Western Midstream Partners LP (WES) 2015 Q4 法說會逐字稿

Good day and welcome to the Western Gas Partners' fourth-quarter 2015 earnings conference call. All participants will be in a listen-only mode.

(Operator Instructions)

After today's presentation there will be an opportunity to ask questions.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Benjamin Fink. Please go ahead, sir.

Thanks. Glad you could join us today to discuss Western Gas's fourth-quarter and full-year 2015 results. Please note that on this call we'll be referring to Western Gas Partners as WES and Western Gas Equity Partners as WGP.

I would 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. Finally, I'm pleased to inform you that WES K-1's are now available on our website, and WGP K-1's will be available in early March.

With that I'll turn the call over to Don Sinclair, following his remarks we'll open up for Q&A with Don and the rest of our executive team. Don?

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

WES' fourth-quarter and full-year results for 2015 were exceptional, especially concerning the industry and commodity backdrop and the fact we were without the DBM complex for the majority of December. We understand that many of you are much more interested in our 2016 outlook than our 2015 performance, but we believe our 2015 results are indicative of how the WES model performs during challenging times.

In 2015, a year in which commodity prices declined by almost 50% from peak to trough, WES delivered 15% distribution growth with a 1.11 times coverage ratio while continuing to maintain both investment grade metrics and prudent financial policies. We ended the year with over $900 million in liquidity and our adjusted EBITDA was higher than our guidance mid-point despite the divestiture in Dew/Pinnacle in July and the previously mentioned incident at our Ramsey plant in December.

Through both cost savings and increased efficiencies, WES decreased its full-year capital expenditures to below the low end of our guidance and maintenance capital as a percentage of adjusted EBITDA was right at the low end of our announced range. We also delivered 33% distribution growth at WGP, which exceeded our full-year guidance. Delivering our originally stated 2015 distribution growth while facing a sharp unit price decline is another example of how we kept our promises to our unit holders.

WES' fourth-quarter adjusted EBITDA was $188.7 million and distributable cash flow was $162.2 million. The fourth quarter was impacted by an incident at the Ramsey plant which resulted in the plant being shut down since December 3. It caused December EBITDA to be $7 million below our forecast. We're very grateful that no serious injuries were sustained as a result of the incident and when we cover our 2016 outlook I will discuss our timetable for bringing Ramsey back into service.

In the fourth quarter, sequential natural gas throughput was essentially flat with the prior quarter when adjusted for the Dew/ Pinnacle divestiture in July and the Ramsey incident in December. Specifically, strong DJ Basin throughput was somewhat offset by declines at Chipeta, the Granger straddle plant, and in the Marcellus.

Crude and NGL throughput was down slightly due primarily to lower volumes from our NGL pipeline at Chipeta where our gross margin per Mcf for natural gas assets was $0.03 higher than the third quarter due primarily to non-reoccurring items at the DJ complex, as well as the divestment of lower margin Dew and Pinnacle systems in July.

Now I'd like to discuss our acquisition of Anadarko's 50.1% interest in the Springfield oil and gas gathering system which I'll refer to as Springfield. Many of you are familiar with Springfield because it delivers hydrocarbons to our Brasada facility that we built in 2013. Springfield's gathering lines are located in La Salle, Maverick, Dimmit, and Webb counties in south Texas and serve production from the Eagle Ford shale.

This acquisition is noteworthy in two ways: First, at $750 million it's the largest drop-down in our history. And second, it marks WES' entry in to the crude gathering and stabilization business. Anadarko and its up-stream partners are the four shippers on the system and the partners also own the remaining 49.9% of Springfield. A new gathering agreement was recently executed by all of the partners and extends through 2034.

The assets are 100% fee based, and perhaps more importantly in this environment, have a minimum volume commitment equal to 75% of the forecast production plus a cost-of-service rate-adjustment provision that allows us to earn a market-based return on our invested capital.

The $750 million purchase price represents a multiple of 5.8 times the assets projected 2016 EBITDA. We had three goals in structuring this highly accretive acquisition. First, raise enough capital to fund this transaction and our 2016 capital needs without returning to capital markets this year.

Second, maintain the adequate revolving credit facility capacity given the current uncertainty in the capital markets. And third, utilizing private capital which we believe could be obtained in greater amounts and a lower cost than what is available in the public markets.

In consideration of these three factors we entered into an arrangement with Kayne Anderson and First Reserve to issue WES 8.5% perpetual convertible preferred units at a price of $32 per unit. WES will receive $440 million in net proceeds from this transaction. These securities have an annual distribution of $2.72 per unit and are convertible into common units on a one-for-one basis after two years. It's also important to note that the purchasers of these preferred units are prohibited from hedging or otherwise trading around the conversion feature for two years.

We expect the preferred units will receive 50% equity credit from S&P and Fitch and 100% equity credit from Moody's. The preferred units come with an over-allotment feature which, if exercised, will bring total net proceeds to $688 million.

If the purchasers do not exercise the over allotment we have the right to sell additional preferred units to other investors. We're also issuing $38 million and $25 million of WES common units to Anadarko and WGP respectively as part of this transaction.

WGP will fund its common unit purchase through a draw on a new secured three-year revolving credit facility. So far we've received over $300 million of commitments to this new credit facility and we anticipate the final size will be around $250 million.

The facility's initial pricing will be based on the leverage matrix and start at LIBOR plus 200 basis points and we expect it will close in early March. Depending on the ultimate amount of the preferred units purchased, WGP may have the opportunity to acquire additional WES common units. We expect that WES common unit purchases would be significantly accretive to WGP unit holders as they effectively capture the spread between the yield of the common units and the facilities borrowing costs after expenses.

In summary, we believe we have acquired a highly accretive asset with financing that provides a reasonable cost to capital while preserving liquidity during the most challenging capital market environment we have seen since 2009. I'm really pleased that we're able to execute the transaction and continue to provide meaningful lower risk growth for our unit holders, and I thank all of the WGP lenders and WES' new preferred unit holders for all of their hard work over the past few weeks to get this deal across the finish line.

Now I'd like to talk about our 2016 capital program. The pie chart on slide 7 shows the geographic breakdown of where we will spend our organic capital this year. As you can see, 85% of our capital is expected to be spent in the Delaware where we will be in various stages of construction on three of the Ramsey processing plants. All capital outside the Delaware will be used for well connections, additional compression or maintenance.

We continue to forecast that Ramsey IV will be in service by the end of the second quarter of 2016, and Ramsey V will be in service by the end of the third quarter of 2016. Each of these Trains will add 200 million cubic feet per day of processing capacity.

The December 3 incident shut down the entire DBM complex and damaged Trains II and III. DBM is currently moving approximately 55 million cubic feet per day through its system for deliveries to third parties in the area.

Ramsey III will be placed in limited service in April with scheduled return to its full 200 million cubic feet per day of capacity with the start of Ramsey IV in the second quarter. Ramsey II is currently being repaired and is expected back in service to its full capacity of 100 million cubic feet per day by the end of the year.

Our property and business interruption insurance covers up to $250 million of losses per occurrence. Our property insurance contains a $1 million deductible and we estimate our claim will be between $50 million and $70 million for all of the repairs to Ramsey. On the business interruption side, our policy has a deductible of 30 days meaning we expect that all losses from January 2, 2016 onward will be covered.

As we review our 2016 outlook we will explain how we are treating our expected business interruption insurance proceeds, but first I want to give you an overview of how the year looks.

As you read in yesterday's release, we expect WES' adjusted EBITDA for 2016 to be between $860 million and $950 million. With respect to this EBITDA range, there are three key assumptions I'd like to discuss: First, we're including the full year results from the Springfield assets we'll acquire from Anadarko.

Second, we expect the only areas to experience throughput growth will be the DJ and Delaware Basins. However, since these are basins with margins that are higher than our portfolio average, we do expect organic cash flow growth despite net throughput declines. Furthermore, we also expect crude and NGL throughput to be slightly down from our 2015 levels.

Third, we are forecasting we'll recover all of our business interruption insurance proceeds in the second half of the year. And now, Ben will cover the accounting implications of that.

Thanks, Don. Our accounting treatment for the receipt of BI proceeds is simple. We book the amount we receive in the quarter we actually receive it. We're not allowed under GAAP to make any accruals for any BI insurance proceeds that we expect to receive.

So how is this going to work? For example only, let's say our BI losses were $10 million per quarter for the first two quarters and in the third quarter we receive a $20 million reimbursement. What this would mean is that our EBITDA, DCF and coverage ratio would look pretty low in the first two quarters and then quite high in the third as the entire $20 million would be recognized on our third-quarter income statement.

Each quarter we'll provide you with supplemental information as to what amounts we believe will be reimbursable under the BI policy so that you in turn can get a better sense of our true run rate performance. And now I'll turn it back to Don.

Thanks, Ben. WES' total CapEx guidance range is $450 million to $490 million and total maintenance capital is expected to be between 7% and 10% of adjusted EBITDA, which is consistent with our historic results. We believe our outlook for 2016, with significant adjusted EBITDA growth despite the current commodity outlook, is not only impressive but also once again highlights the durability of the WES model.

As you read last night, we believe WES can deliver 10% full-year distribution growth despite what we believe is a more challenging backdrop than 2015. We believe we can do this while maintaining our long-term coverage ratio objective of 1.1 times and our historic investment-grade credit metrics. We further believe that this will result in 20% distribution growth at WGP.

Finally, we've recently received numerous requests to provide more information about our counterparty credit risk. In response we've compiled the data that you see on slide 10, which shows that 88% of our upstream revenues are from producers with investment-grade ratings. With no single below investment-grade producer representing more than 5% of our revenues, we believe our counterparty risk profile compares quite favorably to our peers in the midstream space.

In conclusion, 2016 has been tough for all of us so far. We believe it will be the most challenging year we have faced in our eight-year history. Although some have recently questioned the continuing viability of the MLP business model, we believe that the combination of a strong, supportive sponsor, a high-quality, well-diversified asset base, and a comprehensive commodity and volumetric risk mitigation program will allow us to meaningfully grow our distribution even in this environment.

We thank you for your continued support, and with that, operator, I'd like to open up the line for questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

And our first question comes from Brandon Blossman of Tudor, Pickering, Holt.

Good morning, guys.

Good morning.

Big picture, Don and Ben, given where the balance sheet is, given the Springfield acquisition, is there any kind of incremental flexibility left in terms of 2016 and 2017 to do small bolt-on acquisitions if the opportunity presents itself?

Brandon, there is. I'll let Ben give you more of the details around the preferred and our ability to draw more units relative to that structure.

One of the things we wanted to try to accomplish as we did Springfield and looked out into 2016 is to make sure we had adequate liquidity that if opportunities present themselves that we'd have the financial flexibility to execute on them without having to go back into the public markets again, but I'll let Ben give you a little more color around the detail.

Yes, Brandon, quite simply we've always said we manage 4x debt to run-rate EBITDA. We're well south of that now which will give us some flexibility should acquisitions present themselves. If you look at our debt equity mix relative to the multiple of this deal, we're providing ourselves with more flexibility coming out of the drop-down.

And the ability to attract more private capital is really quite astounding. I think in the last 12 hours we've gotten three inbounds asking if they can take the over-allotment. So I think there's a lot of private capital that is looking for a home.

Okay. Fair enough. It's probably good to be wanted, particularly in this environment.

On the Springfield volumes, it still looks like a very attractive drop even at the MPCs. Any additional color on where you expect those volumes to track over 2016 and 2017 in terms of the 2016 forecast and then relative to the floor there of 75%?

Sure, Brandon. I'll do my best. My CFO disclaimer is that Anadarko is having its analyst day next week and I certainly can't front-run any Anadarko operational detail. What I can tell you is that we forecast conservatively.

I think it's well known that Anadarko's priority in the near-term in the onshore US are the Wattenberg and the Delaware. We're not really assuming any additional rigs or anything like that, just the connections of some deferred uncompleted wells and some wells that are completed on pipeline.

And if you just really assume that conservative forecast, the out year multiple, 17 multiple, doesn't really get above 8x. If you want to go further than that and take a three-year average type multiple, that's sub 7x. So what you can see is even under very conservative assumptions this is a highly accretive transaction.

Does that answer your question?

It provides some useful color. Thanks, Ben. That's it for me.

Our next question comes from Jeremy Tonet of JPMorgan.

Good morning. I might have missed it with the preferreds, but are those dividends cumulative there?

That's correct, yes.

Okay, great. Thanks for that. And then maybe just go into the guidance. I appreciate there's a lot of unknowns out there in the market right now, but was just curious as far as how you see some of the drivers for the upside versus the lower end of guidance and how things could play out to move it towards one side or the other over the course of the year.

In no particular order, I think activity in the DJ and the ability to put additional capital dollars toward the end of the year might be one driver, and then the timing of the ramp of the new capacity that comes online in the Delaware would certainly be a big driver as well that gets you to the top-end.

Got you. That's helpful. That's it for me. Thank you.

Our next question comes from Sunil Sibal of Seaport Global Securities.

Hi, good morning. Couple of questions from me on the Ramsey facility. I was curious, those volumes, how are they being handled currently? I presume some of them are probably being (inaudible) to other processors in the area.

I was curious when your facilities are back up and running, does the fact that you had to [out pay] impacts in any way your ability to get those volumes back on your systems as you had originally planned?

Sunil, this is Don. If I understand your question correctly, basically what happened to the volumes that were flowing to Ramsey post incident, and as you know, there's not an overbuild of processing capacity in west Texas today. From what we've seen the majority of the volumes have just been shut in.

There was some incremental capacity available in the area. It was limited. We've used some of that ourselves, but there's not a lot of places for that gas to go. With current flaring rules and regulations, the options that producers had were to shut in.

Okay. Got it. Then on your financial guidance, a couple of things. On the 1.1x coverage that you talked about, so with the range of EBITDA that you mentioned, how should we think about that coverage? Is that coverage achievable at the high end of what you're targeting in terms of the distribution growth? Is that fair?

This is Ben. It may be overly simplistic, but think about it if everything comes in at the midpoint it should be around 1.1.

Okay. Okay. Got it. Lastly on 75% MVCs, is it fair to think of that 75% MVCs as (inaudible) 75% on revenues or EBITDA also? Are there any new answers there?

Yes, there is. It has to do with the rate structure. I think it's fairly close. I hope you can appreciate we are limited under confidentiality provisions with the producers that we can't go in to too much detail. We've basically given you all the detail we can because we thought it was important for investors. So I think it could represent something south of 75%, but not too far south.

Okay. Got it. Thanks for the color, guys, and congrats on a very good transaction.

And Sunil, I'll just repeat, remember, there's MVCs on this, but as Don mentioned in the prepared remarks, there's also a cost of service component. To my knowledge this is our first contract ever that displayed both components, an MVC as well as the ability to reset rates to get you back to a market-based return. More importantly, that market-based return is above our weighted average cost of capital.

Okay. Got it. And how frequently are those redeterminations on rates, is it like an every quarter process or more like a yearly process?

It's annual.

Oh, okay. Thanks, guys.

Our next question comes from Kristina Kazarian of Deutsche Bank.

Hey guys, nice job on the transaction today. I've got a quick question on balance sheet. You know we saw some news out of Moody's last week associated with APC, but given another positive transaction today, can you just give me an update on how conversations with the rating agencies are going and what you guys are looking for maybe there?

Sure, Kristina. This is Ben and I appreciate the question.

I think you're aware Moody's downgraded us along with Anadarko. I would advise you to read that release. It says that -- well, I'm going to paraphrase, but it says that as a standalone WES could support investment-grade rating but the policy is the sponsor's rating is a cap and we can't be rated higher than the sponsor and therefore we're rated the same as the sponsor.

Within a week of that S&P also affirmed our rating of BBB-minus stable. Fitch hasn't taken any action. They're currently at BBB-minus stable, so we currently have investment-grade ratings from two out of the three agencies. I expect that to continue which means we continue to do deals off the investment-grade desk with investment grade debentures. There's no change in our bank pricing.

We have no contracts that triggered anything as a result of the Moody's downgrade. There was no spring in collateral or margins or anything like that, so operationally it was a non-event. I don't think this transaction in itself will change anything with Moody's, and really it is all up to how they view the credit quality of our sponsor.

Perfect. I appreciate the clarification. Nice job again on the transaction.

Thanks.

Our next question comes from John Edwards of Credit Suisse.

Good morning, everybody. So just to confirm on the Springfield transaction with these annual redeterminations, I'm presuming then that there's a downward volume metric slope on this.

And then I guess on the redetermination, is there some sort of a target multiple? Does it have to go back to, say, 6 times, 7 times? How do you -- how should I think about that?

It's a great question. The volume metric profile, John, is a function of what your prediction of commodity prices is. If you think strip, then you're right. You will see declines in 2016 and 2017.

I can't tell you exactly what the target ROIC is, just that it allows us to give us a market-based rate of return that exceeds our weighted average cost of capital. So if you can do a quick calculation of our WACC and thinking of something accretive to that you get an idea of what the market-based ROIC is. I would say it compares very close to the other costs of service provisions that we have in our other agreements.

John, one other thing to think about. If you think about how these cost of service models work, you can have some relative high volatility in the reset of the rates. And so what we tried to accomplish with this structure was to try to take some of the volatility out of the rate resets and just use the cost of service as a true-up mechanism for a small adjustment at the end of each year if for some reason the forecast is incorrect.

So the intent was to try to have stability around the cash flows. And like Ben said, obviously it's all driven by a market-based return of which it covers our cost of capital and accretion easily.

Okay. Except here's where I have a little difficulty, is that the cost of capital is not constant. It moved. That's why I'm trying to figure out ? how should I think about it in terms of like a multiple or a spread? How does that rate -- that rate can move quite drastically given how volatile given how the capital markets are. So if you could help me out a little bit there, or maybe we should take it off line?

I don't think off line is going to help. Think of it as a project IRR that would be accretive.

And you mentioned that, obviously, cost of capital can change, John. We've had a significant increase in our cost of capital in the last 12 to 15 months. So we knew all that at the time that we went and priced this and looked at it relative to the multiple we paid. So we're very comfortable with the spread between what our current cost to capital is and forecasted cost of capital versus the return that we'll get from the project.

Okay. If you can you just give us an update on any sort of expected funding for the 2016 capital program? Are you staying out of debt and equity markets or do you expect some participation there? If you could help out with that, that would be great.

Sure. Sorry. I thought I covered it, but I'll just repeat. The way we structured this transaction, we believe we're covering not only this transaction but the rest of our 2016 capital needs without going back to the capital markets.

Okay, great. Thanks. I thought I missed that. Then just on the -- any details on the impairment expense? Is that just because volumes stopped and so you had to write it down? Is there anything else on that?

No, you got it right, John. In certain areas the rigs just went away, volumes go down, it triggers impairments.

Okay. That's it for me. Thank you.

Thanks, John.

Our next question comes from Selman Akyol of Stifel.

Thank you. Good morning. On the adjusted EBITDA, is there anything in there at all for the -- I presume not, but anything in there on the business interruption insurance?

There is, Selman, and that's an important assumption because if we don't receive the check in 2016, then it won't show up in our 2016 results. So we're assuming we actually receive that check from the insurance company in 2016. If we don't, let's say we receive it on January 1 of 2017 then you won't see that full-year impact until the first quarter of 2017. Does that make sense?

Okay. Yes. Then when I think about that spread -- let me step back. On the Springfield acquisition, can you say what the current capacity utilization is on that right now?

No. I don't have it right in front of me. My guess is you're running about 75% to 80% of the current capacity. We have capacity in the system.

Okay. I guess because longer term you said you look out into 2016, 2017 it would be at sub-7 multiple. But if I'm thinking about it, if your capacity utilization increases over time, shouldn't that multiple just continue to drop from the 5.8 times you acquired it for?

Absolutely, if we see growth on the system. Absolutely.

Okay. Then you also highlighted this is really the first drop where you're doing oil gathering. As you think forward would you expect to see more and more assets going that way?

If you look at the existing inventory that's still out there, as well as our opportunity set, you still have two large current gathering opportunities that we see. One is in the DJ. The other is in the Delaware Basin. Obviously, the DJ has been built out significantly and is already owned and operated by APC.

In the Delaware you're still in the early stages. So there's still a lot of opportunity there in not only in what's been built to acquire it but to continue the buildout that's going to be needed as those resources are developed. So we think that's going to become a significant part of our business model as we move forward.

All right. I'll follow up with the rest off line. I appreciate all the color. Thanks.

Thank you.

Our next question comes from Sharon Lui of Wells Fargo.

Just a quick follow up on the business interruption insurance. You indicated, I guess it was like about a $7 million impact for the month. Is that a good estimate going forward in terms of trying to figure out like the timing of the impact of the cash flows?

Yes. That was the swing in December, right? And that was right after it. So you couldn't cut back on your OpEx in December because the incident just happened and maybe even had a little more OpEx in the month because you're dealing with the incident. So the monthly impact is probably less.

But it's hard to give a number for proceeds recovery because if your actuals are better, your recovery is less. If your actuals are worse than you think; your proceeds are more. Because what the policy covers is the delta between what you were making before and your actuals going forward. But if you're trying to base it off of December, that was probably a little high.

Okay. So what is the figure that's assumed in your 2016 guidance?

If you think about it, as long as we get it in 2016, it doesn't matter, right? Because you're just being made [hold] for what you lost. For the reason I just mentioned, it's really hard to estimate because you're just predicting what actuals is, but the $20 million example that I used in the prepared comments is as good as anything else.

Okay. All right. Then just turning to the gross CapEx budget for 2016. Just based on the utilization of the Springfield assets, I'm assuming there's really no related CapEx with the drop-down?

Yes. It's virtually all maintenance. And these contracts have a provision similar to what we see in the Delaware Basin where actually the producers pay for the well connection capital to tie to us, which helps cut down on our CapEx needs.

Okay. Maybe if you would walk through some of the larger components of 2016 spending and the potential that some of the projects could be deferred into 2017 depending on the environment?

I think the pie chart in the slides is pretty instructive. It's a very Delaware heavy budget and what you're really -- the bulk of that is Trains IV and V, and then the knock-on effects to gathering in terms of need for associated pipe and compression.

Sharon, as you think about it in west Texas, those projects are underway, so the probability of that capital not being spent is very low.

Okay. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thanks, Dan. I'd like to thank everyone for joining us today and your interest in Western Gas and we look forward to speaking with you again soon.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.