Western Midstream Partners, LP quarterly report, Q2 FY2015

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Business context and reporting period

This is Western Gas Equity Partners, LP’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015—not a filing under the name Western Midstream Partners, LP. WGP’s principal assets are its interests in Western Gas Partners, LP (WES); WES operates natural-gas gathering, processing and transportation assets and related crude-oil and NGL businesses. WGP consolidates WES, so consolidated results include WES and amounts attributable to noncontrolling owners. Dollar amounts below are generally in millions unless stated otherwise.

Financial performance and liquidity

  • Second-quarter revenue: $402.4, up 16% from $345.6 a year earlier. Operating income was $134.0 versus $120.8; net income attributable to WGP was $67.8 versus $59.4; and net income per common unit was $0.31 versus $0.25.
  • First-half revenue: $777.5, up 22% from $639.3. Operating income was $243.1 versus $225.6; net income attributable to WGP was $124.8 versus $112.6; and net income per common unit was $0.56 versus $0.48.
  • Margins and operating measures: Reported operating margin was approximately 33% in Q2 and 31% for the first half of 2015, compared with approximately 35% in each prior-year period. WES’s non-GAAP adjusted EBITDA attributable to WES rose 17% to $205.5 in Q2 and 19% to $386.4 for the first half. Distributable cash flow rose 21% to $173.3 and 19% to $321.3, respectively. WES’s first-half distribution coverage ratio was 1.18x, versus 1.24x for the comparable 2014 period.
  • Cash flow: For the first six months, WGP reported $300.4 of operating cash flow, $349.2 used in investing and $70.9 provided by financing; cash ended at $89.3. WES reported operating cash flow of $301.5 for the period. Investing outflows chiefly reflected capital spending.
  • Balance sheet and debt: At June 30, cash was $89.3, current assets $273.7 and current liabilities $213.1. Long-term debt carrying value was $2.68 billion ($2.69 billion principal), up from $2.42 billion at year-end. WES had $270 million drawn on its revolving facility, $12.8 million of letters of credit and $917.2 million available; WGP’s $30 million Anadarko working-capital facility was undrawn. Both were reported in compliance with covenants.
  • Capital returns: WGP declared a Q2 distribution of $0.36375 per unit, 34% above Q2 2014. WES declared $0.750 per unit, 15% higher year over year. The respective aggregate distributions were approximately $79.6 million and $139.7 million.

Material changes versus the prior comparable period

  • Growth in gathering, processing and transportation revenue and throughput reflected higher DJ Basin volumes and fees, the 2014 DBM acquisition, and new or expanded facilities. WES-attributable natural-gas throughput rose 13% in both Q2 and the first half; crude/NGL throughput rose 17% and 37%, respectively.
  • Lower commodity prices pressured realized NGL and drip-condensate prices: Q2 average prices fell 56% for NGLs and 60% for drip condensate. Total product sales nevertheless rose, reflecting higher natural-gas sales and DBM contribution. The expiration of certain 2014 swaps also affected comparisons.
  • Depreciation, amortization and impairments increased 46% in Q2 and 56% for the first half, in part due to DBM and assets placed in service. First-half impairments were $9.5 million, primarily related to abandoned compressors and cancelled projects.
  • Interest expense increased 32% in Q2 and 45% for the first half, reflecting debt financing and $5.6 million of first-half accretion on the DBJV deferred purchase obligation. WES issued $500 million of 3.950% notes due 2025 and used net proceeds to repay revolving borrowings.
  • Comparative 2014 financial statements were recast to include DBJV as a common-control transaction. Pre-acquisition figures reflect Anadarko historical-cost records and may not represent results WES would have generated as owner.

Outlook, commentary, risks and unusual items

  • WES estimated 2015 capital expenditures, excluding acquisitions, at $629–$689 million excluding equity investments, or $640–$700 million including equity investments. Maintenance capital expenditure outlook was revised to 7%–10% of adjusted EBITDA. Construction of DBM Trains IV and V was expected to begin operations in the first and second halves of 2016, respectively.
  • WES acquired Anadarko’s 50% interest in DBJV in March 2015. Consideration is payable in 2020 and depends on specified earnings and capital spending; the recorded present value was $179.9 million at June 30, versus an estimated future payment of $282.8 million. Lancaster Train II, a 300 MMcf/d plant, began operations in June 2015.
  • The Dew and Pinnacle systems were classified as held for sale; the sale was expected to close July 31, 2015. WES also had $52.3 million of unconditional capital-project commitments, mostly expected to be paid within 12 months.
  • WES said its liquidity sources should meet expected requirements, but anticipates relying on external financing for expansion spending and acquisitions. Distributions depend on WES’s ability to generate and distribute cash; WGP depends on distributions from WES.
  • Customer and affiliate concentration is significant: Anadarko was the only customer exceeding 10% of consolidated revenue, and accounted for 47% of WES natural-gas gathering, treating and transportation throughput in Q2 2015. WES also relies on Anadarko for substantial volumes, services, product purchases, swaps and a $260 million note receivable. Swap protection is not assured beyond current terms; the filing warns of counterparty and producer-volume risks.
  • WES was in litigation with DCP Midstream concerning gas dedication and related claims; trial was scheduled for June 2016. Management did not expect a material financial effect and cited contractual indemnities. Separately, a subsidiary was negotiating with the EPA over alleged Clean Air Act leak-detection noncompliance at its Granger facility; management said a fine or penalty above $100,000 was reasonably likely, but could not predict the outcome.
  • Management identified potential partnership-tax-law changes as a risk, including proposals that could affect partnership tax treatment. It also cautioned that non-GAAP adjusted EBITDA and distributable cash flow have limitations and are not substitutes for GAAP measures.

Key facts for investors to verify

  • Confirm the correct issuer and entity scope: this 2015 filing is for Western Gas Equity Partners, LP and includes consolidated WES results.
  • Review WES distribution coverage, cash generation, capital spending and reliance on debt or equity financing; distributable cash flow is a non-GAAP measure.
  • Track Anadarko concentration, counterparty credit exposure, the $260 million note receivable and the assumptions behind commodity swaps and the DBJV deferred payment.
  • Check final sale proceeds and closing for Dew and Pinnacle, final DBM purchase-price allocation, and progress, costs and start-up timing for the expansion projects.
  • Monitor the DCP litigation, the EPA matter and any changes to tax rules affecting publicly traded partnerships.