Western Gas Equity Partners, LP (WGP) — FY 2017 Form 10-K
Entity and period: The filing is for the fiscal year ended December 31, 2017, not a standalone Q4 report. Although the request identifies Western Midstream Partners, LP, the registrant named in this filing is Western Gas Equity Partners, LP (WGP). WGP has no independent operating business; it consolidates Western Gas Partners, LP (WES), its principal cash-generating investment. Figures below distinguish WGP consolidated results from WES operating measures where relevant.
Business context and financial performance
WES provides natural gas gathering, treating, processing and transportation, as well as crude oil, NGL and produced-water services across the Rocky Mountains, Texas, New Mexico and North-central Pennsylvania. WGP owns WES’s general partner interest and IDRs and, at year-end, 29.8% of WES’s common units.
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Total revenues and other | $2.248 billion | $1.804 billion | Up 25% |
| Operating income, WGP consolidated | $704.4 million | $704.5 million | Essentially flat |
| Net income attributable to WGP | $376.6 million | $345.8 million | Up 9%; $1.72 per common unit versus $1.53 |
| Net cash from operating activities | $897.4 million | $913.1 million | Down 2% |
| Net cash used in investing activities | $763.6 million | $1.106 billion | Lower spending, including fewer acquisition outlays |
| Net cash used in financing activities | $413.3 million | Net cash provided of $451.8 million | 2017 included distributions and RCF borrowing |
| Adjusted gross margin, WES non-GAAP | $1.376 billion | $1.337 billion | Up 3%; natural gas margin $0.94/Mcf, up 13% |
| Adjusted EBITDA, WES non-GAAP | $1.061 billion | $1.028 billion | Up 3% |
| Distributable cash flow, WES non-GAAP | $929.0 million | $852.4 million | Up 9%; distribution coverage 1.13x |
| WES natural gas throughput attributable to WES | 3,575 MMcf/d | 3,940 MMcf/d | Down 9% |
| WES crude oil, NGL and produced-water throughput | 201 MBbl/d | 184 MBbl/d | Up 9% |
WES reported $707.3 million of operating income in its operating-results discussion; WGP’s consolidated statement reports $704.4 million. The filing presents these on different reporting bases.
Balance sheet, debt and distributions
- At December 31, 2017, consolidated cash was $79.6 million, total assets $8.016 billion, long-term debt carrying value $3.493 billion and total equity and partners’ capital $3.945 billion.
- WES had $370 million outstanding under its revolving credit facility and $825.4 million available to borrow at year-end; it was in covenant compliance. WGP had $28 million outstanding under its separate facility, with $222 million available at year-end.
- WES’s $350 million 2.6% notes due August 2018 were classified as long-term because management said it had the ability and intent to refinance. In February 2018, WES amended and extended its revolver to a $1.5 billion facility maturing in 2023. WGP reduced its facility commitments to $35 million.
- WES declared $3.590 per unit for 2017, including $0.920 for Q4, up 7% year over year. WGP declared $2.105 per unit for 2017; its Q4 distribution of $0.54875 was up 19% year over year.
- WES reported a $170.3 million working-capital deficit, primarily related to construction and expansion spending. WGP’s cash flows and distributions depend on cash distributions from WES.
Material changes and unusual items
- In March 2017, WES exchanged its 33.75% non-operated Marcellus interest and $155 million cash for an additional 50% of the DBJV system, bringing its ownership to 100%. The exchange generated a $125.7 million net gain. WES also sold the Helper and Clawson systems, recording a $16.3 million gain.
- WES recorded $178.4 million in impairment charges, including $158.8 million at the Granger complex following a producer bankruptcy and reduced throughput fees. This compares with $15.5 million in 2016.
- WES received $52.9 million of insurance proceeds related to the 2015 DBM facility fire and explosion, including $29.9 million for business interruption and $23.0 million for property damage. A $5.7 million loss was recorded in 2017 from revised property-claim recovery estimates.
- WES’s natural gas throughput fell partly because of the asset exchange and declines in certain producing areas. Processing throughput rose, supported by DBM plant trains and DJ Basin activity. Produced-water system start-up contributed to higher liquids and water throughput.
- WES’s 2017 distributable cash flow included $58.6 million of above-market swap contributions from Anadarko. The swaps were renewed only through December 31, 2018.
Outlook, risks and contingencies
- Capital plan: WES estimated 2018 capital expenditures, excluding acquisitions, of $1.0–$1.1 billion, including $80–$90 million of maintenance capital. Planned growth includes two 200-MMcf/d Mentone trains expected in 2018 and two 200-MMcf/d Latham trains expected in 2019.
- Key dependencies: Anadarko accounted for 61% of WES revenue in 2017 and supplied 34% of natural gas gathering/treating/transportation throughput, 41% of processing throughput and 56% of crude oil, NGL and produced-water throughput (excluding equity-investment throughput). Anadarko also controls WGP and provides operating, administrative and commercial support.
- Commodity protection: WES said 94% of adjusted gross margin was fee-based and 96% came from fee-based contracts or hedged percent-of-proceeds/keep-whole contracts. The Anadarko swaps expire at the end of 2018; replacement terms may be less favorable or unavailable.
- Legal matters: WES was pursuing approximately $190 million in gathering-fee claims against SWEPI in arbitration, while SWEPI asserted counterclaims of approximately $18 million. A hearing was scheduled to begin April 30, 2018; management did not expect a materially unfavorable effect. WES also disclosed three EPA negotiations over alleged regulatory noncompliance and said each was reasonably likely to result in a fine or penalty exceeding $100,000.
- Other principal risks: producer activity and commodity prices can reduce throughput; debt, capital-market access and high growth spending affect distribution capacity; pipeline-safety and environmental rules may increase costs; produced-water disposal faces induced-seismicity regulation; and WES has customer, counterparty, joint-venture and asset-impairment risks. Colorado safety initiatives followed a 2017 home explosion; Anadarko cooperated with the NTSB investigation.
- Accounting: WGP adopted Topic 606 on January 1, 2018. Management expected no material effect on 2018 net income from timing changes, but anticipated significant revenue and expense presentation changes.
Important facts for investors to verify
- Confirm the intended issuer: this is WGP’s 10-K, with WES consolidated, rather than a filing under the requested Western Midstream Partners name.
- Review WES’s leverage, refinancing of the 2018 notes, revolver availability and covenant headroom alongside the $170.3 million working-capital deficit and planned 2018 capital spending.
- Assess distribution sustainability against WES’s 1.13x coverage, its reliance on external financing and the fact that distributable cash flow includes Anadarko swap contributions.
- Track post-2018 hedge economics, Anadarko’s production and financial capacity, customer concentration, and WES’s ability to replace declining gas volumes.
- Follow the SWEPI arbitration, EPA matters, Colorado regulatory developments and the construction schedule and costs for Mentone and Latham.
- Interpret non-GAAP adjusted gross margin, Adjusted EBITDA and distributable cash flow alongside GAAP results; the filing cautions that these measures are not substitutes for GAAP cash flow or earnings.