Western Midstream Partners, LP quarterly report, Q1 FY2016

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Business Context and Reporting Period

Western Gas Equity Partners, LP (WGP) filed this unaudited Form 10-Q for the three months ended March 31, 2016. Although the request identifies Western Midstream Partners, the registrant named in this filing is WGP, the predecessor name; its consolidated statements include Western Gas Partners, LP (WES), the midstream operating partnership. WGP says its only cash-generating assets are its interests in WES.

Prior-period figures were recast to include the Springfield system, acquired from Anadarko in March 2016, as a common-control transaction. The recast 2015 results may not reflect results that would have occurred had WES owned the system at that time.

Key Financial Metrics

Amounts below are in U.S. dollars; financial-statement amounts are rounded to millions unless otherwise noted.

MetricQ1 2016Q1 2015
Total revenue and other$383.1 million$437.0 million
Operating income (loss)$152.2 million$(123.2) million
Net income (loss) attributable to WGP$81.8 million$(16.4) million
Net income (loss) per WGP common unit$0.32$(0.19)
Net cash provided by operating activities$235.9 million$194.3 million
Net cash used in investing activities$(842.8) million$(214.2) million
Net cash provided by financing activities$618.7 million$12.6 million
  • At March 31, 2016, cash was $111.5 million, total assets were $7.37 billion, and long-term debt carrying value was $3.05 billion, compared with $99.7 million, $7.30 billion, and $2.69 billion, respectively, at year-end 2015.
  • WES generated $231.1 million of Adjusted EBITDA and $191.9 million of distributable cash flow, both non-GAAP measures, up 5% and 3%, respectively. WES’s reported distributable-cash-flow coverage of its declared common and general-partner distributions was 1.21x.
  • WES natural-gas throughput attributable to WES fell 11% to 3,781 MMcf/d; crude/NGL throughput was 184 MBbls/d, up 1%. Adjusted gross margin attributable to WES rose 3% to $311.2 million.

Material Changes Versus the Prior Comparable Period

  • Revenue declined 12%, including a 47% reduction in natural-gas and NGL sales, reflecting lower commodity prices and the DBM processing outage. Gathering, processing and transportation revenue increased 9%, helped by the DJ Basin complex.
  • WGP swung to attributable net income of $81.8 million from a $16.4 million loss. A major factor was the prior-year $272.6 million impairment charge, versus $6.5 million in Q1 2016; the current-period impairment primarily related to the Newcastle system. This comparison should not be read as a like-for-like improvement in underlying operations.
  • WES’s Springfield acquisition cost $750 million: $712.5 million in cash plus WES common units. Funding included $440 million of net proceeds from a March Series A preferred issuance and borrowings under WES’s revolving facility. WES issued additional preferred units in April and used $247.5 million of the proceeds to repay revolving borrowings.
  • WES total debt carrying value rose to $3.05 billion from $2.69 billion, principally reflecting acquisition-related revolving borrowings. At March 31, WES had $565.1 million of available borrowing capacity; WGP had $222 million available under its new revolver and $30 million under its working-capital facility.

Outlook, Commentary, Risks and Unusual Items

  • DBM outage: A December 2015 fire and explosion curtailed processing. Train III began accepting limited gas in April 2016; management expected it to return to full service with new liquid-handling and amine-treating facilities by the end of Q2 2016. Train II, with 100 MMcf/d capacity, was expected back by year-end 2016. These are management expectations, not guarantees.
  • Insurance: A $49 million property-insurance receivable was recorded at March 31. WES estimated recoverable business-interruption proceeds of $11–$15 million for the quarter, but recognizes such income only when non-refundable proceeds are received.
  • Projects and spending: Train IV was expected to begin operations in Q2 2016, Train V in the second half of 2016, and Train VI around mid-2017. WES reported $90 million of committed capital-project payments, mostly expected within 12 months. Its board-approved estimated maintenance capital expenditures for 2016 were $17.7 million per quarter.
  • Distributions: WGP declared $0.42375 per unit for Q1 2016, payable in May; WES declared $0.815 per unit, also payable in May. WGP’s ability to distribute cash depends on distributions received from WES. WES’s preferred units carry senior, cumulative distributions of $0.68 per unit quarterly and may convert into common units subject to specified terms.
  • Concentration and market risks: Anadarko was the only customer exceeding 10% of consolidated revenue and accounted for a majority of WES throughput excluding equity-investment throughput. WES also depends on Anadarko for services, product purchases and sales, a $260 million note receivable, and commodity swaps. Management considered direct commodity-price exposure limited by swaps, which were scheduled to expire in December 2016; variable-rate debt creates exposure to interest-rate increases.
  • Controls and legal/regulatory matters: Management concluded disclosure controls were ineffective at March 31 because of a previously identified material weakness in long-lived-asset impairment controls; remediation was expected by the end of Q2 2016. WES was negotiating with the EPA over alleged Clean Air Act leak-detection noncompliance at its Granger facility; management considered a fine or penalty above $100,000 reasonably likely. Proposed PHMSA pipeline-safety rules could increase costs, potentially significantly.
  • Legal proceedings: Apart from the EPA matter, management said it was not aware of proceedings expected to have a material adverse effect.

Important Facts for Investors to Verify

  • Confirm the correct issuer and entity scope: this filing is for Western Gas Equity Partners, LP and consolidates WES; it is not filed under the later Western Midstream Partners name.
  • Track DBM restoration milestones and whether property and business-interruption insurance proceeds are actually collected.
  • Assess post-acquisition leverage, April debt repayment, remaining revolver availability, and the cash burden and potential dilution associated with preferred units.
  • Review WES’s distributable-cash-flow coverage and distribution sustainability, including the effects of capital spending, debt service, and Anadarko-related swap contributions.
  • Monitor Anadarko concentration and counterparty credit exposure, the Granger EPA resolution, proposed pipeline rules, and completion of the impairment-control remediation.