Business Context and Reporting Period
This is Western Gas Equity Partners, LP’s (WGP) Form 10-K for the fiscal year ended December 31, 2015, filed February 25, 2016. The filing is for WGP—not Western Midstream Partners, LP, the company name in the request. WGP’s only cash-generating assets are its interests in Western Gas Partners, LP (WES); WES’s midstream operations are consolidated in WGP’s financial statements. Unless otherwise noted, financial figures below are for WGP on a consolidated basis.
Financial and Operating Metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue and other | $1,561.4 million | $1,382.9 million |
| Operating income | $34.4 million | $475.3 million |
| Net income attributable to WGP | $87.9 million | $239.2 million |
| Net income per common unit | $0.39 | $1.02 |
| Cash from operating activities | $666.8 million | $576.4 million |
| Cash and cash equivalents at year-end | $99.7 million | $67.2 million |
| Long-term debt, carrying value | $2,707.4 million | $2,423.0 million |
| Total assets | $6,709.4 million | $6,955.2 million |
| WGP distributions per unit | $1.49125 | $1.12500 |
WES reported non-GAAP Adjusted EBITDA of $758.0 million and distributable cash flow of $636.4 million, up 12% and 13%, respectively. Its reported distribution coverage ratio was 1.11x. WES natural-gas throughput attributable to WES averaged 3,854 MMcf/d, up 8%; crude/NGL throughput averaged 138 MBbl/d, up 19%. WES’s adjusted gross margin per Mcf was $0.69, up 3%. These are WES measures, not WGP standalone measures.
WES had $300 million drawn and $893.6 million available under its $1.2 billion revolving credit facility, plus $6.4 million in letters of credit. WGP had no borrowings under its separate $30 million working-capital facility. WES reported $87.6 million working capital. WGP’s consolidated current assets of $289.0 million less current liabilities of $199.3 million imply $89.7 million of working capital.
Material Changes Versus the Prior Comparable Period
- Revenue rose 13%, but operating income fell sharply and WGP reported a net loss before noncontrolling interests. The principal driver was $514.1 million of impairment expense, versus $3.1 million in 2014; this included impairments of $280.2 million at Red Desert and $220.9 million at Hilight, primarily reflecting low commodity prices and reduced expected throughput.
- Net income attributable to WGP declined 63%. Cash from operations increased 16%; WES Adjusted EBITDA and distributable cash flow increased 12% and 13%, respectively.
- WES acquired a 50% interest in the DBJV gathering system from Anadarko, with an estimated $282.8 million payment due in 2020 (present value $188.7 million at year-end). WES sold the Dew and Pinnacle systems for net proceeds of $145.6 million and recorded a $77.3 million gain.
- WES completed Lancaster Train II in the DJ Basin and increased its quarterly distribution to $0.80 per unit for Q4 2015. WGP’s Q4 distribution was $0.40375 per unit.
Outlook, Risks, Contingencies and Unusual Items
- Outlook and capital spending: WES estimated 2016 capital expenditures, excluding acquisitions, of $450 million to $490 million; maintenance capital expenditures were expected to equal 7% to 10% of Adjusted EBITDA. Planned work included DBM processing trains and a residue pipeline expansion. Management expected many customers, including Anadarko, to reduce 2016 capital spending amid low oil prices.
- DBM incident: A December 3, 2015 fire and explosion damaged liquid-handling and amine-treatment facilities and affected Trains II and III. WES recorded a $68.8 million gross loss and a $48.5 million insurance claim receivable; the filing also reports a $20.3 million net loss related to the event. Insurance claims were in process. Management expected Train III to resume limited deliveries in April 2016 and full service by the end of Q2; Train II was expected back by year-end 2016.
- Credit and commodity exposure: Moody’s downgraded WES to Ba1 with a negative outlook in February 2016; S&P affirmed WES’s rating, while changing Anadarko’s outlook to negative. WES’s above-market swaps with Anadarko, which contributed $18.4 million to 2015 distributable cash flow, were scheduled to expire at year-end 2016. Renewal on comparable terms was uncertain.
- Concentration and liquidity risks: Anadarko accounted for 66% of WES revenue and 48% of throughput on the stated measures; its production, creditworthiness and capital-spending decisions could affect WES’s cash flows and distributions. WES also faced risks from low commodity prices, lower drilling activity, future impairments, leverage, capital-market access, regulation, environmental liabilities and operational interruptions.
- Reporting controls: Management and KPMG identified a material weakness in internal control over financial reporting involving the application of impairment accounting. The error led to restatement of unaudited 2015 interim financial statements. KPMG issued an adverse opinion on control effectiveness, but an unqualified opinion on the consolidated financial statements. Management planned training and process remediation by the end of Q2 2016.
- Legal and subsequent events: WES was negotiating with the EPA over alleged Clean Air Act leak-detection noncompliance at Granger; management considered a penalty above $100,000 reasonably likely. A separate DCP dispute was settled in January 2016 and dismissed in February with no cash impact to WES. In February 2016, WES agreed to acquire Anadarko’s Springfield interest for $750 million, subject to approvals, using preferred units, common units and revolving-credit borrowings.
Most Important Facts for Investors to Verify
- Confirm the issuer and security: the supplied filing is WGP’s 2015 10-K, while the request names Western Midstream Partners.
- Review the impairment calculations, interim-period restatements and remediation evidence for the disclosed material weakness.
- Track DBM repair progress, insurance recoveries and any change to the stated restart timetable.
- Assess WES debt, rating developments, facility availability, covenant headroom and the 2020 DBJV payment estimate.
- Evaluate distribution sustainability against distributable cash flow and coverage, including dependence on Anadarko and swaps expiring in 2016.
- Verify the final terms, funding and closing status of the announced Springfield acquisition, and monitor the EPA matter and other environmental exposures.