Western Gas Equity Partners, LP (WGP) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing is by WGP, which consolidates Western Gas Partners, LP (WES); WGP has no material independent operations and depends on WES distributions. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions.
Business context and financial performance
WES provides natural-gas gathering, processing and transportation, as well as crude oil, NGL and produced-water services across several U.S. regions. For Q3 2018, WGP reported consolidated revenue of $507.8 million, down from $574.7 million a year earlier; operating income of $199.6 million, up from $178.7 million; and net income attributable to WGP of $107.5 million, or $0.49 per unit, compared with $96.2 million, or $0.44 per unit.
For the first nine months, revenue was $1.432 billion versus $1.616 billion, and net income attributable to WGP was $276.1 million versus $277.1 million. WES’s nine-month operating income declined 12% to $463.2 million; the 2017 comparison included a $125.7 million gain on a property exchange and $29.9 million of business-interruption insurance proceeds.
| WES non-GAAP metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Adjusted gross margin | $431.6 million | $344.4 million | $1,178.4 million | $1,009.5 million |
| Adjusted EBITDA | $314.5 million | $257.8 million | $858.3 million | $787.7 million |
| Distributable cash flow | $248.2 million | $231.9 million | $701.4 million | $695.6 million |
| Distribution coverage | 1.08x | — | 1.04x | — |
WES’s attributable natural-gas throughput rose 12% in Q3 and 4% for the nine-month period. Crude-oil, NGL and produced-water throughput increased 101% and 82%, respectively. Adjusted gross margin per barrel for those liquids and water assets declined 13% in Q3 and 17% year to date, partly reflecting growth in lower-margin water volumes.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $749.4 million, compared with $642.5 million in 2017. Investing used $1.161 billion, including $949.0 million of capital expenditures; financing provided $464.6 million. Cash at September 30 was $132.9 million.
- Capital spending was concentrated on expansion: $887.8 million of expansion expenditures and $61.2 million of maintenance expenditures during the nine months. WES had a $130.4 million working-capital deficit, while $1.495 billion remained available under its $1.5 billion revolving credit facility.
- Consolidated debt carrying value was approximately $4.594 billion, including $28.0 million of WGP short-term borrowings. WES issued $1.85 billion of senior notes during 2018, used proceeds in part to repay maturing notes and revolving-credit borrowings, and reported covenant compliance. WGP had $7.0 million available on its $35.0 million revolver, which matures in March 2019.
- WGP declared a Q3 distribution of $0.595 per unit, up 11% year over year; WES declared $0.965 per unit, up 7%. Both were payable in November 2018.
Material changes, outlook and risks
- Revenue accounting: WGP adopted Topic 606 on January 1, 2018, with a $44.4 million reduction to opening equity. The change shifted certain customer-product sales and related costs to net presentation, materially lowering reported product sales and cost of product without a comparable change in operating economics. Prior-year results were not restated. Management also revised previously reported 2018 interim revenue and cost figures; it said the adjustments did not affect operating income, net income, balance sheets, cash flows or non-GAAP metrics. Investors should distinguish accounting presentation changes from underlying growth.
- System closures and impairments: WES decided to permanently shut the Kitty Draw and Third Creek gathering systems. Nine-month results included $134.0 million of impairments related to those closures, within total impairments of $152.7 million, and $10.9 million of accrued shutdown costs recorded as a reduction in affiliate product sales.
- Capital outlook and projects: WES raised its 2018 capital-expenditure estimate, excluding acquisitions, to $1.35–$1.45 billion and lowered estimated maintenance spending to $85–$95 million. Mentone Train I was expected to start operations in Q4 2018; the Cactus II pipeline was expected to begin operating in Q4 2019.
- Colorado exposure: Management warned that Proposition 112, on Colorado’s November 2018 ballot, could significantly reduce demand for WES services in the state if enacted. The filing said 30% of natural-gas throughput, excluding equity-investment throughput, was generated in Colorado.
- Customer and affiliate concentration: Anadarko was the only customer contributing more than 10% of consolidated revenue. WES also relies on Anadarko for marketing, operating support, a $260 million note receivable and commodity-price swaps. WGP’s ability to pay distributions depends on distributions from WES.
- Legal and regulatory matters: A binding arbitration decision in a dispute with SWEPI awarded no damages to either side; reversal of a previously recorded $7.5 million contract liability increased Q3 fee-based service revenue. WES was negotiating with regulators over alleged Clean Air Act leak-detection violations at two facilities; management considered fines or penalties above $100,000 reasonably likely for each matter. WES separately agreed to a $226,000 EPA penalty concerning risk-management-plan regulations.
Important facts for investors to verify
- Whether reported revenue trends are being compared consistently across Topic 606’s gross-to-net presentation changes and the interim-period revisions.
- Whether the elevated expansion-capital program converts into expected throughput, cash flow and distribution coverage, and whether the 2018 capital estimates are achieved.
- How shutdown obligations, impairment assumptions and any additional environmental penalties develop.
- Whether WES maintains adequate liquidity and refinancing capacity as debt and interest expense rise, and whether cash generation supports distributions.
- How Colorado regulatory outcomes and Anadarko’s operating, credit and production position affect WES’s volumes and WGP’s distribution dependence.