Western Gas Equity Partners, LP (WGP) — Form 10-Q Summary
Business context and reporting period
Entity note: The supplied filing is for Western Gas Equity Partners, LP, the parent of Western Gas Partners, LP (WES), for the quarter ended September 30, 2014. It is not filed under the name Western Midstream Partners, LP. WGP’s principal assets are its interests in WES, which operates natural-gas and liquids gathering, processing and transportation assets.
Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted. Prior-period results were recast to include the TEFR Interests acquired from Anadarko, so historical comparisons may not represent the results WES would have reported as their owner at the time.
Financial and operating results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $326.5 | $273.5 | $935.9 | $750.7 |
| Operating income | $122.6 | $89.5 | $336.2 | $221.2 |
| Net income attributable to WGP | $60.0 | $44.4 | $164.7 | $111.3 |
| Net income per WGP common unit | $0.27 | $0.20 | $0.76 | $0.49 |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $401.2 | $314.3 |
- Q3 revenue increased about 19%, and net income attributable to WGP increased about 35% year over year. For nine months, revenue rose about 25% and attributable net income about 48%.
- WES’s reported non-GAAP Adjusted EBITDA attributable to WES was $167.3 million in Q3 and $475.6 million for nine months, up 34% and 45%, respectively. Distributable cash flow was $136.7 million and $393.0 million, up 29% and 43%. WES reported distribution coverage of 1.23x for Q3 and 1.24x for nine months. These are non-GAAP measures, not substitutes for GAAP results.
- WES-attributable natural-gas throughput rose 5% in Q3 to 3,459 MMcf/d and 12% for nine months to 3,476 MMcf/d. Management attributed growth to new facilities, increased volumes and acquisitions; equity-investment natural-gas throughput declined.
- Cash and equivalents were $78.2 million at September 30, versus $113.1 million at year-end 2013. Total assets were $5.06 billion; total liabilities were $2.37 billion.
- Debt carrying value was $2.08 billion (principal $2.09 billion), versus $1.42 billion carrying value at year-end. WES had $170 million drawn on its revolving credit facility, $12.8 million in letters of credit and about $1.0 billion available. It reported compliance with debt covenants.
- Nine-month investing cash use was $913.4 million, including $492.3 million of capital expenditures and $372.4 million of affiliate acquisitions. Financing provided $477.3 million. WES reported a $0.3 million working-capital deficit.
Material changes and management commentary
- WES acquired 20% interests in Texas Express Gathering and Texas Express Pipeline and a 33.33% interest in Front Range Pipeline from Anadarko in March 2014. The acquisition was funded with borrowings, cash and WES units; comparative results were recast for common-control accounting.
- WES completed and started Lancaster Train I in April 2014 and was building Train II, with operations expected in Q2 2015. WES revised estimated 2014 capital expenditures, excluding acquisitions and equity investments, to $628–$678 million; including equity investments but excluding acquisitions, the estimate was $670–$720 million.
- On October 28, WES agreed to acquire Nuevo Midstream for $1.5 billion in cash, subject to adjustment and closing conditions. Expected funding included cash, revolving-credit borrowings and $750 million of Anadarko Class C units. WES expected a Q4 2014 closing; a third party had an opportunity to acquire a 50% interest.
- WGP declared a Q3 distribution of $0.29125 per unit, up 36% from Q3 2013. WES declared $0.675 per unit, up 16% from Q3 2013. The subsequent distributions were payable in November 2014.
- Natural-gas and NGL prices were lower in some categories, while higher throughput, facility start-ups and equity-investment distributions supported results. Interest expense rose with additional debt issuance.
Risks, contingencies and unusual items
- WES relies substantially on Anadarko for throughput, revenue, affiliate transactions and its $260 million note receivable; Anadarko was the only customer exceeding 10% of consolidated revenue. Any deterioration in Anadarko’s ability to perform or pay could affect WES distributions and, in turn, WGP.
- Management identified potential regulatory restrictions on oil and gas operations, including in Colorado, as a risk to customer production and WES throughput. Other cited risks include commodity prices, counterparties, financing access, permitting and capital-project execution.
- A subsidiary was negotiating with the EPA over alleged Clean Air Act leak-detection and repair noncompliance at its Granger, Wyoming facility. Management said a resolution was reasonably likely to result in a fine or penalty exceeding $100,000; the amount and outcome were not clear.
- A DCP Midstream lawsuit involving Anadarko and a WES subsidiary was scheduled for trial in July 2015. Management did not expect a material financial effect and cited contractual indemnities.
- WES had $70.5 million of unconditional capital-project payment commitments, most expected within 12 months. The filing also reports impairments associated with project cancellations, an idle compressor and a non-operational plant.
- WES said 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 12 months, excluding gas imbalances. Swap agreements with Anadarko extend through December 2016; counterparty performance remains a risk.
Important facts for investors to verify
- Confirm the issuer and entity scope: this is WGP’s consolidated filing, which includes WES and noncontrolling interests; it is not a filing under the requested Western Midstream Partners name.
- Review the TEFR recast and acquisition accounting when comparing periods, and distinguish WGP-attributable earnings from WES operating measures and non-GAAP metrics.
- Assess the increase in debt and planned Nuevo financing alongside WES’s capital-spending needs, distribution policy and available credit capacity.
- Monitor Anadarko concentration, the Nuevo transaction’s closing and funding terms, the EPA matter, and the DCP litigation.
- Check whether the stated 2014 capital-spending outlook and Lancaster Train II timetable were achieved; this filing provides expectations, not subsequent outcomes.