Fitch Affirms Western Gas Partners at 'BBB-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed Western Gas Partners' WES ratings as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB-';

--Senior unsecured notes at 'BBB-'.

The Rating Outlook is Stable.

WES recently closed the private placement of $449 million of 8.5% perpetual convertible preferred units. The preferred units receive 50% equity credit under Fitch's hybrids criteria. Proceeds were used to partially fund the $750 million acquisition of midstream gathering & transportation assets from Anadarko Petroleum Corp. APC. The balance of funding will initially come from drawings on the WES revolver of approximately $248 million and common units issued to APC and Western Gas Equity Partners, LP WGP. Fitch expects WES's mid-cycle leverage metrics to remain within the bounds that management has publicly targeted (4.0x debt/EBITDA) and on balance views the acquisition and preferred funding as credit-neutral.

The Stable Outlook reflects the relative credit strength at sponsor APC (Fitch: 'BBB'/Negative Outlook), as well as good visibility on throughput volumes and associated cash flows related to key WES gathering systems. Downside risks for WES are related to changes to upstream budgets and subsequent production volumes in WES areas of operation rather than from commodity price fluctuations (i.e. volumetric rather than commodity price), although sustained lower commodity prices are likely to have an impact on upstream producers' drilling activity levels and subsequent need for gathering & processing services.

There is currently no explicit rating notching between WES and APC. Fitch believes that the rating profile of APC has more potential for volatility given significant commodity price exposure, and that potential rating changes at WES would be more muted given the current contract profile and counterparty risk. However, in the event of a significant ratings change at APC, Fitch would closely examine the expected volumetric and cash flow exposure to APC to determine the subsequent credit profile at WES.

KEY RATING DRIVERS

RELATIONSHIP WITH ANADARKO

As of Dec. 31, 2015, WGP economic interests in WES consisted of a 34.6% limited partner (LP) interest, a 1.8% general partner (GP) interest, and 100% of WES' incentive distribution rights. Subsidiaries of APC held units representing an 8.5% LP interest in WES, as well as an 87.3% LP interest in WGP. Fitch believes that APC's significant direct and indirect interests in WES and WGP create a strong economic incentive for APC to effectively manage WES from a growth, cash flow, and capital structure perspective.

APC's 2016 U.S. onshore capital allocation to the Wattenberg and Delaware basins should benefit WES via allocation of APC volumes. APC has minimum throughput and production dedication arrangements with WES on specific systems, and the relationship with APC provides visibility on the level of throughput volumes on WES's gathering and processing systems in the Wattenberg and Delaware basins. However, U.S. onshore volume growth could remain under pressure in a sustained oil & natural gas price stress scenario, and volumetric risk remains an area of concern for gathering & processing companies, including WES. Additionally, WES and APC have swap agreements that mitigate WES's commodity price exposure associated with percent-of-proceeds and keep-whole volumes.

FEE-BASED CONTRACT STRUCTURE

WES has approximately 98% of gross margin tied to fee-based & fixed-price arrangements, which provide for stability in earnings and cash flow measures. This helps to minimize margin volatility and provide cash flow and earnings stability. Volumetric risk remains a concern, as lower throughput can be driven by reduced drilling activity by producers. However, in the near term WES is favorably positioned to the extent that production in its major operating basins continues to remain relatively stable, and APC continues to develop its U.S. onshore resource base. Additionally, a substantial portion of volumes are insulated by WES's contract portfolio. In 2015, 71% of throughput volumes were linked to cost-of-service or demand-charge contracts.

CREDIT NEUTRAL FUNDING OF GROWTH PROJECTS

Debt/Adj. EBITDA was 3.6x for the year ending Dec. 31, 2015, down from 4.2x as of Dec. 31, 2014. Fitch assumes that management will continue to target run-rate leverage at or below 4.0x. Fitch believes that distribution growth rates could come under pressure over the next few years as upstream producers reduce capex budgets, but believes that WES will continue to manage distribution growth as needed to target 1.1x distribution coverage.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Increases in 2016 EBITDA driven by the Springfield acquisition and organic growth projects;

--Distributions growth is limited to growth in underlying cash flow to maintain 1.1x distribution coverage;

--Limited new large-scale capex commitments or new growth projects;

--Funding of growth and asset dropdowns is assumed at approximately 60% debt - 40% equity

RATING SENSITIVITIES

Positive: Future developments that may lead to positive rating actions include:

--Asset and business line expansion leading to a more diversified cash flow profile;

--Increased size and scale in existing businesses leading to adjusted EBITDA (including cash distributions from equity affiliates) above $1 billion;

--Debt/Adj. EBITDA sustained at or below 3.5x.

Negative: Future developments that may lead to positive rating actions include:

--Debt/Adj. EBITDA sustained above 4.5x and distribution coverage below 1.0x;

--Material unfavorable changes in sponsor support, contract mix, or in hedging arrangements;

--Adoption of a growth funding strategy which does not include a significant equity component

ADEQUATE LIQUIDITY POSITION

As of Dec. 31, 2015, WES had $98 million in cash and $894 million available on the $1.2 billion unsecured revolving credit facility, leading to total liquidity of $992 million. Distribution coverage has been around 1.1x over the past few periods, with management retaining flexibility to fund capex and maintain a consistent pace of distribution increases. Fitch expects that liquidity will remain adequate over the near term, particularly given relatively low committed capital spending requirements.

FULL LIST OF RATING ACTIONS

Fitch has affirmed Western Gas Partners, LP's ratings as follows:

--Long-term IDR at 'BBB-';

--Senior unsecured notes at 'BBB-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001254

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001254

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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