Western Midstream Partners, LP quarterly report, Q2 FY2014

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Business context and reporting period

The supplied filing is Western Gas Equity Partners, LP’s (WGP) unaudited Form 10-Q for the quarter ended June 30, 2014, filed August 6, 2014. Although the request identifies Western Midstream Partners, LP, that name does not appear as the registrant in the filing. WGP is a holding partnership whose principal asset is its interest in Western Gas Partners, LP (WES), an operator of natural-gas, NGL, condensate and crude-oil gathering, processing and transportation assets. Unless noted, dollar amounts below are in millions.

Financial and operating results

  • Second-quarter results: Revenue was $329.9, up 31% from $251.4. Operating income was $114.4 versus $68.9; net income attributable to WGP was $55.3 versus $34.5; and net income per common unit was $0.25 versus $0.16.
  • First-half results: Revenue was $609.4, up 28% from $477.2. Operating income was $213.6 versus $131.7, and net income attributable to WGP was $104.8 versus $66.9.
  • WES operating metrics: Second-quarter throughput attributable to WES for natural-gas assets increased 13% to 3,561 MMcf/d. WES adjusted gross margin attributable to WES rose 44% to $231.3; adjusted EBITDA rose 55% to $167.3; and distributable cash flow (DCF) rose 53% to $137.0. Natural-gas adjusted gross margin per Mcf was $0.65, up 18%; crude/NGL margin per barrel was $2.06, up 44%. WES’s second-quarter DCF coverage ratio was 1.30x, compared with 1.25x.
  • Cash flow, first half: Net cash from operating activities was $262.1 versus $180.7. Investing activities used $770.8, compared with $1,182.7 used in the prior-year period; financing activities provided $517.7 versus $671.8. Cash increased $9.1 to $122.1.
  • Liquidity and debt: At June 30, WES had $2,030.0 of debt principal outstanding and $110.0 drawn on its $1.2 billion revolving facility, with approximately $1.1 billion available after borrowings and letters of credit. WES reported $47.5 of working capital. WGP had no borrowings under its separate $30.0 million working-capital facility. WES reported compliance with its debt covenants.

Material changes versus the prior comparable period

  • Growth was supported by higher volumes and new or recently completed infrastructure, including the Brasada facility, Lancaster Train I, the Mont Belvieu JV fractionation trains, and TEP, TEG and FRP. The latter three equity interests were acquired from Anadarko in March 2014.
  • WES’s acquisition of the TEFR Interests was a common-control transaction; historical results were recast to include those interests in all periods shown. Prior-period results may not represent what WES would have reported had it owned the interests then.
  • WES acquired 20% interests in TEP and TEG and a 33.33% interest in FRP. The acquisition was funded in part with $350.0 of revolver borrowing and 308,490 WES common units issued to Anadarko.
  • Debt increased from $1,420.0 in principal at December 31, 2013 to $2,030.0 at June 30, 2014, reflecting new notes and revolver activity. Interest expense rose 65% in Q2 and 42% in the first half year over year.
  • WES raised its quarterly distribution to $0.650 per unit, up 16% from Q2 2013. WGP raised its quarterly distribution to $0.27125 per unit, up 37% from Q2 2013.

Outlook, risks, contingencies and unusual items

  • WES increased its 2014 capital expenditure estimate, excluding acquisitions and equity investments, to $668–$718; including equity investments but excluding acquisitions, the estimate was $720–$770. Train II at Lancaster was expected to begin operations in Q2 2015. WES also cited $58.3 of unconditional commitments for capital-project services and products, mostly payable within 12 months.
  • Management said expected operating cash flow, cash balances, the revolving facility and access to debt and equity markets should meet near- and long-term funding needs. WES expects to rely on external financing for expansion spending and acquisitions. No earnings guidance was provided in the supplied filing text.
  • WES relies substantially on Anadarko for volumes, revenues, affiliate transactions and a $260.0 note receivable. This creates significant customer and counterparty concentration risk and makes WGP’s ability to distribute cash dependent on WES’s distributions.
  • WES’s commodity swaps with Anadarko extend through December 2016. Management viewed commodity-price exposure as limited, but identified exposure to gas imbalances and counterparty performance. A 10% change in LIBOR was described as having a nominal effect on income and fair value at period end.
  • A lawsuit involving DCP Midstream and a WES subsidiary remained in discovery; management did not expect a material effect and cited contractual indemnities. Separately, WES was negotiating with the EPA over alleged Clean Air Act leak-detection and repair non-compliance at its Granger, Wyoming facility; management considered a fine or penalty exceeding $100,000 reasonably likely, but the amount and outcome were not established.
  • WES recorded impairment charges of $1.2 in Q1 related primarily to a non-operational Powder River Basin plant and $0.3 in Q2 related primarily to cancelled projects at the Non-Operated Marcellus Interest.
  • Colorado ballot initiatives concerning oil and gas operations had been withdrawn, but a state commission was to make recommendations. New restrictions could affect customer production and WES throughput, particularly in the Wattenberg field.

Important facts for investors to verify

  • Confirm that the intended issuer is WGP, the registrant in this filing, rather than Western Midstream Partners, LP.
  • Review the TEFR common-control recast and distinguish acquisition-related growth from organic operating improvement.
  • Assess debt growth, interest costs, capital-spending estimates, revolver availability and WES’s dependence on continued access to capital markets.
  • Evaluate Anadarko concentration, including customer revenues, the note receivable, swap agreements, indemnities and WGP’s reliance on WES distributions.
  • Monitor Lancaster Train II timing, committed project spending, the EPA matter and any developments in the DCP litigation or Colorado regulation.
  • Interpret adjusted gross margin, adjusted EBITDA and DCF alongside GAAP results; the filing cautions that these non-GAAP measures have limitations and may not be comparable across companies.