Fitch Affirms Western Gas Partners at 'BBB-'; Outlook Negative
NEW YORK -- May 3, 2013
Fitch Ratings has affirmed the Issuer Default Rating (IDR) and senior
unsecured rating of Western Gas Partners, LP (WES) at 'BBB-'. The Rating
Outlook is Negative. Roughly $1.6 billion of debt is affected by today's
WES' ratings reflect its conservative financial profile which is supported by
fee-based and fixed-priced contracts that limit commodity price exposure, as
well as the strong credit linkage with its ultimate sponsor and general
partner, Anadarko Petroleum Corporation (APC IDR rated 'BBB-' with a Negative
Outlook by Fitch). WES is a growth-oriented MLP formed by APC in 2008 to own,
operate, acquire and develop midstream energy assets, including gathering,
processing, compressing, treating, and transporting natural gas, condensate,
natural gas liquids (NGLs) and crude. APC controls WES through its ownership
and control of Western Gas Equity Partners, LP (WGP) which owns WES's 2%
general partner interest, all of WES' incentive distribution rights and a 46%
limited partner interest.
KEY RATINGS DRIVERS
Close Linkage to Anadarko: WES's management and operations are strongly tied
to APC, a large and diverse exploration and production company with a
significant inventory of midstream assets that are potentially available for
future dropdowns. APC volumes represent the vast majority of WES's throughput
at 74% and are generally under fee based and/or fixed price contracts.
Additionally, Anadarko acts as a hedging counterparty for non-APC volumes
under percent of proceeds (POP) and keep-whole contracts with third parties at
formerly APC-owned facilities. Unlike its competitors, WES is able to directly
hedge exposures to both natural gas and NGL components by entering into fixed
price agreements with APC for actual volumes produced and/or received for
longer periods of time than are typically available in the market. The hedging
arrangements allow WES to substantially reduce commodity price exposure, thus
reducing cash flow volatility and business risk but increasing WES's
APC's ratings currently have a Negative Outlook reflecting the uncertainty
relating to the ongoing Tronox litigation in U.S. Bankruptcy Court. Currently,
Anadarko has reserved approximately $525 million for Tronox. A settlement or
judgment of less than $5 billion could lead to a revision of APC's Outlook
provided funding was achieved in a debt neutral manner. In regard to potential
remaining Macondo related oil spill liabilities in the Gulf of Mexico, Fitch
believes it is likely that any future amounts incurred will be manageable for
APC within the current rating.
Favorable Contract Mix and Managed Commodity Exposure: WES's contract mix is
largely fee-based/fixed priced or hedged providing significant gross margin
and cash flow stability. Unlike many of its competitors, WES is able to hedge
POP and keep-whole exposure with product specific hedges as opposed to proxy
hedges that many others use. This limits WES's exposure to breakdowns in the
relationship of gas to crude and NGLs. Volume risk is still a concern as lower
throughput can be driven by reduced drilling activity by producers in a low
commodity price environment and/or due to bypass of NGL processing facilities
when natural gas prices are very high.
Strategic Location of Assets: WES's assets are focused primarily within
liquids-rich basins which are strategic for APC and other producers given the
value of the NGLs in the current low gas price environment. WES's assets are
located in East, West and South Texas, the Rocky Mountains, Pennsylvania and
the Mid-Continent, and include gathering, processing, compressing, treating,
and transporting natural gas, condensate, NGLs and crude.
Somewhat Limited Size and Scale: While WES has grown significantly since its
IPO, size, scale and third party volumes remain a concern. These credit
considerations are offset somewhat by the relationship with APC and the
availability of asset drops, as well as expected growth in third party volumes
driven by recent acquisitions.
Conservative Financial Policies: WES's financial profile is fairly
conservative with a targeted 50/50 debt to equity capital structure. Fitch
expects Debt to Operating EBITDA between 3.0 to 3.5(x) and distribution
coverage of 1.1x for 2013. Should leverage be forecast to exceed 4.5x on a
sustained basis Fitch would likely consider a negative ratings action.
Similarly, if distribution coverage should fall below 1.0x on a sustained
basis Fitch would consider a negative ratings action. Liquidity is adequate
with $415 million in availability under WES's $800 million revolver as of the
end of 1Q 2013. WES is in compliance with its revolver covenant which limits
Debt/EBITDA to 5.0x (or 5.5x following an acquisition). WES's debt/EBITDA as
per its covenant calculation was 3.97x.
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Stabilization or improvement in the credit profile of APC.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Negative ratings action at APC;
--Negative change in sponsor support, contract mix, or in hedging
--Debt/EBITDA on a sustained basis above 4.5x;
--Distribution coverage below 1.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable criteria and Related Research:
--'Corporate Rating Methodology'(Aug. 8, 2012);
--'Parent and Subsidiary Ratings Linkage' (Aug. 8, 2012);
--'Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs'(April
--'Top 10 Comparisons of REITs and MLPs' (April 16, 2013);
--'The Top Ten Differences Between MLP and Corporate Issuers' (Feb. 19, 2013).
Applicable Criteria and Related Research
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs
Top 10 Comparisons of REITs and MLPs
The Top Ten Differences Between MLP and Corporate Issuers
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Peter Molica, +1 212-908-0288
Fitch Ratings, Inc.
One State Street Plaza,
New York, NY 10004
Kathleen Connelly, +1 212-908-0290
Sean T. Sexton, CFA, +1 312-368-3130
Brian Bertsch, +1 212-908-0549
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