Western Gas Equity Partners, LP (WGP) — 2013 Form 10-K
Entity and period: The supplied filing is WGP’s annual report for the fiscal year ended December 31, 2013—not a quarterly filing. The metadata’s “Western Midstream Partners, LP” does not match the registrant named in this 10-K. WGP consolidates Western Gas Partners, LP (WES); the operating metrics below are identified by entity where relevant.
Business context
WGP’s cash-generating assets are its interests in WES: a 2.0% general partner interest, all WES incentive distribution rights, and a substantial limited partner interest. At year-end, WGP held 49.3 million WES common units, representing 41.2%. WES gathers, processes, treats and transports natural gas, NGLs, condensate and crude oil across several U.S. regions. Anadarko owned 91.0% of WGP and was WES’s principal customer and affiliate.
Financial and operating performance
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| WGP consolidated revenue | $1,053.5 million | $910.6 million | Up 16% |
| WGP operating income | $317.9 million | $194.4 million | Up 64% |
| WGP net income attributable to WGP | $160.2 million | $61.4 million | Up from a year affected by IPO-related and other items |
| WGP diluted earnings per unit | $0.71 | $0.01 | 2012 reflects only the post-IPO period and is not directly comparable |
| WGP operating cash flow | $412.3 million | $277.5 million | Up 49% |
| WGP investing cash flow | $(1,416.1) million | $(1,249.9) million | Includes acquisitions and capital spending |
| WGP financing cash flow | $694.3 million | $1,168.5 million | Included debt and equity financing and distributions |
| Year-end cash | $113.1 million | $422.6 million | Down, largely alongside significant investment activity |
| WES gross margin | $689.2 million | $574.5 million | Up 20% |
| WES Adjusted EBITDA | $457.8 million | $377.9 million | Up 21% |
| WES distributable cash flow | $380.5 million | $309.9 million | Up 23%; coverage ratio was 1.17x |
| WES throughput attributable to WES | 3,200 MMcf/d | 2,795 MMcf/d | Up 14% |
Debt and liquidity: WES reported $1.418 billion of long-term debt carrying value at year-end, comprising notes due 2018, 2021 and 2022. It had no borrowings on its $800 million revolving facility and $787.2 million available after letters of credit. WES reported $4.4 million of working capital. Separately, WGP had no borrowings under its $30 million working-capital facility. WGP consolidated current assets exceeded current liabilities by approximately $16.3 million.
Distributions: WGP declared $0.23125 per unit for 2013’s fourth quarter, an 8% increase from the third quarter; 2013 distributions totaled $0.82125 per unit. WES’s fourth-quarter distribution was $0.60 per unit, up 3% sequentially. These are distributions of separate partnerships.
Material changes versus the prior comparable period
- Revenue, operating income, operating cash flow and WES throughput increased. Growth reflected higher volumes and contributions from acquisitions and projects, including the Marcellus interests, Brasada facility and Mont Belvieu fractionation venture.
- WES completed acquisitions of Marcellus gathering interests, a 25% interest in the Mont Belvieu JV and OTTCO. It also issued public equity and $250 million of 2.6% notes due 2018; proceeds were used in part to repay revolving-credit borrowings.
- WES’s 2013 net income comparison is affected by 2012’s $69.9 million decrease in noncash compensation expense in 2013, after the incentive plan was settled in connection with WGP’s IPO. WGP’s 2012 per-unit results cover only the post-IPO period. Historical results may also reflect common-control accounting and acquisition-related recasting.
- WGP cash declined as investing outflows remained substantial. WES’s capital expenditures were $645.9 million in 2013, primarily expansion spending; acquisition cash outlays were also significant.
Outlook, risks and unusual items
- WES estimated 2014 capital expenditures, excluding acquisitions, of $614–$664 million, with maintenance capital expenditures expected to be 9%–11% of the total. Planned work included Lancaster expansion and well connections in the DJ Basin and Marcellus.
- The first Lancaster train, with 300 MMcf/d capacity, was expected to start service in Q1 2014 and had a 10-year fee-based throughput guarantee for 270 MMcf/d. A second 300 MMcf/d train was expected in Q2 2015, with a 10-year guarantee for 200 MMcf/d.
- After year-end, WES entered a five-year $1.2 billion revolving credit agreement, expandable to $1.5 billion. It also announced a $375 million acquisition of interests in Texas Express and Front Range pipeline entities, expected to close in March 2014, with planned funding primarily from revolver borrowings.
- Revenue and volumes are concentrated in Anadarko: 79% of WES revenue and 57% of specified gathering, transportation and treating throughput were attributable to Anadarko in 2013. Management reported 99% of gross margin came from fee-based contracts or commodity-exposed contracts hedged with swaps, but counterparty and customer concentration remain important risks.
- Management cited natural production declines, commodity-price effects on customers’ drilling, competition, capital-market access, acquisition execution, and regulatory, environmental and pipeline-safety requirements as risks. The filing says 26% of WES gross margin was associated with percent-of-proceeds and keep-whole arrangements; related swaps with Anadarko had expirations through 2016.
- A subsidiary paid a $125,000 fine in 2013 under a Colorado air-emissions compliance order. A DCP Midstream lawsuit involving alleged gas-diversion and dedication-agreement issues was scheduled for trial in April 2014; management said it did not expect a material effect and cited contractual indemnities. The filing also describes potential costs from evolving environmental and pipeline-safety regulation.
- KPMG issued an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting at year-end.
Important facts for investors to verify
- Confirm the intended issuer: this document is WGP’s 2013 10-K, not a filing under the metadata name Western Midstream Partners, LP.
- Review WGP and WES distributions separately, and assess WES distributable cash flow and the reported 1.17x coverage against declared distributions.
- Assess Anadarko’s share of revenue and throughput, its ability to perform under commercial, note-receivable and hedging arrangements, and the related-party terms of acquisitions and services.
- Reconcile acquisition and expansion spending with operating cash flow, debt, equity issuance and the subsequent $375 million pipeline-interest acquisition.
- Check the status and economics of the Lancaster trains, 2014 capital plan, debt covenants, DCP litigation and material regulatory or environmental developments.