Good day, everyone, and welcome to the Western Gas Second Quarter Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. At this time, I would like to turn the conference over to Jean Vandenbrand, Director of Investor Relations. Please go ahead, sir.
Thank you. I'm glad you could join us today for Western Gas' Q2 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 on forward looking statements as well as the non GAAP reconciliations. Please see the WES and WGP 10 ks 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 all posted on the Western Gas website at www.westerngas.com. I would now like to turn the call over to our CEO, Ben Fink. Ben?
Thank you, John. And I hope everyone will join me in welcoming Jennifer Kelly, our new Chief Operating Officer. Jennifer joined us in May and brings over 20 years of industry experience to our team. She has already made a meaningful impact to our operations and we will continue to leverage her expertise as we execute the largest capital program in our history. This is a special quarter for us as Western Gas recently celebrated the 10th anniversary of its IPO.
And while we have certainly seen healthier MLP investor sentiment than what we're experiencing today, we believe that our asset performance and competitive positioning is as strong as at any time in our history. Our assets are running smoothly, our volumes from key basins are growing, and our development activities remain on schedule. We began the year by telling you why we expected to see a ramp of volumes during the second half of the year, and I'm delighted to say that the ramp is now beginning to materialize. Hopefully, you were able to see Anadarko's earnings release from last night as they reported that they brought critical West Texas infrastructure online safely and on time. The first two trains at the Reeves Regional Oil Treating Facility or ROADF representing 60,000 barrels per day of capacity came online towards the end of the quarter and subsequent to quarter end, the first train at the Loving RODIF was placed into service.
As a reminder, while these projects are part of Anadarko's dropdown inventory, the start up of this midstream infrastructure allows APC to more efficiently develop their acreage and should result in a step change in production growth in the second half of the year. You also no doubt noted that this quarter's results included an accrual of approximately $11,000,000 This accrual is related to estimated future costs associated with our decision to shut down 2 legacy gas gathering systems, 1 in Wyoming and 1 in Colorado that had reached the end of their useful lives. These systems represent throughput of less than 8,000,000 cubic feet per day and our decision to shut down these systems was driven by our focus on doing what is best in the name of safety and the environment. Turning to our Q2 results, we reported adjusted EBITDA and distributable cash flow of $271,700,000 $221,800,000 respectively, after the aforementioned shutdown costs. These costs also reduced our quarterly coverage ratio by 0 point 0 five times.
In general, our run rate coverage is in line with our expectations and we still expect quarterly distribution coverage to be over 1.2 times by the end of the year. Operationally, we had a very strong quarter as we experienced natural gas throughput growth at the DBM complex, DBJV Gathering System, DJ Basin Complex and Bison Treaters. The adjusted gross margin per Mcf of 0.95 dollars was $0.05 lower than the previous quarter, primarily due to the impact of the shutdown costs. Also during the quarter, we closed the acquisitions of a 20% interest in White Thorn and a 15% interest in the Cactus II pipeline. The growth in our crude NGL and produced water throughput was driven by the White Thorn acquisition in June as well as the continued volumetric ramp of our produced water gathering and disposal business.
We also saw higher volumes on the Front Range and Texas Express pipelines. The adjusted gross margin for crude NGL and produced water assets of $1.56 was $0.28 lower than the previous quarter. Approximately $0.18 of this decrease was due to the fact that while we booked volumes at Whitethorn for the month of June, we have yet to receive the associated distributions. The balance of the decrease was primarily driven by the incremental volumes on our DBM water system, which as we have noted previously have a lower margin than most of our crude and NGL assets. Looking forward, our 2018 outlook for adjusted EBITDA and total capital expenditures remains unchanged, while we're updating our full year guidance for maintenance capital expenditures to a range of $90,000,000 to $100,000,000 This $10,000,000 increase is primarily due to increased activity in some of our key basins.
We still plan to finance our capital program without issuing equity while maintaining our investment grade ratings. As always, we appreciate all of your continued support. With that, operator, I'd like to open up the line for questions.
Thank you, sir. We will now begin the question and answer session. Your first question will be from Jeremy Tonet of JPMorgan. Please go ahead.
Good morning. Good morning, Jeremy. Just wanted to touch on the kind of the ramp over the back half of the year as you guys talked about with APCs or ROADOFS coming online, is that something we could expect kind of ratable increases into 3Q and into 4Q? And would that kind of ramp for those two facilities extend into 2019? Or any color on how we should think about that trajectory?
Yes, Jeremy, this is Ben. I would think of it as accelerating through the second half of the year, so a bit heavier in the 4th than in the 3rd and then continuing into the early part of 2019.
Great. Thanks. And we've seen some assets upstream change hands in the Permian recently. I was just wondering if this could impact West's outlook and kind of where does the 3rd party business mix stand now in the Permian and where do you think that could go over time?
Sure. I'll take that. In terms of the 3rd party mix, remember that until you got to RAMSI VI earlier this year, virtually all of our processing business was a 3rd party business and it wasn't until RAMSI VI we started to process meaningful Anadarko volumes. We continue to talk to 3rd party customers. We're seeing growth.
We're tying in some offset production. We love the transaction that you're referring to. It puts a very high marker on the value of the acreage nearby and the associated mid stream value of systems near that system. We are in contact with the acquirer. We feel we have some infrastructure that's literally right on their doorstep and we should be able to provide services quite competitively.
Got you. And just a housekeeping question. Just want to touch base with regards to structural simplification, something that has been talked about a lot in the past. Just didn't know if you had any updated thoughts at this point that you would be able to
share with us?
Yes, Jeremy, I appreciate you asking the question, but we have nothing new to say on the topic. Right now, we're focused on the second half ramp and maximizing our performance.
Thanks. That's it for me. Thank you.
The next question will be from Colton Bean of Tudor, Pickering, Holt. Please go ahead.
Hi, Ben. You mentioned the downtick in margin barrel there for the liquids assets. Thinking about Q3, should we expect a true up for the Whitethorn distribution, meaning do we get a June payment plus a Q3 distribution or is it more so just a trailing quarterly lag there?
Yes. I'll let Jaime take that Colton.
Yes. Colton, good morning. Yes, we will get a full quarter, but we won't get 4 months in that distribution is what you should be assuming. Got it. So we'll get June in the next 2 months, but we wouldn't get September in that quarter.
Understood.
And then I think you can
get that.
On top of that, you'll have continued growth in the water business, which will have the impact on the margin as well. Keep in mind, there's nothing out of the ordinary here. Ordinary course of operations is you get the distributions 1 month after you see the volumes. So it just so happened that our 1st month of operations was the last month in a quarter, hence this disparity what you saw.
Makes sense. And I guess just so APC message this morning that they would be dropping a spread in the DJ maybe later this month and they're revising volume expectations. Does that impact the timing of Latham 1 and 2 at all or maybe the expected time to fill those plants with their online?
I'll let Jennifer Kelly address that.
Right now, we don't expect the level of activity that Anadarko is telegraphing for DJ to impact our construction dates for Latham 1 and 2. Latham 2 is still on schedule to commence building in earlier I guess later next year in 2019 and it may take a little if on a continued trend, it may take a little bit longer to fill Latham II with DJ volumes, but the majority of volume scheduled for Latham II are 3rd party volumes anyway. So we really don't see any big impacts with Anadarko's DJ news today.
Right. And I'll just remind you Colton that also on that call earlier today, they talked about the balancing of that lifting the fracture being balanced with increased production in the Delaware. So WES is kind of neutral.
That's helpful. And I guess just last one here for me. So again, some positive comments at APC on the powder opportunity. I think they noted that they would probably provide an update with the 2019 capital budget later this year. Should we expect a similar timeline in terms of any potential West participation in that basin?
That's exactly right, Colton. When we evaluate options, we do it on a coordinated basis, just like we did in the DJ, just like we did in the Delaware. We're virtually hand in hand as we create our plan for the basin. And so that's something we will release in more detail together.
All right. Really appreciate the time.
The next question will be from Tom Abrams of Morgan Stanley. Please go ahead.
Thanks. Could you just remind us or update us on your the options you have for equity interest in takeaway capacity?
Sure. You mean unexercised options, Tom? Yes. Okay. So we've got an option on the Red Bluff pipeline, which will expire Q4 this year.
We have an option on the Cheyenne Connector pipeline, which will expire in the Q1 of next year. And that's all we've disclosed today.
Well, thank you for that. Sure. That's all.
The next question will be from Barrett Blaschke of MUFG Securities. Please go ahead.
Hey, guys. Can you give us just a little update on sort of any other systems that you might see coming offline? Or is there anything else in the portfolio that you're looking to rationalize like that?
You mean similar to the accrual that we took during the quarter? No. Those were special situations where the systems have just reached the end of their useful life. There are no other systems that we anticipate anything like this in the near term.
And ladies and gentlemen, that will conclude our question and answer session. I would like to hand the conference back to the executive team for their closing remarks.
Thank you, everyone, for participating today, and we'll talk to you again in 3 months. Bye.
Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your