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Western Gas Partners LP (NYSE:WES)

Q1 2014 Earnings Call

May 07, 2014 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 - Former Chief Executive Officer of Western Gas Holdings LLC, President of Western Gas Holdings LLC and Non-Independent Director of Western Gas Holdings LLC

Analysts

Jerren Holder - Goldman Sachs Group Inc., Research Division

Jeffrey Birnbaum - UBS Investment Bank, Research Division

Sharon Lui - Wells Fargo Securities, LLC, Research Division

John D. Edwards - Crédit Suisse AG, Research Division

Operator

Good afternoon. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Gas Conference Call. [Operator Instructions] Thank you. And I would now like to turn the conference over to your host for today, Mr. Benjamin Fink, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Benjamin M. Fink

Thanks. I'm glad you could join us today to discuss Western Gas' first quarter 2014 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; Jacqui Dimpel, our Senior Vice President; 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.

Before I discuss our first quarter, I'd like to formally congratulate Anadarko's Midstream team for the safety awards they recently received from the Gas Processing Association (sic) [Gas Processors Association]. Anadarko Midstream was noted for having the second lowest total recordable injury rate, with only ExxonMobil reporting a lower figure. On top of this, Anadarko's Midstream team was also awarded the chairman's award for safety improvement. We at Western Gas feel very fortunate to have a sponsor that operates our assets using industry-leading best practices and with the highest regard for health, welfare and safety.

Last night, we announced our first quarter results for 2014. Our quarter was highlighted by closing of the Texas Express and Front Range acquisitions that we discussed on our last call.

We raised the WES quarterly distributions to $0.625 per unit, which is a 16% increase over the first quarter of last year. We also raised the WGP quarterly distribution to $0.25 per unit, which is a 40% increase over the first quarter of last year.

We reported adjusted EBITDA of $141 million and distributable cash flow of $119.3 million, which together represent yet another quarter of consistent performance. Our coverage ratio of 1.21x is well above our targeted coverage ratio of 1.1x, primarily due to the timing of maintenance capital expenditures. These timing issues will cause distribution coverage to vary from quarter-to-quarter but our philosophy of maintaining distribution coverage of no less than 1.1x for the full year remains unchanged.

Our first quarter DJ Basin throughput was impacted by weather-related issues. These issues are now behind us as our DJ Basin throughput in March was over 10% higher than the first quarter average. Helping offset the sequential decline in DJ was continued throughput growth at our Marcellus assets and Brasada plant, as well as increased volumes at our Granger Straddle Plant.

We're also pleased to report that we introduced gas to the Lancaster plant at the beginning of April, and Anadarko's guarantee of 90% of plant's capacity began May 1. We remain on schedule for Train II startup in the second quarter of 2015.

I'm also excited about how our operations are evolving in DJ basin. If you remember our history in the DJ Basin, we started by acquiring the Wattenberg gathering system and the Fort Lupton plant in 2010. We then acquired the Platte Valley plant and gathering systems from Encana in 2011 and have added the Lancaster Train I as well as significant gathering and compression facilities in the field. We've now taken all these assets and combined them into a single integrated system that we refer to as the DJ Basin complex. A single integrated system in the DJ will result in additional flexibility in managing and optimizing our assets in the basin. This combination impacts both the presentation of our throughput and gross margin, so I'd like to ask Ben to discuss how we are now calculating and disclosing these metrics.

Benjamin M. Fink

Thanks, Don. There are a few changes that we made this quarter that I'll walk you through, but perhaps the most important point I'll make is that none of these changes are expected to have an impact on our adjusted EBITDA, our distributable cash flow or our coverage ratio.

The first change I'd like to point out is that we're no longer including equity income as part of total revenues but instead are breaking it out on a separate line item right below total revenues. However, we will include our cash distributions received from equity investments in our gross margin calculation, which we'll now, therefore, call adjusted gross margin.

Secondly, as you know, we've historically reported a single gross margin per Mcf number for our entire portfolio. This metric historically blended our gas assets together with our crude and NGL assets but mostly reflected gas asset performance due to minimal cash flows from our crude and NGL assets. Today, with Mont Belvieu fractionators 7 and 8 now on line, our recent acquisitions of Texas Express and Front Range and the future opportunities that we see in the crude side of the business, we believe that our cash flows from crude and NGL assets will become more meaningful going forward. Therefore, beginning this quarter, we're reporting an adjusted gross margin per Mcf metric strictly for our natural gas assets and a separate adjusted gross margin per barrel metric for our crude and NGL assets. We believe this additional level of disclosure will be helpful to those of you who build your own models and wish to track the performance of our portfolio.

Finally, you'll also notice on Slide 5 that our adjusted gross margin per Mcf for gas assets looks higher than it did last quarter. This is primarily due to the combination of several assets into what we now refer to as our DJ Basin complex that Don mentioned previously. As a result of this combination, we will not double-count the same molecule within that system that we both gather and process.

Slide 6 provides a reconciliation to how we are presenting DJ Basin complex throughput this quarter to how we presented it last quarter. Once again, it's important to remember that these changes are expected to have 0 impact on our adjusted EBITDA, distributable cash flow or coverage ratio.

Now I'll hand it back to Don to discuss our full-year outlook.

Donald R. Sinclair

Thank you, Ben. Our guidance for 2014 is unchanged. We believe our results continue to support distribution growth of no less than 15% at WES and no less than 34% at WGP. As always, this outlook does not include the effect of any future acquisitions. And consistent with our past practice, we'll update our outlook should we make future acquisitions this 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 Jerren Holder with Goldman Sachs.

Jerren Holder - Goldman Sachs Group Inc., Research Division

Just wanted to touch on, I guess, the Marcellus, just gathering volumes in that region, what you guys are seeing as the volume growth decelerating at this point. And what are, I guess, the implications of all the [indiscernible] and stuff that we're seeing taking place on the bigger takeaway pipelines, and how that's impacting your gathering going forward?

Benjamin M. Fink

Jerren, this is Ben. Remember our volume growth there is really driven by working through an inventory of wells that are waiting on completion in our pipeline. We still got an inventory of about 60 wells that we're continuing to work through. So we've seen good sequential growth versus last quarter, and we continue to see that -- or expect to continue to see that through the rest of the year.

Jerren Holder - Goldman Sachs Group Inc., Research Division

And as far as, I guess, the timing of you guys actually working through that, I guess the actual timing that you're working through it doesn't change with respect to, I guess, additional drilling activity or incremental takeaway capacity. You guys are following your, I guess, your CapEx plans, is that how I should think about it?

Benjamin M. Fink

That was all budgeted towards the end of '13 and none of that has changed as of now.

Operator

[Operator Instructions] Your next question comes from the line of Jeff Birnbaum with UBS.

Jeffrey Birnbaum - UBS Investment Bank, Research Division

Just a quick question, Ben, you mentioned now that you guys are breaking out the NGL and crude kind of profitability separately, there may be more of an increased focus on crude assets going forward. I was wondering if you guys collaborated on that a bit just in terms of perhaps what additional organic projects or potentially drop-down assets you would be most interested in? And I guess, also importantly, whether there's the possibility that the WES model of the contract structure might in any way be altered on those assets.

Donald R. Sinclair

Jeff, this is Don. I'll try to answer the first question and whatever I miss, I'll ask Ben to follow-up with. If you think about Anadarko, when they've gone in to these major shale plays, there's been a lack of infrastructure not only for gas gathering but for crude. So at the same time that the gas assets have been installed, they've done the same thing with crude. So if you think about Eagle Ford, DJ and West Texas, those are probably the 3 most prominent that there's existing midstream assets that are crude-based. At some point in time, those assets will be ready for drop to WES, so we just look at that as a continuation of our existing gathering business in the field, being operated by the same people. Same thing as it is today, it will just be incremental inventory for us to acquire from Anadarko. As far as contract structure, there won't be anything. It will just be tariff-based pipes with throughput. At the time that they're dropped, we'll let everyone know exactly what the throughput and the revenue stream associated with that is.

Operator

[Operator Instructions] Your next question comes from the line of Sharon Lui with Wells Fargo.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

You talked about, I guess, optimizing your assets through this creation of the DJ Basin complex. Do you anticipate, I guess, the benefit of doing this through enhanced volumes or maybe on the operating cost side? Maybe if you can just talk about the optimization process.

Donald R. Sinclair

Okay, Sharon, as far as field operations and O&M, that's already started to take place. As you remember, last year, we consolidated the upstream and midstream operations group so the O&M synergies are already in place. Basically, what we're trying to do here is optimize gross margin. So if you think about today, we want to make sure that we get the right BTUs to the most efficient facilities. Those BTUs may not necessarily be contracted for those facilities, but we want the ability to go back and make sure that we pay according to the existing contract. So if you will, there will be a physical dispatch for molecules that will optimize our existing assets, and then there'll be a financial dispatch, if you will, to make sure that everything's paid under the existing contracts in their proper plants.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. And then I guess in terms of timing of realizing those types of benefits?

Donald R. Sinclair

It's ongoing. It'll be as Lancaster I, that's really the big null point because that will be our most efficient facility up there. It will continue all the way through till we bring Lancaster II in service. And this is going to happen just every day. You'll see it based on where development is on the system and where we have existing horsepower, the most efficient horsepower in the field. So it'll happen every day. But the big points are Lancaster I and Lancaster II as we optimize those facilities.

Operator

Your next question comes from the line of John Edwards with Crédit Suisse.

John D. Edwards - Crédit Suisse AG, Research Division

Just Don, I don't know if you'll be able to speak to this or not. But I'm just curious, any impact to drop-down trajectories in the wake of the litigation settlement at Anadarko?

Donald R. Sinclair

John, we're very fortunate that we've been able to have a pattern of execution. And I think the capital markets have gotten pretty comfortable with as we have and Anadarko has. So we don't see anything in the -- in our future that's going to change that pattern of execution based on what we know today.

John D. Edwards - Crédit Suisse AG, Research Division

Okay, great. And then I'm just curious, to what extent did you think weather impacted you operationally and financially during the quarter?

Donald R. Sinclair

Ben did a good job. I'll let him talk to you about throughput. Just if you think about mechanically, as those liquids came to the ground and the ambient temperature is below freezing, that causes a lot of operational problems in the field, not only through your compression but through your slug catchers. So that's really what drives the change in volumes. And so anytime we have that downstream operational issue, it's going to impact us at the well head and the volumes. But I'll let Ben address it a different way.

Benjamin M. Fink

John, financially, I'm estimating the impact at around $2 million to $3 million. And if you look at Slide 6 of the slides we referred to you today, you can see the DJ Basin throughput for the quarter was around 402. Well, in March, after the weather cleared up, it was closer to 450, so you get an idea of the throughput impact.

Operator

And there are no further questions at this time. I will now turn the call back over to the presenters.

Donald R. Sinclair

Jonathan, thank you. I want to thank everyone for joining us today and for your continued interest in Western Gas. Then I look forward to speaking with each of you again soon. Thank you.

Operator

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

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