Western Gas Partners LP Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Western Gas (WES)

Western Gas Partners LP (NYSE:WES)

Q1 2013 Earnings Call

May 02, 2013 12:00 pm ET

Executives

Benjamin M. Fink - Chief Financial Officer of Western Gas Holdings LLC, Principal Accounting Officer of Western Gas Holdings LLC, Senior Vice President of Western Gas Holdings LLC and Treasurer of Western Gas Holdings LLC

Donald R. Sinclair - Chief Executive Officer of Western Gas Holdings LLC, President of Western Gas Holdings LLC and Director of Western Gas Holdings LLC

Analysts

Brett Reilly - Crédit Suisse AG, Research Division

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Heejung Ryoo - Barclays Capital, Research Division

Suzanne M. Hannigan - Janney Montgomery Scott LLC, Research Division

Operator

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 first quarter Western Gas Partners and Western Gas Equity Partners earnings conference call. [Operator Instructions] Thank you. 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.

Benjamin M. Fink

Thank you, Steve. I'm glad you all could join us today to discuss Western Gas' first quarter 2013 results. Please note that on this call, we'll 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'll 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-Ks, 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 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.

With that, let me turn the call over to Don.

Donald R. Sinclair

Thanks, Ben. Good morning, everyone, and thank you for joining us today. Last night, we announced our first quarter results for 2013. Our quarter was highlighted by the closing of the 2 Marcellus acquisitions that we discussed on our last call. We raised the WES quarterly distribution to $0.54 per unit, which is a 17% increase over the first quarter of last year and an 80% increase over the distribution at IPO. In addition, we raised the WGP quarterly distribution to $0.17875 per unit, which is 8% above the prior quarter. I'm also very pleased to report that last week, WES received an investment-grade rating from Standard & Poor's. We have now achieved our goal of investment-grade ratings from all of the major credit rating agencies.

We reported adjusted EBITDA of $95.9 million and distributable cash flow of $79.1 million, which together represent yet another quarter of consistent performance. Our coverage ratio of 1.13x is in line with our target coverage ratio of 1.1x. And while we still believe there may be quarters of lower coverage in 2013, our long-term target will remain at 1.1x.

Our first quarter operating results benefited from sequential throughput growth in the DJ Basin and at our Red Desert facility. We also experienced higher throughput at Chipeta, although mechanical issues affected the plant's performance. Train II is impacted for 7 weeks during the quarter, and Train VII (sic) [III] was limited to 250 million cubic feet per day. We are diligently working to resolve these issues in the second quarter. The overall financial impact has been mitigated by higher-than-expected throughput and our ability to process substantially all the available gas with our refrigeration facilities.

We are particularly excited by the drilling activity in a number of well connections in our liquids-rich areas, primarily at the Wattenberg, Platte Valley, Red Desert and Hilight systems. We are the beneficiary of Anadarko's continued horizontal development in the DJ Basin, while our anticipated growth at Red Desert and Hilight will come from third-party producers. We are also encouraged by the growth of our Marcellus assets, with throughput significantly higher today than year-end exit rates. Our gross margin per Mcf was ramping lower than we reported in the fourth quarter due primarily to the addition of the lower margin Marcellus gathering assets in March.

Now I'd like to quickly update you on the status of our major growth projects. I am pleased to report that Brasada's construction is almost complete, commission activity has begun, and we are expected to be in full operations by June. Both Brasada and Lancaster continue to be on time and in line with the total project cost estimates that we discussed last quarter.

As you read in yesterday's release, our guidance for 2013 is unchanged. We believe our results continue to support distribution growth of no less than 15% WES and no less than 33% at WGP. As always, this outlook does not include the effect of any future acquisitions, and consistent with our past practice, we will update our outlook should we make future acquisitions this year.

With that, Steve, I'd like to open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Brett Reilly with Credit Suisse.

Brett Reilly - Crédit Suisse AG, Research Division

So with Brasada coming online this quarter, any updated thoughts on looking forward to Brasada 2?

Donald R. Sinclair

Brett, as you know, Anadarko has got a very aggressive development program, and you'll hear them talk about it next Tuesday on their earnings call. I think, our model of operation has been, we'll fill up 1 plant and then start to work on another. So our objective is to get Brasada 1 up and running, and then I'm sure our focus will turn to the next train.

Brett Reilly - Crédit Suisse AG, Research Division

Okay. And just maybe to follow up, how long generally would it take to construct the second plant there?

Donald R. Sinclair

The historical cycle has always been 15 to 18 months for construction of a new cryo.

Brett Reilly - Crédit Suisse AG, Research Division

Okay. And maybe one for you, Ben. G&A running pretty low even relative to this quarter of last year. Is that something we can look forward to continuing around this run rate moving forward?

Benjamin M. Fink

It's tough to compare G&A quarter-over-quarter when you're looking at assets pre- and post drop-down because how you allocate the G&A before drop-down is just different. So those -- that comparison is always a little messy. The other thing you got to do is take out the noncash piece because we have a lot more noncash G&A last year due to that EIP bonus plan that we've talked about that you won't see going forward.

Operator

Your next question comes from the line of Abdulla Merdi [ph] from CDP Capital.

Unknown Analyst

A couple of things. One, I know you've indicated in the past that there would be likely another monetization of WGP to improve the liquidity after, I think, after the 6 months following the IPO. If I'm not mistaken, I think right now, there's about 8% or 9% of the GP is out in the public float. I'm wondering if what conceptually you're thinking about in terms of how much the public float would increase and how much will still be retained by Anadarko after the next liquidation.

Benjamin M. Fink

This is Ben. The information I can give you is somewhat limited because it's Anadarko that owns 91% of those units, and any sales they make there are up to them. They did indicate during the roadshow that they would be amenable to periodic transactions, but there's been no indication of any type of size or timing. I think they're quite pleased with how their holdings have performed.

Unknown Analyst

Okay. And then secondarily, just more conceptually, as we look over the next 18 to 24 months or so, when we think about the organic growth opportunities outside of drop-downs or acquisitions, how should we think about the balance between third-party organic opportunities versus those that are specifically tied to Anadarko?

Donald R. Sinclair

That's hard to forecast because if you think about where the organic opportunities are going to come, they will come obviously from the liquids-rich areas. Our biggest contributor in the liquids-rich areas, as you all know, is Wattenberg. The biggest producer behind there is Anadarko. But obviously, we provide services for Noble, Encana and others. So it's hard to really give you a split, but it will be significant -- tilted towards Anadarko because of the DJ Basin. But you'll see a lot of third-party activity behind Red Desert and Hilight as well, as well as Chipeta.

Benjamin M. Fink

And obviously, we are also going to be spending a lot of money in the Marcellus, and that's 4-party gas there: Anadarko, Chesapeake, Statoil and Mitsui.

Operator

Your next question comes from the line of Selman Akyol from Stifel.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Real quickly, going into the Marcellus, the Liberty, Rome, Larry's Creek, I guess, when you made the acquisitions, came with the backlog of wells, 270 in total, and you had 50 get connected in the quarter. Is that a good rate going forward? Should we think of that accelerating?

Benjamin M. Fink

I would think of it as a pretty consistent clip of well connects throughout the year, pretty consistent monthly clip.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just going back to the Brasada Plant coming online in June, just to reconfirm, that's going to be pretty much full from day 1, or will there be a ramp-up through the end of the year?

Benjamin M. Fink

This is Ben. No, it will not. It will be a slow ramp from when we introduce gas to the facility in June to the end of the year. And as you know, starting in January, Anadarko had the guarantee for 180.

Operator

Your next question comes from the line of Helen Ryoo from Barclays.

Heejung Ryoo - Barclays Capital, Research Division

On your comments on the Chipeta mechanical issue, was there any cash flow impact for you guys?

Benjamin M. Fink

Yes, relative to our expectations we were about $1 million short.

Heejung Ryoo - Barclays Capital, Research Division

Okay. And it's still an ongoing issue, did you say?

Benjamin M. Fink

Yes, as Don said in his prepared remarks, we hope to have it worked out by June.

Donald R. Sinclair

This is Don. We have contractors on site today, who are working to, and having equipment delivered so we're diligently working on it. And as we stated, we think we'll have it all back in full service by the end of the quarter.

Heejung Ryoo - Barclays Capital, Research Division

Got it. Okay, great. And then just switching gears to your Rockies processing plant. I guess, with all the talks about ethane rejection going on, are your plants up there rejecting ethane at this point?

Benjamin M. Fink

A little, but since the majority of our contracts are fee-based, we don't really feel it. Just like the past couple of quarters, the financial impact of ethane rejection was south of $1 million. It's just not a meaningful number to us.

Donald R. Sinclair

Helen, you should know that the ethane crack spread is still negative in the Rockies today.

Heejung Ryoo - Barclays Capital, Research Division

Right. Okay. So I guess even if there is -- even if you are fully -- you're rejecting all the ethane in all your plants, I guess, from your standpoint, you shouldn't really have any economic hit on your cash flow?

Donald R. Sinclair

It's minimal.

Heejung Ryoo - Barclays Capital, Research Division

Okay. Got it, great. And then just, I guess, just looking at your -- especially your new plants like -- new projects like Chipeta 3, Lancaster, Brasada, I guess you have throughput commitment with Anadarko on these new projects. And I guess that means that even if drilling slows down around any of these assets, your cash flow will be protected, correct?

Benjamin M. Fink

That's correct, Helen. At Lancaster and Brasada, that's a throughput guarantee. So it's demand charge, whether or not they deliver the volumes. Chipeta is a little different. It's a 500 million a day commitment to the plant. If there's a shortfall, they pay a deficiency fee. So you get something but not what you would have gotten had they delivered volumes.

Heejung Ryoo - Barclays Capital, Research Division

Okay. And then could you just speak about other systems in Rockies whether you have similar contracts, I mean, to the extent that Anadarko is your volume provider, would you say other plants in Rockies also have somewhat of a similar contract?

Benjamin M. Fink

For the Bison treaters are 100% demand charge, which are in the Rockies. But Mountain Gas, DJ Basin, Hilight, no, there's no demand charge.

Heejung Ryoo - Barclays Capital, Research Division

Okay. Even with Anadarko...

Donald R. Sinclair

And at Red Desert, there's some true-up based on volume but not demand charge component.

Heejung Ryoo - Barclays Capital, Research Division

Right, okay. And we're not talking about third-party. We're talking about Anadarko volume.

Donald R. Sinclair

Okay. For Anadarko, the answer is no, except at Bison.

Heejung Ryoo - Barclays Capital, Research Division

Okay. Okay, got it. All right. And then just lastly, did your CapEx for the year go up by 50?

Benjamin M. Fink

Our CapEx guidance is unchanged. Not sure I understand the...

Heejung Ryoo - Barclays Capital, Research Division

Okay, so it's unchanged, right? Okay, got it.

Operator

[Operator Instructions] And your next question comes from the line of Suzanne Hannigan from Janney.

Suzanne M. Hannigan - Janney Montgomery Scott LLC, Research Division

On the last call when you announced your acquisitions in the Marcellus, you said at that time that as we move into 2014, the EBITDA multiple would look much lower than the purchase price or the multiple on 2013. I know we're in early days, but is there any further guidance you can give as to where you think that number will be coming in for 2014?

Benjamin M. Fink

Nothing's changed from last quarter. Our first quarter performance was exactly like we thought it would be internally, and our year -- our forecast for the year is what we thought it would be at the beginning of the year. So nothing has changed relative to what we talked about last quarter.

Suzanne M. Hannigan - Janney Montgomery Scott LLC, Research Division

Okay. I'm sorry, I'm asking about the EBITDA multiple on the Marcellus acquisitions.

Benjamin M. Fink

Right. Nothing has changed in terms of our '14 outlook as well.

Operator

I'm showing there are no further questions at this time.

Donald R. Sinclair

Thanks, Steve. Thank you, everyone, for joining us today, and thank you for your interest in Western Gas and Western Gas Equity Partners. And we look forward to speaking to you soon. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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