Business context and reporting period
Western Gas Equity Partners, LP (WGP) filed this Form 10-Q for the quarter ended September 30, 2013. The filing describes WGP as a holding partnership whose principal assets are its interests in Western Gas Partners, LP (WES), a midstream operator. WGP itself has no independent operations of significance; its cash generation and distributions depend on WES.
The supplied filing is for Western Gas Equity Partners, LP, not a registrant named Western Midstream Partners, LP. Prior-period financials were recast to include the Non-Operated Marcellus Interest; acquisition activity and the recast affect comparisons.
Financial results and key metrics
Unless stated otherwise, amounts are in millions of dollars. Consolidated WGP results:
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $278.0 | $234.7 | $762.9 | $679.7 |
| Operating income | $89.5 | $61.3 | $221.5 | $187.8 |
| Net income | $81.1 | $40.9 | $193.9 | $126.3 |
| Net income attributable to WGP | $44.3 | $19.3 | $111.4 | $55.0 |
| Net income per WGP common unit | $0.20 | Not clearly stated | $0.49 | Not clearly stated |
- Revenue and operations: WES revenue increased 18% in Q3 and 12% for the first nine months. WES-attributable throughput rose 16% in Q3 and 13% year to date. Gathering, processing and transportation revenue increased, supported by Marcellus interests, higher volumes in Wattenberg and Chipeta, and the Brasada plant start-up.
- Profitability: WES gross margin was $184.5 million in Q3 (+27%) and $492.8 million for nine months (+16%). WES-attributable Adjusted EBITDA was $125.2 million in Q3 (+28%) and $328.7 million for nine months (+17%). These are non-GAAP measures. WES distributable cash flow was $105.9 million in Q3 (+42%) and $274.8 million for nine months (+20%); Q3 distribution coverage was 1.26x.
- Cash flow: Consolidated WGP operating cash flow was $286.1 million for nine months, versus $281.6 million. WES operating cash flow was $289.1 million, down from $343.6 million, largely because of working-capital changes. WGP investing cash outflow was $1,226.4 million, primarily for acquisitions and capital projects; financing cash inflow was $574.9 million.
- Debt and liquidity: September 30 cash was $57.1 million. Long-term debt carrying value was $1,518.1 million, up from $1,168.3 million at year-end 2012. WES had $100 million drawn on its $800 million revolver and $687.2 million available after letters of credit. WES reported a $55 million working-capital deficit; WGP’s consolidated current assets of $141.7 million and current liabilities of $178.1 million imply a $36.4 million deficit.
- Distributions: WGP declared $0.21375 per unit for Q3, an 8% increase from Q2. WES declared $0.58 per unit, up 4% from Q2 and 16% year over year. Both distributions were payable after quarter-end.
Material changes versus the prior comparable period
- WES-attributable throughput and gross margin increased, while operating and maintenance costs and depreciation also rose. Depreciation, amortization and impairments increased 32% for Q3 and 28% for the first nine months.
- WGP net income attributable to partners more than doubled in Q3 and approximately doubled year to date. Lower income-tax expense contributed to the comparison: the 2012 periods included taxes on pre-IPO income, while WGP became a publicly traded partnership in December 2012 and generally is not subject to federal and state income taxes, except Texas margin tax.
- General and administrative expense declined substantially year over year, principally because WGP’s December 2012 IPO ended the prior incentive plan and its associated non-cash compensation charges.
- WES completed or acquired interests in Marcellus gathering systems, the Mont Belvieu fractionation joint venture and the OTTCO pipeline, and issued equity and debt to fund growth and repay revolver borrowings.
Outlook, risks and unusual items
- WES raised its 2013 capital-expenditure estimate, excluding acquisitions, to $670–$740 million from its original $550–$600 million range. The increase reflects Lancaster, Wattenberg and Hilight expansion spending. Lancaster was under construction, with an announced 300 MMcf/d expansion; Brasada’s 200 MMcf/d plant began operating in June 2013.
- WES expected to rely on external debt and equity financing for expansion and acquisitions, consistent with its distribution policy. Management stated that available liquidity and expected operating cash flows were expected to meet short- and long-term funding needs.
- At September 30, WES had about $61.3 million of unconditional capital-project payment obligations, mostly due within twelve months, and a further estimated $13.6 million commitment for its share of remaining Mont Belvieu project costs.
- Key risks include dependence on Anadarko for a substantial majority of throughput and revenue, counterparty and note-receivable credit risk, reliance on continued WES distributions to fund WGP distributions, commodity and operating risks, and the possibility that construction projects are delayed, exceed budget or fail to attract expected volumes. WES reported that a 10% change in natural-gas or NGL prices was not expected to materially affect operating income, financial condition or cash flows over the next twelve months, excluding imbalance effects.
- A DCP Midstream lawsuit involving Anadarko and a WES subsidiary remained in discovery, with trial scheduled for April 2014; management did not expect a material effect and cited contractual indemnities. Separately, a WES subsidiary agreed to a Colorado environmental-permit consent order and an approximately $125,000 penalty in July 2013.
- WES recognized a $1.0 million impairment in Q2, primarily related to capital projects canceled by the third-party operator of the Non-Operated Marcellus Interest. Management also disclosed a non-material correction to 2012 cash-flow classification: $35.7 million was reclassified from operating expenses to capital projects.
Important facts for investors to verify
- Confirm the registrant and security being analyzed: this filing is for Western Gas Equity Partners, LP (WGP), with substantial financial and operating data relating to WES.
- Review how the Marcellus recast, acquisition timing, noncontrolling interests and pre-IPO taxes affect year-over-year comparability.
- Assess debt growth, revolver availability, capital spending and the funding required for acquisitions and construction against distributable cash flow and declared distributions.
- Evaluate Anadarko concentration, including customer exposure and the $260 million note receivable, as well as the terms and effectiveness of affiliate indemnities and commodity swaps.
- Track the revised 2013 capital-spending range, project completion and utilization, the DCP litigation, and the stated distribution coverage; distributable cash flow is a non-GAAP measure and is not itself cash available for distribution.