Business context and reporting period
This summary covers Western Gas Equity Partners, LP (WGP), not an issuer named Western Midstream Partners, LP. The filing is WGP’s unaudited Form 10-Q for the quarter ended June 30, 2017, filed July 26, 2017. WGP has no independent operations or material assets beyond its partnership interests in Western Gas Partners, LP (WES), whose results are consolidated. WES provides natural gas, crude oil, NGL and produced-water gathering, processing and transportation services.
Financial and operating results
| Metric | Q2 2017 | Six months 2017 | Comparable 2016 |
|---|---|---|---|
| Total revenue and other | $525.5 million | $1.042 billion | $428.7 million Q2; $811.8 million six months |
| Net income attributable to WGP | $104.9 million; $0.48 per unit | $180.9 million; $0.83 per unit | $88.9 million and $0.41 per unit Q2; $170.7 million and $0.73 per unit six months |
| Operating income | $207.0 million | $344.6 million | $175.3 million Q2; $327.5 million six months |
| Operating cash flow | Quarterly amount not stated in the provided cash flow statement | $431.4 million | $391.8 million six months |
WES reported Q2 adjusted EBITDA attributable to WES of $274.8 million, up 10%, and distributable cash flow of $247.2 million, up 24%. For the six months, those measures were $529.8 million (up 10%) and $463.7 million (up 19%). WES’s adjusted gross margin attributable to WES was $333.5 million for Q2 and $665.1 million for the six months. These are non-GAAP measures; the filing cautions they are not substitutes for GAAP results.
- Q2 WES distribution coverage was 1.19x; six-month coverage was 1.17x.
- WGP declared a Q2 distribution of $0.52750 per unit, up 7% from Q1 2017 and 22% year over year. WES declared $0.890 per unit, up 2% sequentially and 7% year over year.
- At June 30, cash was $188.8 million, current assets $335.7 million and current liabilities $277.5 million. WES reported working capital of $57.4 million.
- Long-term debt carrying value was $3.281 billion, versus $3.119 billion at year-end 2016. WES had $160 million drawn on its revolving facility and $1.035 billion available; WGP had $28 million drawn and $222 million available under its RCF. The partnerships reported covenant compliance.
- Six-month investing cash outflow was $363.1 million and financing cash outflow was $238.5 million; cash declined by $170.2 million from year-end.
Material changes versus the prior comparable period
- Revenue increased 23% in Q2 and 28% for the six months. Commodity sales rose substantially, largely reflecting higher volumes at the DBM complex; higher product costs also accompanied those sales.
- Net income attributable to WGP increased 18% in Q2 and 6% for the six months. Six-month results included $167.9 million of impairments, versus $8.9 million in 2016, and $134.9 million of net gains on divestitures and other items, versus a $2.5 million loss.
- WES’s natural-gas throughput attributable to WES declined 10% in Q2 and 3% for the six months. Crude, NGL and produced-water throughput declined 3% and 5%, respectively. Processing throughput growth at DBM partly offset declines elsewhere.
- Interest expense increased to $36.3 million in Q2 and $72.3 million for the six months, mainly reflecting debt issued in 2016 and prior-period accounting effects related to the deferred purchase-price obligation.
Outlook, commentary, risks and unusual items
- Management said WES expected liquidity sources to be sufficient for short- and long-term requirements, but anticipated reliance on external financing for expansion capital and acquisitions. The filing provides no quantified earnings or distribution guidance.
- WES exchanged its 33.75% non-operated Marcellus interest and $155 million cash for an additional 50% of DBJV, taking its DBJV interest to 100%; the exchange generated a $125.7 million gain. WES also sold its Helper and Clawson systems, recording a $16.3 million gain.
- A $158.8 million impairment at the Granger complex followed a reduced throughput fee after a producer’s bankruptcy. Further impairments included the Granger straddle plant, Fort Union equity investment and a cancelled West Texas pipeline project.
- WES settled the DBM facility insurance claims and received $52.9 million in the first half, including $29.9 million of business-interruption proceeds and $23.0 million of property-insurance proceeds. These proceeds contributed to reported operating results and cash flow.
- Exposure to Anadarko is material: it was the only customer generating more than 10% of consolidated revenue, and WES relies on it for significant volumes, payments, a $260 million note receivable, and commodity swaps. WGP’s ability to distribute cash depends on WES distributions.
- After a Colorado home explosion, Anadarko shut in operated vertical DJ Basin wells for inspections. Colorado regulators required flowline inventory and integrity testing near buildings; the NTSB investigation and potential operating disruption remain risks.
- WES disclosed EPA/Department of Justice negotiations concerning alleged Clean Air Act leak-detection and repair violations at facilities in Colorado and Wyoming; management considered fines or penalties above $100,000 reasonably likely for each matter. WES also had $53.6 million in capital-project payment commitments, mostly due within 12 months.
- WES renewed commodity swaps with Anadarko through December 31, 2017. Management described commodity-price exposure as limited under those arrangements, while noting counterparty and settlement risks.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this is WGP’s filing, with WES consolidated, not a filing under the Western Midstream name.
- Review the quality and recurrence of earnings, particularly the DBJV and asset-sale gains, insurance proceeds, and substantial Granger-related impairment.
- Assess distribution sustainability against WES cash generation, coverage, capital spending, debt service and WGP’s dependence on WES distributions.
- Evaluate Anadarko concentration and credit exposure, including the note receivable and performance under operating and swap agreements.
- Track throughput trends, the Granger producer bankruptcy, Colorado regulatory developments, EPA matters and committed expansion spending.