income

Three Months Ended March 31, 2016 and 2017

(Unaudited)

(In thousands, except per unit amounts)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2016

 

2017

 

 

 

Revenue:

    

 

 

    

 

 

Gathering and compression–Antero Resources

 

$

69,359

 

 

91,524

Water handling and treatment–Antero Resources

 

 

66,439

 

 

83,110

Gathering and compression–third party

 

 

275

 

 

135

Total revenue

 

 

136,073

 

 

174,769

Operating expenses:

 

 

 

 

 

 

Direct operating

 

 

49,141

 

 

47,554

General and administrative (including $5,972 and $6,286 of equity-based

compensation in 2016 and 2017, respectively)

 

 

13,091

 

 

14,457

Depreciation

 

 

23,823

 

 

27,536

Accretion of contingent acquisition consideration

 

 

3,396

 

 

3,526

Total operating expenses

 

 

89,451

 

 

93,073

Operating income

 

 

46,622

 

 

81,696

Interest expense, net

 

 

(3,704)

 

 

(8,836)

Equity in earnings of unconsolidated affiliates

 

 

 —

 

 

2,231

Net income and comprehensive income

 

 

42,918

 

 

75,091

Net income attributable to incentive distribution rights

 

 

(1,850)

 

 

(11,553)

Limited partners' interest in net income

 

$

41,068

 

 

63,538

 

 

 

 

 

 

 

Net income per limited partner unit - basic and diluted

 

$

0.23   

 

 

0.35   

 

 

 

 

 

 

 

Weighted average limited partner units outstanding - basic

 

 

176,154   

 

 

183,033   

Weighted average limited partner units outstanding - diluted

 

 

176,160   

 

 

183,447   

 

See accompanying notes to condensed consolidated financial statements.

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ANTERO MIDSTREAM PARTNERS LP

Condensed Consolidated Statements of Partners’ Capital

Three Months Ended March 31, 2017

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited Partners

 

 

 

 

 

 

 

 

Common Unitholders
Public

 

Common
Unitholder
Antero Resources

 

Subordinated
Unitholder Antero Resources

 

General
Partner

 

Total Partners' Capital

Balance at December 31, 2016

  

$

1,458,410

  

 

26,820

  

 

(269,963)

  

 

7,543

  

 

1,222,810

Net income and comprehensive income

 

 

25,609

 

 

37,929

 

 

 —

 

 

11,553

 

 

75,091

Distributions to unitholders

 

 

(19,606)

 

 

(30,484)

 

 

 —

 

 

(7,543)

 

 

(57,633)

Conversion of subordinated units to common units

 

 

 —

 

 

(269,963)

 

 

269,963

 

 

 —

 

 

 —

Equity-based compensation

 

 

2,149

 

 

4,137

 

 

 —

 

 

 —

 

 

6,286

Issuance of common units, net of offering costs

 

 

223,119

 

 

 —

 

 

 —

 

 

 —

 

 

223,119

Balance at March 31, 2017

  

$

1,689,681

  

 

(231,561)

  

 

 —

  

 

11,553

  

 

1,469,673

 

See accompanying notes to condensed consolidated financial statements.

 

 

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ANTERO MIDSTREAM PARTNERS LP

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2016 and 2017

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 Three months ended March 31,

 

2016

    

2017

Cash flows from operating activities:

 

 

 

  

 

Net income

$

42,918

 

 

75,091

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

 

 

 

 

 

Depreciation

 

23,823

 

 

27,536

Accretion of contingent acquisition consideration

 

3,396

 

 

3,526

Equity-based compensation

 

5,972

 

 

6,286

Equity in earnings of unconsolidated affiliates

 

 —

 

 

(2,231)

Amortization of deferred financing costs

 

366

 

 

631

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable–Antero Resources

 

2,267

 

 

(7,361)

Accounts receivable–third party

 

1,415

 

 

40

Prepaid expenses

 

(336)

 

 

31

Accounts payable

 

116

 

 

2,504

Accounts payable–Antero Resources

 

1,598

 

 

(765)

Accrued liabilities

 

813

 

 

(5,540)

Net cash provided by operating activities

 

82,348

 

 

99,748

Cash flows used in investing activities:

 

 

 

 

 

Additions to gathering systems and facilities

 

(48,686)

 

 

(66,559)

Additions to water handling and treatment systems

 

(37,036)

 

 

(36,954)

Investment in unconsolidated affiliates

 

 —

 

 

(159,889)

Change in other assets

 

(9,270)

 

 

(5,874)

Net cash used in investing activities

 

(94,992)

 

 

(269,276)

Cash flows provided by financing activities:

 

 

 

 

 

Distributions to unitholders

 

(39,725)

 

 

(57,633)

Borrowings (repayments) on bank credit facilities, net

 

60,000

 

 

(10,000)

Issuance of common units, net of offering costs

 

 —

 

 

223,119

Other

 

(36)

 

 

 —

Net cash provided by financing activities

 

20,239

 

 

155,486

Net increase (decrease) in cash and cash equivalents

 

7,595

 

 

(14,042)

Cash and cash equivalents, beginning of period

 

6,883

 

 

14,042

Cash and cash equivalents, end of period

$

14,478

 

 

 —

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

$

3,686

 

 

19,668

Supplemental disclosure of noncash investing activities:

 

 

 

 

 

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

$

27,640

 

 

14,989

See accompanying notes to condensed consolidated financial statements.

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

(1) Business and Organization

 

Antero Midstream Partners LP (the “Partnership”) is a growth-oriented master limited partnership formed by Antero Resources Corporation (“Antero Resources”) to own, operate and develop midstream energy infrastructure primarily to service Antero Resources’ rapidly increasing production and completion activity in the Appalachian Basin’s Marcellus Shale and Utica Shale located in West Virginia and Ohio. The Partnership’s assets consist of gathering pipelines, compressor stations, and water handling and treatment assets, through which the Partnership provides midstream services to Antero Resources under long-term, fixed-fee contracts. The Partnership’s condensed consolidated financial statements as of March 31, 2017, include the accounts of the Partnership and its 100% owned operating subsidiaries: Antero Midstream LLC (“Midstream Operating”), Antero Water LLC (“Antero Water”), and Antero Treatment LLC (“Antero Treatment”). The condensed consolidated financial statements also include the accounts of Antero Midstream Finance Corporation (“Finance Corp”), the co-issuer of the Partnership’s senior notes. The Partnership’s 100% owned operating subsidiaries fully and unconditionally guarantee the Partnership’s outstanding debt securities on a joint and several basis. The Partnership has no independent assets or operations and there are no restrictions on the ability of the Partnership to obtain funds from its 100% owned subsidiaries by dividend or loan.

The Partnership also has a 15% equity interest in the gathering system of Stonewall Gas Gathering LLC (“Stonewall”) and a 50% interest in a joint venture to develop processing and fractionation assets with MarkWest Energy Partners, L.P. (“MarkWest”). See Note 11 – Equity Method Investments.

The Partnership’s financial statements are consolidated with the financial statements of Antero Resources (NYSE: AR), our primary beneficiary, for financial reporting purposes. See Note 13 – Subsequent Events for information regarding our general partner.

(2)Summary of Significant Accounting Policies

(a) Basis of Presentation

These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC applicable to interim financial information and should be read in the context of the December 31, 2016 consolidated financial statements and notes thereto for a more complete understanding of the Partnership’s operations, financial position, and accounting policies.  The December 31, 2016 consolidated financial statements have been filed with the SEC in the Partnership’s 2016 Form 10-K.

The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, and, accordingly, do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary to present fairly the Partnership’s financial position as of December 31, 2016 and March 31, 2017, the results of its operations for the three months ended March 31, 2016 and 2017, and its cash flows for the three months ended March 31, 2016 and 2017. The Partnership has no items of other comprehensive income or loss; therefore, its net income or loss is identical to its comprehensive income or loss. The Partnership’s statement of cash flows for the three months ended March 31, 2016 includes reclassifications within current liabilities that were made to conform to the three months ended March 31, 2017 presentation. The Partnership’s statement of operations and comprehensive income (loss) for the three months ended March 31, 2016 includes reclassifications within operating expenses that were made to conform to the three months ended March 31, 2017 presentation.

Certain costs of doing business which are incurred by Antero Resources on our behalf have been reflected in the accompanying condensed consolidated financial statements. These costs include general and administrative expenses attributed to us 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

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

·

employee compensation, including equity‑based compensation.

Transactions between us and Antero Resources have been identified in the condensed consolidated financial statements (see Note 3—Transactions with Affiliates).

As of the date these condensed consolidated financial statements were filed with the SEC, the Partnership completed its evaluation of potential subsequent events for disclosure and no items requiring disclosure were identified, except the declaration of a cash distribution to unitholders, as described in Note 7—Partnership Equity and Distributions.

(b)Revenue Recognition

We provide gathering and compression and water handling and treatment services under fee-based contracts based on throughput or cost plus a margin. Under these arrangements, we receive fees for gathering oil and gas products, compression services, and water handling and treatment services. We recognize revenue when all of the following criteria are met: (1) persuasive evidence of an agreement exists, (2) services have been rendered, (3) prices are fixed or determinable and (4) collectability is reasonably assured.

(c) Use of Estimates

The preparation of the 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 assets and liabilities. Items subject to estimates and assumptions include the useful lives of property and equipment and valuation of accrued liabilities, among others. Although management believes these estimates are reasonable, actual results could differ from these estimates.

(d)Cash and Cash Equivalents

We consider 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, we may be in a position of a “book overdraft” in which outstanding checks exceed cash and cash equivalents. We classify book overdrafts within accounts payable within our condensed consolidated balance sheet, and classify the change in accounts payable associated with book overdrafts as an operating activity within our condensed consolidated statement of cash flows.

(e)Property and Equipment

Property and equipment primarily consists of gathering pipelines, compressor stations and fresh water delivery pipelines and facilities stated at historical cost less accumulated depreciation. We capitalize construction-related direct labor and material costs. We also capitalize interest on capital costs related to the water treatment facility currently under construction. Maintenance and repair costs are expensed as incurred.

Depreciation is computed using the straight-line method over the estimated useful lives and salvage values of assets. The depreciation of fixed assets recorded under capital 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 our services in the areas in which we operate. When assets are placed into service, management makes estimates with respect to useful lives and salvage values that management believes are reasonable. However, subsequent events could cause a change in estimates, thereby impacting future depreciation amounts.

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

Our investment in property and equipment was as follows as of December 31, 2016 and March 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Estimated
useful lives

    

December 31,
2016

    

March 31,
2017

 

Land

 

n/a

 

$

11,338

 

 

12,786

 

Fresh water surface pipelines and equipment

 

5 years

 

 

39,562

 

 

40,402

 

Above ground storage tanks

 

10 years

 

 

4,301

 

 

4,301

 

Fresh water permanent buried pipelines and equipment

 

20 years

 

 

443,453

 

 

462,410

 

Gathering systems and facilities

 

20 years

 

 

1,551,771

 

 

1,629,761

 

Construction-in-progress

 

n/a

 

 

400,096

 

 

389,320

 

Total property and equipment

 

 

 

 

2,450,521

 

 

2,538,980

 

Less accumulated depreciation

 

 

 

 

(254,642)

 

 

(282,178)

 

Property and equipment, net

 

 

 

$

2,195,879

 

 

2,256,802

 

 

(f)Equity‑Based Compensation

Our condensed consolidated financial statements reflect various equity-based compensation awards granted by Antero Resources, as well as equity-based compensation awards associated with our own plan. These awards include restricted stock, stock options, and phantom units. For purposes of these condensed consolidated financial statements, we recognized as expense in each period an amount allocated from Antero Resources, with the offset included in partners’ capital. See Note 3—Transactions with Affiliates for additional information regarding Antero Resources’ allocation of expenses to us.

Antero Midstream GP LP (“AMGP”), the sole member of Antero Midstream Partners GP LLC (our “general partner”), has adopted the Antero Midstream Partners LP Long-Term Incentive Plan (“Midstream LTIP”), pursuant to which certain non-employee directors of our general partner and certain officers, employees and consultants of our general partner and its affiliates are eligible to receive awards representing equity interests in the Partnership. An aggregate of 10,000,000 common units may be delivered pursuant to awards under the Midstream LTIP, subject to customary adjustments. For accounting purposes, these units are treated as if they are distributed from us to Antero Resources. Antero Resources recognizes compensation expense for the units awarded to its employees and a portion of that expense is allocated to us. See Note 6—Equity-Based Compensation.

(g)Income Taxes

Our condensed consolidated financial statements do not include a provision for income taxes as we are treated as a partnership for federal and state income tax purposes, with each partner being separately taxed on its share of taxable income.

(h)Fair Value Measures

The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification 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 we estimate 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. Our 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.

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

(i) Investment in Unconsolidated Affiliates

The Partnership uses the equity method to account for its investments in companies if the investment provides the Partnership with the ability to exercise significant influence over, but not control, the operating and financial policies of the investee. The Partnership’s consolidated net income includes the Partnership’s proportionate share of the net income or loss of such companies. The Partnership’s judgment regarding the level of influence over each equity method investee includes considering key factors such as the Partnership’s ownership interest, representation on the board of directors and participation in policy-making decisions of the investee and material intercompany transactions. See Note 11–Equity Method Investments.

 

 

(3)Transactions with Affiliates

(a)Revenues

All revenues earned, except revenues earned from third parties, were earned from Antero Resources, under various agreements for gathering and compression and water services.

(b)Accounts receivable—Antero Resources and Accounts payable—Antero Resources

Accounts receivable—Antero Resources represents amounts due from Antero Resources, primarily related to gathering and compression services and water handling and treatment services. Accounts payable—Antero Resources represents amounts due to Antero Resources for general and administrative expenses, seconded employees, and other costs.

(c)Allocation of Costs

The employees supporting our operations are employees of Antero Resources. Direct operating expense includes allocated costs of $0.9 million and $1.2 million during the three months ended March 31, 2016 and 2017, respectively, related to labor charges for Antero Resources employees associated with the operation of our gathering lines, compressor stations, and water handling and treatment assets. General and administrative expense includes allocated costs of $12.4 million and $13.0 million during the three months ended March 31, 2016 and 2017, respectively. These costs relate to: (i) various business services, including payroll processing, accounts payable processing and facilities management, (ii) various corporate services, including legal, accounting, treasury, information technology and human resources and (iii) compensation, including equity-based compensation (see Note 6—Equity-Based Compensation for more information). These expenses are charged or allocated to us based on the nature of the expenses and are allocated based on a combination of our proportionate share of gross property and equipment, capital expenditures and labor costs, as applicable.

 

(4)Long-Term Debt

Long-term debt was as follows at December 31, 2016 and March 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2016

    

March 31, 2017

Revolving credit facility (a)

 

$

210,000

 

 

200,000

5.375% senior notes due 2024 (b)

 

 

650,000

 

 

650,000

Net unamortized debt issuance costs

 

 

(10,086)

 

 

(9,821)

 

 

$

849,914

 

 

840,179

 

(a) Revolving Credit Facility

We have a secured revolving credit facility with a syndicate of bank lenders. The revolving credit facility provides for lender commitments of $1.5 billion and a letter of credit sublimit of $150 million. The revolving credit facility matures on November 10, 2019.

The revolving credit facility is ratably secured by mortgages on substantially all of our properties, including the properties of our subsidiaries, and guarantees from our subsidiaries. The revolving credit facility contains certain covenants including

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

restrictions on indebtedness, and requirements with respect to leverage and interest coverage ratios. The revolving credit facility provides that, so long as no event of default exists or would be caused thereby, and only to the extent permitted by our organizational documents, distributions to the holders of our equity interests may be made in accordance with the cash distribution policy adopted by the board of directors of our general partner in connection with the IPO. The Partnership was in compliance with all of the financial covenants under the revolving credit facility as of December 31, 2016 and March 31, 2017.

Principal amounts borrowed are payable on the maturity date with such borrowings bearing interest that is payable quarterly or, in the case of Eurodollar Rate Loans, at the end of the applicable interest period if shorter than six months. Interest is payable at a variable rate based on LIBOR or the base rate, determined by election at the time of borrowing. Commitment fees on the unused portion of the revolving credit facility are due quarterly at rates ranging from 0.25% to 0.375% of the unused facility based on utilization.

At December 31, 2016 and March 31, 2017, we had borrowings under the revolving credit facility of $210 million and $200 million, respectively, with a weighted average interest rate of 2.23% and 2.51%, respectively.  No letters of credit were outstanding at December 31, 2016 or March 31, 2017. 

(b) 5.375% Senior Notes Due 2024

On September 13, 2016, the Partnership and its wholly-owned subsidiary, Finance Corp, as co-issuers, issued $650 million in aggregate principal amount of 5.375% senior notes due September 15, 2024 (the “2024 Notes”) at par.  The 2024 Notes are unsecured and effectively subordinated to the revolving credit facility to the extent of the value of the collateral securing the revolving credit facility.  The 2024 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by the Partnership’s wholly-owned subsidiaries (other than Finance Corp) and certain of its future restricted subsidiaries.  Interest on the 2024 Notes is payable on March 15 and September 15 of each year.  The Partnership may redeem all or part of the 2024 Notes at any time on or after September 15, 2019 at redemption prices ranging from 104.031% on or after September 15, 2019 to 100.00% on or after September 15, 2022.  In addition, prior to September 15, 2019, the Partnership may redeem up to 35% of the aggregate principal amount of the 2024 Notes with an amount of cash not greater than the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 105.375% of the principal amount of the 2024 Notes, plus accrued and unpaid interest.  At any time prior to September 15, 2019, the Partnership may also redeem the 2024 Notes, in whole or in part, at a price equal to 100% of the principal amount of the 2024 Notes plus a “make-whole” premium and accrued and unpaid interest.  If the Partnership undergoes a change of control, the holders of the 2024 Notes will have the right to require the Partnership to repurchase all or a portion of the notes at a price equal to 101% of the principal amount of the 2024 Notes, plus accrued and unpaid interest.

 

(5)  Accrued Liabilities

Accrued liabilities as of December 31, 2016 and March 31, 2017 consisted of the following items (in thousands):

 

 

 

 

 

 

 

 

    

December 31, 2016

    

March 31, 2017

Capital expenditures

 

$

35,608

 

 

26,590

Operating expenses

 

 

14,582

 

 

16,715

Interest

 

 

10,613

 

 

1,761

Other

 

 

838

 

 

2,017

 

 

$

61,641

 

 

47,083

 

(6)Equity-Based Compensation

Our general and administrative expenses include equity-based compensation costs allocated to us by Antero Resources for grants made pursuant to Antero Resources’ long‑term incentive plan and the Midstream LTIP. Equity‑based compensation expense allocated to us was $6.0 million and $6.3 million for the three months ended March 31, 2016 and 2017, respectively. These expenses were allocated to us based on our proportionate share of Antero Resources’ labor costs. Antero Resources has

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

unamortized expense totaling approximately $157.1 million as of March 31, 2017 related to its various equity-based compensation plans, which includes the Midstream LTIP. A portion of this will be allocated to us as it is amortized over the remaining service period of the related awards.

Midstream LTIP

Our general partner manages our operations and activities and Antero Resources employs the personnel who provide support to our operations pursuant to a secondment agreement between us and Antero Resources. AMGP has adopted the Midstream LTIP, pursuant to which non‑employee directors of our general partner and certain officers, employees and consultants of our general partner and its affiliates are eligible to receive awards representing ownership interests in the Partnership. An aggregate of 10,000,000 common units may be delivered pursuant to awards under the Midstream LTIP, subject to customary adjustments. A total of 7,944,445 common units are available for future grant under the Midstream LTIP as of March 31, 2017. Phantom units granted under the Midstream LTIP vest subject to the satisfaction of service requirements, upon the completion of which common units in the Partnership and distribution equivalent rights are delivered to the holder of the phantom units. Compensation related to each phantom unit award is recognized on a straight-line basis over the requisite service period of the entire award. The grant date fair values of these awards are determined based on the closing price of the Partnership’s common units on the date of grant. These units are accounted for as if they are distributed by the Partnership to Antero Resources. Antero Resources recognizes compensation expense for the units awarded and a portion of that expense is allocated to the Partnership. Antero Resources allocates equity-based compensation expense to the Partnership based on our proportionate share of Antero Resources’ labor costs. The Partnership’s portion of the equity-based compensation expense is included in general and administrative expenses, and recorded as a credit to the applicable classes of partners’ capital.

A summary of phantom unit awards activity during the three months ended March 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted
average

 

Aggregate

 

 

    

Number of
units

    

grant date
fair value

    

intrinsic value
(in thousands)

 

Total awarded and unvested—December 31, 2016

 

1,331,961

 

$

27.31

 

$

41,131

 

Granted

 

5,967

 

$

33.52

 

 

 

 

Vested

 

 —

 

$

 —

 

 

 

 

Forfeited

 

(16,327)

 

$

29.00

 

 

 

 

Total awarded and unvested—March 31, 2017

 

1,321,601

 

$

27.33

 

$

43,824

 

 

Intrinsic values are based on the closing price of the Partnership’s common units on the referenced dates. Midstream LTIP unamortized expense of $29.0 million at March 31, 2017, is expected to be recognized over a weighted average period of approximately 1.9 years and our proportionate share will be allocated to us as it is recognized.

 

 

(7)Partnership Equity and Distributions

Our Minimum Quarterly Distribution

Our partnership agreement provides for a minimum quarterly distribution of $0.17 per unit for each quarter, or $0.68 per unit on an annualized basis.

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

If cash distributions to our unitholders exceed $0.1955 per common unit in any quarter, our unitholders and the holder of our incentive distribution rights (“IDRs”), will receive distributions according to the following percentage allocations:

 

 

 

 

 

 

 

 

Marginal Percentage

 

 

 

Interest in Distributions

 

Total Quarterly Distribution

 

 

 

Holder of

 

Target Amount

 

Unitholders

 

IDRs

 

above $0.1955 up to $0.2125

    

85

%  

15

%  

above $0.2125 up to $0.2550

 

75

%  

25

%  

above $0.2550

 

50

%  

50

%  

 

General Partner Interest

Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, AMGP, the sole member of our general partner, controls the holder of the IDRs and may in the future own common units or other equity interests in us and will be entitled to receive distributions on any such interests.

On January 11, 2017, the board of directors of our general partner declared a cash distribution of $0.28 per unit for the quarter ended December 31, 2016. The distribution was paid on February 8, 2017 to unitholders of record as of February 1, 2017. Upon payment of this distribution, the requirements for the conversion of all subordinated units were satisfied under our partnership agreement. As a result, effective February 9, 2017, the 75,940,957 subordinated units owned by Antero Resources were converted into common units on a one-for-one basis and now participate on terms equal with all other common units in distributions of available cash. The conversion did not impact the amount of the cash distributions paid by the Partnership or the total units outstanding, as shown on the “Conversion of subordinated units to common units” line item on our condensed consolidated Statement of Partners’ Capital.

Cash Distributions

The board of directors of our general partner has declared a cash distribution of $0.30 per unit for the quarter ended March 31, 2017. The distribution will be payable on May 10, 2017 to unitholders of record as of May 3, 2017.

The following table details the amount of quarterly distributions the Partnership paid for each of its partnership interests, with respect to the quarter indicated (in thousands, except per unit data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

Limited Partners

 

 

 

 

 

 

 

 

 

Quarter
and
Year

    

Record Date

    

Distribution Date

    

Common
unitholders

    

Subordinated
unitholders

    

Holder of IDRs

    

Total

  

Distributions
per limited
partner unit

Q4 2015

 

February 15, 2016

 

February 29, 2016

 

$

22,048

 

 

16,708

 

 

969

 

 

39,725

 

$

0.2200

Q1 2016

 

May 11, 2016

 

May 25, 2016

 

 

23,556

 

 

17,846

 

 

1,850

 

 

43,252

 

$

0.2350

Q2 2016

 

August 10, 2016

 

August 24, 2016

 

 

25,059

 

 

18,985

 

 

2,731

 

 

46,775

 

$

0.2500

Q3 2016

 

November 10, 2016

 

November 24, 2016

 

 

26,901

 

 

20,124

 

 

4,820

 

 

51,845

 

$

0.2650

*

 

November 12, 2016

 

November 18, 2016

 

 

849

 

 

 —

 

 

 —

 

 

849

 

$

*

 

 

Total 2016

 

 

 

$

98,413

 

 

73,663

 

 

10,370

 

 

182,446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q4 2016

 

February 1, 2017

 

February 8, 2017

 

$

28,827

 

 

21,263

 

 

7,543

 

 

57,633

 

$

0.2800

 

 

Total 2017

 

 

 

$

28,827

 

 

21,263

 

 

7,543

 

 

57,633

 

 

 

* Distribution equivalent rights on units that vested under the Midstream LTIP

 

 

 

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

(8)Net Income Per Limited Partner Unit

The Partnership’s net income is attributed to the limited partners, in accordance with their respective ownership percentages, and when applicable, giving effect to incentive distributions paid to the holders of the incentive distribution rights. Basic and diluted net income per limited partner unit is calculated by dividing limited partners’ interest in net income, less incentive distributions, by the weighted average number of outstanding limited partner units during the period.

We compute earnings per unit using the two-class method for master limited partnerships. Under the two-class method, earnings per unit is calculated as if all of the earnings for the period were distributed under the terms of the partnership agreement, regardless of whether the general partner has discretion over the amount of distributions to be made in any particular period, whether those earnings would actually be distributed during a particular period from an economic or practical perspective, or whether the general partner has other legal or contractual limitations on its ability to pay distributions that would prevent it from distributing all of the earnings for a particular period.

We calculate net income available to limited partners based on the distributions pertaining to the current period’s net income. After adjusting for the appropriate period’s distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are attributed in accordance with the contractual terms of the partnership agreement under the two-class method.

Basic earnings per unit is computed by dividing net earnings attributable to unitholders by the weighted average number of units outstanding during each period. Diluted net income per limited partner unit reflects the potential dilution that could occur if agreements to issue common units, such as awards under long-term incentive plans, were exercised, settled or converted into common units. When it is determined that potential common units resulting from an award should be included in the diluted net income per limited partner unit calculation, the impact is reflected by applying the treasury stock method. Earnings per common unit assuming dilution for the three months ended March 31, 2017 was calculated based on the diluted weighted average number of units outstanding of 183,446,952, including 413,452 dilutive units attributable to non-vested phantom unit awards.

The Partnership’s calculation of net income per limited partner unit for the periods indicated is as follows (in thousands, except per unit data):

 

 

 

 

 

 

 

  

 

Three months ended March 31,

 

    

2016

    

2017

  

 

 

 

 

 

 

Net income

  

$

42,918

  

 

75,091

Less:

 

 

 

 

 

 

Net income attributable to incentive distribution rights

 

 

(1,850)

 

 

(11,553)

Limited partner interest in net income

  

$

41,068

 

 

63,538

 

 

 

 

 

 

 

Net income per limited partner unit - basic and diluted

 

$

0.23

 

 

0.35

 

 

 

 

 

 

 

Weighted average limited partner units  outstanding - basic

 

 

176,154

 

 

183,033

 

 

 

 

 

 

 

Weighted average limited partner units  outstanding - diluted

 

 

176,160

 

 

183,447

 

 

 

 

 

(9) Sale of Common Units Under Equity Distribution Agreement

During the third quarter of 2016, the Partnership entered into an Equity Distribution Agreement (the “Distribution Agreement”), pursuant to which the Partnership may sell, from time to time through brokers acting as its sales agents, common units representing limited partner interests having an aggregate offering price of up to $250 million.  The program is registered with the SEC on an effective registration statement on Form S-3. Sales of the common units may be made by means of ordinary brokers’ transactions on the New York Stock Exchange, at market prices, in block transactions, or as otherwise agreed to between the Partnership and the sales agents.  Proceeds are expected to be used for general partnership purposes, which may include repayment of indebtedness and funding working capital or capital expenditures.  The Partnership is under no obligation to offer and sell common units under the Distribution Agreement.

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

The Partnership did not sell any common units under the Distribution Agreement during the first quarter of 2017. As of March 31, 2017, the Partnership had the capacity to issue additional common units under the Distribution Agreement up to an aggregate sales price of $183.8 million.

(10) Fair Value Measurement

In connection with Antero Resources’ contribution of Antero Water and certain wastewater treatment assets to the Partnership in September 2015 (“Water Acquisition”), we agreed to pay Antero Resources (a) $125 million in cash if the Partnership delivers 176,295,000 barrels or more of fresh water during the period between January 1, 2017 and December 31, 2019 and (b) an additional $125 million in cash if the Partnership delivers 219,200,000 barrels or more of fresh water during the period between January 1, 2018 and December 31, 2020. This contingent consideration liability is valued based on Level 3 inputs.

The following table provides a reconciliation of changes in Level 3 financial liabilities measured at fair value on a recurring basis (in thousands):

 

 

 

Beginning balance - December 31, 2016

$

194,538

Accretion

 

3,526

Ending balance - March 31, 2017

$

198,064

 

We account for contingent consideration in accordance with applicable accounting guidance pertaining to business combinations. We are contractually obligated to pay Antero Resources contingent consideration in connection with the Water Acquisition, and therefore recorded this contingent consideration liability at the time of the Water Acquisition. We update our assumptions each reporting period based on new developments and adjust such amounts to fair value based on revised assumptions, if applicable, until such consideration is satisfied through payment upon achievement of the specified objectives or it is eliminated upon failure to achieve the specified objectives.

As of March 31, 2017, we expect to pay the entire amount of the contingent consideration amounts in 2019 and 2020. 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. The fair value of the contingent consideration liability associated with future milestone payments was based on the risk adjusted present value of the contingent consideration payout.

The carrying values of accounts receivable and accounts payable at December 31, 2016 and March 31, 2017 approximated market value because of their short-term nature. The carrying value of the amounts under the revolving credit facility at December 31, 2016 and March 31, 2017 approximated fair value because the variable interest rates are reflective of current market conditions.

Based on Level 2 market data inputs, the fair value of the Partnership’s 2024 Notes was approximately $660.6 million at March 31, 2017.

(11) Equity Method Investments

On February 6, 2017, we formed a joint venture to develop processing and fractionation assets in Appalachia (the “Joint Venture”) with MarkWest, a wholly owned subsidiary of MPLX, LP. We and MarkWest each own a 50% interest in the Joint Venture and MarkWest operates the Joint Venture assets. The Joint Venture assets consist of processing plants in West Virginia, and a one-third interest in a recently commissioned MarkWest fractionator in Ohio. We contributed approximately $160 million to the Joint Venture in the first quarter of 2017.

In conjuction with the Joint Venture, on February 10, 2017 we issued 6,900,000 common units, including the underwriters’ purchase option, resulting in net proceeds of approximately $223 million (the “Offering”). We used the proceeds from the Offering to repay outstanding borrowings under our revolving credit facility incurred to fund the investment in the Joint Venture, and for general partnership purposes.

In the second quarter of 2016, the Partnership exercised its option to purchase a 15% equity interest in Stonewall, which operates the 67-mile Stonewall pipeline on which Antero is an anchor shipper.

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

Our condensed consolidated net income includes the Partnership’s proportionate share of the net income (loss) of equity method investees. When the Partnership records its proportionate share of net income (loss), it increases (decreases) equity income in the condensed consolidated statements of operations and comprehensive income and the carrying value of that investment. The Partnership uses the equity method of accounting to account for its investments in Stonewall and the Joint Venture because the Partnership exercises significant influence over the entities. Our judgment regarding the level of influence over our equity investments includes considering key factors such as the Partnership’s ownership interest, representation on the board of directors and participation in policy-making decisions of Stonewall and the Joint Venture.

The following table is a reconciliation of our investments in unconsolidated affiliates as presented on our condensed consolidated balance sheets (in thousands):

 

 

 

 

 

 

 

 

 

 

 

MarkWest

 

Total Investment in

 

 

Stonewall

 

Joint Venture

 

Unconsolidated Affiliates

Balance at December 31, 2016

$

68,299

 

 —

 

68,299

Initial investment

 

 —

 

153,770

 

153,770

Additional investments

 

 —

 

6,119

 

6,119

Equity in net income (loss) of unconsolidated affiliates

 

2,475

 

(244)

 

2,231

Balance at March 31, 2017

$

70,774

 

159,645

 

230,419

 

 

 

(12)    Reporting Segments

The Partnership’s operations are located in the United States and are organized into two reporting segments: (1) gathering and processing and (2) water handling and treatment.

Gathering and Processing

The gathering and processing segment includes a network of gathering pipelines, compressor stations, and interests in processing and fractionation plants that collect and process natural gas, NGLs and oil from Antero Resources’ wells in West Virginia and Ohio.

Water Handling and Treatment

The Partnership’s water handling and treatment segment includes two independent systems that deliver fresh water from sources including the Ohio River, local reservoirs as well as several regional waterways. The water handling and treatment segment also includes other fluid handling services which includes high rate transfer, wastewater transportation, disposal and treatment.

These segments are monitored separately by management for performance and are consistent with internal financial reporting. These segments have been identified based on the differing products and services, regulatory environment and the expertise required for these operations. We evaluate the performance of the Partnership’s business segments based on operating income. Interest expense is primarily managed and evaluated on a consolidated basis.

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

Summarized financial information concerning the Partnership’s segments for the periods indicated is shown in the following table (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Water

 

 

 

 

  

Gathering and

  

Handling and

  

Consolidated

 

    

Processing

    

Treatment

    

Total

Three months ended March 31, 2016

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Revenue - Antero Resources

 

$

69,359

 

 

66,439

 

 

135,798

Revenue - third-party

 

 

275

 

 

 —

 

 

275

Total revenues

 

 

69,634

 

 

66,439

 

 

136,073

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Direct operating

 

 

7,619

 

 

41,522

 

 

49,141

General and administrative (before equity-based compensation)

 

 

4,949

 

 

2,170

 

 

7,119

Equity-based compensation

 

 

4,386

 

 

1,586

 

 

5,972

Depreciation

 

 

16,861

 

 

6,962

 

 

23,823

Accretion of contingent acquisition consideration

 

 

 —

 

 

3,396

 

 

3,396

Total expenses

 

 

33,815

 

 

55,636

 

 

89,451

Operating income

 

$

35,819

 

 

10,803

 

 

46,622

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated affiliates

 

$

 -

 

 

 -

 

 

 -

Total assets

 

$

1,503,098

 

 

524,348

 

 

2,027,446

Additions to property and equipment

 

$

48,686

 

 

37,036

 

 

85,722

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2017

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Revenue - Antero Resources

 

$

91,524

 

 

83,110

 

 

174,634

Revenue - third-party

 

 

135

 

 

 —

 

 

135

Total revenues

 

 

91,659

 

 

83,110

 

 

174,769

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Direct operating

 

 

8,114

 

 

39,440

 

 

47,554

General and administrative (before equity-based compensation)

 

 

5,549

 

 

2,622

 

 

8,171

Equity-based compensation

 

 

4,589

 

 

1,697

 

 

6,286

Depreciation

 

 

19,700

 

 

7,836

 

 

27,536

Accretion of contingent acquisition consideration

 

 

 —

 

 

3,526

 

 

3,526

Total expenses

 

 

37,952

 

 

55,121

 

 

93,073

Operating income

 

$

53,707

 

 

27,989

 

 

81,696

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated affiliates

 

$

2,231

 

 

 -

 

 

2,231

Total assets

 

$

1,925,752

 

 

645,941

 

 

2,571,693

Additions to property and equipment

 

$

66,559

 

 

36,954

 

 

103,513

 

 

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ANTERO MIDSTREAM PARTNERS LP

Notes to Condensed Consolidated Financial Statements

December 31, 2016 and March 31, 2017

(13)    Subsequent Events

On April 6, 2017, in connection with its proposed initial public offering, Antero Resources Midstream Management LLC (“ARMM”) formed Antero Midstream Partners GP LLC (“AMP GP”), a Delaware limited liability company, as a wholly owned subsidiary, and, on April 11, 2017, assigned it the general partner interest in us. Concurrent with the assignment, AMP GP was admitted as the Partnership’s sole general partner and ARMM ceased to be our general partner.

On May 3, 2017, ARMM, which indirectly controls our incentive distribution rights, announced the pricing of its initial public offering of 37,250,000 common shares held by its sole member, Antero Resources Investment LLC (“Antero Investment”), at $23.50 per common share. The underwriters were granted an option to purchase up to an additional 5,587,500 common shares. ARMM anticipates closing its initial public offering on May 9, 2017. In connection with the offering, ARMM was converted into a Delaware limited partnership, and, in connection with such conversion, changed its name to Antero Midstream GP LP (“AMGP”). We will receive no proceeds from the sale of common shares in this offering.

Following AMGP’s initial public offering and Antero Investment’s anticipated liquidation, certain of our directors and executive officers will own AMGP common shares as well as profits interests in Antero IDR Holdings LLC, which owns all of our IDRs.  In addition, certain of our directors and executive officers own a portion of Antero Resources’ common stock.

 

 

 

 

 

 

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report. The information provided below supplements, but does not form part of, our condensed consolidated financial statements. This discussion contains forward‑looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward‑looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, please see “Item 1A. Risk Factors.” and the section entitled “Cautionary Statement Regarding Forward‑Looking Statements.” We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. For more information please refer to the Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 28, 2017.

In this section, references to “the Partnership,” “we,” “us,” and “our” refer to Antero Midstream Partners LP and its subsidiaries, unless otherwise indicated or the context otherwise requires.

Overview

We are a growth-oriented master limited partnership formed by Antero Resources to own, operate and develop midstream energy assets to service Antero Resources’ increasing production. Our assets consist of gathering pipelines, compressor stations, and interests in processing and fractionation plants that collect and process natural gas, NGLs and oil from Antero Resources’ wells in the Marcellus Shale in West Virginia and the Utica Shale in Ohio. Our assets also include two independent fresh water delivery systems that deliver fresh water from the Ohio River, several regional waterways, and wastewater handling services for well completion operations in Antero Resources’ operating areas. These fresh water delivery systems consist of permanent buried pipelines, surface pipelines and fresh water storage facilitates, as well as pumping stations and impoundments to transport the fresh water throughout the pipelines. The wastewater handling services consist of wastewater transportation, disposal, and treatment, including a water treatment facility currently under construction.

Address, Internet Website and Availability of Public Filings

Our principal executive offices are at 1615 Wynkoop Street, Denver, Colorado 80202.  Our telephone number is (303) 357-7310. Our website is located at www.anteromidstream.com.

We make available free of charge our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. These documents are located at www.anteromidstream.com under the “Investors Relations” link.

Information on our website is not incorporated into this Quarterly Report on Form 10-Q or our other filings with the SEC and is not a part of them.

2017 Developments and Highlights 

 

Financial Results

 

For the three months ended March 31, 2017, we generated cash flows from operations of $100 million, net income of $75 million, and Adjusted EBITDA of $119 million. This compares to cash flows from operations of $82 million, net income of $43 million, and Adjusted EBITDA of $80 million for the three months ended March 31, 2016.  See “—Non-GAAP Financial Measures” for a definition of Adjusted EBITDA (a non-GAAP measure) and a reconciliation of Adjusted EBITDA to net income.

 

Energy Industry Environment

 

In late 2014, global energy commodity prices declined precipitously as a result of several factors, including an increase in worldwide commodity supplies, a stronger U.S. dollar, relatively mild weather in large portions of the U.S., and strong competition among oil producing countries for market share.  Depressed commodity prices continued into 2015 and 2016, although a modest recovery has occurred in late 2016 and early 2017.  The following chart depicts changes in natural gas (Henry Hub), propane (Mont Belvieu), and oil (West Texas Intermediate) spot prices since June 30, 2014.

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Picture 1

Cash Distributions

The board of directors of our general partner has declared a cash distribution of $0.30 per unit for the quarter ended March 31, 2017. The distribution will be payable on May 10, 2017 to unitholders of record as of May 3, 2017.

2017 Capital Budget and Capital Spending

Our 2017 capital budget is approximately $800 million, which includes $460 million of expansion capital, $65 million of maintenance capital, and $275 million of capital investment in the Joint Venture. The capital budget includes $350 million of expansion and maintenance capital on gathering and processing infrastructure, approximately 75% of which will be invested in the Marcellus Shale and the remaining 25% will be invested in the Utica Shale. The gathering and processing budget is expected to result in over 35 miles of additional gathering pipelines in the Marcellus and Utica Shales combined. We also expect to invest $75 million for water infrastructure and maintenance capital for four fresh water storage impoundments as well as 37 miles of additional fresh water trunklines and surface pipelines to support Antero Resources’ completion activities. Approximately 67% of the water infrastructure budget will be allocated to the Marcellus Shale and the remaining 33% will be allocated to the Utica Shale. Our 2017 budget also includes $100 million of construction capital for the advanced wastewater treatment facility, which is expected to be placed into service in late 2017. During the three months ended March 31, 2017, our total gathering and processing capital expenditures were approximately $67 million and our total water handling and treatment capital expenditures were approximately $37 million.

For the three months ended March 31, 2017, our capital expenditures were approximately $264 million, including $88 of expansion capital, $16 million of maintenance capital, and $160 million of capital investment in the Joint Venture.

Dedication Release

On September 28, 2016, the board of directors of AMGP, in consultation with its conflicts committee, agreed to release approximately 13,800 net acres located in Washington, Greene, West Moreland and Fayette Counties in Pennsylvania from Antero Resources’ dedication for gathering and compression services to us under our gathering and compression agreement and from the right of first offer granted by Antero Resources to us under our right of first offer agreement in exchange for $10 million. Antero Resources subsequently sold such acreage to a third party on December 16, 2016.

Joint Venture – Sherwood Processing Facility

On February 6, 2017, we formed a joint venture to develop processing and fractionation assets in Appalachia (the “Joint Venture”) with MarkWest Energy Partners, L.P. (“MarkWest”), a wholly owned subsidiary of MPLX, LP. We and MarkWest each

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own a 50% interest in the Joint Venture and MarkWest operates the Joint Venture assets. The Joint Venture assets consist of processing plants in West Virginia, and a one third interest in a recently commissioned MarkWest fractionator in Ohio. We contributed approximately $160 million to the Joint Venture in the first quarter of 2017.

In conjunction with the Joint Venture, on February 10, 2017 we issued 6,900,000 common units, including the underwriters’ purchase option, resulting in net proceeds of approximately $223 million (the “Offering”). We used the proceeds from the Offering to repay outstanding borrowings under our revolving credit facility incurred to fund the investment in the Joint Venture, and for general partnership purposes.

Subordinated Unit Conversion

Upon payment of the 2016 fourth quarter distribution, the requirements for the conversion of all subordinated units were satisfied under our partnership agreement. As a result, effective February 9, 2017, the 75,940,957 subordinated units owned by Antero Resources were converted into common units on a one-for-one basis and participate on terms equal with all other common units in distributions of available cash. The conversion did not impact the amount of the cash distributions paid by the Partnership or the total units outstanding.

Antero Midstream GP LP Initial Public Offering

On April 6, 2017, in connection with its proposed initial public offering, Antero Resources Midstream Management LLC (“ARMM”) formed Antero Midstream Partners GP LLC (“AMP GP”), a Delaware limited liability company, as a wholly owned subsidiary, and, on April 11, 2017, assigned it the general partner interest in us. Concurrent with the assignment, AMP GP was admitted as the Partnership’s sole general partner and ARMM ceased to be our general partner.

On May 3, 2017, ARMM, which indirectly controls our incentive distribution rights, announced the pricing of its initial public offering of 37,250,000 common shares held by its sole member, Antero Resources Investment LLC, at $23.50 per common share. The underwriters were granted an option to purchase up to an additional 5,587,500 common shares. ARMM anticipates closing its initial public offering on May 9, 2017. In connection with the offering, ARMM was converted into a Delaware limited partnership, and, in connection with such conversion, changed its name to Antero Midstream GP LP (“AMGP”). We will receive no proceeds from the sale of common shares in this offering.

Credit Facility

As of March 31, 2017, lender commitments under our revolving credit facility were $1.5 billion, with a letter of credit sublimit of $150 million. At March 31, 2017, we had borrowings of $200 million and no letters of credit outstanding under the revolving credit facility. Our revolving credit facility matures in November 2019. See “—Debt Agreements—Revolving Credit Facility” for a description of our revolving credit facility.

Items Affecting Comparability of Our Financial Results

Certain of the historical financial results discussed below may not be comparable to our future financial results primarily as a result of the significant increase in the scope of our operations over the last several years. Our gathering and processing and water handling and treatment systems are relatively new, having been substantially built within the last three years. Accordingly, our revenues and expenses over that time reflect the significant ramp up in our operations. Similarly, Antero Resources has experienced significant changes in its production and drilling and completion schedule over that same period. Accordingly, it may be difficult to project trends from our historical financial data going forward.

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Results of Operations

Three months ended March 31, 2016 compared to three months ended March 31, 2017

We have two operating segments: (1) gathering and processing and (2) water handling and treatment. The operating results and assets of our reportable segments were as follows for the three months ended March 31, 2016 and 2017 (in thousands):

<

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Water

 

 

 

 

  

Gathering and

  

Handling and

  

Consolidated

 

    

Processing

    

Treatment

    

Total

Three months ended March 31, 2016

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Revenue - Antero Resources

 

$

69,359

 

 

66,439

 

 

135,798

Revenue - third-party

 

 

275

 

 

 —

 

 

275

Total revenues

 

 

69,634

 

 

66,439

 

 

136,073

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Direct operating

 

 

7,619

 

 

41,522

 

 

49,141

General and administrative (before equity-based compensation)

 

 

4,949

 

 

2,170

 

 

7,119

Equity-based compensation

 

 

4,386

 

 

1,586

 

 

5,972

Depreciation

 

 

16,861

 

 

6,962

 

 

23,823

Accretion of contingent acquisition consideration

 

 

 —

 

 

3,396

 

 

3,396

Total expenses

 

 

33,815

 

 

55,636

 

 

89,451

Operating income

 

$

35,819

 

 

10,803

 

 

46,622

 

 

 

 

 

 

 

 

 

 

Segment and consolidated Adjusted EBITDA(1)

 

$

57,066

 

 

22,747

 

 

79,813

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2017

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Revenue - Antero Resources

 

$

91,524

 

 

83,110

 

 

174,634

Revenue - third-party

 

 

135

 

 

 —

 

 

135

Total revenues

 

 

91,659

 

 

83,110

 

 

174,769

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Direct operating

 

 

8,114

 

 

39,440

 

 

47,554

General and administrative (before equity-based compensation)

 

 

5,549

 

 

2,622

 

 

8,171

Equity-based compensation

 

 

4,589

 

 

1,697

 

 

6,286

Depreciation

 

 

19,700

 

 

7,836

 

 

27,536

Accretion of contingent acquisition consideration

 

 

 —

 

 

3,526

 

 

3,526

Total expenses

 

 

37,952

 

 

55,121

 

 

93,073

Operating income

 

$

53,707

 

 

27,989

 

 

81,696

 

 

 

 

 

 

 

 

 

 

Segment and consolidated Adjusted EBITDA(1)

 

$