Fitch Affirms WES at 'BBB-'; Outlook Revised to Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Western Gas Partners (NYSE: WES) ratings as follows:

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

--Senior unsecured notes at 'BBB-'.

The Rating Outlook has been revised to Stable from Positive.

KEY RATING DRIVERS

WES ratings reflect consistent execution of the growth strategy, a larger asset platform, and increased EBITDA, as well as the relationship with sponsor Anadarko Petroleum Corp. (NYSE: APC, BBB/Stable).

Offsetting positive factors are expectations for continued weakness in oil, gas and natural gas liquids (NGLs) prices, which could have negative implications for throughput volumes and the pace at which WES is able to grow its business. This would increase dependency on dropdowns for cash flow growth and could slow the overall rate of growth.

Fitch believes that there is a strong relationship between the ratings of WES and APC. However, given the current challenging commodity price environment and questions as to the sustainability of robust U.S. onshore production growth, we are maintaining a one-notch separation between WES and APC. An extended period of lower NGL and natural gas prices could begin to increase APC's willingness to let contracts expire, or renew them on less favourable terms for WES. However, any transition from the current supportive contract portfolio and execution of commodity swap arrangements is expected to be gradual and well within the ability of WES to accommodate at the current rating. On a standalone basis, WES credit metrics, cash flow stability and liquids-rich asset position are consistent with an investment grade midstream services processor.

STRONG SPONSOR RELATIONSHIP WITH ANADARKO

WES credit quality has historically been tied closely to APC. APC controls WES through its ownership and control of Western Gas Equity Partners, LP (NYSE: WGP), which owns WES 1.8% general partner interest, all of WES incentive distribution rights, and a significant limited partner (LP) interest. APC's significant interests in WES, through its ownership and control of WGP, give APC a strong economic incentive to effectively steward WES from a growth and cash flow perspective.

The WES credit profile benefits from its strategic and operational relationship with APC. Throughput and cash flow exposure to APC remain significant, with APC representing roughly 53% of WES throughput, primarily under fixed-price and/or fee-based contracts. APC has a significant position in North American onshore production, which should benefit WES via allocation of APC volumes from producing areas. WES and APC have swap agreements that mitigate WES commodity price exposure associated with percent-of-proceeds and keep-whole volumes, which accounted for 20% of gross margin in 2014. As a result, WES has approximately 95% of gross margin tied to fixed-fee arrangements, which provides for significant stability in earnings and cash flow measures.

APC has minimum throughput and production dedication arrangements with WES on specific systems. WES should benefit from APC's near-term focus on its onshore North American development program, as well as substantial resolution of litigation overhang on the APC credit profile (APC is rated 'BBB'/Stable by Fitch). The relationship with APC also provides visibility on growth in throughput volumes on WES gathering and processing systems. APC's large inventory of midstream assets is a significant advantage for WES, and enables the company to be selective in capital allocation with regard to acquisitions and organic growth opportunities.

FEE-BASED CONTRACT STRUCTURE

WES has approximately 95% of gross margin tied to fee-based or fixed-fee arrangements. 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 favourably positioned to the extent that production in its major operating basins continues to remain relatively stable and APC continues to focus heavily on developing its domestic resource base and increasing volumes. Additionally, a substantial portion of volumes are protected by WES' contract portfolio, where 70% of throughput volumes are linked to cost of service or demand charge contracts.

STRATEGIC ASSET POSITIONING

The company has transitioned from a pure natural gas midstream company to a more balanced platform with increasing exposure to liquids. The company has a platform in some of the most economic basins in North America, which are experiencing increased production volumes (DJ Basin, Permian, Marcellus, Eagle Ford, Bakken). Exposure to economic plays helps provide visibility regarding the stability of and growth in throughput volumes, particularly in periods of lower commodity prices.

CONSERVATIVE FUNDING OF GROWTH PROJECTS

WES' relatively stable contract structure tends to allow WES to run at moderately higher leverage. Debt/Adj. EBITDA was 3.7x for the LTM ending March 31, 2015, flat from Dec. 31, 2014. The size and timing of dropdowns from sponsors can have a material effect on leverage numbers when using actual EBITDA vs. pro forma numbers. Fitch assumes that management will target run-rate leverage of at or below 4.0x, excluding the effect of dropdowns. Management has publicly announced distribution growth targets of 15% over the next few years, which is a plausible target given future dropdowns from APC and associated cash flow generation.

GOOD LIQUIDITY POSITION

The company maintains a $1.2 billion credit facility, which provides adequate liquidity in addition to funding growth in between capital raises. Revolver availability was $567 million as of March 31, 2015. WES issued $500 million in senior notes due 2025 in the second quarter, with proceeds intended to reduce facility borrowings. Pro forma liquidity measures reflect the issuance. Management has publicly announced annual distribution growth targets of 15% over the next few years, which Fitch views as achievable given expected dropdowns from APC and associated cash flow generation. Distribution coverage has been around 1.2x over the past few periods, with management retaining flexibility to fund growth and maintain a consistent pace of distribution increases. WES is in compliance with its revolver covenant which limits debt/EBITDA to 5.0x (or 5.5x following an acquisition).

KEY ASSUMPTIONS

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

--$2.1 billion in asset dropdowns from APC show up as acquisitions in model. APC current dropdown inventory is estimated at >$2 billion

--EBITDA Multiples are assumed at 8.5x due to relationship with APC

--Organic growth projects contribute 10% annual revenue growth from incremental throughput

--Distributions grow at 15% per year

--Funding of growth and asset dropdowns is assumed at 55/45 debt - 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 (includes cash distributions from equity affiliates) above $1.0 billion;

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

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

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

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

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

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. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988653

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988653

Endorsement Policy

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

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150728006813/en/

Fitch Ratings
Primary Analyst
Brad Bell
Associate Director, U.S. Oil & Gas
+1 312-368-3149
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Peter Molica
Senior Director
+1 212-908-0288
or
Committee Chairperson
Shalini Mahajan
Managing Director
+1 212-908 0351
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]

Source: Fitch Ratings

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