Western Gas Partners LP (NYSE:WGP)
Q4 2012 Earnings Call
February 28, 2013 12:00 PM ET
Benjamin Fink – SVP and CFO
Donald Sinclair – President and CEO
Danny Rea – SVP and COO
Brett Reilly - Credit Suisse AG
Elvira Scotto - RBC Capital Markets, LLC
Louis Shamie - Zimmer Partners
Sharon Lui - Wells Fargo Securities, LLC
Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 Western Gas Partners and Western Gas Equity Partners Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to your host for today, Benjamin Fink, Senior Vice President and Chief Financial Officer. Please go ahead, sir.
Thank you, Steve. I'm glad you could join us today to discuss Western Gas' Fourth Quarter and Full Year 2012 Results, as well as our outlook for 2013. Please note that on this call, we will be referring to Western Gas Partners as WES and Western Gas Equity Partners as WGP. Joining me on the call today are Don Sinclair, our President and CEO; Danny Rea, our COO; and other members of the management team who will be available to answer your questions later in the call.
Before I turn the call over to Don, I'll remind you that this presentation contains estimates that are based on the best information available to us at this time and we believe that these estimates are reasonable. However, a number of factors could cause actual results to differ materially from those that we discuss. You should read our full disclosure on forward-looking statements, our presentation slides, our latest 10-K, our other SEC filings and our press releases for the risks associated with our business and other relevant information.
In addition, we'll be referencing certain non-GAAP measures on the call, so please be sure to see the reconciliations in our earnings release. As a reminder, you can view and download all of these materials including the slides that we will refer to on this call at www.westerngas.com.
Lastly, for those of you who are unit holders of WES in 2012, I'm pleased to inform you that your K-1 will be available on our website by next week with paper copy that will be mailed to you later in March. For those of you who are unit holders of WGP in 2012, your K-1 will be made available on our website in mid-March, with paper copy to be mailed to you towards the end of the month.
And with that, let me turn the call over to Don.
Thanks, Ben. Good morning, everyone, and thank you for joining us today. I'd like to welcome those of you who are new investors in WGP and therefore, first time participants on our earnings call. On this call, I will be posting my comments on Western's operation and financial performance and we'll discuss the implications to WGP where appropriate.
Yesterday, we announced our fourth quarter and full year results for 2012. For the full year, WES' adjusted EBITDA was in line with the low end of our most recently announced guidance range, our full year results for total capital expenditures and maintenance capital as a percentage of adjusted EBITDA, were in the middle of the announced ranges. 2012 was an important year for WES, highlighted by 2 acquisitions, consistent performance despite weak natural gas and NGL markets; the launch of a robust growth capital program and the receipt of our second investment-grade rating. We ended the year with over $1 billion in liquidity and raised our fourth quarter distribution to $0.52 per unit, an 18% increase over the last year, while maintaining healthy coverage ratios.
Now let's talk about WES' fourth quarter. Adjusted EBITDA was $83.3 million and distributable cash flow was $67.2 million, which enabled us to raise our distribution for the 15th straight quarter. Note that WES' fourth quarter coverage ratio of 1.02 times includes all the units it issued in conjunction with the initial public offering of WGP in December, the proceeds of which were in our cash balance at the end of the year. For comparative purposes, if the WES units issued in December were excluded from the coverage ratio calculation, the fourth quarter coverage ratio would have been 1.12 times and the full year coverage ratio would have been a very healthy 1.23 times.
The drivers behind our fourth quarter results were lower than expected throughput of our Red Desert facility due to third-party development that was pushed into 2013. Unexpected production shut in at Hilight due to simultaneous drilling operations and lower throughput due to mechanical issues. We also experienced periodic ethane rejection at all of our processing plants as well as colder than normal weather in the Rockies that led to (inaudible).
We estimate financial impact of weather-related mechanical issues to be approximately $1.2 million, while the impact of ethane rejection was approximately $900,000 for the quarter. Offsetting these declines was significant growth on our DJ Basin throughput as a result of the increased compression we brought online in August and September. Our capital overall -- or our total overall throughput was flat for the third quarter. Our gross margin per Mcf was $0.01 higher than third quarter, due to these changes in throughput mix. We remain excited by the upstream capital being spent by APC in the DJ Basin and other onshore basin as highlighted in our recent Investor Call in February 20. If you have not viewed the slides from that call, we encourage you to do so at www.anadarko.com.
Now I'd like to take a moment to discuss the acquisitions we announced yesterday in more detail. First, I'll discuss our most recent drop down from Anadarko. We're acquiring a 33.75% interest in the Liberty and Rome gas gathering systems which serve Marcellus Shale production in Northeast Pennsylvania. These assets may be familiar to some of you, as they are currently operated by Access Midstream Partners. The assets are operated under a cost of service gathering agreement, which targets an 18% rate of return over the life of the contract. The assets are 100% fee-based and serve production in area of mutual interest between Anadarko, Chesapeake, Statoil and Mitsui. The total capacity of these 2 systems is currently over 2 Bcf a day and we expect it will increase to 2.5 Bcf a day later this year.
With over 180 wells drilled and in various stages in completion and or waiting on pipeline connections, we believe that these assets are posed to generate significant near-term growth. We're excited by this acquisition as it expands our fee-base assets, our geographic diversity, and adds additional high-quality resources to the portfolio.
Next, I'd like to talk about the second acquisition we announced yesterday, which is also located in the Marcellus. The seller of these assets is Chesapeake Country Corporation, who had retained an interest in the Marcellus midstream assets that are currently operated by Anadarko. We're requiring a 33.75% interest in Larry's Creek, Seely and Warrensville gas gathering systems that are held by Chesapeake. But please note, we are not acquiring Anadarko midstreams equivalent interest in these assets, which remain available to be dropped to WES at a later date.
Identical to drop-down assets, assets we're acquiring from Chesapeake are 100% fee-based and covered on our cost service gathering agreement. Also similar to the drop-down assets, we believe that 2013 investments in these assets will result in significant near-term growth, primarily due to over 80 wells that have been drilled and are in various stages of completion and/or waiting on pipeline connections. In addition to the existing production behind these systems, we believe there might be additional upside due to the further development in areas adjacent to the systems. Any upside related to these areas would be strictly additive to our current forecast.
Both of these acquisitions are mainly accretive to our distributable cash flow. The drop down will be financed with $220 million of cash on hand, borrowings of $246 million and an issuance of 449,129 WES units to Anadarko. The acquisition from Chesapeake will be funded through a draw on our credit facility. Based on the need to kack so many wells behind all the acquired systems, we are forecasting that the assets capital expenditures will exceed their EBITDA in 2013, ultimately achieving capital maturity in 2014. However, we are focusing that the capital we're spending will result in significant near-term growth. With forecasted 2014 EBITDA multiple significantly lower than the 2000 multiple we discussed in the earnings release.
Now before we move on to our full year 2013 outlook, I'd like to give you an update on our major growth projects. Many of you are already familiar with the Brasada and Lancaster projects that we announced last year. The plans to start production to the most prolific basins in the country, the drilling activity is primarily driven by crude oil economics. The Brasada Plant, pipelines and stabilization facility serving production from the Eagle Ford Shale, continue to be on time with projected start-up in the second quarter of 2013. All major components have been delivered and our current focus is on installing piping, instrument and the electrical systems.
We predict Brasada will ramp up to the remainder of 2013, with Anadarko guaranteeing 90% of the plants 200 million cubic feet per day capacity beginning on January 1, 2014. We believe that the total project will cost between $250 million and $260 million, and it will generate no less than a 6.5 times 2014 EBITDA multiple. We anticipate spending approximately $100 million on this project in 2013.
The Lancaster Plant serving production from the Niobrara and Cordale formations in the DJ Basin also continues to be on time with projected start-up in the first quarter of 2014. I'm pleased to report that site preparations now are complete, the chemical contractors are being mobilized and shipping of major components is underway. Anadarko's guarantee of 90% of the plants 200 million cubic feet per day capacity will begin at the plant's start-up date. We continue to believe that the total project cost is approximately $160 million and will generate no less than a 6.5 times 2014 EBITDA multiple. We anticipate streaming approximately $120 million on this project in 2013.
Our major growth projects showed 100% fee-based revenue and are underwritten by long-term agreements with Anadarko. We believe these projects help give our unit holders a clear line of sight into our ability to generate distributable cash flow in 2014 and beyond. Our strong liquidity position and sponsor support enable us to execute these projects, while maintaining our previously stated objectives for distribution growth and coverage. Combining everything we've discussed today, including equity investments, but excluding capital spend on acquisitions, the pie chart on Slide 9 shows where we expect to spend our money in 2013. As one would expect, given the current commodity price environment, we are focusing the bulk of our capital program in 3 areas with world-class resources: The DJ, the Eagle Ford and the Marcellus. Hope you all share our excitement about the growth projects that are in our budget for 2013.
Now let's go to our full year 2013 outlook. As you read in yesterday's release, we expect adjusted EBITDA for 2013 to be between $410 million and $450 million. There are 3 key assumptions behind the suggested EBITDA range that I'd like to discuss. First, we expect to see throughput growth in our Wattenberg Red Desert Hilight systems due to additional drilling, as well as growth in Chipeta as a result of this month's completion of the Questar Pipeline interconnect.
Second, we're including the full year results associated with the Marcellus assets we're requiring from Anadarko. And third, we're assuming a mid-March 2013 closing of the Marcellus asset acquisition from Chesapeake and a May 2012 start-up for that Brasada plant. Changes in timing on either of these projects would affect our results accordingly.
Our total capital -- CapEx guidance range is $550 million to $600 million. I want to be very clear on what is included in this number and what is not. First, this range also includes approximately $20 million in capital relates to the pre-acquisition period of the assets acquired from Anadarko. Secondly, this range does not include the approximately $23 million we expect to spend on White Cliffs. This mater is recorded as an equity investment as opposed to capital expenditure. As you can see, the bulk of our expenditures related to the growth projects that service dynamic resource plays and are 100% fee-based. We're also planning to spend additional capital on our Wattenberg Red Desert Hilight assets due to additional activity behind those systems.
We have a consistent history of diligently managing our balance sheet and maintaining flexibility to finance our projects, while preserving investment-grade metrics. We believe that the financing cost associated with our growth projects, all of which should be fully online by the first quarter of next year, will compress our distribution coverage in 2013 when compared to historic levels.
We've been very consistent over the past 4 years in sustaining our target coverage ratio of 1.1 times is acceptable for WES' liable business risk. And while the quarterly coverage ratio may fall below this level in 2013, our target still remains 1.1 times. As is always the case, the timing of certain expenditures, especially maintenance and capital expenditures will impact the coverage ratio on any given quarter. And we encourage our investors to measure coverage ratios over the longer periods of time.
Finally, as a subset of our total CapEx, our maintenance CapEx is expected to be between 9% and 12% of adjusted EBITDA, which is consistent with our 2012 results. Overall, we believe our results will support solid growth in our distributable cash flow, which should result in distribution growth of no less than 15% at WES and no less than 33% at WGP. It is important to remember that this outlook does not include the effect of any future acquisitions we may make.
Any acquisitions we pursue would be added to the outlook discussed today and we would update guidance consistent with our past practice. With that Steve, I'd like to open up the line for questions.
(Operator Instructions) Your first question comes from the line of Brett Reilly with Credit Suisse.
Brett Reilly - Credit Suisse
Just a quick question on the drop down and third-party acquisition. Can you maybe give us a little color on why you chose to go after the Marcellus assets versus some of the other areas in which Anadarko is operating?
I want to make sure I understand the question, are you asking about the Anadarko drop and/or the Chesapeake acquisition? I want to make sure before I answer the question.
Brett Reilly - Credit Suisse
Just, I guess, more generally, why the Marcellus -- I guess, on the drop down side of things relative to maybe some of the systems in the Eagle Ford or other areas that Anadarko is really ramping?
Brett, as you know, we look at numerous variables before we determine what's going to be our next acquisition from Anadarko. There's capital maturity, quality of resources, contracts, and scale and scope. And when we went to the inventory and looked at where we are in time, we thought the Marcellus assets is based on the quality of the contracts and the scale and scope fit us best at this time.
Brett Reilly - Credit Suisse
Okay. And then maybe just a little color on expected ramp in cash flow from those assets throughout the course of the year. It sounds like you're expecting volumes to grow pretty significantly throughout the course of the year.
Brett, this is Ben. You can see on our pie chart, we're spending a big chunk of CapEx on those assets and we expect to realize some pretty good returns on those assets due to the cost of service model. So as we mentioned, we think the 2014 multiples will be a lot lower than the 2013 multiples.
Your next question comes from the line of Elvira Scotto from RBC Capital Markets.
Elvira Scotto - RBC Capital Markets
A couple of questions from me. So it looks like with this drop down, the assets acquired maybe a little bit for reaching capital maturity and we're seeing some more, I guess, organic growth. How should we think about that maybe going forward? I know WES is a drop-down story, first and foremost, but should we be thinking about sort of maybe some sort of base level of kind of organic growth built into the model now?
This is Ben, again, Elvira. I think when we talked about it last year, when you saw the big step up in our growth CapEx, we asked is this kind of a onetime aberration and what we said at the time is this is more like the new normal. Well, we're now a year into that and what you're seeing is that as WES has increased its own scale and scope, we are capable of having a larger growth CapEx burden, so we're comfortable at these levels. I think capital maturity will always be a factor in terms of attractiveness of near-term drop-down candidates. But we're certainly more comfortable spending a lot more CapEx than we used to.
Elvira, one other thing. If you think about the organic growth projects, the multiple on them, is lower than, the estimate multiple is lower than what our usual acquisition is. So for us, we like where it fits relative to accretion. And in our mind, it's just part of prepaying for future growth.
Elvira Scotto - RBC Capital Markets
Right. Now that makes a lot of sense. The other question that I had is really around ethane rejection. Maybe talk a little bit about -- because you've kind of mentioned how it impacted fourth quarter, maybe talk a little bit about how if it all you think it's going to impact 2013 and if you've built some of that into the guidance?
Elvira, I'd like to first start, if you think about how our processing portfolio sets up, the majority of that portfolio is fee-based. So the ethane rejection component doesn't impact us that much, as you could tell by $900 million was not a big number in the fourth quarter. So I think you can see from those variables that ethane rejection is not going to have a big impact on us and we have put all that, all our thoughts around ethane rejection in our 2013 guidance as well.
Your next question comes from the line of Louis Chamois from Zimmer Partners.
Louis Chamois - Zimmer Partners
So just want to talk a little bit -- you mentioned that the, I think, both assets that you're acquiring here are under this cost of service model that Chesapeake had instituted with Access, where you spent capital and basically get a fixed rate of return on the capital spent with adjustors and is that -- can you talk a little bit about the mechanisms of how that works and that 18% return that you mentioned, how frequently that's trued up or what the mechanics are there?
Yes, Louis, this is Danny Rea. Basically, as we stated on the script, it is a 18% before tax on invested capital. We looked at a longer-term view of over 15-year type period in doing that and forecasting our forward years -- forward views of both capital and cost. We also redetermine that annually and revisit it.
The other thing in that redetermination, Louis, one thing is important is, it takes previous performance and wells into your future projections to determine those rates. So you always have a true-up mechanism that allows you to stay on path for that 18%.
Louis Chamois - Zimmer Partners
Got it. So if in one year your volumes fell a little bit short of projection, you'd make it up in the future?
Or if you over earn, it goes both ways.
Louis Chamois - Zimmer Partners
Right. And so when you're spending capital, say, in 2013, are you realizing a benefit of that in '13 or does that all come out like a one year lag?
It's all built in to the model that give you that average rate that we're currently utilizing in '13.
So it does take in consideration prompt year capital.
Louis Chamois - Zimmer Partners
Okay. Great. And the other question I had, first off, definitely like seeing more growth capital as part of the model. The other thing was something like $600-plus million of acquisition and drop down announced today or last night, it seems like you guys are being, I guess, a little -- taking a little bit of a faster pace of growing MLPS that was, I guess, now that your asset base is a little bit bigger. Can we expect like a little bit of acceleration of the drop down or third-party acquisitions relative to what we've seen over the last few years?
Louis, this is Ben. I would say that, and as I've said in the past, sizes is only one factor that we look at when we determine what is the next appropriate asset for drop down and you'll continue to see a lot of variability in size. Obviously, all of the cash that went into WES in conjunction with the WGP IPO was a factor in determining which assets to drop this time. And in the future, we'll just determine accordingly.
(Operator Instructions) And your next question comes from the line of Sharon Lui from Wells Fargo.
Sharon Lui - Wells Fargo Securities
For the acquisitions, you did indicate that there are a lot of wells waiting on pipe. Just wondering if you can give us a sense in terms of maybe Anadarko's capital spending or activity in that region relative to 2012 levels?
Sharon, this is Don. What I would suggest you do, as I mentioned on the script, you can go back to the Anadarko investment -- Investor Conference on the 20th. There are slides in there for all their onshore North American resource plays and it has what they expect relative to increase in wells from '12 to '13 and what they expected to -- I don't think they break it down specific capital by region, but it will give you an idea of what's going to show up in the well count between '12 and '13.
I'm showing there are no further questions at this time.
Thank you again for joining us and for your interest in Western Gas. We look forward to seeing, hopefully, all of you all before too long. Steve, thank you today.
And ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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