Western Midstream Partners LP (WES) 2013 Q4 法說會逐字稿

Good morning. My name is Shirley and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Gas 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. (Operator Instructions). Thank you.

I would now like to turn the conference over to your host for today, Benjamin Fink, Senior Vice President, Chief Financial Officer (technical difficulty)

Thank you operator. I'm glad you could join us today to discuss Western Gas' fourth-quarter and full-year 2013 results as well as our outlook for 2014. Please note that, on this call, we will be referring to Western Gas Partners as WES, and Western Gas Equity Partners as WGP.

Don Sinclair, our President and CEO, is joining me on the call today, and I'm also very pleased introduce all of you to Jackie Dimpel, who is also with us today. Jackie succeeded Danny Rea as Anadarko's Vice President of Midstream and was just appointed yesterday as our newest senior vice president.

As always, this presentation contains estimates that are based on the best information available to us at this time, and we believe these estimates are reasonable. However, a number of factors could cause actual results to differ materially from what we discuss. Please refer to our latest filings with the SEC for the risk factors associated with our business.

In addition, we will 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 this call's presentation slides, at www.westerngas.com.

Lastly, for those of you who were of WES in 2013, I'm pleased to inform you that your K-1 is now available through our website with paper copies to be mailed to you later in March. For those of you who are unitholders of WGP in 2013, your K-1 will be made available on our website in mid-March with paper copies to be mailed to you towards the end of the month.

With that, let me turn the call over to Don.

Thanks Ben. Good morning, everyone, and thank you for joining us today.

WES's fourth quarter and full-year results for 2013 were excellent. For the full year, WES adjusted EBITDA was above the high end of the guidance range we announced in November. WES' full-year total capital expenditures on a cash basis came in lower than expected due primarily to timing of cash payments. And maintenance capital as a percentage of adjusted EBITDA was at the low end of the announced range.

2013 was an important year for WES highlighted by over $700 million of acquisitions, 16% full-year distribution growth. Total capital and equity investments have grown by more than seven times over the last two years, and the receipt of our third investment-grade rating. WES ended the year with approximately $900 million in liquidity and maintained healthy coverage ratios throughout the year. The strong performance of WES led to substantial growth in WGP as its fourth-quarter distribution was 40% higher than it was in the fourth quarter of 2012.

Looking specifically at WES' fourth quarter, adjusted EBITDA was $129 million and distributable cash flow was $105.7 million. WES's fourth-quarter coverage of 1.14 times includes all the units it issued in conjunction with its December equity offering, the proceeds of which will allow us to fund the Texas Express and Front Range acquisition we announced yesterday without issuing additional equity.

For comparative purposes, if the WES units issued in December we excluded from the coverage ratio calculation, the fourth quarter-coverage ratio would've been 1.19 times.

The drivers behind WES' fourth-quarter results was sequential growth in the DJ Basin and Marcellus Shale, the continued ramp up of the Brasada facility in addition to the OTTCO pipeline in September. We were able to achieve this growth by experiencing colder than normal weather across our operations which WES made had a $2 million negative financial impact on quarterly results.

Now, I'd like to take a moment to discuss the acquisition announced yesterday in more detail. Many of you are familiar with the assets we are acquiring because of the remaining interest in each of these assets were held by other master limited partnerships. We acquired a 20% interest in both Texas Express Pipeline LLC and Texas Express Gathering LLC and one-third interest in Front Range pipeline LLC.

Texas Express Pipeline is a 580-mile 20-inch pipeline that transports natural gas liquids in Skellytown, Texas to the Mont Belvieu fractionation complex. The pipeline has initial capacity of 280,000 barrels per day, and has expanded to over 400,000 barrels per day with the addition of pumps. Enterprise Products Partners is their operator and owner and the remaining owners are Midcoast Energy partners, and DCP Midstream Partners. Texas Express Pipeline was placed in service in November 2013.

The Texas Express Gathering system gathers natural gas liquids produced in the Anadarko Basin. The gathering system is operated by Midcoast, which is an owner, along with Enterprise US. The buildout in the gathering system is (technical difficulty) basis with the first phase consistent, you have approximately 116 miles of gathering lines and additional phases are expected to be completed through 2019. Texas Express Gathering began operations in November 2013.

Front Range Pipeline is a 400-mile 16-inch pipeline that connects the DJ Basin in Colorado to Texas Express in Skellytown, Texas. Front Range has initial capacity of 150,000 barrels per day and is expandable to 230,000 barrels per day with additional pumps.

Utilizing Front Range and Texas Express, DJ Basin producers now have the ability to move NGLs directly to Mont Belvieu. Front Range began operations in February and is operated by Enterprise in terms of one-third interest along with DCP Midstream. This acquisition is immediately accretive to our distributable cash flow. Assets are supported by firm transportation agreements that have increasing volume commitments over time from the investment-grade shippers.

Given the low risk negative assets growth, we believe it is appropriate to evaluate the assets based on total project cash flows as opposed to only the next 12 months. The purchase price is equal to the assets' current book value and the three projects have a blended base case unlevered and total rate of return at 14% to 18%.

Now, before we move on to our full-year 2014 outlook, I'd like to give you an update on Lancaster, our major growth project in the DJ Basin. The first train of our Lancaster plant is currently being commissioned with startup expected by the end of March. We are currently purchasing longer leadtime items for Lancaster 2 and based on the recent experienced cold weather which impacted our construction schedule, we now expect that the second train will be in service in the second quarter of 2015.

Looking at the entire facility, we anticipate spending approximately $130 million on the two trains in 2014.

The pie chart on Slide 11 shows where we expect investor money in 2014, including both capital expenditures and equity investments. As always, these figures do not include acquisition capital.

In addition to the Lancaster complex, highlights of our capital plan, including well connects in addition to pipeline and compression facilities in the DJ Basin in addition to well connections and compression in the Marcellus Shale.

We are also excited about the partial repurchasing of our Haley system in West Texas to enable it to gather rich gas produced from the Wolfcamp and Bone Spring developments in the Permian Basin. We also anticipate spending approximately $36 million in equity investments, which includes Texas Express and Front Range.

Now let's go to our full-year outlook for 2014. As you read in the yesterday's release, we expect to WES' adjusted EBITDA for 2014 to be between $600 million and $650 million. We are very excited for this year as this range implies year-over-year EBITDA growth of over 35% with a substantial portion coming from organic projects. As mentioned in our earnings release, WES began a robust capital program in 2012 and those investments will generate tangible results in 2014.

With respect to the EBITDA range, there are two key assumptions I'd like to discuss. First, the estimated range includes the results of Texas Express and Front Range assets from March going onwards and does not assume any other acquisitions. We expect the Texas Express and Front Range assets to represent 3% to 5% of unadjusted EBITDA in 2014.

Second, we have assumed that EBITDA will grow as the year progresses, similar to what we experienced in 2013, with those quarters in particular being affected by the continuation of colder than normal weather that occurred last quarter. As always, we strive to maintain no less than 1.1 coverage for the year and we believe we can maintain this trend in 2014. Our recoveries will potentially fall below 1.1 times in the first quarter because neither the acquisition or the startup of Lancaster will have a material impact on first-quarter results.

WES' total CapEx guidance range, which includes equity investments this year, is $650 million to $700 million. This range includes equity investments in Texas Express and Front Range from March 1 onwards. We have a consistent history of diligently managing our balance sheet and maintaining flexibility to finance our projects while preserving investment-grade metrics. As you saw in yesterday's press release, we recently upsized our committed credit facility to $1.2 billion in extended maturities to February 2019, thus ensuring more than adequate liquidity for both our capital program and future acquisitions.

Finally, as a subset of WES' total CapEx, maintenance capital is expected to be between 8% and 11% on adjusted EBITDA, which is a little higher than 2013 but consistent with our 2012 results.

Overall, we believe WES' results do support solid growth on the distributable cash flow and should once again result in distribution growth of no less than 15% in WES and no less than 34% in WGP. It's important remember that this outlook does not include the effect of any future acquisitions we may make. Any acquisitions we pursue will be added to the outlook discussed today and would we update guidance consistently of our past practice.

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

(Operator Instructions). Bradley Olsen.

Good morning guys. I had a question about the profiles or the return profiles of the organic capital spending. As the organic capital spending becomes a larger and larger piece of the WES growth story, would you mind walking through kind of what determines the returns as you further build out your systems in places like the Marcellus and the Wattenberg where I expect a majority of your organic growth spending is taking place?

Sure. This is Ben. Let's start with the Marcellus because that's easiest. You might recall that we have the cost of service modeling effect, so through the rate of reset mechanism we are targeting 18% rate of return on invested capital.

When you look at the DJ, which is obviously the bulk of 2014, let's separate out Lancaster and the gathering. Lancaster, we've already targeted IRR of 16% on the first train, base case IRR of 17% to 24% on the second train. On the gathering side, there is no cost of service, there is no floor level, but obviously you're protected by the fact that so many rigs are running, and we have been kind of averaging a midteens to low 20% type of return there.

Okay, great. And following up on the acquisition, as we think about the ramp-up in contractual volume that you have on both Front Range and the Texas Express system, are those systems currently expected to get to north of 80% or 90% committed volumes as we move through this decade?

This is Don. That's not in our model. As you well know, a lot of that will be dependent on the resource development. Basically, a lot of it will be driven in the DJ Basin. So we don't have it modeled that way. We have the minimum volume requirements with some other additions that we know about. The shippers have an option to increase their NDQs in 2015. I think that will be a key indicator to really what happens towards the end of around 2019.

The other thing is you have contracts that expire where volumes are going to Overland Pass, and those volumes will be put back into Front Range and Texas Express. So, that's kind of how we look at the profile, if that makes sense.

Yes, okay. That's helpful. And so the 14% to 18% cited in the press release, that reflects largely what's committed today along with, as you mentioned, maybe some additional volume capture opportunities, but nothing really beyond that. Or I guess a better way to ask it would be most of the 14% to 18% IRR projection is based on committed volume ramp-up on those two pipes.

Correct, and volumes that we have a clear line of sight to.

Yes, that's right. Just remember, when these projects were initially built, there was no Lancaster 2, there was no Lucerne 2.

Great, thanks a lot guys.

Paul Jacobs, Credit Suisse.

Good morning guys. Thanks for taking my call. So, I'm just curious sort of broadly how you think about IRR. What's the timeframe that you look at those investments? And then do you include any additional investment like that you are planning on just spending for these assets within that IRR?

That's a great question. This is Ben. We are looking at over 10 years because that's the life of the committed contract. We're putting a pretty conservative turnover value at the end of 5X. And we are assuming that we are going to have to put the pumps in, which is not big dollar CapEx next to us, but that gets factored into the IRR as well.

Okay. And then I think you -- I think I missed it a little bit, but you talk about the EBITDA that you might be expecting from Texas Express in 2014 relative to your total EBITDA guidance. Could you just reiterate what you said there and give some sense as to whether or not that will include the additional equity investments that you are planning on making?

Just to be clear, what we said was the acquisition will represent 3% to 5% of our expected 2014 EBITDA, and we only have those acquisitions for 10 months. To be clear, we do not count anything except cash distribution as EBITDA, so that is our best guess of the cash distributions we will receive. Obviously, the operator's policy is going to have a big impact on what the cash distributions amount to be. Does that answer your question?

Yes, that does. And then the last one from me is given that this is an equity investment, is there going to be any maintenance CapEx associated with these assets that you would book on your sheets?

Yes. On equity investment, what happens is that's usually deducted from the distribution you receive. The maintenance part is netted so our distribution is lower. So, we won't book maintenance CapEx on our books, but you are in the same place from a DCF basis.

Okay, great. Thanks guys.

Jerren Holder, Goldman Sachs.

Good morning. So obviously great volumes across your systems. Just wanted to get a sense of what type of utilization the Brasada plant is running it. I know there are throughput guarantees essentially, but just trying to get a sense of the volumes there and the potential for an expansion within the next call it two to three years there.

This is Don. Anadarko is delivering today what their volume and contract requirement is to Brasada. As far as Brasada 2, it's an Anadarko-based decision. There's a lot of variables that they look at relative to capacity in the area of rates, recoveries, run time, fuel efficiencies. And really one of the big variables that comes into play for them is the fact that, to make sure that they have what we think as simultaneous operations all the way from the perforation of the well to the tailgate of the plant. So we provide them the information we can relative to what we can do with Brasada 2. They take it and analyze it against their other options, and they will make the decision accordingly.

Okay. Thank you. And also a question across I guess the drop-down backlog. Can you give us a sense of I guess what's left, whether or not the call it six to eight month kind of drop-down rate, if you're just continuing to see that over time as you guys gradually move to more of an organic growth story?

This is Ben, and good morning to you. As we've said in the past, our strategy and our execution pattern around drop-downs really hasn't changed. We kind of drop one and then move on to the next. Obviously, I can't give you any insight as to what's next and what's coming there, but there are still some really nice assets at the Anadarko level. In no particular order, you have a plant in the DJ Basin, you have all the gathering at the Eagle Ford, you have additional gathering at the Marcellus. You have all the Permian assets, both in crude and gas, and all the gathering lines (inaudible).

Okay, great. Thank you.

(Operator Instructions). Selman Akyol, Stifel.

Good morning. You talked about the gathering -- Texas Express gathering coming on in different phases I think going through 2019. Phase I is just getting started. How long do you expect Phase I to go through?

That's a better question for Midcoast who is the operator. All I can say is it's well underway right now.

Okay. And maybe you addressed this and I got on the call a little bit late, but it looked like your maintenance capital in the quarter was a little below what we were looking for. And then as you rolled into 2014 maybe a little bit higher, so I was just wondering. Were there some timing issues there?

There's always timing around maintenance CapEx. It's quite lumpy. For the year, we came in on the low end of our range. And on a dollar basis, it's actually going to come close to doubling 2014 versus 2013. Most of that is the trajectory of the volume curve in the Marcellus. What you may have recalled last year is the Marcellus wells exceeded our expectations, and therefore we booked more into expansion relative to what we budgeted. And as that rate of growth slows down, more is going to be booked to maintenance as per our policy in 2014.

All right, thanks very much.

There are no further questions in queue at this time.

Thank you. I want to thank everyone for joining us and for your interest in Western Gas. I know today is a busy day for a lot of people and we really appreciate you dialing in. And we look forward to seeing you again soon. Thank you.

This concludes today's conference call. You may now disconnect.