Western Gas Equity Partners, LP (WGP) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 6, 2015. The supplied filing is for Western Gas Equity Partners, LP, not an entity named Western Midstream Partners. WGP’s consolidated statements include Western Gas Partners, LP (WES), which operates the midstream business; WGP’s cash-generating assets are its interests in WES.
Business context and key financial metrics
WES gathers, processes, treats and transports natural gas, NGLs, condensate and crude oil in several U.S. regions. Unless otherwise noted, amounts below are in millions of dollars. Comparative 2014 figures were recast to include the Delaware Basin JV (DBJV) system as if WES had owned it throughout the periods presented.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $375.1 | $293.7 |
| Operating income | $109.1 | $104.8 |
| Net income attributable to WGP | $57.0 | $53.2 |
| WGP net income per common unit | $0.25 | $0.23 |
| Net cash provided by operating activities | $155.5 | $132.3 |
| Capital expenditures | $200.9 | $199.2 |
| WES Adjusted EBITDA (non-GAAP) | $180.9 | $148.1 |
| WES distributable cash flow (non-GAAP) | $148.0 | $125.1 |
- Revenue increased 28%, while WGP-attributable net income rose 7%. Higher operating costs, depreciation and interest expense limited earnings growth.
- WES-attributable natural-gas throughput increased 13% to 3,917 MMcf/d; crude/NGL throughput increased 66% to 131 MBbl/d. WES reported natural-gas adjusted gross margin per Mcf of $0.66, up 5%, and crude/NGL adjusted gross margin per barrel of $1.71, up 13%.
- WGP cash and cash equivalents were $59.8 at quarter-end, down from $67.2 at December 31, 2014. Total current assets were $215.0 and current liabilities $242.5. WES separately reported a $29.0 working-capital deficit.
- Long-term debt carrying value was $2.533 billion, versus $2.423 billion at year-end; WES had $620.0 outstanding on its revolving facility and $567.2 available. A separate $175.7 present-value deferred purchase-price obligation to Anadarko is recorded for the DBJV acquisition.
- Operating cash flow less reported capital expenditures was negative $48.5 million. WES’s distributable cash flow covered declared WES distributions 1.11x; DCF is a non-GAAP measure and is not the same as cash available for distribution.
Material changes and unusual items
- WES acquired Anadarko’s 50% interest in DBJV in March 2015. Payment is due in 2020 and is tied to future DBJV earnings and capital expenditures; estimated future payment was $282.8 million, recorded at $175.7 million present value at quarter-end. Q1 interest expense included $1.4 million of accretion.
- Growth reflected the November 2014 DBM acquisition, stronger DJ Basin activity, and a full quarter of contribution from the TEFR interests. Revenue from gathering, processing and transportation rose 36%; equity income nearly doubled.
- Depreciation, amortization and impairment expense increased 67%, including an $8.2 million impairment related primarily to abandoned compressors. Interest expense rose 64%, partly due to prior-period note issuances and higher revolving-credit borrowings.
- Commodity-linked sales prices fell year over year: average natural gas price was $3.61/Mcf, NGL price $25.91/Bbl, and drip condensate price $56.65/Bbl. Swaps helped mitigate exposure, but certain system hedges had expired and DJ Basin and Hugoton swaps were scheduled to expire in June and September 2015, respectively.
- WES issued 480,109 common units through its continuous offering program, generating $31.1 million net proceeds. The WGP quarterly distribution was raised to $0.3425 per unit, and WES’s to $0.725 per unit; both were declared after quarter-end for payment in May.
Outlook, risks and contingencies
- WES estimated 2015 capital expenditures, excluding acquisitions, of $629–$689 million excluding equity investments, or $640–$700 million including them. Projects included Lancaster Train II and DBM Train IV; Lancaster Train II was expected to begin operations in Q2 2015, DBM Train IV in Q1 2016, and DBM Train V around mid-2016.
- Management said available cash, operating cash flows and borrowing capacity were expected to meet short- and long-term requirements. WES also expects to rely on external debt or equity funding for expansion spending and acquisitions. No specific earnings or distribution guidance was provided.
- WGP depends on WES distributions, and WES relies substantially on Anadarko for throughput, revenues, affiliate services, the $260 million note receivable, and commodity swaps. Anadarko was the only customer exceeding 10% of consolidated revenue. Adverse changes in Anadarko’s ability to perform could affect WES distributions and WGP cash flow.
- WES was in compliance with its debt covenants. Other risks include counterparty and interest-rate exposure, commodity price changes as hedges expire, capital needs, and operating and regulatory risks.
- A WES subsidiary was negotiating with the EPA over alleged Clean Air Act leak-detection compliance issues at its Granger facility; management considered a fine or penalty above $100,000 reasonably likely, but the outcome was uncertain. A separate DCP Midstream lawsuit involving alleged gas diversion was scheduled for trial in June 2016; management did not expect a material effect and cited contractual indemnities.
Important facts for investors to verify
- Confirm the issuer and security: this filing is WGP’s, with WES consolidated, and should not be mistaken for a filing by a differently named company.
- Review the DBJV deferred payment formula, forecast assumptions and eventual 2020 cash obligation.
- Assess WES’s ability to fund planned capital spending and distributions given negative operating-cash-flow-less-capex for the quarter, the working-capital deficit and reliance on financing.
- Track Anadarko concentration and credit exposure, including the note receivable, customer payments and swap-counterparty performance.
- Check actual project commissioning, capital-spending outcomes, hedge renewals or expirations, and developments in the EPA matter and DCP litigation.
- Compare non-GAAP EBITDA, adjusted gross margin and distributable cash flow with their GAAP reconciliations; the filing cautions these measures are not substitutes for GAAP results or actual distributable cash.