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Western Gas Equity Partners, LP (NYSE:WGP)

Q3 2013 Results Earnings Call

November 07, 2013, 12:00 PM ET

Executives

Benjamin M. Fink - Senior Vice President and Chief Financial Officer and Treasurer

Donald R. Sinclair - President and Chief Executive Officer

Danny J. Rea - Senior Vice President and Chief Operating Officer

Analysts

Stephen J. Maresca - Morgan Stanley

Bradley Olsen - Tudor, Pickering, Holt & Co.

Paul Jacob - Credit Suisse

Curt N. Launer - Deutsche Bank AG

Operator

Good morning. My name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the Third Quarter Western Gas Earnings Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Benjamin Fink you may begin your conference.

Benjamin M. Fink

Good morning, everyone. Thanks for joining us today to discuss Western Gas’ third quarter 2013 results.

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 able to answer your questions later in the call.

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 what we discussed. Please refer to our latest filings with the SEC for the risk factors associated with our business.

In addition, we will 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 this call’s presentation slides 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. Our third quarter operating results were very impressive. You will recall that in early 2012 we began several substantial organic growth projects and we are now realizing the benefits of these significant investments.

Our strong performance raised WES’ third quarter distribution to $0.58 per unit which is a 16% increase over last year, and is WES’s 18th quarterly increase. We also raised WGP’s distribution to $0.21 and $0.38 per unit, which is an 8% increase over the second quarter.

Also in the third quarter we executed our first senior notes offering that carried investment grade rating from all three major credit rating agencies. These five year notes were very well received by the market as evidenced by the final coupon of 2.6%.

Yesterday, we announced our third quarter results for 2013. We reported adjusted EBITDA of $125.2 million, distributable cash flow of $105.9 million and a healthy coverage ratio of 1.26 times. We expect that coverage will be above 1.1 times for the full year, although it may fall below 1.1 times in the fourth quarter as additional maintenance CapEx is spent.

Our third quarter throughput numbers were driven by the ramp up of our Brasada facility, sequential growth in the DJ and Marcellus basins, and increased volumes at our Highlight and Chipeta plants. Brasada facility results are a key driver to the increase in our gross margin per Mcf which was $0.04 higher than what we reported in the second quarter.

With Brasada online and ramping up, our remaining major growth projects under construction are Lancaster Trains I and II. As you note on our last conference call the startup of Lancaster I is contingent on Front Range Pipeline being in service. Based on Front Range's updated completion schedule and construction delays suffered as a result of the flooding in Colorado we now believe that Lancaster I will be operational in March 2014. Train II remains on schedule for a first quarter 2015 startup.

As provided in yesterday’s release we have revised our full year outlook for 2013. We believe adjusted EBITDA will be between $440 million and $450 million and our maintenance capital will be between 7% and 10% of adjusted EBITDA. Our total capital expenditure guidance is $670 million to $740 million is unchanged and does not include acquisitions or the equity investments in White Cliffs and the Mont Belvieu fractionators.

However, please note that the capital expenditure guidance we provide is on a cash basis. This means the actual amounts spent can be materially affected by items over which we have no control, such as the timing of invoices. In the future we will provide CapEx guidance on an incurred basis which will have less sensitivity to invoice timing issues.

We now believe WES and WGP will generate 2013 full year distribution growth of 16% and 37% respectively which exceeds our initial guidance. While we cannot give formal guidance for 2014 till after our annual budgeting process has been completed, what we can say today is that we like the organic growth that we are seeing from our portfolio and we believe 2014 has the potential to be another outstanding year.

With that operator, I’d like to open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steven Moresca from Morgan Stanley. Your line is open.

Stephen J. Maresca - Morgan Stanley

Thanks, hi, good morning, Ben, Don and team.

Donald R. Sinclair

Good morning, Steve.

Stephen J. Maresca - Morgan Stanley

So things obviously seem to be working quite well. But it has been a bit of a longer spread I think between your last acquisition that you did in March and here we are in November. And just looking back at the history and one of your recent probably one of the longest gaps, I think you had since your IPO in terms of either a drop down or third party. Anything to read into the gap between deals thus far, is it just you don't need to do some right now, there is so much on your plate organically, certain things up '14, just any commentary around that?

Donald R. Sinclair

Steve, you know, obviously the portfolio is performing well. We spend a tremendous amount of money and capital around organic growth and it has performed well. We actually have had transactions, as you know we did OTTCO which was not very significant but we also did Mount Belvieu 7 and 8 at midyear as well as announced Lancaster II. So in our mind it's still, we are still down the same path of execution. It just looked a little bit different at mid-year this year than it has in the past.

Stephen J. Maresca - Morgan Stanley

Okay, so we should expect sort of same continuum going forward that we are seeing in the past.

Donald R. Sinclair

Based on what we know today.

Stephen J. Maresca - Morgan Stanley

Okay, have you guys had any more rate resets on any of the dry gas systems in 2013?

Donald R. Sinclair

No.

Stephen J. Maresca - Morgan Stanley

Okay, and then just on maintenance CapEx coming down a little bit for the year, I guess the fourth quarter will be a little bit heavier but it will grow on a percent basis on the year it’s down. I know you talked little bit about what's driving that?

Benjamin M. Fink

Sure, Steven, this Ben and that is an important question. Obviously when you look at maintenance as a percentage of EBITDA, higher EBITDA would mean a lower percentage. So that’s part of it. But there is another part here that is important to understand. When we set our guidance we go through a rigorous process of looking at all our CapEx and putting it in three buckets. There is a maintenance bucket, an expansion bucket and a well connection bucket.

And as you know we take that well connection bucket and we reallocate it between maintenance and expansion. Using the theory that you are trying to determine what portion of maintenance kept your volumes flat and that amount of well connections goes to maintenance and the rest goes to expansion.

So if you think about what we go through in the beginning of the year we are making assumptions about decline rates on systems as well as throughput growth and then as actual come in you may need to revise that allocations. And so what we really saw this year as an example is a lot higher throughput growth in Marcellus based on the same amount of well connection capital. So under that formula you are able to allocate more to expansion because there was more growth for the same capital.

Compare that to last year we had well connections in the Rockies but didn’t see as much throughput growth because of some of the downstream issues, and so more went to expansion in that scenario. And so really because of some really wonderful throughput performance we were able to allocate more to expansion and that’s going to change every year depending on what we see in the system.

Stephen J. Maresca - Morgan Stanley

Okay. Great, that’s all I have. Thanks guys.

Donald R. Sinclair

Thanks, Steve.

Operator

Your next question comes from the line of Bradley Olsen from TPH. Your line is open.

Bradley Olsen - Tudor, Pickering, Holt & Co.

Hey, good morning, guys.

Donald R. Sinclair

Good morning, Brad.

Bradley Olsen - Tudor, Pickering, Holt & Co.

Quick one from me, obviously this quarter showed some real strong performance. And I was hoping that you might be able to maybe just a qualitatively talk around the three factors that you mentioned in your prepared remarks specifically Marcellus, Wattenberg and then the start-up of Brasada in the Eagle Ford , is there any way that you could give some more clarity around what were the big drivers causing results to kind of pick up quarter-over-quarter the way they did.

Donald R. Sinclair

Sure, I mean, obviously on the processing side you had very little impact of Brasada in the second quarter and a very nice ramp in the third. Third quarter average throughput was around 4x what it was in the second. So you just saw a ramp there just as you would expect. And we fully expect it would be at least 180 at the beginning in the year as under our contract.

If you look at the gathering and transportation side, the bulk of the increase was clearly Marcellus where you just saw a step up in throughput as we worked thorough inventory and the bulk of our results there, first of all as you know, are covered in the cost of service model and then most of our EBITDA comes from the non-operated system which is just because of operating the upstream.

Bradley Olsen - Tudor, Pickering, Holt & Co.

How big a component was just the organic growth through the Wattenberg system?

Donald R. Sinclair

If you look at a percentage of the growth in gathering and transportation, I’d say it was in the 20% range.

Bradley Olsen - Tudor, Pickering, Holt & Co.

Great, that's helpful. Again thanks a lot guys.

Operator

(Operator’s instruction). Your next question comes from the Line of Paul Jacob of Credit Suisse. Your line is open.

Paul Jacob - Credit Suisse

Good morning, guys, and congratulations on the quarter.

Donald R. Sinclair

Thanks.

Paul Jacob - Credit Suisse

I guess I’m just wondering in terms of Brasada, what are you seeing there in terms of condensate stabilization and what capacity do you have for stabilizing condensate at that plant.

Danny J. Rea

Well, this is Danny, we brought the facility up. What we are doing is collecting the condensate up and bringing it into the Brasada for the stabilization and it goes further down the pipeline there. We built that to meet the needs of Anadarko obviously, but we also have the ability to look at that for additional customers as well.

At this point, we are early in the ramp facility at Brasada I and even as we said before we are looking at Brasada II as well. So in terms of current capacity we are moving about 4,000 to 5,000 barrels a day of throughput and our capacity exceeds that by quite a bit.

Paul Jacob - Credit Suisse

Okay, that’s helpful. I guess shifting over to Lancaster, what type of volume ramp do you expect when that comes on late in the first quarter?

Benjamin M. Fink

Paul, this is Ben. As you know, that’s going to be a 300 a day plant and we will have a 90% commitment from Anadarko at startup, so that’s 270 a day.

Donald R. Sinclair

Paul, the other thing that you recognize as well as you know we are utilizing the refrigeration facilities in the field. Obviously this is going to be most efficient plant in the DJ Basin so pure economics will hold the plant physically above and beyond what the contractual obligations are as well.

Paul Jacob - Credit Suisse

Okay, so it should ramp pretty quickly.

Donald R. Sinclair

Yes.

Paul Jacob - Credit Suisse

Okay. And then last question from me is do you still expect to spend, I think you had indicated in the last quarter $120 million to fund your interest in train seven and eight at Belvieu, is that what you are targeting still at this point?

Benjamin M. Fink

Still a good number, Paul.

Paul Jacob - Credit Suisse

Okay, thank you so much.

Donald R. Sinclair

Thank you.

Operator

Your next question comes from the line of Curt Launer from Deutsche Bank. Your line is open.

Curt N. Launer - Deutsche Bank AG

Yeah, Curt Launer here. Thank you very much for answering the question relative to maintenance capital earlier. My other one is relative to the status in the Marcellus there seemed to be a stepwise function really to you hooking up the wells, waiting on pipeline connection. You mentioned the inventory earlier. What still remains there, was this a stepwise function that we will now see slower growth going ahead, how does this shake out into the 2014 year where new liquids takeaway capacity comes on in the Marcellus and those other factors?

Benjamin M. Fink

Okay, Curt, I’ll take a start at this, Don may want to add something. In terms of pure inventory both Anadarko and Chesapeake have made comments on their calls and I will refer you to them. What we’re seeing from our third party operators is that 76 wells waiting on pipeline right now and that’s just pure inventory. But I don’t think that includes wells that are currently being fracked. So the true number is actually quite a bit above that. But I don’t think that it's fair to see that you will see the type of gross rate of growth in ’14 that you saw in ‘13 just because of the step up. And if you look at what that system is doing today compared to the exit rate at the beginning of this year, it's about 60% to70% higher and you won’t just see that kind of level of growth in 2014, it will be much more tempered.

Donald R. Sinclair

Kirk, you know, if you listened to Anadarko’s call they referenced that will have a lower activity level in the Marcellus in 2014. Chesapeake’s has been pretty straightforward about what they think their activity level is. So it’s been said by definition you will chew through some of the inventory but we still see, , good volumes, obviously very good volumes in third quarter and it's been mentioned earlier one of the things we really like and appreciate about that system is the cost of service model.

Curt N. Launer - Deutsche Bank AG

Right, thank you very much.

Donald R. Sinclair

Thank you.

Operator

There are no further questions at this time. I turn the call back over to the presenters.

Donald R. Sinclair

I want to thank you everyone for joining us today and for your interest in Western Gas. Ben and I look forward to speaking with all of you again soon. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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