Western Gas Equity Partners, LP (WGP) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The filing is by Western Gas Equity Partners, LP, which consolidates Western Gas Partners, LP (WES); it is not filed under the “Western Midstream Partners, LP” name. WGP’s cash-generating assets are its interests in WES.
Financial and operating highlights
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenues and other | $435.9 million | $525.5 million | $873.1 million | $1,041.6 million |
| Net income attributable to WGP | $67.6 million | $104.9 million | $168.6 million | $180.9 million |
| Net income per WGP common unit | $0.31 | $0.48 | $0.77 | $0.83 |
| WES Adjusted EBITDA (non-GAAP) | $271.7 million | $274.8 million | $543.8 million | $529.8 million |
| WES distributable cash flow (non-GAAP) | $221.8 million | $247.2 million | $453.2 million | $463.7 million |
- For the six months, WGP generated $513.2 million in operating cash flow, used $826.7 million in investing activities, and generated $289.1 million in financing activities. Cash ended at $55.3 million, down from $79.6 million at year-end 2017.
- Six-month capital expenditures were $650.1 million, including $612.8 million of expansion and $37.3 million of maintenance spending. Capital incurred was $628.0 million.
- At June 30, total debt carrying value was approximately $4.2 billion. WES had no borrowings under its $1.5 billion revolving facility and $1.495 billion available; WGP had $28 million outstanding and $7 million available on its $35 million facility.
- WGP current assets were $249.4 million and current liabilities $517.2 million. WES reported a $242 million working-capital deficit. WES’s second-quarter distributable-cash-flow coverage ratio was 0.98x.
- WES adjusted gross margin was $378.3 million in Q2, up 13%; margin per Mcf for natural gas assets was $0.95, while margin per barrel for crude oil, NGL and produced-water assets was $1.56.
Changes versus the prior period
- WGP Q2 revenue declined 17% and net income attributable to WGP declined 36%. WES operating income fell 64% in Q2 and 24% for the first half.
- Comparisons are materially affected by adoption of Topic 606 on January 1, 2018. The new standard changed presentation and timing of some revenues and product costs; reported product sales fell sharply while some amounts moved to service revenue. Management’s reconciliation indicates Topic 606 increased WGP-attributable income by $3.2 million for Q2 and $32.8 million for the first half versus the prior accounting method. The comparative periods were not restated.
- WES throughput attributable to it for natural gas assets rose 9% in Q2 to 3,794 MMcf/d; first-half throughput was approximately flat at 3,711 MMcf/d. Crude oil, NGL and produced-water throughput increased 88% in Q2 and 71% for the first half.
- WES first-half Adjusted EBITDA increased 3%, but distributable cash flow declined 2%; Q2 distributable cash flow declined 10%, reflecting higher interest and maintenance spending.
Outlook, risks and unusual items
- WES raised its estimated 2018 capital spending range to $1.35–$1.45 billion, including equity investments and its share of Chipeta spending, excluding acquisitions. Mentone Train I was expected to begin operations at the end of Q3 2018; the Cactus II pipeline was expected to start operations in Q4 2019.
- WES acquired a 20% interest in Whitethorn for a net $150.6 million and a 15% interest in Cactus II for $11.3 million. Both were funded with cash and accounted for under the equity method.
- WES permanently shut the Kitty Draw and Third Creek gathering systems, citing safety and environmental protection. It recorded $127.2 million of impairment expense and accrued $10.9 million of anticipated shutdown costs. Short-term shutdown-related liabilities included $40.2 million of asset-retirement obligations.
- WES issued $400 million of 2028 notes and $700 million of 2048 notes in March. The 2018 Notes, with $350 million principal, were due in August 2018; WES stated it had the ability and intent to refinance them with long-term debt. Both WES and WGP reported compliance with credit-facility covenants.
- WES’s arbitration against SWEPI seeks approximately $194.2 million in gathering fees; SWEPI counterclaimed for $14.9 million. A decision was expected by the end of Q3 2018. Management said it did not expect a materially unfavorable effect; any award to DBJV would be shared with its former partner under the property-exchange terms.
- Environmental matters include likely fines or penalties exceeding $100,000 in each of two EPA leak-detection cases, according to management, and a separate $226,000 penalty agreed for alleged Risk Management Plan noncompliance. Anadarko concentration is significant: it was the only customer exceeding 10% of consolidated revenue, and WES does not maintain a credit limit for it.
- WGP declared a Q2 distribution of $0.5825 per unit, up 10% year over year; WES declared $0.95 per unit, up 7%. The filing provides no specific earnings guidance.
Investor verification priorities
- Confirm the Topic 606 accounting effects and distinguish presentation changes from underlying volume, pricing, and cash-flow trends.
- Track the August 2018 maturity/refinancing of the $350 million 2018 Notes and the funding of the elevated 2018 capital program.
- Assess whether operating cash flow and distributable cash flow support distributions, particularly given WES’s 0.98x Q2 coverage ratio and reliance on external financing for growth spending.
- Monitor shutdown costs, environmental resolutions, and the outcome and timing of the SWEPI arbitration.
- Evaluate Anadarko counterparty concentration, including the $260 million note receivable and reliance on affiliate service and commodity agreements.