Business Context and Reporting Period
This Form 8-K filing by Western Gas Equity Partners, LP (WGP) and its subsidiary Western Gas Partners, LP (WES) covers events occurring on March 2, 2015. The report details a material asset acquisition and an amendment to an existing gathering agreement.
Key Financial Metrics and Obligations
- Acquisition Consideration: WES agreed to a deferred cash payment due on March 31, 2020. Management estimates this obligation at approximately $283 million.
- Payment Formula: The final amount is calculated as 8 times the average of 50% of the Net Earnings of the acquired system for 2018 and 2019, less 50% of capital expenditures incurred between the effective date and February 29, 2020.
- Fee Increase: An amendment to the Wattenberg Gas Gathering Agreement provides for a $0.16 per Mcf increase in the gathering fee through the end of 2015.
- Balance Sheet Impact: The acquisition consideration will be recorded as a liability on WES's balance sheet until paid in 2020.
Material Changes and Transactions
Delaware Basin Acquisition
WES acquired a 100% interest in Delaware Basin JV Gathering LLC (DBJV), which holds a 50% interest in a 403-mile gathering system and related facilities in the Delaware Basin (Loving, Ward, Winkler, and Reeves Counties, Texas). The seller was WGR Asset Holding Company LLC, a subsidiary of Anadarko Petroleum Corporation.
Wattenberg Agreement Amendment
Kerr-McGee Gathering, LLC (a WES subsidiary) amended its agreement with Kerr-McGee Oil & Gas Onshore LLC (an Anadarko subsidiary) to extend the term through June 30, 2021, and added a condensate handling fee.
Related Party Relationships
Anadarko holds a significant interest in the partnership structure:
- 88.3% limited partner interest in WGP.
- 35.4% limited partner interest in WES (common units).
- 7.8% limited partner interest in WES (Class C units).
- 1.8% general partner interest in WES via WES GP.
Outlook, Risks, and Management Commentary
- Valuation Approval: The transaction was approved by a special committee of independent directors based on an opinion from an independent financial advisor that the consideration is fair from a financial point of view.
- Indemnification: Anadarko agreed to indemnify WES against losses resulting from breaches of representations and warranties. WES agreed to reciprocal indemnification for its own breaches.
- Contingencies: The final purchase price is contingent on future Net Earnings (revenues less cost of product, operating expenses, and property taxes) and capital expenditures over a multi-year period.
Investor Verification Checklist
- Verify the final calculation of the $283 million estimated consideration based on actual 2018-2019 Net Earnings and capital expenditures.
- Review the full Purchase and Sale Agreement (Exhibit 2.1) for specific definitions of "Net Earnings" and capital expenditure exclusions.
- Assess the impact of the $0.16 per Mcf fee increase on WES's cash flow for the remainder of 2015.
- Confirm the status of the extended Wattenberg Gas Gathering Agreement term through 2021.
- Monitor the balance sheet liability recognition for the deferred payment obligation.