M&A Announcement

Oct 9, 2018

Good morning, everyone, and welcome to the Antero Midstream Partners LP Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. And at this time, I'd like to turn the conference call over to Mr. Mike Kennedy, CFO of Antero Midstream. Sir, please go ahead. Thank you for joining us for AMGP's and AM's investor conference call to discuss today's simplification transaction. We'll spend a few minutes going through transaction highlights and then we'll open it up for Q and A. I would also like to direct you to the homepage of our website at ww.anteromidstream.com or www.anteromidstreamgp.com, where we have provided a separate simplification transaction presentation that will be reviewed during today's call. Before we start our comments, I would first like to remind you that during this call, Antero management will make forward looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Antero Resources, Antero Midstream and AMGP and are subject to a number of risks and uncertainties, many of which are beyond Antero's control. Actual outcomes and results could materially differ from what is expressed, implied or forecast in such statements. Today's call may also contain certain non GAAP financial measures. Please refer to our press release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. Joining me on the call today are Paul Rady, Chairman and CEO of Antero Resources and Antero Midstream and Glen Warren, President and CFO of Antero Resources and President of Antero Midstream. With that, I'll turn the call over to Paul. Thanks, Mike. I'll begin the call highlighting the special committee process objectives on Slide three before handing the call off to Glenn to get into transaction specifics. When we tasked our special committees with evaluating potential transactions and alternatives among the Antero family, we focused on five key objectives. First objective was achieving a win win win across the Antero family. We believe Antero is already well positioned in terms of profitability, drilling inventory, growth, leverage and DCF coverage at all three entities. For that reason, any transaction had to improve the financial profile and deliver accretion to all entities. Second, our objective was to further align the interests of management, our private equity sponsors and all of our equity holders to address a perceived conflict of interest across the shareholder base. Our third objective was to simplify the current corporate structure in order to unlock shareholder value and appeal to a broader base of investors. Fourth, we wanted to maintain our integrated development strategy. We strongly believe in the tangible and intangible benefits of owning the midstream business and value of Antero's integrated model. Our vision and long term strategy remains unchanged and we believe this is the best way to create and deliver value to our upstream and midstream shareholders. Lastly, the special committee at AR was tasked with evaluating a return of capital to AR shareholders. Importantly, with the cash transaction, AR has visible funding for its initial share repurchase program. As you can see with all of the objectives and parties involved, this process took some time and we thank our unitholders and shareholders for their patience. With that, I'll hand the call over to Glenn. Thanks, Paul. Moving to Slide number four titled Today's Strategic Announcement. We're pleased to announce that we have completed the special committee process. The results of the process is a midstream simplification transaction where AMGP will acquire AM in a cash and stock transaction and eliminate the IDRs lowering AM's cost of capital. AM public unitholders will receive all in consideration of $31.41 per unit, which represents a 7% premium to yesterday's close. The resulting entity will be a C Corp for both tax and governance purposes and due to the tax basis step up will eliminate approximately $375,000,000 of expected taxes at AMGP from 2019 through 2022. These tax savings allow the transaction to be accretive to both AM unitholders and AMGP shareholders on a distributable cash flow basis. In addition, our new dividend targets increased the prior 2019 distribution and reaffirm our prior distribution growth targets and $2,700,000,000 organic project backlog with attractive project and corporate level rates of return. This along with DCF accretion per unit allow us to make AM public unitholders more than whole on their distribution targets while improving DCF coverage. We believe this transaction creates a best in class Appalachian Midstream Corporation in the most tax efficient and investor preferred structure, which we'll refer to as New AM. Moving to Slide number five titled Best in Class Midstream Vehicle, we believe this simplification checks all the boxes for our current and future shareholders. New AM will be a ten ninety nine secondurity with no IDRs and substantially shielded from taxes through at least the year 2024. Our core financial policy will remain unchanged with New AM maintaining its self funding organic business model, strong balance sheet, healthy DCF coverage and significant liquidity. We remain highly aligned and integrated with AR, which gives us visibility to provide our long term targets. Our organic growth strategy will continue to be focused on just in time capital investment, which we believe leads to top tier capital efficiency and high teens return on capital. Now let's move on to the transaction details on Slide six titled Simplification Transaction Overview. AMGP is acquiring all of the outstanding public AM units for all in consideration valued at $31.41 per unit consisting of 1.635 AMGP shares and $3.41 per unit in cash. AM public unitholders can elect to receive their merger consideration in all cash or all stock subject to proration to ensure that the aggregate amount of cash consideration paid to all AM unitholders equals $598,000,000 The combination of equity and cash results in a 1.832 times equivalent exchange ratio for AM public unitholders and represents a 719% premium to yesterday's close and the unaffected price prior to the formation of the special committee respectively. The new entity which will be renamed Antero Midstream Corporation will be treated as a corporation for both tax and governance purposes, meaningfully improving shareholder rights and voting power. The transaction is taxable to all AM unitholders resulting in new AM receiving the benefit of a tax basis step up, which will shield future corporate level taxes for new AM. As a result, new AM is not expected to pay material corporate level taxes through at least the year 2024. This tax efficiency is key to the transaction as it allows for accretion to both parties and enables new AM to target a dividend policy that keeps AM unitholders more than whole on the previously communicated distribution targets through the year 2022, while increasing DCF coverage to 1.2 to 1.3 times. The cash components of the transaction will be financed through borrowings under AM's revolving credit facility, which is in the process of being expanded from $1,500,000,000 up to $2,000,000,000 The transaction is subject to a majority of minority vote at both AM and AMGP and is expected to close in the 2019. Slide number seven titled Antero Family Simplified Pro Form a Structure illustrates the current Antero family corporate structure on the left and the pro form a structure on the right. This transaction simplifies Antero's corporate structure into one upstream and one midstream entity, both structured as C Corps. Importantly, through this transaction, we have aligned the ownership of sponsors and management and Antero Resources, all owning common shares of new AM with no remaining IDRs. As co founders with significant ownership, we will remain highly aligned with both our upstream midstream investors and will continue to operate the business with our proven integrated strategy and long term vision. With that, I'll turn the call over to Mike. Thanks, Glenn. I will begin my comments on Slide eight titled New AM, increased cash dividend targets. New AM will target a dividend of $1.24 per share in 2019. Using the $1.24 per share in 2019 multiplied by the AM public unitholder exchange ratio of 1.832 times results in a distribution to AM public unitholders of $2.27 per unit, 3% above AM's status quo 2019 distribution target of $2.21 per unit. In 2020, New AM will continue to target distribution growth of 28% to 30% and then year over year distribution growth remains the same at 20% in both 2021 and 2022. This dividend policy keeps AR whole on its distributions for AM and delivers modest accretion to public AM unitholders on all of the previously communicated distribution targets. Quantifying this accretion, the AM public unitholders receives $0.36 per unit more than the previously communicated targets over the same time period. Additionally, new AM will target an increased DCF coverage range of 1.2 times to 1.3 times to maintain financial flexibility and for further delevering into the low two times range, which is the same 2022 leverage target as status quo AM. Now let's move on to Slide number nine to go through the transaction financing and pro form a leverage profile. AMGP will issue $5,500,000,000 of equity consideration for the acquisition of AM. The fixed cash consideration of $598,000,000 along with estimated transaction fees will be funded through borrowings on the revolving credit facility. We are in the process of exercising the accordion feature on AM's credit facility, which increases our borrowing capacity from $1,500,000,000 to $2,000,000,000 leaving us with over $600,000,000 of available liquidity on a pro form a basis as of June 3038. The bottom right hand portion of the page illustrates New AM's leverage profile declining into the low two times. We feel very comfortable with this leverage profile, which is consistent with AM's status quo leverage policy due to significant visibility we have in the AR's long term development plan and the increased DCF coverage. Also, from a credit perspective, simplification transactions are typically viewed favorably as the elimination of the IDRs results in retention of a greater percentage of cash flow in the future. In this transaction, we are forecasting a 50% increase in retained cash flow through 2022. As a result of the transaction, New AM will be one of the top 20 midstream companies by market capitalization, which is highlighted on Slide 10 titled Highest Dividend Growth Among Top 20 Midstream. In the chart, red font indicates midstream companies that are structured as C Corps and the asterisk indicate companies that have eliminated IDRs. As we looked at the premier midstream peer group, a substantial portion are structured as C Corps and the majority have eliminated IDRs. As a result, we felt that a C Corp structure without IDRs was the appropriate vehicle with which to join this premier group of midstream companies. In addition, we took our simplification a step further and incorporated C Corp governance, moving New AM to the forefront of best shareholder practices. Importantly, New AM is expected to have the highest distribution growth among the top 20 infrastructure C Corps and one of the strongest balance sheets. With a 27% distribution compounded annual growth rate through 2021 and initial leverage around three times trailing in the low two times range. In our view, a midstream infrastructure corporation with all of the attributes previously mentioned should support an attractive valuation as highlighted on Slide number 11 titled Yield versus Growth Correlation Implies Attractive Value. As depicted on the slide in the blue rectangle, New AM will have the highest distribution growth among midstream infrastructure corporations with strong DCF coverage and low leverage, making it a unique vehicle with attractive upside. When we compared MLPs to C Corps and entities that eliminated IDRs, we found that C Corps traded at a premium to MLPs due to the increase in trading liquidity and a broader investor base. As a result, we believe the C Corp structure is the appropriate structure for New AM and results in an attractive value proposition for investors. Based on the market implied yield, if new AM is valued efficiently on the yield versus growth regression, there is upside to today's trading levels. With that, I'll turn the call back to Paul for closing remarks. Thanks, Mike. I'll conclude the call with summary highlights and rationale for the Midstream simplification transaction on Slide number 12 titled Simplification Transaction Summary. First, the transaction simplifies the midstream structure and aligns all equity holders. New AM will be structured as a C Corp without IDRs, which we believe is the increasingly preferred structure by midstream investors. We expect the structure to broaden our investor base and importantly position Antero Midstream to be included in major equity indices in the future. In addition to the intangible benefits of structure and governance, the transaction is immediately accretive to both AM and AMGP on a DCF per unit basis. AMGP shareholders will receive 42% immediate distribution accretion compared to the status quo 2019 AMGP target and AM unitholders will receive a premium and will be more than made whole on their previously communicated distributions and growth profiles. Third, the transaction eliminates the IDRs reducing the pro form a cost of equity capital. While we didn't view the IDRs as overly burdensome in the near term due to our attractive project and corporate rates of return. As we looked out five to ten years, we felt it was something that eventually needed to be addressed. Eliminating the IDRs helps to ensure that we don't miss out on any future growth opportunities both organic and third party and allows us to compete for larger scale projects with other entities that have already eliminated IDRs. Structured as a corporation for both tax and governance purposes, the transaction significantly enhances governance and shareholder rights as compared to the MLP structure. Antero Midstream will have an elected board with a majority of independent directors pushing it to the forefront of best corporate governance practices in the midstream space. The transaction is also tax efficient and eliminates approximately three seventy five million dollars of taxes that AMGP expected to pay from 2019 through 2022. This tax efficiency generated by the step up in basis allows the transaction to be accretive to both AM and AMGP. Lastly, together with a portion of AR's targeted free cash flow over the next twelve to eighteen months, cash consideration from the announced transaction today is expected to fully fund AR's buyback and delevering program. Ultimately, a strong sponsor with low leverage results in a healthier and stronger midstream entity. With that, operator, let's open the lines up for questions. Our first question today comes from Jeremy Tonet from JPMorgan. Please go ahead with your question. Good morning and congratulations on reaching these transactions. Just want Thanks, to start off with this deal now being struck, does this in any way change the strategic outlook for the midstream vehicle going forward as far as third party business, M and A or anything along those lines? Is there you see consolidation in the Northeast and Terro playing a part of it? Or really the strategy that you had in place before is working with everything you wanted and you'll continue to follow those lines? The strategy has always been the same, which is to the primary goal is to take care of the upstream and provide the midstream services. And so we stay very focused on that and that coupling. But it's always been part of our playbook to look at other opportunities, particularly as you say, in the Northeast for consolidation infrastructure. So it could be both, but really the number one goal is to stay very linked with AR because of the certainty of the production and the cash flows. So we could we'll do both. And the strategy hasn't really changed, but it does open up opportunities to do more outside of providing that service for AR upstream. Great. And then have you guys been in contact with the agencies at this point with I mean, simplification is generally a credit positive event. The metrics you lay out there seems like they screen in line with some of the things that they're looking for, for IG status. So was just wondering if you could provide any color there. Yes, we have been in contact with the rating agencies. They do view simplification transactions as generally favorable as you retain more of the cash flow. So they were positive on the transaction. In addition, AR's shareholder buyback has the leverage targets on that as well. So that was a positive feature for them. So when we reviewed the transaction with them, they were generally positive on it. Great. And just one last one. Longer dated, I'm wondering, there any specific ownership levels that AR would like to have with AM or any thoughts you can provide on that topic? No, there really isn't, Jeremy, but I think you can assume here that the $300,000,000 maybe more than that that goes to AR and the transaction really satisfies AR's needs towards deleveraging and supporting a share repurchase program or return of capital. So it really satisfies AR's appetite for some time, I think, and we're very happy with the holdings that we end up with pro form a from an AR perspective. Great. That's it for me. Thank you. Thank you. Our next question comes from Sunil Sibal from Seaport Global Securities. Please go ahead with your question. Hi, good morning guys and thanks for all the clarity and congrats on the transaction too. I just had a follow-up on the previous question with regard to your discussion with the rating agencies, especially with the new combined midstream entity. I was kind of curious if you could lay out what kind of leverage metrics do you need for this new entity to get to IG at S and P or Moody's? Yes. The reason I mentioned the AR, were positive on the AR shareholder buyback with the leverage targets associated with that is that AM is limited based on AR's credit rating. So right now, if you would look at Antero Midstream, it would map to investment grade profile. But as I mentioned, it's limited to AR's rating, which is right now it is investment grade at Fitch, but BB plus at S and P. So AM definitely is mapping towards investment grade right now. This transaction enhances that as well, but really waiting on AR's credit profile being assessed as investment grade by the rating agencies. Okay, got it. And I think when you think about the overall business opportunity set, clearly the commodity price environment is helping all the Northeast folks. I was kind of curious, there have been some asset packets out there. How do you guys kind of think about opportunity set on the M and A side, with your over reliance on AR from a cash flow perspective? Well, we're very pleased and confident with the inventory that we have at AR and that's going to last us quite a long time and it's good high quality. So nothing has changed there in terms of focusing on our own development, same number of wells per year and CapEx and production. That's all good. We do watch the landscape out there in the Northeast understand the competitors pretty well and the quality of acreage throughout the basins. So we study, but there's of course nothing underway and but that's those are always opportunities. We've done mostly organic leasing in our history and so still look toward that. But anything could happen there. Okay, got it. That's all I had, guys. Thank you. And ladies and gentlemen, at this time, we've reached the end of today's question and answer session. I'd like to turn the conference call back over to Mr. Kennedy for any closing remarks. Thank you to everyone for joining us on the call today. If you have any additional questions, please feel free to reach out to us. Thanks again. Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.