Antero Midstream Reports Fourth Quarter and Full Year 2016 Financial and Operational Results

Capital Budget and Guidance Increase

Concurrent with the Joint Venture announcement, Antero Midstream increased its 2017 capital budget from $525 million to $800 million.  Additionally, Antero Midstream increased its 2017 Adjusted EBITDA guidance to $520 million to $560 million and reaffirmed its compound annual distribution growth target of 28% to 30% and increased its DCF coverage target to greater than 1.25x through 2020. Antero Midstream is targeting leverage in the low 2-times range over the corresponding period.

Primary Unit Offering

In conjunction with the Joint Venture announcement, Antero Midstream issued 6,900,000 common units, including the underwriter's purchase option, resulting in net proceeds of approximately $223 million.  Proceeds from the offering were used to fund the initial $155 million capital contribution for the Joint Venture and general partnership purposes.

Distribution for the Fourth Quarter of 2016 and Conversion of Subordinated Units

The Board of Directors of Antero Resources Midstream Management LLC, the general partner of the Partnership, declared and paid a cash distribution of $0.28 per unit ($1.12 per unit annualized) for the fourth quarter of 2016.  The distribution represented a 27% increase compared to the prior year quarter and a 6% increase sequentially.  The distribution was the Partnership's eighth consecutive quarterly distribution increase since its initial public offering in November 2014 and was paid on February 8, 2017 to unitholders of record as of February 1, 2017.  Upon payment of this distribution, the 75,940,957 subordinated units owned by Antero Resources were converted into common units on a one-for-one basis under the terms of the Partnership agreement.

Commenting on the Joint Venture, Paul Rady, Chairman and CEO, said, "Antero Midstream took another step in becoming a full value chain Appalachian midstream provider and diversifying its cash flow contribution with the addition of processing and fractionation services. The Joint Venture supports Antero Midstream's long term annual distribution growth target of 28% to 30% through 2020 while targeting a DCF coverage ratio greater than 1.25x and leverage in the low 2-times.  In addition, the Joint Venture increases Antero Midstream's organic investment opportunity set to $2.7 billion from 2017 through 2020 and is another example of leveraging Antero Resources' status as the leader in C3+ NGL production and drilling inventory in Appalachia."

Fourth Quarter 2016 Financial and Operational Results

Low pressure gathering volumes for the fourth quarter of 2016 averaged 1,522 MMcf/d, a 35% increase from the fourth quarter of 2015 and a 6% increase sequentially from the third quarter of 2016.  Compression volumes for the fourth quarter of 2016 averaged 920 MMcf/d, a 92% increase from the fourth quarter of 2015 and an 18% increase sequentially.  High pressure gathering volumes for the fourth quarter of 2016 averaged 1,437 MMcf/d, a 20% increase from the fourth quarter of 2015 and a 6% increase sequentially.    The increase in throughput volumes was driven by Antero Resources' production growth in Antero Midstream's area of dedication.

Fresh water delivery volumes averaged 149,682 Bbl/d during the quarter, a 25% increase compared to the prior year quarter and a 7% increase sequentially.  The increase in volumes was driven by an increase in wells serviced by the fresh water delivery system and higher water intensity advanced completions.

For the three months ended December 31, 2016, the Partnership reported revenues of $167 million, comprised of $88 million from the Gathering and Processing segment and $79 million from the Water Handling and Treatment segment.  Revenues increased 27% compared to the prior year quarter, primarily driven by growth in natural gas throughput volumes and fresh water delivery volumes.  Gathering and Processing revenues included a $4 million gain on asset sale related to the divestiture of certain gathering and compression assets in Pennsylvania during the quarter.  Water Handling and Treatment segment revenues include $28 million from fluid handling and high rate water transfer services provided to Antero Resources, which is billed at cost plus 3%. 

Direct operating expenses for the Gathering and Processing and Water Handling and Treatment segments were $8 million and $29 million, respectively, for a total of $37 million compared to $40 million in direct operating expenses in the prior year quarter.  Water Handling and Treatment direct operating expenses include $27 million from fluid handling and high rate water transfer services.  The decrease in direct operating expenses was driven primarily by a reduction in fluid handling and high rate transfer expenses.  General and administrative expenses including equity-based compensation were $14 million, a $1 million increase compared to the fourth quarter of 2015.  General and administrative expenses excluding equity-based compensation were $8 million during the fourth quarter of 2016, in line with the fourth quarter of 2015.  Total operating expenses were $83 million, including $26 million of depreciation, $7 million of equity-based compensation, and $6 million of accretion of contingent acquisition consideration.

Net income for the fourth quarter of 2016 was $73 million, a 50% increase compared to the prior year quarter.  Net income per limited partner unit was $0.37 per unit, a 37% increase compared to the prior year quarter.  Adjusted EBITDA was $126 million, a 52% increase compared to the prior year quarter.  Adjusted EBITDA for the fourth quarter included an $8 million distribution from unconsolidated affiliates related to Antero Midstream's 15% interest in Stonewall Gathering, LLC.  The distribution represents 2016 cash received from Stonewall operations since acquiring the 15% interest in May of 2016.  The increase in net income and Adjusted EBITDA from the prior year is primarily driven by increased gathering and compression volumes and fresh water delivery volumes.  Cash interest paid and cash reserved for bond interest were $2 million and $10 million during the quarter, respectively.  Income tax withholding upon vesting of Antero Midstream equity-based compensation awards was $3 million.  Maintenance capital expenditures during the quarter totaled $5 million and distributable cash flow was $103 million, resulting in a DCF coverage ratio of 1.8x.

Commenting on Antero Midstream's quarterly results, Michael Kennedy, CFO of Antero Midstream said, "Antero Midstream closed out another strong year operationally and financially, driven by the growth in throughput volumes from Antero Resources.  Additionally, during the fourth quarter, Antero Midstream benefitted from Antero Resources' accelerated completions, resulting in increased throughput and fresh water delivery volumes that are projected to continue into 2017."

Gathering and Processing — Antero Midstream increased compression capacity by placing into service a 145 MMcf/d compressor station in Tyler County, West Virginia late during the fourth quarter of 2016.  Antero's current compression capacity is approximately 1.1 Bcf/d in the Marcellus and Utica combined and compression capacity was approximately 90% utilized in the fourth quarter.  Additionally, Antero Midstream connected 41 wells to its Marcellus and Utica gathering systems during the quarter, bringing total wells connected to 440.  Antero Resources is currently operating six drilling rigs in the Marcellus and Utica.

Water Handling and Treatment — Antero Midstream's Marcellus and Utica fresh water delivery systems serviced 35 well completions in the fourth quarter of 2016, in line with the prior year quarter.  As a result of pilot tests utilizing advanced completions, Antero Midstream's fresh water delivery volumes increased 25% as compared to the prior year quarter despite servicing the same number of wells.  Antero's completions during the fourth quarter averaged 46 barrels per foot in the Marcellus and 39 barrels per foot in the Utica, for a quarterly weighted average of 44 barrels per foot.  Antero Resources is currently operating six completion crews in the Marcellus and Utica.

Antero Midstream continued construction on the Antero Clearwater Facility, which is expected to be placed into service during the fourth quarter of 2017. Through year-end 2016, Antero Midstream has invested $217 million, or approximately 70% of the total estimated project cost, in the Antero Clearwater Facility.  The Antero Clearwater Facility will be the largest advanced wastewater treatment facility in the world designed for oil and gas operations.

Fourth Quarter Capital Spending

Antero Midstream's capital expenditures for the three months ended December 31, 2016 were $126 million as compared to $128 million during the prior year quarter.  Capital expenditures included $75 million that was invested in gathering and compression and $51 million invested in water handling and treatment infrastructure.  Water handling and treatment infrastructure capital expenditures included $36 million for the continued construction of the Antero Clearwater Facility.  Additionally, Antero Midstream made a $30 million capital contribution to Stonewall Gathering LLC to repay outstanding debt, thereby releasing restrictions on cash distributions to equity interest holders.

2016 Financial and Operational Results

Low pressure gathering volumes for 2016 averaged 1,403 MMcf/d, a 38% increase from the prior year.  Compression volumes and high pressure gathering volumes for 2016 averaged 741 MMcf/d and 1,316 MMcf/d representing a 72% and 11% increase, respectively, from the prior year.  The increase in gathering and compression volumes was due to production growth from Antero Resources in Antero Midstream's area of dedication.  Fresh water delivery volumes for 2016 averaged 123,258 Bbl/d, a 29% increase compared to the prior year.  The increase in volumes was driven by an increase in wells serviced by the fresh water delivery system and higher water intensity advanced completions.

Total revenues for 2016 were $590 million, a 52% increase over the prior year, and were comprised of $308 million from the Gathering and Processing segment and $282 million from the Water Handling and Treatment segment.  Water Handling and Treatment segment revenues include $116 million from fluid handling and high rate water transfer services provided to Antero Resources, which is billed at cost plus 3%.  Direct operating expenses for 2016 for the Gathering and Processing and Water Handling and Treatment segments were $27 million and $135 million, respectively, for a total of $162 million.  Water Handling and Treatment direct operating expenses include $113 million from fluid handling and high rate water transfer services provided to Antero Resources, which is billed at cost plus 3%.  Direct operating expenses increased 105% from the prior year, driven by the commencement of fluid handling and high rate transfer services provided to Antero Resources for a full twelve month period.  General and administrative expenses including equity-based compensation were $54 million, a 6% increase compared to the prior year.  General and administrative expenses excluding equity-based compensation for 2016 were $28 million, a 2% decrease from the prior year.  Total operating expenses were $332 million, including $100 million of depreciation, $26 million of equity-based compensation, and $16 million of accretion of contingent acquisition consideration, representing a 51% increase over the prior year.

Net income for 2016 was $237 million, a 49% increase compared to the prior year.  Net income per limited partner unit was $1.24 per unit, a 63% increase over the prior year.  Adjusted EBITDA was $404 million, a 45% increase compared to the prior year.  The increases in net income and Adjusted EBITDA were primarily driven by increased throughput volumes and fresh water delivery volumes.  Cash interest paid and cash reserved for bond interest for 2016 were $13 million and $10 million, respectively.  Income tax withholding upon vesting of Antero Midstream equity-based compensation awards was $6 million.  Maintenance capital expenditures for 2016 totaled $22 million and distributable cash flow was $353 million, resulting in a DCF coverage ratio of 1.8x.

2016 Capital Spending

Antero Midstream's capital expenditures for the year ended December 31, 2016, including the $75 million investment in Stonewall Gathering LLC, totaled $475 million as compared to $452 million during the prior year.  Capital expenditures included $228 million in gathering and compression and $188 million in water handling and treatment infrastructure.  Water handling and treatment infrastructure capital expenditures include $149 million for the continued construction of the Antero Clearwater Facility.

The following table reconciles net income to Adjusted EBITDA and distributable cash flow as used in this release (in thousands):

	Three months ended						Years ended
	December 31,						December 31,
	2015			2016			2015			2016
Net income	$	49,008			73,351		$	159,105		$	236,703
Interest expense		2,892			9,008			8,158			21,893
Depreciation expense		23,155			25,761			86,670			99,861
Accretion of contingent acquisition consideration		3,333			6,105			3,333			16,489
Equity-based compensation		4,807			6,683			22,470			26,049
Equity in (earnings) loss of unconsolidated affiliate		—			1,542			—			(485)
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