party commitments, Antero Resources has dedicated to Antero Midstream all of its current and future acreage in West Virginia, Ohio and Pennsylvania for gathering and compression services and all of its acreage within defined services areas in West Virginia and Ohio for water services. Antero Midstream also has certain rights of first offer with respect to gathering, compression, processing and fractionation services and water services for acreage located outside of the existing dedicated areas. The gathering and compression and water services agreements each have a 20-year initial term and are subject to automatic annual renewal after the initial term. Antero Midstream also owns a 15% equity interest in the gathering system of Stonewall Gas Gathering LLC (“Stonewall”) and a 50% equity interest in the Joint Venture to develop processing and fractionation assets in Appalachia with MarkWest, a wholly owned subsidiary of MPLX. In connection with Antero Midstream’s entry into the Joint Venture with MarkWest, Antero Midstream released to the Joint Venture its right to provide certain processing and fractionation services on 195,000 gross acres held by Antero Resources in Ritchie, Tyler and Wetzel Counties in West Virginia. The processing and fractionation arrangements are underpinned by long-term agreements subject to automatic annual renewal after the initial term.
Our results of operations, financial position and cash flows are dependent on the results of operations, financial position and cash flows of Antero Midstream. We are highly dependent on Antero Midstream as we expect to derive all of our income from distributions made on the IDRs of Antero Midstream for the foreseeable future. Accordingly, we are indirectly subject to the business risks of Antero Midstream. For additional information, please read “Risk Factors—Risks Inherent in an Investment in Us.” Because our income is derived from Antero Midstream, any development that materially and adversely affects Antero Midstream’s operations, financial condition or market reputation could affect their ability to make cash distributions, and therefore could have a material adverse impact on us. As a result, our consolidated financial statements should be read in conjunction with Antero Midstream’s consolidated financial statements and notes thereto presented in its Annual Report on Form 10-K for the year ended December 31, 2017.
For a discussion of Antero Midstream’s business and properties, please read Items 1 and 2. “Business and Properties” of Antero Midstream’s Annual Report on Form 10‑K for the year ended December 31, 2017, which has been included in this filing as Exhibit 99.1 and incorporated herein by reference, as the activities of Antero Midstream have a significant impact on our results of operations and financial position.
Initial Public Offering and Cash Distributions
On May 9, 2017, we completed our IPO of 37,250,000 common shares representing limited partnership interests at a price of $23.50 per common share. All of the common shares sold in the offering were offered by the selling shareholder. We did not receive any of the proceeds from the offering.
The board of directors of our general partner has declared cash distributions of $0.027, $0.059, and $0.075 per share for the second, third and fourth quarters of 2017, respectively.
Employees
We and our general partner have no employees. All of our officers and other personnel necessary for our business to function (to the extent not outsourced) are employed by Antero Resources, and we pay Antero Resources an annual fee for corporate, general and administrative services. This fee is initially $0.5 million per year and is subject to adjustment on an annual basis, beginning on January 1, 2018, based on the CPI. The fee is also subject to adjustment to reflect any increase in the cost of providing services due to changes in applicable law, rules or regulations and any increase in the scope and extent of the services provided. The fee will not be decreased below the initial fee unless the type or extent of services provided materially decreases.
Antero Midstream does not have any employees. The officers of AMP GP, who are also officers of Antero Resources manage its operations and activities. As of December 31, 2017, Antero Resources employed approximately 593 people who provide support to Antero Midstream’s operations. All of the employees required to conduct and support Antero Midstream’s operations are employed by Antero Resources and all of Antero Midstream’s direct, full‑time personnel are subject to the services agreement with Antero Midstream’s general partner and Antero Resources. Antero Resources considers its relations with its employees to be satisfactory. Additionally, Antero Midstream has a secondment agreement whereby Antero Resources provides seconded employees to perform certain operational services with respect
Item 1A. Risk Factors
Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. Because of our relationship with Antero Midstream and its relationship with Antero Resources, adverse developments or announcements concerning Antero Midstream or Antero Resources could materially adversely affect our business. You should carefully consider the following risk factors together with all of the other information included in this Annual Report on Form 10‑K, including the matters addressed under “Cautionary Statement Regarding Forward-Looking Statements,” in evaluating an investment in our common shares.
If any of the following risks were to occur, our business, financial condition, results of operations and cash available for distribution could be materially adversely affected
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For a discussion of Antero Midstream’s risk factors, please read Item 1A. “Risk Factors” of Antero Midstream’s Annual Report on Form 10‑K for the year ended December 31, 2017, which has been included in this filing as Exhibit 99.1 and incorporated herein by reference, as the activities of Antero Midstream have a significant impact on our results of operations and financial position.
Risks Inherent in an Investment in Us
Our cash flows are entirely dependent upon the ability of Antero Midstream to make cash distributions on the IDRs.
We own all of the capital interests in IDR LLC, which owns all of the IDRs in Antero Midstream. Accordingly, the source of our earnings and cash flows currently consist exclusively of cash distributions from IDR LLC, which consist exclusively of cash distributions from Antero Midstream on the IDRs. We receive at least 94% of the cash distributions paid by Antero Midstream on the IDRs. The amount of cash that Antero Midstream is able to distribute to its partners, including IDR LLC, each quarter principally depends upon the amount of cash it generates from its business.
Antero Midstream may not have sufficient available cash each quarter to continue paying distributions at its current level or at all. If Antero Midstream reduces its per unit distribution, either because of reduced operating cash flow, higher expenses, increased capital requirements, increased common units outstanding (including common units issued in connection with Antero Midstream’s at‑the‑market equity offering program) or otherwise, we will have less cash available for distribution to you and would likely be required to reduce our per share distribution to you. You should also be aware that the amount of cash Antero Midstream has available for distribution depends primarily upon Antero Midstream’s cash flow, including borrowings, and is not solely a function of profitability, which is affected by non‑cash items. As a result, Antero Midstream may make cash distributions during periods when it records losses and may not make cash distributions during periods when it records profits.
Furthermore, our ability to distribute cash received in connection with distributions on the IDRs to our shareholders is limited by a number of factors, including:
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the expenses we incur as a result of being a publicly traded company;
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our payment of any income taxes;
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interest expense and principal payments on any future indebtedness incurred by us;
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distributions made by IDR LLC with respect to the Series B Units;
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restrictions on distributions contained in Antero Midstream’s current revolving credit facility and any future debt agreements entered into by Antero Midstream or us; and
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reserves, if any, our general partner establishes for the proper conduct of our business, to comply with applicable law or any agreement binding on us or our subsidiaries (exclusive of Antero Midstream and its subsidiaries), which reserves are not subject to a limit pursuant to our partnership agreement.
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A material increase in amounts paid or reserved with respect to any of these factors could restrict our ability to pay quarterly distributions to our shareholders.
In the future, we may not have sufficient cash to pay our estimated initial quarterly distribution or to increase distributions.
Because our cash flows are entirely dependent on cash distributions from IDR LLC, which is dependent on cash distributions from Antero Midstream on the IDRs, the amount of distributions we are able to make to our shareholders may fluctuate based on the level of distributions Antero Midstream makes to its partners, including IDR LLC, and the level of distributions IDR LLC makes to its members, including us. We cannot assure you that Antero Midstream will continue to make quarterly distributions at its most recently declared level of $0.365 per unit, or any other level, or increase its quarterly distributions in the future. In addition, while we would expect to increase or decrease distributions to our shareholders if Antero Midstream were to increase or decrease distributions, the timing and amount of such changes in distributions, if any, would not necessarily be comparable to the timing and amount of any changes in distributions made by Antero Midstream. Various factors, such as reserves established by the board of directors of our general partner (including in anticipation of increasing distributions to our unitholders to account for make‑whole distributions paid by IDR LLC to the holders of newly‑vested Series B Units), may affect the distributions we make to our shareholders. The actual amount of cash that is available for distribution to our shareholders will depend on numerous factors, many of which are beyond our control or the control of our general partner.
Our right to receive distributions paid by Antero Midstream on the IDRs may be limited or modified by our general partner without the consent of our shareholders, which may reduce cash distributions to you.
We own all of the capital interests in IDR LLC, which owns all of the IDRs that entitle IDR LLC to receive increasing percentages (up to a maximum of 50%) of any cash distributed by Antero Midstream in excess of $0.1955 per Antero Midstream common unit in any quarter. We receive at least 94% of the cash distributions paid by Antero Midstream on the IDRs. All of the cash flows we receive from IDR LLC is derived from its ownership of these IDRs.
Antero Midstream, like other publicly traded partnerships, generally will undertake an acquisition or expansion capital project only if, after giving effect to related costs and expenses, the transaction would be expected to be accretive, meaning it would increase cash distributions per unit in future periods. Because IDR LLC currently participates in the IDRs at all levels, including the highest sharing level of 50%, an acquisition or capital project generally is less likely to be accretive to the unitholders of Antero Midstream than if the IDRs were entitled to a lower incremental cash flow. IDR LLC may receive a proposal to reduce the IDRs to facilitate a particular acquisition or expansion capital project. Any such reduction of IDRs will reduce the amount of cash that otherwise would have been distributed by IDR LLC to us, which will in turn reduce the cash distributions we otherwise would be able to pay to you. Our shareholders will not be able to vote on, or otherwise prohibit our general partner from taking, similar actions in the future and our general partner may elect to modify the incentive distributions. In addition, there can be no guarantee that the expected benefits of any IDR modification will be realized.
Additionally, IDR LLC has the right under Antero Midstream’s partnership agreement, subject to certain conditions, to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and target distribution levels upon which the incentive distribution payments to IDR LLC would be set. In connection with the resetting of the target distribution levels and the corresponding relinquishment by IDR LLC of incentive distribution payments based on the target cash distributions prior to the reset, IDR LLC will be entitled to receive a number of newly‑issued common units in Antero Midstream equal to the result of dividing (i) the aggregate amount of cash distributions made by Antero Midstream for the quarter immediately preceding the reset event by (ii) the cash distribution made by Antero Midstream in respect of each common unit for such quarter. IDR LLC’s right to reset the minimum quarterly distribution amount and target distribution levels upon which the incentive distributions payable to IDR LLC are based may be exercised, subject to certain
restrictions, without approval of Antero Midstream’s unitholders, our shareholders or Antero Midstream’s conflicts committee. The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum quarterly distribution amount and the target distribution levels prior to the reset such that IDR LLC will not receive any incentive distributions under the reset target distribution levels until cash distributions per unit following this event increase.
IDR LLC may exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to the general partner.
A reduction in Antero Midstream’s distributions will disproportionately affect the amount of cash distributions on the IDRs.
IDR LLC’s ownership of Antero Midstream’s IDRs currently entitle it to receive increasing percentages, ranging from 15% up to 50%, of all cash distributed by Antero Midstream in excess of $0.1955 per common unit per quarter. Based on Antero Midstream’s distribution history, IDR LLC initially will be entitled to receive 50% of all cash distributed by Antero Midstream in excess of $0.2550 per common unit per quarter. A decrease in the amount of quarterly distributions paid by Antero Midstream to $0.2550 or less per common unit would reduce IDR LLC’s percentage of incremental quarterly cash distributions in excess of $0.1955 per common unit from 50% to 15%. As a result, any such reduction in quarterly cash distributions from Antero Midstream would have the effect of disproportionately reducing the amount of distributions that IDR LLC receives from Antero Midstream on the IDRs as compared to cash distributions Antero Midstream makes with respect to its common units.
If distributions on our common shares are not paid with respect to any fiscal quarter, our shareholders will not be entitled to receive any payments in respect of such quarter.
Our distributions to our shareholders are not cumulative. Consequently, if distributions on our common shares are not paid with respect to any fiscal quarter, our shareholders will not be entitled to receive any payments in respect of such quarter in the future.
The amount of cash that we and Antero Midstream distribute each quarter may limit our ability to grow.
Because we and Antero Midstream each distribute all of our respective cash from operations on a quarterly basis, our growth and Antero Midstream’s growth may not be as fast as the growth of businesses that continually reinvest their cash to expand ongoing operations. In fact, because our cash flows currently are generated solely from distributions we receive from IDR LLC, which are derived exclusively from the IDRs, our growth will be completely dependent upon Antero Midstream. The amount of distributions paid on the IDRs is based on the per unit distribution paid by Antero Midstream on each of its common units and the number of Antero Midstream common units outstanding. If we issue additional common shares or incur debt, the payment of distributions on those additional common shares or interest on that debt could increase the risk that we will be unable to maintain or increase our cash distribution levels.
Our rate of distribution growth may be reduced to the extent we purchase equity interests from Antero Midstream, which will reduce the relative percentage of the cash we receive from the IDRs.
Our business strategy includes, where appropriate, supporting the growth of Antero Midstream by making loans, purchasing equity interests or providing other forms of financial support to Antero Midstream to fund an acquisition of a business or asset or another growth project. To the extent we purchase equity interests from Antero Midstream that are not entitled to distributions or do not receive distributions at the same rates as the IDRs, the rate of our distribution growth may be reduced, at least in the short term, as less of our cash distributions will come from our ownership of IDRs, whose distributions increase at a faster rate than Antero Midstream’s common units and any similar equity interests Antero Midstream may issue in the future.
Restrictions in Antero Midstream’s existing and future debt agreements could limit Antero Midstream’s ability to make distributions to IDR LLC, and therefore IDR LLC’s ability to make distributions to us, which in turn would limit our ability to make distributions on our common shares.
Antero Midstream’s revolving credit facility and the indenture governing Antero Midstream’s outstanding senior notes contain various operating and financial restrictions and covenants. Antero Midstream’s ability to comply with these restrictions and covenants may be affected by events beyond its control, including prevailing economic, financial and industry conditions. If Antero Midstream is unable to comply with these restrictions and covenants, any indebtedness under this credit facility may become immediately due and payable and Antero Midstream’s lenders’ commitment to make further loans under this credit facility may terminate. Antero Midstream might not have, and might be unable to obtain, sufficient funds to satisfy these accelerated payment obligations.
Antero Midstream’s payment of principal and interest on any indebtedness will reduce its cash distributions on the IDRs, thereby reducing our cash available for distribution on our common shares. Antero Midstream’s revolving credit facility and the indenture governing Antero Midstream’s outstanding senior notes will limit our ability to pay distributions to our shareholders during an event of default or if an event of default would result from the distribution.
For more information regarding risks related to Antero Midstream’s debt agreements, please see “—Risks Related to Antero Midstream’s Business—“Restrictions in Antero Midstream’s revolving credit facility and future debt agreements could adversely affect its business, financial condition, results of operations and ability to make quarterly cash distributions to its unitholders.”
Our partnership agreement restricts the rights of shareholders owning 20% or more of our shares.
Our shareholders’ voting rights are restricted by the provision in our partnership agreement generally providing that any shares held by a person or group that owns 20% or more of any class of shares then outstanding, other than our general partner, the Sponsors (or certain transferees in private, non‑exchange transactions), their respective affiliates and persons who acquired such shares with the prior approval of our general partner’s board of directors, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of our shareholders to call meetings or to acquire information about our operations, as well as other provisions limiting our shareholders’ ability to influence the manner or direction of our management. As a result, the price at which our common shares will trade may be lower because of the absence or reduction of a takeover premium in the trading price.
Our shareholders will not elect or have the power to remove our general partner. The Sponsors will own a sufficient number of common shares to allow them to prevent the removal of our general partner.
Our shareholders only have limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. The board of directors of our general partner, including our independent directors, were initially designated and elected by the Sponsors or their designees following our IPO. Our remaining shareholders do not have the ability to elect our general partner or the members of the board of directors of our general partner unless the Sponsors no longer own specified amounts of our common shares. Additionally, as a result of our resulting governance arrangements and the 20% voting limitation in our partnership agreement, it will be difficult for one or more of our shareholders to gain control of our general partner’s board of directors.
In addition, if our shareholders are dissatisfied with the performance of our general partner, they have little ability to remove our general partner. Our general partner may not be removed unless that removal is for cause and is approved by the holders of at least 80% of our outstanding shares. The ownership level of the Sponsors enables the Sponsors to prevent our general partner’s removal.
As a result of these provisions, the price at which our common shares will trade may be lower because of the absence or reduction of a takeover premium in the trading price.
Our general partner may cause us to issue additional common shares, including in connection with the redemption of Series B Units, or other equity securities, as well as issue equity securities that are senior to our common shares, without your approval, which may adversely affect you.
Our general partner may cause us to issue an unlimited number of additional common shares, including in connection with the redemption of Series B Units, or other equity securities of equal rank with the common shares, without shareholder approval. In addition, we may issue an unlimited number of shares that are senior to our common shares in right of distribution, liquidation and voting. The issuance of additional common units or our other equity securities of equal or senior rank will have the following effects:
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each shareholder’s proportionate ownership interest in us may decrease;
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the amount of cash available for distribution on each common share may decrease;
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the relative voting strength of each previously outstanding common share may be diminished; and
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the market price of the common shares may decline.
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If Antero Midstream’s unitholders remove AMP GP as the general partner of Antero Midstream, AMP GP would be required to sell or exchange its general partner interest, and we would lose the ability to manage and control Antero Midstream.
We own, and appoint all of the members of the board of directors of, AMP GP, which owns the non‑economic general partner interest in Antero Midstream. AMP GP may not be removed as general partner of Antero Midstream unless that removal is for cause and is approved by the vote of the holders of not less than 66
2/3
% of the outstanding units of Antero Midstream, voting together as a single class, including units held by AMP GP and its affiliates, and Antero Midstream receives an opinion of counsel regarding limited liability and tax matters. Any removal of AMP GP is also subject to the approval of a successor general partner by the vote of the holders of a majority of the outstanding Antero Midstream common units, voting as a class. The ownership of more than 33
1/3
% of the outstanding units by AMP GP and its affiliates gives them the ability to prevent our general partner’s removal. In the event of the removal of AMP GP as general partner of Antero Midstream or its withdrawal as general partner in violation of Antero Midstream’s partnership agreement, a successor general partner will have the option to purchase AMP GP’s general partner interest for a cash payment equal to the fair market value of that interest. Under all other circumstances where AMP GP withdraws as general partner of Antero Midstream, AMP GP will have the option to require the successor general partner to purchase the general partner interest of Antero Midstream for fair market value. In each case, this fair market value will be determined by agreement between AMP GP and the successor general partner. If no agreement is reached, an independent investment banking firm or other independent expert selected by AMP GP and the successor general partner will determine the fair market value. If, however, AMP GP and the successor general partner cannot agree upon an expert, then an expert chosen by agreement of the experts selected by each of them will determine the fair market value. In each case, AMP GP would also lose its ability to manage Antero Midstream.
In addition, if AMP GP is removed as general partner of Antero Midstream, we would face an increased risk of being deemed an investment company.
Our shareholders may not have limited liability if a court finds that shareholder action constitutes control of our business.
Under Delaware law, our shareholders could be held liable for our obligations to the same extent as a general partner if a court determined that the right or the exercise of the right by our shareholders as a group to remove or replace our general partner, to approve some amendments to the partnership agreement or to take other action under our partnership agreement constituted participation in the “control” of our business. Additionally, the limitations on the liability of holders of limited partner interests for the liabilities of a limited partnership have not been clearly established in many jurisdictions.
Furthermore, Section 17‑607 of the Delaware Revised Uniform Limited Partnership Act provides that, under some circumstances, a shareholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution.
If in the future we cease to manage and control Antero Midstream, we may be deemed to be an investment company under the Investment Company Act of 1940.
If we cease to manage and control Antero Midstream or IDR LLC and are deemed to be an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”), we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our organizational structure or our contractual rights or asset mix to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage, require us to add additional directors who are independent of us and our affiliates, and adversely affect the price of our common shares.
The price of our common shares may be volatile, and a trading market that will provide you with adequate liquidity may not develop.
The market price of our common shares could be subject to significant fluctuations, and may decline below the current price. You may be unable to resell your common shares at or above the current price. The following factors, among others, could affect our common share price:
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Antero Midstream’s operating and financial performance and prospects and the trading price of its common units;
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the level of Antero Midstream’s quarterly distributions and our quarterly distributions;
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quarterly variations in the rate of growth of our financial indicators, such as distributable cash flow per common share, net income and revenues;
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changes in revenue or earnings estimates or publication of research reports by analysts;
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speculation by the press or investment community;
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sales of our common shares by our shareholders;
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the exercise by the Series B Holders of their redemption rights with respect to any vested Series B Units;
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announcements by Antero Midstream or its competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, securities offerings or capital commitments;
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general market conditions;
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changes in accounting standards, policies, guidance, interpretations or principles;
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adverse changes in tax laws or regulations;
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domestic and international economic, legal and regulatory factors related to Antero Midstream’s performance; and
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other factors described in these “Risk Factors.”
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Our common shares and Antero Midstream’s common units may not trade in relation or proportion to one another.
Our common shares and Antero Midstream’s common units may not trade in simple relation or proportion to one another. Instead, while the trading prices of our common shares and Antero Midstream’s common units are likely to follow generally similar broad trends, the trading prices may diverge because, among other things:
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with respect to the first $0.1955 of distributable cash flow per common unit, Antero Midstream’s cash distributions to its unitholders have a priority over distributions on its IDRs;
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our cash flows are more volatile than the cash flows paid to Antero Midstream’s unitholders because we participate in tiered incentive distributions associated with the IDRs in Antero Midstream while Antero Midstream’s unitholders participate in all distributions made by Antero Midstream;
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IDR LLC will distribute a portion of the cash it receives from Antero Midstream to the holders of outstanding Series B Units;
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we expect to continue to pay federal and state income taxes in the future; and
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we may enter into other businesses separate and apart from Antero Midstream or any of its affiliates.
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An increase in interest rates may cause the market price of our common shares to decline.
Like all equity investments, an investment in our common shares is subject to certain risks. In exchange for accepting these risks, investors may expect to receive a higher rate of return than would otherwise be obtainable from lower‑risk investments. Accordingly, as interest rates rise, the ability of investors to obtain higher risk‑adjusted rates of return by purchasing government‑backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield‑based equity investments such as publicly traded limited partnership interests. Reduced demand for our common shares resulting from investors seeking other more favorable investment opportunities may cause the trading price of our common shares to decline.
Future sales of our common shares in the public market could reduce our common share price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.
Subject to certain limitations and exceptions, each Series B Holder may require IDR LLC to redeem all or a part of such holder’s vested Series B Units for common shares in us at a ratio described in the IDR LLC Agreement, subject to customary conversion rate adjustments for equity splits, equity dividends and reclassification and other similar transactions, and then sell those common shares. We may also issue additional common shares or convertible securities in subsequent public or private offerings. We cannot predict the size of future issuances of our common shares or securities convertible into common shares or the effect, if any, that future issuances and sales of our common shares will have on the market price of our common shares. Sales of substantial amounts of our common shares (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our common shares.
The Sponsors hold a majority of the voting power of our common shares.
The Sponsors are entitled to act separately in their own respective interests with respect to their partnership interests in us, and have the ability to elect all of the members of our board of directors. In addition, they will be able to determine the outcome of all matters requiring shareholder approval, including certain mergers and other material transactions, and will be able to cause or prevent a change in the composition of our board of directors or a change in control of our company that could deprive our shareholders of an opportunity to receive a premium for their common shares as part of a sale of our company. So long as the Sponsors continue to own a significant amount of our outstanding shares, even if such amount is less than 50%, they will continue to be able to strongly influence all matters requiring
shareholder approval, regardless of whether or not other shareholders believe that the transaction is in their own best interests.
For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.
The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes Oxley Act of 2002, (2) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (3) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (4) provide certain disclosure regarding executive compensation required of larger public companies or (5) hold shareholder advisory votes on executive compensation.
If we or Antero Midstream fail to develop or maintain an effective system of internal controls, our ability to accurately report our financial results or prevent fraud could be adversely affected. As a result, our shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our common shares.
Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a publicly traded company. We are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes‑Oxley Act of 2002, which require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Though we are required to disclose material changes made to our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until our annual report on Form 10-K for the year ended December 31, 2018. If we or Antero Midstream cannot provide reliable financial reports or prevent fraud, our and Antero Midstream’s reputation and operating results will be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our and Antero Midstream’s operating results or cause us or Antero Midstream to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common shares and Antero Midstream’s common units.
The NYSE does not require a limited partnership like us to comply with certain of its corporate governance requirements.
Because we are a limited partnership, the NYSE does not require our general partner to have a majority of independent directors on its board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, our shareholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. In addition, as a limited partnership we are not required to seek shareholder approval for issuances of common shares, including issuances in excess of 20% of our outstanding equity securities, or for issuances of equity to certain affiliates.
We may incur liability as a result of our ownership of Antero Midstream’s general partner.
Under Delaware law, a general partner of a limited partnership is generally liable for the debts and liabilities of the partnership for which it serves as general partner, subject to the terms of any indemnification agreements contained in the partnership agreement and except to the extent the partnership’s contracts are non‑recourse to the general partner. As
a result of our structure, we own all of the interests in and appoint all of the members of the board of directors of the general partner of Antero Midstream. To the extent the indemnification provisions in the applicable partnership agreement or non‑recourse provisions in our contracts are not sufficient to protect us from such liability, we may in the future incur liabilities as a result of our ownership of AMP GP.
Our general partner interest or the control of our general partner may be transferred to a third party without shareholder consent.
Our general partner may transfer its general partner interest to a third party, including in a merger or in a sale of all or substantially all of its assets, without the consent of our shareholders. Furthermore, the Sponsors may transfer all or a portion of their ownership interests in our general partner to a third party, also without shareholder consent. The new owners of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own designees and thereby exert significant control over the decisions made by the board of directors and officers.
The future debt that we incur may limit the distributions that we can pay to our shareholders.
Our payment of principal and interest on any future indebtedness will reduce our cash available for distribution to our shareholders. We anticipate that any credit facility we enter into in the future would limit our ability to pay distributions to our shareholders during an event of default or if an event of default would result from the distributions.
Moreover, any future indebtedness may adversely affect our ability to obtain additional financing for future operations or capital needs, limit our ability to pursue other business opportunities, or make our results of operations more susceptible to adverse economic or operating conditions.
The amount of cash distributions that we will be able to distribute to our shareholders will be reduced by the incremental costs associated with our being a publicly traded company, other general and administrative expenses and any reserves that our general partner believes it is prudent to maintain for the proper conduct of our business and for future distributions.
Before we can pay distributions to our shareholders, we will first pay our expenses, including the costs of being a publicly traded company, which we expect to be approximately $1.5 million per year, and taxes and other expenses, and may establish reserves for debt service requirements, if any, for future distributions during periods of limited cash flows or for other purposes.
Risks Related to Conflicts of Interest
Our existing organizational structure and the relationships among us, Antero Midstream, our respective general partners, Antero Resources, the Sponsors and affiliated entities present the potential for conflicts of interest. Moreover, additional conflicts of interest may arise in the future among us and the entities affiliated with any general partner or similar interests we acquire or among Antero Midstream and such entities.
Certain holders of our common shares have investments in our affiliates that may conflict with the interests of other holders of our common shares.
Certain funds affiliated with Warburg Pincus LLC (“Warburg”), certain funds affiliated with Yorktown Partners LLC (“Yorktown”), Paul M. Rady and Glen C. Warren, Jr. (collectively, the “Sponsors”) collectively own 100% of our general partner and a majority of our outstanding common shares. Messrs. Rady and Warren also own a portion of the Series B Units in IDR LLC. Affiliates of Warburg and Yorktown, Mr. Rady and Mr. Warren serve as members of the board of directors of our general partner, the board of directors of Antero Resources, and the board of directors of Antero Midstream’s general partner, and each of Warburg and Yorktown are controlled in part by individuals who serve as members of the board of directors of our general partner, the board of directors of Antero Resources, and the board of directors of Antero Midstream’s general partner. The Sponsors also own common units representing limited partner interests in Antero Midstream and shares of common stock in Antero Resources. Please see “Item 11. Executive
Compensation
—Narrative Disclosure to Summary Compensation Table—Long-Term Equity-Based Incentive Awards—Series B Units in IDR LLC” for more information regarding the Series B Units in IDR LLC.
As a result of their investments in Antero Midstream and Antero Resources, the Sponsors may have conflicts of interest with other holders of our common shares. These conflicts of interest could arise in the future between us, on the one hand, and the Sponsors, on the other hand, regarding, among other things, decisions to modify or limit the IDRs in the future, the terms of our agreements with Antero Midstream and Antero Resources and their respective subsidiaries and the pursuit of potentially competitive business activities or business opportunities.
Conflicts of interest may arise as a result of our organizational structure and the relationships among us, Antero Midstream, our respective general partners, Antero Resources and other affiliated entities.
Our partnership agreement defines the duties of our general partner (and, by extension, its officers and directors). Our general partner’s board of directors or its conflicts committee will have authority on our behalf to resolve any conflict involving us and they have broad latitude to consider the interests of all parties to the conflict.
Conflicts of interest may arise between us and our shareholders, on the one hand, and our general partner and affiliated entities, on the other hand, or between us and our shareholders, on the one hand, and Antero Midstream and its unitholders, on the other hand. The resolution of these conflicts may not always be in our best interest or that of our shareholders.
Our partnership agreement defines our general partner’s duties to us and contains provisions that reduce the remedies available to our shareholders for actions that might otherwise be challenged as breaches of fiduciary or other duties under state law.
Our partnership agreement contains provisions that substantially reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement:
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permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, the Sponsors, our affiliates or any limited partner. Examples include the exercise of its limited call right, its rights to transfer or vote any shares it may own, and its determination whether or not to consent to any merger or consolidation of our partnership or amendment to our partnership agreement;
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generally provides that our general partner will not have any liability to us or our shareholders for decisions made in its capacity as a general partner so long as it acted in good faith which, pursuant to our partnership agreement, requires a subjective belief that the determination, or other action or anticipated result thereof is in, or not opposed to, our best interests;
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generally provides that any resolution or course of action adopted by our general partner and its affiliates in respect of a conflict of interest will be permitted and deemed approved by all of our shareholders, and will not constitute a breach of our partnership agreement or any duty stated or implied by law or equity if the resolution or course of action in respect of such conflict of interest is:
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approved by a majority of the members of our general partner’s conflicts committee after due inquiry, based on a belief that the course of action or determination that is the subject of such approval is not adverse to us;
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approved by majority vote of our common shares (excluding shares owned by our general partner and its affiliates, but including shares owned by the Sponsors) voting together as a single class;
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provides that, to the fullest extent permitted by law, in connection with any action or inaction of, or determination made by, our general partner or the conflicts committee of our general partner’s board of
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directors with respect to any matter relating to us, it shall be presumed that our general partner or the conflicts committee of our general partner’s board of directors acted in a manner that satisfied the contractual standards set forth in our partnership agreement, and in any proceeding brought by any limited partner or by or on behalf of such limited partner or any other limited partner or our partnership challenging any such action or inaction of, or determination made by, our general partner, the person bringing or prosecuting such proceeding shall have the burden of overcoming such presumption; and
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provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non‑appealable judgment entered by a court of competent jurisdiction determining that our general partner or those other persons acted in bad faith or, in the case of a criminal matter, acted with knowledge that such person’s conduct was criminal.
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The Sponsors may have interests that conflict with holders of our common shares.
The Sponsors own a certain number of our outstanding shares and certain of the Sponsors own a portion of the Series B Units in IDR LLC. In addition, certain of the Sponsors own a portion of Antero Midstream’s common units and Antero Resources’ common stock. As a result, the Sponsors may have conflicting interests with holders of our common shares.
Furthermore, conflicts of interest could arise in the future between us, on the one hand, and the Sponsors, on the other hand, concerning among other things, a decision whether to modify or limit the IDRs in the future or potential competitive business activities or business opportunities. These conflicts of interest may not be resolved in our favor.
Antero Resources does not own our general partner and is under no obligation to adopt a business strategy that favors us.
The directors and officers of Antero Resources have a fiduciary duty to make decisions in the best interests of the owners of Antero Resources, which may be contrary to our interests. Antero Resources has dedicated acreage to, and entered into long‑term contracts for gathering and compression services on, Antero Midstream’s gathering and compression systems, as well as long‑term contracts for receiving water services. However, while Antero Midstream has a 20‑year right of first offer to provide processing and fractionation services to Antero Resources, subject to certain exceptions, Antero Resources is under no obligation to consider whether any future drilling plans would create beneficial opportunities for Antero Midstream. Additionally, although Antero Midstream’s water services agreement and the processing and fractionation services provided by the Joint Venture are supported by minimum volume commitments, Antero Midstream’s gathering and compression agreement includes minimum volumes commitments only on high‑pressure pipelines and compressor stations constructed at Antero Resources’ request after the Antero Midstream IPO. A reduction in the current levels of throughput volumes on Antero Midstream’s gathering and compression systems by Antero Resources could have a material adverse effect on Antero Midstream’s business, financial condition, results of operations and ability to make quarterly cash distributions to its unitholders, including us.
Our general partner’s affiliates and the Sponsors may compete with us.
Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than acting as our general partner and those activities incidental to its ownership of interests in us. The restrictions contained in our general partner’s limited liability company agreement are subject to a number of exceptions. Affiliates of our general partner and the Sponsors will not be prohibited from engaging in other businesses or activities that might be in direct competition with us except to the extent they compete using our confidential information.
Our general partner has a call right that may require you to sell your common shares at an undesirable time or price.
If at any time more than 80% of our outstanding common shares on a combined basis (including common shares issued in connection with the redemption of Series B Units) are owned by our general partner, the Sponsors (or certain
transferees) or their respective affiliates, our general partner will have the right (which it may assign to any of its affiliates, the Sponsors or us), but not the obligation, to acquire all, but not less than all, of the remaining common shares held by public shareholders at a price equal to the greater of (x) the current market price of such shares as of the date three days before notice of exercise of the call right is first mailed and (y) the highest price paid by our general partner, the Sponsors (or certain transferees in private, non‑exchange transactions) or their respective affiliates for such shares during the 90 day period preceding the date such notice is first mailed. As a result, you may be required to sell your common shares at an undesirable time or price and may not receive any return of or on your investment. You may also incur a tax liability upon a sale of your common shares.
Tax Risks
As our only cash‑generating assets consists of our capital interest in IDR LLC and its related direct interests in Antero Midstream, our tax risks are primarily derivative of the tax risks associated with an investment in Antero Midstream.
The tax treatment of Antero Midstream depends on its status as a partnership for U.S. federal income tax purposes, as well as it not being subject to a material amount of entity‑level taxation. If the Internal Revenue Service (“IRS”) were to treat Antero Midstream as a corporation for federal income tax purposes or Antero Midstream were to become subject to additional amounts of entity‑level taxation for state tax purposes, it would reduce the amount of cash available for distribution to us.
We own all of the capital interests in IDR LLC, which directly owns all of the IDRs in Antero Midstream. Accordingly, the value of our investment in IDR LLC, as well as the anticipated after‑tax economic benefit of an investment in our common shares, depends largely on Antero Midstream being treated as a partnership for U.S. federal income tax purposes, which requires that at least 90% of Antero Midstream’s gross income for each taxable year of its existence consist of qualifying income, as that term is defined in Section 7704 of the Internal Revenue Code of 1986, as amended (the “Code”).
Despite the fact that Antero Midstream is a limited partnership under Delaware law and, unlike us, has not elected to be treated as a corporation for U.S. federal income tax purposes, it is possible, under certain circumstances, for Antero Midstream to be treated as a corporation for U.S. federal income tax purposes. Although we do not believe, based on its current operations, that Antero Midstream will be so treated, a change in Antero Midstream’s business could cause it to be treated as a corporation for U.S. federal income tax purposes. A change in current law could also cause Antero Midstream to be treated as a corporation for U.S. federal income tax purposes or otherwise subject Antero Midstream to entity‑level taxation. In addition, several states are evaluating ways to subject partnerships to entity‑level taxation through the imposition of state income, franchise and other forms of taxation.
If Antero Midstream were treated as a corporation for U.S. federal income tax purposes, it would pay federal income tax on its taxable income at the applicable corporate tax rate and would likely pay state income taxes at varying rates. Distributions to Antero Midstream’s partners, including IDR LLC, would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to Antero Midstream’s partners. Because a tax would be imposed upon Antero Midstream as a corporation, its cash available for distribution would be substantially reduced. Therefore, treatment of Antero Midstream as a corporation would result in a material reduction in the anticipated cash flows and after‑tax return to us, likely causing a substantial reduction in the value of our common shares.
Antero Midstream’s partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects Antero Midstream to taxation as a corporation or otherwise subjects Antero Midstream to entity‑level taxation for U.S. federal state or local income tax purposes, Antero Midstream’s minimum quarterly distribution and target distribution amounts may be adjusted to reflect the impact of that law or interpretation on Antero Midstream. If this were to happen, the amount of distributions IDR LLC receives from Antero Midstream and our resulting cash flows could be reduced substantially, which would adversely affect our ability to pay distributions.
The tax treatment of publicly traded partnerships such as Antero Midstream could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly applied on a retroactive basis.
The present U.S. federal income tax treatment of publicly traded partnerships, including Antero Midstream, may be modified by administrative, legislative or judicial changes, or differing interpretations at any time. From time to time, members of Congress propose and consider such substantive changes to the existing U.S. federal income tax laws that affect publicly traded partnerships. Although there is no current legislative proposal, a prior legislative proposal would have eliminated the qualifying income exception to the treatment of all publicly traded partnerships as corporations upon which we rely for our treatment as a partnership for U.S. federal income tax purposes.
In addition, on January 24, 2017, final regulations regarding which activities give rise to qualifying income within the meanings of Section 7704 of the Code (the “Final Regulations”) were published in the Federal Register. The Final Regulations are effective as of January 19, 2017, and apply to taxable years beginning on or after January 19. 2017. Antero Midstream does not believe the Final Regulations affect its ability to be treated as a partnership for U.S. federal income tax purposes.
However, any modification to the U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible for Antero Midstream to meet the exception for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes. Antero Midstream is unable to predict whether any of these changes or other proposals will be reintroduced or ultimately will be enacted. Any similar or future legislative changes could negatively impact the value of our indirect investment in Antero Midstream.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 3. Legal Proceedings
Our operations are subject to a variety of risks and disputes normally incident to our business. As a result, we may, at any given time, be a defendant in various legal proceedings and litigation arising in the ordinary course of business. However, we are not currently subject to any material litigation.
Item 4. Mine Safety Disclosures
Not applicable.