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Western Gas Partners LP (NYSE:WES)

Q3 2012 Earnings Call

November 01, 2012 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

David Nathan Fleischer - Chickasaw Capital Management, LLC

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 Third Quarter Western Gas 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.

Benjamin M. Fink

Thank you, Steve. Good morning, everyone. I'm glad you could join us today to discuss Western Gas' third quarter 2012 results. 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 our questions later in the call.

Before I turn the call over to Don, I'll remind you that this presentation contains our best and most reasonable estimates and information. However, a number of factors could cause actual results to differ materially from what we discuss. You should read our full disclosure on forward-looking statements, our presentation slides, our latest 10-K, our other filings and our press releases for the risk factors associated with our business.

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 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. First, I want to share our heartfelt concerns and prayers for those of you in the Northeast impacted by Hurricane Sandy. The safety and well-being of you and your families are certainly in our thoughts today, and we thank you for taking the time this morning to join us.

Yesterday, we announced our third quarter results for 2012. We reported adjusted EBITDA of $84.5 million and distributable cash flow of $64.4 million, which together represent another solid quarter.

We raised our third quarter distribution to $0.50 per unit, which is a 19% increase over last year and a 67% increase since the second quarter of 2009. We're proud of our ability to grow distributions while maintaining healthy coverages as evidenced by our year-to-date coverage ratio of 1.27x.

Next, I'd like to take a moment to discuss our operating highlights for the third quarter. In the DJ Basin, we are pleased to report that we put 50 million cubic feet per day of compression in service during the quarter. This allowed us to increase capacity and lower field pressures for the growing throughput in the Wattenberg field. While we are encouraged by the horizontal drilling activity in the DJ Basin, our results continue to be impacted by service interruptions on a third-party NGL pipeline. These interruptions impact our throughput for the quarter and consequently impact our gross margin by $1 million to $1.5 million.

Our sequential quarter throughput growth was driven by several factors: the resumption of deliveries under an interruptible processing agreement at Mountain Gas as discussed last quarter, continued drilling activity at Chipeta, as well as our recent Chipeta acquisition. Please note that while our normal practice is to recast prior period financial statements following an acquisition from Anadarko, we are not required to do this for the recent Chipeta acquisition because we are already consolidating Chipeta in our financial statements.

We are pleased to report that Chipeta Train III was successfully commissioned in early October and is now operational. Our other major plant projects, Brasada and Lancaster, are progressing, with Brasada scheduled to come online in the second quarter of 2013 and Lancaster scheduled to come online in the beginning of 2014. While these projects remain on schedule, we are expecting to incur additional costs predominantly due to changes in scope and increasing costs of materials.

Brasada's project cost is now estimated to be approximately $250 million and Lancaster's project cost is now estimated to be approximately $160 million. We will still achieve the 6.5x EBITDA multiples that we originally announced due to rate adjustment clauses in each applicable agreement.

Turning to our guidance. We're forecasting results will still fall within the ranges that we announced last quarter. We remain on track to deliver 16% to 20% distribution growth for the year, and in yesterday's earning release, we announced our goal of raising our quarterly distribution by a minimum of 15% in 2013. We see low commodity prices combined with NGL downstream issues continuing to be a challenge for our industry in 2013, but we believe our portfolio is well-positioned to deliver stable results and best-in-class risk-adjusted distribution growth.

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 the line of Brett Reilly with Crédit Suisse.

Brett Reilly - Crédit Suisse AG, Research Division

Just a quick question on the increase in scope on the capital projects. Could you speak a little bit more to that? Is that an increase in the size of the plant at Brasada?

Donald R. Sinclair

Brett, this is Don. No, it's not. It's basically an increase in the condensate stabilization facilities in the field and a little bit of capital around a bigger site for potential plant expansion. And then at Lancaster, it's driven by additional recompression to tailgate the plant that we're going to need now due to higher downstream line pressures.

Brett Reilly - Crédit Suisse AG, Research Division

Okay. And if you look at the increase in costs for each one of those, how much of that is related to shortage of labor or just rising material costs? Is there any way to bracket that?

Donald R. Sinclair

It's not significant.

Operator

[Operator Instructions] And you have a question here from the line of Selman Akyol from Stifel.

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

Two quick questions, if I may. First of all, in terms of the throughput, is all that behind you, do you think in terms of being constrained?

Donald R. Sinclair

Relative to DJ, Selman, is that the question?

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

Correct.

Donald R. Sinclair

It's not going to be. We think there will still be challenges through the rest of this year in 2013 and then really does the -- it's hard to tell when and how much. But they're not going to go away until Texas Express and Front Range both go into service.

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

Okay. That's helpful. And prior there had been some issues in last quarter going into air permits and everything. Has all that been resolved successfully? As you guys look forward, do you think you've got everything you need?

Donald R. Sinclair

Yes, we do.

Operator

Your next question comes from the line of David Fleischer from Chickasaw Capital Management.

David Nathan Fleischer - Chickasaw Capital Management, LLC

Actually, I was going to ask about the environmental issue, and I'll still ask about it. But, yes, you bought the $50 million in compression on -- with the delay this quarter. But as you look out in time and think broadly if this administration stays in power, if the EPA continues doing what they're doing, can you file early enough to minimize delays? Or is this going to be an increasing problem? Do you see it as an increasing problem?

Donald R. Sinclair

David, this is Don. What we've tried to do in the DJ Basin specifically is put a lot of time and effort between ourselves and the other major operators in the field working with the local regulators also in conjunction with the governor of Colorado. So I'm not sure a change or November -- next Tuesday event is going to really change how that's executed. And we continue to spend a tremendous amount of time communicating and making sure that the local officials understand what we're trying to do and the timing of which we're trying to do and the impact it has on the local economies.

Operator

And we have a follow-up question from the line of Brett Reilly with Crédit Suisse.

Brett Reilly - Crédit Suisse AG, Research Division

Could you guys just maybe add a little bit of color as to some of the assumptions that you're making around the 15% distribution growth guidance for next year?

Benjamin M. Fink

Brett, this is Ben. And it's a very fair question. It's hard to be emphatic because we're currently in the process of doing our 2013 capital budgeting, as is Anadarko. As you can imagine, where Anadarko decides to deploy rigs and capital will have a material effect on us. So what we can just basically say is based on what we're seeing, although it's not finalized, and of course, our ability to buy additional acquisition -- buy additional assets from Anadarko, that we're comfortable giving that distribution growth guidance.

Brett Reilly - Crédit Suisse AG, Research Division

Okay. And can you remind us how much Anadarko spent on their own in the midstream maybe this year? And I guess you can't really give guidance as to next year, but just ballpark the figure for maybe this year and the year prior?

Benjamin M. Fink

Yes. For '12, it will be north of $500 million, but remember that doesn't include investments in equity investments that don't count as CapEx. When you add that in, it will be closer to $700 million.

Operator

And I'm showing there are no further questions at this time. I'll turn it back over.

Donald R. Sinclair

Thank you, Steve. I'd like to thank everyone for joining us and your interest in Western Gas Partners, and we hope you and your families are safe and can start to put your lives back together after Sandy. Thank you.

Operator

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

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