Business context and reporting period
The filing is a Form 10-Q for the quarter ended September 30, 2016. The registrant named in the filing is Western Gas Equity Partners, LP (WGP), not Western Midstream Partners, LP. WGP’s consolidated results include Western Gas Partners, LP (WES), its midstream subsidiary; WGP says its cash-generating assets are its interests in WES.
WES gathers, processes, treats and transports natural gas, NGLs and crude oil for Anadarko and third parties. Prior-period results were recast to include the Springfield assets as though owned for all periods presented.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue and other | $481.6 million | $432.5 million | $1,293.5 million | $1,335.5 million |
| Operating income (loss), WGP consolidated | $196.6 million | $225.7 million | $524.1 million | $272.4 million |
| Net income attributable to WGP | $91.4 million | $109.2 million | $262.1 million | $180.5 million |
| Net income per WGP common unit | $0.42 | $0.41 | $1.15 | $0.53 |
| Operating cash flow | Not presented in the supplied filing text for the quarter | Not presented in the supplied filing text for the quarter | $654.7 million | $595.3 million |
WGP’s nine-month investing cash flow was negative $1,040.7 million and financing cash flow was positive $432.6 million. Cash increased by $46.7 million to $146.3 million. Capital expenditures were $372.7 million on a cash basis; affiliate acquisitions accounted for a further $716.5 million of investing outflows.
At September 30, 2016, WGP had $2,935.4 million of carrying-value long-term debt (principal $2,968.0 million), $369.8 million of current assets and $254.6 million of current liabilities. WES reported $1.18 billion of available borrowing capacity on its revolving facility; WGP had $222.0 million available on its revolving facility and $30.0 million on its working-capital facility. Both WES and WGP reported covenant compliance.
WES’s non-GAAP measures showed Q3 adjusted gross margin of $344.0 million, adjusted EBITDA of $278.2 million and distributable cash flow of $237.3 million; its reported distribution coverage ratio was 1.42x. For the first nine months, those measures were $984.5 million, $759.8 million and $628.6 million, respectively. These are WES measures, not WGP GAAP results.
Material changes versus prior comparable periods
- Q3 revenue rose 11%, while WGP-attributable net income fell to $91.4 million from $109.2 million. Nine-month revenue declined about 3%, but WGP-attributable net income increased to $262.1 million from $180.5 million.
- The nine-month earnings comparison is materially affected by a $276.6 million impairment charge in 2015, versus $11.3 million in 2016. The 2015 period also included a $77.2 million gain on divestiture and other, compared with a $8.8 million loss in 2016.
- WES’s natural-gas throughput attributable to WES fell 8% for the first nine months to 3,908 MMcf/d; crude/NGL throughput was down 1% to 185 MBbls/d. Q3 natural-gas throughput was essentially flat year over year.
- WES acquired Springfield from Anadarko for $750 million in March 2016, funded with cash, common units, preferred units and borrowings. The preferred-unit issuance generated $686.9 million net in total and carries quarterly cash distributions of $0.68 per unit.
Outlook, commentary and risks
- WES said available liquidity and operating cash flows were expected to meet short-term working-capital needs and maintenance and expansion spending. It expects to rely on external financing for expansion projects and future acquisitions. The filing does not provide earnings guidance.
- WES raised its estimated 2016 capital spending range, excluding acquisitions, to $490–$530 million. Train IV at the Delaware Basin Midstream complex began operating in May; Train V began operating in October 2016. Train VI’s timing remained under evaluation, with the earliest potential start-up in Q4 2017.
- A December 2015 fire and explosion at the DBM complex reduced processing capacity. Train III returned to full service in May 2016; Train II, the most damaged train, was expected back by year-end 2016. By September 30, WES had received $16.3 million of business-interruption proceeds and $18.4 million of property-insurance proceeds; the insurance adjustment process was ongoing.
- The estimated present value of the Anadarko-linked deferred purchase price for the 2015 DBJV acquisition fell to $16.4 million from $188.7 million at year-end 2015, primarily reflecting lower estimated future earnings and higher estimated capital expenditures.
- WES classified the Hugoton system as held for sale, recorded a $6.2 million loss on remeasurement and completed the sale on October 31, 2016.
- Key exposures include dependence on Anadarko for a substantial share of throughput and revenue, counterparty and note-receivable credit risk, the expiration of commodity swaps in December 2016, and possible higher pipeline-safety compliance costs. The filing also identifies preferred-unit distribution seniority and potential future dilution upon conversion.
- An EPA matter concerning alleged Clean Air Act leak-detection and repair non-compliance at the Granger facility was under negotiation; management considered a fine or penalty above $100,000 reasonably likely. Management reported disclosure controls effective and said the previously identified impairment-control material weakness had been remediated in June 2016.
Most important facts for investors to verify
- Confirm the issuer and security being analyzed: this 2016 filing is for Western Gas Equity Partners, LP, and reports consolidated WES results.
- Review WES’s post-quarter operating performance, particularly restoration of DBM capacity and Train V operations, as well as the status of Train VI and insurance recoveries.
- Assess whether distributable cash flow supports distributions after preferred-unit payments, capital spending and debt service; note that DCF and coverage are non-GAAP measures.
- Monitor Anadarko’s financial condition and continued role as a major customer, affiliate, swap counterparty and $260 million note obligor.
- Check actual 2016 capital spending against the revised $490–$530 million estimate and assess the implications of the Hugoton sale and debt financing activity.