Good day, and welcome to the Western Gas 4th Quarter and Full Year 2018 Conference Call. All participants will be in listen only mode. Please note this event is being recorded. At this time, I'd like to turn the conference over to Jack Spinks, Manager of Investor Relations. Please go ahead.
Thank you. I'm glad you could join us today for Western Gas' 4th quarter and full year 2018 conference call. I'd like to remind you that today's presentation includes forward looking statements and certain non GAAP financial measures. The accompanying slide deck and last night's earnings release contain important disclosures and forward looking statements as well as the non GAAP reconciliations. Please see WES and WGP 10ks and other public filings for a description of the factors that could cause actual results to differ materially from what we discuss today.
Those materials are posted on the Western Gas Web site at www.westerngas.com. In addition, as mentioned on our simplification conference call, we plan to release additional volumetric disclosure with our Q1 2019 results. That disclosure will include geographic volume data for each of our key basins and will also separately break out water volumes from our crude and NGL volumes in our operating data. Finally, I am pleased to inform you that the WES and WGP K1s will be available online via our website beginning February 20 March 1, respectively. Hard copies will be mailed out several days later.
Now, I'd like to turn the call over to our CEO, Robin Fielder. Robin?
Thanks, Jack, and thanks, everyone, for joining us today. Before we go any further, please allow me to formally introduce Jack Spinks as our primary Investor Relations contact for Western Gas. Many of you have met Jack over the past several months since he moved into our IR group. I have the highest confidence in him as he brings financial and commercial experience from within the Anadarko and Western Gas family and has already demonstrated his ability to address investor questions and clearly communicate our story. I'd also like to pause a moment to thank John Vandenbrand for his excellent work during the past several years.
John has moved to an Investor Relations role with our sponsor Anadarko, where I know he will continue to excel. To begin, I would like to provide a brief update on our simplification transaction. Wes will have a special meeting of its unitholders to vote on the merger on Wednesday, February 27, and we encourage all WES unitholders to cast their vote. Subject to unitholder approval, we expect the transactions to close shortly after the meeting. In addition, as you saw in last night's press release, I would like to announce that upon closing, the new combined partnership will be known as Western Midstream Partners LP and will trade under the ticker symbol WES, WES.
As we have mentioned in the past, these transactions will simplify our capital structure, lower our cost of capital and improve our ability to generate higher DCF per unit growth. The assets we are acquiring are highly complementary to our existing asset base and consists primarily of high growth oil systems in the Delaware and DJ Basins as well as produced water assets in the Delaware coverage and enable us to continue to fund high return projects without the need to issue equity, all while maintaining investment grade credit ratings. Before turning to our quarterly and annual results, I want to mention that I'm extremely excited for the opportunity to lead Western Gas on the heels of our recently announced transactions, and I'm confident in our ability to leverage our best in class asset footprints and multi commodity midstream services. Now I'd like to discuss our 2018 results and talk a little more about the transformation that Western Gas will undergo in 2019. For full year 2018, our adjusted EBITDA of approximately $1,200,000,000 was above the midpoint of our guidance.
Coverage ratio of 1.05. Total capital investments of $1,460,000,000 were just above our guidance range, primarily due to higher than expected construction costs for the Mentone I gas plant and the integrated gas gathering system in the Delaware Basin. Additions to the gathering and 200,000,000 cubic feet a day of incremental gas processing and 200,000,000 cubic feet a day of incremental gas processing capacity. These assets along with the crude and water assets we expect to acquire from Anadarko should efficiently support years of volume growth. Turning to the 4th quarter, we generated approximately 3 $47,000,000 of adjusted EBITDA, dollars 257,000 of distributable cash flow and a coverage ratio of 1.1.
These results were impacted by a combination of lower than anticipated throughput and margins at our West Texas complex due to unplanned weather related and operational downtime in the field, constraints downstream of the West Texas complex and less than optimal recoveries partially associated with the start up of the Mentone plant. Additionally, adjusted EBITDA included a non cash net increase to revenue of $27,000,000 associated with revenue recognition accounting. Although we didn't realize the volume growth we expected late last year, we are currently seeing record throughput of more than 1.1 Bcf per day across our West Texas complex, and we expect significant growth in 2019 from both the Delaware and DJ Basins. For the quarter, our natural gas throughput of nearly 4 Bcf per day was driven by strong growth in our DJ Basin complex, which achieved record throughput levels during the past few months as our customers continue to see strong volume growth at our non operated Marcellus asset. These sequential volume increases were partially offset by decline in lower margin volumes at our Wyoming assets and Chapita plant in Utah.
Our crude NGL and produced water throughput saw an increase of more than 10,000 barrels per day with growth primarily driven by the continued volume ramp on our produced water gathering and disposal system in the Delaware Basin. Currently, WES operates 5 saltwater disposal facilities, with an additional 600,000 barrels per day of capacity that we expect to acquire from Anadarko. Additionally, we continue to see strong liquids throughput at many of our equity investments. Our 4th quarter adjusted gross margin per barrel was significantly higher, primarily due to 2 key items. First was the accounting treatment associated with revenue recognition for our Springfield crude gathering assets in the Eagle Ford.
2nd, we benefited from higher than expected distributions from some of our equity investments. Absent these two items, adjusted gross margin would have been roughly in line with our expectations. Looking at our pro form a portfolio, the majority of our growth and capital investments in 2019 will be our total capital investments in the first half of the year as we complete both Mentone II and Latham I processing trains. With this additional infrastructure in place and along with a contribution from the assets we expect to acquire from Anadarko, we are anticipating adjusted EBITDA and coverage to increase in the back half of the year as throughput significantly increases. With the majority of our 2019 capital investments allocated to the capacity, 200,000 barrels per day of oil treating capacity and more than 900,000 barrels per day of produced water gathering and disposal capacity, with the 3 product streams largely sharing the same footprint.
Our 2018 2019 investments will allow us to world class U. S. Onshore basins, along with the most supportive E and P sponsor, our 3rd party business provides significant line of sight to growth for our portfolio. Turning to our 2019 guidance. Despite the operational items that affected the 4th quarter, the 2019 forecast we laid out in November remains unchanged.
I want to remind you that the midpoint of our guidance implies more than 50% annual adjusted EBITDA growth with slightly less capital investments this year. Before I wrap up my prepared remarks, a few parting thoughts. I would like to sincerely thank our employees and contractors for their contributions and dedication and also acknowledge the millions of hours they have safely worked over the past year. Finally, we look forward to closing our simplification and acquisition transactions, which will set a strong foundation for Wes' future. With that, operator, I'd like to open up the line for questions.
Thank you. We will now begin the question and answer session. Our first question today will come from Spiro Dounis of Credit Suisse. Please go ahead.
Hey, good afternoon. And Robin, congrats to you and your team and all the new positions there.
Thank you.
Just maybe a 2 part question on some of those items impacting the 4th quarter results. I guess, first, were those all ring fenced in the Q4? So did any sort of leak into 1Q? And then second, I guess, could you just provide a little more detail around the weather impacts? Was it just the typical freeze offs we see?
Or is it something else?
Sure. So on our 4Q results, as you just heard and you saw in our press release, it was really a number of contributing factors that, when you add them all up, impacted the quarter. In isolation, any of the events would not have been extremely significant. But we did have some unplanned weather and operational downtime that was within the field, including some power issues. And then everyone is aware of some of the downstream operational constraints we had.
And as we were starting up our Mentone gathering plant or our Mentone processing plant, we always have a little bit of start up process as you go through as typical and expected. But a lot of that was pretty short lived. So and as we're looking today, we've got Mentone up above flowing up above nameplate capacity and we're very excited about our 2019 as we just reiterated our full year guide.
Okay, great. And then second one on capital allocation. I guess as CapEx winds down a bit after 2019, how should we think about deploying that excess capital? Trying to get a sense of where the preference might lie and if buybacks could become or take a more prominent role there?
On capital allocation, we're always looking at projects that compete at sort of mid to high teens rate of return on unlevered basis. And so we'll continue to look for that. And we've got plenty of running room as far as projects already slotted in our 2 key basins. Beyond that, we'll look at additional opportunities. We've obviously got an option outstanding out there that we will evaluate as well.
And beyond that, as I pointed out, we've got our transactions expected to close here within the quarter. So there's a lot of additional growth in running room just on continuing to build out those facilities that we've set out to be very scalable. So we've got a lot of the backbone in place today and the initial plants and sites and then we can expand and add trains as needed.
Yes. And I would say regarding potential buybacks, we don't have any current plans for 2019 given the fact that post closing of the simplification transaction, our leverage is going to be higher than we would like it to be. And so our plan is to grow into that over the course of 2019. And then after that, we would consider buybacks to the extent that makes sense.
Great. Appreciate that color. That's it for me. Thanks, everyone.
Thanks, Biren. Our next question will come from Jeremy Tonet of JPMorgan. Please go ahead.
Good morning. Just want to follow-up on the 3 items that you laid out in the press release there. Would you be able to kind of quantify in aggregate, how much those 3 impacted the quarter there? And, just wanted to confirm that the constraints with your assets and the downstream constraints have been fully resolved at this point?
I'd say most of the delta from what our expectation were West Texas related and probably split up as far as throughput and margin related and it's sort of a combination of several of those factors. So it's for instance, when you're talking about lower throughput that also impacts some of the margin and where you're sending your volumes downstream. So they kind of overlap quite a bit.
And all these issues have been fully resolved at this point?
Yes. Well, as I said, we've got
I mean, weather comes and goes. It was pretty temporal, and we've got the plant up performing excellent right now above nameplate capacity. And we're seeing, I guess, better movement of product beyond the basin as we have residue and NGLs leaving the tailgate of our plants.
That's helpful. Thanks. And just want to turn to the DJ, if you could. And it seems like there's a few options out there for NGL takeaway coming out of basin there. And in the past, APC had used their equity volumes to get stakes in takeaway projects out of the basin.
Is that something that you see as a possibility here? And then just also given the issues on the regulatory side or potential issues there as far as the recent ballot initiative. I was wondering if you could update us there as how you think these issues would proceed going forward?
Okay. Let me start on NGL takeaway out of the there was a DJ Basin, correct, that you're asking?
Yes. Yes.
Well, as you know, we've already got an equity ownership on both Front Range at Leasing and Texas Compress bringing the majority of our NGL barrels into the Mont Belvieu complex. There's already an announced and ongoing expansion on Front Range. So with that, we're very encouraged by that. And there's also been an announcement out there as far as basin takeaway that White Cliffs will take one of their crude lines out of service and put it in NGL service. So we feel like there's plenty of takeaway there and we will look at any opportunity where you've got especially Anadarko backed volumes as potential place for incremental equity options over time.
So that's sort of a philosophy for us.
Back to your other question on Colorado. We were obviously very encouraged
on the voting results back in November, particularly that we saw a clear vote against the setback proposal in the local communities in which we have our footprint and operate. And I think it's no secret what we've heard from both the media and coming directly from some of the key political figures in the state. Just earlier this week, the Speaker of the House, Casey Becker, was commenting that there is a bill in the works and it was going to be focusing on a couple of key areas, really amping up the regulatory's body focus on health and safety and fostering some expanded local control. Both of these are sort of as expected and we think are great ways that we can balance continuing having responsible oil and natural gas development with the state. And we'll continue to engage with these communities.
We take a lot of pride in going out and visiting with them before we lave in a single inch of pipe or Anadarko goes out and drills a well. So that's an ongoing dialogue and we're encouraged and cautiously optimistic that we'll get something in place this year.
That's helpful. Thanks. And just the last one if I could. With the simplification, it seems like it's going to be closing in the near term here. Just wondering from where you sit now, if you see this transaction kind of changing the relationship between APC and WES in any way?
Good question, but no. We've had this great kind of family relationship and that changes. I guess the one difference is now that virtually all of Anadarko's assets are expected to be dropped into the MLP. We won't have the need to fund any of those future drops, but they're also younger assets, particularly when you look at the crude and watering systems in West Texas. So there's a lot of incremental running room and growth.
And as I mentioned earlier, they've been designed and constructed with scalability in mind. So we're very encouraged by that. As far as the greater relationship, it's kind of the backbone of what we're doing. You look at the assets we're acquiring, it's where Anadarko is very active in these two key basins. So we're quite aligned.
And we're happy that we've got Ben Bake over at the helm as CFO at Anadarko.
Our next question will come from Elvira Scotto of RBC Capital Markets. Please go ahead.
Hey, hi everyone. Just a couple of quick ones for me. Can you maybe just talk a little bit about that $27,000,000 of non cash revenue that's included in adjusted EBITDA. Adjusted EBITDA is a non GAAP metric. Why not just exclude that $27,000,000
Good morning and that's a great question. We the SEC does not like you to exclude revenue line items or portion of revenue line items and obviously not exclude the entire line item when you do the reconciliation to non GAAP figures. But that's exactly why we highlighted in our press release to the fact that it is it's important to note that it is for this quarter, it was non cash, but we expect to receive that revenue over the life of the contract.
So I'm just curious then how this flows through kind of going forward. And aren't these contracts, aren't the rates kind of reset on an annual basis? I mean, could that number change and this issue pop up again?
Yes, absolutely. So, for our typical cost of service contract, the rates will reset on an annual basis based on the new volume forecast, the operating capital cost to achieve a certain rate of return. And basically, that's obviously impossible to forecast on an accurate basis, just given the fact that we don't know what the new forecasts are going to be. But as the rates increase, we'll basically receive more non cash revenue in that period. But if rates were to decrease, we would receive more cash we recognize more cash that is not recorded in revenue.
So on a go forward basis, you'll just kind of make note of that like you did in this quarter?
Absolutely. To the extent it has a material impact on our financial results, we will continue to highlight that in our obviously in our press releases as well as our quarterly filings.
That's okay.
And it is in terms of this is the first time you're seeing it is because this is a new accounting standard that went into effect beginning of last year. And as the new rates reset for 2019, it had an impact in what we reported during the Q4.
Got you. And then, just going back to the less than optimal recoveries that I think you said partially attributable to the startup of Mentone 1. I mean, is that does that is that just because of how it ramps? I mean, do we expect that anytime you bring a plant online that you're going to have these less than optimal recoveries, but it's not that big a number, it's just you're calling it out this quarter because combined with everything else, it affected your results?
Hi, Elvira. Yes, that's I mean, that's correct. We anticipate some of that as you commission and bring on a brand new facility. There were some offset some downstream constraints as far as what we could send down the line. So that's why we said it was partially due to the start up.
But in yes, in isolation, it was somewhat smaller.
Got you. And then just the last one for me. You mentioned how post simplification you're going to provide more detail by geography. Have you thought about maybe looking at how you report gathering and processing to show the actual volumes that you're gathering and then for processing like your inlet volumes? Because I think now in your processing, you're actually you're including gathering, but you're not including that in your gathering number.
I think maybe what you're referring to is we've got 2 major complexes now. As you know, a few years ago, we combined all of the assets and created the DJ Basin complex. And then this year now going forward, we've got the West Texas complex that now that we've got an integrated gas gathering and processing system and we can have the we have the flexibility to swing volumes, we're now reporting it altogether. Is that sort of what you're asking?
Yes. Yes. And I would say going forward, we would expect to report those on a combined basis just so we don't end up double counting volumes because in some cases we gather and process the same molecule. And so we have to make a decision that we include in gathering and processing for the Anadarko volumes. We include that in our processing figures.
And so I think going forward for gas, we will just continue to show gathering and processing one line items so that we don't double count volumes.
Our next question will come from Dennis Coleman of Bank of America Merrill Lynch. Please go ahead.
Hi. Good morning or I guess, good afternoon. Couple for me please. I wonder Robin, if you could, are there specifics about these downstream constraints that you can share? The basin constraints obviously are well known, but was it something specific?
Was it I mean, which third parties, I guess? And is it potentially an opportunity for WES at some point?
We were tight on NGL takeaway out of the basin. I don't think that was secured during the quarter. And then also, there was some tightness obviously in Mont Belvieu for fractionation as well.
Okay. But not okay. I guess the other question maybe just to follow-up on Jeremy's question about the relationship with Anadarko. One concern that comes up often is them potentially selling down shares. Anything that you can comment there?
Well, one of the benefits of simplification is, of course, enhanced trading liquidity, at least we hope as we quadruple that ability once we combine into a single entity. Now Western Midstream Partners will be the new name of that entity going forward. So I've got a lot of confidence. We've got a familiar face and Ben Fink over at CFO of Anadarko. And frankly, I think we don't see some near term liquidity need knowing that we're about to have a cash settlement of $2,000,000,000 as part of the transaction when it closes, going over to Anadarko.
So again, the relationship there has not changed. Anadarko continues. This will be a very large asset form and the largest owner of the outstanding units. And we're excited about the hopefully the enhanced trading dynamics we'll have going forward.
Okay. That's it for me. Thanks.
Our next question will come from Sharon Lui of Liu of Wells Fargo. Please go ahead.
Hi, good afternoon. Just wondering if you can maybe comment on the status and timing of Mentone 2 and Latham 2?
Sure. Mentone 2 is still on track for to come on and decommissioned and placed in a service here later this Q1. And Latham II, we've talked about it will be kind of just in time as needed as we just put out in or Latham, sorry, the 1st Latham Shrine will be middle of this year. Latham II will be later at the end of this year.
Okay, great. And just trying to thinking about the ramp in EBITDA, is that a function of the assets that are going to be dropped down at the close? Are you guys still comfortable with the expected EBITDA of 420,000,000
dollars It's a combination of the actual assets that are coming in, but also just the forecast and the growth, keeping in mind that the Delaware Basin is a younger development and we've got a lot of, again, the backbone in place, so it will be incremental volume growth and throughput as expected and we just reiterated it within our 2019 guide and outlook.
Okay, great. Thank you.
Ladies and gentlemen, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to Robin Fielder for any closing remarks. All right.
Thank you, everyone. We really appreciate you joining us today and taking your time out of Friday, and we look forward to a fantastic 2019. So everyone have a great weekend, and thank you.
The conference has now concluded.