Western Gas Equity Partners, LP (WGP) — 2017 Q3 Form 10-Q
Entity note: The filing is for Western Gas Equity Partners, LP, not Western Midstream Partners, LP. WGP later became associated with the Western Midstream name. WGP consolidates Western Gas Partners, LP (WES), which accounts for substantially all of its operating business; WGP itself has no independent operations or material assets beyond its WES interests. Period ended September 30, 2017; unaudited.
Business context and key financial metrics
WES provides natural-gas gathering, processing and transportation, and crude oil, NGL and produced-water services across the Rocky Mountains, Pennsylvania and Texas. Figures below are in millions of dollars except per-unit data and operating statistics.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue and other | $574.7 | $481.6 | $1,616.3 | $1,293.5 |
| Operating income (WGP consolidated) | $178.7 | $196.6 | $523.3 | $524.1 |
| Net income attributable to WGP | $96.2 | $91.4 | $277.1 | $262.1 |
| WGP net income per common unit | $0.44 | $0.42 | $1.27 | $1.15 |
| Operating cash flow | Not stated by quarter in supplied text | Not stated by quarter in supplied text | $642.5 | $654.7 |
| WES Adjusted EBITDA attributable to WES | $257.8 | $278.2 | $787.7 | $759.8 |
| WES distributable cash flow | $231.9 | $237.3 | $695.6 | $628.6 |
| WES distribution coverage | 1.09x | Not provided | 1.14x | Not provided |
At September 30, 2017, cash was $153.0 million, down from $359.1 million at year-end 2016. Current assets were $359.0 million and current liabilities $393.6 million; WES reported a $35.0 million working-capital deficit. Long-term debt carrying value was $3.372 billion, versus $3.119 billion at December 31, 2016. WES had $945.4 million available under its revolving credit facility; WGP had $222.0 million available under its facility. Both entities reported covenant compliance.
For WES, adjusted gross margin attributable to WES was $344.4 million in Q3, essentially flat year over year, and $1,009.5 million for nine months, up 3%. Natural-gas throughput attributable to WES fell 16% in Q3 and 8% year to date; crude, NGL and produced-water throughput rose 13% in Q3 and 1% year to date. These adjusted measures are non-GAAP and should be read alongside GAAP results.
Changes versus comparable periods
- Q3 revenue increased 19%, but consolidated operating income declined about 9%; net income attributable to WGP increased about 5%. Higher commodity sales were accompanied by substantially higher product costs.
- Nine-month revenue rose 25%, while operating income was nearly unchanged and net income attributable to WGP rose about 6%. Results included a $125.7 million gain on the DBJV property exchange and a $16.4 million gain on sale of the Helper and Clawson systems.
- Nine-month impairment expense increased to $170.1 million from $11.3 million, principally a $158.8 million impairment at the Granger complex after a producer bankruptcy and lower throughput fees.
- Operating cash flow declined to $642.5 million from $654.7 million. Investing outflow narrowed to $514.8 million from $1,040.7 million, largely because the prior-year period included the Springfield acquisition. Financing shifted to a $333.7 million outflow from a $432.6 million inflow.
- Q3 WES distributable cash flow declined 2% and Adjusted EBITDA declined 7%; nine-month distributable cash flow increased 11% and Adjusted EBITDA increased 4%.
Outlook, commentary, risks and unusual items
- WES reduced its 2017 capital-spending estimate, excluding acquisitions, to $800–$850 million from an initial $900 million–$1.0 billion; estimated maintenance spending was reduced to $50–$55 million from $60–$80 million. Management cited improved capital efficiency and spending shifted to later periods. No full-year earnings or cash-flow guidance is provided in the supplied filing text.
- Train VI at the DBM complex was expected to begin operations in Q4 2017. Produced-water systems at DBM began operating in Q2.
- WES declared a Q3 distribution of $0.905 per unit, up 7% year over year; WGP declared $0.5375 per unit, up 20%. WGP’s cash flows and ability to distribute are dependent on distributions from WES.
- WES paid Anadarko $37.3 million in May to settle early a deferred purchase-price obligation related to the 2015 DBJV acquisition. The March 2017 property exchange added the remaining 50% of DBJV in exchange for the Non-Operated Marcellus Interest and $155 million cash.
- Anadarko is a significant counterparty and customer: it was the only customer exceeding 10% of consolidated revenue. Anadarko-attributable throughput varied by asset type; WES disclosed continuing exposure to Anadarko’s creditworthiness, performance under contracts, and the $260 million note receivable.
- Following an April 2017 home explosion in Colorado, Anadarko undertook inspections and flowline work; state policy and rulemaking developments and an NTSB investigation could affect operations. WES also disclosed EPA/DOJ negotiations over alleged Clean Air Act leak-detection and repair noncompliance at two facilities; management considered fines or penalties above $100,000 reasonably likely for each matter, but outcomes were uncertain.
- WES had $143.3 million of unconditional capital-project payment commitments, mostly expected within 12 months. It received $52.9 million in final insurance proceeds related to the 2015 DBM incident during the first nine months of 2017. WES said a 10% commodity-price change was not expected to materially affect results over the next 12 months, based on its swap arrangements; swap performance by Anadarko remains a counterparty risk.
Most important facts for investors to verify
- Confirm the intended issuer: this is WGP’s 10-Q, not a filing under the Western Midstream Partners name.
- Assess recurring earnings and cash generation apart from the property-exchange and asset-sale gains, the Granger impairment, and insurance recoveries.
- Review the basis and sustainability of WES distributable cash flow and distribution coverage, including the effect of Anadarko swap contributions and other non-GAAP adjustments.
- Track debt, liquidity, the 2018 Notes refinancing, capital commitments, and whether revised 2017 capital-spending estimates are achieved.
- Monitor Anadarko concentration and credit exposure, Colorado regulatory developments, and the EPA/DOJ matters and potential penalties.