Western Gas Equity Partners' (WGP) CEO Don Sinclair on Q1 2014 Results - Earnings Call Transcript

| About: Western Gas (WGP)

Western Gas Equity Partners, LP (NYSE:WGP)

Q1 2014 Results Earnings Conference Call

May 07, 2014 12:00 PM ET

Executives

Benjamin Fink - SVP and Chief Financial Officer

Don Sinclair - President and CEO

Jacqui Dimpel - Senior Vice President

Analysts

Jerren Holder - Goldman Sachs

Jeff Birnbaum - UBS

Sharon Lui - Wells Fargo

John Edwards - Credit Suisse

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. 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.

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 Fink

Thanks. I am glad you could join us today to discuss Western Gas’ first quarter 2014 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 call today are Don Sinclair, our President and CEO; Jacqui Dimpel, our Senior Vice President; and other members of the management team 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-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.

Don 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. Anadarko midstream is noted for having the second lowest total recordable injury rate with only Exxon Mobil 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 sponsored (inaudible) 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 distribution 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 1.21 times is well above our targeted coverage ratio of 1.1 times, 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 1.1 times 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 to our Granger straddle Plant.

We're also pleased to report that we introduced gas to Lancaster Plant at the beginning of April and Anadarko’s guarantee of 90% of plant’s capacity began in May 1. We remain on schedule for Train II start-up 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 have purchased at DJ Basin complex. A single integrated system in the DJ will result in a 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 Fink

Thanks Don. There are a few changes that we have 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 or distributable cash flow or our coverage ratio. The first change I'd like to point out is that we are no longer including equity income as part of total revenues, but instead are breaking 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 will now be therefore called 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/NGL assets, but mostly reflected gas asset performance due to minimal cash flows from our crude/NGL assets.

Today, with Mont Belvieu fractionators 7 and 8 now online , 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/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/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 will also notice on slide five 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 (inaudible) molecule within that system that we both gather and process. Slide six provides 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 zero 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.

Don Sinclair

Thank you, Ben. Our guidance for 2014 is unchanged. We believe our results continue to support distribution growth of not 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 quarter comes from the line of Jerren Holder with Goldman Sachs. Please go ahead.

Jerren Holder - Goldman Sachs

Good morning. I just wanted I guess -- good morning guys. Just wanted to touch on, I guess, the Marcellus gathering volumes in that region, what you guys are seeing is the volume growth decelerating at this point, and what are, I guess, the implications of all the reverses and stuff that we’re seeing taking place on the bigger takeaway pipelines and how that’s impacting your gathering going forward?

Benjamin Fink

Hey, good morning Jerren, this is Ben. Remember our volume growth there is really driven by working through on inventory of wells that are waiting on completion into our pipeline. We’ve still gotten 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, we expect to continue to see that through the rest of the year.

Jerren Holder - Goldman Sachs

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 we should think about?

Benjamin Fink

That was all budgeted towards the end of ‘13 and none of that’s changed as of now.

Jerren Holder - Goldman Sachs

Okay. That’s it. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Jeff Birnbaum with UBS. Please go ahead.

Jeff Birnbaum - UBS

Good morning guys.

Don Sinclair

Good morning Jeff.

Jeff Birnbaum - UBS

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 could elaborate on that a bit just in terms of perhaps what additional organic projects or potentially dropdown assets you would be most interested in? And I guess also importantly, whether it is the [possibility] (ph) that the west model of a contract structure might -- will be altered on those assets? Thanks.

Don Sinclair

Jeff, this is Don. I will try to answer the first question and whatever I miss; I’ll ask Ben to follow-up with. If you think about Anadarko, when it has gone into these major shale plays, there has 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 have done the same thing with crude. So if you think about Eagle Ford, DJ, and West Texas, those are probably pretty most prominent that there is existing midstream assets that are crude-based.

At some point in time, those assets will be ready for (inaudible), so we just look at that as a continuation of our existing gathering business in the field. We operate 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] (ph) pipes with throughput at the time that their drop will let everyone know exactly what the throughput and the revenue streams associated with that is.

Jeff Birnbaum - UBS

Great, thanks.

Operator

(Operator Instructions). Your next question comes from the line of Sharon Lui with Wells Fargo. Please go ahead.

Sharon Lui - Wells Fargo

Hi, good morning.

Don Sinclair

Good morning Sharon.

Sharon Lui - Wells Fargo

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?

Don Sinclair

Okay. Sharon, as far as field operations in 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 in most efficient facilities, those BTUs may not necessarily be contracted for those facilities, but we want to build these and go back and make sure that we pay according to the existing contracts. So, if you will, there will be a physical dispatch of molecules that will optimize our existing assets, and then there will be financial dispatch if you will to make sure that everything is paid under the existing contracts and the profit plans.

Sharon Lui - Wells Fargo

Okay. And then I guess in terms of timing of realizing this type of benefit?

Don Sinclair

It's ongoing, it will be as Lancaster 1, that's really the big note point, because that will be our most efficient facility up there, and it will continue to all the way through until we bring Lancaster 2 in service. And this is going to happen just every day. You will see it based on where our development is on the system and where we have existing horsepower , most efficient horsepower in the field.

So, it will happen every day, but the big points for Lancaster 1 and Lancaster 2 is we optimize those facilities.

Sharon Lui - Wells Fargo

Okay, great. Very helpful. Thank you.

Operator

Your next question comes from the line of John Edwards with Credit Suisse. Please go ahead.

John Edwards - Credit Suisse

Yes, good morning everybody. Just 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 of Anadarko?

Don Sinclair

John, we're very fortunate that we've been able to have a pattern of execution and I thank the capital markets have got 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 Edwards - Credit Suisse

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

Jacqui Dimpel

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 was below freezing that caused us a lot of operational [bumps] in the field, not only to the compression, but to your [slide catchers]. That's really what drives the change in volumes. And so anytime we have downstream operational issue, it’s going to be impact us with well head volumes. But I’ll let Ben addresses it in a different way.

Benjamin Fink

John, financially I’m estimating the impact at around $2 million to $3 million. If you look at slide six of the slides we referred to you today, if you see the DJ Basin throughput, for the quarter it was around 402 in March. After the weather cleared up, it was closer to 450, so you get an idea of the throughput impact.

John Edwards - Credit Suisse

Okay, great. Alright, thank you. That's all I had.

Don Sinclair

Thanks John.

Operator

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

Don Sinclair

Jonathan, thank you. I want thank everyone for joining us today and for your continued interest in Western Gas. And 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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