Business context and reporting period
The filing is an unaudited Form 10-Q for the three months ended March 31, 2013. The registrant named in the filing is Western Gas Equity Partners, LP (WGP), not Western Midstream Partners, LP. WGP is a holding partnership whose principal assets are its interests in Western Gas Partners, LP (WES), including WES’s general partner interest, incentive distribution rights and limited partner units; WES owns and operates midstream energy assets.
Financial and operating highlights
Dollar amounts below are in millions unless stated otherwise. WGP consolidated financial results include WES and reflect noncontrolling interests.
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Total revenue | $229.7 | $224.7 | Up 2.3% |
| Operating income | $62.8 | $67.2 | Down 6.6% |
| Income before income taxes | $55.9 | $62.3 | Down 10.3% |
| Net income | $51.7 | $45.6 | Up 13.3% |
| Net income attributable to WGP | $32.3 | $17.1 | Up; prior-year amount included substantially higher pre-IPO tax expense |
| Net income per WGP common unit | $0.13 | Not presented comparably | 2012 per-unit figure not provided |
| Operating cash flow | $129.2 | $94.5 | Higher, including favorable working-capital movements |
| Cash capital expenditures | $166.5 | $75.8 | Primarily expansion spending |
| Cash and cash equivalents | $91.5 | $422.6 at Dec. 31, 2012 | Quarterly decrease of $331.1 |
| Debt carrying value | $1,553.3 | $1,168.3 at Dec. 31, 2012 | Increase primarily from $385.0 drawn on WES’s revolver |
- WES throughput attributable to WES averaged 2,906 MMcf/d, up 7% year over year. WES gross margin was $146.7 million, up 4%; attributable gross margin per Mcf was $0.55, unchanged.
- WES Adjusted EBITDA was $95.9 million, up 1%; distributable cash flow was $79.1 million, down 4%. WES reported a 1.13x distribution coverage ratio for Q1.
- WES’s $800 million revolving credit facility had $385.0 million drawn and $12.8 million of letters of credit; reported remaining borrowing availability was $402.2 million. WGP had no borrowings under its separate $30 million working-capital facility.
- WGP’s consolidated current assets were $129.0 million and current liabilities $203.3 million at March 31, 2013. Separately, management reported WES working capital deficit of $101.3 million, principally reflecting cash used for an acquisition.
Material changes versus the prior comparable period
- Gathering, processing and transportation revenue rose 12% to $102.9 million, supported by higher volumes at the Marcellus, Chipeta and Wattenberg systems. Natural gas, NGL and condensate sales declined 5% to $121.7 million, mainly from lower NGL sales volumes.
- Operating expenses increased to $167.0 million from $157.5 million. Depreciation, amortization and impairments rose 20% to $32.4 million, while operation and maintenance increased 14% to $36.7 million. General and administrative expense fell 25%, partly because non-cash incentive-plan costs recorded in 2012 did not recur after the plan’s termination following WGP’s IPO.
- Interest expense increased 23% to $11.8 million, mainly reflecting the 2022 senior notes. Income tax expense in WGP’s consolidated statements fell to $4.2 million from $16.7 million; the prior period included pre-IPO, separate-return tax expense. WGP became a partnership for federal and state income-tax purposes after its December 2012 IPO, apart from Texas margin tax.
- WES completed two Marcellus-area acquisitions: a 33.75% non-operated interest for $465.5 million cash plus WES units, and a 33.75% operated interest for approximately $135.4 million, funded mainly with $133.5 million of borrowings. Acquisition and capital spending drove net investing cash outflow of $771.9 million.
- The comparative statements were recast to include the Non-Operated Marcellus Interest. Management also corrected a nonmaterial classification error in 2012 cash flows, moving $14.0 million of invoices from operating to investing activities.
Outlook, commentary, risks and contingencies
- No formal earnings or operating guidance is provided. Management said WES expected cash generated from operations, cash on hand, revolver availability and access to debt or equity financing to meet short- and long-term requirements. WES expects to rely on external financing for expansion capital and acquisitions, while coordinating spending, distributions and leverage.
- On April 17, 2013, WGP declared a first-quarter distribution of $0.17875 per unit, or $39.1 million, payable May 22. WES declared $0.54 per unit, or $70.1 million including incentive distributions, payable May 13. WES described this as its sixteenth consecutive quarterly distribution increase.
- WES remains substantially dependent on Anadarko for throughput, revenues and other affiliate arrangements. Anadarko-controlled production represented approximately 60% of gathering, transportation and treating throughput and 55% of processing throughput in Q1 2013. Anadarko was the only customer exceeding 10% of consolidated revenues.
- Other disclosed risks include commodity and interest-rate exposure, access to financing, operating and regulatory risks, customer and counterparty credit risk, and the ability to sustain distributions. Management considered direct commodity-price exposure limited by swaps with Anadarko and did not expect a 10% change in gas or NGL prices to materially affect results over the next 12 months, excluding gas imbalances.
- WES had approximately $60.3 million of unconditional capital-project payment commitments, mostly due within 12 months. A DCP Midstream lawsuit involving Anadarko and a WES subsidiary was in discovery, with trial set for April 2014; management did not expect a material effect and cited contractual indemnities. The filing states no material litigation involving WGP.
- Management concluded disclosure controls were effective at March 31, 2013. The filing does not provide a management assessment or auditor attestation of internal control over financial reporting, citing the transition period applicable to newly public companies.
Important facts for investors to verify
- Confirm the relevant issuer and security: the filing is for Western Gas Equity Partners, LP (WGP), while most operating and debt information concerns consolidated subsidiary WES.
- Review acquisition funding, purchase-price accounting and the effect of the Marcellus interests on recast comparisons and future throughput.
- Assess distribution coverage and cash availability against acquisition spending, expansion commitments, debt service and the reported working-capital deficit.
- Evaluate dependence on Anadarko, including customer concentration, the $260 million note receivable, affiliate contracts, indemnities and commodity swaps.
- Check the status of the DCP litigation, capital commitments, revolver availability and covenant compliance in subsequent filings.