Western Gas Equity Partners, LP (WGP) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited, compared with Q1 2016. The filing is by Western Gas Equity Partners, LP, which consolidates Western Gas Partners, LP (WES). WGP has no independent operations or material assets beyond its interests in WES.
Financial results and liquidity
Amounts below are in millions of dollars except per-unit data. WGP consolidated results are shown unless identified as WES measures.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue and other | $516.2 | $383.1 |
| Operating income | $137.6 | $152.2 |
| Net income attributable to WGP | $75.9 | $81.8 |
| Net income per WGP common unit | $0.35 | $0.32 |
| Net cash from operating activities | $191.7 | $235.9 |
- Revenue increased 35%, reflecting higher natural gas and NGL sales and gathering, processing and transportation revenue. Cost of product rose to $189.4 million from $76.5 million, reflecting increased commodity volumes and sales.
- Reported operating expenses included $164.7 million of impairment charges, principally a $158.8 million Granger complex impairment after a producer’s bankruptcy reduced the expected throughput fee. The comparable impairment charge in Q1 2016 was $6.5 million.
- Operating results also included a $125.4 million gain on the DBJV property exchange, partly offset in the divestiture and other line by a $5.7 million downward revision to the DBM property-insurance recovery estimate. WES recognized $5.8 million of business-interruption insurance proceeds as income.
- WES non-GAAP measures: adjusted gross margin was $331.6 million, up 7%; adjusted EBITDA was $255.0 million, up 10%; distributable cash flow was $216.5 million, up 13%. WES’s distribution coverage ratio was 1.15x. These measures are supplemental and are not GAAP substitutes.
- At March 31, WGP reported cash of $122.7 million, current assets of $286.2 million and current liabilities of $280.2 million. WES separately reported working capital of $5.6 million.
- Total debt principal was $3.148 billion ($3.120 billion carrying value). WES had $1.195 billion available under its revolving credit facility; WGP had $222 million available under its revolver and $30 million under its working-capital facility. WGP and WES reported covenant compliance.
- Operating cash flow was below the prior-year period; cash fell by $236.4 million to $122.7 million. Investing outflows included $155.3 million for the property exchange and $124.6 million of capital expenditures, net of construction contributions. Financing outflows included distributions.
Material changes and operating developments
- On March 17, WES acquired the remaining 50% of the DBJV system, previously holding 50% and operating it. Consideration was the 33.75% non-operated Liberty and Rome Marcellus interests plus $155 million cash. The exchange was recorded as a nonmonetary transaction and generated a $125.4 million net gain.
- WES-attributable natural gas throughput rose 4% to 3,938 MMcf/d, while crude/NGL throughput declined 8% to 169 MBbl/d. Higher DBM and DJ Basin processing volumes contributed to natural gas growth; lower Springfield and other gathering volumes weighed on throughput.
- WES’s first-quarter distribution was declared at $0.875 per unit, up 2% from Q4 2016 and 7% year over year. WGP declared $0.49125 per unit, up 6% sequentially and 16% year over year. Both were payable in May 2017.
- Half of WES’s Series A Preferred units converted into common units on March 1; the remainder was scheduled to convert in May. Anadarko extended the conversion date of WES Class C units to March 1, 2020.
Outlook, risks and contingencies
- WES expected two West Texas produced-water disposal systems to enter service in Q2 2017. The filing provides no formal earnings or distribution guidance. Management stated that available liquidity sources were expected to meet short- and long-term requirements, while noting WES expects to rely on external financing for expansion spending and acquisitions.
- WES had $36.9 million of unconditional capital-project payment commitments, mostly expected within 12 months. WES’s board-approved estimated maintenance capital expenditure level for 2017 was $18 million per quarter.
- WGP depends entirely on WES distributions. Anadarko was the only customer contributing more than 10% of consolidated revenue; it also represents a significant share of throughput, and WES has a $260 million note receivable from Anadarko. The filing highlights counterparty, production, commodity, financing, capital-project and distribution risks.
- WES was negotiating with the EPA over alleged Clean Air Act leak-detection and repair noncompliance at its Granger facility. Management considered a fine or penalty exceeding $100,000 reasonably likely, but could not predict the outcome. Management reported no other known proceeding expected to materially adversely affect financial condition, results or cash flows.
- Management reported effective disclosure controls as of March 31, 2017, and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the economics and valuation assumptions behind the DBJV–Marcellus property exchange and its reported gain.
- Assess the Granger impairment, including producer exposure, revised throughput-fee assumptions and any further asset impairment risk.
- Reconcile distributable cash flow and coverage to declared distributions, noting preferred-unit and Class C unit terms and that DCF is non-GAAP.
- Review liquidity and funding needs against debt maturities, committed capital spending and expected reliance on external financing.
- Monitor Anadarko’s creditworthiness and operating activity, the DBM insurance recovery, and the outcome and potential cost of the EPA matter.