Thank you. I'm glad you could join us today for Western Gas' conference call to discuss the simplification and the acquisition of strategic assets from Anadarko. 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 this morning's press release contain important disclaimers and disclosures on the forward looking statements. Please see the 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 all posted on the Western Gas website at www.westerngas.com. Now, I'd like to turn the call over to our CEO, Ben Fink.
Ben? Thank you, John, and welcome, everyone. I've been with Western Gas for almost 10 years, and I've never been so excited to come to work. Our announcement is the result of months of hard work by our team and our Boards of Directors. For those listening to today's call, thank you for everything you did to make this happen, and I believe you helped achieve something that we can all be proud of.
When we began planning these transactions, we had one goal in mind, to structure a deal where all unitholders were not only unharmed, but truly benefited from the outcome. With this combination of simplification and a significantly accretive acquisition, I honestly believe that we have achieved our objective. Even though we were comfortably earning return above our weighted average cost of capital, we are eliminating our IDRs, meaning that now our cost of capital is improved while our expected returns are unchanged. No one will get a tax bill as a result of this deal. And over the next 3 years, WES and WGP unitholders will all benefit from significant DCF per unit accretion.
Furthermore, in 2019, we expect that all unitholders will receive a full year distribution that will be greater than 20 eighteen. Our pro form a capital structure will be simple and clean. Upon closing, we'll have no private capital, no hybrid or convertible securities or any other potential structural overhangs. And even though we're converting our Class C units a year early, thanks to our portfolio growth, we still expect to generate distribution coverage of no less than 1.2 times in 2019 and over 1.3 times in 2020 2021. As one of the largest MLPs, we will still offer a rare combination of significant scale and cash flow Not everything will change as a result of this transaction.
We'll maintain our commitment to investment grade ratings and we'll continue to target long term leverage below 4 times. Now that we will own virtually all their midstream assets, our alignment with Anadarko is as strong as ever and as we've said more than once, we believe they are the best most supportive sponsor in the MLP space. Now let's get into the leads. WGP has agreed to acquire substantially all of the limited partner interest in WES that it does not currently own in a unit for unit tax free exchange and Anadarko will retain a 2% interest in WES. WES will continue to exist as a private subsidiary of WGP and will remain the borrower for all existing and future debt.
The exchange ratio of 1.525 represents a 7.6% premium over WES' last closing price. The Class C units will convert into WES common units on a one for one basis just prior to closing and will be acquired by WGP in the merger. While simplification in itself would be a positive outcome for many, we wanted to take it one step further in order to create something that's attractive as possible. Therefore, we're not only simplifying, but also executing an immediately accretive $4,000,000,000 drop down of virtually all of Anadarko's remaining midstream assets. We expect these assets to generate 2019 adjusted EBITDA of approximately $420,000,000 which includes an additional $40,000,000 of G and A expense that will be allocated to us post closing.
Half the consideration will be paid in cash and Anadarko will take back the other half in WES units. Anadarko will retain some of these units to keep a 2% stake in WES, while the remainder of these newly issued WES units will be converted into WGP units at no premium. To fund the cash portion, we have secured a commitment for a $2,000,000,000 term loan facility. We expect the simplification transaction and the acquisition to close simultaneously in the Q1 of 2019. Now let's talk about what we'll be acquiring.
It's a portfolio of high growth, well positioned assets that are a perfect complement to our existing asset base. Approximately 95 percent of the portfolio's adjusted EBITDA comes from the high growth DJ and Delaware basins, with the largest assets being the oil systems in the Delaware and DJ Basins, as well as the produced water assets in the Delaware Basin. We are fortunate to be able to acquire this package of high growth assets at an attractive multiple of 9.5 times twenty nineteen estimated adjusted EBITDA. There are four points about this acquisition price that I feel are important to mention. First, when compared to the price levels at which similar assets in these basins have traded this year, this deal is extremely attractive.
2nd, the growth profile of the acquired assets exceeds that of any previous dropdown in our history. 3rd, the result in accretion from this deal is consistent with, if not better than, many of our prior transactions. And finally, it's important to remember that this transaction's multiple compares quite favorably to the effective multiples that Anadarko previously received when it benefited from the residual economics of the IDRs, which will no longer exist. These assets are supported by long term fixed fee contracts with minimum volume commitments and cost of service agreements. Pro form a on a run rate basis, we expect that our gross margins will be 97% fee based and approximately 66% of the natural gas throughput and approximately 80% of the liquids throughput is supported by either MVCs with associated deficiency payments or cost of service agreements.
To summarize, getting these assets at this price under this structure is one of the reasons why today is such a good day. Assuming all assets are held for the full year, approximately 80% of our 2019 estimated adjusted EBITDA will come from the DJ and Delaware Basins and an additional 10% comes from our investments in long haul transportation and fractionation assets. On the capital side, the DJ and Delaware Basins will continue to represent over 90% of our spending. We expect that our pre acquisition assets will require approximately 40% less capital than what we spent in 2018. Above this amount, we're assuming that we will exercise our option on the Red Bluff Express pipeline by the end of November.
Exercising this option will add approximately $110,000,000 of incremental capital expenditures and we also anticipate that the newly acquired assets will require between $400,000,000 $450,000,000 of capital in 2019. This capital program continue to expand what we believe is now the most comprehensive integrated midstream platform in each basin. Earlier, I mentioned our initial objective of structuring a transaction in which everyone is better off. Slide 7 represents the framework under which we evaluate whether or not we succeeded. If each unitholder can say they are benefiting via growth, coverage and liquidity, then personally I think we've done our job.
1st, whether you are a WES or WGP unitholder, we expect to deliver distribution growth to you in 2019 and as we all know that doesn't always happen transaction, but will be so even with the 0.1 times negative impact of the early Class C unit conversion. Current plan is to run coverage at around 1.2 times in 2019 and we believe that the pro form a portfolio is capable of delivering 6% to 8% distribution growth in 20202021, while maintaining no less than 1.3 times coverage. This combination of growth and coverage would simply not have been possible pre simplification. Finally, I don't think we should overlook the significantly increased liquidity of WGP post closing. While there's no way to predict average daily trading volume, we do know that a key driver of ADTV is size of the public float and WGP's is expected to more than quadruple as a result of this transaction.
We believe that the increased float will better position WGP for investors who require a certain level of trading liquidity. Of all the things that I'm excited about today and finally getting this deal done is one of them, I think releasing our pro form a outlook for 2019 is what excites me the most. The midpoint of our adjusted EBITDA range of $1,800,000,000 to $1,900,000,000 is over 50% higher than our 2018 midpoint with over 20% growth generated organically. Since the beginning of 2017, we have been strategically pulling capital forward with the goal of being in the enviable position that we're in today, strong cash flow growth and declining capital requirements that drive higher returns over time. Our leverage ratio will increase post transaction and should be between 4 and 4.25 times by the end of 2019 with the explicit objective of returning to our historic range of 3.5 times to 4 times in 2020.
We believe this is achievable without any new equity issuances. Finally, after we close this transformational transaction, we believe that additional volumetric disclosure will better highlight the intrinsic growth in our portfolio. We will therefore provide quarterly geographic volume data for each of our key basins and we will also break out water volumes from our crude and NGL volumes in our operating data. We believe this additional clarity will be an important part of helping investors understand the key drivers of our success. Okay.
It's time to wrap up now. I hope that I've effectively communicated how thrilled we are to execute these transactions at a time when our business fundamentals are so strong. So with that, operator, please open the line for questions.
Thank you.
Your first question comes from the line of Shneur Gershuni with UBS. Please go ahead.
Hey, good morning, Ben.
Good morning.
I'm sure you're happy to not have to answer these questions on calls anymore.
Maybe you
will. Just starting off, I was wondering if we can talk about the growth potential of the new assets. When I sort of look at your distribution growth guidance of 6% to 8% for 2020 2021, but you're also having coverage growth as well too, which sort of suggests that there's a stronger underlying growth level. I was just wondering if you can sort of give us your thoughts around the legacy business as well as these new assets that are being acquired in terms of growth potential in 2020 2021?
Sure, Shneur, and thank you for the question. The assets that we're acquiring are perfectly overlapping with our current assets. So the general trajectory is the same, but the acquired assets are far less mature and therefore higher growth because they're newer, right? In the history of a systems life, it's usually the gas assets you build first, then crude and water, excuse me. And so by definition, they will be shorter along in their life and therefore higher growth.
And so since we're bringing more of those newer crude and water assets into the portfolio, it's higher growth. I think when you see the S-four in a couple of weeks and you can actually see the cash flow growth of those assets, that will bear itself out nicely.
Okay. And just to clarify, so I am seeing it right though that the base business is even growing faster than your guidance for the distribution growth. Is that the right way to read that?
That is the right way to
read that. And obviously, we're trying to figure out the efficient frontier between growth and coverage.
All right, perfect. And just as a quick follow-up, you'd mentioned that there's no backdoor cut to WES. Could we assume that there'll be a simultaneous distribution increase upon transaction close just to make sure that the 2% accretion is not doesn't resolve in even the modest cut for a quarter or how would that work?
No, I don't think that would be a correct assumption. I look at this the way I look at my personal portfolio, which is, am I is what I'm getting in 2019 greater the same as or less in 2018 as opposed to the individual quarters. And as we've said, we believe the 2019 full year will be above the 2018 full year and we think that's rare in this type of deals, but there very well could be a quarter or 2 where you might see a dip before you get back to growth.
No, no, that makes sense and it definitely is rare. Thank you for the feedback and color and I'll jump back in queue.
Okay. Your next question comes from the line of Ross Payne with Wells Fargo. Please go ahead.
Ben, well done and nice structure here. Given your size, I assume the rating agencies will look at WGP on a standalone basis as some of them have already been doing. But perhaps more important, and I know you're close to APC, can you speak to their long term thoughts on their long term plans on their ownership position? Thanks.
Unfortunately, I really can't. What I can say is that they're in a highly liquid position that they were beforehand because of the capital discipline they've exercised and the fact that they have a budget that works at $50 oil. And so this obviously increases their liquidity, but I don't see any near term pressure to reduce that stake.
Okay, that's helpful. And no change on the rating and and ratings from what I saw. Thanks.
Thank you.
Next question comes from the line of Jeremy Tonet with JPMorgan. Please go ahead.
Good morning. Congratulations. Thanks. Just want to go back to the drop here a little bit and want to see for your guidance for 2019, does that include a full year drop or partially over the drop? And then maybe just as far as what that multiple could look like over time if you expect kind of really rapid growth from these assets, if you could talk about that?
Yes, absolutely. And you've been with us a little for a while, Jeremy. So you might remember the days of recasting. And so even if we were to close this acquisition, say, February, March timeframe, when we report that Q1, it will show up as if we owned it for the full year. And that's what we've done for all of our 10 drops year to date.
And so when we talk about our outlook, we show it on a full year basis even if it closes later in the year. Let me just stop there and make sure that makes sense before I tackle the next one.
So the $1,800,000 $1,900,000 is that effective recast?
That is effectively a full year recast, correct. Okay, thanks. Remind me what your next question was?
Just as far as where that multiple could go over time as you're spending more capital and those assets are growing, imagine that 9.5% could compress in the future?
Yes, I could see it being in that 8% to 8.5% range and that's inclusive of all CapEx in a couple of years' time.
Got you. And just with that G and A, just a little housekeeping there, what's the 40,000,000 dollars comprised of, I guess?
It's just a step up. The way to think about it is that coming out of this transaction, Western Gas is effectively the midstream arm of Anadarko. And therefore, there aren't cost to allocate between the 2 different groups, Anadarko Midstream and Western Gas. And so since all Midstream costs are coming to West, that results in a step up in G and A. But remember, that's coming out of the purchase price.
That's very helpful. I'll hop back in the queue. Thank you.
Sure. Your next question comes from the line of David Amoss with Heikkinen. Please go ahead. Good
Ben, just wanted to get your kind of high level viewpoints on the lowering of the cost of capital. It didn't sound like you're going to lower your return thresholds at all. So, is the way to think about it more just goes to the Western shareholders or unitholders? Or is there a 3rd party business that you think you'll be more competitive for going forward?
Thanks, David. And I want to be pretty clear about this. We have never lost a single piece of business or not been able to execute an acquisition because of cost of capital, all right? That is just simply not the narrative, right? So by keeping our returns unchanged and lowering our cash to capital, we expect that benefit to accrue to our unitholders, excuse me.
Okay. And then just thinking about like longer term the relationship with Anadarko, if you think about other assets that they own, how does the negotiation now go with them for something like the PRB? If they were to go into the PRB more activity like how would Western participate alongside? Is there an official agreement or is it more of an arms like negotiation?
What I would say is it's flexible. Anadarko is our largest owner by far and therefore a highly supportive sponsor just like they've always been in the past. My default expectation on any new project and let me be very clear, PRB is not in our numbers in any way. That is an unsanctioned project as far as I'm concerned, right? But my default assumption is that as midstream spend is required, it would be done at the Western Gas level.
But if for some reason that we didn't have the capacity to do it West, we can do what we've done in previous years and have Anadarko acquire that spend or implement that spend and then drop it to us later. So what I would say, it was flexible, but our default assumption that we would be the organic arm.
Got it. Thanks. That's helpful. And just one last one, if you could give us a little bit more color on the I think you said $400,000,000 to $450,000,000 of new CapEx on the drop assets in 2019. What exactly is that?
Sure. I'll let Jaime take
that one. Yes. That's obviously going to be focused on the DJ and Delaware Basin. Again, that's where all the EBITDA and cash flow is coming from, and that's where we're making the significant investment, is in those two basins.
It's just well connections and compression on the oil and water system.
Okay. Thank you.
Your next question comes from the line of Tom Abrams. Please go ahead.
That's been answered guys. Thanks a lot.
Your next question comes from the line of Selman Akyol with Stifel.
Congrats on the deal. How should we think of capital spending on the dropdown asset in 2020 beyond? And if you could kind of frame it for just the combined entity as a whole as well?
Yes. Obviously, we're not giving formal guidance for 2020 beyond. But I think the overall philosophy on the acquire assets exactly mirrors the base assets. And as I mentioned in the prepared remarks, right, what we're doing with the base assets is pulling capital forward, right, so that we're sizing pipes in the near term so that we don't have to loop them in the longer term, which leads to more efficient returns in the future. That's what we did on the gas side.
That's exactly what Anadarko was doing on the oil and water side. So it should be the same dynamic of increasing cash flow growth with decreasing capital requirements.
Okay. That makes sense. And then is there any update on the Anadarko capital contributions? Do you anticipate the pro form a entity still receiving those? Or is that still in discussion?
Are you referring to the fixed price agreements?
Yes, Yes. The like $50,000,000 to $60,000,000 per year, I think that Western
transaction now. Those expire at the end of this year and I do not expect them being renewed going forward. Remember, those were out of market transactions that we put in place when the macro environment was very, very different and we needed those to sustain our level of distribution growth and that's just simply not the case today.
Yes. And we just on that point, we just want to be clear that obviously that cash flow is not in our base forecast that we have provided. And so even without that additional DCF contribution, we still have very strong and robust 2019 outlook.
Got it. And then just one more, if you don't mind. So we understand the 112 failed, but just wondering how you think about this transaction. I mean, I think consensus thinks that there's some kind of compromise that happens and how your cash flows are protected. I assume there's NBCs look like they're kind of across the board, but just how you thought about a potential future outcome of a compromise with this dropdown?
Well, actually coming out of this dropdown on a pro form a basis, we're actually slightly less exposed to the DJ than we were before the drop, but it doesn't matter. It's still one of our key basins, one of our key avenues of growth. We're obviously very fortunate that we're not just the owner and operator of a DJ Basin asset, but one in which Anadarko is the producer because their economics have a significant uplift to every other producer due to their mineral interest and so there's greater economics at play. In terms of the broader situation, obviously, we were happy to see the election result that enabled us to make today's announcement. There's going to be future engagement.
This is very much the beginning. I think a 2 year cycle is no good for anyone. It's not good for the Colorado economy. It's not good for the business community. It doesn't really help anyone.
And so I do see a commitment by industry to engage earlier and try to avoid this vicious 2 year cycle.
Got it. That's all from us. Thank you.
Sure.
Your next question comes from the line of Elvira Scotto with RBC Capital Markets. Please go ahead.
Hey, good morning. Couple of questions for me. In terms of your growth CapEx kind of looking 2019 beyond, is the goal here to be equity self funding? And how do you look at funding that growth CapEx? Is it sort of fifty-fifty debt equity?
Any color there?
Yes. To be clear, we expect to be able to fund this capital program without the need for new equity issuance, period. With the inherent growth in our portfolio, we believe we can do that and still maintain our historic target leverage ratio of 3.5x to 4x going forward. It will be a little higher in 2019. As I mentioned, we'll end 2019 probably in the 4 to 4.25 times.
But then after that, we should go back down to where we've always been and do so without equity.
Great. Thanks. And then just in terms of Anadarko's ownership of WGP units, is there a plan just to maintain that ownership or is that expected to come down over time?
I have no idea to be quite honest. I think that might be a question for Anadarko IR's group. What I can tell you is that they have been an extraordinarily supportive sponsor. And as you can see by looking at their balance sheet, they are not concerned with liquidity, shall we say. They are very liquid organization as you can see by their stock buybacks, dividend increases, etcetera.
And so there is a huge alignment of operations and whatever is they do, I think they will be very focused on maximizing the value of this entity because it's still one of the most valuable entities in their portfolio.
Got you. Great. That's all I had. Thanks a lot guys.
Your next question comes from the line of Spiro Dounis. Please go ahead.
Hey, good morning and congrats. First one, just on the equity options that you guys have received from Anadarko in the past. It sounds like still very much aligned, but just curious if this changes your ability to see more equity options excuse me going forward?
No, no, no. Nothing changes really. The MO, if you will, is exactly the same, which is we have a sponsor that has the commercial wherewithal to use its leverage as a big customer to negotiate these options and then they make their way down to Western Gas one way or another. Great.
And then just with respect to the timing, I guess we were bit surprised that
you guys were able to
get this done in 2018, a lot earlier than expected. But have to notice that it comes right after Prop 12 is voted down. Just curious, was that a major factor in announcing the simplification?
We were unable to do so until that election result. I'll just leave it at that.
Yes. That makes sense. Quick housekeeping one, I think just the tachon tail virus question. Is there any sort of lockup on the units that ABC will get as a result of this transaction?
No.
Perfect. That's it for me. Thanks guys.
Your next question comes from the line of Jeremy Tonet with JPMorgan. Please go ahead.
Hi, thanks for the follow-up here. Just a real quick one. I think when you guys were discussing what to do before, you're talking about the potential of C Corp conversion being in the mix of things. And I imagine that would have introduced a significant tax leakage across the board. So just was wondering if you had any thoughts to share there?
And if at some point down the future, it seems like a C Corp does provide benefits such as increased trading liquidity. Is that something you could consider at a later date?
Well, I mean, you're right, Jeremy, that as we spoke conceptually over the past year, we talked about looking at all options and having a blank sheet of paper and that we wouldn't rule anything out when we began this process. Obviously, there is significant component of our investor base that have been with us for a long time. We're over 10 years old. And the idea of sticking them with a tax bill without liquidity is really unpalatable to us. And that was key to this decision.
There are other decisions as well, but we wanted to make sure all unitholders felt good about this deal and wanted to treat everyone right. The flow the people often recognize that C Corps have a little more liquidity than MLPs and that's technically true, but the key driver of liquidity is really float and not structure. And as I mentioned earlier, WGP's float is going to more than quadruple. And so between that liquidity benefit, between the ability to treat investors fairly and the fact that we always
have the optionality at a later date, if we choose to, we felt staying
with an MLP is Sure.
Thank you. We have no further questions in the queue at this time. I'd now like to turn the call back to management for final remarks.
Well, thanks for getting on the phone with us in short notice and pretty early. Obviously, we're very excited. And if you have any other questions, you know where to find us. Have a great day.
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