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Anadarko's Western Gas sticking to MLP format but vigilant for cost 'impediment'

Even as investors put pressure on the midstream energy sector to eliminate payouts from oil and gas pipeline partnership to their sponsor companies, Western Gas Partners LP does not plan to jump on the simplification bandwagon unless the cost becomes too high.

"We remain confident in the strength of our business and our ability to deliver returns well above our current cost of capital," CEO Benjamin Fink said Feb. 16 during Western Gas' fourth-quarter 2017 earnings conference call. "At the appropriate time, we'll proactively address the structure if we believe that our cost of capital could present an impediment to the fundamentals of our business."

Incentive distribution rights, or IDRs, are required cash contributions that master limited partnerships have historically made as incentives to their sponsor companies. They can total 50% of a partnership's incremental quarterly cash distributions, increasing the MLP's cost of capital and handicapping its ability to reinvest in the business. While MLPs such as NuStar Energy LP and Spectra Energy Partners LP have recently eliminated IDRs to bolster balance sheet stability, Western Gas currently makes its payments to sponsor Anadarko Petroleum Corp. through a Western Gas Equity Partners LP-owned general partner.

Even though Sanford C. Bernstein & Co. LLC analysts wrote in a January note to clients that Anadarko could eventually get rid of IDRs, they also noted that the oil and gas producer is more likely to split from Western Gas as the MLP accumulates non-Anadarko assets. Fink said during the Feb. 16 call that he is optimistic about the partnership's expansion potential.

"What we are finding in the Delaware [Basin] is we have a competitive advantage in our ability to leverage our existing infrastructure," he explained. "You've seen the map of ... the gathering backbone that we're laying strictly financed by [our] sponsor to serve their needs. Just by virtue of doing that, we are on the doorstep of dozens of producers."

Fink added that in 2017, the MLP focused on maintaining a position of strength through executing a Marcellus-for-Delaware asset swap with Williams Partners LP and deferring additional asset drop-downs from its sponsor, which eliminated the need to issue public equity in 2018.

"If we had not taken the steps, our distribution coverage would have been significantly higher in 2017, but we would not be in the enviable position we're in today, which [is] we can execute capital plan of over $1 billion without reliance on equity capital market access," he said.

Western Gas on Feb. 15 reported fourth-quarter adjusted EBITDA of $273.3 million, up from $268.4 million in the prior-year period. Distributable cash flow in the fourth quarter was $233.4 million, an increase from $223.8 million in the year-earlier period.

For the full year, the partnership posted adjusted EBITDA of $1.06 billion, up from $1.03 billion in 2016, and distributable cash flow of $929.0 million, up from $852.4 million in the previous year.