01—Abstract
Summary
Summary of the 10-K filed February 25, 2016. Cited figures are marked; the original filing is the authoritative source.
Western Gas Equity Partners, LP (WGP) is a Delaware MLP formed by Anadarko whose only cash-generating assets are its interests in Western Gas Partners, LP (WES): a 1.8%a general partner interest, 100% of the incentive distribution rights, and a significant limited partner interest (49,296,205 WES common units, a 34.6% limited partner interest as of December 31, 2015).
WES gathers, processes, treats and transports natural gas, NGLs and crude oil, primarily for Anadarko and third-party producers. Reported 2015 total revenues and other were $1,561,372 thousandb, versus $1,382,868 thousand in 2014, while operating income fell to $34,386 thousand from $475,278 thousand, driven by $514,096 thousand of impairments at the Red Desert complex and Hilight system and a $20,224 thousand fourth-quarter loss tied to the December 3, 2015 DBM complex incident. WGP reported net income attributable to WGP of $87,863 thousand for 2015, and distributions declared on its units totaled $1.49125 per unit.
The filing discloses a material weakness in internal control over financial reporting, which KPMG's report describes as resulting in an adverse opinion. The weakness stems from an impairment triggering-event assessment as of March 31, 2015 that incorrectly included the effect of WES's commodity price swaps with Anadarko, and it led to restatement of unaudited interim 2015 periods. Credit ratings were downgraded by Moody's in February 2016 (WES senior unsecured to Ba1 with negative outlook).
Cash distributions on WGP units increased to $0.40375c per unit for the fourth quarter of 2015, and WES's distribution rose to $0.800 per unit. Subsequent to year end, WES agreed on February 24, 2016 to acquire Springfield Pipeline LLC from Anadarko for $750.0 million, financed by perpetual convertible preferred units, WES common units and borrowings under the WES RCF. Investors should weigh the dependence on Anadarko for a substantial share of throughput and revenues, the swap agreements expiring December 31, 2016, and the impairment and credit rating pressures disclosed in the filing.
02—Key points
Key Highlights
- Total revenues and other of $1,561,372 thousand in 2015, up from $1,382,868 thousand in 2014; operating income of $34,386 thousand, down from $475,278 thousand.
- Impairments of $514,096 thousand in 2015, including $280.2 million at the Red Desert complex and $220.9 million at the Hilight system.
- Net income attributable to Western Gas Equity Partners, LP of $87,863 thousand in 2015, compared with $239,220 thousand in 2014.
- Material weakness in internal control over financial reporting; KPMG issued an adverse opinion on internal control as of December 31, 2015.
- Quarterly WGP distribution raised to $0.40375 per unit for Q4 2015; WES distribution raised to $0.800 per unit.
- Anadarko accounted for 66% of WES total revenues and 48% of throughput in 2015, and holds 87.3% of WGP common units.
- Subsequent event: WES agreed on February 24, 2016 to acquire Springfield Pipeline LLC from Anadarko for $750.0 million.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 25, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $1.75B$1.53B | +14.3% |
| Operating Expenses | $1.73B$1.04B | +66.0% |
| Operating Income | $154.18M$551.48M | −72.0% |
| Interest Expense | $113.87M$76.77M | +48.3% |
| Net Income | $165.51M$288.02M | −42.5% |
05—Questions
Frequently Asked Questions
Why did operating income decline so sharply in 2015?
The filing attributes the decline mainly to $514,096 thousand of impairments, primarily at the Red Desert complex and Hilight system, triggered by lower estimated future cash flows from the low commodity price environment and reduced producer drilling. The December 3, 2015 fire and explosion at the DBM complex also produced a $20.3 million loss recorded in gain on divestiture and other, net for the year.
What does the material weakness mean for investors?
Management concluded internal control over financial reporting was not effective as of December 31, 2015. The weakness involved an error in a March 31, 2015 impairment triggering-event assessment, which incorrectly included the effect of WES's commodity price swaps with Anadarko. It led to restatement of unaudited interim financial statements for the first three quarters of 2015, and management expects remediation by the end of the second quarter of 2016.
How dependent is WES on Anadarko, and what happens when the swaps expire?
Anadarko accounted for 66% of WES total revenues and 48% of throughput in 2015. The commodity price swap agreements covering the DJ Basin complex, Hugoton system and MGR assets expire December 31, 2016. The filing states that renewal may occur at lower prices or not at all, and that third-party hedges would likely be significantly less favorable, which could materially reduce distributable cash flow.
What is the Springfield acquisition and how will it be financed?
WES agreed on February 24, 2016 to acquire Anadarko's 100% interest in Springfield Pipeline LLC for $750.0 million, expected to close by March 15, 2016 subject to regulatory approvals. Financing includes $449.0 million of 8.5% perpetual convertible preferred units, 1,253,761 WES common units issued to Anadarko and 835,841 to WGP, and $247.5 million of WES RCF borrowings. WGP will fund its unit purchase through a secured revolving credit facility.
06—Continue