Business Context and Reporting Period
This Form 8-K, dated February 14, 2019, is a supplemental disclosure filed by Western Gas Equity Partners, LP ("WES") regarding a proposed merger with Anadarko Petroleum Corporation. The filing serves to amend and supplement a definitive proxy statement/prospectus filed on January 28, 2019, in response to two putative class action lawsuits (Lennes v. Western Gas Partners, LP and Sabatini v. Western Gas Partners, LP) alleging inadequate disclosure. The company intends to vote on the Merger Agreement at a special meeting of unitholders on February 27, 2019.
Key Financial Metrics and Forecasts
The filing provides unaudited forecasted financial information for WES, its parent Western Gas Partners, LP ("WGP"), and the assets subject to the proposed contribution. The filing does not contain historical revenue, profit, or cash flow data for the current reporting period, as it focuses on forward-looking projections used for valuation analysis.
| Entity | Metric | 2019E | 2020E | 2021E |
|---|---|---|---|---|
| WES (Status Quo) | Net Revenues ($M) | $2,028 | $2,228 | $2,312 |
| WES (Status Quo) | Adjusted EBITDA ($M) | $1,476 | $1,694 | $1,791 |
| WES (Status Quo) | Distributable Cash Flow ($M) | $1,140 | $1,319 | $1,396 |
| WGP (Status Quo) | Cash Available for Distribution ($M) | $563 | $651 | $703 |
| Pro Forma WGP | Net Revenues ($M) | $2,572 | $2,849 | $3,011 |
| Pro Forma WGP | Adjusted EBITDA ($M) | $1,896 | $2,184 | $2,358 |
| Pro Forma WGP | Distributable Cash Flow ($M) | $1,387 | $1,622 | $1,770 |
Valuation Assumptions: Lazard utilized an equity discount rate of 9.0% to 11.0% for dividend discount model analyses. Terminal multiples ranged from 8.25x to 10.25x for WES and 10.00x to 12.00x for WGP.
Material Changes and Supplemental Disclosures
The filing amends the Proxy Statement with the following material updates:
- Forecast Correction: An immaterial calculation error regarding the pro forma number of units outstanding post-merger was corrected in the Project Clarity Forecast Model. There was no change to forecasted Adjusted EBITDA, Distributable Cash Flow, or cash available for distribution.
- Comparable Company Multiples: Added specific trading multiples (Price/DCF/Unit and Enterprise Value/EBITDA) for E&P-sponsored and other midstream comparable companies for 2019E and 2020E.
- Precedent Transactions: Added trading multiples for selected precedent transactions involving midstream assets, including G&P assets and pipeline joint ventures.
- Contingency Adjustments: Management applied a 2.5% downward contingency to Status Quo WES Adjusted EBITDA projections and a 5.0% downward contingency to the Assets Subject to Contribution projections for years 2019 and thereafter to account for uncertainty.
Outlook, Risks, and Contingencies
Management Commentary: WES believes the allegations in the pending lawsuits are without merit but is providing these supplemental disclosures to moot the allegations and avoid litigation expenses. The company urges investors to read the Proxy Statement and this supplement in conjunction.
Risks and Contingencies:
- Legal Proceedings: Two lawsuits seek to enjoin the unitholder vote until additional disclosures are made.
- Transaction Risks: Risks include failure of unitholders to approve the merger, failure to satisfy closing conditions, lack of regulatory approvals, and adverse reactions to business relationships.
- Forward-Looking Statements: Actual results may differ materially from projections due to economic conditions, competitive responses, and the inability to realize expected synergies or cost savings.
Investor Verification Checklist
- Verify the details of the pending lawsuits (Lennes and Sabatini) and their potential impact on the February 27, 2019, special meeting.
- Review the corrected Project Clarity Forecast Model to confirm the immaterial nature of the unit count error.
- Assess the sensitivity of the merger valuation to the 2.5% and 5.0% downward contingency adjustments applied to future EBITDA projections.
- Compare the disclosed trading multiples for comparable companies and precedent transactions against current market data to validate the fairness opinion.
- Confirm the status of regulatory approvals required for the Simplification Transaction.