Business Context and Reporting Period
Company: Western Gas Equity Partners, LP (WGP)
Reporting Period: Fiscal year ended December 31, 2012
Structure: WGP is a Delaware master limited partnership (MLP) formed in September 2012 by Anadarko Petroleum Corporation. It holds a 2.0% general partner interest, 100% of the incentive distribution rights (IDRs), and a significant limited partner interest in Western Gas Partners, LP (WES). WGP consolidates WES's financial results.
Operations: WES operates midstream assets (gathering, processing, treating, and transporting natural gas, NGLs, and crude oil) in Texas, the Rocky Mountains, and the Mid-Continent. Approximately 76% of WES's throughput is attributable to Anadarko Petroleum Corporation.
Key Financial Metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Total Revenues | $849.4 million | $823.3 million |
| Operating Income | $147.5 million | $209.2 million |
| Net Income (Consolidated) | $93.2 million | $161.7 million |
| Net Income Attributable to WGP | $34.0 million | $75.6 million |
| Adjusted EBITDA (Attributable to WGP) | $327.7 million | $324.3 million |
| Distributable Cash Flow | $264.4 million | $282.0 million |
| Cash Flow from Operating Activities | $186.1 million | $273.2 million |
| Capital Expenditures | $459.3 million | $142.9 million |
| Total Debt (Long-term) | $1.17 billion | $669.2 million |
| Cash and Cash Equivalents | $422.6 million | $226.6 million |
Note: Net income attributable to WGP is significantly lower than consolidated net income due to the allocation of income to noncontrolling interests (public WES unitholders) and income tax expenses incurred prior to WGP's IPO in December 2012.
Material Changes vs. Prior Period
- Initial Public Offering (IPO): WGP completed its IPO on December 12, 2012, issuing 19.8 million common units at $22.00 per unit, generating net proceeds of $412.0 million. Proceeds were used to purchase WES common units and fund capital contributions.
- Acquisitions: WES acquired Mountain Gas Resources (MGR) assets in January 2012 and the remaining 24% interest in Chipeta Processing LLC in August 2012. These acquisitions increased throughput and asset base.
- Debt Issuance: WES issued $670.0 million in aggregate principal amount of 4.000% Senior Notes due 2022. Proceeds were used to repay the revolving credit facility and a note payable to Anadarko.
- Operating Results: Total revenues increased 3.2% year-over-year. However, operating income decreased 29.5% primarily due to a significant increase in general and administrative expenses (driven by non-cash equity-based compensation of $59.8 million) and higher interest expense from new debt issuances.
- Throughput: Total throughput attributable to WES increased 9% to 2,432 MMcf/d, driven by processing volume growth at Chipeta and MGR assets, partially offset by declines in gathering volumes at mature systems.
Guidance, Outlook, and Risks
- Capital Expenditure Outlook: WES estimates total capital expenditures for 2013 (excluding acquisitions) to be between $550 million and $600 million. Maintenance capital expenditures are expected to be 5% to 10% of total capital expenditures.
- Growth Projects: Key projects include the Brasada plant (South Texas, expected Q2 2013) and the Lancaster plant (Northeast Colorado, expected Q1 2014), both supported by long-term fee-based contracts with Anadarko.
- Distributions: WES raised its quarterly distribution to $0.52 per unit in Q4 2012. WGP declared its first quarterly distribution of $0.03587 per unit (prorated) for Q4 2012.
- Key Risks:
- Concentration Risk: Heavy reliance on Anadarko for the majority of throughput and revenues.
- Commodity Price Risk: While ~66% of gross margin is fee-based, ~34% is exposed to commodity prices (hedged via swaps with Anadarko).
- Regulatory Risk: Potential changes in FERC jurisdiction over gathering lines and increased pipeline safety regulations (2011 Pipeline Safety Act).
- Capital Markets: Dependence on external financing for growth due to the requirement to distribute all available cash.
Investor Verification Checklist
- Noncontrolling Interest Allocation: Verify the impact of the 51.8% noncontrolling interest in WES on WGP's net income and distributable cash flow.
- Equity-Based Compensation: Review the $59.8 million non-cash compensation expense in 2012 and its effect on GAAP net income versus Adjusted EBITDA.
- Debt Covenants: Confirm compliance with the 5.0x leverage ratio covenant under the WES Revolving Credit Facility and Senior Notes indentures.
- Acquisition Accounting: Understand that assets acquired from Anadarko are recorded at historic carrying value, not fair value, which may impact future impairment testing.
- Commodity Hedging: Assess the expiration dates of commodity price swap agreements with Anadarko (expiring through 2016) and the risk of renewal terms.