Western Gas Equity Partners, LP — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; unaudited. The supplied filing is for Western Gas Equity Partners, LP (WGP), not a later-named Western Midstream entity. WGP’s results consolidate Western Gas Partners, LP (WES), which owns and operates the midstream business; WGP’s cash generation depends on distributions from WES.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue and other | $385.1 million | $357.5 million | $1,190.1 million | $1,016.2 million |
| Operating income | $191.9 million | $132.7 million | $435.0 million | $358.3 million |
| Net income attributable to WGP | $88.3 million | $66.4 million | $213.1 million | $179.0 million |
| Net income per common unit | $0.40 | $0.27 | $0.97 | $0.76 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $496.8 million | $438.3 million |
- Q3 revenue rose about 8% year over year; nine-month revenue rose about 17%. Q3 WGP-attributable net income increased about 33%; nine-month income increased about 19%.
- Q3 operating income included a $77.2 million net gain from the sale of the Dew and Pinnacle systems. The gain materially boosts reported operating income and is not a recurring operating result.
- WES non-GAAP measures: Q3 adjusted EBITDA was $182.9 million and distributable cash flow (DCF) was $152.8 million; for nine months, adjusted EBITDA was $569.2 million and DCF was $474.1 million. WES’s DCF coverage ratio was 1.05x for Q3 and 1.13x for the nine-month period. Management cautions that DCF is not equivalent to cash available for distribution.
Liquidity, debt and capital
- At September 30, WGP consolidated cash was $74.8 million, total assets were $7.17 billion, current assets were $236.8 million and current liabilities were $223.0 million. WES reported $12.3 million of working capital in MD&A.
- Long-term debt carrying value was $2.59 billion, including $180 million drawn on WES’s revolving credit facility. WES reported $1.0 billion available under that facility, plus $30 million available under WGP’s working-capital facility; both entities reported covenant compliance.
- Nine-month capital expenditures were $473.4 million, while operating cash flow was $496.8 million. Cash distributions to WGP unitholders were $223.0 million; distributions to WES noncontrolling-interest holders were $171.7 million.
- WES issued $500 million of 3.950% senior notes due 2025, using net proceeds to repay revolving-credit borrowings. WES’s debt principal totaled $2.60 billion at quarter-end.
Material changes and operating developments
- WES acquired Anadarko’s 50% interest in the DBJV gathering system in March 2015. Consideration is a cash payment due in 2020, estimated at $282.8 million; its recorded present value was $184.2 million at September 30.
- WES sold Dew and Pinnacle in July for net proceeds of $146.7 million. The sale reduced gathering throughput but produced the reported divestiture gain.
- Natural-gas throughput attributable to WES rose 7% in Q3 and 11% for nine months; crude/NGL throughput rose 5% and 23%, respectively. Processing volumes increased, while gathering volumes declined partly due to the divestiture and production declines in certain areas.
- Lancaster Train II, a 300 MMcf/d processing plant, began operations in June. Trains IV and V at the DBM complex were expected to start in 2016, with Train VI expected in mid-2017.
- The filing recast historical results to include DBJV as a common-control acquisition. It also reclassified electricity reimbursements from reduced operating expense to revenue; management said the correction did not affect net income or cash flow and was not material.
Outlook, risks and contingencies
- WES reduced its 2015 estimated capital spending outlook (excluding acquisitions) to $580–$620 million including equity investments, from a prior $675–$745 million range. Estimated maintenance capital expenditures were revised to 7%–9% of adjusted EBITDA from 8%–11%.
- WES declared a Q3 distribution of $0.775 per unit, up 3% sequentially and 15% year over year; WGP declared $0.38125 per unit, up 5% sequentially and 31% year over year. Both were payable in November 2015. The filing provides no broader earnings or distribution guidance.
- WGP and WES are substantially dependent on Anadarko for volumes, transactions, services, hedging and other support. Anadarko was the only customer accounting for more than 10% of consolidated revenue; management also highlighted Anadarko counterparty and note-receivable exposure.
- Commodity swaps with Anadarko covered a substantial majority of relevant price exposure, but some agreements expired without renewal and extensions were scheduled only through December 2015 for the DJ Basin and Hugoton. Renewal on similar terms was not assured.
- WES had $42.0 million of unconditional capital-project payment commitments, mostly expected within twelve months. Management said a Colorado gathering/processing dispute was not expected to materially affect WGP and cited contractual indemnities; trial was scheduled for June 2016.
- WES was negotiating with the EPA over alleged Clean Air Act leak-detection and repair noncompliance at its Granger facility. Management said a fine or penalty above $100,000 was reasonably likely, but the outcome was uncertain.
- Management highlighted potential changes to partnership tax rules as a risk. The filing reports effective disclosure controls and no material quarter-end change in internal control over financial reporting.
Investor verification priorities
- Separate recurring performance from the $77.2 million divestiture gain, and assess the effects of acquisitions, divestitures and historical recasting on comparisons.
- Review WES’s DCF definition and reconciliation, 1.05x quarterly coverage, and the role of above-market Anadarko swap contributions in reported DCF.
- Verify the 2020 DBJV deferred-payment estimate, which depends on projected earnings and capital spending, and monitor the recorded obligation’s accretion.
- Assess Anadarko concentration and ability to meet its operating, payment, note-receivable and commodity-swap obligations.
- Track capital-spending execution, project start-up timing, debt and revolver usage, distributions, and developments in the EPA matter and DCP litigation.