Business context and reporting period
Filing identity: The supplied filing is Western Gas Equity Partners, LP (WGP), not Western Midstream Partners, LP. WGP’s only cash-generating assets are its interests in Western Gas Partners, LP (WES), whose midstream operations are consolidated in WGP’s statements. The filing covers the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing.
WES gathers, treats, processes and transports natural gas, and gathers and transports crude oil, condensate and NGLs across the Rocky Mountains, Pennsylvania and Texas. WGP held 29.9% of WES’s common units, its 1.5% general partner interest and all WES incentive distribution rights at year-end. Anadarko owned 81.6% of WGP and remained a major WES customer and related party.
Key financial and operating metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $1.804 billion | $1.752 billion |
| Operating income | $704.5 million | $154.2 million |
| Net income | $597.0 million | $11.1 million |
| Net income attributable to WGP | $345.8 million | $165.5 million |
| WGP earnings per common unit | $1.53 | $0.39 |
| Net cash from operating activities | $913.1 million | $782.8 million |
| Net cash used in investing activities | $1.106 billion | $500.3 million |
| Capital expenditures, excluding acquisitions | $473.9 million | $637.5 million |
| Cash and cash equivalents at year-end | $359.1 million | $99.7 million |
| Working capital | $278.7 million | Not stated here |
| Long-term debt, carrying value | $3.119 billion | $2.691 billion |
WES reported distributable cash flow of $852.4 million, up 9%, and a 1.29x coverage ratio against $659.1 million of declared common and general partner distributions. These are non-GAAP measures; the filing cautions they are not substitutes for GAAP cash flow or a direct measure of cash available for distribution. WGP’s 2016 declared distributions totaled $1.7675 per unit, versus $1.49125 in 2015. WES’s fourth-quarter distribution was $0.86 per unit.
WES’s natural-gas throughput attributable to WES averaged 3,940 MMcf/d, down 5%; crude/NGL throughput was 184 MBbl/d, down 1%. Adjusted gross margin was $1.337 billion, up 7%, and Adjusted EBITDA was $1.028 billion, up 13%. The filing does not provide a single comparable consolidated gross-margin percentage.
Material changes versus the prior comparable period
- Revenue increased 3%, while operating income and net income rose sharply from 2015. Comparisons are heavily affected by $515.5 million of impairments recorded in 2015, principally at the Red Desert and Hilight assets; 2016 impairment expense was $15.5 million.
- Operating cash flow increased about 17%. Investing outflow rose as WES paid $712.5 million in cash for Springfield and continued expansion projects. Springfield, acquired from Anadarko for $750 million total consideration, added a 50.1% interest in South Texas gathering systems.
- WES sold its Hugoton system in October 2016, recording a $12.0 million net loss. The prior-year sale of the Dew and Pinnacle systems had generated a $77.3 million gain.
- Year-end debt increased by about $429 million. WES issued $500 million of 2026 Notes and $200 million of additional 2044 Notes, and repaid $900 million of revolving-credit borrowings. WES had no borrowings under its own revolving facility at year-end.
- Distributable cash flow growth included $45.8 million of Anadarko capital contributions related to above-market commodity swaps and was partly offset by $45.8 million of Series A preferred distributions.
Outlook, risks, contingencies and unusual items
- WES estimated 2017 capital expenditures, excluding acquisitions, of $900 million to $1.0 billion, including $60 million to $80 million of maintenance spending. Planned work included DBM Train VI, DBJV expansion, initial Mentone gas-plant trains and two produced-water disposal systems. Train VI was expected to enter service in the fourth quarter of 2017; the water systems were expected in the second quarter.
- WES’s commodity-swap agreements with Anadarko for the DJ Basin and MGR assets run through December 31, 2017. Management warned that replacement arrangements could be less favorable or unavailable. Although 94% of 2016 Adjusted gross margin was fee-based and 99% was fee-based or hedged, this support includes material dependence on Anadarko agreements.
- Anadarko accounted for 68% of WES revenue and 47% of throughput, excluding equity-investment throughput. Anadarko announced sales of its Marcellus assets and Eagle Ford upstream assets; these transactions could affect volumes and customer concentration. WES also has a $260 million note receivable from Anadarko.
- Moody’s rated WES Ba1, below investment grade, with a stable outlook; S&P and Fitch rated it BBB- with stable outlooks. WES reported $1.195 billion available under its revolving credit facility and $278.7 million working capital, which includes an estimated insurance receivable.
- A December 2015 fire and explosion at the DBM complex disrupted operations. Train III returned to service in May 2016 and Train II in December 2016. WES had received $33.8 million in insurance proceeds by year-end, including $16.3 million for business interruption and $17.5 million for property damage; it received another $29.8 million in January 2017.
- After year-end, WES agreed to acquire Williams Partners’ 50% non-operated DBJV interest in exchange for its 33.75% non-operated Marcellus interest and $155 million cash. Anadarko deferred conversion of WES Class C units to March 1, 2020. Separately, WES and Series A holders agreed to convert the preferred units into common units in two stages during 2017, creating potential dilution.
- WES disclosed ongoing EPA discussions over alleged Clean Air Act leak-detection and repair noncompliance at its Granger facility; management considered a fine or penalty above $100,000 reasonably likely. The filing also highlights pipeline-safety and environmental regulation, commodity-price and production risks, competition, capital-market access, and conflicts arising from Anadarko’s control and related-party transactions.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this is WGP’s 10-K, with consolidated WES results, not a filing under the Western Midstream Partners name.
- Assess how much reported cash generation and distribution coverage depends on Anadarko, including the above-market swap contributions and the $260 million note receivable.
- Review the 2017 capital program, funding needs and leverage after the planned DBJV transaction, and verify subsequent project timing and spending.
- Check the terms, timing and dilution effects of the Series A conversion and the extended Class C units.
- Evaluate whether throughput, insurance recoveries and margins support distributions after the Anadarko swaps expire at the end of 2017; distinguish non-GAAP distributable cash flow from GAAP operating cash flow.
- Follow the Granger EPA matter, insurance claim settlement and any changes in WES credit ratings or borrowing capacity.