Western Gas Equity Partners, LP (WGP) — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. WGP’s consolidated results include Western Gas Partners, LP (WES), its controlled midstream operating partnership. WGP’s only cash-generating assets are its interests in WES. The filing anticipated that, after the proposed merger, WGP would change its name to Western Midstream Partners, LP and trade under the symbol WES.
Business context and key financial metrics
WES gathers, processes, treats and transports natural gas, crude oil, NGLs and condensate, and gathers and disposes of produced water. Its operations span the Rocky Mountains, North-central Pennsylvania, Texas and New Mexico. Anadarko was a significant customer and controlling affiliate.
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue and other, WGP consolidated | $1.990 billion | $2.248 billion |
| Operating income, WGP consolidated | $625.4 million | $704.4 million |
| Net income, WGP consolidated | $448.5 million | $573.2 million |
| Net income attributable to WGP | $369.4 million | $376.6 million |
| Net income per WGP common unit | $1.69 | $1.72 |
| Operating cash flow, WGP consolidated | $1.017 billion | $897.4 million |
| Investing cash flow, WGP consolidated | $(1.460) billion | $(763.6) million |
Fourth-quarter data: Supplemental quarterly information reports revenue and other of $557.8 million, operating income of $164.4 million, net income of $108.8 million, net income attributable to WGP of $93.4 million and earnings per unit of $0.43. These are unaudited quarterly figures.
WES operating measures: Adjusted EBITDA, a non-GAAP measure, was $1.206 billion, up 14%; distributable cash flow was $958.7 million, up 3%; and distribution coverage was 1.05x. Adjusted gross margin was $1.646 billion, up 20%. These non-GAAP measures have company-specific definitions and should be considered alongside GAAP results.
Margins and volumes: Adjusted gross margin per Mcf for natural gas assets rose 7% to $1.01; per barrel for crude oil, NGLs and produced water fell 12% to $1.85. Natural gas throughput attributable to WES increased 6% to 3,802 MMcf/d; combined crude oil, NGL and produced-water throughput increased 82% to 365 MBbl/d.
Debt and liquidity: At year-end, WES had $4.8 billion of carrying-value long-term debt and $220 million drawn on its revolving facility, with about $1.3 billion of remaining borrowing capacity. WGP separately had $28 million of short-term borrowings and $7 million available under its reduced $35 million facility. WES reported a $174.1 million working-capital deficit and $92.1 million of cash and cash equivalents.
WES declared a fourth-quarter distribution of $0.980 per unit, up 7% from the fourth quarter of 2017; WGP declared $0.60250 per unit, up 10%. WES’s figures exclude distributions on Class C units unless stated otherwise.
Material changes versus the prior year
- WGP consolidated revenue declined 11% and net income declined 22%; WGP-attributable net income declined about 2%. WES operating income fell about 11%, while Adjusted EBITDA and distributable cash flow increased.
- WES recorded $228.3 million of impairments, versus $178.4 million in 2017. Significant items included impairments associated with the permanent shutdown of the Third Creek and Kitty Draw gathering systems, and reduced expected cash flows at Hilight and MIGC.
- WES adopted revenue-recognition standard Topic 606 on January 1, 2018. It changed the presentation and timing of certain revenues and costs, including net presentation of some product transactions. The filing states that this materially changed reported line items but did not materially affect operating income; the opening equity adjustment was a $44.4 million reduction. Comparisons of reported revenue and product sales are therefore not fully like-for-like.
- Capital expenditures increased to $1.194 billion from $673.6 million, principally reflecting expansion at the West Texas and DJ Basin complexes. WES’s operating cash flow rose, but investing outflows also increased substantially.
- WES issued $1.85 billion of senior notes in two 2018 offerings and repaid $350 million of notes due in 2018. Year-end carrying-value long-term debt rose from $3.493 billion to $4.787 billion.
- 2018 acquisitions included a 20% Whitethorn interest for $150.6 million and a 15% Cactus II interest. WES sold the Newcastle system for $3.2 million. Equity income from affiliates increased 80% to $153.0 million.
Outlook, risks and unusual items
- Merger and asset transactions: The November 2018 agreement contemplated WES acquiring specified Anadarko midstream assets and interests for cash and units, followed by a merger into WGP. The filing expected closing in Q1 2019; completion was not assured. A $2.0 billion 364-day facility was arranged to fund substantially all of the merger’s cash consideration and related costs, conditional on closing.
- Capital outlook: WES estimated 2019 capital expenditures of $1.3–$1.4 billion, excluding acquisitions, and maintenance capital of $110–$120 million. Projects included Mentone Train II, two Latham processing trains, and pipeline expansions; timing and returns depend on execution and customer volumes.
- Commodity exposure: Most throughput was under fee-based contracts, but the Anadarko commodity-price swap agreements expired without renewal on December 31, 2018. Management said a 10% commodity-price change was not expected to materially affect the next 12 months, excluding imbalance effects; reduced drilling or production could still lower throughput.
- Customer and affiliate concentration: Anadarko accounted for 54% of WES revenue and 38% of throughput on the filing’s stated volume basis. Its production represented 41% of natural-gas processing throughput and 73% of crude oil, NGL and produced-water throughput, excluding equity investments. WES also held a $260 million note receivable from Anadarko.
- Other risks: The filing highlights competition, capital-market access, leverage and interest rates, pipeline-safety and environmental regulation, produced-water disposal and induced seismicity, and dependence on producer activity. FERC’s policy on MLP income-tax allowances could adversely affect regulated pipeline revenue.
- Contingencies and accounting: WES was negotiating with the EPA and Department of Justice over alleged leak-detection and repair violations at two facilities; management believed a fine or penalty exceeding $100,000 was reasonably likely in each matter. A separate arbitration over gathering fees concluded with no damages awarded to either side; WES reversed a $7.5 million contract liability into fee-based revenue in Q3 2018.
- Unusual operational item: The Third Creek and Kitty Draw systems were permanently taken out of service in 2018, with $134.0 million of impairment expense and shutdown-related asset retirement obligation effects. Total asset retirement obligations increased to $285.9 million, including substantial revisions in estimated liabilities.
Important facts for investors to verify
- Whether the merger and related asset contributions closed as planned, and the final consideration, financing and resulting unit count.
- How much of reported revenue and cost changes reflects Topic 606 presentation rather than underlying business growth; compare margins, cash flow and volumes as well as revenue.
- Whether 2019 capital projects were completed on schedule and within budget, and whether new capacity attracted contracted throughput.
- Debt, covenant headroom, refinancing needs and liquidity after merger funding; also monitor the working-capital deficit and interest costs.
- Whether WES can maintain distributions and coverage, given 1.05x 2018 coverage, its capital program and reliance on external financing.
- Developments in the EPA matters, pipeline shutdown costs and asset retirement estimates, as well as Anadarko’s financial condition and continued customer contribution.