Business context and reporting period
Filing identity: The supplied filing is Western Gas Equity Partners, LP (WGP), Form 10-Q for the quarter ended March 31, 2018, not a filing under the name Western Midstream Partners, LP. WGP consolidates Western Gas Partners, LP (WES); the reported consolidated results therefore largely reflect WES’s midstream operations. WGP itself has no independent operations and depends on distributions from WES.
Financial and operating performance
- Revenue: $437.2 million, down from $516.2 million in Q1 2017. The decline is substantially affected by the adoption of Topic 606, which changed the presentation of product sales and related costs; it does not represent an equivalent decline in underlying activity.
- Profit: Net income attributable to WGP was $101.0 million, versus $75.9 million; diluted earnings per common unit were $0.46, versus $0.35. Operating income was $187.3 million, versus $137.6 million. Prior-year results included $164.7 million of impairment expense and a $119.5 million net divestiture gain and other, making reported comparisons unusual.
- WES performance measures: Adjusted EBITDA was $272.1 million, up 7%; distributable cash flow was $231.4 million, up 7%. WES reported a 1.05x distribution coverage ratio. These are non-GAAP measures and are not substitutes for GAAP results.
- Operating trends: WES-attributable natural gas throughput fell 8% to 3,627 MMcf/d; crude oil, NGL and produced-water throughput rose 53% to 258 MBbls/d. Adjusted gross margin increased 11% to $368.5 million.
- Cash flow and investment: Operating cash flow was $240.9 million, compared with $191.7 million. Capital expenditures were $302.3 million, including $285.9 million for expansion and $16.4 million for maintenance. Cash and cash equivalents were $523.7 million at quarter-end.
- Debt and liquidity: Long-term debt carrying value was $4.18 billion, with a further $28 million drawn under WGP’s facility. WES had no borrowings under its $1.5 billion revolving credit facility and $1.495 billion available. WES reported a $255.6 million working-capital surplus.
- Distributions: WGP declared $0.56875 per unit for Q1, 16% above Q1 2017. WES declared $0.935 per unit, 7% above Q1 2017.
Material changes versus the prior comparable period
- Topic 606 adoption on January 1, 2018 reduced opening equity by $44.4 million. It also changed revenue and expense presentation: product sales were $216.4 million lower and cost of product $197.2 million lower than they would have been under the former standard. The filing says comparative periods were not restated.
- WES issued $400 million of 2028 notes and $700 million of 2048 notes in March, and refinanced its revolving facility with a new $1.5 billion facility, expandable to $2.0 billion and maturing in February 2023. Proceeds partly repaid revolving borrowings and supported general purposes, including capital spending.
- Q1 expansion spending rose substantially year over year. WES increased its 2018 capital expenditure estimate to $1.35–$1.45 billion from an originally reported $1.0 billion.
- Natural gas gathering throughput was lower partly because of the 2017 property exchange and asset sales; processing volumes benefited from increased production and the DBM Train VI start-up. New DBM water systems contributed to the increase in liquids and produced-water throughput.
Outlook, commentary, risks and contingencies
- Management stated that available liquidity and expected cash flows should meet short- and long-term needs, while noting that WES expects to rely on external financing for expansion spending and acquisitions. Distribution decisions remain dependent on WES’s performance, capital needs and other factors; WGP’s distributions depend on cash received from WES.
- WES has a $260 million note receivable from Anadarko, bearing 6.5% interest. Anadarko was the only customer exceeding 10% of consolidated revenue. WES also relies on Anadarko for material service revenue and commodity purchases and sales, creating customer, counterparty and concentration risk.
- WES renewed commodity-price swaps with Anadarko through December 31, 2018. Management characterized commodity-price exposure as limited under the swaps, but the arrangements leave Anadarko counterparty risk.
- A DBJV arbitration seeks approximately $194.2 million in gathering fees; SWEPI counterclaimed for $14.9 million. The hearing began April 30, 2018, with a decision expected by year-end. The filing records a $7.5 million contract liability relating to the counterclaim and states management did not expect a materially unfavorable effect.
- WES was negotiating with the EPA and/or Department of Justice over alleged Clean Air Act compliance matters at three facilities. Management considered fines or penalties exceeding $100,000 reasonably likely in each matter, but the outcomes were not determined.
- The filing identifies risks including throughput and producer activity, customer and counterparty credit, access to capital, interest rates, commodity exposure, regulation, environmental matters, and WES’s ability to fund debt service, projects and distributions. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this filing is for Western Gas Equity Partners, LP (WGP), with WES consolidated, rather than an entity identified in the request as Western Midstream Partners, LP.
- Assess Topic 606’s effect on revenue comparability and the $44.4 million opening-equity adjustment; do not interpret the reported revenue decline without considering presentation changes.
- Review the 2018 capital spending range of $1.35–$1.45 billion against funding needs, debt levels and distribution coverage.
- Evaluate Anadarko concentration and credit exposure, including the $260 million note receivable and the related-party swaps.
- Track the SWEPI arbitration, EPA/DOJ matters, and the August 2018 maturity of the $350 million 2018 Notes; management stated it intended and was able to refinance those notes with long-term debt.