Western Midstream Partners LP (WES) 2014 Q4 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Gas fourth quarter and full-year earnings 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)

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.

Thank you. I'm glad you could join us today to you discuss Western Gas' fourth quarter and full-year 2014 results. Before we get started, I want to make sure you have on your calendars our conference call scheduled for March 4 where we will provide 2015 guidance. Please note that on this call we will be referring to Western Gas Partners as WES and Western Gas Equity Partners as WGP. I'd also like to remind you that today's presentation includes forward-looking statements and certain non-GAAP financial measures. A number of factors could cause results to differ materially from what we discuss today. We encourage you to read our full disclosure on forward-looking statements and the GAAP reconciliations on our website and attached to yesterday's earnings release.

For those of you who are unit holders of WES in 2014, I'm pleased to inform you that your K-1 will be available on our website next week with paper copy to be mailed to you later in March. For those of you who are unit hollers of WGP in 2014, 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, I'll turn the call over to Don Sinclair, and following his remarks we'll open it up for Q&A with Don and the rest of our executive team. Don.

Thanks, Ben. Good morning, everyone, and thank you for joining us today. WES' fourth quarter and full year results for 2014 were excellent. For the full year, WES' adjusted EBITDA was near the high end of the guidance range we announced in November. WES' full-year capital expenditures were slightly above the high end of the guidance range and maintenance capital as a percentage of adjusted EBITDA was at the low end of our announced range. Strong performance at WES led to another year of substantial growth at WGP as its 2014 full year distribution was 37% higher than 2013.

Looking specifically at WES' fourth quarter, adjusted EBITDA was $170.4 million and distributable cash flow was $138.1 million. WES' fourth quarter coverage ratio of 1.1 times includes all the common units it issued in conjunction with its November equity offering with only 37 days of distributable cash flow from the Nuevo assets. The drivers behind WES' fourth quarter results were sequential natural gas throughput growth in the DJ Basin and the Nuevo acquisition tempered by declines at Chipeta and the Granger straddle plant.

Crude and NGL throughput put was down slightly in both our gross margin per Mcf and our gross margin per barrel where we expected them to be. I'm also pleased to report that Lancaster Train II in the DJ Basin complex remains on schedule for second quarter startup. Our integration of Nuevo Midstream, which we have now renamed Delaware Basin Midstream, is progressing as planned.

The recent drop in commodity prices has impacted [producer]-growing plants across the lower 48. As such, we do not believe that additional processing capacity in the Delaware Basin will be required as quickly as we had anticipated in October. Our current schedule is to add the Ramsey IV plant, which has capacity of 200 million cubic feet per day, in the first quarter of 2016. Ramsey V will add another [2] million cubic feet per day of capacity and is currently scheduled to be placed in service in mid-2016. We have already purchased all the long lead time items for Ramsey V and have the ability to accelerate the in-service date if market conditions warrant.

While these capacity additions will be later than originally anticipated, our strategic rational for the acquisition has not changed. We still believe the Delaware Basin has some of the best undeveloped resources in North America and with our established midstream footprint we will provide quality service our producers while creating significant unit holder value, similar to what we're doing in the DJ Basin.

We're aware that many of you have questions about our 2015 outlook given the current commodity price environment. We will answer those questions on our call on March 4, which is the morning after Anadarko's investor call. We continue to expect to grow distributions at WES by no less than 15% in 2015 and look forward to sharing the details of our execution plan with you on March 4. With that, operator, I'd like to open up the line for questions about the quarter.

Thank you.

(Operator Instructions)

We do have a question from Jerren Holder. Your line is open.

Good afternoon. Just wanted to maybe touch on the drop-down strategy here. Obviously the big acquisition last quarter, third party, how does that change things especially I guess in light of this commodity environment? Obviously you guys are growing at least 15% this year, so you don't really need one. How should we think about drop downs I guess 2015 going forward?

I guess -- Hi, Jerren, this is Ben. I guess to sum it up in a word is unchanged. We moved assets from Anadarko to WES over time when we believe they're appropriate for our portfolio. And we're doing it the same way now as we have before.

And it's more WES driven versus Anadarko needs financing or --?

Historically, that process has always originated at WES and we expect that to be the case.

Okay. And a housekeeping item for WGP. Notice the SG&A expense in the DCF calculation there was a bit of an uptick there. Usually it's less than $1 million, but it was like $2.4 million or $2.5 million. Any particular reason for that? Is that a run rate we should expect or is that probably related to the acquisition in the fourth quarter?

Full year of D&L insurance hit in the fourth.

So, should not expect to be a run rate going forward?

No, that run rate of $3 million a year that we've been averaging is still pretty good.

Okay. All right. That's it from me. Thanks.

(Operator Instructions)

Your next question comes from Brad Olson. Your line is open.

Hey, guys. Good morning. I apologize if you covered this as I got on the call a couple minutes late. I just wanted to check and see if the longer term target of 7.5 times to [EV] to EBITDA in the Nuevo deal is still intact in this new rig count environment we find ourselves in?

Hi, Brad. I think you're referring to the 8.5 times 16 multiple that we announced at the time of the acquisition.

I apologize, 8.5 times.

That's okay. I guess the way we're looking at it is everything is being pushed out about a year. So, I think that multiple is probably more appropriate for 2017 at this point than 2016.

Okay. Great. That was all from me. Thanks, guys.

(Operator Instructions)

Your next question comes from Sharon Lui. Your line is open.

Hi. Good morning. Maybe if you could just provide a little bit more color on the sequential decrease in the crude and NGL volumes, specifically which regions are experiencing the most weakness?

Sure, Sharon, and keep in mind we're talking about a seven barrel-a-day sequential throughput that's spread over five different systems. So, it really is just minor decreases at places like Texas Express, Front Range, (inaudible), it's just nothing meaningful in any system.

Okay. But I guess looking at your footprint, is there -- has there been I guess a larger shift in activity levels in one region versus another?

Not exactly. In terms of our footprint the growth in our DJ Basin is still there and, as you know, that's a higher margin asset which affects our gross margin per Mcf assets. In terms of the gross margin per barrel, those are mostly pipelines, all right. That's the White Cliffs pipeline, that's Texas Express pipeline, Front Range pipeline, our NGL pipeline which connects to Chipeta MAPL, and then of course our interest in fractionator 7 and 8.

Okay. All right. Thank you.

Your next question comes from Elvira Scotto. Your line is open.

Hi. Good afternoon. Just one really quick follow-up question from me. The 15% or no less than 15% distribution growth, have you stated whether that is inclusive of drop downs or is that just based on your base business?

We have not and we'll give a lot of color around that on the fourth.

Okay. Great. That's all I had. Thanks a lot.

Your next question comes from Faisel Khan. Your line is open.

Just going back to some of your previous comments on pushing back some of the need for processing capacity in the Delaware Basin, so I just want to make sure that's clear. That relates to your Nuevo assets. So I just kind of want to understand how you guys are thinking about accretion dilution in that transaction given the pushback of those processing plants?

Sure. This is Ben again. Remember that this was going to be marginally accretive in 2015, and we were able to generate the accretion through the flexible financing structure we put in place, the $715 million of Class C units. So if you think about 2015, that was basically the year of the large buildout. So, instead of two plants coming online in the beginning and the end of the fourth quarter 2015, now it's the beginning of 2016 and mid-2016. So, one plant being delayed one quarter, another plant being delayed two quarters is the way to think about it. Does that answer your question?

Yes, basically it won't be accretive at all this year, but you should see the cash flows kick in in 2016 is what you're saying?

If it is accretive in 2015, it will be marginal.

Okay. Understood. All right. Thanks.

We have another question from [Josh Golden]. Your line is open.

This is Josh Golden from JPMorgan Asset Management. I just want to see how you're thinking as the partnership grows, how you think about your balance sheet and your overall general approach again as you grow to the credit ratings of the partnership? Thank you.

Sure. This is Ben again. Maintaining our investment grade ratings are something that we worked very hard for, and now that we are rated investment grade by all three agencies, it's not something we ever intend to put at risk. I think you know when the market bifurcates, it tends to bifurcate across investment grade lines. So what that means to us is really keeping debt to EBITDA kind of below 4X, which we've done historically. Over time, as we grow and develop more size and scope, I'd love to migrate to BBB, and I think that's very achievable l over time. Does that answer your question?

It certainly does. And just as a followup to that, can you touch a little bit upon your approach to fee-based income, minimum volume commitments in conjunction with the credit ratings?

That isn't a number that we manage, that is a number that you can say we inherit as we move assets from Anadarko to WES. If you think about where we are today, and this is a bit rough, but approximately one-third of our throughput is covered under demand charge. Another third on top of that is covered under cost of service agreements in our dry gas areas. And what we always try to do is mitigate the commodity risk impact at WES. I think that's very important component of our credit rating. So, what that means is have as much fee based business as possible to the extent we have proper [key hole] contracts, have Anadarko retain that through the fixed price commodity swap agreements that we have in place.

Okay. Excellent. I appreciate that color.

Sure.

Next question comes from Helen Ryoo. Your line is open.

Thank you. Ben, so just to follow up on the plant -- the push out of the plant timing. Is there potential for that timing to get adjusted further based on the key producer's plans or at this point do you have enough visibility to make those timing very solid, and would that be affected at all by what Anadarko ends up coming up with early March?

Helen, this is Don. How we look at it today is what we're trying to do is make sure we have plenty of flexibility around infrastructure that we're going to build. We're of no different than anyone else as far as seeing what a producer is going to do as far as capital development. We still feel very good about the Delaware Basin and how we see capital allocated across the different producer's balance sheet so far. Obviously Anadarko's development plans will be a driver.

What we've tried to do is make sure with Ramsey V that we have all the long lead time items purchased and our ability to put it in service in basically six months from when we hit the start button. So, we have flexibility to move that plant. If commodity and capital dictates that the development tells us that we need to do that, we'll look at that as well. But as far as predicting what's going to happen in 2016 and 2017, I'm not sure I'm good at the second quarter right now.

Okay. That's very helpful. And then just in terms of the timing of the pick unit conversion, I guess could you remind us where that stands? Is it the case that you could convert -- is there a hard date where those units need to convert and you have the option to do it earlier if you want or where is the point when it has to convert to common?

That's right. At the end of 2017 is when it converts to common. WES has the unilateral option to convert early and Anadarko has the unilateral option to delay conversion.

Okay. Got it. All right. Thank you very much.

At this time I have no further questions in queue. I turn the call back over to Mr. Fink for closing remarks.

Thank you for your interest, everyone, and we'll talk to you in two weeks.

Thank you, everyone. This concludes today's conference call. You may now disconnect.