Western Gas Partners, LP WES
Q4 2012 Earnings Call Transcript
Transcript Call Date 02/28/2013

Operator: Good morning, my name is Steve and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q4 Western Gas Partners and Western Gas Equity Partners 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. 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 - SVP, CFO and Treasurer: Thank you Steve. I'm glad you could join us today to discuss Western Gas's fourth quarter and full year 2012 results as well as our outlook for 2013. 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 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 believe that these estimates are reasonable. However, a number of factors could cause actual results to differ materially from those that we discussed. You should read the full disclosure on forward-looking statements, our presentation slides, our latest 10-K, 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 this 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.

Lastly for those of you who are unitholders of WES in 2012, I'm pleased to inform you that your K-1 will be available on our website by next week with paper copies to be mailed to you later in March. For those of you who are unitholders of WGP in 2012, your K-1 will be made available on our website in mid-March with paper copy to be mailed to you towards the end of the month.

With that let me turn the call over to Don.

Donald R. Sinclair - President and CEO: Thanks, Ben. Good morning, everyone, and thank you for joining us today. I'd like to welcome those of you who are new investors in WGP and therefore first time participants on our earnings call. On this call, we posted my comments on WES's operation and financial performance and we will discuss the implications to WGP where appropriate.

Yesterday we announced our fourth quarter and full year results for 2012. For the full year, WES's adjusted EBITDA was in line with low end of our most recently announced guidance range. Our full year results for total capital expenditures and maintenance capital as a percentage of adjusted EBITDA were in the middle of the announced ranges.

2012 was an important year for WES, highlighted by two acquisitions, consistent performance despite weak natural gas and NGL markets, the launch of a robust growth capital program, and the receipt of our second investment-grade rating. We ended the year with over $1 billion in liquidity and raised our fourth quarter distribution to $0.52 per unit, an 18% increase over last year while maintaining healthy coverage ratios.

Now let's talk about WES's fourth quarter. Adjusted EBITDA was $83.3 million and distributable cash flow was $67.2 million, which enabled us to raise our distribution for the 15th straight quarter. Note that WES's fourth quarter coverage ratio of 1.02 times includes all the units that are issued in conjunction with the initial public offering of WGP in December, the proceeds of which were in our cash balance at the end of the year.

For comparative purposes if the WES units issued in December were excluded from the coverage ratio calculation, the fourth quarter coverage ratio would've been 1.12 times and the full year coverage ratio would have been a very healthy 1.23 times.

The drivers behind the fourth quarter results for lower than expected throughput at our Red Desert facility due to third-party development that was pushed in 2013, an unexpected production shut-in at Hilight due to simultaneous drilling operations and lower throughput due to mechanical issues. We also experienced periodic ethane rejection at all for processing plants as well as colder than normal weather in the Rockies that led to freeze-offs.

WES estimates financial impact of weather-related mechanical issues to be approximately $1.2 million, while the impact of ethane rejection was approximately $900,000 for the quarter. Offsetting these declines were significant growth at our DJ Basin throughput as a result of increased compression we brought online in August and September.

While our total overall throughput was flat for the third quarter, our gross margin per Mcf was once higher than the third quarter due to these changes in throughput metrics. We remain excited by the upstream capital being spent by APC in the DJ Basin and other onshore basin as highlighted in their recent investor call on February 20th.

If we have not viewed the slides from that call, we encourage you to do so at www.anadarko.com.

Now, I'd like to take a moment to discuss acquisitions we announced yesterday in more detail. First, I will discuss our most recent drop-down from Anadarko. We are acquiring a 33.75% interest in Liberty and Rome gas gathering systems, which serve Marcellus shale production in Northeast Pennsylvania. These assets may be familiar to some of you as they are currently operated by Access Midstream Partners.

The assets are operated under a cost of service gathering agreement which targets an 18% rate of return over the life of the contract. The assets are 100% fee-based and serve production in area of mutual interest between Anadarko, Chesapeake, Statoil and Mitsui. The total capacity of these two systems is currently over 2 Bcf a day, and we expect to increase to 2.5 Bcf a day later this year.

With over 180 wells drilled and in various stages in completion and waiting on pipeline connections, we believe that these assets are (poised) to generate significant near-term growth. We're excited by this acquisition, as it expands our fee-based assets, our geographic diversity and adds additional high quality resources to the portfolio.

Next I would like to talk about the second acquisition we announced yesterday, which is also located in Marcellus. Some of these assets is Chesapeake Energy Corporation, who had retained an interest in the Marcellus midstream assets that are currently operated by Anadarko.

We are acquiring a 33.75% interest in Larry's Creek, Seely and Warrensville gas gathering systems that are held by Chesapeake, but please note we are not acquiring Anadarko Midstream's equivalent interest in these assets, which remain available to be dropped to us at a later date.

Identical to drop down assets, assets we are acquiring from Chesapeake are 100% fee based and covered on a cost service gathering agreement. Also similar to the drop down assets we believe that 2013 investments in these assets will result in significant near-term growth primarily due to over 80 wells that have been drilled and are in various stages of completion and/or waiting on pipeline connections.

In addition to the existing production by these systems, we believe there might be additional upside due to further development in areas adjacent to the systems. Any upside related to these areas would be strictly additive to our current forecast. Both of these acquisitions are mainly accretive to our distributable cash flow.

The drop down will be financed with $220 million of cash on hand, borrowings of $246 million and issuance of 449,129 WES units to Anadarko. The acquisition from Chesapeake will be funded through a draw on our credit facility. Based on the need to connect so many wells behind all the acquired systems, we are forecasting that the assets capital expenditures will exceed their EBITDA on 2013, ultimately achieving capital maturity in 2014.

However we're focusing that the capital we are spending will result in significant near term growth. The forecast of 2014 EBITDA multiple is significantly lower than the 2000 multiple we discussed in the earnings release.

Now before we move on to our full year 2013 outlook, I'd like to give you an update on our major growth projects.

Many of you are already familiar with the Brasada and Lancaster projects that we announced last year. The plants are production to the most prolific basins in the country where drilling activity is primarily driven by crude oil economics. The Brasada plant pipelines and stabilization facilities serving production from the Eagleford shale continue to be on time with projected start up in the second quarter of 2013. All major components have been delivered and our current focus is on installing piping instrument and electrical systems.

Throughput at Brasada will ramp up through the remainder of 2013 with Anadarko guarantying 90% of plant's 200 million cubic feet per day capacity beginning on January 1, 2014. We believe that the total project will cost between $250 million and $260 million and will generate no less than 6.5 times 2014 EBITDA multiple. We anticipate spending approximately $100 million on this project in 2013.

The Lancaster plants serving production from the Niobrara and Codell formations in the DJ basin also continues to be on time with projected start up in the first quarter 2014 am pleased to report that site reparations now are complete mechanical contractors being mobilized and shipping of major components is underway. Anadarko's guarantee 90% of plant 7 million cubic feet per day capacity will begin at the plant startup date.

We continue to believe that the total project cost is approximate $160 million and will generate no less than 6.5 times 2014 EBITDA multiples we anticipate spending approximately $120 million on this project in 2013.

Our major growth projects assured 100% fee based revenue and are written by long term agreements with Anadarko. We believe these projects help give our unitholders a clear line of sight into our ability to generate distributable cash flow in 2014 and beyond. Our strong liquidity position and sponsor support enables us to execute these projects or maintain our previously stated objectives for distribution growth and coverage.

Combining everything we discussed today including equity investments, but excluding capital spent on acquisitions, the pie chart on Slide 9 shows where we expect to spend our money in 2013. As one would expect given the current commodity price environment, we are focusing the bulk of our capital program in three areas with world-class resources, the DJ, Eagleford and Marcellus.

I hope you all share excitement about the growth projects that in our budget for 2013.

Now, let's go to our full year 2013 outlook. As you read in yesterday's release, we expect adjusted EBITDA for 2013 to be between $410 million and $450 million. There are three key assumptions behind this adjusted EBITDA range that I would like to discuss.

First, we expect to see throughput growth in our Wattenberg, Red Desert and Hilight systems due to additional drilling as well as growth at Chipeta as a result of this month's completion of the Questar Pipeline interconnect. Second, we are including the full year results associated with Marcellus assets we are acquiring from Anadarko. Third, we are assuming a mid-March 2013 closing of the Marcellus asset acquisition from Chesapeake and a May 2012 startup for the Brasada plant.

Changes in timing on either of these projects would affect our results accordingly. Our total CapEx guidance range is $550 million to $600 million. I want to be very clear what is included in this number and what is not. First, this range also includes approximately $20 million capital related to the pre-acquisition period of assets acquired from Anadarko. Secondly, this range does not include the approximately $23 million we expect to spend on White Cliffs. This amount records an equity investment as opposed to capital expenditure.

As you can see, the bulk of our spend is related to growth projects at service dynamic resource plays and are 100% fee-based. We're also planning to spend additional capital at Wattenberg, Red Desert, Hilight assets due to additional activity behind those systems.

We have a consistent history of diligently managing our balance sheet and maintaining flexibility to finance our projects, while preserving investment grade metrics. We believe that the financing costs associated with the growth projects, all of which should be fully online by the first quarter of next year, we'll compress our distribution coverage in 2013, when compared to historic levels.

We've been very consistent over the past four years and staying near our target coverage ratio of 1.1 times is acceptable for WES's global business risk. While the quarterly coverage ratio may fall below this level in 2013, our target still remains 1.1 times. As is always the case, the timing of certain expenditures especially maintenance and capital expenditures will impact the coverage ratio in any given quarter, and we encourage our investors to measure coverage ratios over longer periods of time.

Finally as a subset of our total CapEx, our maintain CapEx is expected to be between 9% and 12% of adjusted EBITDA which is consistent with our 2012 results. Overall, we believe our results will support solid growth in our distributable cash flow, which should result in distribution growth of no less than 15% at WES and no less than 33% at WGP.

It's important to remember that this outlook does not include the effect of any future acquisitions we may make. Any acquisitions we pursue would be added to the outlook discussed today and we would update guidance consistent with our past practice.

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

Transcript Call Date 02/28/2013

Operator: Brett Reilly, Credit Suisse.

Brett Reilly - Credit Suisse: Just a quick question on the dropdown on third-party acquisition. Can you maybe give us a little color on why you chose to go after the Marcellus asset versus some of the other areas in which Anadarko was operating?

Donald R. Sinclair - President and CEO: Brett, I want to make sure I understand the question you're asking about. Is it the Anadarko drop or the Chesapeake acquisition? I want to make sure I answer the question….

Brett Reilly - Credit Suisse: Just I guess more generally, why the Marcellus, I guess on the dropdown side of things, relative to maybe some of the systems in the Eagleford or other areas the Anadarko is really ramping?

Donald R. Sinclair - President and CEO: Right, you know we look at numerous variables before we determine what could be our next acquisition from Anadarko. There's capital maturity, quality resources, contracts, and scale and scope. When we went to the inventory and looked at where we are in time, we thought the Marcellus assets based on the quality of the contracts, and the scale and scope fit us best at this time.

Brett Reilly - Credit Suisse: Then maybe just a little color on expected ramp in cash flow from those assets throughout the course of the year? It sounds like you're expecting volumes to grow pretty significant throughout the course of the year?

Benjamin M. Fink - SVP, CFO and Treasurer: This is Ben. If you can see on our pie chart, we're spending a big chunk of CapEx on those assets and we expect to realize some pretty good returns on those assets due to the cost of service model. So as we mentioned, we think the 2014 multiples would be a lot lower than the 2013 multiples.

Operator: Elvira Scotto, RBC Capital Markets.

Elvira Scotto - RBC Capital Markets: Couple of questions for me. So, it looks like with this dropdown, the assets were acquired maybe a little before reaching capital maturity and we're seeing some more, I guess organic growth. How should we think about that maybe going forward? I know WES is a dropdown story first and foremost, but should we be thinking about sort of maybe some sort of base level of kind of organic growth built into the model now?

Benjamin M. Fink - SVP, CFO and Treasurer: This is Ben again. Elvira, good morning. I think when we talk about it last year when you saw the big step up in our growth CapEx we asked is this kind of a one-time aberration and what we said at the time is this is more like the new normal. We're now a year into that and what you are seeing is that as WES has increased its own scale and scope we're capable of having a larger growth CapEx burden. So, we're comfortable at these levels. I think capital maturity will always be a factor in terms of attractiveness of near-term dropdown candidates, but we're certainly more comfortable spending lot of CapEx than we used to.

Donald R. Sinclair - President and CEO: Elvira, one those thing if you think about organic growth projects the multiple on them, is lower than the estimate multiples, lower than what our usual acquisition is so for us, we like where it fits relative to accretion and in our mind it's just part of preparing for future growth.

Elvira Scotto - RBC Capital Markets: The other question that I had is really around ethane rejection, maybe talk a little bit about – because you kind of mentioned it how it impacted fourth quarter, maybe talk a little bit about how if at all you think it's going to impact 2013 and if you've built some of that into the guidance.

Donald R. Sinclair - President and CEO: I'd like to first start if you think about how our processing portfolio sets out, the majority of that portfolio is fee-based. So the ethane rejection component doesn't impact as that much as you could tell by $900 million was not a big number in the fourth quarter. So I think you can see from those variables that ethane rejection is not going to have a big impact on us and we have put all of that, all our thoughts around ethane rejection in our 2013 guidance as well.

Operator: (Louis Shamie, Zimmer Partners).

Louis Shamie - Zimmer Partners: Just wanted to talk a little bit – you mentioned that I think both assets that you're acquiring here under this cost of service model that Chesapeake had instituted with Access, where you spent capital and basically get a fixed rate of return on the capital spent with adjusters and – can you talk a little bit about the mechanisms of how that works and that 18% return that you mentioned, how frequently that's trued up or what the mechanics are there?

Danny J. Rea - Senior Vice President and COO: Louis, this is Danny Rea. Basically, as we stated in the script, it is a 18% before tax on invested capital. We look at a longer term view over a 15 year type period and in doing that and forecasting our forward years and forward views of both capital and costs. We also re-determine that annually and revisited.

Donald R. Sinclair - President and CEO: In that redetermination Louis one thing is important is it takes previous performance and rolls in to your future projections to determine those rates. So you always have a true-up mechanism that allows you to stay on path for that 18%.

Louis Shamie - Zimmer Partners: So if in one year your volumes fell a little bit short of projections you'd make it up in the future?

Donald R. Sinclair - President and CEO: It goes both ways.

Louis Shamie - Zimmer Partners: So when you are spending capital say in 2013 are you realizing a benefit of that in '13 or does that all come out like a one year lag.

Donald R. Sinclair - President and CEO: It's all built into the model to give you that average rate that we are currently utilizing in '13. So it does take into consideration capital.

Louis Shamie - Zimmer Partners: The other question I had first off definitely like seeing more growth capital as part of the model. The other thing was with something like 600 million of acquisition and drop down announced today or last night. It seems like you guys are being I guess a little picking a little bit of a faster pace of growing MLP assets wise, guess now that your asset base is a little bit bigger can we expect like a little bit of an acceleration of the drop downs or third party acquisitions relative to what we've seen over the last few years?

Benjamin M. Fink - SVP, CFO and Treasurer: I would say that as I have said in the past sizes is only one factor that we look at when we determine what is the next appropriate asset for dropdown and yield. Continue to see a lot of variability in size obviously all the cash that went into WES in conjunction with the WGP IPO was a factor in determining, which assets to drop this time and in the future will just determine accordingly.

Operator: Sharon Lui, Wells Fargo.

Sharon Lui - Wells Fargo: For the acquisitions you did indicate that there are lot of wells waiting on pipe, just wondering if you can give us a sense in terms of maybe Anadarko's capital spending or activity in that region relative to 2012 levels?

Donald R. Sinclair - President and CEO: Sharon, this is Don. What I would suggest to do, so I mentioned in the script you can go back to the Anadarko Investment Investor Conference on the 29th. Their slides and therefore all their onshore North American resources plays and it has what they expect relative to increase wells from '12 to '13 and what they expected to I don't think it break it downs specific capital by region, so give you an idea what's going to show up in the well account between '12 and '13.

Operator: I am showing there are no further questions at this time.

Donald R. Sinclair - President and CEO: Thank you gain for joining us and for your interest in Western Gas. We look forward to seeing hopefully all of you all before too long stay. Thank you today.

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