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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 June 30, 2020

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 pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes   No

The registrant had 476,597,058 shares of common stock outstanding as of July 24, 2020.

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

54

Item 4.

Controls and Procedures

55

PART II—OTHER INFORMATION

56

Item 1.

Legal Proceedings

56

Item 1A.

Risk Factors

56

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 6.

Exhibits

58

SIGNATURES

59

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some of the information in this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements, although not all forward-looking statements contain such identifying words. When considering these forward-looking statements, investors should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q. These forward-looking statements are based on management’s current beliefs, based on currently available information, as to the outcome and timing of future events. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

Antero Resources Corporation’s (“Antero Resources”) expected production and development plan;
impacts to producer customers of insufficient storage capacity;
our ability to execute our business strategy;
our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;
our ability to realize the anticipated benefits of our investments in unconsolidated affiliates;
natural gas, natural gas liquids (“NGLs”), and oil prices;
impacts of world health events, including the coronavirus (COVID-19) pandemic;
our ability to complete the construction of or purchase new gathering and compression, processing, water handling or other assets on schedule, at the budgeted cost or at all, and the ability of such assets to operate as designed or at expected levels;
our ability to execute our share repurchase program;
competition and government regulations;
actions taken by third-party producers, operators, processors and transporters;
pending 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
our other plans, objectives, expectations and intentions contained in this Quarterly Report on Form 10-Q.

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,

2

Table of Contents

regulatory changes, the uncertainty inherent in projecting Antero Resources’ future rates of production, cash flows and access to capital, the timing of development expenditures, impacts of world health events, including the COVID-19 pandemic, potential shut-ins of production by producers due to lack of downstream demand or storage capacity, and the other risks described or referenced under the heading “Risk Factors” herein, including the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, each of which is on file with the Securities and Exchange Commission (“SEC”).

Should one or more of the risks or uncertainties described or referenced in this Quarterly Report on Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.

3

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PART I—FINANCIAL INFORMATION

ANTERO MIDSTREAM CORPORATION

Condensed Consolidated Balance Sheets

December 31, 2019 and June 30, 2020

(In thousands)

(Unaudited)

December 31,

June 30,

    

2019

   

2020

 

Assets

Cash and cash equivalents

$

1,235

2,997

Accounts receivable–Antero Resources

101,029

76,088

Accounts receivable–third party

4,574

3,392

Income tax receivable

17,547

Other current assets

1,720

645

Total current assets

108,558

100,669

Property and equipment, net

3,273,410

3,249,643

Investments in unconsolidated affiliates

709,639

729,823

Deferred tax asset

103,231

160,579

Customer relationships

1,498,119

1,462,908

Goodwill

575,461

Other assets, net

14,460

11,433

Total assets

$

6,282,878

5,715,055

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable–Antero Resources

$

3,146

2,714

Accounts payable–third party

6,645

19,822

Accrued liabilities

104,188

72,284

Contingent acquisition consideration

125,000

Other current liabilities

3,105

3,325

Total current liabilities

242,084

98,145

Long-term liabilities:

Long-term debt

2,892,249

3,088,785

Other

5,131

4,943

Total liabilities

3,139,464

3,191,873

Stockholders' Equity:

Preferred stock, $0.01 par value: 100,000 authorized at December 31, 2019 and June 30, 2020, respectively

Series A non-voting perpetual preferred stock; 12 designated and 10 issued and outstanding at both December 31, 2019 and June 30, 2020

Common stock, $0.01 par value; 2,000,000 authorized; 484,042 and 476,486 issued and outstanding at December 31, 2019 and June 30, 2020, respectively

4,840

4,765

Additional paid-in capital

3,480,139

3,164,474

Accumulated loss

(341,565)

(646,057)

Total stockholders' equity

3,143,414

2,523,182

Total liabilities and stockholders' equity

$

6,282,878

5,715,055

See accompanying notes to unaudited condensed consolidated financial statements.

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ANTERO MIDSTREAM CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive Income

Three Months Ended June 30, 2019 and 2020

(Unaudited)

(In thousands, except per share amounts)

Three Months Ended June 30,

    

2019

    

2020

Revenue:

    

    

Gathering and compression–Antero Resources

$

168,925

173,991

Water handling–Antero Resources

95,181

63,351

Water handling and treatment–third party

46

Amortization of customer relationships

(8,534)

(17,606)

Total revenue

255,618

219,736

Operating expenses:

Direct operating

63,998

42,067

General and administrative (including $21,543 and $2,697 of equity-based compensation in 2019 and 2020, respectively)

34,622

12,422

Facility idling

2,475

Impairment of property and equipment

594

Depreciation

36,447

27,745

Accretion and change in fair value of contingent acquisition consideration

2,297

Accretion of asset retirement obligations

69

61

Loss on asset sale

240

Total operating expenses

138,027

85,010

Operating income

117,591

134,726

Interest expense, net

(31,521)

(35,311)

Equity in earnings of unconsolidated affiliates

13,623

20,947

Income before income taxes

99,693

120,362

Provision for income tax expense

(30,419)

(31,921)

Net income and comprehensive income

$

69,274

88,441

Net income per share–basic

$

0.14

0.19

Net income per share–diluted

$

0.14

0.18

Weighted average common shares outstanding:

Basic

506,816

476,836

Diluted

507,767

478,837

See accompanying notes to unaudited condensed consolidated financial statements.

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ANTERO MIDSTREAM CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Six Months Ended June 30, 2019 and 2020

(Unaudited)

(In thousands, except per share amounts)

Six Months Ended June 30,

    

2019

    

2020

Revenue:

    

    

Gathering and compression–Antero Resources

$

202,459

337,120

Water handling–Antero Resources

117,532

161,535

Water handling–third party

50

Amortization of customer relationships

(10,315)

(35,211)

Total revenue

309,726

463,444

Operating expenses:

Direct operating

78,980

90,795

General and administrative (including $32,966 and $6,035 of equity-based compensation in 2019 and 2020, respectively)

54,431

25,959

Facility idling

11,153

Impairment of goodwill

575,461

Impairment of property and equipment

594

89,083

Depreciation

44,097

55,088

Accretion and change in fair value of contingent acquisition consideration

3,346

Accretion of asset retirement obligations

79

103

Loss on asset sale

240

Total operating expenses

181,527

847,882

Operating income (loss)

128,199

(384,438)

Interest expense, net

(37,738)

(72,942)

Equity in earnings of unconsolidated affiliates

16,503

40,024

Income (loss) before income taxes

106,964

(417,356)

Provision for income tax benefit (expense)

(28,042)

112,864

Net income (loss) and comprehensive income (loss)

$

78,922

(304,492)

Net income (loss) per share–basic and diluted

$

0.21

(0.63)

Weighted average common shares outstanding:

Basic

381,045

479,969

Diluted

382,026

479,969

See accompanying notes to unaudited condensed consolidated financial statements.

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ANTERO MIDSTREAM CORPORATION

Condensed Consolidated Statement of Partners’ Capital and Stockholders’ Equity

Six Months Ended June 30, 2019

(Unaudited)

(In thousands)

Common

Shares

Representing

Limited

Additional

Partner

Series B

Preferred

Common Stock

Paid-In

Accumulated

Total

Interests

Unitholders

Stock

Shares

Amount

Capital

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)

506,641

5,066

4,002,898

4,017,881

Issuance of Series A non-voting perpetual preferred stock

Equity-based compensation post-acquisition

4,389

4,389

Net income and comprehensive income post-acquisition

23,197

23,197

Balance at March 31, 2019

506,641

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

206

2

(1,830)

(1,828)

Net income and comprehensive income

69,274

69,274

Balance at June 30, 2019

$

506,847

$

5,068

3,874,820

92,471

3,972,359

See accompanying notes to unaudited condensed consolidated financial statements.

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ANTERO MIDSTREAM CORPORATION

Condensed Consolidated Statement of Stockholders’ Equity

Six Months Ended June 30, 2020

(Unaudited)

(In thousands)

Additional

Accumulated

Preferred

Common Stock

Paid-In

Income

Total

Stock

Shares

Amount

Capital

(Loss)

Equity

Balance at December 31, 2019

    

$

    

484,042

    

$

4,840

    

3,480,139

    

(341,565)

    

3,143,414

Dividends to stockholders

(149,014)

(149,014)

Equity-based compensation

3,338

3,338

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

43

(26)

(26)

Repurchases and retirement of common stock

(4,700)

(46)

(15,778)

(15,824)

Net (loss) and comprehensive (loss)

(392,933)

(392,933)

Balance at March 31, 2020

$

479,385

$

4,794

3,318,659

(734,498)

2,588,955

Dividends to stockholders

(147,656)

(147,656)

Equity-based compensation

2,697

2,697

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

311

4

(370)

(366)

Repurchases and retirement of common stock

(3,210)

(33)

(8,856)

(8,889)

Net income and comprehensive income

88,441

88,441

Balance at June 30, 2020

$

476,486

$

4,765

3,164,474

(646,057)

2,523,182

See accompanying notes to unaudited condensed consolidated financial statements.

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ANTERO MIDSTREAM CORPORATION

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2019 and 2020

(Unaudited)

(In thousands)

Six Months Ended June 30,

    

2019

    

2020

 

Cash flows provided by (used in) operating activities:

    

    

  

Net income (loss)

$

78,922

(304,492)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Distributions from Antero Midstream Partners LP, prior to the Transactions

43,492

Depreciation

44,097

55,088

Payment of contingent consideration in excess of acquisition date fair value

(34,342)

Accretion and change in fair value of contingent acquisition consideration

3,425

103

Impairment

594

664,544

Deferred income taxes

28,042

(56,408)

Equity-based compensation

32,966

6,035

Equity in earnings of unconsolidated affiliates

(16,503)

(40,024)

Distributions from unconsolidated affiliates

23,860

41,828

Amortization of customer relationships

10,315

35,211

Amortization of deferred financing costs

1,102

2,190

Settlement of asset retirement obligations

(601)

Loss on asset sale

240

Changes in assets and liabilities:

Accounts receivable–Antero Resources

38,414

24,941

Accounts receivable–third party

9

1,089

Income tax receivable

(17,547)

Other current assets

(1,867)

930

Accounts payable–Antero Resources

973

(432)

Accounts payable–third party

(4,629)

5,495

Income taxes payable

(15,370)

Accrued liabilities

(15,678)

(21,701)

Net cash provided by operating activities

252,164

362,147

Cash flows provided by (used in) investing activities:

Additions to gathering systems and facilities

(89,206)

(103,937)

Additions to water handling systems

(51,984)

(19,477)

Investments in unconsolidated affiliates

(103,409)

(21,988)

Cash received on acquisition of Antero Midstream Partners LP

619,532

Cash consideration paid to Antero Midstream Partners LP unitholders

(598,709)

Cash received in asset sale

123

Change in other assets

2,375

1,938

Net cash used in investing activities

(221,401)

(143,341)

Cash flows provided by (used in) financing activities:

Distributions to unitholders and dividends to stockholders

(182,625)

(296,395)

Distributions to Series B unitholders

(3,720)

Distributions to preferred stockholders

(98)

(275)

Repurchases of common stock

(24,713)

Issuance of senior notes

650,000

Payments of deferred financing costs

(6,952)

Borrowings (repayments) on bank credit facilities, net

(480,500)

195,500

Payment for contingent acquisition consideration

(90,658)

Employee tax withholding for settlement of equity compensation awards

(1,828)

(392)

Other

(71)

(111)

Net cash used in financing activities

(25,794)

(217,044)

Net increase in cash and cash equivalents

4,969

1,762

Cash and cash equivalents, beginning of period

2,822

1,235

Cash and cash equivalents, end of period

$

7,791

2,997

Supplemental disclosure of cash flow information:

Cash paid during the period for interest

$

31,147

74,665

Cash refund received (paid) during the period for income taxes

$

(16,001)

38,910

Increase (decrease) in accrued capital expenditures and accounts payable for property and equipment

$

9,447

(3,461)

See accompanying notes to unaudited condensed consolidated financial statements.

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ANTERO MIDSTREAM CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2019 and June 30, 2020

(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 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 (the “Conversion”), (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 (“AM common stock”). As a result of the Transactions, Antero Midstream Partners became and 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 became owners of AM 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, including 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 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 Securities and Exchange Commission (the “SEC”) applicable to interim financial information and should be read in the context of the Company’s December 31, 2019 consolidated financial statements and notes thereto for a more complete understanding of the Company’s operations, financial position, and accounting policies. The Company’s December 31, 2019 consolidated financial statements were included in the Company’s 2019 Annual Report on Form 10-K, which was filed with the SEC.

These unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, and, accordingly, do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary to present fairly the Company’s financial position as of December 31, 2019 and June 30, 2020, the results of the Company’s operations for the three and six months ended June 30, 2019 and 2020, and its cash flows for the six months ended June 30, 2019 and 2020. The Company has no items of other comprehensive income (loss); therefore, net income (loss) is equal to comprehensive income (loss).

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ANTERO MIDSTREAM CORPORATION

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

December 31, 2019 and June 30, 2020

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).

(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. All significant intercompany accounts and transactions have been eliminated in the Company’s unaudited condensed consolidated financial statements.

(c)

Revenue Recognition

The Company, through Antero Midstream Partners and its affiliates, provides gathering, compression and water handling 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, compression services and water handling services. The revenue the Company earns from these arrangements is directly related to (i) 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, (ii) in the case of fresh water services, the quantities of fresh water delivered to its customers for use in their well completion operations, (iii) 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 its customers, (iv) in the case of wastewater services provided by third parties, the third-party costs the Company incurs plus 3%, or (v) in the case of flowback and produced water treatment performed by the Company, a cost of service fee based on the costs incurred by the Company. 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. The Company includes lease revenue within revenues by service. See Note 7—Revenue.

(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.

(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.

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ANTERO MIDSTREAM CORPORATION

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

December 31, 2019 and June 30, 2020

(f)

Property and Equipment

Property and equipment primarily consists of gathering pipelines, compressor stations and the wastewater treatment facility and related landfill (collectively, the “Clearwater Facility”) previously used for the disposal of salt therefrom, other flowback and produced water treatment facilities, 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, and 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 freshwater delivery system during the six months ended June 30, 2020.

(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 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

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ANTERO MIDSTREAM CORPORATION

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

December 31, 2019 and June 30, 2020

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, flowback and produced water facilities and the Clearwater Facility upon abandonment. See Note 4—Clearwater Facility Idling.

(h)

Equity-Based Compensation

The Company’s unaudited condensed consolidated financial statements include equity-based compensation costs related to awards granted by its own plans, as in place before and after the Transactions, as well as costs allocated by Antero Resources for grants made prior to the Transactions. Costs allocated from Antero Resources are offset to additional paid in capital on the unaudited condensed consolidated balance sheet. See Note 6—Transactions with Affiliates for additional information regarding Antero Resources’ allocation of expenses to the Company. For awards granted under its own plan, the Company recognizes compensation cost related to all equity-based awards in the financial statements based on the estimated grant date fair value. The Company is authorized to grant various types of equity-based compensation awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, dividend equivalent awards and other types of awards. The grant date fair values of such awards are determined based on the type of award and may utilize market prices on the date of grant, Black-Scholes option-pricing model, Monte Carlo simulations or other acceptable valuation methodologies, as appropriate for the type of equity-based award. Compensation cost is recognized ratably over the applicable vesting or service period. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period. See Note 11—Equity-Based Compensation.

(i)

Income Taxes

The Company 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.  The Company regularly reviews its tax positions in each significant taxing jurisdiction during the process of evaluating its tax provision.  The Company 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.  

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted.  The CARES Act allows corporations with net operating losses (“NOLs”) incurred in 2018, 2019, and 2020 to carry back such NOLs to each of the five years preceding the year of the NOLs, beginning with the earliest year in which there was taxable income, and claim an income tax refund in the applicable carryback years.  As a result of this NOLs carryback provision in the CARES Act, the Company was able to recognize an income tax refund receivable in March 2020 of $55 million, including $11 million in current income tax benefit and $44 million of previously recognized deferred income tax benefit.  As of June 30, 2020, the Company had received $39 million of this refund.

(j)

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

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ANTERO MIDSTREAM CORPORATION

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

December 31, 2019 and June 30, 2020

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 unaudited condensed 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 party, accrued liabilities and other current liabilities 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). Additionally, the Company uses certain fair valuation techniques in performing its goodwill impairment test described below and in determining the fair value of the freshwater delivery system, both of which were impaired in the first quarter of 2020.

(k)

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 unaudited condensed consolidated net income (loss) 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 15—Investments in Unconsolidated Affiliates.

(l)

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, as applicable, 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.

(m)

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 in the fourth quarter 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.

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ANTERO MIDSTREAM CORPORATION

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

December 31, 2019 and June 30, 2020

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 asset 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 Idling and Note 5—Goodwill and Intangibles.

(n)

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.

(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 AM 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 AM 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, 2019 and June 30, 2020

The final purchase price allocation of the Transactions are summarized in the table below. The fair value of assets acquired and liabilities assumed at March 12, 2019, were as follows (in thousands):

Cash and cash equivalents

    

$

619,532

Accounts receivable–Antero Resources

142,312

Accounts receivable–third party

117

Other current assets

1,150

Property and equipment, net

3,371,427

Investments in unconsolidated affiliates

568,285

Customer relationships

1,567,000

Other assets, net

42,887

Total assets acquired

6,312,710

Accounts payable–Antero Resources

3,316

Accounts payable–third party

30,674

Accrued liabilities

87,021

Other current liabilities

537

Long-term debt

2,364,935

Contingent acquisition consideration

116,924

Other liabilities

8,524

Total liabilities assumed

2,611,931

Net assets acquired, excluding goodwill

3,700,779

Goodwill

915,811

Net assets acquired

$

4,616,590

All customer relationships are subject to amortization, which is recognized over a weighted-average period of 23 years for the remaining economic life of the relationship.

The purchase price allocation resulted in the recognition of $915 million of goodwill, including $575 million within the Company’s gathering and processing segment and $340 million of goodwill within its water handling segment. Substantially all of the goodwill is expected to be deductible for tax purposes. Goodwill represented the efficiencies realized with simplifying our corporate structure to own, operate and develop midstream energy infrastructure primarily to service Antero Resources. See Note 5—Goodwill and Intangibles.

The Company’s unaudited condensed consolidated statement of operations for the six months ended June 30, 2019 include $6 million of acquisition-related costs associated with the Transactions. These costs were expensed as general and administrative costs.

(4) Clearwater Facility Idling

On September 18, 2019, the Company commenced a strategic evaluation of the Clearwater Facility, at which time such facility was idled. The Company expects the facility to continue to be idled for the foreseeable future. Accordingly, the Company performed an 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 year ended December 31, 2019 related to the Clearwater Facility (in thousands):

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ANTERO MIDSTREAM CORPORATION

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

December 31, 2019 and June 30, 2020

Impairment of property and equipment

    

$

408,882

Impairment of goodwill

42,290

Impairment of customer relationships

11,871

Total impairment expense

$

463,043

The Company incurred $2.5 million and $11.2 million in facility idling costs for the care and maintenance of the Clearwater Facility during the three and six months ended June 30, 2020, respectively.

(5) Goodwill and Intangibles

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 incurred impairment charges to the goodwill and customer relationships intangible asset associated with the Clearwater Facility, which is in the water handling segment. See Note 4—Clearwater Facility Idling.

During the fourth quarter of 2019, the Company incurred impairment charges of $298 million to its fresh water delivery and services reporting unit, which is in the water handling segment. This was primarily due to decreased water volumes driven by decreased drilling and increased use of water blending operations by Antero Resources. There was no goodwill remaining in this segment after this impairment was incurred.

During the first quarter of 2020, the Company performed an interim impairment analysis of the goodwill due to changes in Antero Resources’ drilling plans as a result of the decline in commodity prices. As a result of this evaluation, the Company impaired all remaining goodwill of $575 million associated with its gathering and processing segment in the first quarter of 2020.

All customer relationships are subject to amortization and are amortized over a weighted-average period of 23 years, which reflects the remaining economic life of the relationships. The changes in the carrying amount of customer relationships for the six months ended June 30, 2020 were as follows (in thousands):

Customer relationships as of December 31, 2019

    

$

1,498,119

Accumulated amortization

(35,211)

Customer relationships as of June 30, 2020

$

1,462,908

Future amortization expense is as follows (in thousands):