Business context and reporting period
Western Gas Equity Partners, LP (WGP) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. WGP’s principal assets are its interests in Western Gas Partners, LP (WES), whose midstream operations gather, process, treat and transport natural gas, NGLs and crude oil. The filing is by Western Gas Equity Partners, not an entity named Western Midstream Partners.
Comparative 2015 figures were recast to include the Springfield interest as if owned for all periods; pre-acquisition results are based on Anadarko’s historical accounts. WGP’s consolidated results include WES and substantial noncontrolling interests.
Financial and operating metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue and other | $428.7 million | $466.0 million | $811.8 million | $903.0 million |
| Operating income | $175.3 million | $169.9 million | $327.5 million | $46.7 million |
| Net income attributable to WGP | $88.9 million | $87.7 million | $170.7 million | $71.3 million |
| Net income per WGP common unit | $0.41 | $0.31 | $0.73 | $0.13 |
| Operating cash flow | Not separately stated here | Not separately stated here | $391.8 million | $371.2 million |
Revenue fell about 8% for the quarter and 10% for the six-month period. WES’s non-GAAP adjusted gross margin was $329.3 million for Q2, up 1%, and $640.5 million for six months, up 2%. Adjusted EBITDA was $250.6 million for Q2, up 2%, and $481.7 million for six months, up 3%. Distributable cash flow declined 6% to $199.3 million in Q2 and 2% to $391.3 million for six months. WES reported distribution coverage of 1.22x for the six-month period.
Operating throughput attributable to WES declined 12% for natural gas in Q2 to 3,870 MMcf/d; crude/NGL throughput rose 1% to 187 MBbl/d. Adjusted gross margin per Mcf for natural gas rose 15% to $0.84; crude/NGL margin per Bbl rose 3% to $2.03.
At June 30, cash was $159.7 million, working capital was $143.7 million, and total assets were $7.51 billion. Long-term debt had $2.988 billion principal and $2.960 billion carrying value, versus $2.720 billion principal at year-end 2015. WES had $655.1 million available under its revolver; WGP had $222.0 million available under its revolver and $30.0 million under its working-capital facility. Both WGP and WES reported covenant compliance.
For the first six months, capital expenditures were $255.9 million and acquisitions from affiliates were $715.2 million. Net cash used in investing activities was $952.8 million; financing activities provided $621.0 million. The filing reports WGP cash increased by $60.0 million to $159.7 million.
Material changes versus the prior comparable period
- WES acquired a 50.1% interest in the Springfield system from Anadarko for $750.0 million, funded with cash and WES units. WES issued Series A preferred units and borrowed under its revolver to finance the transaction.
- Lower commodity prices and volumes reduced natural gas and NGL sales; six-month natural gas sales fell 38% and NGL sales fell 36%. Gathering, processing and transportation revenue increased, partly reflecting DJ Basin growth and higher processing fees.
- Natural gas throughput weakened, primarily due to asset divestitures, production declines and the DBM outage. Cost of product fell substantially, while adjusted gross margin and EBITDA increased modestly.
- Six-month 2015 results included a $264.4 million Red Desert impairment; 2016 impairments were $8.9 million, including a $6.1 million Newcastle impairment tied to lower expected cash flows.
- WES’s quarterly distribution increased to $0.830 per unit, up 11% year over year; WGP’s increased to $0.43375 per unit, up 19% year over year.
Outlook, risks and unusual items
- WES raised its 2016 estimated capital spending range, excluding acquisitions, to $490 million–$530 million. Train IV at the DBM complex began operating in May; Train V was expected to start in the second half of 2016. Train VI timing remained under evaluation, with the earliest anticipated start in Q1 2018.
- The December 2015 fire and explosion at DBM impaired processing capacity. Train III returned to full service in May 2016; Train II was expected back by year-end 2016. The company had received $5.5 million of insurance proceeds by June 30 and a further $29.1 million after quarter-end, expected to be recorded in Q3.
- The estimated present value of the DBJV deferred purchase-price obligation fell to $29.2 million from $174.3 million at acquisition, reflecting lower estimated 2018–2019 earnings and higher forecast capital spending. The revision reduced interest expense and affected reported results.
- WES depends materially on Anadarko for throughput, revenues, commodity transactions and a $260 million note receivable. The filing identifies counterparty concentration, producer activity, commodity markets, capital access, interest rates, operational incidents and regulatory changes as risks. Commodity swaps with Anadarko were scheduled to expire in December 2016.
- Pipeline safety legislation and proposed regulations could increase compliance costs. An EPA matter concerning alleged leak-detection and repair noncompliance at the Granger facility was under negotiation; management considered a penalty above $100,000 reasonably likely.
- No specific earnings guidance was provided. Management said available liquidity and operating cash flows were expected to support near-term needs, while expansion projects and acquisitions may require external financing. WES issued $500 million of 4.650% notes due 2026 in July and used proceeds primarily to repay revolver borrowings.
- Management stated that disclosure controls were effective and that the previously identified material weakness in impairment controls had been remediated by June 30, 2016.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this filing is for Western Gas Equity Partners, LP (WGP), and its consolidated statements include WES.
- Review the recast Springfield comparatives and distinguish consolidated results from income attributable to WGP and from WES non-GAAP measures.
- Track DBM outage recovery, Train II’s return to service, and the timing and accounting of insurance proceeds.
- Assess the assumptions behind the sharply reduced DBJV deferred purchase-price estimate and its potential future cash payment.
- Monitor Anadarko concentration, swap arrangements expiring in December 2016, WES debt and revolver use, Series A preferred distributions and conversion/dilution terms.
- Compare the raised 2016 capital-spending estimate with project execution, cash generation, distribution coverage and future financing needs.