Western Midstream Partners, LP — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019. Amounts are in U.S. dollars unless noted. The filing is a combined report for Western Midstream Partners, LP (WES) and its consolidated subsidiary, Western Midstream Operating, LP (WES Operating).
Business context and reporting period
WES provides natural gas gathering, processing and transportation; crude oil and NGL services; and produced-water gathering and disposal. On February 28, 2019, WES completed its merger with WES Operating, changed its name from Western Gas Equity Partners, LP, and began trading under the WES ticker. The quarter also included the acquisition of Anadarko Midstream Assets (AMA). Because AMA was acquired from an affiliate under common control, prior-period results were recast to include AMA; those historical results may not represent what WES would have reported had it owned the assets then.
Financial and operating metrics
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Total revenues and other | $671.9 million | $501.1 million | Up 34% |
| Operating income | $318.9 million | $224.9 million | Up 42% |
| Net income | $212.0 million | $181.0 million | Up 17% |
| Net income attributable to WES | $118.7 million | $131.5 million | Down; comparison reflects merger-related ownership and allocation changes |
| Net income per WES common unit | $0.30 | $0.46 | Weighted-average units increased to 299.6 million from 218.9 million |
| Adjusted gross margin | $587.7 million | $418.8 million | Up 40%; non-GAAP |
| Adjusted EBITDA | $428.3 million | $312.1 million | Up 37%; non-GAAP |
| Distributable cash flow | $340.2 million | $264.1 million | Up 29%; non-GAAP |
| Operating cash flow | $343.1 million | $300.2 million | Up |
| Cash and cash equivalents | $100.0 million | $92.1 million at Dec. 31, 2018 | Quarter-end balance |
| Total debt, carrying value | $7.2 billion | $5.2 billion at Dec. 31, 2018 | Includes $2.0 billion short-term 364-day facility |
| Distribution per unit | $0.61000 | $0.56875 | Up 7% year over year; Q1 distribution declared at $276.3 million |
Natural gas throughput attributable to WES was 4,199 MMcf/d, up 13%. Crude oil, NGL and produced-water throughput attributable to WES was 1,102 MBbl/d, up 123%, substantially reflecting acquired and recently commissioned assets. Adjusted gross margin per Mcf for natural gas assets rose 9% to $1.09; per Bbl for crude oil, NGL and produced-water assets declined 5% to $1.77.
Material changes and notable items
- AMA acquisition and related transactions involved approximately $2.0 billion of cash acquisition outlays and equity consideration. WES also acquired a 30% interest in Red Bluff Express for an initial net investment of $92.5 million.
- Investing cash outflow was $2.516 billion, including acquisitions and $386.1 million of capital expenditures. Financing cash inflow was $2.181 billion, including borrowings and $451.6 million of net contributions from Anadarko.
- Operating and maintenance expense increased 48% to $142.8 million, and depreciation and amortization increased 34% to $113.9 million. Product sales declined 14% to $72.1 million, partly reflecting lower realized prices and volumes.
- Interest expense rose 73% to $65.9 million, primarily due to debt issued in 2018 and higher RCF borrowings. A noncash $35.6 million loss on interest-rate swaps contributed to other expense; WES does not apply hedge accounting.
- Cash distributions exceeded the Partnership’s reported distributable cash flow by a coverage ratio of 1.23x, as calculated by management. The filing cautions that distributable cash flow is non-GAAP and is not necessarily cash available for distribution.
Liquidity, outlook, risks and contingencies
- WES reported a $2.2 billion working-capital deficit, primarily due to the $2.0 billion 364-day facility used to fund the merger cash consideration and transaction costs. It had $1.4 billion available under its $2.0 billion revolving credit facility, with $640 million drawn; the RCF matures in February 2024.
- The 364-day facility matures in February 2020. Management stated its intent to refinance it before maturity. WES said it believes operating cash flow and other available sources should meet short- and long-term needs, while noting expected reliance on external financing for expansion spending and acquisitions.
- No formal financial guidance was provided in the supplied filing text. The Board declared a $0.61-per-unit Q1 distribution, payable May 14, 2019. Management cited increased throughput and new facilities as contributors to growth.
- On April 11, 2019, after quarter-end, Anadarko agreed to be acquired by Chevron, subject to shareholder, regulatory and other closing conditions; Anadarko expected a second-half 2019 close. WES identified potential conflicts of interest, business uncertainty, and dependence on the future owner’s development plans as risks.
- Anadarko was the only customer contributing more than 10% of consolidated revenue. It accounted for 83% of crude oil, NGL and produced-water throughput (excluding equity investments), and 41% of natural-gas processing throughput. WES highlighted counterparty and concentration exposure.
- Colorado legislation enacted April 16, 2019 may increase operating constraints and reduce demand for services in the state. WES also disclosed negotiations over alleged Clean Air Act leak-detection compliance at facilities in Colorado and Wyoming; management considered fines or penalties above $100,000 reasonably likely in each matter, but could not predict outcomes.
- Management reported compliance with debt covenants and effective disclosure controls. Commodity-price sensitivity was described as limited; variable-rate debt, interest-rate swaps, customer credit, operating disruptions, environmental liabilities and capital-project commitments remain risks.
Important facts for investors to verify
- How the merger, AMA acquisition and common-control recasting affect comparability, ownership allocations, and per-unit earnings.
- The plan and terms for refinancing the $2.0 billion facility due February 2020, and the effect of refinancing costs and interest rates on leverage and distributions.
- Whether acquired and new facilities sustain throughput and margins, particularly as crude-oil, NGL and produced-water throughput grows.
- Distribution coverage and cash available after capital spending, debt service and noncontrolling-interest distributions; assess non-GAAP measures alongside GAAP cash flow.
- The Chevron-Anadarko transaction’s completion and resulting changes to governance, customer relationships, conflicts of interest and development activity.
- Developments in Colorado regulation, the disclosed environmental matters, and Anadarko’s ability to meet its customer, note-receivable and other affiliate obligations.