Fitch Rates Western Gas' Senior Unsecured Notes Reopening 'BBB-'

NEW YORK--()--Fitch Ratings rates Western Gas Partners, LP's (NYSE: WES) senior unsecured notes due 2044 'BBB-'. The notes are being offered under the company's indenture for $400 million of notes due 2044 and will be fully fungible with the existing 2044 notes. WES intends to use the proceeds to repay a portion of amounts currently outstanding under the revolving credit facility and to fund capital expenditures.

Ratings for WES reflect the relative credit strength at sponsor Anadarko Petroleum Corp. (NYSE: APC; 'BBB'/Outlook Negative), 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 producer's drilling activity levels and subsequent need for gathering & processing services.

There is currently no explicit rating notching between WES and APC. Fitch believes APC's rating profile 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

Fitch believes 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. As of June 30, 2016, WGP ownership interests in WES consisted of a 30% limited partner (LP) interest, the 1.5% general partner (GP) interest, and 100% of WES incentive distribution rights. Subsidiaries of APC held units representing an 87.3% LP interest in WGP, as well as an 8.4% LP interest in WES.

APC's 2016 U.S. onshore capital allocation to the Wattenberg and Delaware 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 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 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' contract portfolio. In 2015, 71% of throughput volumes were linked to cost of service or demand charge contracts.

CREDIT NEUTRAL FUNDING OF GROWTH PROJECTS

As calculated by Fitch, debt/EBITDA was 4.0x for the last 12 months ending June 30, 2016, up from 3.7x as of Dec. 31, 2015. 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/adjusted EBITDA sustained at or below 3.5x.

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

--Debt/adjusted 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 June 30, 2016, WES had $158 million in cash and $655 million available on the $1.2 billion unsecured revolving credit facility, leading to total liquidity of $813 million. Fitch expects that liquidity will remain adequate over the near term given recent liquidity enhancing measures, including the April 2016 issuance of Series A Preferred units, issuance of senior notes due 2026 and 2044 used to term out revolver borrowings. WES also has relatively low committed capital spending requirements.

Fitch currently rates WES as follows:

Western Gas Partners, LP

--Long-Term IDR 'BBB-';

--Senior unsecured notes 'BBB-'.

Date of Relevant Rating Committee: March 18, 2016

Summary of Financial Statement Adjustments

Fitch has made no material financial statement adjustments that are not disclosed within the company's public filings.

Additional information is available on www.fitchratings.com.

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Contacts

Fitch Ratings
Primary Analyst
Brad Bell, CFA
Associate Director
+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
Mark Sadeghian
Senior Director
+1-312-368 2090
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Brad Bell, CFA
Associate Director
+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
Mark Sadeghian
Senior Director
+1-312-368 2090
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com