S-1 1 d408045ds1.htm FORM S-1 Form S-1
Table of Contents
Index to Financial Statements

As filed with the Securities and Exchange Commission on November 5, 2012

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Western Gas Equity Partners, LP

(Exact name of Registrant as Specified in Its Charter)

 

 

 

Delaware   4922   46-0967367
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

1201 Lake Robbins Drive

The Woodlands, Texas 77380-1046

(832) 636-6000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Philip H. Peacock

Western Gas Equity Partners, LP

1201 Lake Robbins Drive

The Woodlands, Texas 77380-1046

(832) 636-6000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

David P. Oelman

Alan Beck

Vinson & Elkins L.L.P.

1001 Fannin, Suite 2500

Houston, Texas 77002

(713) 758-2222

 

Michael E. Dillard

Sean T. Wheeler

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨     Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)   Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities To Be Registered
  Proposed
Maximum Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee

Common units representing limited partner interests

  $362,250,000   $49,411

 

(1) Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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Index to Financial Statements

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated November 5, 2012

PROSPECTUS

 

 

LOGO

15,000,000 Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of the common units of Western Gas Equity Partners, LP. We are offering 15,000,000 common units. No public market currently exists for our common units. We have applied for listing on the New York Stock Exchange under the symbol “WGP.” We currently estimate that the initial public offering price will be between $         and $         per common unit.

Investing in our common units involves risks. See “Risk Factors” beginning on page 20 of this prospectus. These risks include the following:

 

 

Our only cash-generating assets are our partnership interests in Western Gas Partners, LP (“WES”), and our cash flow is therefore completely dependent upon the ability of WES to make cash distributions to its partners.

 

 

WES’s general partner, with our consent but without the consent of our unitholders, may limit or modify the incentive distributions we are entitled to receive from WES, which may reduce cash distributions to you.

 

 

A reduction in WES’s distributions will disproportionately affect the amount of cash distributions to which we are currently entitled.

 

 

Our unitholders do not elect our general partner or vote on our general partner’s directors. In addition, upon completion of this offering, Anadarko will own a sufficient number of our common units to allow it to prevent the removal of our general partner.

 

 

WES’s general partner owes duties to WES’s unitholders that may conflict with our interests, including in connection with the terms of contractual agreements between us and WES; the determination of cash distributions to be made by WES; and the determination of whether WES should make acquisitions and on what terms. Additionally, our and WES’s partnership agreements contain modifications of state law fiduciary duty obligations which may limit an investor’s remedies.

 

 

Because WES is substantially dependent on Anadarko as its primary customer and ultimate owner of its general partner, any development that materially and adversely affects Anadarko’s operations, financial condition or market reputation could have a material and adverse impact on WES and us.

 

 

Because of the natural decline in production from existing wells, WES’s success depends on its ability to obtain new sources of natural gas, which is dependent on certain factors beyond its control. Any decrease in the volumes of natural gas that WES gathers, processes, treats and transports could adversely affect its business and operating results.

 

 

Our taxation as a flow-through entity depends on our status as a partnership for U.S. federal income tax purposes. Likewise, WES’s taxation as a flow-through entity depends on its status as a partnership for U.S. federal income tax purposes. If the IRS were to treat WES or us as a corporation for federal income tax purposes, then our cash available for distribution to you could be substantially reduced.

 

 

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

In addition, we qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933 and, as such, are allowed to provide in this prospectus more limited disclosures than an issuer that would not so qualify. Furthermore, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes Oxley Act of 2002 and the Investor Protection and Securities Reform Act of 2010. Please read “Prospectus Summary—Emerging Growth Company Status” and “Risk Factors.”

 

     Per Common Unit      Total  

Price to the public

   $                              $                    

Underwriting discounts and commissions (1)

   $         $     

Proceeds to Western Gas Equity Partners, LP (before expenses)

   $         $     

 

(1) Excludes a structuring fee of an aggregate of     % of the gross offering proceeds payable to Barclays Capital Inc. and Citigroup Global Markets Inc. Please read “Underwriting.”

We have granted the underwriters a 30-day option to purchase up to an additional 2,250,000 common units on the same terms and conditions as set forth above if the underwriters sell more than 15,000,000 common units in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Barclays, on behalf of the underwriters, expects to deliver the common units on or about                     , 2012.

 

 

 

Barclays    Citigroup

Prospectus dated                     , 2012


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Index to Financial Statements

[Inside cover art]


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

Western Gas Equity Partners, LP

     1   

Western Gas Partners, LP

     5   

Risk Factors

     10   

Our Structure

     12   

Our Management

     13   

Our Principal Executive Offices

     14   

Emerging Growth Company Status

     14   

The Offering

     16   

Summary Historical and Pro Forma Financial and Operating Data

     18   

RISK FACTORS

     20   

Risks Inherent in an Investment in Us

     20   

Risks Related to Conflicts of Interest

     29   

Risks Inherent in WES’s Business

     32   

Tax Risks to Our Common Unitholders

     46   

USE OF PROCEEDS

     51   

CAPITALIZATION

     52   

DILUTION

     53   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     54   

General

     54   

Our Initial Quarterly Distribution

     55   

Western Gas Equity Partners, LP Unaudited Pro Forma Available Cash for the Year Ended December  31, 2011 and the Twelve Months Ended September 30, 2012

     58   

Estimated Minimum Necessary WES Adjusted EBITDA to Enable Us to Pay the Annualized Initial Quarterly Distribution of Western Gas Equity Partners, LP for the Year Ending December 31, 2013

     61   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     67   

General

     67   

General Partner Interest

     67   

Adjustments to Capital Accounts

     67   

Distributions of Cash Upon Liquidation

     67   

Our Sources of Distributable Cash

     67   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

     69   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     72   

Introduction

     72   

Overview of WES

     76   

How WES Evaluates Its Operations

     77   

Items Affecting the Comparability of Financial Results—Western Gas Equity Partners, LP

     81   

Items Affecting the Comparability of Financial Results—Western Gas Partners, LP

     83   

General Trends and Outlook

     85   

Results of Operations—Combined Overview

     86   

Operating Results

     87   

Liquidity and Capital Resources

     97   

Total Contractual Cash Obligations

     105   

Quantitative and Qualitative Disclosures About Market Risk

     106   

Critical Accounting Policies and Estimates

     107   

 

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Index to Financial Statements

BUSINESS

     110   

Western Gas Equity Partners, LP—Overview

     110   

Western Gas Partners, LP—Overview

     111   

Industry Overview

     116   

Our and WES’s Assets

     119   

Safety and Maintenance

     129   

Regulation of Operations

     130   

Environmental Matters

     135   

Title to Properties and Rights-of-Way

     138   

Employees

     139   

Legal Proceedings

     139   

MANAGEMENT

     140   

Directors and Executive Officers

     140   

Board Committees

     143   

Election of Directors

     144   

Compensation of Directors

     144   

Executive Compensation Discussion and Analysis

     144   

Executive Compensation

     152   

Summary Compensation Table

     152   

Grants of Plan-Based Awards in 2011

     153   

Outstanding Equity Awards at Fiscal Year-End 2011

     155   

Option Exercises and Stock Vested in 2011

     157   

Pension Benefits for 2011

     158   

Nonqualified Deferred Compensation for 2011

     158   

Potential Payments Upon Termination or Change of Control

     158   

Compensation of WES GP Directors

     163   

Compensation Committee Interlocks and Insider Participation

     164   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     165   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     167   

Our Relationship with WES and WES GP

     167   

Indemnification of Directors and Officers

     167   

Agreements Entered Into or to be Entered Into in Connection with this Offering

     167   

Related Party Transactions of Western Gas Partners, LP

     168   

Conflicts of Interest

     172   

Material Provisions of Our General Partner’s Limited Liability Company Agreement

     173   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     174   

Conflicts of Interest

     174   

Fiduciary Duties

     176   

DESCRIPTION OF THE COMMON UNITS

     179   

The Common Units

     179   

Transfer Agent and Registrar

     179   

Transfer of Common Units

     179   

Comparison of Rights of Holders of WES’s Common Units and Our Common Units

     180   

THE PARTNERSHIP AGREEMENT OF WESTERN GAS EQUITY PARTNERS, LP

     183   

Organization and Duration

     183   

Purpose

     183   

Power of Attorney

     183   

Capital Contributions

     183   

 

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Index to Financial Statements

Limited Liability

     184   

Voting Rights

     184   

Transfer of Ownership Interests in Our General Partner

     185   

Issuance of Additional Securities

     185   

Amendments to Our Partnership Agreement

     186   

Merger, Sale or Other Disposition of Assets

     188   

Termination or Dissolution

     188   

Liquidation and Distribution of Proceeds

     189   

Withdrawal or Removal of the General Partner

     189   

Transfer of General Partner Interest

     189   

Change of Management Provisions

     190   

Limited Call Right

     190   

Meetings; Voting

     190   

Status as Limited Partner

     191   

Non-Citizen Assignees; Redemption

     191   

Indemnification

     191   

Reimbursement of Expenses

     192   

Books and Reports

     192   

Right to Inspect Our Books and Records

     192   

Registration Rights

     193   

THE PARTNERSHIP AGREEMENT OF WESTERN GAS PARTNERS, LP

     194   

Organization and Duration

     194   

Purpose

     194   

Power of Attorney

     194   

Cash Distributions

     194   

Capital Contributions

     194   

Voting Rights

     195   

Limited Liability

     196   

Issuance of Additional Securities

     197   

Amendment of WES’s Partnership Agreement

     197   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     199   

Termination and Dissolution

     200   

Liquidation and Distribution of Proceeds

     200   

Withdrawal or Removal of the General Partner

     201   

Transfer of General Partner Units

     202   

Transfer of Ownership Interests in the General Partner

     202   

Transfer of Incentive Distribution Rights

     202   

Change of Management Provisions

     202   

Limited Call Right

     203   

Non-U.S. and Non-Taxpaying Assignees; Redemption

     203   

Meetings; Voting

     204   

Status as Limited Partner

     204   

Non-Citizen Assignees; Redemption

     204   

Indemnification

     205   

Reimbursement of Expenses

     205   

Books and Reports

     205   

Right to Inspect Books and Records

     206   

Registration Rights

     206   

 

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UNITS ELIGIBLE FOR FUTURE SALE

     207   

Rule 144

     207   

Our Partnership Agreement and Registration Rights

     207   

Lock-Up Agreements

     207   

Registration Statement on Form S-8

     208   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     209   

Taxation of the Partnership

     210   

Tax Consequences of Unit Ownership

     211   

Tax Treatment of Operations

     218   

Disposition of Units

     218   

Uniformity of Units

     221   

Tax-Exempt Organizations and Other Investors

     222   

Administrative Matters

     223   

State, Local and Other Tax Considerations

     226   

INVESTMENT IN OUR COMMON UNITS BY EMPLOYEE BENEFIT PLANS

     227   

General Fiduciary Matters

     227   

Prohibited Transaction Issues

     227   

Plan Asset Issues

     228   

UNDERWRITING

     229   

LEGAL MATTERS

     236   

EXPERTS

     236   

WHERE YOU CAN FIND MORE INFORMATION

     236   

FORWARD-LOOKING STATEMENTS

     236   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A—FORM OF FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF WESTERN GAS EQUITY PARTNERS, LP

     A-1   

APPENDIX B—GLOSSARY OF TERMS

     B-1   

 

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Index to Financial Statements

Presentation of Assets, Operations and Financial Statements

Unless the context otherwise indicates, references in this prospectus to the assets and operations of Western Gas Partners, LP (together with its subsidiaries, “WES”) are to the assets owned by WES as of September 30, 2012. Because Anadarko Petroleum Corporation (together with its subsidiaries other than us, our general partner, WES’s general partner and WES, “Anadarko”) controls WES through its ownership of its general partner, each acquisition by WES of assets from Anadarko through September 30, 2012 was considered a transfer of net assets between entities under common control. As such, the assets WES acquired from Anadarko were initially recorded at Anadarko’s historic carrying value, which does not correlate to the total acquisition price paid by WES. Further, after an acquisition of assets from Anadarko, WES may be required to recast its financial statements to include the activities of such assets as of the date of common control. The consolidated financial statements included in this prospectus for periods prior to WES’s acquisition of assets under common control have been prepared from Anadarko’s historical cost-basis accounts and may not necessarily be indicative of the actual results of operations that would have occurred if WES had owned the assets during the periods reported. References in this prospectus to the historical and pro forma financial statements of Western Gas Equity Partners, LP are to the consolidated historical and condensed consolidated pro forma financial statements, respectively, included elsewhere in this prospectus.

Trademarks and Trade Names

We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and does not imply, a relationship with us or endorsement or sponsorship by or of us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and trade names.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before making an investment decision. You should read the entire prospectus, including the historical and pro forma financial statements and the notes to those financial statements, for a more complete understanding of this offering of common units. You should read “Risk Factors” for more information regarding risks you should consider before investing in our common units. Unless the context otherwise indicates, the information included in this prospectus assumes (i) that the underwriters do not exercise their over-allotment option, (ii) an initial public offering price of $             per common unit and (iii) that we will use the net proceeds of this offering to purchase 5,767,708 WES (as defined below) common units and 117,708 WES general partner units, in each case, at a purchase price of $48.00 per unit.

Throughout this prospectus, when we use the terms “WGP,” “we,” “us,” “our” and “Western Gas Equity Partners, LP,” we are referring to Western Gas Equity Partners, LP in its individual capacity or to Western Gas Equity Partners, LP and its consolidated subsidiaries collectively, as the context requires. As used in this prospectus, (i) “our general partner” refers to Western Gas Equity Holdings, LLC, the general partner of Western Gas Equity Partners, LP; (ii) “WES” refers to Western Gas Partners, LP in its individual capacity or to Western Gas Partners, LP and its subsidiaries collectively, as the context requires; (iii) “WES GP” refers to Western Gas Holdings, LLC, our wholly owned subsidiary and the general partner of Western Gas Partners, LP; (iv) “Anadarko” refers to Anadarko Petroleum Corporation and its subsidiaries and affiliates, other than us, our general partner, WES GP, WES, and its subsidiaries as of the closing date of this offering; and (v) “Anadarko Petroleum Corporation” refers to Anadarko Petroleum Corporation excluding its subsidiaries and affiliates. We include a glossary of some of the terms used in this prospectus as Appendix B.

Western Gas Equity Partners, LP

We are a Delaware limited partnership formed to own three types of partnership interests in Western Gas Partners, LP, a publicly traded limited partnership (NYSE: WES). WES is a growth-oriented Delaware master limited partnership organized by Anadarko Petroleum Corporation (NYSE: APC) to own, operate, acquire and develop midstream energy assets. Our only cash-generating assets consist of our partnership interests in WES, which upon the completion of this offering will consist of the following:

 

   

2,075,553 WES general partner units, representing a 2.0% general partner interest in WES;

 

   

all of the incentive distribution rights in WES, which entitle us to receive increasing percentages, up to the maximum level of 48.0%, of any incremental cash distributed by WES as certain target distribution levels are reached in any quarter; and

 

   

46,340,947 WES common units, representing a 44.7% limited partner interest in WES.

We were formed in September 2012 upon the conversion of our predecessor, WGR Holdings, LLC, into a Delaware limited partnership. As of September 30, 2012, we owned 40,573,239 WES common units and, indirectly through our 100% membership interest in WES GP, 1,957,845 WES general partner units and all of the incentive distribution rights.

Based on WES’s current cash distribution and our expected ownership of WES following this offering, we expect our initial quarterly cash distribution to be $         per common unit, or $         per common unit on an annualized basis. Our primary objective is to increase distributions to our unitholders over time through growth in the distributions payable with respect to our partnership interests in WES. To achieve this objective, we intend to actively monitor and support WES in the successful execution of its business strategy. In the future, we may facilitate WES’s growth through the use of our capital resources, which could involve capital contributions, loans or other forms of financial support.

 

 

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Index to Financial Statements

WES is required by its partnership agreement to distribute, and it has historically distributed within 45 days of the end of each quarter, all of its cash on hand at the end of each quarter, less reserves established by its general partner to provide for the proper conduct of its business or to provide funds for future distributions. Like WES, we are structured as a limited partnership and will distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner.

Our cash flows will consist of the cash distributions we receive with respect to the WES partnership interests we own. While we, like WES, are structured as a limited partnership, our capital structure and cash distribution policy differ materially from those of WES. Most notably, (i) our general partner does not have an economic interest in us and is not entitled to receive any distributions from us and (ii) our capital structure does not include incentive distribution rights. Therefore, our distributions will be allocated exclusively to our common units.

Our ownership of WES’s incentive distribution rights entitles us to receive the following percentages of cash distributed by WES at the following target cash distribution levels:

 

   

13.0% of all incremental cash distributed in a quarter after $0.345 has been distributed in respect of each common unit and general partner unit of WES for that quarter;

 

   

23.0% of all incremental cash distributed in a quarter after $0.375 has been distributed in respect of each common unit and general partner unit of WES for that quarter; and

 

   

the maximum sharing level of 48.0% of all incremental cash distributed in a quarter after $0.450 has been distributed in respect of each common unit and general partner unit of WES for that quarter.

The cash distributions we receive from WES are tied to (i) WES’s per unit distribution level and (ii) the number of WES common units outstanding. An increase in either factor (assuming the other factor remains constant or increases) will generally result in an increase in the amount of cash distributions we receive from WES. Since its initial public offering, WES has engaged in transactions that have resulted in significant increases in both its per unit distribution level and outstanding equity capitalization, and we expect WES to engage in similar transactions in the future. WES has increased its quarterly cash distribution from $0.30 per common unit, or $1.20 on an annualized basis, for the quarter ended June 30, 2008, to $0.50 per common unit, or $2.00 on an annualized basis, for the quarter ended September 30, 2012. During the same period, WES issued a total of 42.9 million common units.

Based on WES’s ownership structure after giving effect to our acquisition of WES common units and general partner units in connection with the closing of this offering as described under “Use of Proceeds,” WES’s most recently declared distribution of $0.50 per common unit will result in a quarterly distribution to us of $32.1 million, or approximately $128.4 million on an annualized basis, consisting of (i) $23.2 million from distributions on our WES common units, (ii) $1.2 million from distributions on our WES general partner units and (iii) $7.7 million from distributions on the incentive distribution rights. We are currently receiving distributions at the highest level on the incentive distribution rights and therefore will receive 48.0% of the cash that WES distributes in excess of $0.450 per common unit, if any. As a result, the cash distributions we receive from WES with respect to the incentive distribution rights will increase more rapidly than those with respect to our WES common and general partner units.

 

 

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Index to Financial Statements

The following two graphs illustrate (i) the historical growth in WES’s distributions on its common units and the corresponding historical growth in quarterly distributions to WES GP, including pursuant to the 2.0% general partner interest and the incentive distribution rights, and (ii) the historical growth in WES’s distributions on a per unit annualized basis, each beginning with WES’s quarterly distribution paid with respect to the second quarter of 2008 and continuing through the most recently declared distribution with respect to the third quarter of 2012. As described above, the increases in WES’s aggregate cash distributions over time have resulted from increases in WES’s per unit quarterly distribution and equity capitalization over time.

Historical Quarterly Cash Distributions by WES

 

LOGO

 

(1) Represents the prorated distribution for the period beginning with the closing of WES’s initial public offering on May 14, 2008 and ending on June 30, 2008.
(2) Includes distributions on subordinated units prior to their conversion to common units in August 2011.

 

 

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Index to Financial Statements

Annualized Cash Distributions Per Common Unit by WES

 

LOGO

 

(1) Compound annual growth rate.

The below graph illustrates the impact on us of WES raising or lowering its quarterly cash distribution from the most recently declared distribution of $0.50 per unit, or $2.00 on an annualized basis, based on our ownership of partnership interests in WES as of the closing of this offering and assuming that WES’s outstanding partnership interests remain constant. This information is presented for illustrative purposes only and is not intended to be a prediction of future performance.

Hypothetical Annualized WES Distributions to Us

 

LOGO

 

 

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Index to Financial Statements

The impact on us of changes in WES’s per unit cash distribution levels will vary depending on several factors, including the number of WES’s outstanding common units on the record date for cash distributions and the impact of the incentive distribution rights structure. In addition, the level of cash distributions we receive may be affected by risks associated with the underlying business of WES. Please read “Risk Factors.”

We expect to make an initial quarterly cash distribution of $         per common unit, or $         on an annualized basis, to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including reimbursements to our general partner. If WES is successful in implementing its business strategy and increasing distributions to its partners, we generally would expect to increase distributions to our unitholders, although the timing and amount of any such increase in our distributions will not necessarily correlate to any increase in WES’s distributions. However, we cannot assure you that any distributions will be declared or paid. The common units offered hereby are not entitled to arrearages in distributions. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

Western Gas Partners, LP

Western Gas Partners, LP (NYSE: WES) is a growth-oriented Delaware master limited partnership formed by Anadarko to own, operate, acquire and develop midstream energy assets. WES’s assets are located in East, West and South Texas, the Rocky Mountains (Colorado, Utah and Wyoming) and the Mid-Continent (Kansas and Oklahoma), and WES is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, natural gas liquids (“NGLs”) and crude oil for Anadarko, as well as third-party producers and customers. Approximately two-thirds of WES’s services are provided under long-term contracts with fee-based rates with the remainder provided under percent-of-proceeds and keep-whole contracts. A substantial majority of the commodity price risk associated with the percent-of-proceeds and keep-whole contracts is hedged under commodity price swap agreements with Anadarko. WES’s only commodity price risk that is not hedged is associated with the non-fee-based agreements that were acquired with the purchase of the Platte Valley system, which represented less than 5% of WES’s gross margin for the twelve months ended September 30, 2012. A substantial part of WES’s business is conducted under long-term contracts with Anadarko that typically have a minimum term of ten years from the date of execution. None of WES’s material gathering and processing contracts with Anadarko expires before December 30, 2017, and, as of September 30, 2012, the volume weighted-average remaining life of all of such contracts with Anadarko was 7.7 years. WES currently has over 700 third-party gathering and processing contracts with over 200 customers, with no third-party customer representing more than 10% of WES’s revenues. The largest third-party customer, which represents approximately 6% of WES’s revenues, has entered into a “life of lease” contract with WES, meaning that the contract remains in effect until the customer ceases production from the leases that are dedicated under this contract.

As of September 30, 2012, WES’s assets consisted of thirteen gathering systems, seven natural gas treating facilities, ten natural gas processing facilities, two NGL pipelines, one interstate natural gas pipeline that is regulated by the Federal Energy Regulatory Commission (“FERC”), one intrastate natural gas pipeline and interests in two natural gas gathering systems and a crude oil pipeline. For a detailed description of WES’s assets, please read “Business—Our and WES’s Assets.”

 

 

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The following table provides information regarding WES’s assets by geographic region, other than natural gas processing facilities currently under construction in South Texas and Colorado, as of and for the nine months ended September 30, 2012:

 

Area

  

Asset Type

  Miles of
Pipeline
    Approximate
Number of
Receipt Points
    Gas
Compression
(horsepower)
    Processing
or Treating
Capacity
(MMcf/d)
    Average
Gathering,
Processing and
Transportation
Throughput
(MMcf/d)
 

Rocky Mountains (1)

  

Gathering, Processing and Treating

    7,106        4,887        344,137        2,480        2,215   
  

Transportation

    982        32        26,828        —          83   

Mid-Continent

  

Gathering

    2,012        1,498        92,097        —          81   

East Texas

  

Gathering and Treating

    590        843        37,820        502        244   

West Texas

  

Gathering

    120        90        —          —          52   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

       10,810        7,350        500,882        2,982        2,675   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Throughput includes 100% of Chipeta system volumes; 50% of Newcastle gathering system volumes; 22% of Rendezvous volumes; and 14.81% of Fort Union volumes. For the nine months ended September 30, 2012, throughput does not include the following NGL or crude oil transportation volumes: 25 MBbls/d of average NGL pipeline volumes from the Chipeta assets and 6 MBbls/d of oil pipeline volumes representing WES’s 10% share of average White Cliffs volumes.

We believe that one of WES’s principal strengths is its relationship with Anadarko. Anadarko is among the largest independent oil and gas exploration and production companies in the world. Anadarko’s upstream oil and gas business explores for and produces natural gas, crude oil, condensate and NGLs. We believe Anadarko, through its indirect economic interest in WES and in us following this offering, will continue to be motivated to promote and support the successful execution of WES’s business plan and to pursue projects that help to enhance the value of WES’s business.

Approximately 75% and 76% of WES’s total natural gas gathering, transportation and treating throughput (excluding equity investment throughput) during the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, was comprised of natural gas production owned or controlled by Anadarko. Approximately 64% and 59% of WES’s total processing throughput (excluding equity investment throughput) during the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, was attributable to natural gas production owned or controlled by Anadarko. In addition, with respect to WES’s Wattenberg, Dew/Pinnacle, Haley, Helper, Clawson and Hugoton gathering systems, Anadarko has dedicated to WES pursuant to the terms of its applicable gathering agreements all of the natural gas production it owns or controls from (i) wells that are currently connected to such gathering systems, and (ii) additional wells that are drilled within one mile of wells connected to such gathering systems as those systems currently exist and as they are expanded to connect additional wells in the future. As a result, this dedication will continue to expand as long as additional wells are connected to these gathering systems. In executing its growth strategy, which includes acquiring and constructing additional midstream assets, WES utilizes the significant experience of Anadarko’s management team.

Although we believe WES’s relationship with Anadarko provides it with a significant advantage in the midstream natural gas sector, it is also a source of potential conflicts. For example, Anadarko is not restricted from competing with WES. Given Anadarko’s significant indirect economic interest in WES and in us, we believe it will be in Anadarko’s best interest for it to transfer additional assets to WES over time. However, Anadarko continually evaluates acquisitions and divestitures and may elect to acquire, construct or dispose of

 

 

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midstream assets in the future without offering WES the opportunity to acquire, construct or participate in the ownership of those assets. Anadarko is under no contractual obligation to offer any such opportunities to WES, nor is WES obligated to participate in any such opportunities. We cannot state with any certainty which, if any, opportunities to acquire additional assets from Anadarko may be made available to WES or if WES will elect, or will have the ability, to pursue any such opportunities.

WES’s Primary Growth Drivers

We believe WES’s continued growth will be primarily driven by future acquisitions, negotiated equity interests and organic growth projects.

Acquisitions. As reflected in the chart below, since 2008, WES has completed nine acquisitions for total consideration of approximately $2.2 billion, including over $300 million in third-party acquisitions. WES has consistently maintained investment grade leverage metrics, maintaining debt-to-Adjusted EBITDA levels of less than 4:1, while funding acquisitions through (i) two debt financings resulting in over $1.0 billion of total proceeds; (ii) six equity financings resulting in approximately $1.0 billion of total proceeds; and (iii) the issuance of approximately 8.3 million common units and 170,000 general partner units to Anadarko.

 

     Acquisition Date      Percentage Acquired     Acquisition Price
($MM) (1)
 

Powder River

     12/19/2008         100   $ 210.0   

Chipeta

     07/22/2009         51     107.0   

Granger

     01/29/2010         100     254.4   

Wattenberg

     08/02/2010         100     498.0   

White Cliffs (2)

     09/28/2010         10     38.0   

Platte Valley (2)

     02/28/2011         100     301.9   

Bison

     07/08/2011         100     130.0   

MGR

     01/13/2012         100     483.0   

Chipeta

     08/01/2012         24     135.0   

 

(1) Acquisition price includes the cash consideration for the acquisition together with, when applicable, the value of units (based on a trailing average closing price of the common units as of the acquisition date) issued to Anadarko as consideration and reflects the impact of post-closing purchase price adjustments.
(2) Third-party acquisition. The White Cliffs transaction involved the purchase by WES from Anadarko of an equity interest in White Cliffs Pipeline, L.L.C. (“White Cliffs”) and a related option to purchase an additional interest in White Cliffs from a third party for $20 million. Concurrently with that transaction, WES exercised its option to purchase the additional interest in White Cliffs from the third party for $18 million.

We expect that WES’s future growth will be driven in large part by additional acquisitions of midstream assets from Anadarko over time. Anadarko’s total domestic midstream asset portfolio (excluding assets which WES fully consolidates into its results) had aggregate average throughput of approximately 2.5 Bcf/d for the nine months ended September 30, 2012 and as of that date consisted of 17 gathering systems, approximately 4,300 miles of pipeline and eight processing and/or treating facilities. Anadarko also continues to make significant investments in midstream assets that may present potential acquisition opportunities for WES, with over $1.0 billion invested in 2011 (including approximately $576 million of acquisitions) and over $500 million (excluding acquisitions and equity investments) projected to be invested in 2012.

Negotiated equity interests. Due to its significant resource position in many developing basins, Anadarko has also been able to further increase its midstream asset base by acquiring equity interests in third-party projects in exchange for long-term volume commitments. These investments could provide incremental acquisition opportunities for WES if pursued by Anadarko or represent additional investment opportunities for WES if Anadarko chooses to offer WES the opportunity to pursue them directly.

 

 

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Organic growth projects. WES has successfully completed both large and small organic growth projects associated with its existing assets and expects to continue to do so in the future. As of September 30, 2012, these projects had involved growth capital expenditures of approximately $363 million since 2008, and WES has budgeted over $400 million for organic growth projects in 2012.

WES currently has a number of significant projects scheduled for completion in 2012, 2013 and 2014 that are supported by long-term, fee-based throughput commitments from Anadarko. These projects include:

 

   

Chipeta Train III in the Uinta Basin: WES recently completed the construction of a new cryogenic processing train at its Chipeta facility which has a designed capacity of approximately 300 MMcf/d and was placed into service in October 2012. In connection with the construction of Chipeta Train III, Anadarko has agreed to a fee-based contract with a ten-year throughput commitment of not less than 500 MMcf/d to the Chipeta facility, which will begin on the first day of the month following Chipeta Train III’s in-service date.

 

   

Brasada plant in the Maverick Basin: WES is currently constructing a new cryogenic facility which will process production from the Eagleford shale. The new plant has a designed capacity of approximately 200 MMcf/d and is expected to begin service in the second quarter of 2013. Anadarko has agreed to a fee-based contract with a ten-year throughput guarantee, which will begin on the plant’s in-service date and will increase to 180 MMcf/d (or 90% of the plant’s capacity) on January 1, 2014, and will include associated demand charges. Based on WES’s commercial contracts with Anadarko, WES’s management expects that the project’s cost will represent a multiple of 6.5x the Brasada plant’s anticipated 2014 EBITDA.

 

   

Lancaster plant in the DJ Basin: WES is currently constructing a new cryogenic facility which will process production from the Niobrara and Codell formations in the Wattenberg field. The new plant has a designed capacity of approximately 300 MMcf/d and is expected to begin service in the first quarter of 2014. Anadarko has agreed to a fee-based contract with a ten-year throughput guarantee of 270 MMcf/d (or 90% of the plant’s capacity) and associated demand charges, which will begin on the plant’s in-service date. Based on WES’s commercial contracts with Anadarko, WES’s management expects that the project’s cost will represent a multiple of 6.5x the Lancaster plant’s anticipated annual EBITDA.

 

   

Red Desert expansion in the Greater Green River Basin. In conjunction with upstream development in the Greater Green River Basin, WES is constructing approximately 30 miles of 16-inch pipeline to gather up to an additional 40,000 Mcf/d of expected gas production in the area. The pipeline will deliver gas to WES’s Patrick Draw plant, where existing compression and cryogenic capacity will be used for processing and delivery into downstream pipelines. The project is expected to be completed by the end of 2012 and is supported by volume commitments from a third-party producer with an active drilling program in the basin.

We believe that WES is well positioned to continue the successful execution of its growth strategy, and that its current inventory of growth projects, coupled with its historical record of strategic and accretive acquisitions, should result in continued growth in the cash distributions paid by WES to its partners, including us.

WES’s Strategy

WES’s primary business objective is to continue to increase its cash distributions per unit over time. To accomplish this objective, WES intends to execute the following strategy:

 

   

Pursuing accretive acquisitions. WES expects to continue to pursue accretive acquisition opportunities of midstream energy assets from Anadarko and third parties.

 

 

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Capitalizing on organic growth opportunities. As demonstrated by the organic growth projects described above, WES expects to grow certain of its systems organically over time by meeting Anadarko’s and other customers’ midstream service needs that result from their drilling activity in WES’s areas of operation. Additionally, WES continually evaluates economically attractive organic expansion opportunities in existing or new areas of operation that allow it to leverage its existing infrastructure, operating expertise and customer relationships by constructing and expanding systems to meet new or increased demand for its services.

 

   

Attracting third-party volumes to its systems. WES expects to continue to actively market its midstream services to, and pursue strategic relationships with, third-party producers with the intention of attracting additional volumes and/or expansion opportunities.

 

   

Managing commodity price exposure. WES intends to continue limiting its direct exposure to commodity price changes and promote cash flow stability by pursuing a contract structure designed to mitigate exposure to commodity price uncertainty through the use of fee-based contracts and fixed-price hedges.

 

   

Maintaining investment grade ratings. WES intends to operate at appropriate leverage and distribution coverage levels in order to maintain its investment grade status. By maintaining investment grade status, in part through maintaining leverage ratios appropriate for investment-grade partnerships, we believe that WES will have increased flexibility in its growth strategy and will be able to pursue strategic acquisitions and large growth projects at a lower capital cost, which could enhance their accretion.

For a discussion of the possible risks that could adversely affect WES’s strategy, please read “—Risk Factors” beginning on page 10 and “Risk Factors” beginning on page 20.

WES’s Competitive Strengths

We believe that WES is well positioned to successfully execute its strategy and achieve its primary business objective because of the following competitive strengths:

 

   

Affiliation with Anadarko. As a result of its significant retained interest in us, and therefore in WES, we believe that Anadarko is motivated to promote and support the successful execution of WES’s business plan and to use its relationships throughout the energy industry, including with producers in the United States, to help pursue projects that help to enhance the value of WES’s business.

 

   

Relatively stable and predictable cash flows. We believe that WES’s cash flows are largely protected from fluctuations caused by commodity price volatility due to (i) the approximately two-thirds of its services that are provided pursuant to long-term, fee-based agreements and (ii) the commodity price swap agreements that limit its exposure to commodity price changes with respect to its percent-of-proceeds and keep-whole contracts. For the twelve months ended September 30, 2012, approximately 96% of WES’s gross margin was derived from either long-term, fee-based contracts or percent-of-proceeds or keep-whole agreements that were hedged with commodity price swap agreements.

 

   

Financial flexibility to pursue expansion and acquisition opportunities. We believe that WES’s operating cash flows, borrowing capacity, and access to debt and equity capital markets provide it with financial flexibility to competitively pursue acquisition and expansion opportunities and to execute its strategy across capital market cycles. WES currently has investment grade ratings from two of the three major rating agencies and, as of September 30, 2012, WES had approximately $800 million of available borrowing capacity under its revolving credit facility (the “WES RCF”) to fund acquisitions, expansions and working capital.

 

   

Substantial presence in liquids-rich basins. WES’s asset portfolio includes gathering and processing systems, such as its Wattenberg, Platte Valley, Chipeta, Granger and Red Desert assets, which are in areas where the hydrocarbon production contains oil and condensate, as well as a significant amount of

 

 

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NGLs, for which pricing has historically been correlated to crude oil as opposed to natural gas. Due to the relatively high current price of crude oil as compared to natural gas, production in these areas offers WES’s customers higher margins and superior economics compared to basins in which the gas is predominantly dry. This pricing environment offers expansion opportunities for certain of WES’s systems as producers attempt to increase their wet gas and crude oil production.

 

   

Well-positioned, well-maintained and efficient assets. We believe that WES’s asset portfolio across geographically diverse areas of operation provides WES with opportunities to expand and attract additional volumes to its systems from multiple productive basins. Moreover, WES’s systems include an integrated package of high-quality, well-maintained assets for which WES has implemented modern processing, treating, measuring and operating technologies.

 

   

Consistent track record of accretive acquisitions. Since WES’s initial public offering in 2008, WES’s management team has successfully executed seven related-party and two third-party acquisitions of midstream energy assets totaling approximately $2.2 billion, which have contributed to a 16% compound annual growth rate in WES’s per unit distributions since the second quarter of 2009. WES’s management team has demonstrated its ability to identify, evaluate, negotiate, consummate and integrate strategic acquisitions and expansion projects, and it intends to use its experience and reputation to continue to grow WES through accretive acquisitions, focusing on opportunities to improve throughput volumes and cash flows.

For a discussion of the possible risks that could adversely affect WES’s competitive position, please read “—Risk Factors” below and “Risk Factors” beginning on page 20.

Recent Developments

WES Third Quarter Distribution

On October 11, 2012, the board of directors of WES GP declared a cash distribution to its unitholders of $0.50 per unit for the quarter ended September 30, 2012. This distribution is payable on November 13, 2012 to unitholders of record at the close of business on October 31, 2012. This distribution represents a 4% increase over the distribution of $0.48 per common unit paid for the quarter ended June 30, 2012, and a 19% increase over the distribution of $0.42 per common unit paid for the quarter ended September 30, 2011.

Risk Factors

An investment in our common units involves risks associated with our and WES’s business, regulatory and legal matters, limited partnership structure and the tax characteristics of our and WES’s common units. You should carefully consider the risks described in “Risk Factors” beginning on page 20 of this prospectus and the other information in this prospectus before deciding whether to invest in our common units.

Risks Inherent in an Investment in Us

 

   

Our only cash-generating assets are our ownership interests in WES, and our cash flow is therefore completely dependent upon the ability of WES to make cash distributions to its partners.

 

   

WES GP, with our consent but without the consent of our unitholders, may limit or modify the incentive distributions we are entitled to receive from WES, which may reduce cash distributions to you.

 

   

In the future, we may not have sufficient cash to pay our estimated initial quarterly distribution or to increase distributions.

 

   

Our rate of growth may be reduced to the extent we purchase additional WES common units, which will reduce the percentage of our cash flow that we receive from the incentive distribution rights.

 

 

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Our ability to meet our financial needs may be adversely affected by our cash distribution policy and our lack of operational assets.

 

   

A reduction in WES’s distributions will disproportionately affect the amount of cash distributions to which we are currently entitled.

 

   

If distributions on our common units are not paid with respect to any fiscal quarter, including our expected initial quarterly distribution, our unitholders will generally not be entitled to receive such payments in the future.

 

   

Our and WES’s cash distribution policies limit our respective abilities to grow.

 

   

The terms of any debt that we may incur may limit the distributions that we can pay to our unitholders.

 

   

Our unitholders do not elect our general partner or vote on our general partner’s directors. In addition, upon completion of this offering, Anadarko will own a sufficient number of our common units to allow it to prevent the removal of our general partner.

 

   

You will experience immediate and substantial dilution of $         per common unit in the net tangible book value of your common units.

Risks Related to Conflicts of Interest

 

   

WES GP owes duties to WES’s unitholders that may conflict with our interests.

 

   

Potential conflicts of interest may arise among our general partner, its affiliates and us. Our general partner has limited its state law fiduciary duties to us and our unitholders, which may permit it to favor its own interests to the detriment of us and our unitholders.

 

   

The duties of our general partner’s officers and directors may conflict with their duties as officers and directors of WES GP.

 

   

Anadarko may compete with us or WES, which could adversely affect our or WES’s ability to grow and our or WES’s results of operations and cash available for distribution.

 

   

Our partnership agreement limits our general partner’s state law fiduciary duties to us and contains provisions that reduce the remedies available to unitholders for actions that might otherwise constitute a breach of fiduciary duty by our general partner.

Risks Inherent in WES’s Business

 

   

WES is dependent on Anadarko for a substantial majority of the natural gas that it gathers, treats, processes and transports. A material reduction in Anadarko’s production that is gathered, treated, processed or transported by WES would result in a material decline in WES’s revenues and cash available for distribution.

 

   

Because WES is substantially dependent on Anadarko as its primary customer and the ultimate owner of its general partner, any development that materially and adversely affects Anadarko’s operations, financial condition or market reputation could have a material and adverse impact on WES and us. Material adverse changes at Anadarko could restrict WES’s or our access to capital, make it more expensive to access the capital markets or increase the costs of WES’s or our borrowings.

 

   

Because of the natural decline in production from existing wells, WES’s success depends on its ability to obtain new sources of natural gas, which is dependent on certain factors beyond WES’s control. Any decrease in the volumes of natural gas that WES gathers, processes, treats and transports could adversely affect its business and operating results.

 

 

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Lower natural gas, NGL or oil prices could adversely affect WES’s business.

 

   

WES’s strategies to reduce its exposure to changes in commodity prices may fail to protect WES and could negatively impact its financial condition, thereby reducing its cash flows and ability to make distributions to partners, including us.

 

   

If Anadarko were to limit transfers of midstream assets to WES or if WES were to be unable to make acquisitions on economically acceptable terms from Anadarko or third parties, WES’s future growth would be limited. In addition, any acquisitions WES makes may reduce, rather than increase, its cash generated from operations on a per-unit basis.

Tax Risks to Our Common Unitholders

 

   

Our taxation as a flow-through entity depends on our status as a partnership for U.S. federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. Likewise, WES’s taxation as a flow-through entity depends on its status as a partnership for U.S. federal income tax purposes, as well as WES’s not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat WES or us as a corporation for federal income tax purposes or either WES or we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to you could be substantially reduced.

 

   

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

 

   

You will be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.

Our Structure

The chart on page 15 depicts our organization and ownership structure after giving effect to this offering and the related transactions. Upon the consummation of this offering:

 

   

our general partner, Western Gas Equity Holdings, LLC, which is a wholly owned subsidiary of Anadarko, will own a non-economic general partner interest in us;

 

   

our public unitholders will own 15,000,000 common units, representing a     % limited partner interest in us;

 

   

Anadarko will own              common units, representing a     % limited partner interest in us;

 

   

we will own 46,340,947 WES common units, representing a 44.7% limited partner interest in WES;

 

   

we will own a 100% membership interest in WES GP, which serves as WES’s general partner and will own 2,075,553 WES general partner units, representing a 2.0% general partner interest in WES, and all of the incentive distribution rights in WES; and

 

   

we expect that our $30.0 million working capital facility with Anadarko as the lender that we entered into on November 1, 2012 will be undrawn at such time.

An increase in the public offering price per common unit above the assumed initial offering price of $             would increase the proceeds of the offering and therefore the number of common and general partner units we purchase from WES, increasing our equity ownership in WES and the distributions we will receive from WES. Because these additional WES units would increase our value, we would also increase the number of WGP common units issued to Anadarko in connection with this offering. Specifically, we would increase the number of WGP common units issued to Anadarko in an amount equal to the increase in the current annualized WES distributions expected to be received on the additional WES units, divided by our annualized initial quarterly

 

 

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distribution. For example, a $1.00 increase in our public offering price would result in incremental net proceeds to us of $             million, which would allow us to purchase              and              additional common and general partner units in WES, respectively, and provide $             million in additional expected annual cash distributions to us. Based on this increase, we would issue              additional WGP common units to Anadarko, and therefore our per unit available cash would not change.

Likewise, an increase in the number of common units sold in this offering would increase the proceeds of the offering and therefore the number of common and general partner units we purchase from WES, and as a result, the number of WGP common units issued to Anadarko in connection with this offering. Specifically, we would increase the number of WGP common units issued to Anadarko in an amount equal to the increase in the current annualized WES distributions expected to be received on the additional WES units, less the distributions payable by us on such additional WGP common units, divided by our annualized initial quarterly distribution. For example, an increase of 1,000,000 WGP common units issued to the public at our assumed midpoint public offering price of $             would result in incremental net proceeds to us of $             million, which would allow us to purchase              and              additional common and general partner units in WES, respectively, and provide $             million in additional expected annual cash distributions to us. Based on this increase, we would issue              additional WGP common units to Anadarko, and therefore our per unit available cash would not change.

If we receive net proceeds from this offering of less than $282.5 million, we will be unable to purchase the aggregate number of WES common units and general partner units that we have assumed in the forecast of our estimated available cash for the year ending December 31, 2013, presented in “Our Cash Distribution Policy and Restrictions on Distributions.” In such instance, our estimated available cash for the year ending December 31, 2013 would decrease by an amount equal to the aggregate annualized distributions associated with the WES common and general partner units that we were unable to purchase.

In the event that (i) we purchase less than the aggregate number of WES common units and general partner units assumed in “Our Cash Distribution Policy and Restrictions on Distributions” and (ii) solely as a direct result of such reduction in the number of purchased units, we do not have sufficient available cash to distribute our initial quarterly distribution to all of our common unitholders (including Anadarko) in any quarter during the forecast period, Anadarko will agree to forgo distributions on the common units that it receives in this offering in an amount sufficient to permit the purchasers of common units in this offering to receive the full initial quarterly distribution in such quarter. Anadarko will agree to forgo such distributions, as applicable, until the first completed quarter in which our available cash is sufficient to pay the full initial quarterly distribution on all of our outstanding common units. In addition, if in any subsequent quarter we have available cash in excess of the amount required to pay our initial quarterly distribution on all of our common units (including those held by Anadarko), we will distribute to Anadarko the lesser of (i) the amount by which available cash exceeds the available cash required to pay our initial quarterly distribution on all of our common units (including those held by Anadarko) and (ii) the amount of distributions forgone by Anadarko that have not yet been repaid.

Our Management

Western Gas Equity Holdings, LLC, our general partner, will manage our operations and activities, including, among other things, establishing the quarterly cash distribution levels for our common units and the reserves that it believes are prudent to maintain for the proper conduct of our business. Our general partner will not receive any management fee or other compensation in connection with its management of our business but will be reimbursed for all direct and indirect expenses incurred on our behalf.

We control and manage WES through our ownership of its general partner, WES GP. The officers of our general partner are also officers of WES GP, and our officers, as well as the employees that operate WES, are Anadarko employees. Five of our directors are affiliated with Anadarko and are also directors of WES GP. Our remaining three directors will be independent directors as defined by the New York Stock Exchange (the

 

 

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“NYSE”). At least one of our independent directors will be appointed prior to the date our common units are listed for trading on the NYSE, a second independent director will be appointed within 90 days of the completion of this offering and the third independent director will be appointed within one year of the completion of this offering. Anadarko is the sole member of our general partner and will have the right to appoint our entire board of directors. Furthermore, because we are the sole member of WES GP, Anadarko indirectly has the right to appoint the entire board of directors of WES GP. The board of directors of WES GP is responsible for overseeing WES GP’s role as the general partner of WES. Please read “Management.”

Our Principal Executive Offices

Our principal executive offices are located at 1201 Lake Robbins Drive, The Woodlands, Texas 77380-1046, and our telephone number is (832) 636-6000. Our website will be located at www.westerngas.com. The information on our website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as we are an emerging growth company, unlike other public companies, we will not be required to:

 

   

provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002;

 

   

comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

   

comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the Securities and Exchange Commission (the “SEC”) determines otherwise;

 

   

provide certain disclosure regarding executive compensation required of larger public companies; or

 

   

obtain shareholder approval of any golden parachute payments not previously approved.

We will cease to be an “emerging growth company” upon the earliest of:

 

   

the last day of the fiscal year in which we have $1.0 billion or more in annual revenues;

 

   

the date on which we have at least $700 million in market value of our common units held by non-affiliates;

 

   

the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period; or

 

   

the last day of the fiscal year following the fifth anniversary of our initial public offering.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

 

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Index to Financial Statements

Western Gas Equity Partners, LP

Ownership and Organizational Chart After This Offering

 

LOGO

 

(1) WES’s joint venture interests consist of a 75% interest in Chipeta Processing LLC (“Chipeta”), a 22% interest in Rendezvous Gas Services, L.L.C. (“Rendezvous”), a 14.81% interest in Fort Union Gas Gathering, L.L.C. (“Fort Union”) and a 10% interest in White Cliffs.

 

 

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Index to Financial Statements

The Offering

 

Common units offered to the public

15,000,000 common units, or 17,250,000 common units if the underwriters exercise their over-allotment option in full.

 

Common units outstanding after this offering

             common units, or              common units if the underwriters exercise their over-allotment option in full.

 

Use of proceeds

We expect to receive net proceeds of approximately $282.5 million from the sale of our common units, after deducting underwriting discounts, the structuring fee and offering expenses. We will use the net proceeds from this offering as follows:

 

   

to purchase from WES 5,767,708 common units representing limited partner interests in WES for approximately $276.8 million; and

 

   

to make a capital contribution to WES on behalf of WES GP of approximately $5.7 million in exchange for 117,708 WES general partner units in order to maintain WES GP’s 2.0% general partner interest in WES.

 

  We will use any net proceeds from the exercise of the underwriters’ over-allotment option to purchase from WES additional common units and a corresponding number of general partner units.

 

  The foregoing assumes (i) an initial public offering price for our common units of $             per common unit and (ii) a purchase price of $48.00 per WES unit. WES will use the proceeds from the issuance and sale to us of WES units for general partnership purposes. Please read “—Our Structure” for a discussion of the impact on our equity capitalization of a change in the public offering price of our common units or the number of common units sold in this offering.

 

Cash distributions

We expect to make an initial quarterly cash distribution of $         per common unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

 

  We will pay our unitholders a prorated distribution for the first quarter that we are a publicly traded partnership. This distribution will be paid for the period beginning on the closing date of this offering and ending on the last day of that fiscal quarter. Therefore, assuming that we become a publicly traded partnership after September 30, 2012 and before December 31, 2012, we will pay you a distribution for the period from the closing date of this offering to and including December 31, 2012. We expect to pay this cash distribution on or about February 25, 2013. However, we can provide no assurance that we will declare or pay distributions. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

 

 

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Issuance of additional securities

We can issue an unlimited number of additional limited partner interests and other equity securities without the consent of our unitholders. Please read “Units Eligible for Future Sale” and “The Partnership Agreement of Western Gas Equity Partners, LP—Issuance of Additional Securities.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or its directors on an annual or continuing basis. Our general partner may not be removed except by a vote of the holders of at least 80% of the outstanding common units voting together as a single class, including any limited partner units owned by our general partner and its affiliates, including Anadarko. Upon consummation of this offering, Anadarko will own an aggregate of     % of our common units. This will give Anadarko the ability to prevent the involuntary removal of our general partner. Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price that is not less than the then-current market price of the common units.

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2014, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $         per common unit, we estimate that your average allocable federal taxable income per year will be no more than $         per unit. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions” and “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Limitations on Deductibility of Losses.”

 

Material tax consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material U.S. Federal Income Tax Consequences.”

 

Exchange listing

We have applied to list our common units on the NYSE under the symbol “WGP.”

 

 

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Summary Historical and Pro Forma

Financial and Operating Data

The following table shows our summary historical and pro forma financial and operating data, in each case for the periods and as of the dates indicated. The summary historical consolidated statements of income and cash flow data for the years ended December 31, 2009, 2010 and 2011 and the balance sheet data as of December 31, 2010 and 2011 are derived from our audited historical consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated balance sheet data as of December 31, 2009 is derived from our unaudited historical consolidated financial statements not included in this prospectus. The summary historical consolidated statements of income and cash flow data for the nine months ended September 30, 2011 and 2012 and the balance sheet data as of September 30, 2012 are derived from our unaudited historical consolidated financial statements included elsewhere in this prospectus. Our financial statements consolidate WES and its general partner, WES GP, which is our wholly owned subsidiary. This financial information is an integral part of, and should be read in conjunction with, the consolidated financial statements and notes thereto included elsewhere in this prospectus, “Selected Historical and Pro Forma Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We have no separate operating activities apart from those conducted by WES, and our cash flows consist of distributions from WES on the partnership interests we own. Accordingly, the summary historical consolidated financial data set forth in the following table primarily reflect the operating activities and results of operations of WES. Since we own and control WES GP, we reflect our ownership interest in WES on a consolidated basis, which means that our financial results are combined with those of WES and WES GP.

The unaudited pro forma financial data below has been prepared as if certain transactions to be effected at the closing of this offering had taken place on September 30, 2012, in the case of the pro forma balance sheet, and on January 1, 2011, in the case of the pro forma statements of operations for the year ended December 31, 2011 and the nine months ended September 30, 2012. These transactions include:

 

   

the receipt of net proceeds of $282.5 million, after deducting underwriting discounts, the structuring fee and offering expenses, from the issuance and sale of 15,000,000 common units at an assumed initial offering price of $             per common unit;

 

   

the use of the net proceeds from this offering to purchase 5,767,708 WES common units and to make a capital contribution to WES on behalf of WES GP in exchange for 117,708 WES general partner units in order to maintain WES GP’s 2.0% general partner interest in WES, as described in “Use of Proceeds”; and

 

   

WES’s use of the funds received from us for general partnership purposes.

For a description of all of the assumptions used in preparing the unaudited summary pro forma financial data, you should read the notes to our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. The pro forma financial data should not be considered as indicative of the historical results we would have had or the future results that we will have after this offering.

 

 

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    Historical     Pro Forma  
      Year Ended
December 31,
2011
    Nine Months
Ended
September 30,
2012
 
    Year Ended December 31,     Nine Months Ended September 30,      
    2009     2010     2011             2011                     2012              
    (unaudited)                 (unaudited)     (unaudited)  
    (in thousands, except per unit and operating data)  

Statement of Income Data:

             

Total revenues

  $ 619,764      $ 663,274      $ 823,265      $ 608,068      $ 636,603      $ 823,265      $ 636,603   

Costs and expenses (1)

    392,808        394,276        502,168        366,556        400,991        502,168        400,991   

Depreciation, amortization and impairments

    90,692        91,010        111,904        78,413        81,270        111,904        81,270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    483,500        485,286        614,072        444,969        482,261        614,072        482,261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    136,264        177,988        209,193        163,099        154,342        209,193        154,342   

Interest income (expense), net

    10,762        1,449        (1,785     (2,746     (17,443     (1,785     (17,443

Other income (expense), net

    1,628        (538     (44     (895     (287     (44     (287

Income tax expense (2)

    39,667        51,464        45,664        36,000        29,902        19,018        699   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    108,987        127,435        161,700        123,458        106,710        188,346        135,913   

Net income attributable to WES public unitholders and other noncontrolling interests (3)

    36,772        63,495        86,057        64,016        71,258        86,057        71,258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Western Gas Equity Partners, LP

  $ 72,215      $ 63,940      $ 75,643      $ 59,442      $ 35,452      $ 102,289      $ 64,655   

Pro forma net income per WGP common unit

              $     
             

 

 

 

Balance Sheet Data (at period end):

             

Net, property, plant and equipment

  $ 1,714,006      $ 1,753,762      $ 2,052,224        $ 2,342,923       

Total assets

    2,246,321        2,263,094        2,837,626          2,953,944       

Total long-term liabilities

    785,952        1,021,737        1,258,450          1,537,447       

Total equity and partners’ capital

    1,408,882        1,182,658        1,466,954          1,141,610       

Cash Flow Data:

             

Net cash provided by (used in):

             

Operating activities

  $ 186,422      $ 221,331      $ 273,222      $ 201,484      $ 232,769       

Investing activities

    (223,128     (885,507     (472,951     (405,241     (899,943    

Financing activities

    70,616        621,266        399,214        428,140        488,109       

Capital expenditures

    121,295        138,000        142,946        78,573        294,596       

Operating Data (volumes in MMcf/d):

             

Gathering, treating and transportation throughput (4)

    1,229        1,181        1,321        1,327        1,255       

Processing throughput (5)

    808        815        962        940        1,182       

Equity investment throughput (6)

    225        228        198        191        236       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total throughput

    2,262        2,224        2,481        2,458        2,673       

Throughput attributable to noncontrolling interests

    180        197        242        237        254       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Throughput attributable to Western Gas Equity Partners, LP

    2,082        2,027        2,239        2,221        2,419       

 

(1) Pro forma costs and expenses do not give effect to estimated annual incremental general and administrative expenses of approximately $3.0 million that we expect we will incur as a result of being a publicly traded partnership.
(2) Prior to our conversion in September 2012 to a limited partnership, we were a single-member limited liability company, required to reflect our income tax expense and liability on a separate-return basis. Upon the completion of this offering, and similar to WES, we will be treated as a partnership for U.S. federal and state income tax purposes and therefore will not be subject to U.S. federal and state income taxes, except for the Texas margin tax.
(3) Represents the publicly held common units of WES and WES’s noncontrolling interests in Chipeta that were held by Anadarko and a third-party member. Effective August 1, 2012, WES acquired Anadarko’s remaining interest in Chipeta, accounted for on a prospective basis.
(4) Excludes average NGL pipeline volumes from the Chipeta assets of 11 MBbls/d, 14 MBbls/d, 24 MBbls/d, 23 MBbls/d, and 25 MBbls/d for the years ended December 31, 2009, 2010, 2011 and the nine months ended September 30, 2011 and 2012, respectively.
(5) Consists of 100% of Chipeta, Granger, Hilight and Red Desert complex volumes and 50% of Newcastle system volumes for all periods presented, as well as throughput beginning March 2011 attributable to the Platte Valley system.
(6) Represents WES’s 14.81% share of Fort Union and 22% share of Rendezvous gross volumes, and excludes WES’s 10% share of average White Cliffs pipeline volumes consisting of 3 MBbls/d, 4 MBbls/d, 3 MBbls/d and 6 MBbls/d for the years ended December 31, 2010 and 2011 and the nine months ended September 30, 2011 and 2012, respectively. WES’s 10% share of White Cliffs volumes for 2009 was not material.

 

 

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RISK FACTORS

Limited partner interests are inherently different from capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in similar businesses. We urge you to carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

If any of the following risks were to occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, we might not be able to pay the initial quarterly distribution on our common units, the trading price of our common units could decline and you could lose all or part of your investment in us.

Risks Inherent in an Investment in Us

Our only cash-generating assets are our ownership interests in WES, and our cash flow is therefore completely dependent upon the ability of WES to make cash distributions to its partners.

The amount of cash that WES can distribute each quarter to its partners, including us, principally depends upon the amount of cash it generates from its operations, which will fluctuate from quarter to quarter based on, among other things:

 

   

the prices of, level of production of, and demand for natural gas;

 

   

the volume of natural gas that WES gathers, compresses, processes, treats and transports;

 

   

the volumes and prices of NGLs and condensate that WES retains and sells;

 

   

demand charges and volumetric fees associated with WES’s transportation services;

 

   

the level of competition from other midstream energy companies;

 

   

regulatory action affecting the supply of or demand for natural gas, the rates WES can charge, how it contracts for services, its existing contracts, its operating costs or its operating flexibility;

 

   

prevailing economic conditions; and

 

   

our continued success in the guidance, supervision and support of the execution of WES’s business strategy.

In addition, the actual amount of cash WES will have available for distribution will depend on other factors, some of which are beyond its control, including:

 

   

the level of capital expenditures it makes;

 

   

the level of its operating and maintenance and general and administrative costs;

 

   

its debt service requirements and other liabilities;

 

   

fluctuations in its working capital needs;

 

   

its ability to borrow funds and access capital markets;

 

   

its treatment as a flow-through entity for U.S. federal income tax purposes;

 

   

restrictions contained in debt agreements to which it is a party; and

 

   

the amount of cash reserves established by WES GP.

Because of these factors, WES may not have sufficient available cash each quarter to pay quarterly distributions at its most recently paid amount of $0.48 per unit, its most recently declared amount of $0.50 per unit or any other amount. The amount of cash that WES has available for distribution depends primarily upon its cash

 

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flow, including cash flow from operations and working capital borrowings, and is not solely a function of profitability, which will be affected by non-cash items. As a result, WES may be able to make cash distributions when it records losses for financial accounting purposes and may not be able to make cash distributions during periods when it records net income for financial accounting purposes. Please read “—Risks Inherent in WES’s Business” for a discussion of risks affecting WES’s ability to generate cash flow.

WES GP, with our consent but without the consent of our unitholders, may limit or modify the incentive distributions we are entitled to receive from WES, which may reduce cash distributions to you.

We own WES GP, which owns the incentive distribution rights in WES that entitle us to receive increasing percentages, up to a maximum of 48.0%, of any cash distributed by WES as certain target distribution levels in excess of $0.345 per WES unit are reached in any quarter. A growing portion of the cash flow we receive from WES is expected to be provided by these incentive distribution rights.

WES, like other publicly traded partnerships, will generally only undertake an acquisition or expansion capital projects if, after giving effect to related costs and expenses, the transaction would be expected to be accretive, meaning it would increase cash distributions per unit in future periods. Because WES GP currently participates in the incentive distribution rights at all levels, including the highest sharing level of 48.0%, it is more difficult for an acquisition or capital project to show accretion for the common unitholders of WES than if the incentive distribution rights received less incremental cash flow. As a result, WES GP may determine, in certain cases, to propose a reduction in the incentive distribution rights to facilitate a particular acquisition or expansion capital project. Such a reduction may relate to all of the cash flow on the incentive distribution rights or only to the expected cash flow from the transaction and may be either temporary or permanent in nature.

Our partnership agreement authorizes our general partner to approve any waiver, reduction, limitation or modification of or to WES’s incentive distribution rights without the consent of our unitholders. In determining whether or not to approve any such waiver or modification, our general partner’s board of directors or its special committee may consider whatever information it believes appropriate in making such determination. Our general partner’s board of directors or its special committee must also believe that any such modification is in the best interest of our partnership. Any determination with respect to such modification could include consideration of one or more financial cases based on a number of business, industry, economic, legal, regulatory and other assumptions applicable to the proposed transaction. Although we expect a reasonable basis will exist for those assumptions, the assumptions will generally involve current estimates of future conditions, which are difficult to predict. Realization of many of the assumptions will be beyond our general partner’s control. Moreover, the uncertainty and risk of inaccuracy associated with any financial projection will increase with the length of the forecasted period.

If distributions on the incentive distribution rights were reduced for the benefit of the WES common units, the total amount of cash distributions we would receive from WES, and therefore the amount of cash distributions we could pay to our unitholders, would be reduced.

In the future, we may not have sufficient cash to pay our estimated initial quarterly distribution or to increase distributions.

Because our only source of operating cash flow consists of cash distributions from WES, the amount of distributions we are able to make to our unitholders may fluctuate based on the level of distributions WES makes to its partners, including us. We cannot assure you that WES will continue to make quarterly distributions at its most recently paid level of $0.48 per unit, its recently declared level of $0.50 per unit or any other level, or increase its quarterly distributions in the future. In addition, while we would expect to increase or decrease distributions to our unitholders if WES were to increase or decrease distributions to us, the timing and amount of such changes in distributions, if any, would not necessarily be comparable to the timing and amount of any changes in distributions made by WES to us. Various factors such as reserves established by the board of directors of our general partner may affect the distributions we make to our unitholders. In addition, prior to

 

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making any distributions to our unitholders, we will reimburse our general partner and its affiliates for all direct and indirect expenses incurred by them on our behalf. Our general partner will determine the amount of these reimbursed expenses. The reimbursement of these expenses could adversely affect the amount of distributions we make to our unitholders. We cannot guarantee that in the future we will be able to pay distributions or that any distributions WES does pay to us will allow us to pay distributions at or above our estimated initial quarterly distribution of $         per common unit. The actual amount of cash that is available for distribution to our unitholders will depend on numerous factors, many of which are beyond our control or the control of our general partner.

Our rate of growth may be reduced to the extent we purchase additional WES common units, which will reduce the percentage of our cash flow that we receive from the incentive distribution rights.

Our business strategy includes supporting the growth of WES through the use of our capital resources, including by purchasing WES common units or lending funds to WES to finance acquisitions or internal growth projects. To the extent we purchase common units, or securities not entitled to a current distribution from WES, the rate of our distribution growth may be reduced, at least in the short term, because a smaller percentage of our cash distributions will come from our ownership of the WES incentive distribution rights, the distributions on which increase at a faster rate than those of the other securities we hold. Our purchase of WES common units with the net proceeds of this offering will reduce the percentage of the cash flow we receive from WES that is attributable to our ownership of incentive distribution rights from 25.3% with respect to the third quarter of 2012 to 24.0% upon the completion of the offering (or 23.8% assuming the underwriters exercise their over-allotment option in full). If the aggregate size of this offering were to increase, we would use the incremental net proceeds to purchase additional WES common units and general partner units in the manner described under “Prospectus Summary—Our Structure.”

Our ability to meet our financial needs may be adversely affected by our cash distribution policy and our lack of operational assets.

Our cash distribution policy, which is consistent with our partnership agreement, requires us to distribute all of our available cash quarterly. Our only cash-generating assets are partnership interests in WES, and we currently have no independent operations separate from those of WES. Moreover, as discussed below, a reduction in WES’s distributions will disproportionately affect the amount of cash distributions we receive. Given that our cash distribution policy is to distribute available cash and not retain it and that our only cash-generating assets are partnership interests in WES, we may not have enough cash to meet our needs if any of the following events occur:

 

   

an increase in our operating expenses;

 

   

an increase in our general and administrative expenses;

 

   

an increase in our working capital requirements; or

 

   

an increase in the cash needs of WES or its subsidiaries that reduces WES’s distributions.

A reduction in WES’s distributions will disproportionately affect the amount of cash distributions to which we are currently entitled.

Our indirect ownership of all the incentive distribution rights in WES entitles us to receive specified percentages of total cash distributions made by WES with respect to any particular quarter only in the event that WES distributes more than $0.345 per unit for such quarter. As a result, the holders of WES’s common units have a priority over us to cash distributions by WES up to and including $0.345 per unit for any quarter.

Because we are currently participating at the 48.0% level on the incentive distribution rights, future growth in distributions paid by WES will not result in an increase in our share of incremental cash distributed by WES. Furthermore, a decrease in the amount of distributions by WES to less than $0.450 per unit per quarter would reduce our percentage of the incremental cash distributions above $0.375 per common unit per quarter from

 

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48.0% to 23.0%, and a decrease in the amount of distributions by WES to levels below the other established target distribution levels would similarly reduce our percentage of the incremental cash distributions from WES. As a result, any reduction in quarterly cash distributions from WES would have the effect of disproportionately reducing the amount of all distributions that we receive from WES based on our indirect ownership of the incentive distribution rights in WES as compared to cash distributions we receive from WES with respect to our indirect 2.0% general partner interest in WES and our WES common units.

If distributions on our common units are not paid with respect to any fiscal quarter, including our expected initial quarterly distribution, our unitholders will generally not be entitled to receive such payments in the future.

Our distributions to our unitholders will generally not be cumulative. Consequently, if distributions on our common units are not paid with respect to any fiscal quarter, including our expected initial quarterly distribution, our unitholders will generally not be entitled to receive such payments in the future. However, in the event we receive proceeds in this offering less than the assumed net proceeds of $282.5 million, and as a result we purchase fewer WES common and general partner units, Anadarko will agree to forgo certain distributions (subject to future reimbursement) in order to enable us to pay the full initial quarterly distribution on all common units sold to the public in this offering. Please read “Prospectus Summary—Our Structure.”

Our and WES’s cash distribution policies limit our respective abilities to grow.

Because we distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. In fact, our growth will initially be completely dependent upon WES’s ability to increase its quarterly distribution per unit because currently our only cash-generating assets are partnership interests in WES. If we issue additional units or incur debt, including under our working capital facility, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to maintain or increase our per unit distribution level.

In addition, consistent with the terms of its partnership agreement, WES distributes to its partners all of its available cash each quarter. To the extent WES does not have sufficient cash reserves or is unable to finance growth externally, its cash distribution policy will significantly impair its ability to grow. Further, to the extent WES issues additional units in connection with any acquisitions or expansion capital projects, the payment of distributions on those additional units may increase the risk that WES will be unable to maintain or increase its per unit distribution level, which in turn may impact the available cash that we have to distribute to our unitholders. The incurrence of additional debt to finance its growth strategy would result in increased interest expense to WES, which in turn may reduce the available cash that we have to distribute to our unitholders.

The debt that we incur may limit the distributions that we can pay to our unitholders.

Our payment of principal and interest on any future indebtedness, including under our working capital facility, will reduce our cash available for distribution to our unitholders. We anticipate that any additional credit facility we enter into in the future would limit our ability to pay distributions to our unitholders during an event of default or if an event of default would result from the distributions.

In addition, any future indebtedness may adversely affect our ability to obtain additional financing for future operations or capital needs, limit our ability to pursue other business opportunities, or make our results of operations more susceptible to adverse economic or operating conditions.

Our unitholders do not elect our general partner or vote on our general partner’s directors. In addition, upon completion of this offering, Anadarko will own a sufficient number of our common units to allow it to prevent the removal of our general partner.

Unlike the holders of common stock in a corporation, our unitholders have only limited voting rights and, therefore, limited ability to influence management’s decisions regarding our business. Our unitholders do not

 

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have the ability to elect our general partner or the members of our general partner’s board of directors and will have no right to elect our general partner or the directors of our general partner on an annual or other continuing basis in the future. The members of our general partner’s board of directors, including the independent directors, are chosen by Anadarko, the sole member of our general partner. Furthermore, if our public unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Our general partner may not be removed except upon the vote of the holders of at least 80% of the outstanding common units. Because Anadarko will own more than 20% of our outstanding common units after this offering, our public unitholders will be unable to remove our general partner without Anadarko’s consent. Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Withdrawal or Removal of the General Partner.”

As a result of these provisions, the price at which our common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price. Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Meetings; Voting.”

You will experience immediate and substantial dilution of $             per common unit in the net tangible book value of your common units.

The assumed initial public offering price of our common units is substantially higher than the pro forma net tangible book value per common unit of the common units to be outstanding immediately after the offering. If you purchase common units in this offering you will incur immediate and substantial dilution in the pro forma net tangible book value per common unit from the price you pay for the common units. Please read “Dilution.”

Our general partner may cause us to issue additional common units or other equity securities without your approval, which would dilute your ownership interests.

Our general partner may cause us to issue an unlimited number of additional common units or other equity securities, including securities that rank senior to the common units, without unitholder approval. The issuance of additional common units or other equity securities will have the following effects:

 

   

your proportionate ownership interest in us will decrease;

 

   

the amount of cash available for distribution on each common unit may decrease;

 

   

the relative voting strength of each previously outstanding common unit may be diminished;

 

   

the ratio of taxable income to distributions may increase; and

 

   

the market price of the common units may decline.

Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Issuance of Additional Securities.”

The general partner interest in us or the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, Anadarko, the owner of our general partner, may transfer its ownership interest in our general partner to a third party, also without unitholder consent. Our new general partner or the new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner and to control the decisions taken by the board of directors and officers.

 

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If WES’s unitholders remove WES GP, we would lose our general partner interest and incentive distribution rights in WES and the ability to manage WES.

We currently manage WES through WES GP, our wholly owned subsidiary. WES’s partnership agreement, however, gives unitholders of WES the right to remove the general partner of WES upon the affirmative vote of holders of 66 2/3% of WES’s outstanding units. If WES GP were to be removed as general partner of WES, it would receive cash or WES common units in exchange for its 2.0% general partner interest and the incentive distribution rights and would lose its ability to manage WES. While the WES common units or cash WES GP would receive are intended under the terms of WES’s partnership agreement to fully compensate it in the event such an exchange is required, the value of these WES common units or of the investments WES GP makes with the cash over time may not be equivalent to the value of the general partner interest and the incentive distribution rights had it retained them. Furthermore, the conversion of the incentive distribution rights into WES common units would disproportionately impact the amount of cash distributions to which we are entitled with respect to increases in WES distributions. Please read “The Partnership Agreement of Western Gas Partners, LP—Withdrawal or Removal of the General Partner.”

In addition, if WES GP is removed as general partner of WES, we would face an increased risk of being deemed an investment company under the Investment Company Act of 1940 (the “Investment Company Act”).

Our ability to sell our partnership interests in WES may be limited by securities law restrictions and liquidity constraints.

Upon completion of this offering and the application of the use of proceeds therefrom, we will own 46,340,947 common units of WES, all of which will be unregistered and restricted securities, within the meaning of Rule 144 under the Securities Act of 1933. Unless we exercise our registration rights with respect to these common units, we will be limited to selling into the market in any three-month period an amount of WES common units that does not exceed the greater of 1.0% of the total number of WES common units outstanding or the average weekly reported trading volume of the WES common units for the four calendar weeks prior to the sale. In addition, we face contractual limitations under WES’s partnership agreement on our ability to sell WES general partner units and the incentive distribution rights and the market for such interests is illiquid.

You may not have limited liability if a court finds that unitholder action constitutes control of our business.

Under Delaware law, you could be held liable for our obligations to the same extent as a general partner if a court were to determine that the right or the exercise of the right by our unitholders as a group to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other action under our partnership agreement constituted participation in the “control” of our business. Additionally, the limitations on the liability of holders of limited partner interests for the liabilities of a limited partnership have not been clearly established in many jurisdictions.

Furthermore, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act (the “Delaware Act”) provides that, under some circumstances, a unitholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution. Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Limited Liability” for a discussion of the implications of the limitations on liability to a unitholder.

If in the future we cease to manage and control WES, we may be deemed to be an investment company under the Investment Company Act.

If we cease to manage and control WES and are deemed to be an investment company under the Investment Company Act, we will either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our organizational structure or our contractual rights to fall outside the definition of an investment company. Registering as an investment company could, among other

 

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things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage, require us to add additional directors who are independent of us and our affiliates, and adversely affect the price of our common units. In addition, if we were required to register under the Investment Company Act, we would be taxed as a corporation for U.S. federal income tax purposes.

Our partnership agreement restricts the rights of unitholders owning 20% or more of our units.

Our unitholders’ voting rights are restricted by a provision in our partnership agreement which provides that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of our unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting our unitholders’ ability to influence the manner or direction of our management. As a result, the price at which our common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price.

WES may issue additional limited partner interests or other equity securities, which may increase the risk that WES will not have sufficient available cash to maintain or increase its cash distribution level.

WES has wide latitude to issue additional limited partner interests on the terms and conditions established by its general partner. We receive cash distributions from WES on the general partner interests, incentive distribution rights and limited partner interests that we hold. Because we expect a growing portion of the cash we receive from WES to be attributable to our ownership of the incentive distribution rights, payment of distributions on additional WES limited partner interests may increase the risk that WES will be unable to maintain or increase its quarterly cash distribution per unit, which in turn may reduce the amount of incentive distributions we receive and the available cash that we have to distribute to our unitholders.

If WES GP is not fully reimbursed or indemnified for obligations and liabilities it incurs in managing the business and affairs of WES, its value and, therefore, the value of our common units could decline.

WES GP, as the general partner of WES, may make expenditures on behalf of WES for which it will seek reimbursement from WES. Under Delaware partnership law, WES GP, in its capacity as the general partner of WES, has unlimited liability for the obligations of WES, such as its debts and environmental liabilities, except for those contractual obligations of WES that are expressly made without recourse to the general partner. WES GP has expressly made certain WES indebtedness recourse to it. To the extent WES GP incurs obligations on behalf of WES, it is entitled to be reimbursed or indemnified by WES. If WES is unable or unwilling to reimburse or indemnify WES GP, WES GP may not be able to satisfy those liabilities or obligations, which would reduce its cash flows to us.

The amount of cash distributions that we will be able to distribute to our unitholders will be reduced by the incremental costs associated with our being a publicly traded partnership, other general and administrative expenses and any reserves that our general partner believes it is prudent to maintain for the proper conduct of our business and for future distributions.

Before we can pay distributions to our unitholders, we will first pay our expenses, including the costs of being a publicly traded partnership, which we expect to be approximately $3.0 million per year, and other operating expenses, and may establish reserves for debt service requirements, if any, for future distributions during periods of limited cash flows or for other purposes. In addition, we may reserve funds to allow our wholly owned subsidiary, WES GP, to make capital contributions to WES in order to maintain WES GP’s 2.0% general partner interest in WES when WES issues additional common units.

 

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The price of our common units may be volatile, and a trading market that will provide you with adequate liquidity may not develop.

Prior to this offering there has been no public market for our common units. An active market for our common units may not develop or may not be sustained after this offering. The initial public offering price of our common units will be determined by negotiations between us and the underwriters, based on several factors that we discuss in the “Underwriting” section of this prospectus. This price may not be indicative of the market price for our common units after this initial public offering. The market price of our common units could be subject to significant fluctuations after this offering, and may decline below the initial public offering price. You may be unable to resell your common units at or above the initial public offering price. The following factors could affect our common unit price:

 

   

WES’s operating and financial performance and prospects;

 

   

quarterly variations in the rate of growth of our financial indicators, such as EBITDA, distributable cash flow per unit, net income and revenues;

 

   

changes in revenue or earnings estimates or publication of research reports by analysts;

 

   

speculation by the press or investment community;

 

   

sales of our common units by our unitholders;

 

   

announcements by WES or its competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, securities offerings or capital commitments;

 

   

general market conditions; and

 

   

domestic and international economic, legal and regulatory factors related to WES’s performance.

The equity markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common units. In addition, potential investors may be deterred from investing in our common units for various reasons, including the very limited number of publicly traded entities whose assets consist almost exclusively of partnership interests in a publicly traded partnership. The lack of liquidity may also contribute to significant fluctuations in the market price of our common units and limit the number of investors who are able to buy our common units.

Our common units and WES’s common units may not trade in relation or proportion to one another.

Our common units and WES’s common units may not trade in simple relation or proportion to one another. Instead, while the trading prices of our common units and WES’s common units are likely to follow generally similar broad trends, the trading prices may diverge because, among other things:

 

   

WES’s cash distributions to its common unitholders have a priority over distributions on its incentive distribution rights;

 

   

we participate in the distributions on WES GP’s general partner interest and incentive distribution rights in WES while WES’s common unitholders do not; and

 

   

we may pursue business opportunities separate and apart from WES or any of its affiliates.

The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public or private markets, including sales by Anadarko or other large holders.

After this offering, we will have              common units outstanding, or              common units if the underwriters exercise their over-allotment option. All of the              common units that are issued to Anadarko, representing     % of our outstanding common units (assuming no exercise by the underwriters of their over-allotment option), will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters.

 

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Each of the lock-up agreements with the underwriters may be waived in the discretion of Barclays Capital Inc. and Citigroup Global Markets Inc. Sales by Anadarko or other large holders of a substantial number of our common units in the public markets following this offering, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities. In addition, under our partnership agreement, our general partner and its affiliates, including Anadarko, have registration rights relating to the offer and sale of any units that they hold, subject to certain limitations. Please read “Units Eligible for Future Sale.”

Increases in interest rates may cause the market price of our common units, or WES’s common units, to decline.

Interest rates may increase in the future, whether because of inflation, increased yields on U.S. Treasury obligations or otherwise. As is true with other master limited partnerships (the common units of which are often viewed by investors as yield-oriented securities), the price of our and WES’s common units are impacted by our and WES’s levels of cash distributions and implied distribution yields. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our common units or WES’s common units, and a rising interest rate environment could have an adverse impact on our unit price, WES’s unit price, and our and WES’s ability to make cash distributions at intended levels.

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

In April 2012, President Obama signed into law the JOBS Act. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes Oxley Act of 2002, (2) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (3) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (4) provide certain disclosure regarding executive compensation required of larger public companies or (5) hold unitholder advisory votes on executive compensation.

If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes- Oxley Act of 2002, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a publicly traded partnership, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Though we will be required to disclose material changes made to our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a publicly traded partnership, we will need to implement additional internal controls, reporting systems and procedures and hire additional accounting, finance and legal staff. Furthermore, while we generally must comply with Section 404 of the Sarbanes Oxley Act of

 

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2002 for our fiscal year ended December 31, 2012, we are not required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our first annual report subsequent to our ceasing to be an “emerging growth company” within the meaning of Section 2(a)(19) of the Securities Act. Accordingly, we may not be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our annual report for the fiscal year ending December 31, 2017. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed.

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.

Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a publicly traded partnership. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results will be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes Oxley Act of 2002. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our units.

The NYSE does not require a publicly traded partnership like us to comply with certain of its corporate governance requirements.

We have applied to list our common units on the NYSE under the symbol “WGP.” Because we will be a publicly traded partnership, the NYSE does not require our general partner to have a majority of independent directors on its board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements.

Risks Related to Conflicts of Interest

Conflicts of interest exist and may arise in the future among us, WES and our respective general partners and affiliates, including Anadarko, the owner of our general partner. For a further discussion of conflicts of interest that may arise, please read “Conflicts of Interest and Fiduciary Duties.”

WES GP owes duties to WES’s unitholders that may conflict with our interests, including in connection with the terms of contractual agreements, the determination of cash distributions to be made by WES, and the determination of whether WES should make acquisitions and on what terms.

Conflicts of interest exist and may arise in the future as a result of the relationships between us and our affiliates, including WES GP, on the one hand, and WES and its limited partners, on the other hand. The directors and officers of WES GP have duties to manage WES in a manner beneficial to us, as WES GP’s owner. At the same time, WES GP, as the general partner of WES, has a duty to manage WES in a manner beneficial to WES and its limited partners. The board of directors of WES GP or its special committee will resolve any such conflict and have broad latitude to consider the interests of all parties to the conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

For example, conflicts of interest may arise in connection with the following:

 

   

the terms and conditions of any contractual agreements between us and our affiliates, including Anadarko, on the one hand, and WES, on the other hand;

 

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the determination of the amount of cash to be distributed to WES’s partners, including us, and the amount of cash to be reserved for the future conduct of WES’s business;

 

   

the determination of whether WES should make acquisitions and on what terms;

 

   

the determination of whether WES should use cash on hand, borrow or issue equity to raise cash to finance acquisitions or expansion capital projects, repay indebtedness, meet working capital needs, pay distributions or otherwise;

 

   

any decision we make in the future to engage in business activities independent of WES; and

 

   

the allocation of shared overhead expenses to WES and us.

Potential conflicts of interest may arise among our general partner, its affiliates and us. Our general partner has limited its state law fiduciary duties to us and our unitholders, which may permit it to favor its own interests to the detriment of us and our unitholders.

Upon completion of this offering, Anadarko, the owner of our general partner, will own a     % limited partner interest in us. Conflicts of interest may arise among our general partner and its affiliates (including Anadarko), on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:

 

   

our general partner is allowed to take into account the interests of parties other than us in resolving conflicts of interest, which has the effect of limiting its state law fiduciary duty to our unitholders;

 

   

our general partner determines whether or not we incur debt and that decision may affect our or WES’s credit ratings;

 

   

our general partner will have limited liability and fiduciary duties under our partnership agreement, which will restrict the remedies available to our unitholders for actions that, without these limitations, might constitute breaches of fiduciary duty. As a result of purchasing common units, our unitholders consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law;

 

   

our general partner controls the enforcement of obligations owed to us by it and its affiliates;

 

   

our general partner decides whether to retain separate counsel, accountants or others to perform services for us;

 

   

our partnership agreement gives our general partner broad discretion in establishing financial reserves for the proper conduct of our business. These reserves will affect the amount of cash available for distribution to our unitholders;

 

   

our general partner determines the amount and timing of capital expenditures, borrowings, issuances of additional partnership securities and reserves, each of which can affect the amount of cash that is available for distribution to our unitholders;

 

   

our general partner determines which costs incurred by it and its affiliates are reimbursable by us; and

 

   

our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered on terms that are fair and reasonable to us or entering into additional contractual arrangements with any of these entities on our behalf.

Please read “Certain Relationships and Related Party Transactions—Our Relationship with WES and WES GP” and “Conflicts of Interest and Fiduciary Duties—Conflicts of Interest.”

 

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The duties of our general partner’s officers and directors may conflict with their duties as officers and directors of WES GP.

Our general partner’s officers and directors have duties to manage our business in a manner beneficial to us, our unitholders and the owner of our general partner, Anadarko. However, a majority of our general partner’s directors and all of its officers are also officers and/or directors of WES GP, which has duties to manage the business of WES in a manner beneficial to WES and WES’s unitholders. Consequently, these directors and officers may encounter situations in which their obligations to WES on the one hand, and us, on the other hand, are in conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

In addition, our general partner’s officers, who are also the officers of WES GP and certain of whom are officers of Anadarko, will have responsibility for overseeing the allocation of their own time and time spent by administrative personnel on our behalf and on behalf of WES and/or Anadarko. These officers face conflicts regarding these time allocations that may adversely affect our or WES’s results of operations, cash flows, and financial condition.

Anadarko may compete with us or WES, which could adversely affect our or WES’s ability to grow and our or WES’s results of operations and cash available for distribution.

Anadarko is not restricted in its ability to compete with us or WES. If Anadarko competes with us or WES, our or WES’s results of operations and cash available for distribution may be adversely affected.

Our partnership agreement limits our general partner’s state law fiduciary duties to us and contains provisions that reduce the remedies available to unitholders for actions that might otherwise constitute a breach of fiduciary duty by our general partner.

Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement:

 

   

permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner. Examples of decisions that our general partner may make in its individual capacity include whether to exercise its limited call right, how to exercise its voting rights with respect to any common units it owns, whether to exercise its registration rights and whether to consent to any merger or consolidation of our partnership or amendment to our partnership agreement;

 

   

provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning it believed the decisions were in the best interests of our partnership;

 

   

generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the special committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships among the parties involved, including other transactions that may be particularly advantageous or beneficial to us;

 

   

provides that in resolving conflicts of interest, it will be presumed that in making its decision the general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or us, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption; and

 

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provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the general partner or those other persons acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that such person’s conduct was criminal.

In order to become a limited partner of our partnership, our unitholders are required to agree to be bound by the provisions in our partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

Our general partner has a call right that may require you to sell your common units at an undesirable time or price.

If at any time more than 80% of our outstanding common units are owned by our general partner and its affiliates, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the remaining units held by unaffiliated persons at a price that is not less than the then-current market price of the common units. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your common units. At the completion of this offering and assuming no exercise of the underwriters’ over-allotment option, affiliates of our general partner will own     % of our common units. For additional information about the call right, please read “The Partnership Agreement of Western Gas Equity Partners, LP—Limited Call Right.”

Our general partner may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets without prior approval of our unitholders.

Our general partner may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets without prior approval of our unitholders. If our general partner at any time were to decide to incur debt and secure its obligations or indebtedness by all or substantially all of our assets, and if our general partner were to be unable to satisfy such obligations or repay such indebtedness, the lenders could seek to foreclose on our assets. The lenders could also sell all or substantially all of our assets under such foreclosure or other realization upon those encumbrances without prior approval of our unitholders, which would adversely affect the price of our common units.

Risks Inherent in WES’s Business

WES is dependent on Anadarko for a substantial majority of the natural gas that it gathers, treats, processes and transports. A material reduction in Anadarko’s production that is gathered, treated, processed or transported by WES would result in a material decline in WES’s revenues and cash available for distribution.

WES relies on Anadarko for a substantial majority of the natural gas that it gathers, treats, processes and transports. Approximately 75% and 76% of WES’s total natural gas gathering, transportation and treating throughput (excluding equity investment throughput) during the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, was comprised of natural gas production owned or controlled by Anadarko. Approximately 64% and 59% of WES’s total processing throughput (excluding equity investment throughput) during the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, was attributable to natural gas production owned or controlled by Anadarko. Anadarko may suffer a decrease in production volumes in the areas serviced by WES and is under no contractual obligation to maintain its production volumes dedicated to WES pursuant to the terms of its applicable gathering agreements. The loss of a significant portion of production volumes supplied by Anadarko would result in a material decline in WES’s revenues and its cash available for distribution. In addition, Anadarko may reduce its drilling activity in WES’s areas of operation or determine that drilling activity in other areas of operation is strategically more attractive. A shift in Anadarko’s focus away from WES’s areas of operation could result in reduced throughput on its systems and a material decline in its revenues and cash available for distribution.

 

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Because WES is substantially dependent on Anadarko as its primary customer and the ultimate owner of its general partner, any development that materially and adversely affects Anadarko’s operations, financial condition or market reputation could have a material and adverse impact on WES and us. Material adverse changes at Anadarko could restrict WES’s or our access to capital, make it more expensive to access the capital markets or increase the costs of WES’s or our borrowings.

WES is substantially dependent on Anadarko as its primary customer and the ultimate owner of its general partner and expects to derive a substantial majority of its revenues from Anadarko for the foreseeable future. As a result, any event, whether in WES’s area of operations or otherwise, that adversely affects Anadarko’s production, financial condition, leverage, market reputation, liquidity, results of operations or cash flows may adversely affect WES’s and our revenues and cash available for distribution. Accordingly, we and WES are indirectly subject to the business risks of Anadarko, some of which are the following:

 

   

the volatility of natural gas and oil prices, which could have a negative effect on the value of Anadarko’s oil and natural gas properties, its drilling programs or its ability to finance its operations;

 

   

the availability of capital on an economic basis to fund Anadarko’s exploration and development activities;

 

   

a reduction in or reallocation of Anadarko’s capital budget, which could reduce the gathering, transportation and treating volumes available to WES as a midstream operator, limit WES’s midstream opportunities for organic growth or limit the inventory of midstream assets WES may acquire from Anadarko;

 

   

Anadarko’s ability to replace reserves;

 

   

Anadarko’s operations in foreign countries, which are subject to political, economic and other uncertainties;

 

   

Anadarko’s drilling and operating risks, including potential environmental liabilities;

 

   

transportation capacity constraints and interruptions;

 

   

adverse effects of governmental and environmental regulation; and

 

   

losses from pending or future litigation.

Further, WES is subject to the risk of non-payment or non-performance by Anadarko, including with respect to its gathering and transportation agreements, its $260.0 million note receivable from Anadarko and its commodity price swap agreements. We cannot predict the extent to which Anadarko’s business would be impacted if conditions in the energy industry were to deteriorate, nor can we estimate the impact such conditions would have on Anadarko’s ability to perform under its gathering and transportation agreements, note receivable or commodity price swap agreements. Further, unless and until WES receives full repayment of the $260.0 million note receivable from Anadarko, WES will be subject to the risk of non-payment or late payment of the interest payments and principal of the note. Accordingly, any material non-payment or non-performance by Anadarko could reduce WES’s ability to make distributions to its partners, including us. Also, due to our and WES’s relationship with Anadarko, our and WES’s ability to access the capital markets, or the pricing or other terms of any capital markets transactions, may be adversely affected by any impairments to Anadarko’s financial condition or adverse changes in its credit ratings.

Any material limitations on our or WES’s ability to access capital as a result of such adverse changes at Anadarko could limit our or WES’s ability to obtain future financing under favorable terms, or at all, or could result in increased financing costs in the future. Similarly, material adverse changes at Anadarko could negatively impact our or WES’s unit price, limiting our or WES’s ability to raise capital through equity issuances or debt financing, or could negatively affect our or WES’s ability to engage in, expand or pursue our or its business activities, and could also prevent us or WES from engaging in certain transactions that might otherwise be considered beneficial to us or WES.

 

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Because of the natural decline in production from existing wells, WES’s success depends on its ability to obtain new sources of natural gas, which is dependent on certain factors beyond WES’s control. Any decrease in the volumes of natural gas that WES gathers, processes, treats and transports could adversely affect its business and operating results.

The volumes that support WES’s business are dependent on, among other things, the level of production from natural gas wells connected to its gathering systems and processing and treatment facilities. This production will naturally decline over time. As a result, WES’s cash flows associated with these wells will also decline over time. In order to maintain or increase throughput levels on its systems, WES must obtain new sources of natural gas. The primary factors affecting WES’s ability to obtain sources of natural gas include (i) the level of successful drilling activity near its systems, (ii) its ability to compete for volumes from successful new wells, to the extent such wells are not dedicated to its systems, and (iii) its ability to capture volumes currently gathered or processed by Anadarko or third parties.

While Anadarko has dedicated production from certain of its properties to WES, WES has no control over the level of drilling activity in its areas of operation, the amount of reserves associated with wells connected to its systems or the rate at which production from a well declines. In addition, WES has no control over Anadarko or other producers or their drilling or production decisions, which are affected by, among other things, the availability and cost of capital, prevailing and projected commodity prices, demand for hydrocarbons, levels of reserves, geological considerations, governmental regulations, the availability of drilling rigs and other production and development costs. Fluctuations in commodity prices can also greatly affect investments by Anadarko and third parties in the development of new natural gas reserves. Declines in natural gas prices have had a negative impact on natural gas exploration, development and production activity and, if sustained, could lead to a material decrease in such activity. Sustained reductions in exploration or production activity in WES’s areas of operation would lead to reduced utilization of its gathering, processing and treating assets.

Because of these factors, even if new natural gas reserves are known to exist in areas served by WES’s assets, producers (including Anadarko) may choose not to develop those reserves. Moreover, Anadarko may not develop the acreage it has dedicated to WES. If competition or reductions in drilling activity result in WES’s inability to maintain the current levels of throughput on its systems, it could reduce WES’s revenue and impair its ability to make cash distributions to its partners, including us.

Lower natural gas, NGL or oil prices could adversely affect WES’s business.

Lower natural gas, NGL or oil prices could impact natural gas and oil exploration and production activity levels and result in a decline in the production of natural gas and condensate, resulting in reduced throughput on WES’s systems. Any such decline could also potentially affect WES’s vendors’, suppliers’ and customers’ ability to continue operations. In addition, such a decline would reduce the amount of NGLs and condensate WES retains and sells. As a result, lower natural gas prices could have an adverse effect on WES’s business, results of operations, financial condition and its ability to make cash distributions to its partners, including us.

In general terms, the prices of natural gas, oil, condensate, NGLs and other hydrocarbon products fluctuate in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond WES’s control. For example, in recent years, market prices for natural gas have declined substantially from the highs achieved in 2008, and the increased supply resulting from the rapid development of shale plays throughout North America has contributed significantly to this trend. Factors impacting commodity prices include the following:

 

   

domestic and worldwide economic conditions;

 

   

weather conditions and seasonal trends;

 

   

the ability to develop recently discovered fields or deploy new technologies to existing fields;

 

   

the levels of domestic production and consumer demand, as affected by, among other things, concerns over inflation, geopolitical issues and the availability and cost of credit;

 

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the availability of imported or a market for exported liquefied natural gas (“LNG”);

 

   

the availability of transportation systems with adequate capacity;

 

   

the volatility and uncertainty of regional pricing differentials such as in the Mid-Continent or Rocky Mountains;

 

   

the price and availability of alternative fuels;

 

   

the effect of energy conservation measures;

 

   

the nature and extent of governmental regulation and taxation; and

 

   

the anticipated future prices of natural gas, NGLs and other commodities.

WES’s strategies to reduce its exposure to changes in commodity prices may fail to protect WES and could negatively impact its financial condition, thereby reducing its cash flows and ability to make distributions to partners, including us.

For the nine months ended September 30, 2012, approximately 35% of WES’s processing gross margin was generated under percent-of-proceeds and keep-whole arrangements pursuant to which the associated revenues and expenses are directly correlated with the prices of natural gas, condensate and NGLs. This percentage may significantly increase as a result of future acquisitions, if any.

WES pursues various strategies to seek to reduce its exposure to adverse changes in the prices for natural gas, condensate and NGLs. These strategies will vary in scope based upon the level and volatility of natural gas, condensate and NGL prices and other changing market conditions. WES currently has in place commodity price swap agreements with Anadarko expiring at various times through September 2015 to manage the commodity price risk otherwise inherent in its percent-of-proceeds and keep-whole contracts. To the extent that WES engages in price risk management activities such as the commodity price swap agreements, it may be prevented from realizing the full benefits of price increases above the levels set by those activities. In addition, WES’s commodity price management may expose it to the risk of financial loss in certain circumstances, including if the counterparties to its hedging or other price risk management contracts fail to perform under those arrangements.

On December 31, 2013, and on various dates thereafter, a portion of the commodity price swap agreements that WES has entered into with Anadarko will expire. WES may be unable to renew such agreements with Anadarko on similar terms or at all. If such agreements are renewed with Anadarko, they may be renewed at lower prices than those established in the agreements currently in place. In the event that WES is unable to renew agreements with Anadarko, it may seek to enter into third-party commodity price swap agreements or similar hedging arrangements. Any such market based hedging arrangement may be less favorable from a commodity pricing perspective and would likely expose WES to volumetric risk that it is currently not exposed to, because WES’s current commodity price swap agreements with Anadarko are based on actual WES volumes.

If WES is unable to effectively manage the risk associated with its contracts that have commodity price exposure, it could have a material adverse effect on WES’s business, results of operations, financial condition and ability to make cash distributions to its partners, including us.

WES may not be able to obtain funding on acceptable terms or at all. This may hinder or prevent WES from meeting its future capital needs.

Global financial markets and economic conditions have been, and continue to be, volatile. While WES’s sector has rebounded from lows seen in 2008, the repricing of credit risk and the current relatively weak economic conditions have made, and will likely continue to make, it difficult for some entities to obtain funding. In addition, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets generally has increased as many

 

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lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity at all or on terms similar to the borrower’s current debt, and reduced, or in some cases, ceased to provide funding to borrowers. Further, WES may be unable to obtain adequate funding under the WES RCF if its lending counterparties become unwilling or unable to meet their funding obligations. Due to these factors, WES cannot be certain that funding will be available if needed and to the extent required on acceptable terms. If funding is not available when needed, or is available only on unfavorable terms, WES may be unable to execute its business plans, complete acquisitions or otherwise take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on WES’s financial condition, results of operations, cash flows and ability to make cash distributions to its partners, including us.

Restrictions in the indentures governing WES’s 5.375% Senior Notes due 2021 (the “2021 Notes”) and 4.000% Senior Notes due 2022 (the “2022 Notes” and, together with the 2021 Notes, the “WES Notes”) or the WES RCF may limit WES’s ability to capitalize on acquisition and other business opportunities.

The operating and financial restrictions and covenants in the indentures governing the WES Notes and in the WES RCF and any future financing agreements could restrict WES’s ability to finance future operations or capital needs or to expand or pursue business activities associated with WES’s subsidiaries and equity investments. The WES RCF contains covenants that restrict or limit WES’s ability to do the following:

 

   

incur additional indebtedness or guarantee other indebtedness;

 

   

grant liens to secure obligations other than its obligations under the WES Notes or the WES RCF or agree to restrictions on its ability to grant additional liens to secure its obligations under the WES Notes or the WES RCF;

 

   

engage in transactions with affiliates;

 

   

make any material change to the nature of its business from the midstream energy business; or

 

   

enter into a merger, consolidate, liquidate, wind up or dissolve.

The WES RCF also contains various customary covenants, customary events of default and a maximum consolidated leverage ratio as of the end of each quarter (which is defined as the ratio of consolidated indebtedness as of the last day of a fiscal quarter to Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“Consolidated EBITDA”) for the most recent four consecutive fiscal quarters ending on such day) of 5.0 to 1.0, or a consolidated leverage ratio of 5.5 to 1.0 with respect to quarters ending in the 270-day period immediately following certain acquisitions.

Debt WES owes or incurs in the future may limit its flexibility to obtain financing and to pursue other business opportunities.

WES’s indebtedness could have important consequences to WES, including the following:

 

   

its ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;

 

   

its funds available for operations, future business opportunities and distributions to unitholders will be reduced by that portion of its cash flows required to make interest payments on its debt;

 

   

it may be more vulnerable to competitive pressures or a downturn in its business or the economy generally; and

 

   

its flexibility in responding to changing business and economic conditions may be limited.

 

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WES’s ability to service its debt will depend upon, among other things, its future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond WES’s control. If WES’s operating results are not sufficient to service any future indebtedness, it will be forced to take actions such as reducing distributions, reducing or delaying its business activities, acquisitions, investments or capital expenditures, selling assets or seeking additional equity capital. WES may not be able to effect any of these actions on satisfactory terms or at all.

If Anadarko were to limit transfers of midstream assets to WES or if WES were to be unable to make acquisitions on economically acceptable terms from Anadarko or third parties, WES’s future growth would be limited. In addition, any acquisitions WES makes may reduce, rather than increase, its cash generated from operations on a per-unit basis.

WES’s ability to grow depends, in part, on its ability to make acquisitions that increase its cash generated from operations on a per-unit basis. The acquisition component of WES’s strategy is based, in large part, on its expectation of ongoing divestitures of midstream energy assets by industry participants, including, most notably, Anadarko. A material decrease in such divestitures would limit WES’s opportunities for future acquisitions and could adversely affect its ability to grow its operations and increase its distributions to unitholders.

If WES is unable to make accretive acquisitions from Anadarko or third parties, either because it is (i) unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, (ii) unable to obtain financing for these acquisitions on economically acceptable terms or (iii) outbid by competitors, then its future growth and ability to increase distributions will be limited. Furthermore, even if WES makes acquisitions that it believes will be accretive, these acquisitions may nevertheless result in a decrease in the cash generated from operations on a per-unit basis.

Any acquisition involves potential risks, including the following, among other things:

 

   

mistaken assumptions about volumes or the timing of those volumes, revenues or costs, including synergies;

 

   

an inability to successfully integrate the acquired assets or businesses;

 

   

the assumption of unknown liabilities;

 

   

limitations on rights to indemnity from the seller;

 

   

mistaken assumptions about the overall costs of equity or debt;

 

   

the diversion of management’s and employees’ attention from other business concerns;

 

   

unforeseen difficulties operating in new geographic areas; and

 

   

customer or key employee losses at the acquired businesses.

If WES consummates any future acquisitions, its capitalization and results of operations may change significantly.

The amount of cash WES has available for distribution to its partners, including us, depends primarily on its cash flows rather than on its profitability. As a result, WES may be prevented from making distributions, even during periods in which it records net income.

The amount of cash WES has available for distribution depends primarily upon its cash flows and not solely on profitability, which will be affected by capital expenditures and non-cash items. As a result, WES may make cash distributions for periods in which it records losses for financial accounting purposes and may not make cash distributions for periods in which it records net earnings for financial accounting purposes.

 

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WES typically does not obtain independent evaluations of natural gas reserves connected to its systems. Therefore, in the future, volumes of natural gas on WES’s systems could be less than WES anticipates.

WES typically does not obtain independent evaluations of natural gas reserves connected to its systems. Accordingly, WES does not have independent estimates of total reserves connected to its systems or the anticipated life of such reserves. If the total reserves or estimated life of the reserves connected to WES’s systems are less than WES anticipates, or the timeline for the development of reserves is greater than WES anticipates, and WES is unable to secure additional sources of natural gas, there could be a material adverse effect on its business, results of operations, financial condition and ability to make cash distributions to its partners, including us.

WES’s industry is highly competitive, and increased competitive pressure could adversely affect its business and operating results.

WES competes with similar enterprises in its areas of operation. WES’s competitors may expand or construct midstream systems that would create additional competition for the services it provides to its customers. In addition, WES’s customers, including Anadarko, may develop their own midstream systems in lieu of using WES’s. WES’s ability to renew or replace existing contracts with its customers at rates sufficient to maintain current revenues and cash flows could be adversely affected by the activities of its competitors and customers. All of these competitive pressures could have a material adverse effect on WES’s business, results of operations, financial condition and ability to make cash distributions to its partners, including us.

WES’s results of operations could be adversely affected by asset impairments.

If natural gas and NGL prices decrease, WES may be required to write down the value of its midstream properties if the estimated future cash flows from these properties fall below their net book value. Because WES is an affiliate of Anadarko, the assets WES acquires from Anadarko are recorded at Anadarko’s carrying value prior to the transaction. Accordingly, WES may be at an increased risk for impairments because the initial book values of substantially all of its assets do not have a direct relationship with, and in some cases could be significantly higher than, the amounts WES paid to acquire such assets.

Further, at September 30, 2012, WES had approximately $87.9 million of goodwill on its balance sheet. Similar to the carrying value of the assets WES acquired from Anadarko, WES’s goodwill is an allocated portion of Anadarko’s goodwill, which WES recorded as a component of the carrying value of the assets it acquired from Anadarko. As a result, WES may be at increased risk for impairments relative to entities who acquire their assets from third parties or construct their own assets, as the carrying value of WES’s goodwill does not reflect, and in some cases is significantly higher than, the difference between the consideration WES paid for its acquisitions and the fair value of the net assets on the acquisition date.

Goodwill is not amortized, but instead must be tested at least annually for impairments, and more frequently when circumstances indicate likely impairments, by applying a fair-value-based test. Goodwill is deemed impaired to the extent that its carrying amount exceeds its implied fair value. Various factors could lead to goodwill impairments that could have a substantial negative effect on WES’s profitability, such as if WES is unable to maintain the throughput on its asset base or if other adverse events, such as sustained lower oil and natural gas prices, reduce the fair value of the associated reporting unit. Future non-cash asset impairments could negatively affect WES’s results of operations.

 

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If third-party pipelines or other facilities interconnected to WES’s gathering, transportation, treating or processing systems become partially or fully unavailable, or if the volumes WES gathers or transports do not meet the quality requirements of such pipelines or facilities, WES’s revenues and cash available for distribution could be adversely affected.

WES’s natural gas gathering, transportation, treating and processing systems are connected to other pipelines or facilities, the majority of which are owned by third parties. The continuing operation of such third-party pipelines or facilities is not within WES’s control. If any of these pipelines or facilities becomes unable to transport, treat or process natural gas or NGLs, or if the volumes WES gathers or transports do not meet the quality requirements of such pipelines or facilities, WES’s revenues and cash available for distribution could be adversely affected.

WES’s interstate natural gas transportation assets and operations are subject to regulation by FERC, which could have an adverse effect on WES’s revenues and WES’s ability to make distributions.

MIGC LLC (“MIGC”), an interstate natural gas transportation system owned by WES, is subject to regulation by FERC under the Natural Gas Act of 1938 (the “NGA”) and the EPAct 2005. Under the NGA, FERC has the authority to regulate natural gas companies that provide natural gas pipeline transportation services in interstate commerce. Federal regulation extends to such matters as:

 

   

rates, services and terms and conditions of service;

 

   

the certification and construction of new facilities;

 

   

the acquisition, extension, disposition or abandonment of facilities;

 

   

the maintenance of accounts and records;

 

   

relationships between affiliated companies involved in certain aspects of the natural gas business; and

 

   

market manipulation in connection with interstate sales, purchases or transportation of natural gas.

FERC allows natural gas companies to recover an allowance for income taxes in rates only to the extent the natural gas company or its owners, such as WES’s unitholders, are subject to U.S. income tax. This policy affects whom WES allows to own its units, and if WES is not successful in limiting ownership of its units to persons or entities subject to U.S. income tax, WES’s FERC-regulated rates and revenues could be adversely affected.

In addition, if WES fails to comply with all applicable FERC-administered statutes, rules, regulations and orders, WES could be subject to substantial penalties and fines. Under the EPAct 2005, FERC has civil penalty authority under the NGA to impose penalties for current violations of up to $1.0 million per day for each violation. FERC also has the power to order disgorgement of profits from transactions deemed to violate the NGA and EPAct 2005.

A change in the jurisdictional characterization of some of WES’s assets by federal, state or local regulatory agencies or a change in policy by those agencies could result in increased regulation of its assets, which could cause WES’s revenues to decline and operating expenses to increase.

WES believes that its natural gas pipelines, other than MIGC, meet the traditional tests FERC has used to determine if a pipeline is a gathering pipeline and is, therefore, not subject to FERC jurisdiction although FERC has not made any determinations with respect to the jurisdictional status of any of WES’s pipelines other than MIGC. The distinction between FERC-regulated transmission services and federally unregulated gathering services has been the subject of ongoing litigation and, over time, FERC policy concerning which activities it regulates and which activities are excluded from its regulation has changed. FERC makes jurisdictional determinations on a case-by-case basis. The classification and regulation of WES’s gathering facilities are subject to change based on future determinations by FERC, the courts or Congress. State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements and complaint-based rate regulation. In recent years, FERC has regulated the gathering activities of

 

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interstate pipeline transmission companies more lightly, which has resulted in a number of such companies transferring gathering facilities to unregulated affiliates. As a result of these activities, natural gas gathering may begin to receive greater regulatory scrutiny at both the state and federal levels.

Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs, operating restrictions or delays in the completion of oil and gas wells, which could decrease the need for WES’s midstream services.

Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations such as shales. The process involves the injection of water, sand and chemicals under pressure into the formation to fracture the surrounding rock and stimulate production. The process is typically regulated by state oil and natural gas commissions but the Environmental Protection Agency (the “EPA”) has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel under the Safe Drinking Water Act and recently released draft permitting guidance for hydraulic fracturing using diesel in fracturing fluids in those states where the EPA is the permitting authority. In addition, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, were proposed in recent sessions of Congress. Congress continues to consider legislation to amend the Safe Drinking Water Act.

Certain states in which WES operates, including Colorado, Texas and Wyoming, have adopted, and other states are considering adopting, regulations that could impose more stringent permitting, public disclosure, and well construction requirements on hydraulic fracturing operations or otherwise seek to ban fracturing activities altogether. In December 2011, the Colorado Oil and Gas Conservation Commission adopted rules requiring hydraulic fracturing operators to disclose information about wells and fracturing fluid to the public. The Texas Railroad Commission also adopted rules in December 2011 requiring that the well operator disclose, on an internet website, the list of chemical ingredients used in their hydraulic fracturing operations, subject to the requirements of federal Occupational Safety and Health Act (“OSHA”), and also file the list of chemicals with the Texas Railroad Commission with the well completion report. The total volume of water used to hydraulically fracture a well must also be disclosed to the public and filed with the Texas Railroad Commission. In Wyoming, operators are required to disclose information about chemical additives used in their hydraulic fracturing operations and well stimulations. In addition to state laws, local land use restrictions, such as city ordinances, may restrict or prohibit the performance of well drilling in general and/or hydraulic fracturing in particular. Other states are considering and may adopt more restrictive regulations of hydraulic fracturing beyond what has been discussed above for Texas, Wyoming and Colorado. In the event that federal, state, local or municipal legal restrictions are adopted in areas where WES’s oil and gas exploration and production customers operate, those operators may incur additional costs to comply with such requirements that may be significant in nature, experience delays or curtailment in the pursuit of exploration, development, or production activities, and perhaps even be precluded from the drilling of natural gas wells, which events could decrease the need for WES’s midstream services and could adversely affect its financial position, results of operations and cash flows, and ability to make distributions to its partners, including us. Increased regulation of the hydraulic fracturing process could also lead to greater opposition, including litigation, to oil and gas production activities using hydraulic fracturing techniques.

Furthermore, a number of federal agencies are analyzing, or have been requested to review, a variety of environmental issues associated with hydraulic fracturing. For example, the EPA has commenced a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater, with initial results expected to be available by late 2012 and final results by 2014. In addition, in May 2012, the U.S. Department of the Interior released a draft rule regarding hydraulic fracturing on federal lands that would require disclosure of chemicals used in the fracturing process and establish minimum criteria for well-bore integrity and disposal of flowback water generated during the fracturing process. Also in May 2012, the Bureau of Land Management

 

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issued a proposed rule that would require public disclosure of chemicals used in hydraulic fracturing operations, and impose other operational requirements for all hydraulic fracturing operations on federal lands, including Native American trust lands. These ongoing or proposed reviews, depending on the degree to which they are pursued and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the Safe Drinking Water Act or other regulatory mechanisms.

Climate change legislation or regulatory initiatives could increase WES’s operating and capital costs and could have the indirect effect of decreasing throughput available to WES’s systems or demand for the products it gathers, processes and transports.

Methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of oil, natural gas, and refined petroleum products, are greenhouse gases (“GHGs”). In December 2009, the EPA issued an Endangerment Finding which determined that emissions of GHGs present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. Based on its finding, the EPA has adopted regulations under existing provisions of the federal Clean Air Act that establish motor vehicle GHG emission standards and also require certain construction and operating permit reviews for GHG emissions from certain large stationary sources under the Prevention of Significant Deterioration (“PSD”) and Title V permit programs. These EPA rulemakings could adversely affect WES’s operations and restrict or delay its ability to obtain air permits for new or modified facilities. The EPA also published regulations that require onshore and offshore oil and natural gas production and onshore oil and natural gas processing, transmission, storage, and distribution activities, which include certain of WES’s operations, to monitor and report GHG emissions from covered facilities on an annual basis. In addition, Congress has from time to time considered legislation to reduce emissions of GHG, and numerous states have already taken legal measures to reduce emissions of GHG, primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. The increased costs of operations or delays in drilling that could be associated with climate change legislation may reduce drilling activity by Anadarko or third-party producers in WES’s areas of operation, with the effect of reducing the throughput available to its systems. Further, the adoption of any legislation or regulations that requires reporting of GHG or otherwise limits emissions of GHG from WES’s equipment and operations could require WES to incur costs to reduce emissions of GHG associated with its operations or could adversely affect demand for the natural gas and NGLs WES gathers and processes. Such developments could materially adversely affect WES’s revenues, results of operations and cash available for distribution to its partners, including us.

The recent adoption of derivatives legislation by the U.S. Congress could have an adverse effect on WES’s ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with its business.

The U.S. Congress recently adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act which, among other provisions, establishes federal oversight and regulation of the over-the-counter derivatives market and entities, such as WES or Anadarko, that participate in that market. In its rulemaking under the new legislation, the Commodities Futures Trading Commission (the “CFTC”) has proposed regulations to set position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalent. Certain bona fide hedging transactions or positions would be exempt from these position limits. It is not possible at this time to predict when the CFTC will finalize these regulations. The financial reform legislation may also require WES to comply with margin requirements and with certain clearing and trade-execution requirements in connection with its commodity price management activities, although the application of those provisions to WES is uncertain at this time. The financial reform legislation may also require some counterparties to spin off some of their derivatives activities to separate entities, which may not be as creditworthy. The new legislation and any new regulations could significantly increase the cost of derivative contracts (including through requirements to post collateral which could adversely affect WES’s available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks WES encounters, reduce WES’s ability to monetize or restructure its existing commodity price

 

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contracts, and increase WES’s exposure to less creditworthy counterparties. If WES reduces its use of commodity price contracts as a result of the legislation and regulations, WES’s results of operations may become more volatile and its cash flows may be less predictable, which could adversely affect WES’s ability to plan for and fund capital expenditures and make cash distributions to WES’s partners, including us.

WES may incur significant costs and liabilities resulting from pipeline integrity programs and related repairs.

Pursuant to the Pipeline Safety Improvement Act of 2002, as reauthorized and amended by the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006 and the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 (the “2011 Pipeline Safety Act”), the Department of Transportation (“DOT”) through the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) has adopted regulations requiring pipeline operators to develop integrity management programs for transmission pipelines located where a leak or rupture could do the most harm. The regulations require the operators of covered pipelines to:

 

   

perform ongoing assessments of pipeline integrity;

 

   

identify and characterize applicable threats to pipeline segments that could impact a high consequence area;

 

   

improve data collection, integration and analysis;

 

   

repair and remediate the pipeline as necessary; and

 

   

implement preventive and mitigating actions.

In addition, states have adopted regulations similar to existing DOT regulations for intrastate gathering and transmission lines. At this time, WES cannot predict the ultimate cost of compliance with this regulation, as the cost will vary significantly depending on the number and extent of any repairs found to be necessary as a result of the pipeline integrity testing. The results of these tests could cause WES to incur significant and unanticipated capital and operating expenditures or repairs or upgrades deemed necessary to ensure the continued safe and reliable operations of its gathering and transmission lines.

Pipeline safety laws and regulations expanding integrity management programs or requiring the use of certain safety technologies could require WES to use more comprehensive and stringent safety controls and subject WES to increased capital and operating costs.

On January 3, 2012, President Obama signed the 2011 Pipeline Safety Act, which, among other things, increases the maximum civil penalty for pipeline safety violations and directs the Secretary of Transportation to promulgate rules or standards relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation and testing to confirm the material strength of pipe operating above 30% of specified minimum yield strength in high consequence areas. On August 13, 2012, the PHMSA published a proposed rulemaking consistent with the signed act that, once finalized, will increase the maximum administrative civil penalties for violation of the pipeline safety laws and regulations after January 3, 2012 to $200,000 per violation per day of violation, with a maximum of $2,000,000 for a related series of violations. These civil penalty and safety enhancement requirements could impose increased civil penalties on WES for pipeline safety violations. In addition, the PHMSA published a final rule in May 2011 expanding pipeline safety requirements including added reporting obligations and integrity management standards to certain rural low-stress hazardous liquid pipelines that were not previously regulated in such manner. Also, in August 2011, the PHMSA published an advance notice of proposed rulemaking in which the agency is seeking public comment on a number of changes to regulations governing the safety of gas transmission pipelines, gathering lines and related facilities. The adoption of these and other laws or regulations that apply more comprehensive or stringent safety standards to gathering lines could require WES to install new or modified safety controls, pursue added capital projects, or conduct maintenance programs on an accelerated basis, all of which could require WES to incur increased operational costs that could be significant and have a material adverse effect on its financial position or results of operations and ability to make distributions to its partners, including us.

 

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WES is subject to stringent environmental laws and regulations that may expose it to significant costs and liabilities.

WES’s operations are subject to stringent and complex federal, state and local environmental laws and regulations that govern the discharge of materials into the environment or otherwise relate to environmental protection. Examples of these laws include the following:

 

   

the federal Clean Air Act and analogous state laws that impose obligations related to emissions of air pollutants;

 

   

the federal Comprehensive Environmental Response, Compensation and Liability Act and analogous state laws that require and regulate the cleanup of hazardous substances that have been released at properties currently or previously owned or operated by WES or at locations to which WES’s wastes are or have been transported for disposal;

 

   

the Federal Water Pollution Control Act, also known as the Clean Water Act, and analogous state laws that regulate discharges from WES’s facilities into state and federal waters, including wetlands;

 

   

the federal Resources Conservation and Recovery Act and analogous state laws that impose requirements for the storage, treatment and disposal of solid and hazardous waste from WES’s facilities; and

 

   

the Toxic Substances Control Act and analogous state laws that impose requirements on the use, storage and disposal of various chemicals and chemical substances at WES’s facilities.

These laws and regulations may impose numerous obligations that are applicable to WES’s operations, including the acquisition of permits to conduct regulated activities, the incurrence of capital expenditures to limit or prevent releases of materials from WES’s pipelines and facilities, and the imposition of substantial liabilities for pollution resulting from WES’s operations or existing at its owned or operated facilities. Numerous governmental authorities, such as the EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly corrective actions. Failure to comply with these laws, regulations and permits may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations and the issuance of injunctions limiting or preventing some or all of WES’s operations.

There is an inherent risk of incurring significant environmental costs and liabilities in connection with WES’s operations due to historical industry operations and waste disposal practices, WES’s handling of hydrocarbon wastes and potential emissions and discharges related to its operations. Joint and several strict liability may be incurred, without regard to fault, under certain of these environmental laws and regulations in connection with discharges or releases of substances or wastes on, under or from WES’s properties and facilities, many of which have been used for midstream activities for many years, often by third parties not under WES’s control. Private parties, including the owners of the properties through which WES’s gathering or transportation systems pass and facilities where WES’s wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. In addition, changes in environmental laws and regulations occur frequently, and any such changes that result in more stringent and costly waste handling, storage, transport, disposal or remediation requirements could have a material adverse effect on WES’s results of operations or financial condition. Finally, future federal and/or state restrictions, caps, or taxes on GHG emissions that may be passed in response to climate change or hydraulic fracturing concerns may impose additional capital investment requirements, increase WES’s operating costs and reduce the demand for its services.

 

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Recently finalized rules regulating air emissions from natural gas processing operations could cause WES to incur increased capital expenditures and operating costs, which may be significant.

On August 16, 2012, the EPA published final rules that establish new air emission controls for natural gas and NGL production, processing and transportation activities, including New Source Performance Standards to address emissions of sulfur dioxide and volatile organic compounds, and a separate set of emission standards to address hazardous air pollutants frequently associated with production and processing activities. Among other things, the rules establish specific requirements regarding emissions from compressors and controllers at natural gas gathering and boosting stations and processing plants together with dehydrators and storage tanks at natural gas processing plants, compressor stations and gathering and boosting stations. In addition, the rules establish new requirements for leak detection and repair of leaks at natural gas processing plants that exceed 500 parts per million in concentration. WES is currently reviewing this new rule and assessing its potential impacts on WES’s operations. Compliance with these requirements may require modifications to certain of WES’s operations, including the installation of new equipment to control emissions from WES’s compressors that could result in significant costs, including increased capital expenditures and operating costs, and could adversely impact WES’s business.

WES’s construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect its results of operations and financial condition.

One of the ways WES intends to grow its business is through the construction of new midstream assets. The construction of additions or modifications to WES’s existing systems and the construction of new midstream assets involve numerous regulatory, environmental, political and legal uncertainties that are beyond WES’s control. Construction activities could be subject to state, county and local ordinances that restrict the time, place or manner in which those activities may be conducted so as to reduce or mitigate nuisance-type conditions, including excessive levels of dust or noise or increased traffic congestion. Construction projects may also require the expenditure of significant amounts of capital, and financing may not be available on economically acceptable terms or at all. If WES undertakes these projects, they may not be completed on schedule, at the budgeted cost, or at all. Moreover, WES’s revenues may not increase immediately upon the expenditure of funds on a particular project. For instance, if WES expands a pipeline, the construction may occur over an extended period of time, yet WES will not receive any material increases in revenues until the project is completed. Moreover, WES could construct facilities to capture anticipated future growth in production in a region in which such growth does not materialize. Since WES is not engaged in the exploration for and development of natural gas and oil reserves, WES often does not have access to estimates of potential reserves in an area prior to constructing facilities in that area. To the extent WES relies on estimates of future production in its decision to construct additions to its systems, such estimates may prove to be inaccurate as a result of the numerous uncertainties inherent in estimating quantities of future production. As a result, new facilities may not be able to attract enough throughput to achieve WES’s expected investment return, which could adversely affect its results of operations and financial condition. In addition, the construction of additions to WES’s existing assets may require it to obtain new rights-of-way. WES may be unable to obtain such rights-of-way and may, therefore, be unable to connect new natural gas volumes to its systems or capitalize on other attractive expansion opportunities. Additionally, it may become more expensive for WES to obtain new rights-of-way or to renew existing rights-of-way. If the cost of renewing existing or obtaining new rights-of-way increases, WES’s cash flows could be adversely affected.

WES has partial ownership interests in joint venture legal entities, which affect its ability to operate and/or control these entities. In addition, WES may be unable to control the amount of cash it will receive or retain from the operation of these entities and WES could be required to contribute significant cash to fund its share of their operations, which could adversely affect WES’s ability to distribute cash to its partners, including us.

WES’s inability, or limited ability, to control the operations and/or management of joint venture legal entities in which it has a partial ownership interest may result in WES receiving or retaining less than the amount

 

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of cash it expects. WES also may be unable, or limited in its ability, to cause any such entity to effect significant transactions such as large expenditures or contractual commitments, the construction or acquisition of assets, or the borrowing of money.

In addition, for the Fort Union, White Cliffs and Rendezvous entities in which WES has a minority ownership interest, WES will be unable to control ongoing operational decisions, including the incurrence of capital expenditures or additional indebtedness that WES may be required to fund. Further, Fort Union, White Cliffs or Rendezvous may establish reserves for working capital, capital projects, environmental matters and legal proceedings, that would similarly reduce the amount of cash available for distribution. Any of the above could significantly and adversely impact WES’s ability to make cash distributions to its partners, including us.

Further, in connection with the acquisition of its membership interest in Chipeta, WES became party to Chipeta’s limited liability company agreement (as amended and restated). Among other things, the Chipeta LLC agreement provides that to the extent available, Chipeta will distribute available cash, as defined in the Chipeta LLC agreement, to its members quarterly in accordance with those members’ membership interests. Accordingly, WES may be required to distribute a portion of Chipeta’s cash balances, which are included in the cash balances in its consolidated balance sheets, to the other Chipeta members.

WES does not own all of the land on which its pipelines and facilities are located, which could result in disruptions to WES’s operations.

WES does not own all of the land on which its pipelines and facilities have been constructed, and WES is, therefore, subject to the possibility of more onerous terms and/or increased costs to retain necessary land use if WES does not have valid rights-of-way or if such rights-of-way lapse or terminate. WES obtains the rights to construct and operate its pipelines on land owned by third parties and governmental agencies for a specific period of time. WES’s loss of these rights, through its inability to renew right-of-way contracts or otherwise, could have a material adverse effect on WES’s business, results of operations, financial condition and ability to make cash distributions to WES’s partners, including us.

WES’s business involves many hazards and operational risks, some of which may not be fully covered by insurance. If a significant accident or event occurs for which WES is not fully insured, its operations and financial results could be adversely affected.

WES’s operations are subject to all of the risks and hazards inherent in gathering, processing, compressing, treating and transporting natural gas, condensate and NGLs, including the following:

 

   

damage to pipelines and plants, related equipment and surrounding properties caused by hurricanes, tornadoes, floods, fires and other natural disasters and acts of terrorism;

 

   

inadvertent damage from construction, farm and utility equipment;

 

   

leaks of natural gas and other hydrocarbons or losses of natural gas as a result of the malfunction of equipment or facilities;

 

   

leaks of natural gas containing hazardous quantities of hydrogen sulfide from WES’s Pinnacle gathering system or Bethel treating facility;

 

   

fires and explosions; and

 

   

other hazards that could also result in personal injury, loss of life, pollution and/or suspension of operations.

These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage. These risks may also result in curtailment or suspension of WES’s operations. A natural disaster or other hazard affecting the areas in which

 

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WES operates could have a material adverse effect on its operations. WES is not fully insured against all risks inherent in its business. For example, WES does not have any property insurance on its underground pipeline systems that would cover damage to the pipelines. In addition, although WES is insured for environmental pollution resulting from environmental accidents that occur on a sudden and accidental basis, WES may not be insured against all environmental accidents that might occur, some of which may result in toxic tort claims. If a significant accident or event occurs for which WES is not fully insured, it could adversely affect WES’s operations and financial condition. Furthermore, WES may not be able to maintain or obtain insurance of the type and amount it desires at reasonable rates. As a result of market conditions, premiums and deductibles for certain of WES’s insurance policies may substantially increase. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. Additionally, WES may be unable to recover from prior owners of its assets, pursuant to certain indemnification rights, for potential environmental liabilities.

WES is exposed to the credit risk of third-party customers, and any material non-payment or non-performance by these parties, including with respect to WES’s gathering, processing and transportation agreements, could reduce WES’s ability to make distributions to its unitholders.

On some of its systems, WES relies on a significant number of third-party customers for substantially all of its revenues related to those assets. The loss of all or even a portion of the contracted volumes of these customers, as a result of competition, creditworthiness, inability to negotiate extensions, or replacements of contracts or otherwise, could reduce WES’s ability to make cash distributions to its partners, including us.

The loss of, or difficulty in attracting and retaining, experienced personnel could reduce WES’s competitiveness and prospects for future success.

The successful execution of WES’s growth strategy and other activities integral to its operations will depend, in part, on WES’s ability to attract and retain experienced engineering, operating, commercial and other professionals. Competition for such professionals is intense. If WES cannot retain its technical personnel or attract additional experienced technical personnel, WES’s ability to compete could be adversely impacted.

WES is required to deduct estimated future maintenance capital expenditures from operating surplus, which may result in less cash available for distribution to unitholders than if actual maintenance capital expenditures were deducted.

WES’s partnership agreement requires it to deduct estimated, rather than actual, maintenance capital expenditures from operating surplus. The amount of estimated maintenance capital expenditures deducted from operating surplus will be subject to review and change by WES’s special committee at least once a year. In years when WES’s estimated maintenance capital expenditures are higher than actual maintenance capital expenditures, the amount of cash available for distribution will be lower than if actual maintenance capital expenditures were deducted from operating surplus. If WES underestimates the appropriate level of estimated maintenance capital expenditures, it may have less cash available for distribution in future periods when actual capital expenditures begin to exceed its previous estimates. Over time, if WES does not set aside sufficient cash reserves or have sufficient sources of financing available to make the expenditures required to maintain its asset base, WES may be unable to pay distributions at the anticipated level and could be required to reduce its distributions.

Tax Risks to Our Common Unitholders

In addition to reading the following risk factors, please read “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

 

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Our taxation as a flow-through entity depends on our status as a partnership for U.S. federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. Likewise, WES’s taxation as a flow-through entity depends on its status as a partnership for U.S. federal income tax purposes, as well as WES’s not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat WES or us as a corporation for federal income tax purposes or either WES or we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to you could be substantially reduced.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for U.S. federal income tax purposes. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service (the “IRS”) on this or any other tax matter affecting us. The value of our investment in WES depends largely on WES being treated as a partnership for U.S. federal income tax purposes.

Despite the fact that we are organized as a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. Although we do not believe, based upon our current operations, that we will be so treated, a change in our business (or a change in current law) could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state income tax at varying rates. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flows and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.

If WES were treated as a corporation for federal income tax purposes, it would pay federal income tax on its taxable income at the corporate tax rate. Distributions to us would generally be taxable again as corporate distributions, and, in general, no income, gains, losses, deductions, or credits would flow through to us. As a result, there would be a material reduction in our anticipated cash flow, likely causing a substantial reduction in the value of our common units.

In Texas, we will be subject to an entity-level tax on any portion of our income that is generated in Texas in the prior year. Imposition of any additional such taxes on us or an increase in the existing tax rates would reduce the cash available for distribution to our unitholders.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, from time to time members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Currently, one such legislative proposal would eliminate the qualifying income exception upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. We are unable to predict whether any of these changes or other proposals will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units. Any modifications to the U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible to meet the expectation for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes.

 

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You will be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.

Because our unitholders will be treated as partners to whom we will allocate taxable income that could be different in amount than the cash we distribute, you will be required to pay any federal income taxes and, in some cases, state and local income taxes on your share of our taxable income whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from that income.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the constructive termination of our partnership for federal income tax purposes.

We will be considered to have terminated as a partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Immediately following this offering, Anadarko will indirectly own more than 50% of the total interests in our capital and profits. Therefore, a transfer of all or a portion of Anadarko’s indirect interests in us could result in a constructive termination of us as a partnership for federal income tax purposes as well as a constructive termination of WES as a partnership for federal income tax purposes due to the deemed transfer of our interests in WES as a result of our termination. A constructive termination of us as a partnership for federal income tax purposes would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income, including our share of the taxable income of WES to the extent WES is also treated as having terminated as a partnership for federal income tax purposes. In the case of a unitholder reporting on a taxable year other than the calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. A constructive termination would not affect our classification as a partnership for federal income tax purposes, but instead, after our termination we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Constructive Termination” for a discussion of the consequences of a constructive termination for federal income tax purposes.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income result in a decrease in your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture of depreciation deductions and certain other items. In addition, because the amount realized includes a unitholder’s share of our liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may result in adverse tax consequences to them.

Investments in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (or “IRAs”), and non-U.S. persons raise issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S.

 

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persons will be reduced by withholding taxes, and non-U.S. persons will be required to file U.S. federal tax returns and pay tax on their shares of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.

If the IRS contests the federal income tax positions we or WES take, the market for our common units or WES’s common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to you.

The IRS may adopt positions that differ from the positions we or WES take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we or WES take. A court may not agree with some or all of the positions we or WES take. Any contest by the IRS may materially and adversely impact the market for our common units or WES’s common units and the price at which they trade. Our costs of any contest by the IRS will be borne indirectly by our unitholders because the costs will reduce our cash available for distribution.

We will treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we adopt.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We generally prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. Nonetheless, we allocate certain deductions for depreciation of capital additions based upon the date the underlying property is placed in service. The use of this proration method may not be permitted under existing Treasury Regulations, and although the U.S. Treasury Department issued proposed Treasury Regulations allowing a similar monthly simplifying convention, such regulations are not final and do not specifically authorize the use of the proration method we have adopted. Accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to successfully challenge our proration method, we may be required to change the allocation of items of income, gain, loss, and deduction among our unitholders.

A unitholder whose common units are loaned to a “short seller” to cover a short sale of common units may be considered as having disposed of those common units. If so, he would no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

Because there is no tax concept of loaning a partnership interest, a unitholder whose common units are loaned to a “short seller” to cover a short sale of common units may be considered as having disposed of the loaned units. In that case, he may no longer be treated for tax purposes as a partner with respect to those common

 

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units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller should modify any applicable brokerage account agreements to prohibit their brokers from borrowing their common units.

You will likely be subject to state and local taxes and return filing requirements in states where you do not live as a result of investing in our common units.

In addition to U.S. federal income taxes, you will likely be subject to other taxes, including foreign, state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if you do not live in any of those jurisdictions. You will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements. As we or WES make acquisitions or expand our business, we or WES may own assets or conduct business in additional states or foreign jurisdictions that impose a personal income tax. It is your responsibility to file all U.S. federal, foreign, state and local tax returns. Our counsel has not rendered an opinion on the foreign, state or local tax consequences of an investment in our common units.

 

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USE OF PROCEEDS

We expect to receive net proceeds of approximately $282.5 million from the sale of our common units assuming an initial public offering price of $             per common unit, after deducting underwriting discounts, the structuring fee and offering expenses. We will use the net proceeds from this offering as follows:

 

   

to purchase from WES 5,767,708 common units representing limited partner interests in WES for approximately $276.8 million; and

 

   

to make a capital contribution to WES on behalf of WES GP of approximately $5.7 million in exchange for 117,708 WES general partner units in order to maintain WES GP’s 2.0% general partner interest in WES.

We will use any net proceeds from the exercise of the underwriters’ over-allotment option to purchase from WES additional common units and a corresponding number of general partner units. The foregoing assumes a purchase price of $48.00 per WES common unit and general partner unit.

Please read “Prospectus Summary—Our Structure” for a discussion of the impact on our equity capitalization of a change in the public offering price of our common units or the number of common units sold in this offering.

 

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CAPITALIZATION

The following table shows our cash and cash equivalents and our capitalization as of September 30, 2012:

 

   

on a consolidated historical basis; and

 

   

on a pro forma basis after giving effect to:

 

   

the sale of 15,000,000 common units in this offering and the application of the net proceeds to purchase WES common units and to make a capital contribution on behalf of WES GP to WES, as described in “Use of Proceeds;” and

 

   

the use of funds received from us by WES for general partnership purposes.

We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, the historical and pro forma financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of September 30, 2012  
     Historical      Pro forma (1)  
     (in millions)  

Cash and cash equivalents

   $ 47.5       $ 330.0   
  

 

 

    

 

 

 

WES revolving credit facility (2)

   $       $   

WES 5.375% senior notes due 2021 (3)

     515.9         515.9   

WES 4.000% senior notes due 2022 (3)(4)

     494.5         494.5   
  

 

 

    

 

 

 

Total debt(5)

   $ 1,010.4       $ 1,010.4   
  

 

 

    

 

 

 

Equity:

     

Net investment by Anadarko

     108.9           

Common unitholders – public

             282.5   

Common unitholders – Anadarko

          

Noncontrolling interests

     1,032.6         1,032.6   
  

 

 

    

 

 

 

Total equity

     1,141.6      
  

 

 

    

 

 

 

Total capitalization

   $ 2,152.0       $     
  

 

 

    

 

 

 

 

(1) Please read “Prospectus Summary—Our Structure” for a discussion of the impact on our equity capitalization of a change in the public offering price of our common units or the number of common units sold in this offering.
(2) As of October 31, 2012, there were no outstanding borrowings under the WES RCF.
(3) Net of unamortized discount amount.
(4) On October 18, 2012, WES completed an offering of an additional $150.0 million in aggregate principal amount of the 2022 Notes. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and Credit Facilities.”
(5) On November 1, 2012, we entered into a $30.0 million working capital facility with Anadarko as lender that we expect to be undrawn at the closing of this offering.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of September 30, 2012, after giving effect to the offering of common units at an assumed initial public offering price of $             and the application of the net proceeds as described in “Use of Proceeds,” and assuming the underwriters’ over-allotment option is not exercised, the net tangible book value of our assets would have been $             million, or $         per common unit. Net tangible book value excludes $             million of net intangible assets. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table:

 

Initial public offering price per common unit

   $                

Less: Pro forma net tangible book value per unit after the offering

  
  

 

 

 

Immediate dilution in tangible net book value per common unit to purchasers in the offering (1)

   $     
  

 

 

 

 

(1) If the initial public offering price were to increase or decrease by $1.00 per common unit, immediate dilution in net tangible book value per common unit would increase by $         or decrease by $        , respectively.

The following table sets forth the number of common units that we will issue and the total consideration contributed to us by affiliates of our general partner and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus:

 

     Units acquired     Total consideration  
     (in thousands, except percentages)  
   Number      Percent             Amount                      Percent          

General partner and affiliates (1)

               $                          

Purchasers in the offering

     15,000,000                $                          
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

        100.0   $         $ 100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Upon consummation of this offering, our general partner and its affiliates, including Anadarko, will own an aggregate of              common units, representing a     % limited partner interest in us.

 

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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy in conjunction with the factors and assumptions upon which our cash distribution policy is based. In addition, please read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our and WES’s business. For additional information regarding our historical and pro forma operating results, you should refer to our historical and pro forma financial statements, and the notes thereto, included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy

Our partnership agreement requires us to distribute all of our available cash quarterly. Our cash distribution policy reflects a basic judgment that our unitholders will be better served by our distributing rather than retaining our available cash. It is important that you understand that our only cash-generating assets are our partnership interests in WES, consisting of general partner units, common units and incentive distribution rights, on which we expect to receive quarterly distributions. We currently have no operations other than our ownership of these interests in WES. Generally, our available cash is our cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and cash on hand resulting from working capital borrowings made after the end of the quarter, which is consistent with our partnership agreement.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

There is no guarantee that our unitholders will receive quarterly distributions from us. We will not have an obligation to pay any distribution except as provided in our partnership agreement. Our cash distribution policy may be changed at any time and is subject to certain restrictions, including the following:

 

   

We do not have any debt currently outstanding and, therefore, are not subject to any debt covenants. However, we anticipate that any future debt agreements could contain certain financial tests and covenants that we would have to satisfy. If we are unable to satisfy the restrictions under any future debt agreements, we could be prohibited from making a distribution to you notwithstanding our stated distribution policy.

 

   

Our general partner and WES GP will have the authority to establish reserves for the prudent conduct of their respective businesses and for future cash distributions to our unitholders and WES unitholders, respectively. The establishment or increase of those reserves could result in a reduction in cash distributions to you from the levels we currently anticipate pursuant to our stated distribution policy, as well as the distributions we expect to receive from WES. Any determination to establish cash reserves made by our general partner in good faith will be binding on our unitholders. Our partnership agreement provides that in order for a determination by our general partner to be made in good faith, our general partner must believe that the determination is in our best interests.

 

   

If WES is unable to comply with future restrictions under its debt agreements, WES could be prohibited from making cash distributions to us, which in turn would prevent us from making cash distributions to you notwithstanding our stated distribution policy. While the current WES debt agreements do not contain any restrictions upon WES’s ability to distribute cash to its partners, WES may in the future enter into other debt arrangements containing restrictions on making cash distributions.

 

   

Our partnership agreement authorizes our general partner to approve any waiver, reduction, limitation or modification of or to WES’s incentive distribution rights without the consent of our unitholders. When determining whether or not to approve any such waiver or modification, our general partner’s board of directors or its special committee may consider whatever information it believes appropriate in making such determination. Our general partner’s board of directors or its special committee must

 

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also believe that any such modification is in the best interest of our partnership. Please read “Risk Factors—Risks Inherent in an Investment in Us—WES GP, with our consent but without the consent of our unitholders, may limit or modify the incentive distributions we are entitled to receive from WES, which may reduce cash distributions to you.”

 

   

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions contained therein, may be amended by a vote of holders of a majority of our common units. At the closing of this offering, Anadarko will own our general partner and approximately     % of our outstanding common units.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to increases in our or WES’s operating or general and administrative expenses, principal and interest payments on debt, tax expenses, working capital requirements and anticipated cash needs of us or WES and its subsidiaries.

Our Cash Distribution Policy Limits Our Ability to Grow

As with most other publicly traded partnerships, because we distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. Since our only cash-generating assets are our partnership interests in WES, our growth will be dependent upon WES’s ability to increase its quarterly cash distributions. If we issue additional common units or incur debt, including under our working capital facility, the payment of distributions on those additional common units or interest on that debt could increase the risk that we will be unable to maintain or increase our per unit distribution level.

WES’s Ability to Grow is Dependent on its Access to Expansion Capital

Consistent with the terms of its partnership agreement, WES distributes to its partners all of its available cash each quarter. As a result, it relies primarily upon external financing sources, including borrowings under the WES RCF and the issuance of debt and equity securities, to fund its acquisitions and expansion capital expenditures. Accordingly, to the extent WES is unable to finance growth externally, its ability to grow will likely be impaired. To the extent WES issues additional common units and maintains or increases its distribution level per unit, the available cash that we have to distribute to our unitholders should generally increase. However, if WES issues additional common units and is unable to maintain its distribution level, the cash that we have to distribute to our unitholders should generally decrease. In addition, the incurrence of additional debt to finance WES’s growth strategy would result in increased interest expense to WES, which in turn may impact its distributions to us and the available cash that we have to distribute to our unitholders.

Our Initial Quarterly Distribution

Upon completion of this offering, we expect to pay an initial quarterly distribution of $         per common unit, or $         per common unit on an annualized basis. This equates to an aggregate cash distribution of approximately $         million per quarter (approximately $         million on an annualized basis) based on the number of common units expected to be outstanding immediately after the completion of this offering and assuming no exercise of the underwriters’ over-allotment option, or approximately $         million per quarter (approximately $         million on an annualized basis) if the underwriters exercise their over-allotment option in full.

Any distributions received by us from WES related to periods prior to the closing of this offering will be distributed entirely to Anadarko or its affiliates. We will pay a prorated cash distribution for the first quarter that we are a publicly traded partnership. This cash distribution will be paid for the period beginning on the closing date of this offering and ending on December 31, 2012. We expect to pay this cash distribution in February 2013. However, we can provide no assurance that any distributions will be declared or paid by us. See “Risk Factors—Risks Inherent in an Investment in Us—In the future, we may not have sufficient cash to pay our estimated initial quarterly distribution or to increase distributions.” We will pay our cash distributions within 55 days after the end of each fiscal quarter to holders of record on or about the first of the month in which the distribution is paid.

 

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The following table sets forth the number of common units expected to be outstanding upon the completion of this offering (assuming no exercise and full exercise of the underwriters’ over-allotment option) and the aggregate cash distributions payable on these common units during the first four full quarters following the completion of this offering at our initial quarterly distribution of $         per common unit, or $         per common unit on an annualized basis.

 

     No Exercise of the Underwriters’
Over-
Allotment Option
   Full Exercise of the Underwriters’
Over-
Allotment Option
            Distributions           Distributions
     Number of
Units
     One
Quarter
   Four
Quarters
   Number of
Units
     One
Quarter
   Four
Quarters

Publicly held common units

     15,000,000               17,250,000         

Common units held by Anadarko

                 
  

 

 

    

 

  

 

  

 

 

    

 

  

 

Total

                 
  

 

 

    

 

  

 

  

 

 

    

 

  

 

Our cash distributions will generally not be cumulative. Consequently, if we do not pay the initial quarterly distribution on our common units with respect to any fiscal quarter, our unitholders generally will not be entitled to receive such payments in the future. However, in the event we receive proceeds in this offering less than the assumed net proceeds of $282.5 million, and as a result we purchase fewer WES common and general partner units, Anadarko will agree to forgo certain distributions (subject to future reimbursement) in order to enable us to pay the full initial quarterly distribution on all common units sold to the public in this offering. Please read “Prospectus Summary—Our Structure.”

Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly. Generally, our available cash is the sum of our (i) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) cash on hand resulting from working capital borrowings made after the end of a quarter. Our general partner may establish reserves to, among other things:

 

   

satisfy general, administrative and other expenses and any debt service requirements;

 

   

provide for the proper conduct of our business;

 

   

permit WES GP to make capital contributions to WES to maintain its 2.0% general partner interest upon the issuance of partnership securities by WES;

 

   

comply with applicable law, any of our future debt instruments or other agreements, if any; or

 

   

provide funds for distributions to our unitholders for any one or more of the next four quarters.

Our partnership agreement provides that any determination made by our general partner in its capacity as our general partner, including a determination with respect to establishing cash reserves, must be made in good faith, and that any such determination will not be the subject of any other standard imposed by our partnership agreement, the Delaware Act or any other law, rule or regulation applicable to us or at equity. Our partnership agreement also provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must believe that the determination is in our best interests.

WES’s Cash Distribution Policy

Like us, WES has adopted a cash distribution policy that requires it to distribute all of its available cash to its partners on a quarterly basis. Under WES’s partnership agreement, available cash is generally defined to mean the sum of its (i) cash on hand at the end of a quarter after the payment of its expenses and the establishment of cash reserves and (ii) cash on hand resulting from working capital borrowings made after the end of a quarter. WES GP may establish cash reserves to, among other things:

 

   

satisfy general, administrative and other expenses and any debt service requirements;

 

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provide for the proper conduct of its business;

 

   

comply with applicable law, any of its debt instruments or other agreements, if any; or

 

   

provide funds for distributions to its unitholders for any one or more of the next four quarters.

WES makes its quarterly distributions from cash generated from its operations, and those distributions have grown over time as its business has grown, primarily as a result of numerous acquisitions and organic expansion projects that have been funded through external financing sources and cash from operations.

WES has an established record of paying quarterly cash distributions to its partners. The following table sets forth, for the periods indicated, the per unit amount and payment date of the cash distributions paid by WES since the first quarter of 2009. WES’s cash distributions to its partners are generally paid within 45 days after the end of each quarter.

 

     Cash Distribution History
     Per Unit     

Payment Date

2009

     

1st Quarter

   $ 0.300       May 2009

2nd Quarter

   $ 0.310       August 2009

3rd Quarter

   $ 0.320       November 2009

4th Quarter

   $ 0.330       February 2010

2010

     

1st Quarter

   $ 0.340       May 2010

2nd Quarter

   $ 0.350       August 2010

3rd Quarter

   $ 0.370       November 2010

4th Quarter

   $ 0.380       February 2011

2011

     

1st Quarter

   $ 0.390       May 2011

2nd Quarter

   $ 0.405       August 2011

3rd Quarter

   $ 0.420       November 2011

4th Quarter

   $ 0.440       February 2012

2012

     

1st Quarter

   $ 0.460       May 2012

2nd Quarter

   $ 0.480       August 2012

3rd Quarter

   $ 0.50         — (1)

 

(1) The distribution with respect to the quarter ended September 30, 2012 has been declared but not yet paid. Such distribution will be paid on November 13, 2012 to unitholders of record as of the close of business on October 31, 2012.

In the sections that follow, we present the basis for our belief that we will be able to pay our aggregate annualized initial quarterly distribution for the year ending December 31, 2013. In those sections, we present two tables, consisting of:

 

   

“Western Gas Equity Partners, LP Unaudited Pro Forma Available Cash,” in which we present the amount of available cash we would have had on a pro forma basis for the year ended December 31, 2011 and the twelve months ended September 30, 2012, giving pro forma effect to:

 

   

WES’s most recently declared quarterly cash distribution per unit of $0.50;

 

   

interest expense based on WES’s debt balance as of September 30, 2012 as reflected in the pro forma cash interest expense in the table and notes below; and

 

   

the issuance of WES common units and general partner units in connection with this offering (resulting in WES having 101,702,059 common units and 2,075,553 general partner units outstanding).

 

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“Western Gas Equity Partners, LP Estimated Minimum Necessary WES Adjusted EBITDA,” in which we present our estimate of the minimum amount of WES Adjusted EBITDA necessary for WES to pay distributions to its partners, including us, which will enable us to have sufficient available cash to pay our aggregate annualized initial quarterly distribution for the year ending December 31, 2013 on all of the common units expected to be outstanding upon the completion of this offering.

Western Gas Equity Partners, LP Unaudited Pro Forma Available Cash for the Year Ended December 31, 2011 and the Twelve Months Ended September 30, 2012

Our pro forma available cash for each of the year ended December 31, 2011 and the twelve months ended September 30, 2012 would have been approximately $125.2 million. These amounts would have been sufficient for us to pay our aggregate annualized initial quarterly distribution of $125.2 million on all of our common units for such periods.

Our calculation of pro forma available cash includes estimated incremental general and administrative expenses that we expect we will incur as a result of being a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; and registrar and transfer agent fees. We expect that these items will increase our annual general and administrative expenses by approximately $3.0 million.

Western Gas Equity Partners, LP

Unaudited Pro Forma Available Cash

 

     Year Ended
December 31,
2011
    Twelve Months
Ended
September 30, 2012
 
     (in thousands, except ratios)  

Western Gas Partners, LP

    

Revenues

    

Gathering, processing and transportation of natural gas and NGLs

   $ 301,329      $ 314,747   

Natural gas, NGLs and condensate sales

     502,383        517,399   

Equity income and other, net

     19,553        19,653   
  

 

 

   

 

 

 

Total revenues

     823,265        851,799   

Less:

    

Cost of product

     327,371        341,325   
  

 

 

   

 

 

 

Gross margin

     495,894        510,474   

Less:

    

Operation and maintenance expense

     119,104        128,286   

General and administrative expense

     39,114        48,716   

Property and other taxes

     16,579        18,275   

Depreciation, amortization and impairments

     111,904        114,761   
  

 

 

   

 

 

 

Operating income

     209,193        200,436   

Plus:

    

Interest income, net—affiliates (1)

     28,560        22,243   

Interest expense (2)

     (53,255     (51,363

Other income (expense), net

     (44     564   
  

 

 

   

 

 

 

Income before income taxes

     184,454        171,881   

Less:

    

Income tax expense(3)

     19,018        4,155   
  

 

 

   

 

 

 

Net income

     165,436        167,727   

 

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     Year Ended
December 31,
2011
     Twelve Months
Ended
September 30, 2012
 
     (in thousands, except ratios)  

Less:

     

Net income attributable to WES public unitholders and other noncontrolling interests

     14,103         16,393   
  

 

 

    

 

 

 

Net income attributable to Western Gas Partners, LP

   $ 151,333       $ 151,334   

Add:

     

Distributions from equity investees

     15,999         19,614   

Non-cash equity-based compensation expense (4)

     13,754         23,926   

Interest expense (2)

     53,255         51,363   

Income tax expense (3)

     19,018         4,155   

Depreciation, amortization and impairments (5)

     109,151         112,383   

Other expense (5)

     3,683         1,665   

Less:

     

Equity income, net

     11,261         14,331   

Interest income—affiliates (1)

     28,560         22,243   

Other income (5)

     2,049         475   
  

 

 

    

 

 

 

Pro forma Adjusted EBITDA attributable to Western Gas Partners, LP (6)

   $ 324,323       $ 327,392   

Less:

     

Cash interest expense (2)

     53,675         53,675   

Cash income taxes (3)

     190         2,296   

Maintenance capital expenditures

     28,393         33,252   

Plus:

     

Cash interest income

     16,900         16,900   
  

 

 

    

 

 

 

Pro forma available cash of Western Gas Partners, LP (excluding investment and acquisition activity and related financings) (7)

   $ 258,965       $ 255,069   

Pro forma distributions to non-affiliated owners of WES (8)

     110,722         110,722   

Pro forma distributions to Western Gas Equity Partners, LP (8)

     

2% general partner interest

     4,778         4,778   

Incentive distribution rights

     30,750         30,750   

Common units

     92,682         92,682   
  

 

 

    

 

 

 

Total pro forma distributions to Western Gas Equity Partners, LP

     128,210         128,210   

Total pro forma distributions of Western Gas Partners, LP

     238,933         238,933   

Excess of pro forma available cash of Western Gas Partners, LP over total pro forma distributions of Western Gas Partners, LP

   $ 20,032       $ 16,136   

Western Gas Equity Partners, LP

     

Pro forma distributions to Western Gas Equity Partners, LP

   $ 128,210       $ 128,210   

Less:

     

General and administrative expenses (9)

     3,000         3,000   
  

 

 

    

 

 

 

Pro forma available cash of Western Gas Equity Partners, LP

   $ 125,210       $ 125,210   

Pro forma aggregate annualized initial quarterly distribution of Western Gas Equity Partners, LP (8)

   $ 125,210       $ 125,210   

WES leverage ratio (10)

     3.61x         3.57x   

 

(1) Represents cash interest income WES receives annually from Anadarko with respect to the $260.0 million 30-year note bearing interest at a fixed annual rate of 6.50% together with earned interest income on intercompany balances related to assets acquired from Anadarko for periods prior to their acquisition. Beginning December 7, 2011, Anadarko discontinued charging interest on intercompany balances.

 

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(2) Assumes that the currently outstanding WES debt balance of $1.17 billion, consisting of $500 million of the 2021 Notes and $670 million of the 2022 Notes, was in place at the beginning of each period, less adjustments made for capitalized interest. We have not deducted capitalized interest from the calculation of cash interest expense.

 

(3) Represents the amount paid by WES primarily for Texas margin taxes. There will likely be no incremental Texas margin tax attributable to WGP.

 

(4) Represents the amount of equity-based compensation expense incurred by WES that is not expected to be settled in cash. No pro forma adjustments have been made for the amounts incurred under the Amended and Restated Western Gas Holdings, LLC Equity Incentive Plan (the “Incentive Plan”) as a result of this offering that will be settled in cash because such amounts will be ultimately funded by Anadarko. For a description of the Incentive Plan, please read “Management—Executive Compensation Discussion and Analysis.”

 

(5) Includes WES’s share of depreciation, amortization and impairments; other expense; and other income attributable to Chipeta.

 

(6) WES defines Adjusted EBITDA as net income (loss) attributable to Western Gas Partners, LP, plus distributions from equity investees, non-cash equity-based compensation expense, expense in excess of the expense reimbursement cap provided in the WES omnibus agreement (if applicable), interest expense, income tax expense, depreciation, amortization and impairments, and other expense, less income from equity investments, interest income, income tax benefit, and other income.

 

(7) Amounts shown exclude all sources and uses of cash which do not affect available cash, including expansion capital expenditures, acquisitions and related financing activities during the periods shown. While the proceeds received by WES from equity offerings used in financing activities (including the proceeds from the sale of WES common units and general partner units to WGP in connection with this offering) would be considered available cash under the terms of WES’s partnership agreement, a distribution of such proceeds would be considered a return of capital and WES does not intend to pay distributions to its partners that would constitute a return of capital. Accordingly, we have excluded such equity proceeds as they would overstate the available cash that we believe would have been distributable to WES’s partners.

 

(8) Assumes no exercise of the underwriters’ over-allotment option. If the underwriters were to exercise their over-allotment option in full, the number of outstanding WES common units and general partner units would increase to 102,570,278 and 2,093,272, respectively, as a result of the assumed purchase of 868,219 WES common units and 17,719 WES general partner units by WGP with the net proceeds of the exercise of the over-allotment option. In such event, the pro forma distributions to Western Gas Equity Partners, LP for each of the year ended December 31, 2011 and the twelve months ended September 30, 2012 would increase to $130.2 million, and the pro forma aggregate annualized initial quarterly distribution of Western Gas Equity Partners, LP for each of the year ended December 31, 2011 and the twelve months ended September 30, 2012 would increase to $127.2 million.

 

(9) Reflects estimated cash expenses associated with being a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; and registrar and transfer agent fees.

 

(10) The WES RCF contains various customary covenants, including a covenant to maintain a maximum consolidated leverage ratio (which is defined in the credit facility as the ratio of consolidated indebtedness as of the last day of a fiscal quarter to consolidated earnings before interest, taxes, depreciation and amortization for the most recent four consecutive fiscal quarters ending on such day) of 5.0 to 1.0, or a consolidated leverage ratio of 5.5 to 1.0 with respect to quarters ending in the 270-day period immediately following certain acquisitions. The leverage ratio is calculated using the aforementioned assumptions and should not be interpreted as WES’s actual leverage ratio for the periods presented.

 

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Estimated Minimum Necessary WES Adjusted EBITDA to Enable Us to Pay the Aggregate Annualized Initial Quarterly Distribution for the Year Ending December 31, 2013

In order to have sufficient available cash to pay the aggregate annualized initial quarterly distribution on all of our outstanding common units for the year ending December 31, 2013, we estimate that we must receive cash distributions from WES of at least $128.2 million. In order for WES to pay us cash distributions that would permit us to pay the full initial quarterly distribution on all of our outstanding common units for the year ending December 31, 2013 (including the additional common units that we would issue if the offering price or size were increased to yield aggregate gross offering proceeds of approximately $435 million), we estimate that WES must generate Adjusted EBITDA of at least $322.4 million. WES defines Adjusted EBITDA as net income (loss) attributable to Western Gas Partners, LP, plus distributions from equity investees, non-cash equity–based compensation expense, expense in excess of the expense reimbursement cap provided in the WES omnibus agreement (if applicable), interest expense, income tax expense, depreciation, amortization and impairments, and other expense, less income from equity investments, interest income, income tax benefit, and other income. Adjusted EBITDA should not be considered an alternative to net income, net cash provided by operating activities, or any other measure of financial performance calculated in accordance with generally accepted accounting principles in the United States (“GAAP”).

The table below is intended to be an indicator or benchmark of the amount management considers to be the minimum amount of WES Adjusted EBITDA necessary for WES to pay distributions to its partners, including us, which will enable us to have sufficient available cash to pay the initial quarterly distribution of $         per common unit per quarter (or $         per common unit on an annualized basis) on our common units for the year ending December 31, 2013 (including the additional common units that we would issue if the offering price or size were increased to yield aggregate gross offering proceeds of approximately $435 million). The baseline estimate of WES Adjusted EBITDA should not be viewed as management’s full projection of WES’s expected operating results and financial performance for the year ending December 31, 2013. Similarly, such baseline estimate is not intended to modify or replace the guidance that WES provides on an annual basis. Our management believes that WES’s actual Adjusted EBITDA during the year ending December 31, 2013 will exceed the amount presented below.

We believe that our partnership interests in WES, including the incentive distribution rights, will generate sufficient cash flow to enable us to pay the aggregate annualized initial quarterly distribution on all of our common units for the year ending December 31, 2013. You should read the footnotes to the table below for a discussion of the material assumptions underlying this belief. Our belief is based on several assumptions and reflects our judgment of conditions we expect to exist and the course of action we expect WES to take. While we believe that these assumptions are reasonable in light of our current expectations regarding future events, the assumptions underlying our belief are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If WES’s expected results of operations are not realized, the amount of cash that WES distributes to us could be substantially less than that currently expected and could, therefore, be insufficient to permit us to pay the initial quarterly distribution, or any distribution, on our common units, which could cause the market price of our common units to decline materially. Consequently, our belief that we will have sufficient available cash to pay the initial quarterly distribution on all of our common units for the year ending December 31, 2013 should not be regarded as a representation by us, the underwriters or any other person that we will declare and pay such a distribution.

We have prepared the table below and related disclosure to substantiate our belief that we will have sufficient available cash to pay the aggregate annualized initial quarterly distribution on all of our common units for the year ending December 31, 2013. The statements made below are forward-looking statements and should be read together with the historical and pro forma financial statements and the accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The financial information below was not prepared with a view toward complying with the

 

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guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate sufficient available cash to pay the aggregate annualized initial quarterly distribution on all of our common units for the year ending December 31, 2013. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and we undertake no obligation to release publicly the results of any future revisions we may make to this financial information to reflect events or circumstances after the date of this prospectus. As a result, readers of this prospectus are cautioned not to place undue reliance on this financial information.

Neither our independent auditors nor any other independent accountants have compiled, examined or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and they assume no responsibility for, and disclaim any association with, the prospective financial information.

When reading this section, you should keep in mind the risk factors and other cautionary statements under the heading “Risk Factors” in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our financial condition and consolidated results of operations to vary significantly from those set forth in the table below.

 

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Western Gas Equity Partners, LP

Estimated Minimum Necessary WES Adjusted EBITDA

 

     Year Ending
December 31, 2013
 
     (in thousands,
except ratio)
 

Western Gas Partners, LP

  

Estimated Minimum Necessary Adjusted EBITDA attributable to
Western Gas Partners, LP (1)

   $ 322,386   

Less:

  

Cash interest expense (2)

     55,848   

Cash income taxes (3)

     249   

Maintenance capital expenditures (4)

     38,150   

Plus:

  

Cash interest income (5)

     16,900   
  

 

 

 

Estimated available cash of Western Gas Partners, LP

   $ 245,038   

Less:

  

Expansion capital expenditures (6)

     325,901   

Plus:

  

Borrowings to fund expansion capital expenditures (7)

     43,401   

Proceeds from sale of units to WGP to fund expansion capital expenditures (7)

     282,500   
  

 

 

 

Estimated available cash of Western Gas Partners, LP

   $ 245,038   

Distributions to non-affiliated owners of WES (8)

   $ 110,722   

Distributions to Western Gas Equity Partners, LP (8)

  

2% general partner interest

     4,778   

Incentive distribution rights

     30,750   

Common units

     92,682   
  

 

 

 

Total distributions to Western Gas Equity Partners, LP

   $ 128,210   
  

 

 

 

Total distributions of Western Gas Partners, LP

   $ 238,933   

Excess of estimated available cash of Western Gas Partners, LP over total distributions of Western Gas Partners, LP(8)

   $ 6,105   

Western Gas Equity Partners, LP

  

Distributions from Western Gas Partners, LP

   $ 128,210   

Less:

  

General and administrative expenses (9)

     3,000   
  

 

 

 

Estimated available cash of Western Gas Equity Partners, LP

   $ 125,210   

Aggregate annualized initial quarterly distribution of Western Gas Equity Partners, LP (8)

   $ 125,210   

WES leverage ratio (10)

     3.76x   

 

(1) In order to have sufficient available cash to pay the aggregate annualized initial quarterly distribution on all of our outstanding common units for the year ending December 31, 2013, we estimate that we must receive cash distributions from WES of at least $128.2 million. In order for WES to pay us cash distributions that would permit us to pay the full initial quarterly distribution on all of our outstanding common units for the year ending December 31, 2013 (including the additional common units that we would issue if the offering price or size were increased to yield aggregate gross offering proceeds of approximately $435 million), we estimate that WES must generate Adjusted EBITDA of at least $322.4 million for the year ending December 31, 2013, as compared to pro forma Adjusted EBITDA of $324.3 million and $327.4 million for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively.

 

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This table is intended to be an indicator or benchmark of the amount management considers to be the lowest amount of WES Adjusted EBITDA necessary for WES to pay distributions to its partners, including us, which will enable us to have sufficient available cash to pay the initial quarterly distribution of $         per common unit per quarter (or $         per common unit on an annualized basis) on our common units for the year ending December 31, 2013 (including the additional common units that we would issue if the offering price or size were increased to yield aggregate gross offering proceeds of approximately $435 million). The baseline estimate of WES Adjusted EBITDA should not be viewed as management’s full projection of WES’s expected operating results and financial performance for the year ending December 31, 2013. Similarly, such baseline estimate is not intended to modify or replace the guidance that WES provides on an annual basis. Our management believes that WES’s Adjusted EBITDA during the year ending December 31, 2013 will exceed the amount presented below.

The Estimated Minimum Necessary WES Adjusted EBITDA is based on a number of significant assumptions, including the following:

 

   

Total gathering, treating and transportation throughput of 1,154 MMcf/d for the year ending December 31, 2013, as compared to 1,321 MMcf/d and 1,268 MMcf/d for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively.

 

   

Total processing throughput of 1,066 MMcf/d for the year ending December 31, 2013, as compared to 962 MMcf/d and 1,143 MMcf/d for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively.

 

   

Total equity investment throughput of 151 MMcf/d for the year ending December 31, 2013, as compared to 198 MMcf/d and 231 MMcf/d for the year ended December 31, 2011 and twelve months ended September 30, 2012, respectively.

 

   

Reported throughput volumes will continue to exclude average NGL pipeline volumes and WES’s 10% share of White Cliffs pipeline volumes, both of which are measured in barrels. We assume throughput on WES’s NGL pipeline of 26 MBbls/d for the year ending December 31, 2013, as compared to 24 MBbls/d and 26 MBbls/d for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively. We assume throughput attributable to WES’s 10% share of White Cliffs of 6 MBbls/d for the year ending December 31, 2013, as compared to 4 MBbls/d and 6 MBbls/d for the year ended December 31, 2011 and twelve months ended September 30, 2012, respectively.

 

   

Equity income of $17.2 million for the year ending December 31, 2013, as compared to $11.3 million and $14.3 million for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively. The assumed increase is primarily attributable to additional anticipated transportation volumes for the White Cliffs pipeline.

 

   

Distributions from equity investees of $22.1 million for the year ending December 31, 2013, as compared to $16.0 million and $19.6 million for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively. The assumed increase is primarily related to additional anticipated transportation volumes for the White Cliffs pipeline.

 

   

Equity-based compensation expense related to employees seconded to WES of $2.8 million for the year ending December 31, 2013, as compared to $13.8 million and $23.9 million for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively. The assumed decrease is primarily due to the settlement, in cash, of liabilities related to the Incentive Plan in conjunction with the closing of this offering. Please read “Management—Executive Compensation Discussion and Analysis” for more information.

 

   

WES does not consummate any material acquisitions from Anadarko or third parties during the year ending December 30, 2013.

 

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WES does not issue any common units, general partner units or other partnership securities during the year ending December 31, 2013, other than common units and general partner units to be issued to us in connection with this offering.

 

   

Our general partner does not approve any waiver, reduction, limitation or modification of or to WES’s incentive distribution rights that would alter incentive distributions during the year ending December 31, 2013.

 

   

There will not be any new federal, state or local regulation of the portions of the energy industry in which we and WES operate, or any new interpretations of existing regulations, that will be materially adverse to our or WES’s business.

 

   

There will not be any major adverse change in the portions of the energy industry in which we and WES operate resulting from supply or production disruptions, reduced demand for our products or services, or significant changes in the market prices of natural gas or NGLs.

 

   

Market, insurance and overall economic conditions will not change substantially.

We cannot assure you that any of the assumptions summarized above, or any other assumptions upon which our Estimated Minimum Necessary WES Adjusted EBITDA is based, will prove to be correct. If the assumptions are incorrect or not achieved, we may not have sufficient available cash to make the contemplated distributions.

 

(2) We assume consolidated cash interest expense of approximately $55.8 million for the year ending December 31, 2013, as compared to $53.7 million for each of the year ended December 31, 2011 and the twelve months ended September 30, 2012 on a pro forma basis. Cash interest expense is assumed to be comprised of the following components:

(i) approximately $2.2 million of interest expense, net of capitalized interest, related to borrowings of $43.4 million under the WES RCF to fund expansion capital expenditures and the additional interest associated with the annual commitment fee of approximately 0.25% on the unused borrowing capacity under the WES RCF. We assume that WES will finance a substantial portion of its expansion capital expenditures through borrowings under the WES RCF. We have assumed that the weighted-average interest rate on the WES RCF during the year ending December 31, 2013 will not exceed 1.74%;

(ii) approximately $26.8 million of interest expense associated with the 2022 Notes; and

(iii) approximately $26.9 million of interest expense associated with the 2021 Notes.

 

(3) Represents the amount paid by WES primarily for Texas margin taxes. There will likely be no incremental Texas margin tax attributable to WGP.

 

(4) We assume maintenance capital expenditures of $38.2 million for the year ending December 31, 2013, as compared to $28.4 million and $33.3 million for the year ended December 31, 2011 and twelve months ended September 30, 2012, respectively. The assumed increase in maintenance capital expenditures is primarily attributable to WES’s growing asset base and the resulting increased integrity expenditures.

 

(5) Represents cash interest income WES receives annually from Anadarko with respect to the $260.0 million 30-year note bearing interest at a fixed annual rate of 6.50% together with earned interest income on intercompany balances related to assets acquired from Anadarko for periods prior to their acquisition. Beginning December 7, 2011, Anadarko discontinued charging interest on intercompany balances.

 

(6) We assume expansion capital expenditures of $325.9 million for the year ending December 31, 2013, as compared to $87.5 million and $284.9 million for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively. The expected increase in expansion capital expenditures is primarily attributable to amounts WES anticipates spending on the Lancaster Plant, the Brasada Plant, the expansion of the Red Desert system, and the continued expansion of its DJ Basin assets.

 

(7)

Because WES has historically financed organic growth projects and acquisitions through the use of external financing sources, including borrowings under the WES RCF and the issuance of debt and equity securities,

 

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  and we anticipate that it will continue to do so, we have shown estimated borrowings for these purposes as a source of cash in the table above. Specifically, we assume that WES will fund its $325.9 million of expected expansion capital for the year ending December 31, 2013 by borrowing $43.4 million and using the $282.5 million of net proceeds received by WES from the sale of common units and general partner units to us in connection with this offering.

 

(8) Assumes the following:

 

   

WES will pay a quarterly cash distribution of $0.50 per WES common unit for each quarter, which per unit distribution amount is equal to WES’s most recently declared cash distribution for the quarter ended September 30, 2012;

 

   

101,702,059 and 2,075,553 outstanding WES common units and general partner units, including the assumed 5,767,708 WES common units and 117,708 WES general partner units to be purchased by WGP in connection with the closing of this offering; and

 

   

no exercise of the underwriters’ over-allotment option.

If the offering price or size is increased, we will use the resulting additional proceeds to purchase additional WES common and general partner units. We believe the excess of estimated available cash of Western Gas Partners, LP over total distributions of Western Gas Partners, LP presented in the table above would be more than enough to enable WES to distribute sufficient additional cash to us to permit us to pay the initial quarterly distribution on any additional common units we issue in this offering (including if the offering price or size were increased to yield aggregate gross offering proceeds of approximately $435 million).

If we receive proceeds in this offering of less than the assumed net proceeds of $282.5 million, and as a result we purchase fewer WES common and general partner units, Anadarko will agree to forgo certain distributions (subject to future reimbursement) in order to enable us to pay the full initial quarterly distribution on all common units sold to the public in this offering. Please read “Prospectus Summary—Our Structure.”

 

(9) We estimate that our incremental general and administrative expenses associated with being a publicly traded partnership will not exceed $3.0 million for the year ending December 31, 2013.

 

(10) The WES RCF contains various customary covenants, including a covenant to maintain a maximum consolidated leverage ratio (which is defined in the WES RCF as the ratio of consolidated indebtedness as of the last day of a fiscal quarter to consolidated earnings before interest, taxes, depreciation and amortization for the most recent four consecutive fiscal quarters ending on such day) of 5.0 to 1.0, or a consolidated leverage ratio of 5.5 to 1.0 with respect to quarters ending in the 270-day period immediately following certain acquisitions. The leverage ratio is calculated using the aforementioned assumptions and should not be interpreted as WES’s projected leverage ratio for the year ending December 31, 2013.

 

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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

General

Our partnership agreement requires that, within 55 days after the end of each quarter, beginning with the quarter ending December 31, 2012, we distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the initial quarterly distribution for the period from the closing of the offering through December 31, 2012.

Definition of Available Cash

Available cash, for any quarter, consists of all cash on hand at the end of that quarter:

 

   

less, the amount of cash reserves established by our general partner to:

 

   

satisfy general, administrative and other expenses and any debt service requirements;

 

   

provide for the proper conduct of our business;

 

   

permit WES GP to make capital contributions to WES if we choose to maintain our 2.0% general partner interest upon the issuance of additional partnership securities by WES;

 

   

comply with applicable law, any of our future debt instruments or other agreements; or

 

   

provide funds for distributions to our unitholders for any one or more of the next four quarters;

 

   

plus, if our general partner so determines, all or a portion of cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter.

General Partner Interest

Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may own common units or other equity securities in us and is entitled to receive cash distributions on any such interests.

Adjustments to Capital Accounts

We will make adjustments to capital accounts upon the issuance of additional units. In doing so, we will allocate any unrealized and, for tax purposes, unrecognized gain or loss resulting from the adjustments to the unitholders and the general partner in the same manner as we allocate gain or loss upon liquidation.

Distributions of Cash Upon Liquidation

If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called a liquidation. We will first apply the proceeds of liquidation to the payment of our creditors in the order of priority provided in our partnership agreement and by law and, thereafter, we will distribute any remaining proceeds to the unitholders and our general partner in accordance with their respective capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

Our Sources of Distributable Cash

Our only cash-generating assets are our partnership interests in WES. Therefore, our cash flow and resulting ability to make cash distributions will be completely dependent upon the ability of WES to make cash distributions in respect of those partnership interests. The actual amount of cash that WES will have available for distribution will primarily depend on the amount of cash it generates from its operations. The actual amount of this cash will fluctuate from quarter to quarter based on certain factors, including:

 

   

the level of capital expenditures it makes;

 

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the level of its operating and maintenance and general and administrative costs;

 

   

its debt service requirements and other liabilities;

 

   

fluctuations in its working capital needs;

 

   

its ability to borrow funds and access capital markets;

 

   

its treatment as a flow-through entity for U.S. federal income tax purposes;

 

   

restrictions contained in debt agreements to which it is a party; and

 

   

the amount of cash reserves established by WES GP.

Anadarko Distribution Deferral

In the event we receive proceeds in this offering less than the assumed net proceeds of $282.5 million, and as a result we purchase fewer WES common and general partner units, Anadarko will agree to forgo certain distributions (subject to future reimbursement) in order to enable us to pay the full initial quarterly distribution on all common units sold to the public in this offering. Please read “Prospectus Summary—Our Structure.”

Our Partnership Interests in WES

All of our cash flows are generated from the cash distributions we receive with respect to our partnership interests in WES, which upon completion of this offering will consist of the following:

 

   

2,075,553 WES general partner units, representing a 2.0% general partner interest in WES;

 

   

all of the incentive distribution rights in WES, which entitle us to receive increasing percentages, up to the maximum level of 48.0%, of any incremental cash distributed by WES as certain target distribution levels are reached in any quarter; and

 

   

46,340,947 WES common units, representing a 44.7% limited partner interest in WES.

Distributions by WES of Available Cash from Operating Surplus

WES’s partnership agreement provides that distributions of available cash from operating surplus for any quarter will be made in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to WES’s general partner until WES distributes for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—WES Incentive Distribution Rights” below.

WES Incentive Distribution Rights

The right of WES GP, our wholly owned subsidiary and the general partner of WES, to receive incentive distributions is contained in WES’s partnership agreement. WES’s partnership agreement provides that if a quarterly cash distribution to WES’s common units exceeds a target of $0.345 per common unit and WES has distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution of $0.30 per common unit, then WES will distribute any additional available cash from operating surplus for that quarter among the unitholders and its general partner, WES GP, in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to WES’s general partner, until each unitholder receives a total of $0.345 per unit for that quarter (the “first target distribution”);

 

   

second, 85.0% to all unitholders, pro rata, and 15.0% to WES’s general partner, until each unitholder receives a total of $0.375 per unit for that quarter (the “second target distribution”);

 

   

third, 75.0% to all unitholders, pro rata, and 25.0% to WES’s general partner, until each unitholder receives a total of $0.450 per unit for that quarter (the “third target distribution”); and

 

   

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to WES’s general partner.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The following table shows our selected historical and pro forma financial and operating data, in each case for the periods and as of the dates indicated. The selected historical consolidated statements of income and cash flow data for the years ended December 31, 2009, 2010 and 2011 and the balance sheet data as of December 31, 2010 and 2011 are derived from our audited historical consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated statements of income and cash flow data for the years ended December 31, 2007 and 2008 and the balance sheet data as of December 31, 2007, 2008 and 2009 are derived from our unaudited historical consolidated financial statements not included in this prospectus. The selected historical consolidated statements of income and cash flow data for the nine months ended September 30, 2011 and 2012 and the balance sheet data as of September 30, 2012 are derived from our unaudited historical consolidated financial statements included elsewhere in this prospectus. Our financial statements consolidate WES and its general partner, WES GP, which is a wholly owned subsidiary of ours. This financial information is an integral part of, and should be read in conjunction with, the consolidated financial statements and notes thereto included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We have no separate operating activities apart from those conducted by WES, and our cash flows consist of distributions from WES on the partnership interests we own. Accordingly, the selected historical consolidated financial data set forth in the following table primarily reflect the operating activities and results of operations of WES. Since we own and control WES GP, we reflect our ownership interest in WES on a consolidated basis, which means that our financial results are combined with those of WES and WES GP.

The unaudited pro forma financial data below has been prepared as if certain transactions to be effected at the closing of this offering had taken place on September 30, 2012, in the case of the pro forma balance sheet, and on January 1, 2011, in the case of the pro forma statement of operations for the year ended December 31, 2011 and the nine months ended September 30, 2012. These transactions include the following:

 

   

the receipt of net proceeds of $282.5 million, after deducting underwriting discounts, the structuring fee and offering expenses, from the issuance and sale of 15,000,000 common units at an assumed initial offering price of $             per common unit;

 

   

the use of the net proceeds from this offering to purchase 5,767,708 WES common units and to make a capital contribution to WES on behalf of WES GP in exchange for 117,708 WES general partner units in order to maintain WES GP’s 2.0% general partner interest in WES, as described in “Use of Proceeds;” and

 

   

WES’s use of the funds received from us for general partnership purposes.

For a description of all of the assumptions used in preparing the unaudited selected pro forma financial data, you should read the notes to our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. The pro forma financial data should not be considered as indicative of the historical results we would have had or the future results that we will have after this offering.

 

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    Historical     Pro Forma  
    Year Ended December 31,     Nine Months Ended
September 30,
    Year Ended
December 31,
2011
    Nine Months
Ended
September 30,
2012
 
    2007     2008     2009     2010     2011     2011     2012      
   

(unaudited)

                (unaudited)     (unaudited)  
    (in thousands, except per unit and operating data)  

Statement of Income Data:

                 

Total revenues

  $ 731,297      $ 922,314      $ 619,764      $ 663,274      $ 823,265      $ 608,068      $ 636,603      $ 823,265      $ 636,603   

Costs and expenses (1)

    465,224        615,456        392,808        394,276        502,168        366,556        400,991        502,168        400,991   

Depreciation, amortization and impairments

    82,396        116,381        90,692        91,010        111,904        78,413        81,270        111,904        81,270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    547,620        731,837        483,500        485,286        614,072        444,969        482,261        614,072        482,261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    183,677        190,477        136,264        177,988        209,193        163,099        154,342        209,193        154,342   

Interest income (expense), net

    (4,965     13,110        10,762        1,449        (1,785     (2,746     (17,443     (1,785     (17,443

Other income (expense), net

    29        1,549        1,628        (538     (44     (895     (287     (44     (287

Income tax expense (2)

    62,926        65,343        39,667        51,464        45,664        36,000        29,902        19,018        699   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    115,815        139,793        108,987        127,435        161,700        123,458        106,710        188,346        135,913   

Net income (loss) attributable to WES public unitholders and other noncontrolling interests (3)

    (92     24,166        36,772        63,495        86,057        64,016        71,258        86,057        71,258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Western Gas Equity Partners, LP

  $ 115,907      $ 115,627      $ 72,215      $ 63,940      $ 75,643      $ 59,442      $ 35,452      $ 102,289      $ 64,655   

Pro forma net income per WGP common unit

                  $     
                 

 

 

 

Balance Sheet Data (at period end):

                 

Net, property, plant and equipment

  $ 1,617,163      $ 1,693,735      $ 1,714,006      $ 1,753,762      $ 2,052,224        $ 2,342,923       

Total assets

    1,832,397        2,202,023        2,246,321        2,263,094        2,837,626          2,953,944       

Total long-term liabilities

    530,611        680,319        785,952        1,021,737        1,258,450          1,537,447       

Total equity and partners’ capital

    1,243,763        1,442,894        1,408,882        1,182,658        1,466,954          1,141,610       

Cash Flow Data (for year end):

                 

Net cash provided by (used in):

                 

Operating activities

  $ 216,955      $ 266,287      $ 186,422      $ 221,331      $ 273,222      $ 201,484      $ 232,769       

Investing activities

    (199,922     (607,455     (223,128     (885,507     (472,951     (405,241     (899,943    

Financing activities

    (17,513     377,268        70,616        621,266        399,214        428,140        488,109       

Capital expenditures

    192,522        164,360        121,295        138,000        142,946        78,573        294,596       

Operating Data (volumes in MMcf/d):

                 

Gathering, treating and transportation throughput (4)

    1,442        1,339        1,229        1,181        1,321        1,327        1,255       

Processing throughput (5)

    458        557        808        815        962        940        1,182       

Equity investment throughput (6)

    289        304        225        228        198        191        236       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total throughput

    2,189        2,200        2,262        2,224        2,481        2,458        2,673       

Throughput attributable to noncontrolling interests

    —          124        180        197        242        237        254       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Throughput attributable to Western Gas Equity Partners, LP

    2,189        2,076        2,082        2,027        2,239        2,221        2,419       

 

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(1) Pro forma costs and expenses do not give effect to estimated annual incremental general and administrative expenses of approximately $3.0 million that we expect we will incur as a result of being a publicly traded partnership.
(2) Prior to our conversion in September 2012 to a limited partnership, we were a single-member limited liability company, required to reflect our income tax expense and liability on a separate-return basis. Upon the completion of this offering, and similar to WES, we will be treated as a partnership for U.S. federal and state income tax purposes and therefore will not be subject to U.S. federal and state income taxes, except for the Texas margin tax.
(3) Represents the publicly held common units of WES and WES’s noncontrolling interests in Chipeta that were held by Anadarko and a third-party member. Effective August 1, 2012, WES acquired Anadarko’s remaining interest in Chipeta, accounted for on a prospective basis.
(4) Excludes average NGL pipeline volumes from the Chipeta assets of 3 MBbls/d, 11 MBbls/d, 14 MBbls/d, 24 MBbls/d, 23 MBbls/d and 25 MBbls/d for and the years ended December 31, 2008, 2009, 2010, 2011 and the nine months ended September 30, 2011 and 2012, respectively.
(5) Consists of 100% of Chipeta, Granger, Hilight and Red Desert complex volumes and 50% of Newcastle system volumes for all periods presented, as well as throughput beginning March 2011 attributable to the Platte Valley system.
(6) Represents WES’s 14.81% share of Fort Union and 22% share of Rendezvous gross volumes, and excludes WES’s 10% share of average White Cliffs pipeline volumes consisting of 3 MBbls/d, 4 MBbls/d, 3 MBbls/d and 6 MBbls/d for and the years ended December 31, 2010 and 2011 the nine months ended September 30, 2011 and 2012, respectively. WES’s 10% share of White Cliffs volumes for 2009 was not material.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We were formed by converting WGR Holdings, LLC into a limited partnership and changing its name to Western Gas Equity Partners, LP. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to (i) “we,” “us,” “our,” “Western Gas Equity Partners, LP,” and “WGP” refer to Western Gas Equity Partners, LP and its consolidated subsidiaries collectively; (ii) “our general partner” refer to Western Gas Equity Holdings, LLC, the general partner of Western Gas Equity Partners, LP; (iii) “WES” refer to Western Gas Partners, LP and its subsidiaries collectively; (iv) “WES GP” refer to Western Gas Holdings, LLC, our wholly owned subsidiary and the general partner of Western Gas Partners, LP; (v) “Anadarko” refers to Anadarko Petroleum Corporation and its consolidated subsidiaries, other than us, our general partner, WES GP, WES, and its subsidiaries; and (vi) “Affiliates” refer to wholly owned and partially owned subsidiaries of Anadarko, excluding WGP, but including Fort Union Gas Gathering, LLC (“Fort Union”), White Cliffs Pipeline, LLC (“White Cliffs”), and Rendezvous Gas Services, LLC (“Rendezvous”).

You should read the following discussion and analysis of financial condition and results of operations in conjunction with the historical and pro forma financial statements, and the notes thereto, included elsewhere in this prospectus. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding certain risks inherent in our and WES’s businesses.

Introduction

We are a Delaware limited partnership formed to own three types of partnership interests in Western Gas Partners, LP, a publicly traded limited partnership (NYSE: WES). WES is a growth-oriented Delaware master limited partnership organized by Anadarko Petroleum Corporation (NYSE: APC) to own, operate, acquire and develop midstream energy assets. Our only cash-generating assets consist of our partnership interests in WES, which upon the completion of this offering will consist of the following:

 

   

2,075,553 WES general partner units, representing a 2.0% general partner interest in WES;

 

   

all of the incentive distribution rights in WES, which entitle us to receive increasing percentages, up to the maximum level of 48.0%, of any incremental cash distributed by WES as certain target distribution levels are reached in any quarter; and

 

   

46,340,947 WES common units, representing a 44.7% limited partner interest in WES.

We were formed in September 2012 upon the conversion of our predecessor, WGR Holdings, LLC, into a Delaware limited partnership. As of September 30, 2012, we owned 40,573,239 WES common units and, indirectly through our 100% membership interest in WES GP, 1,957,845 WES general partner units and all of the incentive distribution rights.

Based on WES’s current cash distribution and our expected ownership of WES following this offering, we expect our initial quarterly cash distribution to be $         per common unit, or $         per common unit on an annualized basis. Our primary objective is to increase distributions to our unitholders over time through growth in the distributions payable with respect to our partnership interests in WES. To achieve this objective, we intend to actively monitor and support WES in the successful execution of its business strategy. In the future, we may facilitate WES’s growth through the use of our capital resources, which could involve capital contributions, loans or other forms of financial support.

WES is required by its partnership agreement to distribute, and it has historically distributed within 45 days of the end of each quarter, all of its cash on hand at the end of each quarter, less reserves established by its general partner to provide for the proper conduct of its business or to provide funds for future distributions. Like WES, we are structured as a limited partnership and will distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner.

Our cash flows will consist of the cash distributions we receive with respect to the WES partnership interests we own. While we, like WES, are structured as a limited partnership, our capital structure and cash

 

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distribution policy differ materially from those of WES. Most notably, (i) our general partner does not have an economic interest in us and is not entitled to receive any distributions from us and (ii) our capital structure does not include incentive distribution rights. Therefore, our distributions will be allocated exclusively to our common units.

Our ownership of WES’s incentive distribution rights entitles us to receive the following percentages of cash distributed by WES at the following target cash distribution levels:

 

   

13.0% of all incremental cash distributed in a quarter after $0.345 has been distributed in respect of each common unit and general partner unit of WES for that quarter;

 

   

23.0% of all incremental cash distributed in a quarter after $0.375 has been distributed in respect of each common unit and general partner unit of WES for that quarter; and

 

   

the maximum sharing level of 48.0% of all incremental cash distributed in a quarter after $0.450 has been distributed in respect of each common unit and general partner unit of WES for that quarter.

The cash distributions we receive from WES are tied to (i) WES’s per unit distribution level and (ii) the number of WES common units outstanding. An increase in either factor (assuming the other factor remains constant or increases) will generally result in an increase in the amount of cash distributions we receive from WES. Since its initial public offering, WES has engaged in transactions that have resulted in significant increases in both its per unit distribution level and outstanding equity capitalization, and we expect WES to engage in similar transactions in the future. WES has increased its quarterly cash distribution from $0.30 per common unit, or $1.20 on an annualized basis, for the quarter ended June 30, 2008, to $0.50 per common unit, or $2.00 on an annualized basis, for the quarter ended September 30, 2012. During the same period, WES issued a total of 42.9 million common units.

Based on WES’s ownership structure after giving effect to our acquisition of WES common units and general partner units in connection with the closing of this offering as described under “Use of Proceeds,” WES’s most recently declared distribution of $0.50 per common unit will result in a quarterly distribution to us of $32.1 million, or approximately $128.4 million on an annualized basis, consisting of (i) $23.2 million from distributions on our WES common units, (ii) $1.2 million from distributions on our WES general partner units and (iii) $7.7 million from distributions on our incentive distribution rights. We are currently receiving distributions at the highest level on our incentive distribution rights and therefore will receive 48.0% of the cash that WES distributes in excess of $0.450 per common unit, if any. As a result, the cash distributions we receive from WES with respect to the incentive distribution rights will increase more rapidly than those with respect to our WES common and general partner units.

Financial Presentation

Because WGP controls WES GP, which in turn controls WES, we reflect our ownership interest in WES on a consolidated basis, which means that our financial results are combined with those of WES and WES GP. The publicly held limited partner interests in WES are reflected as noncontrolling interests in our results of operations. We have no separate operating activities apart from those conducted by WES, and our operating cash flows consist of distributions from WES on the partnership interests we own. Accordingly, our results of operations do not differ materially from the results of operations of WES, with the reconciling items between WGP’s consolidated financial statements and those of WES consisting primarily of: (i) the presentation of noncontrolling interests in WGP that are held by the limited partners of WES other than WGP, (ii) the elimination of WES GP’s investment in WES with WES GP’s underlying capital account and (iii) the recognition of the liabilities for awards issued pursuant to the Incentive Plan. These items, and certain tax issues specific to WGP insofar as they generate differences from WES’s historical financial statements, are described in “—Items Affecting the Comparability of Financial Results—Western Gas Equity Partners, LP” below, with the remainder of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” consisting

 

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solely of a discussion of the operating activities and results of operations of WES. WES’s historical results of operations do not reflect the incremental general and administrative expenses we expect to incur as a result of being a publicly traded partnership, which we expect to be approximately $3.0 million per year.

Unless the context otherwise indicates, references to the assets and operations of WES in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are to the assets owned by WES as of September 30, 2012. In May 2008, WES closed its initial public offering. Concurrently with the closing of the offering, Anadarko contributed to WES the assets and liabilities of Anadarko Gathering Company LLC (“AGC”), Pinnacle Gas Treating LLC (“PGT”) and MIGC, which are referred to as the “initial assets.” In December 2008, WES completed the acquisition of the Powder River assets from Anadarko, which included (i) the Hilight system, (ii) a 50% interest in the Newcastle system and (iii) a 14.81% membership interest in Fort Union. The following table presents the acquisitions completed by WES during the years ended December 31, 2009, 2010 and 2011, and the nine months ended September 30, 2012, and identifies the funding sources for such acquisitions:

 

     Acquisition
Date
     Percentage
Acquired
    Borrowings      Cash On
Hand
     WES Common
Units Issued
     WES GP
Units
Issued
 
     (in thousands, except unit and percent amounts)  

Chipeta (1)

     07/01/09         51 %    $ 101,451       $ 4,638         351,424          7,172  

Granger (2)

     01/29/10         100     210,000         31,680         620,689         12,667  

Wattenberg (3)

     08/02/10         100     450,000         23,100         1,048,196         21,392  

White Cliffs (4)

     09/28/10         10             38,047                   

Platte Valley (5)

     02/28/11         100     303,000         602                   

Bison (6)

     07/08/11         100             25,000         2,950,284         60,210  

MGR (7)

     01/13/12         100     299,000         159,587         632,783         12,914  

Chipeta (8)

     08/01/12         24             128,250         151,235         3,086  

 

(1) The assets acquired from Anadarko included a 51% membership interest in Chipeta, together with an associated NGL pipeline. These assets provide processing and transportation services in the Greater Natural Buttes area in Uintah County, Utah. Chipeta owns a natural gas processing plant with one refrigeration unit and two cryogenic units. In November 2009, Chipeta acquired the Natural Buttes plant from a third party for $9.1 million, of which $4.5 million was contributed by the noncontrolling interest owners to fund their proportionate share of the acquisition cost. The 51% membership interest in Chipeta and associated NGL pipeline are referred to collectively as the “initial Chipeta assets,” and the acquisition is referred to as the “initial Chipeta acquisition.”
(2) The assets acquired from Anadarko included (i) the Granger gathering system with related compressors and other facilities, and (ii) the Granger complex, consisting of two cryogenic trains, one refrigeration train, an NGL fractionation facility and ancillary equipment. We refer to these assets, located in southwestern Wyoming, as the “Granger assets” and to the acquisition as the “Granger acquisition.”
(3) The assets acquired from Anadarko included the Wattenberg gathering system and related facilities, including the Fort Lupton processing plant. We refer to these assets, located in the Denver-Julesburg Basin, north and east of Denver, Colorado, as the “Wattenberg assets” and to the acquisition as the “Wattenberg acquisition.”
(4) White Cliffs owns a crude oil pipeline that originates in Platteville, Colorado and terminates in Cushing, Oklahoma, and which became operational in June 2009. The acquisition of a 0.4% interest in White Cliffs and related purchase option from Anadarko, combined with the acquisition of an additional 9.6% interest in White Cliffs from a third party, are referred to collectively as the “White Cliffs acquisition.” The membership interest in White Cliffs is referred to as the “White Cliffs investment.”
(5) The assets acquired from a third party include (i) a natural gas gathering system and related compression and other ancillary equipment, and (ii) cryogenic gas processing facilities. We refer to these assets, located in the Denver-Julesburg Basin, as the “Platte Valley assets” and to the acquisition as the “Platte Valley acquisition.” An adjustment to intangible assets of $1.6 million was recorded in August 2011, representing the final allocation of the purchase price.

 

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(6) The Bison gas treating facility acquired from Anadarko is located in the Powder River Basin in northeastern Wyoming, and includes three amine treating units, compressor units, and generators. We refer to these assets as the “Bison assets” and to the acquisition as the “Bison acquisition.” The Bison assets are the only treating and delivery point into the third-party-owned Bison pipeline.
(7) Mountain Gas Resources LLC (“MGR”), acquired from Anadarko, owns (i) the Red Desert complex, located in the greater Green River Basin in southwestern Wyoming, which includes the Patrick Draw processing plant, the Red Desert processing plant, gathering lines, and related facilities, (ii) a 22% interest in Rendezvous, which owns a gathering system serving the Jonah and Pinedale Anticline fields in southwestern Wyoming, and (iii) certain additional midstream assets and equipment. We refer to these assets as the “MGR assets” and to the acquisition as the “MGR acquisition.”
(8) On August 1, 2012, WES acquired Anadarko’s remaining 24% membership interest in Chipeta, with distributions related to the additional interest beginning July 1, 2012, bringing WES’s total membership interest in Chipeta to 75%. The 24% membership interest in Chipeta is referred to as the “additional Chipeta assets” and the acquisition is referred to as the “additional Chipeta acquisition.” The 25% membership interest held by a third party is reflected as a noncontrolling interest in WES’s consolidated financial statements for all periods.

Anadarko acquired MIGC, the Powder River assets, the Granger assets and the MGR assets in connection with its August 2006 acquisition of Western Gas Resources, Inc. (“Western”) and acquired its then 75% interest in Chipeta and the Wattenberg assets in connection with its August 2006 acquisition of Kerr-McGee Corporation (“Kerr-McGee”). Anadarko made its initial investment in White Cliffs on January 29, 2007.

Because Anadarko controls WES through its ownership of WES GP, WES’s acquisitions from Anadarko are considered transfers of net assets between entities under common control. As such, the assets WES acquired from Anadarko were initially recorded at Anadarko’s historic carrying value, which does not correlate to the total acquisition price paid by WES. Further, after an acquisition of assets from Anadarko, WES may be required to recast its financial statements to include the activities of such assets as of the date of common control. WES’s consolidated financial statements include (i) the combined financial results and operations of AGC and PGT from their inception through the closing date of WES’s initial public offering and (ii) the consolidated financial results and operations of WES and its subsidiaries from the closing date of its initial public offering combined with (a) the financial results and operations of MIGC, the Powder River assets, the Granger assets and the MGR assets from August 23, 2006, (b) the financial results and operations of the initial Chipeta assets and Wattenberg assets, from August 10, 2006, (c) the 0.4% interest in White Cliffs from January 29, 2007, (d) the financial results and operations of the Bison assets, which Anadarko began construction of in 2009 and placed in service in June 2010, and (e) the financial results and operations of the additional Chipeta assets from August 1, 2012.

As we consolidate our financial statements with those of WES, the consolidated financial statements included in this prospectus for periods prior to WES’s acquisition of assets under common control have been prepared from Anadarko’s historical cost-basis and may not necessarily be indicative of the actual results of operations that would have occurred if WES had owned the assets during the periods reported.

 

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Cash Distributions

The following table sets forth the distributions that WES has paid in respect of its general partner interest and incentive distribution rights for the periods indicated. We may not distribute all of the cash that we receive from WES to our unitholders, as our general partner may establish reserves for general, administrative and other expenses, future distributions and other purposes.

 

     Cash Distributions Made by WES (1)  
     Year Ended December 31,     Nine Months Ended
September 30,
 
     2009     2010     2011     2011     2012  
     (in thousands, except unit and per unit amounts)  

Cash distribution paid per common unit by WES (2)

   $ 1.260      $ 1.440      $ 1.655      $ 1.215      $ 1.440   

Average number of WES common units outstanding (2)

     57,795,971        69,593,387        86,682,967        85,319,362        94,163,750   

Total cash distributions made by WES to all partners

   $ 74,430      $ 103,364      $ 152,581      $ 109,554      $ 154,824   

Cash distributions paid by WES to WES GP:

          

Distributions on general partner interest

     1,489        2,066        3,052        2,191        3,096   

Distributions on incentive distribution rights

     —          792        5,795        3,569        16,028   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash distributions received by WES GP

   $ 1,489      $ 2,858      $ 8,847      $ 5,760      $ 19,124   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to WES GP as a percentage of total cash distributions

     2     3     6     5     12

Percentage growth of distributions to WES GP over prior periods (3)

     —          92     209     138     157

 

(1) Distributions declared for a quarter are paid 45 days following the end of such quarter. Distributions for the fourth quarter are declared and paid in the year following such quarter.
(2) Average number of WES common units outstanding on the distribution record dates for the periods presented includes 26,536,306 subordinated units, which were converted to common units on a one-for-one basis in August 2011.
(3) The percentage growth for the nine months ended September 30, 2011, is based on distributions of $2.4 million for the nine months ended December 31, 2010, and the percentage growth for the nine months ended September 30, 2012, is based on distributions of $7.4 million for the nine months ended December 31, 2011.

Overview of WES

WES’s results are driven primarily by the volumes of natural gas and NGLs it gathers, processes, treats or transports through its systems. For the year ended December 31, 2011 and the nine months ended September 30, 2012, approximately 79% of WES’s total revenues and 70% and 68%, respectively, of its throughput (excluding equity investment revenues and throughput) was attributable to transactions with Anadarko.

In its gathering operations, WES contracts with producers and customers to gather natural gas from individual wells located near its gathering systems. WES connects wells to gathering lines through which natural gas may be compressed and delivered to a processing plant, treating facility or downstream pipeline, and ultimately to end users. WES also treats a significant portion of the natural gas that it gathers so that it will satisfy required specifications for pipeline transportation.

 

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WES has received significant dedications from its largest customer, Anadarko, solely with respect to the gathering systems connected to the Wattenberg, Dew/Pinnacle, Haley, Helper, Clawson and Hugoton gathering systems. Specifically, Anadarko has dedicated to WES pursuant to the terms of its applicable gathering agreements all of the natural gas production it owns or controls from (i) wells that are currently connected to such gathering systems, and (ii) additional wells that are drilled within one mile of wells connected to such gathering systems, as those systems currently exist and as they are expanded to connect additional wells in the future. As a result, this dedication will continue to expand as long as additional wells are connected to these gathering systems.

For both the year ended December 31, 2011 and the nine months ended September 30, 2012, approximately 65% of WES’s gross margin was attributable to fee-based contracts, under which a fixed fee is received based on the volume and thermal content of the natural gas WES gathers, processes, treats or transports. This type of contract provides WES with a relatively stable revenue stream that is not subject to direct commodity price risk, except to the extent that (i) WES retains and sells drip condensate that is recovered during the gathering of natural gas from the wellhead or (ii) actual recoveries differ from contractual recoveries under a limited number of processing agreements. Fee-based gross margin includes equity income from WES’s interests in Fort Union, White Cliffs and Rendezvous.

For both the year ended December 31, 2011 and the nine months ended September 30, 2012, approximately 35% of WES’s gross margin, including gross margin attributable to condensate sales, was attributable to percent-of-proceeds and keep-whole contracts, pursuant to which WES has commodity price exposure. A substantial majority of the commodity price risk associated with the percent-of-proceeds and keep-whole contracts is hedged under fixed-price swap agreements with Anadarko. For the twelve months ended September 30, 2012, approximately 96% of WES’s gross margin was derived from either long-term, fee-based contracts or percent-of-proceeds or keep-whole agreements that were hedged with fixed-price swap agreements.

How WES Evaluates Its Operations

WES’s management relies on certain financial and operational metrics to analyze its performance. These metrics are significant factors in assessing WES’s operating results and profitability and include (1) throughput, (2) gross margin, (3) operating and maintenance expenses, (4) general and administrative expenses, (5) Adjusted EBITDA and (6) Distributable cash flow. Adjusted EBITDA and Distributable cash flow are not GAAP. For definitions of Adjusted EBITDA and Distributable cash flow and reconciliations of Adjusted EBITDA and Distributable cash flow to their most directly comparable financial measures calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measures” and “—Reconciliation to GAAP Measures.”

Throughput. Throughput is an essential operating variable WES uses in assessing its ability to generate revenues. In order to maintain or increase throughput on WES’s gathering and processing systems, it must connect additional wells to its systems. WES’s success in maintaining or increasing throughput is impacted by successful drilling of new wells by producers that are dedicated to WES’s systems, recompletions of existing wells connected to its systems, its ability to secure volumes from new wells drilled on non-dedicated acreage and its ability to attract natural gas volumes currently gathered, processed or treated by its competitors. During the year ended December 31, 2011 and the nine months ended September 30, 2012, WES added 112 and 110 receipt points to its systems, respectively, with initial throughput of approximately 1.0 MMcf/d and 1.5 MMcf/d per receipt point, respectively.

Gross margin. WES defines gross margin as total revenues less cost of product. WES considers gross margin to provide information useful in assessing its results of operations and its ability to internally fund capital expenditures and to service or incur additional debt. Cost of product expenses include (i) costs associated with the purchase of natural gas and NGLs pursuant to WES’s percent-of-proceeds and keep-whole processing contracts, (ii) costs associated with the valuation of WES’s gas imbalances, (iii) costs associated with WES’s obligations under certain contracts to redeliver a volume of natural gas to shippers, which is thermally equivalent

 

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to condensate retained by WES and sold to third parties, and (iv) costs associated with WES’s fuel-tracking mechanism, which tracks the difference between actual fuel usage and loss, and amounts recovered for estimated fuel usage and loss pursuant to its contracts. These expenses are subject to variability, although WES’s exposure to commodity price risk attributable to purchases and sales of natural gas, condensate and NGLs is mitigated through its commodity price swap agreements with Anadarko.

Operating and maintenance expenses. WES monitors operating and maintenance expenses to assess the impact of such costs on the profitability of its assets and to evaluate the overall efficiency of its operations. Operation and maintenance expenses include, among other things, field labor, insurance, repair and maintenance, equipment rentals, contract services, utility costs and services provided to WES or on its behalf. For periods commencing on and subsequent to its acquisition of its assets, certain of these expenses are incurred under and governed by WES’s services and secondment agreement with Anadarko.

General and administrative expenses. To help ensure the appropriateness of WES’s general and administrative expenses and maximize its cash available for distribution, WES monitors such expenses through comparison to prior periods and the annual budget approved by the board of directors of WES GP, as well as to general and administrative expenses incurred by similar midstream companies. General and administrative expenses for periods prior to WES’s acquisition of assets under common control with Anadarko include reimbursements attributable to costs incurred by Anadarko and WES GP on WES’s behalf and allocations of general and administrative costs by Anadarko and WES GP to WES. For these periods, Anadarko receives compensation or reimbursement through a management services fee with respect to the acquired assets. For periods subsequent to WES’s acquisition of its assets, Anadarko is no longer compensated for corporate services through a management services fee. Instead, WES reimburses Anadarko for general and administrative expenses that Anadarko and WES GP incur on WES’s behalf pursuant to the terms of WES’s omnibus agreement with Anadarko (the “WES omnibus agreement”). General and administrative expenses allocated to WES are determined by Anadarko in its reasonable discretion, in accordance with WES’s partnership agreement and the WES omnibus agreement. Amounts required to be reimbursed to Anadarko under the WES omnibus agreement also include those expenses attributable to WES’s status as a publicly traded partnership, such as the following:

 

   

expenses associated with annual and quarterly reporting;

 

   

tax return and Schedule K-1 preparation and distribution expenses;

 

   

expenses associated with listing on the NYSE; and

 

   

independent auditor fees, legal expenses, investor relations expenses, director fees, and registrar and transfer agent fees.

Public company expenses that were reimbursed by Anadarko, excluding equity-based compensation, were $7.7 million for the year ended December 31, 2011 and $5.0 million for the nine months ended September 30, 2012.

Non-GAAP Financial Measures

Adjusted EBITDA. WES defines Adjusted EBITDA as net income (loss) attributable to Western Gas Partners, LP, plus distributions from equity investees, non-cash equity-based compensation expense, expense in excess of the expense reimbursement cap provided in the WES omnibus agreement (which cap is no longer effective) as described under “—Items Affecting the Comparability of Financial Results—Western Gas Partners, LP—General and administrative expenses under the WES omnibus agreement”, interest expense, income tax expense, depreciation, amortization and impairments, and other expense, less income from equity investments, interest income, income tax benefit, and other income. WES believes that the presentation of Adjusted EBITDA provides information useful to investors in assessing its financial condition and results of operations and that Adjusted EBITDA is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures and make distributions. Adjusted EBITDA is a supplemental financial measure that

 

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management and external users of WES’s consolidated financial statements, such as industry analysts, investors, commercial banks and rating agencies, use to assess the following, among other measures:

 

   

WES’s operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to financing methods, capital structure or historical cost basis;

 

   

the ability of WES’s assets to generate cash flow to make distributions; and

 

   

the viability of acquisitions and capital expenditure projects and the returns on investment of various investment opportunities.

Distributable cash flow. WES defines Distributable cash flow as Adjusted EBITDA, plus interest income, less net cash paid for interest expense (including amortization of deferred debt issuance costs originally paid in cash offset by non-cash capitalized interest), maintenance capital expenditures, and income taxes. WES compares Distributable cash flow to the cash distributions WES expects to pay its unitholders. Using this measure, management can quickly compute the coverage ratio of estimated cash flows to planned cash distributions. WES believes this measure is useful to investors because this measurement is used by many companies, analysts and others in the industry as a performance measurement tool to evaluate WES’s operating and financial performance and compare it with the performance of other publicly traded partnerships.

Distributable cash flow should not be considered an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP. Furthermore, while Distributable cash flow is a measure WES uses to assess its ability to make distributions to its unitholders, Distributable cash flow should not be viewed as indicative of the actual amount of cash that WES has available for distributions or that it plans to distribute for a given period.

Reconciliation to GAAP Measures

Adjusted EBITDA and Distributable cash flow are not defined in GAAP. The GAAP measures most directly comparable to Adjusted EBITDA are net income attributable to Western Gas Partners, LP and net cash provided by operating activities, and the GAAP measure most directly comparable to Distributable cash flow is net income attributable to Western Gas Partners, LP. Please read “—Items Affecting the Comparability of Financial Results—Western Gas Equity Partners, LP.”

WES’s non-GAAP financial measures of Adjusted EBITDA and Distributable cash flow should not be considered as alternatives to the GAAP measures of net income attributable to Western Gas Partners, LP or net cash provided by operating activities. Adjusted EBITDA and Distributable cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect net income and net cash provided by operating activities. Adjusted EBITDA or Distributable cash flow should not be considered in isolation or as a substitute for analysis of WES’s results as reported under GAAP. WES’s definitions of Adjusted EBITDA and Distributable cash flow may not be comparable to similarly titled measures of other companies in its industry, thereby diminishing their utility.

WES management compensates for the limitations of Adjusted EBITDA and Distributable cash flow as analytical tools by reviewing the comparable GAAP measures, understanding the differences between Adjusted EBITDA and Distributable cash flow compared to (as applicable) net income and net cash provided by operating activities, and incorporating this knowledge into its decision-making processes. WES believes that investors benefit from having access to the same financial measures that its management uses in evaluating its operating results.

 

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The following tables present (a) a reconciliation of the non-GAAP financial measure of Adjusted EBITDA to the GAAP financial measures of net income attributable to Western Gas Partners, LP and net cash provided by operating activities, and (b) a reconciliation of the non-GAAP financial measure of Distributable cash flow to the GAAP financial measure of net income attributable to Western Gas Partners, LP. For additional information, please read “—Items Affecting the Comparability of Financial Results—Western Gas Equity Partners, LP.”

Reconciliation of Western Gas Partners, LP Non-GAAP Financial Measures

 

    Year Ended December 31,     Nine Months  Ended
September 30,
 
    2009     2010     2011     2011     2012  
    (in thousands)  

Reconciliation of Adjusted EBITDA to net income attributable to Western Gas Partners, LP

         

Adjusted EBITDA attributable to Western Gas Partners, LP

  $ 223,766      $ 265,024      $ 324,323      $ 241,284      $ 244,349   

Less:

         

Distributions from equity investees

    11,206        10,973        15,999        11,988        15,603   

Non-cash equity-based compensation expense

    3,580        4,787        13,754        6,235        16,407   

Expenses in excess of omnibus cap

    842        133        —          —          —     

Interest expense

    9,955        18,794        30,345        21,738        30,118   

Income tax expense

    22,159        21,702        19,018        15,564        699   

Depreciation, amortization and impairments (1)

    88,486        88,188        109,151        76,282        79,514   

Other expense (1)

    —          2,393        3,683        3,683        1,665   

Add:

         

Equity income, net

    7,923        7,628        11,261        7,682        10,752   

Interest income, net—affiliates

    20,717        20,243        28,560        18,992        12,675   

Other income (1) (2)

    57        267        2,049        1,761        187   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Western Gas Partners, LP

  $ 116,235      $ 146,192      $ 174,243      $ 134,229      $ 123,957   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of Adjusted EBITDA to net cash provided by operating activities

         

Adjusted EBITDA attributable to Western Gas Partners, LP

  $ 223,766      $ 265,024      $ 324,323      $ 241,284      $ 244,349   

Adjusted EBITDA attributable to noncontrolling interests of Western Gas Partners, LP

    12,462        13,823        16,850        11,793        13,709   

Interest income (expense), net

    10,762        1,449        (1,785     (2,746     (17,443

Expenses in excess of omnibus cap

    (842     (133     —          —          —     

Non-cash equity-based compensation expense

    (3,580     (4,787     (13,754     (6,235     (16,407

Current income tax expense

    (22,109     (12,114     (16,414     (10,882     (185

Other income (expense), net (2)

    61        (2,122     (1,628     (1,919     (1,475

Distributions from equity investees less than (in excess of) equity income, net

    (3,283     (3,345     (4,738     (4,306     (4,851

Changes in operating working capital:

         

Accounts receivable and natural gas imbalance receivable

    6,961        802        (3,571     (18,925     5,062   

Accounts payable, accrued liabilities and natural gas imbalance payable

    (14,267     2,734        23,092        30,359        71,420   

Other

    2,834        2,418        4,796        4,978        621   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

  $ 212,765      $ 263,749      $ 327,171      $ 243,401      $ 294,800   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow information of Western Gas Partners, LP

         

Net cash provided by operating activities

  $ 212,765      $ 263,749      $ 327,171      $ 243,401      $ 294,800   

Net cash used in investing activities

  $ (223,128   $ (88,550   $ (472,951   $ (405,241   $ (899,943

Net cash provided by financing activities

  $ 44,273      $ 578,848      $ 345,265      $ 386,223      $ 426,078   

 

(1) Includes WES’s 51% share prior to August 1, 2012, and its 75% share after August 1, 2012, of depreciation, amortization and impairments, other expense, and other income attributable to Chipeta.

 

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(2) Excludes income of $1.2 million and $1.0 million for the nine months ended September 30, 2012 and 2011, respectively, and $1.6 million for each of the years ended December 31, 2011, 2010 and 2009, related to a component of a gas processing agreement accounted for as a capital lease.

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2009     2010     2011     2011     2012  
    (in thousands)  

Reconciliation of Distributable cash flow to net income attributable to Western Gas Partners, LP

         

Distributable cash flow

  $ 203,376      $ 237,769      $ 281,975      $ 211,313      $ 197,285   

Less:

         

Distributions from equity investees

    11,206        10,973        15,999        11,988        15,603   

Non-cash equity-based compensation expense

    3,580        4,787        13,754        6,235        16,407   

Expenses in excess of omnibus cap

    842        133        —          —          —     

Interest expense, net (non-cash settled)

    —          —          —          —          244   

Income tax expense

    22,159        21,702        19,018        15,564        699   

Depreciation, amortization and impairments (1)

    88,486        88,188        109,151        76,282        79,514   

Other expense (1)

    —          2,393        3,683        3,683        1,665   

Add:

         

Equity income, net

    7,923        7,628        11,261        7,682        10,752   

Cash paid for maintenance capital expenditures (1) (2)

    27,335        24,854        28,293        20,584        25,543   

Capitalized interest

    —          —          420        134        3,827   

Cash paid for income taxes

    —          507        190        190        495   

Interest income, net (non-cash settled)

    3,817        3,343        11,660        6,317        —     

Other income (1) (3)

    57        267        2,049        1,761        187   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Western Gas Partners, LP

  $ 116,235      $ 146,192      $ 174,243      $ 134,229      $ 123,957   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes WES’s 51% share prior to August 1, 2012, and its 75% share after August 1, 2012, of depreciation, amortization and impairments, other expense, cash paid for maintenance capital expenditures, and other income attributable to Chipeta.
(2) Net of a prior period adjustment reclassifying approximately $0.7 million from capital expenditures to operating expenses for the nine months ended September 30, 2012.
(3) Excludes income of $1.2 million and $1.0 million for the nine months ended September 30, 2012 and 2011, respectively, and $1.6 million for each of the years ended December 31, 2011, 2010 and 2009, related to a component of a gas processing agreement accounted for as a capital lease.

Items Affecting the Comparability of Financial Results—Western Gas Equity Partners, LP

Because WGP controls WES GP, which in turn controls WES, we reflect our ownership interest in WES on a consolidated basis, which means that our financial results are combined with those of WES and WES GP. Accordingly, our results of operations do not differ materially from the results of operations of WES. WGP’s consolidated financial statements and those of WES are reconciled below.

Income taxes. Prior to our conversion in September 2012 to a limited partnership, we were a single-member limited liability company named WGR Holdings, LLC. The separate existence of a limited liability company is disregarded for U.S. federal income tax purposes, resulting in the treatment of WGR Holdings, LLC as a division of Anadarko and its inclusion in Anadarko’s consolidated income tax return for federal and state tax purposes. The income tax expense recorded on the financial statements of WGR Holdings, LLC, and now reflected in the financial statements of WGP, reflect its income tax expense and liability on a separate-return basis.

 

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The deferred federal and state income taxes included in WGP’s consolidated financial statements are primarily attributable to the temporary differences between the financial statement carrying amount of WGP’s investment in WES and its outside tax basis with respect to its partnership interests in WES. In the determination of the deferred income tax asset and liability balances attributable to its partnership interests in WES, WGP applied an accounting policy that looks through its investment in WES. The application of such accounting policy resulted in no deferred income taxes being created on the difference between the book and tax basis on the non-tax deductible goodwill portion of WGP’s investment in WES in the accompanying consolidated financial statements.

Upon the completion of the offering contemplated in this prospectus, WGP will be treated as a partnership for U.S. federal and state income tax purposes and therefore will not be subject to U.S. federal and state income taxes, except for the Texas margin tax.

Noncontrolling interests. The publicly held common units in WES are reflected as noncontrolling interests in WGP’s consolidated financial statements, and are in addition to the noncontrolling interests in Chipeta that are held by Anadarko and a third party, which are already reflected as noncontrolling interests in WES’s consolidated financial statements.

Equity incentive plan. Equity-based awards issued under the Incentive Plan will ultimately be settled in cash, with the fair value of the relevant equity grant being revised periodically based on the estimated fair value of WES GP using a discounted cash flow estimate and multiples-valuation terminal value. Anadarko, as the parent company of WGP, directs the issuance of equity-based awards to its employees who provide services to WES. As such, in the accompanying consolidated financial statements of WGP, the fair value of the outstanding awards under the Incentive Plan is classified as a dividend payable to Anadarko within current liabilities for vested awards which have not been settled in cash, and as long-term liabilities for unvested awards which are outstanding. A similar liability or dividend payable does not appear in the consolidated financial statements of WES because, among other things, the Incentive Plan is a plan of WES GP, not WES.

Reconciliation of net income attributable to Western Gas Partners, LP to net income attributable to Western Gas Equity Partners, LP. The difference between net income attributable to Western Gas Partners, LP and net income attributable to Western Gas Equity Partners, LP is comprised of the incremental income tax expense of WGP as discussed above and the publicly held common units in WES, reflected as noncontrolling interests of WGP.

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
    2009      2010      2011      2011      2012  
    (in thousands)  

Reconciliation of net income attributable to WGP to net income attributable to WES

             

Net income attributable to WES

  $ 116,235       $ 146,192       $ 174,243       $ 134,229       $ 123,957   

Incremental income tax expense (1)

    17,508         29,762         26,646         20,436         29,203   

Publicly held limited partner interests in WES (2)

    26,512         52,490         71,954         54,351         59,302   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to WGP

  $ 72,215       $ 63,940       $ 75,643       $ 59,442       $ 35,452   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The income tax expense recorded in the financial statements of WGR Holdings, LLC, and now reflected in the financial statements of WGP, reflect its income tax expense and liability on a separate-return basis.
(2) Represents the portion of net income allocated to the publicly held limited partner interests in WES. These amounts will fluctuate with WES equity issuances. As of December 31, 2009, 2010, 2011 and as of September 30, 2011 and 2012, publicly held limited partner interests represented a 43.2%, 51.5%, 54.7%, 54.7% and 56.6% interest in WES, respectively.

 

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Reconciliation of net cash provided by operating and financing activities. The difference between net cash provided by operating activities for WGP and WES is primarily the result of incremental income tax expense and amounts accrued for the Incentive Plan, as discussed above.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2009     2010     2011     2011     2012  
     (in thousands)  

Reconciliation of consolidated WGP cash flows provided by operating and financing activities

          

WES net cash provided by operating activities

   $ 212,765      $ 263,749      $ 327,171      $ 243,401      $ 294,800   

Incremental income tax expense (1)

     (17,508     (29,762     (26,646     (20,436     (29,203

Deferred income taxes (1)

     (8,835     (12,656     (27,303     (21,470     (32,839

Other items

     —          —          —          (11     11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

WGP net cash provided by operating activities

   $ 186,422      $ 221,331      $ 273,222      $ 201,484      $ 232,769   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

WES net cash provided by financing activities

   $ 44,273      $ 578,848      $ 345,265      $ 386,223      $ 426,078   

Proceeds from issuance of WES common and general partner units, net of offering expenses (2)

     (2,459     (7,320     (6,972     (6,972     (4,497

Distributions to unitholders (3)

     70,066        94,194        140,118        99,795        141,505   

Distributions to noncontrolling interest owners and Anadarko (4)

     (15,648     (41,857     (72,080     (50,932     (71,890

Net contributions from (distributions to) Anadarko (5)

     (25,616     (2,599     (7,117     26        (3,087
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

WGP net cash provided by financing activities

     70,616        621,266        399,214      $ 428,140      $ 488,109   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The income tax expense recorded in the financial statements of WGR Holdings, LLC, and now reflected in the financial statements of WGP, reflect its income tax expense and liability on a separate-return basis.
(2) Difference is attributable to elimination upon consolidation of proceeds from issuance of general partner units in exchange for WES GP’s proportionate capital contribution to maintain its 2.0% general partner interest.
(3) Difference attributable to elimination upon consolidation of WES’s distributions on limited partner interests owned by WGP.
(4) Difference attributable to elimination and reclassification upon consolidation of WES’s distributions to publicly held limited partner interests of WES.
(5) Difference attributable to eliminations upon consolidation of proceeds from WES equity offerings, elimination of WES distributions, reclassification of deferred taxes, and changes in net income.

Items Affecting the Comparability of Financial Results—Western Gas Partners, LP

WES’s historical results of operations and cash flows for the periods presented may not be comparable to future or historic results of operations or cash flows for the reasons described below:

Affiliate contracts. Effective October 1, 2009, contracts covering substantially all of the Granger assets’ affiliate throughput were converted from primarily keep-whole contracts into a ten-year, fee-based agreement, and effective July 1, 2010, contracts covering all of Wattenberg’s affiliate throughput were converted from primarily keep-whole contracts into a ten-year, fee-based agreement. These contract changes impact the comparability of the statements of income and cash flows.

Commodity price swap agreements. WES has commodity price swap agreements with Anadarko to mitigate exposure to commodity price uncertainty that would otherwise be present as a result of the purchase and sale of natural gas, condensate or NGLs. Notional volumes for each of the commodity price swap agreements are not

 

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specifically defined; instead, the commodity price swap agreements apply to the actual volume of our natural gas, condensate and NGLs purchased and sold at the Hilight, Hugoton, Newcastle, Granger and Wattenberg systems, with various expiration dates through September 2015.

In December 2011, WES extended the commodity price swap agreements for the Hilight and Newcastle systems through December 2013, and also entered into commodity price swap agreements related to the MGR acquisition, with forward-starting effective dates beginning January 1, 2012, and extending through December 31, 2016. Please read “Risk Factors—Risks Inherent in WES’s Business—WES’s strategies to reduce its exposure to changes in commodity prices may fail to protect WES and could negatively impact its financial condition, thereby reducing its cash flows and ability to make distributions to partners, including us.”

Federal income taxes. Income earned by WES, a non-taxable entity for U.S. federal income tax purposes, including and subsequent to the date of the acquisition of its assets, is subject only to Texas margin tax, while income earned prior to WES’s acquisition of its assets is subject to federal and state income tax.

General and administrative expenses under the WES omnibus agreement. Pursuant to the WES omnibus agreement, Anadarko and WES GP perform centralized corporate functions for WES. Prior to WES’s acquisition of its assets from Anadarko, WES’s historical consolidated financial statements reflect a management services fee representing the general and administrative expenses attributable to its assets. For the nine months ended September 30, 2012, and the year ended December 31, 2011, Anadarko, in accordance with WES’s partnership agreement and the WES omnibus agreement, determined, in its reasonable discretion, amounts to be allocated to WES in exchange for services provided under the WES omnibus agreement. During the nine months ended September 30, 2012 and 2011, and the years ended December 31, 2011, 2010 and 2009, Anadarko billed WES $11.4 million, $8.4 million, $11.8 million, $9.0 million and $6.9 million, respectively, in allocated general and administrative expenses. Prior to December 31, 2010, the general and administrative expenses allocated to WES were subject to a cap as set forth in the WES omnibus agreement. In addition, WES’s general and administrative expenses for the years ended December 31, 2010 and 2009, included $0.1 million and $0.8 million, respectively, of expenses incurred by Anadarko and WES GP in excess of the cap contained in the WES omnibus agreement. Such expenses were recorded as capital contributions from Anadarko and did not impact WES’s cash flows. The amounts charged under the WES omnibus agreement are greater than amounts allocated to WES by Anadarko for the aggregate management services fees reflected in WES’s historical consolidated financial statements for periods prior to WES’s acquisition of its assets from Anadarko. Public company expenses of WES that were reimbursed to Anadarko, excluding equity-based compensation, were $5.0 million, $5.4 million, $7.7 million, $8.0 million and $7.5 million for the nine months ended September 30, 2012 and 2011, and the years ended December 31, 2011, 2010 and 2009, respectively.

Interest on intercompany balances. For periods prior to WES’s acquisition of its assets from Anadarko, except for Chipeta, WES incurred interest expense or earned interest income on current intercompany balances with Anadarko related to such assets. These intercompany balances were extinguished through non-cash transactions in connection with the closing of WES’s initial public offering, the Powder River acquisition, the initial Chipeta acquisition, the Granger acquisition, the Wattenberg acquisition, the acquisition of a 0.4% interest in White Cliffs, the Bison acquisition and the MGR acquisition. Therefore, interest expense and interest income attributable to these balances are reflected in WES’s historical consolidated financial statements for the periods ending prior to WES’s acquisition of those assets, except for Chipeta.

Beginning December 7, 2011, Anadarko discontinued charging interest on intercompany balances. The outstanding affiliate balances on the assets acquired from Anadarko prior to their acquisition were entirely settled through an adjustment to net investment by Anadarko.

Platte Valley acquisition. In February 2011, WES acquired a natural gas gathering system and cryogenic gas processing facilities, collectively referred to as the “Platte Valley assets,” financed with borrowings under the WES RCF. These assets, acquired from a third party, have been recorded in WES’s consolidated financial statements at their estimated fair values on the acquisition date under the acquisition method of accounting.

 

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Results of operations attributable to the Platte Valley assets have been included WES’s consolidated statements of income beginning on the acquisition date in the first quarter of 2011.

The fair values of the plant and processing facilities, related equipment, and intangible assets acquired were based on the market, cost and income approaches. The liabilities assumed include certain amounts associated with environmental contingencies estimated by management. All fair-value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and thus represent Level 3 inputs.

General Trends and Outlook

We expect WES’s business to continue to be affected by the following key trends. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, WES’s actual results may vary materially from expected results.

Impact of natural gas prices. The relatively low natural gas price environment, which has persisted over the past three years, has led to lower levels of drilling activity in areas served by certain of WES’s assets. Several of WES’s customers, including Anadarko, have reduced activity levels in certain areas, shifting capital toward liquid-rich opportunities that offer higher margins and superior economics to producers. This trend has resulted in fewer new well connections and, in some cases, temporary curtailments of production in those areas. To the extent opportunities are available, WES will continue to connect new wells to its systems to mitigate the impact of natural production declines in order to maintain throughput on its systems. However, WES’s success in connecting new wells to its systems is dependent on the activities of natural gas producers and shippers.

Changes in regulations. WES’s operations and the operations of its customers have been, and at times in the future may be, affected by political developments and are subject to an increasing number of complex federal, state, tribal, local and other laws and regulations such as production restrictions, permitting delays, limitations on hydraulic fracturing and environmental protection regulations. WES and/or its customers must obtain and maintain numerous permits, approvals and certificates from various federal, state, tribal and local governmental authorities. For example, regulation of hydraulic fracturing is currently primarily conducted at the state level through permitting and other compliance requirements. If proposed federal legislation is adopted, it could establish an additional level of regulation and permitting. Any changes in statutory regulations or delays in the issuance of required permits may impact both the throughput on and profitability of WES’s systems.

Access to capital markets. WES requires periodic access to capital in order to fund acquisitions and expansion projects. Under the terms of WES’s partnership agreement, WES is required to distribute all of its available cash to its unitholders, which makes WES dependent upon raising capital to fund growth projects. Historically, master limited partnerships have accessed the debt and equity capital markets to raise money for new growth projects and acquisitions. Recent market turbulence has from time to time either raised the cost of capital markets financing or, in some cases, temporarily made such financing unavailable. If WES is unable either to access the capital markets or find alternative sources of capital, WES’s growth strategy may be more challenging to execute.

Impact of inflation. Although inflation in the U.S. has been relatively low in recent years, the U.S. economy could experience a significant inflationary effect from, among other things, the governmental stimulus plans enacted since 2008. To the extent permitted by regulations and escalation provisions in WES’s existing agreements, it has the ability to recover a portion of increased costs in the form of higher fees.

Impact of interest rates. Interest rates were at or near historic lows at certain times during 2012. Should interest rates rise, WES’s financing costs would increase accordingly. Additionally, as with other yield-oriented securities, WES’s unit price is impacted by the level of its cash distributions and an associated implied distribution yield. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in WES’s units, and a rising interest rate environment could have an adverse impact on WES’s unit price and its ability to issue additional equity, or increase the cost of issuing

 

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equity, to make acquisitions, reduce debt or for other purposes. However, WES expects its cost of capital to remain competitive, as its competitors would face similar circumstances.

Acquisition opportunities. As of September 30, 2012, Anadarko’s total domestic midstream asset portfolio, excluding the assets WES owns, consisted of 17 gathering systems, approximately 4,300 miles of pipeline and eight processing and/or treating facilities. A key component of WES’s growth strategy is to acquire midstream assets from Anadarko and third parties over time. We believe Anadarko, through its indirect economic interest in WES following this offering, will continue to be motivated to promote and support the successful execution of WES’s business plan and to pursue projects that help to enhance the value of its business. However, Anadarko continually evaluates acquisitions and divestitures and may elect to acquire, construct or dispose of midstream assets in the future without offering WES the opportunity to acquire or construct those assets. Should Anadarko choose to pursue additional midstream asset sales, it is under no contractual obligation to offer assets or business opportunities to WES. WES may also pursue certain asset acquisitions from third parties to the extent such acquisitions complement WES’s or Anadarko’s existing asset base or allow WES to capture operational efficiencies from Anadarko’s or third-party production. However, if WES does not make additional acquisitions from Anadarko or third parties on economically acceptable terms, its future growth will be limited, and the acquisitions it makes could reduce, rather than increase, cash flows generated from operations on a per-unit basis.

Results of Operations—Combined Overview

The following table and discussion presents a summary of WES’s results of operations for the years ended December 31, 2009, 2010 and 2011 and the nine months ended September 30, 2011 and 2012:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2009     2010     2011     2011     2012  
                       (unaudited)  
     (in thousands)  

Revenues

          

Gathering, processing and transportation of natural gas and natural gas liquids

   $ 246,466      $ 253,273      $ 301,329      $ 222,432      $ 235,849   

Natural gas, natural gas liquids and condensate sales

     361,645        396,037        502,383        371,800        386,818   

Equity income and other, net

     11,653        13,964        19,553        13,836        13,936   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues (1)

     619,764        663,274        823,265        608,068        636,603   

Total operating expenses (1)

     483,500        485,286        614,072        444,969        482,261   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     136,264        177,988        209,193        163,099        154,342   

Interest income–affiliates

     20,717        20,243        28,560        18,992        12,675   

Interest expenses

     (9,955     (18,794     (30,345     (21,738     (30,118

Other income (expense), net

     1,628        (538     (44     (895     (287
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     148,654        178,899        207,364        159,458        136,612   

Income tax expense

     22,159        21,702        19,018        15,564        699   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     126,495        157,197        188,346        143,894        135,913   

Net income attributable to noncontrolling interests of WES

     10,260        11,005        14,103        9,665        11,956   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Western Gas Partners, LP (2)

   $ 116,235      $ 146,192      $ 174,243      $ 134,229      $ 123,957   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Key Performance Metrics: (3)

          

Gross margin

   $ 380,890      $ 416,798      $ 495,894      $ 367,303      $ 381,884   

Adjusted EBITDA attributable to Western Gas Partners, LP

   $ 223,766      $ 265,024      $ 324,323      $ 241,284      $ 244,349   

Distributable cash flow

   $ 203,376      $ 237,769      $ 281,975      $ 211,313      $ 197,285   

 

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(1) Revenues include affiliate amounts earned by WES from services provided to its affiliates, as well as from the sale of residue gas, condensate and NGLs to its affiliates. Operating expenses include amounts charged by WES’s affiliates for services as well as reimbursement of amounts paid by affiliates to third parties on WES’s behalf.
(2) For reconciliations to comparable consolidated results of WGP, please read “—Items Affecting the Comparability of Financial Results—Western Gas Equity Partners, LP.”
(3) For definitions of Adjusted EBITDA and Distributable cash flow and reconciliations of Adjusted EBITDA and Distributable cash flow to their most directly comparable financial measures calculated and presented in accordance with GAAP, please read “—How WES Evaluates Its Operations—Non-GAAP Financial Measures” and “How WES Evaluates Its Operations—Reconciliation to GAAP Measures.”

Operating Results

For purposes of the following discussion, any increases or decreases “for the nine months ended September 30, 2012” refer to the comparison of the nine months ended September 30, 2012 to the nine months ended September 30, 2011; any increases or decreases “for the year ended December 31, 2011” refer to the comparison of the year ended December 31, 2011 to the year ended December 31, 2010; and any increases or decreases “for the year ended December 31, 2010” refer to the comparison of the year ended December 31, 2010 to the year ended December 31, 2009.

Operating Statistics

 

     Year Ended December 31,      Nine Months Ended September 30,  
       2009          2010          2011          2011          2012    
     (MMcf/d)  

Gathering, treating and transportation (1)

     1,229         1,181         1,321         1,327         1,255   

Processing (2)

     808         815         962         940         1,182   

Equity investment (3)

     225         228         198         191         236   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total throughput (4)

     2,262         2,224         2,481         2,458         2,673   

Throughput attributable to noncontrolling interests

     180         197         242         237         254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total throughput attributable to Western Gas Partners, LP

     2,082         2,027         2,239         2,221         2,419   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes average NGL pipeline volumes from the Chipeta assets of 25 MBbls/d, 23 MBbls/d, 24 MBbls/d, 14 MBbls/d, and 11 MBbls/d for the nine months ended September 30, 2012 and 2011 and the years ended December 31, 2011, 2010, and 2009, respectively.
(2) Consists of 100% of Chipeta, Granger, Hilight and Red Desert complex volumes and 50% of Newcastle system volumes for all periods presented, as well as throughput beginning March 2011 attributable to the Platte Valley system.
(3) Represents WES’s 14.81% share of Fort Union and 22% share of Rendezvous gross volumes, and excludes WES’s 10% share of average White Cliffs pipeline volumes consisting of 6 MBbls/d, 3 MBbls/d, 4 MBbls/d and 3 MBbls/d for the nine months ended September 30, 2012 and 2011 and the years ended December 31, 2011 and 2010, respectively. WES’s 10% share of White Cliffs volumes for 2009 was not material.
(4) Includes affiliate, third-party and equity-investment volumes.

Gathering, treating and transportation throughput decreased by 72 MMcf/d for the nine months ended September 30, 2012, due to throughput decreases at the Haley, Pinnacle, Hugoton and Dew systems resulting from natural production declines and reduced drilling activity in those areas, throughput decreases at MIGC due to the September 2012 expiration of a firm transportation agreement and throughput decreases at the Bison facility resulting from reduced drilling activity in the area driven by unfavorable producer economics. These decreases were partially offset by a throughput increase at Wattenberg due to increased drilling behind the system.

 

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Gathering, treating and transportation throughput increased by 140 MMcf/d for the year ended December 31, 2011, primarily due to the startup of the Bison assets in June 2010 and throughput increases at the Wattenberg system due to increased drilling activity in the area. These increases were partially offset by lower throughput at the MIGC system resulting from the January 2011 expiration of certain contracts that were not renewed due to the startup of the third-party owned Bison pipeline, and throughput decreases at the Haley, Pinnacle, Dew and Hugoton systems resulting from natural production declines and reduced drilling activity in those areas.

Gathering, treating and transportation throughput decreased by 48 MMcf/d for the year ended December 31, 2010, primarily due to throughput decreases at Pinnacle, Haley, Dew, Hugoton and an MGR gathering system, resulting from natural production declines and reduced drilling activity in those areas as a result of low natural gas prices. These declines were partially offset by throughput increases at the Wattenberg system due to increased drilling activity and recompletions driven by favorable producer economics in the area and the startup of the Bison assets in June 2010.

Processing throughput increased by 242 MMcf/d for the nine months ended September 30, 2012, primarily due to volumes processed at a plant included in the MGR acquisition under a new contract effective January 2012, with no volumes in the comparable period, throughput increases at the Chipeta system resulting from increased drilling activity and additional throughput from the Platte Valley system beginning in March 2011.

Processing throughput increased by 147 MMcf/d for the year ended December 31, 2011, primarily due to the additional throughput from the Platte Valley system acquired in February 2011, as well as throughput increases at the Chipeta and Hilight systems, resulting from drilling activity in these areas driven by the relatively high liquid content of the gas volumes produced. These increases were partially offset by lower throughput at the Red Desert system resulting from volumes being diverted away upon the resumption of a competing plant in 2011 that experienced an outage in 2010.

Processing throughput increased by 7 MMcf/d for the year ended December 31, 2010, primarily due to increased throughput at the Chipeta system, which was the result of increased drilling activities in the Natural Buttes areas, and increased throughput at the Granger system resulting from the temporary redirection of volumes from competing systems during the last half of 2010.

Equity investment volumes increased by 45 MMcf/d for the nine months ended September 30, 2012, resulting from higher throughput at the Fort Union system due to producers choosing to route additional gas to reach desired end markets and at the Rendezvous system due to increased third-party drilling activity.

Equity investment volumes decreased by 30 MMcf/d for the year ended December 31, 2011, due to lower throughput at the Fort Union system following the startup of the Bison pipeline.

Equity investment volumes increased by 3 MMcf/d for the year ended December 31, 2010, due to a throughput increase of 7 MMcf/d at Rendezvous, partially offset by a 4 MMcf/d decrease in volumes at the Fort Union system as a result of reduced drilling activity in the area.

Natural Gas Gathering, Processing and Transportation Revenues

 

     Year Ended December 31,      Nine Months Ended September 30,  
     2009      2010      2011            2011                  2012        
     (in thousands)  

Gathering, processing and transportation of natural gas and natural gas liquids

   $ 246,466       $ 253,273       $ 301,329       $ 222,432       $ 235,849   

 

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Gathering, processing and transportation of natural gas and natural gas liquids revenues increased by $13.4 million for the nine months ended September 30, 2012, primarily due to increases of $8.8 million and $7.4 million resulting from increased drilling activity in the areas around the Wattenberg and Chipeta systems, respectively, an increase of $5.5 million due to the acquisition of the Platte Valley system in February 2011, and an increase of $2.1 million due to increased rates at the Haley system. These increases were partially offset by decreased revenue of $2.0 million at the Granger system due to diverted volumes, decreased revenue of $1.9 million at the Helper system due to a downward rate revision effective April 1, 2012, decreased revenue of $1.4 million at MIGC due to the expiration of firm transportation agreements, decreased revenue of $1.3 million at the Red Desert complex due to changes in contracts and lower volumes due to shut-ins, and decreased revenue of $3.3 million due to decreased throughput at the Pinnacle, Dew and Hugoton systems as a result of natural production declines in the area.

Gathering, processing and transportation of natural gas and natural gas liquids revenues increased by $48.1 million for the year ended December 31, 2011, primarily due to the acquisition of the Platte Valley system in February 2011, which resulted in an increase of $23.5 million, the June 2010 startup of the Bison assets, which resulted in an increase of $19.7 million, and increased fee revenue of $15.3 million at the Wattenberg system as a result of changes in affiliate contract terms (from primarily keep-whole and percentage-of-proceeds arrangements to fee-based arrangements), effective July 2010. These increases were partially offset by decreased fee revenue of $8.5 million at MIGC due to the January 2011 expiration of certain contracts, an aggregate decrease of $6.2 million due to decreased volume resulting from natural declines at the Haley, Hugoton and Dew systems and decreased volume processed at the Red Desert system resulting from volumes being diverted away upon the resumption of a competing plant in 2011 that experienced an outage in 2010.

Gathering, processing and transportation of natural gas and natural gas liquids revenues increased by $6.8 million for the year ended December 31, 2010, primarily due to the June 2010 startup of Bison, which resulted in an increase of $1.9 million, and increased fee revenue of $10.1 million and $5.7 million at the Wattenberg and Granger systems, respectively. This increase resulted from changes in affiliate contract terms effective in July 2010 at Wattenberg and in October 2009 at Granger, from primarily keep-whole and percentage-of-proceeds agreements to fee-based agreements. In addition, revenues increased due to higher rates at the Pinnacle, Hugoton and Wattenberg systems. These increases were partially offset by an aggregate decrease of $11.1 million, primarily attributable to decreased throughput at the Pinnacle, Haley, Dew and Hugoton systems.

Natural Gas, Natural Gas Liquids and Condensate Sales

 

     Year Ended December 31,      Nine Months Ended September 30,  
     2009      2010      2011            2011                  2012        
     (in thousands, except per unit amounts)  

Natural gas sales

   $ 93,092       $ 91,452       $ 129,939       $ 98,610       $ 73,524   

Natural gas liquids sales

     250,572         279,915         345,646         253,538         291,293   

Drip condensate sales

     17,981         24,670         26,798         19,652         22,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 361,645       $ 396,037       $ 502,383       $ 371,800       $ 386,818   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average price per unit:

              

Natural gas (per Mcf)

   $ 3.86       $ 5.17       $ 5.30       $ 5.43       $ 4.19   

Natural gas liquids (per Bbl)

   $ 30.06       $ 39.94       $ 47.72       $ 47.13       $ 48.21   

Drip condensate (per Bbl)

   $ 47.87       $ 70.50       $ 72.86       $ 73.45       $ 76.28   

Including the effects of commodity price swap agreements, total natural gas, natural gas liquids and condensate sales increased by $15.0 million for the nine months ended September 30, 2012, due to a $37.8 million increase in NGL sales and a $2.3 million increase in drip condensate sales, partially offset by a $25.1 million decrease in natural gas sales. For the nine months ended September 30, 2012, the increase in NGL sales was primarily due to $15.8 million, $7.3 million, $6.8 million and $4.1 million resulting from increased volumes sold at the Chipeta, Granger, Hilight, and Wattenberg systems, respectively, a $2.4 million increase due to increased volumes at the Red Desert complex and an increase of $7.6 million related to volumes processed at

 

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a plant included in the MGR acquisition under a new contract effective January 2012, with no volumes in the comparable period. These increases were partially offset by a $6.8 million price-related decrease at the Platte Valley system. The increase in drip condensate sales for the nine months ended September 30, 2012 was primarily due to a $2.1 million increase at the Wattenberg system and a $0.7 million increase at the Platte Valley system due to increased sales volumes and prices. These increases were partially offset by a $0.5 million decrease at the Hugoton system as a result of lower volumes. The decrease in natural gas sales was primarily due to a 23% decrease in overall natural gas sales prices, in addition to the following decreases due to lower sales volumes: a $12.9 million decrease at the Hilight system, a $4.9 million decrease at the Red Desert complex, a $2.7 million decrease at the Wattenberg system and a $3.1 million decrease at the Platte Valley system.

Including the effects of commodity price swap agreements, total natural gas, natural gas liquids and condensate sales increased by $106.3 million for the year ended December 31, 2011, which consisted of a $65.7 million increase in NGLs sales, a $38.5 million increase in natural gas sales and a $2.1 million increase in drip condensate sales. The increase in NGLs sales was primarily due to the acquisition of the Platte Valley system in February 2011, higher throughput at the Chipeta and Hilight systems and increased commodity prices impacting the Red Desert system at which commodity price swap agreements were not effective until January 1, 2012, partially offset by changes in affiliate contract terms at the Wattenberg system allowing the producer to take its product in kind. The increase in natural gas sales was due to a 38% increase in volumes sold, resulting from the acquisition of the Platte Valley system in February 2011 and higher throughput at the Hilight system due to increased third-party drilling in the area. The increase in drip condensate sales for the year ended December 31, 2011, was primarily due to a higher average sales price at the Wattenberg and Hugoton systems and Platte Valley sales.

Total natural gas, natural gas liquids and condensate sales increased by $34.4 million for the year ended December 31, 2010, consisting of a $29.3 million and $6.7 million increase in NGLs sales and drip condensate sales, respectively, partially offset by a $1.6 million decrease in natural gas sales. The increase in NGLs sales is primarily attributable to a 33% increase in the average price of NGLs for 2010. This increase was partially offset by a 16% decrease in the volume of NGLs sold primarily due to the changes in affiliate contract terms at the Granger and Wattenberg systems effective in October 2009 and July 2010, respectively, allowing the producer to take its liquids and gas in-kind. The decrease in natural gas sales was due to a 27% decrease in the volume of natural gas sold primarily due to the changes in affiliate contract terms at the Granger and Wattenberg systems. The decrease was partially offset by a 34% increase in the average natural gas sales price. Natural gas and NGL prices pursuant to the commodity price swap agreements for the Granger system in 2010 were higher than 2009 market prices, and natural gas and NGL prices pursuant to the 2010 commodity price swap agreements for the Hilight and Newcastle systems were higher than 2009 commodity swap prices. The increase in drip condensate sales for the year ended December 31, 2010, was primarily due to a $22.63 per Bbl, or 47%, increase in the average price of condensate at the Hugoton and Wattenberg systems.

The average natural gas and NGL prices for the nine months ended September 30, 2012, include the effects of commodity price swap agreements attributable to sales for the Granger, Hilight, Hugoton, Newcastle and Wattenberg systems, and the MGR assets. The average natural gas and NGLs prices for the years ended December 31, 2011, and 2010, include the effects of commodity price swap agreements attributable to sales for the Granger, Hilight, Hugoton, Newcastle and Wattenberg systems.

Equity Income and Other Revenues

 

     Year Ended December 31,      Nine Months Ended September 30,  
     2009      2010      2011            2011                  2012        
     (in thousands)  

Equity Income

   $ 7,923       $ 7,628       $ 11,261       $ 7,682       $ 10,752   

Other revenues, net

     3,730         6,336         8,292         6,154         3,184   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,653       $ 13,964       $ 19,553       $ 13,836       $ 13,936   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Equity income increased by $3.1 million for the nine months ended September 30, 2012, due to the increase in income from White Cliffs and Rendezvous as a result of increased volumes. Other revenues decreased by $3.0 million for the nine months ended September 30, 2012, primarily due to indemnity fees received in the prior year at the Red Desert complex and Hugoton system, with no comparable activity in the current period.

Equity income increased by $3.6 million for the year ended December 31, 2011, primarily due to the acquisition of an additional 9.6% interest in White Cliffs in September 2010. Other revenues, net increased by $2.0 million for the year ended December 31, 2011, primarily due to the collection of deficiency fees, predominantly associated with MGR gathering agreements.

Other revenues, net increased by $2.6 million for the year ended December 31, 2010, primarily due to changes in gas imbalance positions at the Hilight, MIGC, Hugoton and Wattenberg systems and reimbursements from a third-party customer at the Pinnacle system for both installation costs and a shared equipment arrangement that ended in the third quarter of 2009.

Cost of Product and Operation and Maintenance Expenses

 

     Year Ended December 31,      Nine Months Ended September 30,  
     2009      2010      2011            2011                  2012        
     (in thousands)  

Cost of product

   $ 238,874       $ 246,476       $ 327,371       $ 240,765       $ 254,719   

Operation and maintenance

     106,590         103,887         119,104         87,859         97,041   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of product and operation and maintenance expenses

   $ 345,464       $ 350,363       $ 446,475       $ 328,624       $ 351,760   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Including the effects of commodity price swap agreements on purchases, cost of product expense increased by $14.0 million for the nine months ended September 30, 2012, primarily due to a $15.8 million increase attributable to increases in NGL volumes purchased and higher pricing at the Chipeta system, a $5.7 million increase at the Hilight system due to increased NGL volumes purchased and higher pricing, and increases of $4.8 million and $3.4 million for the MGR assets and the Granger system, respectively, related to increased residue purchases. Partially offsetting the increase was an $11.4 million decrease due to declines in residue purchases and prices at the Hilight system, and a $5.4 million decrease attributable to lower NGL and residue prices at the Platte Valley system. Cost of product expense for the nine months ended September 30, 2012, included the effects of commodity price swap agreements attributable to purchases for the Granger, Hilight, Hugoton, Newcastle and Wattenberg systems, and for the MGR assets. Cost of product expense for the nine months ended September 30, 2011, included the effects of commodity price swap agreements attributable to purchases for the Granger, Hilight, Hugoton, Newcastle, and Wattenberg systems.

Operation and maintenance expense increased by $9.2 million for the nine months ended September 30, 2012, primarily due to increased maintenance expenses of $5.6 million resulting from the acquisition of the Platte Valley system in February 2011 and a $4.7 million increase incurred at the Wattenberg and Hilight systems. These increases were partially offset by $1.3 million of reduced variable operating expenses at the Red Desert complex resulting from decreased throughput activity compared to the same period in the prior year.

Including the effects of commodity price swap agreements attributable to purchases for the Granger, Wattenberg, Hilight, Newcastle and Hugoton systems, cost of product expense increased by $80.9 million for the year ended December 31, 2011, primarily consisting of a $51.5 million increase due to increased throughput at the Hilight and Chipeta systems and a $44.4 million increase due to the acquisition of the Platte Valley system. These increases were partially offset by a $9.0 million decrease due to decreased throughput at the Red Desert system and a $6.2 million decrease due to changes in gas imbalance positions.

 

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Operation and maintenance expense increased by $15.2 million for the year ended December 31, 2011, primarily due to an increase of $12.1 million resulting from the acquisition of the Platte Valley system and an increase of $3.8 million resulting from the June 2010 startup of the Bison assets, partially offset by a $1.8 million reduction in compressor lease expenses resulting from the purchase of compressors used at the Wattenberg system leased during 2010.

Including the effects of commodity price swap agreements attributable to purchases for the Granger, Wattenberg, Hilight, Newcastle and Hugoton systems, cost of product expense increased by $7.6 million for the year ended December 31, 2010, primarily due to a $19.6 million increase in NGL purchases as a result of higher prices, partially offset by a $1.1 million decrease due to a decrease in the actual cost of fuel compared to the contractual cost of fuel, and a $1.4 million decrease due to changes in gas imbalance positions. The overall increase was also partially offset by a $9.0 million decrease in gathering fees paid by the Granger system for volumes gathered at adjacent gathering systems owned by Anadarko and a third party, then processed at Granger. Effective in October 2009, fees previously paid by Granger are now paid directly by the producer to the other gathering system owners.

Operation and maintenance expense decreased by $2.7 million for the year ended December 31, 2010, primarily due to a $4.9 million reduction in compressor lease expenses resulting from the purchase of previously leased compressors used at the Granger and Wattenberg systems during 2010, a $1.4 million reduction in electricity expense at the Chipeta system, and a $1.1 million reduction in chemical expenses and contract labor. The decrease in compressor lease expense for the year ended December 31, 2010, was offset by an increase in depreciation expense discussed below under General and Administrative, Depreciation and Other Expenses. In addition, the decrease in operating expense was partially offset by $3.8 million in higher field personnel expenses, primarily attributable to merit increases, and a $2.0 million increase due to the startup of the Bison assets in June 2010.

General and Administrative, Depreciation and Other Expenses

 

     Year Ended December 31,      Nine Months Ended September 30,  
     2009      2010      2011            2011                  2012        
     (in thousands)  

General and administrative

   $ 33,171       $ 29,640       $ 39,114       $ 24,630       $ 34,233   

Property and other taxes

     14,173         14,273         16,579         13,302         14,998   

Depreciation, amortization and impairments

     90,692         91,010         111,904         78,413         81,270   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total general and administrative, depreciation and other expenses

   $ 138,036       $ 134,923       $ 167,597       $ 116,345       $ 130,501   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

General and administrative expenses increased by $9.6 million for the nine months ended September 30, 2012, due to an increase of $10.1 million in non-cash compensation expenses primarily resulting from an increase from $370 per unit to $1,053 per unit in the value of equity-based awards and an increase of $3.1 million in corporate and management personnel costs allocated to us pursuant to our omnibus agreement. These increases were partially offset by a $3.2 million decrease in management fees allocated to the Bison and MGR assets, the agreements for which were discontinued as of the respective dates of contribution, and a $0.4 million decrease in consulting and audit fees. Property and other taxes increased by $1.7 million for the nine months ended September 30, 2012, primarily due to ad valorem tax increases at the Platte Valley and Wattenberg assets. Depreciation, amortization and impairments increased by $2.9 million for the nine months ended September 30, 2012, primarily attributable to the addition of the Platte Valley assets, and depreciation associated with capital projects completed at Wattenberg, Hilight and the Red Desert complex, partially offset by a $3.0 million impairment recognized during the three months ended September 30, 2011, for a pipeline included in the MGR acquisition, with no comparable impairment during the three months ended September 30, 2012.

 

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General and administrative expenses increased by $9.5 million for the year ended December 31, 2011, due to an increase of $7.2 million in non-cash payroll expenses primarily due to an increase in the collective value of awards under the Incentive Plan, from $215.00 per unit to $634.00 per unit and an increase of $2.7 million in corporate and management personnel costs allocated to WES pursuant to the WES omnibus agreement. Property and other taxes increased by $2.3 million for the year ended December 31, 2011, primarily due to the ad valorem tax for the Platte Valley, Bison and Wattenberg assets. Depreciation, amortization and impairments increased by $20.9 million for the year ended December 31, 2011, primarily attributable to the addition of the Platte Valley and Bison assets, depreciation associated with capital projects completed and capitalized at the Wattenberg, Hugoton and Hilight systems, and impairment expense due to the indefinite postponement of an expansion project at the Red Desert system.

General and administrative expenses decreased by $3.5 million for the year ended December 31, 2010, due to the $6.9 million management fee allocated to the Granger assets and Wattenberg assets during the year ended December 31, 2009, then discontinued effective January 2010 and July 2010, respectively, upon contribution of the assets to WES. This decrease was partially offset by a $3.3 million increase in corporate and management personnel costs allocated to WES pursuant to the WES omnibus agreement. Depreciation, amortization and impairments increased by approximately $0.3 million for the year ended December 31, 2010, comprised of a $5.5 million increase in depreciation, offset by a $5.2 million decrease in impairment expense. The increase in depreciation expense was primarily attributable to capital projects completed at the Chipeta, Hilight and Hugoton systems, the addition of the Bison assets, and previously leased compressors used at the Granger and Wattenberg systems purchased and contributed to WES during 2010. The decrease in impairment expense was primarily due to a $6.1 million charge taken during the year ended December 31, 2009, as a result of the write-down of an idle MGR pipeline for which no future cash flows were expected. No similar impairment expense was recorded in 2010.

Interest Income, Net—Affiliates and Interest Expense

 

     Year Ended December 31,     Nine Months Ended September 30,  
     2009     2010     2011           2011                 2012        
     (in thousands)  

Interest income on note receivable

   $ 16,900      $ 16,900      $ 16,900      $ 12,675      $ 12,675   

Interest income, net on affiliate balances (1)

     3,817        3,343        11,660        6,317        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income, net—affiliates

   $ 20,717      $ 20,243      $ 28,560      $ 18,992      $ 12,675   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Third parties

          

Interest expense on long-term debt

     (304     (8,530     (20,533   $ (13,889   $ (28,036

Amortization of debt issuance costs and commitment fees (2)

     (555     (3,340     (5,297     (4,282     (3,225

Capitalized interest

     —          —          420        134        3,827   

Affiliates

          

Interest expense on note payable to
Anadarko (3)

     (8,953     (6,828     (4,935     (3,701     (2,440

Interest expense, net on affiliate balances

     (143     (96     —          —          (244
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

   $ (9,955   $ (18,794   $ (30,345   $ (21,738   $ (30,118
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Incurred on affiliate balances related to the Bison and MGR assets for periods prior to the acquisition of such assets. Beginning December 7, 2011, Anadarko discontinued charging interest on intercompany balances. The outstanding affiliate balances on the Bison and MGR assets prior to their acquisition were entirely settled through an adjustment to net investment by Anadarko.

 

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(2) Amortization of the original issue discount and underwriters’ fees related to the 2022 Notes and the 2021 Notes was $0.8 million for the nine months ended September 30, 2012, and related to the 2021 Notes was $0.3 million for the nine months ended September 30, 2011, and $0.5 million for the year ended December 31, 2011. See “—Liquidity and Capital Resources—Debt and Credit Facilities—Senior Notes.”
(3) In June 2012, WES repaid in full the note payable to Anadarko.

Interest expense increased by $8.4 million for the nine months ended September 30, 2012, primarily due to interest expense incurred on the 2021 Notes that were issued in May 2011 and interest expense incurred on the 2022 Notes, partially offset by increased capitalized interest associated with the construction of a second cryogenic train at the Chipeta plant, reductions resulting from the early repayment of the Wattenberg term loan in March 2011 and the related $1.3 million of accelerated amortization expense recognized in March 2011.

Interest expense increased by $11.6 million for the year ended December 31, 2011, due to interest expense incurred on the 2021 Notes issued in May 2011 as well as $1.3 million of accelerated amortization expense related to the early repayment of the Wattenberg term loan in March 2011. The increase was partially offset by lower interest expense on amounts outstanding on the WES RCF during 2011, a decrease in interest expense on the note payable to Anadarko which was amended in December 2010 reducing the interest rate from 4.00% to 2.82% for the remainder of the term, and the repayment of the Wattenberg term loan.

Interest expense increased by $8.8 million for the year ended December 31, 2010, primarily due to interest expense incurred on the amounts outstanding during 2010 under the Wattenberg term loan, the WES RCF and related commitment fees, and expense incurred on intercompany borrowings associated with assets acquired by WES.

Other Income (Expense), Net

 

     Year Ended December 31,     Nine Months Ended September 30,  
         2009              2010             2011             2011             2012      
     (in thousands)  

Other income (expense), net

   $ 1,628       $ (538   $ (44   $ (895   $ (287

Other income (expense), net included interest income related to a capital lease of $1.2 million for the nine months ended September 30, 2012, and $1.0 million for the nine months ended September 30, 2011. Other income (expense), net for the nine months ended September 30, 2012, included a realized loss of $1.7 million resulting from U.S. Treasury rate lock agreements settled simultaneously with the June 2012 issuance of the 2022 Notes. Other income (expense), net for the nine months ended September 30, 2011, included the reversal of an unrealized gain of $1.7 million, previously recorded in March 2011, and a realized loss of $1.9 million upon termination of the interest rate swap agreement in May 2011 concurrent with the issuance of the 2021 Notes.

Other income (expense), net for the year ended December 31, 2011, primarily consisted of the $1.9 million loss realized on an interest-rate swap agreement entered into in March 2011 and terminated in May 2011 in connection with the offering of the 2021 Notes, partially offset by $1.6 million of interest income related to the capital lease component of a processing agreement assumed in connection with the MGR acquisition.

Other income (expense), net for the year ended December 31, 2010, primarily related to financial agreements entered into in April 2010 to fix the underlying ten-year Treasury rates with respect to a potential note issuance that was under consideration at that time. Upon reaching the decision not to issue the notes in May 2010, WES terminated the agreements at a cost of $2.4 million. The loss amount was partially offset by $1.6 million of interest income related to the capital lease component of a processing agreement assumed in connection with the MGR acquisition.

 

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Income Tax Expense

 

     Year Ended December 31,      Nine Months Ended September 30,  
     2009      2010      2011            2011                  2012        
     (in thousands, except percentages)  

Income before income taxes

   $ 148,654       $ 178,899       $ 207,364       $ 159,458       $ 136,612   

Income tax expense

     22,159         21,702         19,018         15,564         699   

Effective tax rate

     15%         12%         9%         10%         1%   

WES is not a taxable entity for U.S. federal income tax purposes, although the portion of WES’s income apportionable to Texas is subject to Texas margin tax. For the periods presented, WES’s variance from the federal statutory rate, which is zero percent as a non-taxable entity, is primarily attributable to federal and state taxes on income attributable to its pre-acquisition assets and WES’s share of Texas margin tax.

Income attributable to (a) the MGR assets prior to and including January 2012, (b) the Bison assets prior to and including June 2011, (c) the Wattenberg assets prior to and including July 2010 and (d) the Granger assets prior to and including January 2010 were subject to federal and state income tax, resulting in an overall lower income tax expense for the year ended December 31, 2011 and the nine months ended September 30, 2012. Income earned by the MGR, Bison, Wattenberg and Granger assets for periods subsequent to January 2012, June 2011, July 2010 and January 2010, respectively, was subject only to Texas margin tax on the portion of their incomes apportionable to Texas.

Noncontrolling Interests

 

     Year Ended December 31,      Nine Months Ended September 30,  
     2009      2010      2011              2011                      2012          
     (in thousands)  

Net income attributable to noncontrolling interests of WES

   $ 10,260       $ 11,005       $ 14,103       $ 9,665       $ 11,956   

For the nine months ended September 30, 2012, and the years ended December 31, 2011 and 2010, net income attributable to noncontrolling interests increased by $2.3 million, $3.1 million and $0.7 million, respectively, primarily due to higher volumes at the Chipeta system. For the nine months ended September 30, 2012, the increase was partially offset by WES’s acquisition of Anadarko’s remaining 24% membership interest in Chipeta in August 2012.

Key Performance Metrics

 

     Year Ended December 31,      Nine Months Ended September 30,  
     2009      2010      2011              2011                      2012          
     (in thousands, except gross margin per Mcf)  

Gross margin

   $ 380,890       $ 416,798       $ 495,894       $ 367,303       $ 381,884   

Gross margin per Mcf (1)

     0.46         0.51         0.55         0.55         0.52   

Gross margin per Mcf attributable to Western Gas Partners, LP (2)

     0.48         0.54         0.58         0.58         0.55   

Adjusted EBITDA attributable to Western Gas Partners, LP (3)

     223,766         265,024         324,323         241,284         244,349   

Distributable cash flow (3)

   $ 203,376       $ 237,769       $ 281,975       $ 211,313       $ 197,285   

 

(1) Average for period. Calculated as gross margin (total revenues less cost of product) divided by total natural gas throughput, including 100% of gross margin and volumes attributable to Chipeta, WES’s 14.81% interest in income and volumes attributable to Fort Union and its 22% interest in income and volumes attributable to Rendezvous.

 

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(2) Average for period. Calculated as gross margin, excluding the noncontrolling interest owners’ proportionate share of revenues and cost of product, divided by total throughput attributable to WES. Calculation includes income attributable to WES’s investments in Fort Union, White Cliffs and Rendezvous and volumes attributable to its investment in Fort Union and Rendezvous.
(3) For reconciliations of Adjusted EBITDA and Distributable cash flow to their most directly comparable financial measures calculated and presented in accordance with GAAP, please read “—How WES Evaluates Its Operations—Non-GAAP Financial Measures” and “—How WES Evaluates Its Operations—Reconciliation to GAAP Measures.”

Gross Margin and Gross Margin per Mcf

Gross margin increased by $14.6 million for the nine months ended September 30, 2012, primarily due to higher margins at the Wattenberg and Chipeta systems due to increases in volumes sold (including the impact of commodity price swap agreements at the Wattenberg system), higher margins driven by volumes processed at a plant included in the MGR acquisition under a new contract effective January 2012, with no volumes in the comparable period, and an increase in volumes at White Cliffs. These increases were partially offset by lower gross margins at the Red Desert complex due to price declines, as well as commodity price swap agreements associated with the MGR acquisition, which became effective in January 2012. Gross margin increases were also partially offset by lower gross margins at the Hugoton system due to decreased drip condensate volumes sold. For the nine months ended September 30, 2012, gross margin per Mcf decreased by $0.03, primarily due to a decrease in volumes sold at the Red Desert complex, coupled with an increase in cost of product as a result of commodity price swap agreements associated with the MGR acquisition which became effective in January 2012. These declines were partially offset by increases at the Wattenberg and Chipeta systems due to increases in volumes sold (including the impact of commodity price swap agreements at the Wattenberg system) and an increase in gross margin per Mcf at the Hilight system as a result of a disproportionate decrease in volume and price.

Gross margin increased by $79.1 million for the year ended December 31, 2011, primarily due to the acquisition of the Platte Valley system; the startup of the Bison assets in June 2010; higher margins at the Wattenberg and Chipeta systems (including the impact of commodity price swap agreements at the Wattenberg system), due to an increase in volumes; higher margins at WES’s Red Desert system due to increased NGL prices during 2011 combined with decreased cost of product as a result of lower volumes processed; and the increase in WES’s interest in White Cliffs from 0.4% to 10% in September 2010. These increases were partially offset by lower gross margin at the MIGC system due to the expiration of certain firm transportation contracts in January 2011 and lower gross margins at the Haley and Hugoton systems due to naturally declining production volumes. For the year ended December 31, 2011, gross margin per Mcf increased by 8% and gross margin per Mcf attributable to Western Gas Partners, LP increased by 7%, primarily due to higher margins combined with lower volumes at WES’s Red Desert system as noted above; the acquisition of the Platte Valley system in 2011; and changes in the throughput mix of the portfolio.

Gross margin increased by $35.9 million for the year ended December 31, 2010, primarily due to higher fee revenue at the Granger and Wattenberg systems resulting from the change in affiliate contract terms, as well as higher throughput volumes at those systems; the startup of Bison in June 2010; and higher margins at WES’s Red Desert system due to higher NGL prices and a slight increase in volumes sold. This increase was offset by lower throughput at the Pinnacle, Haley and Dew systems. For the year ended December 31, 2010, gross margin per Mcf increased by 11% and gross margin per Mcf attributable to Western Gas Partners, LP increased by 13%, primarily due to the changes in contract terms mentioned above and changes in the throughput mix within WES’s portfolio.

Adjusted EBITDA

Adjusted EBITDA increased by $3.1 million for the nine months ended September 30, 2012, primarily due to a $25.5 million increase in total revenues excluding equity income, a $3.6 million increase in distributions

 

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from equity investees, a $0.6 million decrease in general and administrative expenses excluding non-cash equity-based compensation and a $0.4 million decrease in depreciation expense, partially offset by a $14.0 million increase in cost of product, a $9.2 million increase in operation and maintenance expenses, a $2.3 million increase in net income attributable to noncontrolling interests and a $1.6 million increase in property and other tax expense.

Adjusted EBITDA increased by $59.3 million for the year ended December 31, 2011, primarily due to a $156.4 million increase in total revenues excluding equity income, partially offset by an $80.9 million increase in cost of product, a $15.2 million increase in operation and maintenance expenses and a $0.6 million increase in general and administrative expenses, excluding non-cash equity-based compensation and expenses in excess of the 2010 omnibus cap.

Adjusted EBITDA increased by $41.3 million for the year ended December 31, 2010, primarily due to a $43.8 million increase in total revenues excluding equity income, a $4.0 million decrease in general and administrative expenses excluding non-cash equity-based compensation and expenses in excess of the omnibus cap, and a $2.7 million decrease in operation and maintenance expenses, partially offset by a $7.6 million increase in cost of product.

Distributable Cash Flow

Distributable cash flow decreased by $14.0 million for the nine months ended September 30, 2012, primarily due to a $11.8 million increase in net cash paid for interest expense, a $5.0 million increase in cash paid for maintenance capital expenditures and a $0.3 million increase in cash paid for income taxes, partially offset by the $3.1 million increase in Adjusted EBITDA.

Distributable cash flow increased by $44.2 million for the year ended December 31, 2011, primarily due to the $59.3 million increase in Adjusted EBITDA and a $0.3 million decrease in cash paid for income taxes, partially offset by a $12.0 million increase in net cash paid for interest expense and a $3.4 million increase in cash paid for maintenance capital expenditures.

Distributable cash flow increased by $34.4 million for the year ended December 31, 2010, primarily due to the $41.3 million increase in Adjusted EBITDA and a $2.5 million decrease in cash paid for maintenance capital expenditures, partially offset by an $8.8 million increase in net cash paid for interest expense and a $0.5 million increase in cash paid for income taxes.

Liquidity and Capital Resources

Other than capital funding obligations relating to the maintenance of WES GP’s 2.0% interest in WES, we historically have not had any material capital requirements separate from those of WES, and we do not expect to have separate capital requirements in the future. On November 1, 2012, we entered into a $30.0 million working capital facility with Anadarko as the lender. The facility is available exclusively to fund our working capital borrowings. Borrowings under the facility mature on November 1, 2017, and bear interest at London Interbank Offered Rate (“LIBOR”) plus 1.50%. We believe we will have adequate financing over the next twelve months to meet currently anticipated expenditures, and we currently have no plans to use the working capital facility or any other financing sources during that period.

WES’s primary cash requirements are for acquisitions and other capital expenditures, debt service, customary operating expenses, quarterly distributions to limited and general partners and distributions to its noncontrolling interest owners. WES’s sources of liquidity as of September 30, 2012, include cash and cash equivalents, cash flows generated from operations, including interest income on WES’s $260.0 million note receivable from Anadarko, available borrowing capacity under the WES RCF, and issuances of additional equity or debt securities. WES believes that cash flows generated from these sources will be sufficient to satisfy its

 

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short-term working capital requirements and long-term maintenance and expansion capital expenditure requirements. The amount of future distributions to WES’s unitholders will depend on its results of operations, financial condition, capital requirements and other factors, and will be determined by the board of directors of its general partner on a quarterly basis. Due to WES’s cash distribution policy, WES expects to rely on external financing sources, including equity and debt issuances, to fund expansion capital expenditures and future acquisitions. However, to limit interest expense, WES may use operating cash flows to fund expansion capital expenditures or acquisitions, which could result in subsequent borrowings under the WES RCF to pay distributions or fund other short-term working capital requirements.

WES’s partnership agreement requires that it distribute all of its available cash (as defined in its partnership agreement) to unitholders of record on the applicable record date. WES has made cash distributions to its unitholders and has increased its quarterly distribution each quarter from the second quarter of 2009 through the third quarter of 2012. On October 11, 2012, the board of directors of WES GP declared a cash distribution to its unitholders of $0.50 per unit, or $56.3 million in aggregate, including incentive distributions. The cash distribution is payable on November 13, 2012 to unitholders of record at the close of business on October 31, 2012.

WES’s management continuously monitors its leverage position and coordinates its capital expenditure program, quarterly distributions and acquisition strategy with its expected cash flows and projected debt-repayment schedule. WES’s management will continue to evaluate funding alternatives, including additional borrowings and the issuance of debt or equity securities, to secure funds as needed or refinance outstanding debt balances with longer-term notes. To facilitate a potential debt or equity securities issuance, WES has the ability to sell securities under its shelf registration statements. WES’s ability to generate cash flows is subject to a number of factors, some of which are beyond its control. Please read “Risk Factors.”

Working Capital

As of September 30, 2012, WES had a $131.8 million working capital deficit, defined as the amount by which current liabilities exceed current assets. Working capital is an indication of liquidity and potential need for short-term funding. Our working capital requirements are primarily those of WES, which are driven by changes in accounts receivable and accounts payable and factors such as credit extended to, and the timing of collections from, its customers and the level and timing of its spending for maintenance and expansion activity.

Capital Expenditures

WES’s business is capital intensive, requiring significant investment to maintain and improve existing facilities or develop new midstream infrastructure. WES categorizes capital expenditures as either of the following:

 

   

maintenance capital expenditures, which include those expenditures required to maintain the existing operating capacity and service capability of WES’s assets, such as to replace system components and equipment that have been subject to significant use over time, become obsolete or reached the end of their useful lives, to remain in compliance with regulatory or legal requirements or to complete additional well connections to maintain existing system throughput and related cash flows; or

 

   

expansion capital expenditures, which include expenditures to construct new midstream infrastructure and those expenditures incurred in order to extend the useful lives of WES’s assets, reduce costs, increase revenues or increase system throughput or capacity from current levels, including well connections that increase existing system throughput.

 

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Capital expenditures in the consolidated statements of cash flows reflect capital expenditures on a cash basis, when payments are made. Capital incurred is presented on an accrual basis. Capital expenditures as presented in the consolidated statements of cash flows and capital incurred were as follows:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
     2009      2010      2011              2011                      2012          
     (in thousands)  

Acquisitions

   $ 101,451       $ 752,827       $ 330,794       $ 326,957       $ 605,960   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Expansion capital expenditures

   $ 93,768       $ 113,100       $ 114,557       $ 57,893       $ 268,305   

Maintenance capital expenditures

     27,527         24,900         28,389         20,680         26,291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures (1)

   $ 121,295       $ 138,000       $ 142,946       $ 78,573       $ 294,596   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Capital incurred (2)

   $ 109,168       $ 143,223       $ 148,348       $ 88,223       $ 356,090   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Capital expenditures for the years ended December 31, 2009, 2010 and 2011 and for the nine months ended September 30, 2011 included $82.8 million, $101.2 million, $2.7 million and $9.5 million, respectively, of pre-acquisition capital expenditures for the MGR, Bison, Wattenberg and Granger assets and the noncontrolling interest owners’ share of Chipeta’s capital expenditures, funded by contributions from the noncontrolling interest owners. Capital expenditures for the year ended December 31, 2011 and the nine months ended September 30, 2012 excluded $0.4 million and $3.8 million of capitalized interest, respectively.
(2) Capital incurred for the years ended December 31, 2009, 2010 and 2011 and for the nine months ended September 30, 2011 included $76.0 million, $105.0 million, $0.9 million and $7.9 million, respectively, of pre-acquisition capital incurred for the MGR, Bison, Wattenberg and Granger assets and the noncontrolling interest owners’ share of Chipeta’s capital incurred, funded by contributions from the noncontrolling interest owners.

Capital expenditures, excluding acquisitions, increased by $216.0 million for the nine months ended September 30, 2012. Expansion capital expenditures increased by $210.4 million for the nine months ended September 30, 2012, primarily due to an increase of $112.0 million in expenditures at WES’s Wattenberg, Chipeta, and Platte Valley systems and at the Red Desert complex, and $106.2 million related to the construction of the Brasada and Lancaster gas processing facilities. These increases were partially offset by a $6.3 million decrease related to the Bison assets, due to the continued startup costs incurred in early 2011, and a $1.2 million decrease at the Hilight system. Maintenance capital expenditures increased by $5.6 million, primarily as a result of increased expenditures of $6.5 million due to higher well connects at the Platte Valley, Wattenberg, Haley and Hilight systems and the Red Desert complex and a prior period adjustment of $0.7 million recorded during the nine months ended September 30, 2012, partially offset by $1.6 million in improvements at the Hugoton system, completed during 2011.

Capital expenditures, excluding acquisitions, increased by $4.9 million for the year ended December 31, 2011. Expansion capital expenditures increased by $1.5 million for the year ended December 31, 2011, primarily due to an increase of $39.5 million in expenditures primarily at WES’s Chipeta, Bison, Highlight and Wattenberg systems, partially offset by the purchase of previously leased compressors at the Wattenberg system during the year ended December 31, 2010, for $37.5 million. Maintenance capital expenditures increased by $3.5 million, primarily as a result of maintenance projects at the Wattenberg system and higher well connects at the Hilight system, partially offset by fewer well connections at the Haley and Hugoton systems in 2011 and improvements at the Granger system completed during 2010.

Capital expenditures increased by $16.7 million for the year ended December 31, 2010. Excluding cash paid for acquisitions, expansion capital expenditures for the year ended December 31, 2010, increased by $19.3 million, primarily due to Anadarko commencing the construction of the Bison assets in 2009 and placing them in

 

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service in June 2010, in addition to the purchase of previously leased compressors at the Granger and Wattenberg systems during 2010 prior to the Granger and Wattenberg acquisitions. The increase was offset by the indefinite postponement of an expansion project at the Red Desert system, completion of the cryogenic unit at the Chipeta plant and a compressor overhaul at the Hugoton system during 2009. In addition, maintenance capital expenditures decreased by $2.6 million, primarily as a result of fewer well connections.

WES estimates its total capital expenditures for the year ending December 31, 2012, including its share of Chipeta’s capital expenditures and excluding acquisitions, will be between $410 million to $460 million and its maintenance capital expenditures to be approximately 6% to 10% of total capital expenditures. Expected 2012 capital projects include its share of the costs associated with the completion of a second cryogenic train at the Chipeta plant and the construction of new cryogenic processing plants in Colorado and Texas. WES’s future expansion capital expenditures may vary significantly from period to period based on the investment opportunities available to it, which are dependent, in part, on the drilling activities of Anadarko and third-party producers. WES expects to fund future capital expenditures from cash flows generated from operations, interest income from our note receivable from Anadarko, borrowings under the WES RCF, the issuance of additional partnership units or debt offerings.

Consolidated Historical Cash Flow

The following table and discussion presents a summary of WES’s combined net cash provided by (used in) operating activities, combined net cash provided by (used in) investing activities and combined net cash provided by (used in) financing activities for the years ended December 31, 2009, 2010 and 2011 and for the nine months ended September 30, 2011 and 2012.

 

     Year Ended December 31,     Nine Months Ended September 30,  
     2009     2010     2011             2011                     2012          
     (in thousands)  

Net cash provided by (used in):

          

Operating activities

   $ 212,765      $ 263,749      $ 327,171      $ 243,401      $ 294,800   

Investing activities

     (223,128     (885,507     (472,951     (405,241     (899,943

Financing activities

     44,273        578,848        345,265        386,223        426,078   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 33,910      $ (42,910   $ 199,485      $ 224,383      $ (179,065
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities. Net cash provided by operating activities increased by $51.4 million for the nine months ended September 30, 2012, primarily due to the following: a $41.1 million increase resulting from changes in accounts and natural gas imbalance payable and accrued liabilities, net, primarily as a result of accrued liabilities for the continued construction of the Brasada and Lancaster plants; a $25.5 million increase in revenues, excluding equity income, due to increased processing throughput as a result of increased drilling activity in certain of WES’s operating areas, WES’s realization of higher average commodity prices under its fixed-price swap agreements and the addition of the Platte Valley assets in March 2011; a $22.1 million increase due to changes in accounts receivable balances; a $10.7 million decrease in current income tax expense; a $3.0 million increase in equity income; and a $0.6 million decrease in other expense.

The impact of these items was offset by the following: a $14.0 million increase in cost of product expense, due to increased processing throughput as a result of increased drilling activity in certain of WES’s operating areas and the addition of the Platte Valley assets in March 2011; a $9.6 million increase in general and administrative expenses, primarily due to increased compensation expense; a $9.2 million increase in operation and maintenance expense; an $8.4 million increase in interest expense, primarily due to the 2022 Notes offering in June 2012; a $6.3 million decrease in interest income; a $2.5 million decrease due to changes in other items, net, primarily due to increases related to the Western Gas Partners, LP 2008 Long-Term Incentive Plan and the accretion of asset retirement obligations; and a $1.7 million increase in property and other taxes expense.

 

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Net cash provided by operating activities increased by $63.4 million for the year ended December 31, 2011, primarily resulting from the following items: a $156.4 million increase in revenues, excluding equity income, as a result of increased drilling activity in certain of WES’s operating areas, WES’s realization of a higher average commodity price under its fixed-price swap agreements and the addition of the Platte Valley assets in March 2011; and a $19.7 million increase due to changes in accounts payable balances and other items. The impact of these items was offset by the following: an $80.9 million increase in cost of product expense; a $15.2 million increase in operation and maintenance expenses; an $11.6 million increase in interest expense; a $4.3 million increase in current income tax expense; a $2.3 million increase in property and other tax expense; and a $1.3 million decrease due to changes in accounts receivable balances.

Net cash provided by operating activities increased by $51.0 million for the year ended December 31, 2010, primarily resulting from the following items: a $43.8 million increase in revenues, excluding equity income due primarily to increased drilling activity in certain of WES’s operating areas and WES’s realization of a higher average commodity price under its fixed-price swap agreements; a $12.7 million increase due to changes in accounts payable balances and other items; a $10.0 million decrease in current income tax expense; and a $2.7 million decrease in operation and maintenance expenses. The impact of these items was offset by the following: an $8.8 million increase in interest expense; a $7.6 million increase in cost of product expense due to higher commodity prices; and a $2.2 million decrease due to changes in accounts receivable balances.

Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2012, included the following: $458.6 million of cash paid for the MGR acquisition; $294.6 million of capital expenditures; $128.3 million of cash paid for the additional 24% membership interest in Chipeta; and $18.9 million of cash paid for equipment purchases from Anadarko. Net cash used in investing activities for the nine months ended September 30, 2011, included the following: $302.0 million of cash paid for the Platte Valley acquisition; $25.0 million of cash paid for the Bison acquisition; and $78.6 million of capital expenditures.

Net cash used in investing activities for the year ended December 31, 2011, included the following: $302.0 million of cash paid for the Platte Valley acquisition; $142.9 million of capital expenditures; $25.0 million of cash paid for the Bison acquisition; and $3.8 million for equipment purchases from Anadarko.

Net cash used in investing activities for the year ended December 31, 2010, included the following: $473.1 million paid for the Wattenberg acquisition; $241.7 million of cash paid for the Granger acquisition; $138.0 million of capital expenditures; and $38.0 million paid for the White Cliffs acquisition. Offsetting these amounts were $5.6 million of proceeds from the sale of idle compressors to Anadarko and the sale of an idle refrigeration unit at the Granger system to a third party.

Net cash used in investing activities for the year ended December 31, 2009, included the following: $121.3 million of capital expenditures; and $101.5 million paid for the initial Chipeta acquisition in July 2009.

Financing Activities. Net cash provided by financing activities for the nine months ended September 30, 2012, included the following: $511.3 million of net proceeds received from WES’s 2022 Notes offering in June 2012, after deducting underwriting and original issue discounts and offering costs; $299.0 million of borrowings to fund the MGR acquisition; and $216.4 million of net proceeds from WES’s June 2012 equity offering. Proceeds from WES’s 2022 Notes offering were used to repay borrowings outstanding under the WES RCF and WES’s note payable to Anadarko. Net contributions from Anadarko attributable to intercompany balances were $2.2 million during 2012, representing the settlement of intercompany transactions attributable to the Bison assets.

Net cash provided by financing activities for the nine months ended September 30, 2011, included the following: $489.7 million of net proceeds from WES’s 2021 Notes offering in May 2011, after deducting underwriting and original issue discounts and offering costs; $303.0 million of borrowings to fund the Platte Valley acquisition; $250.0 million repayment of the Wattenberg term loan (described below) using borrowings

 

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from the WES RCF; $202.8 million of net proceeds from WES’s September 2011 equity offering; and $132.6 million of net proceeds from WES’s March 2011 equity offering. Proceeds from WES’s 2021 Notes offering and March 2011 equity offering were used to repay borrowings outstanding under the WES RCF. Net distributions to Anadarko attributable to pre-acquisition intercompany balances were $42.9 million during 2011, representing the net non-cash settlement of intercompany transactions attributable to the MGR and Bison assets.

Net cash provided by financing activities for the year ended December 31, 2011, included the following: $493.9 million of net proceeds from WES’s 2021 Notes offering in May 2011; $303.0 million of borrowings to fund the Platte Valley acquisition; $250.0 million repayment of the Wattenberg term loan (described below) using borrowings from the WES RCF; $202.8 million of net proceeds from WES’s September 2011 equity offering; and $132.6 million of net proceeds from WES’s March 2011 equity offering. Proceeds from WES’s March 2011 equity offering and 2021 Notes offering in May 2011 were used to repay $619.0 million of borrowings outstanding under the WES RCF. Net distributions to Anadarko attributable to pre-acquisition intercompany balances were $53.0 million during 2011, representing the net non-cash settlement of intercompany transactions attributable to the Bison and MGR assets.

Net cash provided by financing activities for the year ended December 31, 2010, included the following: $450.0 million of borrowings to partially fund the Wattenberg acquisition; $210.0 million to partially fund the Granger acquisition; $246.7 million of net proceeds from WES’s November 2010 equity offering; and $99.1 million of net proceeds from WES’s May 2010 equity offering. Proceeds from both WES’s May 2010 and November 2010 equity offerings were used to repay $361.0 million of borrowings outstanding under the WES RCF. Net contributions from Anadarko attributable to pre-acquisition intercompany balances were $39.4 million during 2010, representing the net non-cash settlement of intercompany transactions attributable to the Granger, Wattenberg, Bison and MGR assets.

Net cash provided by financing activities for the year ended December 31, 2009, included the following: $122.5 million of proceeds from WES’s December 2009 equity offering; $101.5 million issuance of the three-year term loan to Anadarko in connection with the initial Chipeta acquisition, partially offset by its repayment in October 2009; and $4.3 million of costs paid in connection with the WES RCF entered into in October 2009. Proceeds from WES’s December 2009 equity offering were used to repay $101.5 million outstanding under the WES RCF. Net distributions to Anadarko attributable to pre-acquisition intercompany balances were $36.2 million during 2009, representing the net non-cash settlement of intercompany transactions attributable to the Chipeta, Granger, Wattenberg, Bison and MGR assets.

For the nine months ended September 30, 2012 and 2011 and the years ended December 31, 2011, 2010 and 2009 WES paid $141.5 million, $99.8 million, $140.1 million, $94.2 million and $70.1 million, respectively, of cash distributions to its unitholders. Contributions from noncontrolling interest owners to Chipeta totaled $26.9 million, $16.9 million, $33.6 million, $2.1 million and $40.3 million during such periods, respectively, primarily for expansion of the cryogenic units and plant construction. Distributions from Chipeta to noncontrolling interest owners totaled $14.3 million, $10.2 million, $17.5 million, $13.2 million and $8.0 million for such periods, respectively, representing the distributions for the three preceding quarterly periods ended June 30th of the respective year (in the case of nine month periods) and four preceding quarterly periods ended September 30th of the respective year (in the case of year periods).

Debt and Credit Facilities

Senior Notes. In May 2011, WES completed the offering of $500.0 million aggregate principal amount of 5.375% Senior Notes due 2021 (the “2021 Notes”) at a price to the public of 98.778% of the face amount. Including the effects of the issuance and underwriting discounts, the effective interest rate is 5.648%. As of September 30, 2012, the carrying value of the 2021 Notes was $494.5 million.

 

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Upon issuance, the 2021 Notes were fully and unconditionally guaranteed on a senior unsecured basis by each of WES’s wholly owned subsidiaries. These guarantees were subsequently released on June 13, 2012, upon the release of such subsidiaries’ guarantee under the WES RCF following WES’s receipt of a second investment grade rating, as discussed below.

In June 2012, WES completed the offering of $520.0 million aggregate principal amount of 4.000% Senior Notes due 2022 (the “2022 Notes”) at a price to the public of 99.194% of the face amount. Including the effects of the issuance and underwriting discounts, the effective interest rate is 4.207%. As of September 30, 2012, the carrying value of the 2022 Notes was $515.9 million.

Interest will be paid semi-annually on January 1 and July 1 of each year, commencing on January 1, 2013. The 2022 Notes will mature on July 1, 2022, unless redeemed, in whole or in part, at any time prior to maturity, at a redemption price that includes a make-whole premium. Proceeds (net of underwriting discount of $3.4 million and debt issuance costs) were used to repay all amounts then outstanding under the WES RCF and the $175.0 million note payable to Anadarko (see below).

In October 2012, WES issued an additional $150.0 million in aggregate principal amount of the 2022 Notes (the “Additional 2022 Notes”) at a price to the public of 105.178% of the face amount. The Additional 2022 Notes were issued under the indenture governing the 2022 Notes, and the Additional 2022 Notes and the 2022 Notes are treated as a single class of securities under such indenture. Interest on the Additional 2022 Notes accrues from June 28, 2012, the date the 2022 Notes were issued and will be payable semi-annually in arrears on January 1 and July 1 of each year, commencing January 1, 2013. Including the effects of the issuance premium and underwriting fees, the effective interest rate of the Additional 2022 Notes is 3.527%. The net proceeds from the offering of the Additional 2022 Notes will be used for general partnership purposes, which may include the funding of capital expenditures.

The indentures governing the 2021 Notes and 2022 Notes contain customary events of default, including, among others, (i) default for 30 days in the payment of interest when due; (ii) default in payment, when due, of principal or premium, if any, at maturity, upon redemption or otherwise; and (iii) certain events of bankruptcy or insolvency. The indentures also contain covenants that limit, among other things, WES’s ability, as well as that of certain of its subsidiaries, to (i) create liens on WES’s principal properties; (ii) engage in sale and leaseback transactions; and (iii) merge or consolidate with another entity or sell, lease or transfer substantially all of WES’s properties or assets to another entity. At September 30, 2012, WES was in compliance with all covenants under the indenture.

Note payable to Anadarko. In December 2008, WES entered into a five-year $175.0 million term loan agreement with Anadarko. The term loan agreement was amended in December 2010 to fix the interest rate at 2.82% through maturity in 2013. In June 2012, the note payable to Anadarko was repaid in full with proceeds from the issuance of the 2022 Notes.

Revolving credit facility. In March 2011, WES entered into the WES RCF, an $800.0 million senior unsecured revolving credit facility, and borrowed $250.0 million under the WES RCF to repay the Wattenberg term loan (described below). The WES RCF matures in March 2016 and bears interest at LIBOR plus applicable margins, currently ranging from 1.30% to 1.90%, or an alternate base rate equal to the greatest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.5%, or (c) LIBOR plus 1%, in each case plus applicable margins, currently ranging from 0.30% to 0.90%. WES is also required to pay a quarterly facility fee, currently ranging from 0.20% to 0.35% of the commitment amount (whether used or unused), based upon its senior unsecured debt rating.

On June 13, 2012, following the receipt of a second investment grade rating from a major credit rating agency, the guarantees of indebtedness under the WES RCF provided by WES’s wholly owned subsidiaries were released, and WES is no longer subject to certain of the restrictive covenants associated with the WES RCF. The

 

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WES RCF continues to contain certain covenants that limit, among other things, WES’s, and certain of its subsidiaries’, ability to incur additional indebtedness, grant certain liens, merge, consolidate or allow any material change in the character of WES’s business, enter into certain affiliate transactions and use proceeds other than for partnership purposes. The WES RCF also contains various customary covenants, customary events of default and a maximum consolidated leverage ratio as of the end of each fiscal quarter (which is defined as the ratio of consolidated indebtedness as of the last day of a fiscal quarter to Consolidated EBITDA for the most recent four consecutive fiscal quarters ending on such day) of 5.0 to 1.0, or a consolidated leverage ratio of 5.5 to 1.0 with respect to quarters ending in the 270-day period immediately following certain acquisitions. As of September 30, 2012, WES had no outstanding borrowings under the WES RCF and had $0.3 million in outstanding letters of credit issued under the WES RCF. At September 30, 2012, WES was in compliance with all remaining covenants under the WES RCF.

The 2022 Notes, the 2021 Notes and obligations under the WES RCF are recourse to WES GP. In turn, WES GP has been indemnified by a wholly owned subsidiary of Anadarko against any claims made against the general partner under the 2022 Notes, the 2021 Notes and WES RCF.

Wattenberg term loan. In connection with the Wattenberg acquisition, in August 2010, WES borrowed $250.0 million under a three-year term loan from a group of banks (“Wattenberg term loan”). The Wattenberg term loan incurred interest at LIBOR plus a margin ranging from 2.50% to 3.50% depending on WES’s consolidated leverage ratio as defined in the Wattenberg term loan agreement. WES repaid the Wattenberg term loan in full in March 2011 using borrowings from the WES RCF and recognized $1.3 million of accelerated amortization expense related to its early repayment.

Registered securities. WES may issue an indeterminate amount of common units and various debt securities under its effective shelf registration statement on file with the SEC.

In August 2012, WES filed a registration statement with the SEC authorizing the issuance of up to $125.0 million of its common units in amounts, at prices and on terms to be determined by market conditions and other factors at the time of its offerings. As of September 30, 2012 WES had not issued any common units under such registration statement.

Credit Risk

WES bears credit risk represented by its exposure to non-payment or non-performance by its counterparties, including Anadarko, financial institutions, customers and other parties. Generally, non-payment or non-performance results from a customer’s inability to satisfy payables to WES for services rendered or volumes owed pursuant to gas imbalance agreements. WES examines and monitors the creditworthiness of third-party customers and may establish credit limits for third-party customers. A substantial portion of WES’s throughput, however, comes from producers that have investment-grade ratings.

WES is dependent upon a single producer, Anadarko, for the substantial majority of its natural gas volumes and it does not maintain a credit limit with respect to Anadarko. Consequently, WES is subject to the risk of non-payment or late payment by Anadarko for gathering, processing and transportation fees and for proceeds from the sale of residue gas, NGLs and condensate to Anadarko.

WES expects its exposure to concentrated risk of non-payment or non-performance to continue for as long as it remains substantially dependent on Anadarko for its revenues. Additionally, WES is exposed to credit risk on the note receivable from Anadarko, which was issued concurrently with the closing of its initial public offering. WES is also party to agreements with Anadarko under which Anadarko is required to indemnify WES for certain environmental claims, losses arising from rights-of-way claims, failures to obtain required consents or governmental permits and income taxes with respect to the assets acquired from Anadarko. Finally, WES has entered into various commodity price swap agreements with Anadarko in order to reduce its exposure to commodity price risk and is subject to performance risk thereunder.

 

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WES’s ability to make distributions to its unitholders may be adversely impacted if Anadarko becomes unable to perform under the terms of its gathering, processing and transportation agreements, natural gas and NGL purchase agreements, its note payable to WES, the WES omnibus agreement, the services and secondment agreement, contribution agreements or the commodity price swap agreements.

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements. WES does not have off-balance sheet arrangements other than its operating leases entered into in the ordinary course of its business.

Our Distributions

We expect to pay an initial quarterly distribution of $         per common unit per complete quarter, which equates to $         million per quarter, or $         million per year, based on the number of common units to be outstanding immediately after completion of this offering. We do not have a legal obligation to pay this distribution. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

Total Contractual Cash Obligations

The following is a summary of WES’s contractual cash obligations as of September 30, 2012. The table below excludes amounts classified as current liabilities on the consolidated balance sheets, other than current portions of categories listed within the table. It is expected that the majority of the excluded current liabilities will be paid in cash in 2013.

 

     Obligations by Period  
     2012      2013      2014      2015      2016      Thereafter      Total  
     (in thousands)  

Long-term debt:

                    

Principal

   $ —         $ —         $ —         $ —         $ —         $ 1,170,000       $ 1,170,000   

Interest

     25,098         53,161         53,143         53,124         53,105         263,731         501,362   

Asset retirement obligations

     528         —           —           1,524         117         64,573         66,742   

Capital expenditures

     78,837         —           —           —           —           —           78,837   

Credit facility fees

     668         2,000         2,000         2,000         460         —           7,128   

Environmental obligations

     1,290         584         423         186         140         286         2,909   

Operating leases

     67         239         168         168         168         124         934   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 106,488       $ 55,984       $ 55,734       $ 57,002       $ 53,990       $ 1,498,714       $ 1,827,912   

Debt and credit facility fees. For additional information on notes payable and credit facility fees required under the WES RCF, see “—Liquidity and Capital Resources—Debt and Credit Facilities” above.

Asset retirement obligations. When assets are acquired or constructed, the initial estimated asset retirement obligation is recognized in an amount equal to the net present value of the settlement obligation, with an associated increase in properties and equipment. Revisions to estimated asset retirement obligations can result from revisions to estimated inflation rates and discount rates, changes in retirement costs and the estimated timing of settlement.

Capital expenditures. Included in this amount are capital obligations related to WES’s expansion projects. WES has other planned capital and investment projects that are discretionary in nature, with no substantial contractual obligations made in advance of the actual expenditures.

Environmental obligations. WES is subject to various environmental-remediation obligations arising from federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other

 

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environmental matters. WES regularly monitors the remediation and reclamation process and the liabilities recorded and believes its environmental obligations are adequate to fund remedial actions to comply with present laws and regulations.

Operating leases. Anadarko, on WES’s behalf, has entered into lease agreements for corporate offices, shared field offices and a warehouse supporting WES operations, for which it charges WES rent. The amounts above represent existing contractual operating lease obligations that may be assigned or otherwise charged to WES pursuant to the reimbursement provisions of the WES omnibus agreement.

Quantitative and Qualitative Disclosures About Market Risk

Commodity price risk. Pursuant to certain of WES’s contracts, WES retains and sells drip condensate that is recovered during the gathering of natural gas. As part of this arrangement, WES is required to provide a thermally equivalent volume of natural gas or the cash equivalent thereof to the shipper. Thus, WES’s revenues for this portion of its contractual arrangement are based on the price received for the drip condensate and WES’s costs for this portion of its contractual arrangement depend on the price of natural gas. Historically, drip condensate sells at a price representing a discount to the price of New York Mercantile Exchange, or “NYMEX,” West Texas Intermediate crude oil.

In addition, certain of WES’s processing services are provided under percent-of-proceeds and keep-whole agreements in which Anadarko is typically responsible for the marketing of the natural gas and NGLs. Under percent-of-proceeds agreements, WES receives a specified percentage of the net proceeds from the sale of natural gas and NGLs. Under keep-whole agreements, WES keeps 100% of the NGLs produced, and the processed natural gas, or value of the gas, is returned to the producer. Since some of the gas is used and removed during processing, WES compensates the producer for this amount of gas by supplying additional gas or by paying an agreed-upon value for the gas utilized.

To mitigate WES’s exposure to changes in commodity prices as a result of the purchase and sale of natural gas, condensate or NGLs, WES entered into fixed-price commodity price swap agreements with Anadarko for the Powder River assets, which extend through December 31, 2012, with WES’s option to extend through 2013; for the Granger assets, which extend through the end of 2014; for the Wattenberg assets, which extend through June 30, 2015; and for the Hugoton system, which extend through September 30, 2015. Please read “Risk Factors—Risks Inherent in WES’s Business—WES’s strategies to reduce its exposure to changes in commodity prices may fail to protect WES and could negatively impact its financial condition, thereby reducing its cash flows and ability to make distributions to partners, including us.”

WES considers its exposure to commodity price risk associated with the above-described arrangements to be minimal given the existence of the commodity price swap agreements with Anadarko and the relatively small amount of operating income that is impacted by changes in market prices. Accordingly, WES does not expect a 10% change in natural gas or NGL prices to have a material direct impact on WES’s operating income, financial condition or cash flows for the next twelve months, excluding the effect of natural gas imbalances described below.

WES also bears a limited degree of commodity price risk with respect to settlement of its natural gas imbalances that arise from differences in gas volumes received into WES’s systems and gas volumes delivered by WES to customers, as well as instances where WES’s actual liquids recovery or fuel usage varies from the contractually stipulated amounts. Natural gas volumes owed to or by WES that are subject to monthly cash settlement are valued according to the terms of the contract as of the balance sheet dates, and generally reflect market index prices. Other natural gas volumes owed to or by WES are valued at WES’s weighted average cost of natural gas as of the balance sheet dates and are settled in-kind. WES’s exposure to the impact of changes in commodity prices on outstanding imbalances depends on the timing of settlement of the imbalances.

 

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Interest rate risk. Interest rates during 2011 and the nine months ended September 30, 2012 were low compared to historic rates. As of September 30, 2012, WES had no borrowings under the WES RCF, which bears interest at the variable rate based on LIBOR. If interest rates rise, WES’s future financing costs could increase if WES incurs borrowings under the WES RCF. For the three months ended September 30, 2012, a 10% change in LIBOR would have resulted in a nominal change in net income.

We may incur debt under our working capital facility and WES may incur additional debt in the future, either under the WES RCF or other financing sources, including commercial bank borrowings or debt issuances.

Critical Accounting Policies and Estimates

WES’s management has discussed the development and selection of the following critical accounting estimates of WES with the audit committee of WES GP’s board of directors and WES GP’s audit committee has reviewed and approved these disclosures.

Depreciation. Depreciation expense is generally computed using the straight-line method over the estimated useful life of the assets. Determination of depreciation expense requires judgment regarding the estimated useful lives and salvage values of property, plant and equipment. As circumstances warrant, depreciation estimates are reviewed to determine if any changes in the underlying assumptions are necessary. The weighted average life of WES’s long-lived assets is approximately 23 years. If the depreciable lives of WES’s assets were reduced by 10%, it is estimated that annual depreciation expense would increase by approximately $12.8 million, which would result in a corresponding reduction in WES’s operating income.

Impairments of tangible assets. Property, plant and equipment are generally stated at the lower of historical cost less accumulated depreciation or at fair value, if impaired. Because acquisitions of assets from Anadarko are transfers of net assets between entities under common control, the assets acquired by WES from Anadarko are initially recorded at Anadarko’s historic carrying value. Assets acquired in a business combination or non-monetary exchange with a third party are initially recorded at fair value. Property, plant and equipment balances are evaluated for potential impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable from expected undiscounted cash flows from the use and eventual disposition of an asset. If the carrying amount of the asset is not expected to be recoverable from future undiscounted cash flows, an impairment may be recognized. Any impairment is measured as the excess of the carrying amount of the asset over its estimated fair value.

In assessing long-lived assets for impairments, WES’s management evaluates changes in WES’s business and economic conditions and their implications for recoverability of the assets’ carrying amounts. Since a significant portion of WES’s revenues arise from gathering, processing and transporting the natural gas production from Anadarko-operated properties, significant downward revisions in reserve estimates or changes in future development plans by Anadarko, to the extent they affect WES’s operations, may necessitate assessment of the carrying amount of WES’s affected assets for recoverability. Such assessment requires application of judgment regarding the use and ultimate disposition of the asset, long-range revenue and expense estimates, global and regional economic conditions, including commodity prices and drilling activity by WES’s customers, as well as other factors affecting estimated future net cash flows. The measure of impairments to be recognized, if any, depends upon WES’s management’s estimate of the asset’s fair value, which may be determined based on the estimates of future net cash flows or values at which similar assets were transferred in the market in recent transactions, if such data is available.

Impairments of goodwill. Goodwill represents the allocated portion of Anadarko’s midstream goodwill attributed to the assets WES has acquired from Anadarko. The carrying value of Anadarko’s midstream goodwill represents the excess of the purchase price of an entity over the estimated fair value of the identifiable assets acquired and liabilities assumed by Anadarko. Accordingly, WES’s goodwill balance does not reflect, and in some cases is significantly higher than, the difference between the consideration paid by WES for acquisitions

 

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from Anadarko compared to the fair value of the net assets acquired. WES evaluates whether goodwill has been impaired annually as of October 1, unless facts and circumstances make it necessary to test more frequently. WES’s management has determined that it has one operating segment and two reporting units: (i) gathering and processing and (2) transportation. The carrying value of goodwill as of September 30, 2012 was $83.1 million for the gathering and processing reporting unit and $4.8 million for the transportation reporting unit. Accounting standards require that goodwill be assessed for impairment at the reporting unit level. Goodwill impairment assessment is a two-step process. Step one focuses on identifying a potential impairment by comparing the fair value of the reporting unit with the carrying amount of the reporting unit. If the fair value of the reporting unit exceeds its carrying amount, no further action is required. However, if the carrying amount of the reporting unit exceeds its fair value, goodwill is written down to the implied fair value of the goodwill through a charge to operating expense based on a hypothetical purchase price allocation.

Because quoted market prices for WES’s reporting units are not available, WES’s management must apply judgment in determining the estimated fair value of reporting units for purposes of performing the goodwill impairment test. WES’s management uses information available to make these fair value estimates, including market multiples of EBITDA. Specifically, WES’s management estimates fair value by applying an estimated multiple to projected 2012 EBITDA. WES’s management considered observable transactions in the market, as well as trading multiples for peers, to determine an appropriate multiple to apply against WES’s projected EBITDA. A lower fair value estimate in the future for any of WES’s reporting units could result in a goodwill impairment. Factors that could trigger a lower fair-value estimate include sustained price declines, throughput declines, cost increases, regulatory or political environment changes, and other changes in market conditions such as decreased prices in market-based transactions for similar assets. Based on WES’s most recent goodwill impairment test, WES concluded that the fair value of each reporting unit substantially exceeded the carrying value of the reporting unit. Therefore, no goodwill impairment was indicated and no goodwill impairment has been recognized in WES’s consolidated financial statements.

Impairments of intangible assets. WES’s intangible asset balance at September 30, 2012, represents the fair value, net of amortization, of the contracts assumed by WES in connection with the Platte Valley acquisition in February 2011. These long-term contracts, which dedicate certain customers’ field production to the acquired gathering and processing system, provide an extended commercial relationship with the existing customers whereby WES will have the opportunity to gather and process future production from the customers’ acreage. Customer relationships are amortized on a straight-line basis over 50 years, which is the estimated productive life of the reserves covered by the underlying acreage ultimately expected to be produced and gathered or processed through WES’s assets subject to current contractual arrangements.

WES’s management assesses intangible assets for impairment, together with the related underlying long-lived assets, whenever events or changes in circumstances indicate that the carrying amount of the respective asset may not be recoverable. Impairments exist when an asset’s carrying amount exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the tested asset. When alternative courses of action to recover the carrying amount are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the tested asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset’s carrying amount over its estimated fair value such that the asset’s carrying amount is adjusted to its estimated fair value with an offsetting charge to operating expense. No intangible asset impairment has been recognized in connection with these assets.

Fair value. WES’s management estimates fair value in performing impairment tests for long-lived assets and goodwill as well as for the initial measurement of asset retirement obligations and the initial recognition of environmental obligations assumed in third-party acquisitions. When WES’s management is required to measure fair value, and there is not a market observable price for the asset or liability, or a market observable price for a similar asset or liability, WES’s management utilizes the cost, income or market multiples valuation approach depending on the quality of information available to support assumptions. The income approach utilizes WES’s

 

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management’s best assumptions regarding expectations of projected cash flows, and discounts the expected cash flows using a commensurate risk adjusted discount rate. Such evaluations involve a significant amount of judgment, since the results are based on expected future events or conditions, such as sales prices, estimates of future throughput, capital and operating costs and the timing thereof, economic and regulatory climates and other factors. A multiple approach utilizes WES’s management’s best assumptions regarding expectations of projected EBITDA and multiple of that EBITDA that a buyer would pay to acquire an asset. WES’s management’s estimates of future net cash flows and EBITDA are inherently imprecise because they reflect WES’s management’s expectation of future conditions that are often outside of WES’s management’s control. However, assumptions used reflect a market participant’s view of long-term prices, costs and other factors, and are consistent with assumptions used in WES’s business plans and investment decisions.

 

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BUSINESS

Western Gas Equity Partners, LP—Overview

We are a Delaware limited partnership formed to own three types of partnership interests in Western Gas Partners, LP, a publicly traded limited partnership (NYSE: WES). WES is a growth-oriented Delaware master limited partnership organized by Anadarko Petroleum Corporation (NYSE: APC) to own, operate, acquire and develop midstream energy assets. Our only cash-generating assets consist of our partnership interests in WES, which upon the completion of this offering will consist of the following:

 

   

2,075,553 WES general partner units, representing a 2.0% general partner interest in WES;

 

   

all of the incentive distribution rights in WES, which entitle us to receive increasing percentages, up to the maximum level of 48.0%, of any incremental cash distributed by WES as certain target distribution levels are reached in any quarter; and

 

   

46,340,947 WES common units, representing a 44.7% limited partner interest in WES.

We were formed in September 2012 upon the conversion of our predecessor, WGR Holdings, LLC, into a Delaware limited partnership. As of September 30, 2012, we owned 40,573,239 WES common units and, indirectly through our 100% membership interest in WES GP, 1,957,845 WES general partner units and all of the incentive distribution rights.

Based on WES’s current cash distribution and our expected ownership of WES following this offering, we expect our initial quarterly cash distribution to be $         per common unit, or $         per common unit on an annualized basis. Our primary objective is to increase distributions to our unitholders over time through growth in the distributions payable with respect to our partnership interests in WES. To achieve this objective, we intend to actively monitor and support WES in the successful execution of its business strategy. In the future, we may facilitate WES’s growth through the use of our capital resources, which could involve capital contributions, loans or other forms of financial support.

WES is required by its partnership agreement to distribute, and it has historically distributed within 45 days of the end of each quarter, all of its cash on hand at the end of each quarter, less reserves established by its general partner to provide for the proper conduct of its business or to provide funds for future distributions. Like WES, we are structured as a limited partnership and will distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner.

Our cash flows will consist of the cash distributions we receive with respect to the WES partnership interests we own. While we, like WES, are structured as a limited partnership, our capital structure and cash distribution policy differ materially from those of WES. Most notably, (i) our general partner does not have an economic interest in us and is not entitled to receive any distributions from us and (ii) our capital structure does not include incentive distribution rights. Therefore, our distributions will be allocated exclusively to our common units.

Our ownership of WES’s incentive distribution rights entitles us to receive the following percentages of cash distributed by WES at the following target cash distribution levels:

 

   

13.0% of all incremental cash distributed in a quarter after $0.345 has been distributed in respect of each common unit and general partner unit of WES for that quarter;

 

   

23.0% of all incremental cash distributed in a quarter after $0.375 has been distributed in respect of each common unit and general partner unit of WES for that quarter; and

 

   

the maximum sharing level of 48.0% of all incremental cash distributed in a quarter after $0.450 has been distributed in respect of each common unit and general partner unit of WES for that quarter.

The cash distributions we receive from WES are tied to (i) WES’s per unit distribution level and (ii) the number of WES common units outstanding. An increase in either factor (assuming the other factor remains

 

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constant or increases) will generally result in an increase in the amount of cash distributions we receive from WES. Since its initial public offering, WES has engaged in transactions that have resulted in significant increases in both its per unit distribution level and outstanding equity capitalization, and we expect WES to engage in similar transactions in the future. WES has increased its quarterly cash distribution from $0.30 per common unit, or $1.20 on an annualized basis, for the quarter ended June 30, 2008, to $0.50 per common unit, or $2.00 on an annualized basis, for the quarter ended September 30, 2012. During the same period, WES issued a total of 42.9 million common units.

Based on WES’s ownership structure after giving effect to our acquisition of WES common units and general partner units in connection with the closing of this offering as described under “Use of Proceeds,” WES’s most recently declared distribution of $0.50 per common unit will result in a quarterly distribution to us of $32.1 million, or approximately $128.4 million on an annualized basis, consisting of (i) $23.2 million from distributions on our WES common units, (ii) $1.2 million from distributions on our WES general partner units and (iii) $7.7 million from distributions on the incentive distribution rights. We are currently receiving distributions at the highest level on the incentive distribution rights and therefore will receive 48.0% of the cash that WES distributes in excess of $0.450 per common unit, if any. As a result, the cash distributions we receive from WES with respect to the incentive distribution rights will increase more rapidly than those with respect to our WES common and general partner units.

Western Gas Partners, LP—Overview

Western Gas Partners, LP (NYSE: WES) is a growth-oriented Delaware master limited partnership formed by Anadarko to own, operate, acquire and develop midstream energy assets. WES’s assets are located in East, West and South Texas, the Rocky Mountains (Colorado, Utah and Wyoming) and the Mid-Continent (Kansas and Oklahoma), and WES is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, NGLs and crude oil for Anadarko, as well as third-party producers and customers. Approximately two-thirds of WES’s services are provided under long-term contracts with fee-based rates with the remainder provided under percent-of-proceeds and keep-whole contracts. A substantial majority of the commodity price risk associated with the percent-of-proceeds and keep-whole contracts is hedged under commodity price swap agreements with Anadarko. WES’s only commodity price risk that is not hedged is associated with the non-fee-based agreements that were acquired with the purchase of the Platte Valley system, which represented less than 5% of WES’s gross margin for the twelve months ended September 30, 2012. A substantial part of WES’s business is conducted under long-term contracts with Anadarko that typically have a minimum term of ten years from the date of execution. None of WES’s material gathering and processing contracts with Anadarko expires before December 30, 2017, and, as of September 30, 2012, the volume weighted-average remaining life of all of such contracts with Anadarko was 7.7 years. WES currently has over 700 third-party gathering and processing contracts with over 200 customers, with no third-party customer representing more than 10% of WES’s revenues. The largest third-party customer, which represents approximately 6% of WES’s revenues, has entered into a “life of lease” contract with WES, meaning that the contract remains in effect until the customer ceases production from the leases that are dedicated under this contract.

 

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As of September 30, 2012, WES’s assets consisted of thirteen gathering systems, seven natural gas treating facilities, ten natural gas processing facilities, two NGL pipelines, one interstate natural gas pipeline that is regulated by FERC, one intrastate natural gas pipeline and interests in two natural gas gathering systems and a crude oil pipeline. For a detailed description of WES’s assets, please read “—Our and WES’s Assets.” The following table provides information regarding WES’s assets by geographic region, other than natural gas processing facilities currently under construction in South Texas and Colorado, as of and for the nine months ended September 30, 2012:

 

Area

 

Asset Type

  Miles of
Pipeline
    Approximate
Number of
Receipt Points
    Gas
Compression
(horsepower)
    Processing
or Treating
Capacity
(MMcf/d)
    Average
Gathering,
Processing and
Transportation
Throughput
(MMcf/d)
 

Rocky Mountains (1)

  Gathering, Processing and Treating     7,232        4,983        352,912        2,480        2,215   
 

Transportation

    982        34        26,828        —          83   

Mid-Continent

  Gathering     2,012        1,501        92,097        —          81   

East Texas

  Gathering and Treating     590        845        37,820        502        244   

West Texas

  Gathering     120        90        —          —          52   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      10,936        7,453        509,657        2,982        2,675   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Throughput includes 100% of Chipeta system volumes; 50% of Newcastle gathering system volumes; 22% of Rendezvous volumes; and 14.81% of Fort Union volumes. For the nine months ended September 30, 2012, throughput excludes 25 MBbls/d of average NGL pipeline volumes from the Chipeta assets and 6 MBbls/d of oil pipeline volumes representing WES’s 10% share of average White Cliffs volumes.

We believe that one of WES’s principal strengths is its relationship with Anadarko. Anadarko is among the largest independent oil and gas exploration and production companies in the world. Anadarko’s upstream oil and gas business explores for and produces natural gas, crude oil, condensate and NGLs. We believe Anadarko, through its indirect economic interest in WES and in us following this offering, will continue to be motivated to promote and support the successful execution of WES’s business plan and to pursue projects that help to enhance the value of WES’s business.

Approximately 75% and 76% of WES’s total natural gas gathering, transportation and treating throughput (excluding equity investment throughput) during the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, was comprised of natural gas production owned or controlled by Anadarko. Approximately 64% and 59% of WES’s total processing throughput (excluding equity investment throughput) during the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, was attributable to natural gas production owned or controlled by Anadarko. In addition, with respect to WES’s Wattenberg, Dew/Pinnacle, Haley, Helper, Clawson and Hugoton gathering systems, Anadarko has dedicated to WES pursuant to the terms of its applicable gathering agreements all of the natural gas production it owns or controls from (i) wells that are currently connected to such gathering systems, and (ii) additional wells that are drilled within one mile of wells connected to such gathering systems as those systems currently exist and as they are expanded to connect additional wells in the future. As a result, this dedication will continue to expand as long as additional wells are connected to these gathering systems. In executing its growth strategy, which includes acquiring and constructing additional midstream assets, WES utilizes the significant experience of Anadarko’s management team.

Although we believe WES’s relationship with Anadarko provides it with a significant advantage in the midstream natural gas sector, it is also a source of potential conflicts. For example, Anadarko is not restricted from competing with WES. Given Anadarko’s significant indirect economic interest in WES and in us, we believe it will be in Anadarko’s best interest for it to transfer additional assets to WES over time. However, Anadarko continually evaluates acquisitions and divestitures and may elect to acquire, construct or dispose of

 

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midstream assets in the future without offering WES the opportunity to acquire, construct or participate in the ownership of those assets. Anadarko is under no contractual obligation to offer any such opportunities to WES, nor is WES obligated to participate in any such opportunities. We cannot state with any certainty which, if any, opportunities to acquire additional assets from Anadarko may be made available to WES or if WES will elect, or will have the ability, to pursue any such opportunities.

WES’s Primary Growth Drivers

We believe WES’s continued growth will be primarily driven by future acquisitions, negotiated equity interests and organic growth projects.

Acquisitions. As reflected in the chart below, since 2008, WES has completed nine acquisitions for total consideration of approximately $2.2 billion, including over $300 million in third-party acquisitions. WES has consistently maintained investment grade leverage metrics, maintaining debt-to-Adjusted EBITDA levels of less than 4:1, while funding acquisitions through (i) two debt financings resulting in over $1.0 billion of total proceeds; (ii) six equity financings resulting in approximately $1.0 billion of total proceeds; and (iii) the issuance of approximately 8.3 million common units and 170,000 general partner units to Anadarko.

 

     Acquisition Date      Percentage Acquired     Acquisition Price
($MM) (1)
 

Powder River

     12/19/2008         100   $ 210.0   

Chipeta

     07/22/2009         51     107.0   

Granger

     01/29/2010         100     254.4   

Wattenberg

     08/02/2010         100     498.0   

White Cliffs (2)

     09/28/2010         10     38.0   

Platte Valley (2)

     02/28/2011         100     301.9   

Bison

     07/08/2011         100     130.0   

MGR

     01/13/2012         100     483.0   

Chipeta

     08/01/2012         24     135.0   

 

(1) Acquisition price includes the cash consideration for the acquisition together with, when applicable, the value of units (based on a trailing average closing price of the common units as of the acquisition date) issued to Anadarko as consideration and reflects the impact of post-closing purchase price adjustments.
(2) Third-party acquisition. The White Cliffs transaction involved the purchase by WES from Anadarko of an equity interest in White Cliffs and a related option to purchase an additional interest in White Cliffs from a third party for $20 million. Concurrently with that transaction, WES exercised its option to purchase the additional interest in White Cliffs from the third party for $18 million.

We expect that WES’s future growth will be driven in large part by additional acquisitions of midstream assets from Anadarko over time. Anadarko’s total domestic midstream asset portfolio (excluding assets which WES fully consolidates into its results) had aggregate average throughput of approximately 2.5 Bcf/d for the nine months ended September 30, 2012 and as of that date consisted of 17 gathering systems, approximately 4,300 miles of pipeline and eight processing and/or treating facilities. Anadarko also continues to make significant investments in midstream assets that may present potential acquisition opportunities for WES, with over $1.0 billion invested in 2011 (including approximately $576 million of acquisitions) and over $500 million (excluding acquisitions and equity investments) projected to be invested in 2012.

Negotiated equity interests. Due to its significant resource position in many developing basins, Anadarko has also been able to further increase its midstream asset base by acquiring equity interests in third-party projects in exchange for long-term volume commitments. These investments could provide incremental acquisition opportunities for WES if pursued by Anadarko or represent additional investment opportunities for WES if Anadarko chooses to offer WES the opportunity to pursue them directly.

 

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Organic growth projects. WES has successfully completed both large and small organic growth projects associated with its existing assets and expects to continue to do so in the future. As of September 30, 2012, these projects involved growth capital expenditures of approximately $363 million since 2008, and WES has budgeted over $400 million for organic growth projects in 2012.

WES currently has a number of significant projects scheduled for completion in 2012, 2013 and 2014 that are supported by long-term, fee-based throughput commitments from Anadarko. These projects include:

 

   

Chipeta Train III in the Uinta Basin: WES recently completed the construction of a new cryogenic processing train at its Chipeta facility which has a designed capacity of approximately 300 MMcf/d and was placed into service in October 2012. In connection with the construction of Chipeta Train III, Anadarko has agreed to a fee-based contract with a ten-year throughput commitment of not less than 500 MMcf/d to the Chipeta facility, which will begin on the first day of the month following Chipeta Train III’s in-service date.

 

   

Brasada plant in the Maverick Basin: WES is currently constructing a new cryogenic facility which will process production from the Eagleford shale. The new plant has a designed capacity of approximately 200 MMcf/d and is expected to begin service in the second quarter of 2013. Anadarko has agreed to a fee-based contract with a ten-year throughput guarantee, which will begin on the plant’s in-service date and will increase to 180 MMcf/d (or 90% of the plant’s capacity) on January 1, 2014, and will include associated demand charges. WES’s management expects that the aggregate capital expenditures required for the construction of the Brasada plant will be approximately $250 million. Based on WES’s commercial contracts with Anadarko, WES’s management expects that the project’s cost will represent a multiple of 6.5x the Brasada plant’s anticipated 2014 EBITDA.

 

   

Lancaster plant in the DJ Basin: WES is currently constructing a new cryogenic facility which will process production from the Niobrara and Codell formations in the Wattenberg field. The new plant has a designed capacity of approximately 300 MMcf/d and is expected to begin service in the first quarter of 2014. Anadarko has agreed to a fee-based contract with a ten-year throughput guarantee of 270 MMcf/d (or 90% of the plant’s capacity) and associated demand charges, which will begin on the plant’s in-service date. WES’s management expects that the aggregate capital expenditures required for the construction of the Lancaster plant will be approximately $160 million. Based on WES’s commercial contracts with Anadarko, WES’s management expects that the project’s cost will represent a multiple of 6.5x the Lancaster plant’s anticipated annual EBITDA.

 

   

Red Desert expansion in the Greater Green River Basin. In conjunction with upstream development in the Greater Green River Basin, WES is constructing approximately 30 miles of 16-inch pipeline to gather up to an additional 40,000 Mcf/d of expected gas production in the area. The pipeline will deliver gas to WES’s Patrick Draw plant, where existing compression and cryogenic capacity will be used for processing and delivery into downstream pipelines. The project is expected to be completed by the end of 2012 and is supported by volume commitments from a third-party producer with an active drilling program in the basin.

We believe that WES is well positioned to continue the successful execution of its growth strategy, and that its current inventory of growth projects, coupled with its historical record of strategic and accretive acquisitions, should result in continued growth in the cash distributions paid by WES to its partners, including us.

WES’s Strategy

WES’s primary business objective is to continue to increase its cash distributions per unit over time. To accomplish this objective, WES intends to execute the following strategy:

 

   

Pursuing accretive acquisitions. WES expects to continue to pursue accretive acquisition opportunities of midstream energy assets from Anadarko and third parties.

 

   

Capitalizing on organic growth opportunities. As demonstrated by the organic growth projects described above, WES expects to grow certain of its systems organically over time by meeting Anadarko’s and other customers’ midstream service needs that result from their drilling activity in WES’s areas of operation. Additionally, WES continually evaluates economically attractive organic

 

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expansion opportunities in existing or new areas of operation that allow it to leverage its existing infrastructure, operating expertise and customer relationships by constructing and expanding systems to meet new or increased demand for its services.

 

   

Attracting third-party volumes to its systems. WES expects to continue to actively market its midstream services to, and pursue strategic relationships with, third-party producers with the intention of attracting additional volumes and/or expansion opportunities.

 

   

Managing commodity price exposure. WES intends to continue limiting its direct exposure to commodity price changes and promote cash flow stability by pursuing a contract structure designed to mitigate exposure to commodity price uncertainty through the use of fee-based contracts and fixed-price hedges.

 

   

Maintaining investment grade ratings. WES intends to operate at appropriate leverage and distribution coverage levels in order to maintain its investment grade status. By maintaining investment grade status, in part through maintaining leverage ratios appropriate for investment-grade partnerships, we believe that WES will have increased flexibility in its growth strategy and will be able to pursue strategic acquisitions and large growth projects at a lower capital cost, which could enhance their accretion.

For a discussion of the possible risks that could adversely affect WES’s strategy, please read “Risk Factors” beginning on page 20.

WES’s Competitive Strengths

We believe that WES is well positioned to successfully execute its strategy and achieve its primary business objective because of the following competitive strengths:

 

   

Affiliation with Anadarko. As a result of its significant retained interest in us, and therefore in WES, we believe that Anadarko is motivated to promote and support the successful execution of WES’s business plan and to use its relationships throughout the energy industry, including with producers in the United States, to help pursue projects that help to enhance the value of WES’s business.

 

   

Relatively stable and predictable cash flows. We believe that WES’s cash flows are largely protected from fluctuations caused by commodity price volatility due to (i) the approximately two-thirds of its services that are provided pursuant to long-term, fee-based agreements and (ii) the commodity price swap agreements that limit its exposure to commodity price changes with respect to its percent-of-proceeds and keep-whole contracts. For the twelve months ended September 30, 2012, approximately 96% of WES’s gross margin was derived from either long-term, fee-based contracts or percent-of-proceeds or keep-whole agreements that were hedged with commodity price swap agreements.

 

   

Financial flexibility to pursue expansion and acquisition opportunities. We believe that WES’s operating cash flows, borrowing capacity, and access to debt and equity capital markets provide it with financial flexibility to competitively pursue acquisition and expansion opportunities and to execute its strategy across capital market cycles. WES currently has investment grade ratings from two of the three major rating agencies and, as of September 30, 2012, WES did not have outstanding borrowings under the $800 million WES RCF, and had $0.3 million in outstanding letters of credit issued under the facility.

 

   

Substantial presence in liquids-rich basins. WES’s asset portfolio includes gathering and processing systems, such as its Wattenberg, Platte Valley, Chipeta, Granger and Red Desert assets, which are in areas where the hydrocarbon production contains oil and condensate, as well as a significant amount of NGLs, for which pricing has historically been correlated to crude oil as opposed to natural gas. Due to the relatively high current price of crude oil as compared to natural gas, production in these areas offers WES’s customers higher margins and superior economics compared to basins in which the gas is predominantly dry. This pricing environment offers expansion opportunities for certain of WES’s systems as producers attempt to increase their wet gas and crude oil production.

 

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Well-positioned, well-maintained and efficient assets. We believe that WES’s asset portfolio across geographically diverse areas of operation provides WES with opportunities to expand and attract additional volumes to its systems from multiple productive basins. Moreover, WES’s systems include an integrated package of high-quality, well-maintained assets for which WES has implemented modern processing, treating, measuring and operating technologies.

 

   

Consistent track record of accretive acquisitions. Since WES’s initial public offering in 2008, WES’s management team has successfully executed seven related-party and two third-party acquisitions of midstream energy assets totaling approximately $2.2 billion, which have contributed to a 16% compound annual growth rate in WES’s per unit distributions since the second quarter of 2009. WES’s management team has demonstrated its ability to identify, evaluate, negotiate, consummate and integrate strategic acquisitions and expansion projects, and it intends to use its experience and reputation to continue to grow WES through accretive acquisitions, focusing on opportunities to improve throughput volumes and cash flows.

For a discussion of the possible risks that could adversely affect WES’s competitive position, please read “Risk Factors” beginning on page 20.

Industry Overview

The midstream natural gas industry is the link between the exploration for and production of natural gas and the delivery of its hydrocarbon components to end-use markets. Operators within this industry create value at various stages along the natural gas value chain by gathering raw natural gas from producers at the wellhead, separating the hydrocarbons into dry gas (primarily methane) and NGLs, and then routing the separated dry gas and NGL streams for delivery to end-use markets or to the next intermediate stage of the value chain. The following diagram illustrates the groups of assets found along the natural gas value chain:

 

LOGO

Service Types

The services provided by WES and other midstream natural gas companies are generally classified into the categories described below. As indicated below, WES does not currently provide all of these services, although it may do so in the future.

 

   

Gathering. At the initial stages of the midstream value chain, a network of typically smaller diameter pipelines known as gathering systems directly connect to wellheads in the production area. These gathering systems transport raw, or untreated, natural gas to a central location for treating and processing. A large gathering system may involve thousands of miles of gathering lines connected to thousands of wells. Gathering systems are typically designed to be highly flexible to allow gathering of natural gas at different pressures and scalable to allow gathering of additional production without significant incremental capital expenditures. In connection with WES’s gathering services, it sometimes retains and sells drip condensate, which falls out of the natural gas stream during gathering.

 

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Compression. Natural gas compression is a mechanical process in which a volume of natural gas at a given pressure is compressed to a desired higher pressure, which allows the natural gas to be gathered more efficiently and delivered into a higher pressure system, processing plant or pipeline. Field compression is typically used to allow a gathering system to operate at a lower pressure or provide sufficient discharge pressure to deliver natural gas into a higher pressure system. Since wells produce at progressively lower field pressures as they deplete, field compression is needed to maintain throughput across the gathering system.

 

   

Treating and dehydration. To the extent that gathered natural gas contains contaminants, such as water vapor, carbon dioxide and/or hydrogen sulfide, such natural gas is dehydrated to remove the saturated water and treated to separate the carbon dioxide and hydrogen sulfide from the gas stream.

 

   

Processing. Processing removes the heavier and more valuable hydrocarbon components, which are extracted as NGLs. The residue gas remaining after extraction of NGLs meets the quality standards for long-haul pipeline transportation or commercial use.

 

   

Fractionation. Fractionation is the separation of the mixture of extracted NGLs into individual components for end-use sale. It is accomplished by controlling the temperature and pressure of the stream of mixed NGLs in order to take advantage of the different boiling points of separate products.

 

   

Storage, transportation and marketing. Once the raw natural gas has been treated or processed and the raw NGLs mix has been fractionated into individual NGL components, the natural gas and NGL components are stored, transported and marketed to end-use markets. Each pipeline system typically has storage capacity located both throughout the pipeline network and at major market centers to help temper seasonal demand and daily supply-demand shifts. WES does not currently offer storage services or conduct marketing activities.

Typical Contractual Arrangements.

Midstream natural gas services, other than transportation, are usually provided under contractual arrangements that vary in the amount of commodity price risk they carry. Three typical contract types are described below:

 

   

Fee-based. Under fee-based arrangements, the service provider typically receives a fee for each unit of natural gas gathered, treated and/or processed at its facilities. As a result, the price per unit received by the service provider does not vary with commodity price changes, minimizing the service provider’s direct commodity price risk exposure.

 

   

Percent-of-proceeds, percent-of-value or percent-of-liquids. Percent-of-proceeds, percent-of-value or percent-of-liquids arrangements may be used for gathering and processing services. Under these arrangements, the service provider typically remits to the producers either a percentage of the proceeds from the sale of residue gas and/or NGLs or a percentage of the actual residue gas and/or NGLs at the tailgate. These types of arrangements expose the processor to commodity price risk, as the revenues from the contracts directly correlate with the fluctuating price of natural gas and/or NGLs.

 

   

Keep-whole. Keep-whole arrangements may be used for processing services. Under these arrangements, the service provider keeps 100% of the NGLs produced, and the processed natural gas, or value of the gas, is returned to the producer. Since some of the gas is used and removed during processing, the processor compensates the producer for the amount of gas used and removed in processing by supplying additional gas or by paying an agreed-upon value for the gas utilized. These arrangements have the highest commodity price exposure for the processor because the costs are dependent on the price of natural gas and the revenues are based on the price of NGLs.

There are two forms of contracts utilized in the transportation of natural gas, NGLs and crude oil, as described below:

 

   

Firm. Firm transportation service requires the reservation of pipeline capacity by a customer between certain receipt and delivery points. Firm customers generally pay a “demand” or “capacity reservation”

 

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fee based on the amount of capacity being reserved, regardless of whether the capacity is used, plus a usage fee based on the amount of natural gas transported.

 

   

Interruptible. Interruptible transportation service is typically short-term in nature and is generally used by customers that either do not need firm service or have been unable to contract for firm service. These customers pay only for the volume of gas actually transported. The obligation to provide this service is limited to available capacity not otherwise used by firm customers, and, as such, customers receiving services under interruptible contracts are not assured capacity on the pipeline.

 

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Our and WES’s Assets

Our only cash-generating assets are our partnership interests in WES, and we currently have no independent operations. Accordingly, our financial performance and our ability to pay cash distributions to our unitholders will be directly dependent upon the performance of WES.

The following sections describe in detail the services provided by WES in its areas of operation and the following map depicts its significant midstream assets as of September 30, 2012.

 

LOGO

 

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Rocky Mountains—Northeast Wyoming

Bison treating facility. The Bison treating facility consists of three amine treaters with a combined treating capacity of 450 MMcf/d located in northeastern Wyoming. The assets also include three compressors with a combined compression of 5,230 horsepower and five generators with combined power output of 6.5 megawatts. WES operates and has a 100% working interest in the Bison assets, which provide carbon dioxide treating services for the coal-bed methane gas being gathered in the Powder River Basin to meet downstream pipeline specifications. Anadarko began construction of the Bison assets in 2009 and placed them in service in June 2010.

Customers. Anadarko provided approximately 73% of the throughput at the Bison treating facility for the nine months ended September 30, 2012. The remaining throughput was from one third-party producer.

Supply and delivery points. The Bison treating facility treats and compresses gas from the coal-bed methane wells in the Powder River Basin. The Bison pipeline, operated by TransCanada, is connected directly to the facility, which is currently the only inlet into the pipeline. The Bison treating facility also has access to the Ft. Union and Thunder Creek pipelines.

Fort Union gathering system. The Fort Union system is a 324-mile gathering system operating within the Powder River Basin of Wyoming, starting in west central Campbell County and terminating at the Medicine Bow treating plant. The Fort Union gathering system consists of three parallel pipelines and includes carbon dioxide treating facilities at the Medicine Bow plant. The system’s gas treating capacity will vary depending upon the carbon dioxide content of the inlet gas. At current carbon dioxide levels, the system is capable of treating and blending over 1 Bcf/d while satisfying the carbon dioxide specifications of downstream pipelines.

Fort Union is a partnership among Copano Pipelines/Rocky Mountains, LLC (37.04%), Crestone Powder River LLC (37.04%), Bargath, Inc. (11.11%) and WES (14.81%). WES is the field and construction operator of the Fort Union gathering system.

Customers. The four Fort Union owners named above are the only firm shippers on the Fort Union system. To the extent capacity on the system is not used by the owners, it is available to third parties under interruptible agreements.

Supply. Substantially all of Fort Union’s gas supply is comprised of coal-bed methane volumes that are either produced or gathered by the four Fort Union owners throughout the Powder River Basin. As of September 30, 2012, the Fort Union system gathers gas from approximately 8,400 coal-bed methane wells in the expanding Big George coal play, the multiple seam coal fairway to the north of the Big George play and the Wyodak coal play. Anadarko had a working interest in over 1.8 million gross acres within the Powder River Basin as of September 30, 2012. Another of the Fort Union owners has a comparable working interest in a large majority of Anadarko’s producing coal-bed methane wells. The two remaining Fort Union owners gather gas for delivery to Fort Union under contracts with acreage dedications from multiple producers in the heart of the basin and from the coal-bed methane producing area near Sheridan, Wyoming.

Delivery points. The Fort Union system delivers coal-bed methane gas to the Glenrock, Wyoming Hub, which accesses the following interstate pipelines:

 

   

Colorado Interstate Gas Company’s (“CIG”);

 

   

Kinder Morgan Interstate Gas Transportation Company; and

 

   

Wyoming Interstate Gas Company.

These pipelines serve gas markets in the Rocky Mountains and Midwest regions of the U.S.

Hilight gathering system and processing plant. The 1,113-mile Hilight gathering system, located in Johnson, Campbell, Natrona and Converse Counties of Wyoming, was built to provide low and high-pressure gathering services for the area’s conventional gas production and delivers to the Hilight plant for processing. The

 

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Hilight gathering system has 11 compressor stations with 33,763 combined horsepower. The Hilight system has a capacity of approximately 60 MMcf/d and utilizes a refrigeration process and provides for fractionation of the recovered NGL products into propane, butanes and natural gasoline.

Customers. Gas gathered and processed through the Hilight system is from numerous third-party customers, with the seven largest producers providing approximately 69% of the system throughput during the nine months ended September 30, 2012.

Supply. The Hilight gathering system serves the gas gathering needs of several conventional producing fields in Johnson, Campbell, Natrona and Converse Counties. WES’s customers, including Anadarko, have historically maintained and more recently increased throughput by developing new prospects and performing workovers.

Delivery points. The Hilight plant delivers residue gas into WES’s MIGC transmission line. Hilight is not connected to an active NGL pipeline, so all fractionated NGLs are sold locally through its truck and rail loading facilities.

MIGC transportation system. The MIGC system is a 256-mile interstate pipeline regulated by FERC and operating within the Powder River Basin of Wyoming. The MIGC system traverses the Powder River Basin from north to south, extending to Glenrock, Wyoming. As a result, the MIGC system is well positioned to provide transportation for the extensive natural gas volumes received from various coal-bed methane gathering systems and conventional gas processing plants throughout the Powder River Basin. MIGC offers both forward-haul and backhaul transportation services and is certificated for 175 MMcf/d of firm transportation capacity.

Customers. Anadarko is the largest firm shipper on the MIGC system, with approximately 90% of throughput for the nine months ended September 30, 2012. The remaining throughput on the MIGC system was from 15 third-party shippers.

Revenues on the MIGC system are generated from contract demand charges and volumetric fees paid by shippers under firm and interruptible gas transportation agreements. WES’s current firm transportation agreements range in term from approximately one to seven years. Of the current certificated capacity of 175 MMcf/d, 40 MMcf/d is contracted through October 2018. In addition to its certificated forward-haul capacity, MIGC provides firm backhaul service subject to flowing capacity. WES had 11 MMcf/d contracted through May 2012 under backhaul service agreements that are renegotiated on an annual basis. Most of WES’s interruptible gas transportation agreements are month-to-month with the remainder generally having terms of less than one year.

To maintain and increase throughput on WES’s MIGC system, WES must continue to contract capacity to shippers, including producers and marketers, for transportation of their natural gas. Due to the commencement of operations of TransCanada’s Bison pipeline in January 2011, the existing firm transportation contracts that expired at the end of January 2011 were not renewed. WES monitors producer and marketing activities in the area served by its transportation system to identify new opportunities and to manage MIGC’s throughput.

Supply. As of September 30, 2012, Anadarko had a working interest in over 1.8 million gross acres within the Powder River Basin. Anadarko’s gross acreage includes substantial undeveloped acreage positions in the Big George coal play and the multiple seam coal fairway to the north of the Big George play.

Delivery points. MIGC volumes can be redelivered to the Glenrock, Wyoming Hub, which accesses the following interstate pipelines:

 

   

CIG;

 

   

Kinder Morgan Interstate Gas Transportation Company;

 

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Williston Basin Interstate Pipeline Company; and

 

   

Wyoming Interstate Gas Company.

Volumes can also be delivered to Anadarko’s MGTC, Inc. (“MGTC”) intrastate pipeline, a Hinshaw pipeline that supplies local markets in Wyoming.

Newcastle gathering system and processing plant. The 179-mile Newcastle gathering system, located in Weston and Niobrara Counties of Wyoming, was built to provide gathering services for conventional gas production in the area. The gathering system delivers into the Newcastle plant, which has gross capacity of approximately 3 MMcf/d. The plant utilizes a refrigeration process and provides for fractionation of the recovered NGLs into propane and butane/gasoline mix products. The Newcastle facility is a joint venture among Black Hills Exploration and Production, Inc. (44.7%), John Paulson (5.3%) and WES (50.0%). The Newcastle gathering system includes one compressor station with 560 horsepower. The Newcastle plant has an additional 2,100 horsepower for refrigeration and residue compression.

Customers. Gas gathered and processed through the Newcastle system is from 15 third-party customers, with the largest four producers providing approximately 89% of the system throughput during the nine months ended September 30, 2012. The largest producer, Black Hills Exploration, provided approximately 61% of the throughput during the nine months ended September 30, 2012.

Supply. The Newcastle gathering system and plant primarily service gas production from the Clareton and Finn-Shurley fields in Weston County. Due to infill drilling and enhanced production techniques, producers have continued to maintain production levels.

Delivery points. Propane products from the Newcastle plant are typically sold locally by truck, and the butane/gasoline mix products are transported to the Hilight plant for further fractionation. Residue gas from the Newcastle system is delivered into MGTC pipeline for transport, distribution and sale.

Rocky Mountains—Southwest Wyoming

Granger gathering system and processing complex. The 810-mile Granger natural gas gathering system and gas processing facility is located in Sweetwater County, Wyoming. The Granger complex includes eight field compression stations and has 43,950 combined horsepower. The processing facility has a cryogenic capacity of 200 MMcf/d and refrigeration capacity of 100 MMcf/d with NGL fractionation. The Granger complex also includes a plant with refrigeration capacity of 200 MMcf/d, which is accounted for as a capital lease by WES and was acquired in connection with the acquisition of MGR.

Customers. Anadarko is the largest customer for the Granger complex with approximately 37% of throughput for the nine months ended September 30, 2012. The remaining throughput was primarily from four third-party shippers.

Supply. The Granger complex is supplied by the Moxa Arch, the Jonah field and the Pinedale anticline across which Anadarko controls approximately 591,000 gross acres. The Granger gas gathering system has approximately 700 receipt points.

Delivery points. The residue gas from the Granger complex can be delivered to the following major pipelines:

 

   

CIG;

 

   

The Kern River and Mountain Gas Transportation, Inc. (“MGTI”) pipelines via a connect with Rendezvous Pipeline Company, a FERC-regulated Questar affiliate;

 

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Northwest Pipeline Co. (“NWPL”);

 

   

Overthrust Pipeline (“OTTCO”); and

 

   

QEP Resources (“QEP”).

The NGLs have market access to Enterprise’s Mid-America Pipeline Company (“MAPL”), which terminates at Mont Belvieu, Texas, as well as to local markets.

Red Desert gathering and processing system. The Red Desert system is a group of gathering and processing assets located in Sweetwater and Carbon counties in southwest Wyoming. It includes the Patrick Draw cryogenic processing plant with a capacity of 125 MMcf/d, the Red Desert cryogenic processing plant with a capacity of 48 MMcf/d, 1,295 miles of gathering lines, and related facilities.

Customers. For the nine months ended September 30, 2012, approximately 5% of the Red Desert system throughput was from Anadarko and the remaining throughput was from various third-party customers, with the seven largest producers providing approximately 68% of the system throughput.

Supply. The Red Desert system gathers, compresses, treats and processes natural gas and fractionates NGLs produced in the eastern portion of the Greater Green River Basin, providing service primarily to the Red Desert and Washakie Basins.

Delivery. Residue gas from the Red Desert system is delivered to the CIG and Wyoming Interstate Company, Ltd. (“WIC”) interstate pipelines, while NGLs are delivered to the MAPL, as well as to truck and rail loading facilities.

Rendezvous gathering system. The Rendezvous system is a 338-mile mainline gathering system in southwestern Wyoming that delivers gas to WES’s Granger complex and other locations. The Rendezvous gathering system is a joint venture among QEP (78%) and WES (22%). The Rendezvous gathering system includes five compressor stations with 7,485 combined horsepower.

Customers. QEP and Anadarko are the only firm shippers on the Rendezvous gathering system. To the extent capacity on the system is not used by those shippers, it is available to third parties under interruptible agreements.

Supply and delivery points. The Rendezvous gathering system provides mainline gathering service for gas from the Jonah and Pinedale anticline fields and delivers to WES’s Granger plant, as well as QEP Field Services’ Blacks Fork gas processing plant which connects to Questar Pipeline, NWPL and Kern River via Rendezvous Pipeline Company, a FERC-regulated Questar affiliate.

Rocky Mountains—Utah

Chipeta processing complex and NGL pipeline. WES is the managing member of Chipeta, a limited liability company owned, as of September 30, 2012, by WES (75%) and Ute Energy Midstream Holdings LLC (25%). Chipeta owns the Chipeta processing complex and the Natural Buttes refrigeration plant, which currently provides 670 MMcf/d of cryogenic and refrigeration processing capacity in the Greater Natural Buttes field in Uintah County, Utah. The Chipeta processing complex includes two processing trains (one refrigeration and one cryogenic) which are currently operational and a third, 300 MMcf/d cryogenic train which was under construction as of September 30, 2012 and placed in service in October 2012. A 100% WES-owned, 17-mile NGL pipeline connects the Chipeta and Natural Buttes plants to a third-party pipeline for NGL transportation out of the area.

 

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Customers. Anadarko is the largest customer on the Chipeta system with approximately 93% of the system throughput for the nine months ended September 30, 2012. The balance of throughput on the system during the nine months ended September 30, 2012 was from three third-party customers.

Supply. The Chipeta system is well-positioned to access Anadarko and third-party production in the area with available capacity in the Uintah Basin. Anadarko controls approximately 212,000 gross acres in the Uintah Basin. Chipeta is connected to both Anadarko’s Natural Buttes gathering system and to the Three Rivers gathering system owned by Ute Energy and a third party.

Delivery points. The Chipeta plant delivers NGLs through WES’s 17-mile pipeline to the MAPL, which provides transportation through the Seminole pipeline in West Texas and ultimately to the NGL markets at Mont Belvieu, Texas and the Texas Gulf Coast. The Chipeta plant has natural gas delivery points through the following pipelines:

 

   

CIG;

 

   

Questar Pipeline Company; and

 

   

WIC.

Clawson gathering system. The 47-mile Clawson gathering system, located in Carbon and Emery Counties of Utah, was built in 2001 to provide gathering services for Anadarko’s coal-bed methane development of the Ferron Coal play. The Clawson gathering system provides gathering, dehydration, compression and treating services for coal-bed methane gas. The Clawson gathering system includes one compressor station with 6,310 horsepower and a carbon dioxide treating facility.

Customers. Anadarko is the largest shipper on the Clawson gathering system with approximately 97% of the total throughput delivered into the system during the nine months ended September 30, 2012. The remaining throughput on the system was from one third-party producer.

Supply. Clawson Springs field covers approximately 7,000 acres and produces primarily from the Ferron Coal play.

Delivery points. The Clawson gathering system delivers into Questar Transportation Services Company’s pipeline.

Helper gathering system. The 67-mile Helper gathering system, located in Carbon County, Utah, was built to provide gathering services for Anadarko’s coal-bed methane development of the Ferron Coal play. The Helper gathering system provides gathering, dehydration, compression and treating services for coal-bed methane gas. The Helper gathering system includes two compressor stations with 14,075 combined horsepower and two carbon dioxide treating facilities.

Customers. Anadarko is the only shipper on the Helper gathering system.

Supply. The Helper and the Cardinal Draw fields are Anadarko-operated coal-bed methane developments on the southwestern edge of the Uintah Basin that produce from the Ferron Coal play. The Helper field covers approximately 20,000 acres, and the Cardinal Draw field, which lies immediately to the east of Helper field, covers approximately 21,000 acres.

Delivery points. The Helper gathering system delivers into Questar Transportation Services Company’s pipeline. Questar provides transportation to regional markets in Wyoming, Colorado and Utah and also delivers into the Kern River Pipeline, which provides transportation to markets in the western U.S., primarily California.

 

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Rocky Mountains—Colorado

DJ Basin Gathering System and Processing Plants. The Platte Valley and Wattenberg systems are located in the DJ Basin, north and east of Denver, Colorado. The Platte Valley system consists of a processing plant with current cryogenic capacity of 100 MMcf/d, two fractionation trains, a 1,105-mile natural gas gathering system and related equipment. The Platte Valley gathering system has 13 compressor stations with 17,011 combined horsepower. The Wattenberg gathering system is a 1,870-mile wet gas gathering system and includes seven compressor stations with 83,404 combined horsepower. The Fort Lupton processing plant has two trains with combined processing capacity of 105 MMcf/d.

Customers. For the nine months ended September 30, 2012, approximately 14% of the Platte Valley system throughput was from Anadarko and the remaining throughput was from various third-party customers, the largest being EnCana Corporation. Anadarko-operated production represented approximately 67% of Wattenberg system throughput during the nine months ended September 30, 2012. Approximately 28% of Wattenberg system throughput was from two third-party producers and the remaining throughput was from various third-party customers.

Supply and delivery points for the Platte Valley gathering system and processing plant. There were 671 receipt points connected to the Platte Valley gathering system as of September 30, 2012. The Platte Valley system is connected to WES’s Wattenberg gathering system and is primarily supplied by the Wattenberg field and covers portions of Adams, Arapahoe, Boulder, Broomfield, Denver, Elbert, and Weld Counties, Colorado. The Platte Valley system delivers NGLs to local markets and through the following pipelines:

 

   

ONEOK’s Overland Pass Pipeline; and

 

   

the Wattenberg Pipeline owned and operated by DCP Midstream (formerly the Buckeye Pipeline).

In addition, the Platte Valley system can deliver to the CIG and Xcel Energy residue gas pipelines.

Supply and delivery points for the Wattenberg gathering system and processing plant. There were 2,196 receipt points and over 6,400 wells connected to the gathering system as of September 30, 2012. The Wattenberg gathering system is primarily supplied by the Wattenberg field and covers portions of Adams, Arapahoe, Boulder, Broomfield and Weld counties. Anadarko controls approximately 784,000 gross acres in the Wattenberg field. Anadarko drilled 355 wells and completed 2,166 fracs in connection with its active recompletion and re-frac program at the Wattenberg field during the nine months ended September 30, 2012, and has identified 1,200 to 2,700 opportunities to increase production including new well locations, re-fracs and recompletions.

The Wattenberg gathering system has five delivery points, including the following primary delivery points:

 

   

Anadarko’s Wattenberg processing plant;

 

   

WES’s Fort Lupton processing plant; and

 

   

WES’s Platte Valley processing plant.

The two remaining delivery points are DCP Midstream’s Spindle processing plant and AKA Energy’s Gilcrest processing plant. All delivery points are connected to the CIG and Xcel Energy residue gas pipelines, the ONEOK Overland Pass Pipeline for NGLs, and also have truck-loading facilities for access to local NGL markets. Anadarko’s Wattenberg and WES’s Platte Valley processing plants also have NGL connections to the Wattenberg Pipeline owned and operated by DCP Midstream (formerly the Buckeye Pipeline).

White Cliffs pipeline. The White Cliffs pipeline is a 526-mile crude oil pipeline that originates in Platteville, Colorado and terminates in Cushing, Oklahoma. It has an approximate capacity of 80,000 barrels per day. At the point of origin, it has a 100,000-barrel storage facility and a truck-loading facility with an additional 220,000 barrels of storage. The pipeline is a joint venture owned by SemCrude Pipeline LP (51%), Plains Pipeline LP (34%), Noble Energy, Inc. (5%) and WES (10%).

 

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Customers. The White Cliffs pipeline has two throughput contracts with Anadarko and Noble Energy that run through May 2014. In addition, other parties may ship on the White Cliffs pipeline at FERC-based rates. During the nine months ended September 30, 2012, Anadarko was the largest shipper on the White Cliffs pipeline.

Supply. The White Cliffs pipeline is supplied by production from the Denver-Julesburg Basin and offers the only direct route from the Denver-Julesburg Basin to Cushing, Oklahoma.

Delivery points. The White Cliffs pipeline delivery point is SemCrude’s storage facility in Cushing, Oklahoma, a major crude oil marketing center, which ultimately delivers to the mid-continent refineries.

Mid-Continent

Hugoton gathering system. The 2,012-mile Hugoton gathering system provides gathering service to the Hugoton field and is primarily located in Seward, Stevens, Grant and Morton Counties of Southwest Kansas and Texas County in Oklahoma. The Hugoton gathering system has 44 compressor stations with 92,097 combined horsepower.

Customers. Anadarko is the largest customer on the Hugoton gathering system with approximately 81% of the system throughput during the nine months ended September 30, 2012. Approximately 13% of the throughput on the Hugoton system for the nine months ended September 30, 2012 was from one third-party shipper with the balance from various other third-party shippers.

Supply. The Hugoton field is one of the largest natural gas fields in North America. The Hugoton field continues to be a long-life, low-decline asset for Anadarko, which has an extensive acreage position in the field with approximately 470,000 gross acres. By virtue of a farm-out agreement between a third-party producer and Anadarko, the third-party producer gained the right to explore below the primary formations in the Hugoton field. The Hugoton system is well-positioned to gather volumes that may be produced from successful new wells the third-party producer may drill.

Delivery points. The Hugoton gathering system is connected to DCP Midstream’s National Helium plant, which extracts NGLs and helium and delivers residue gas into the Panhandle Eastern pipeline. The system is also connected to the Satanta plant, which is owned jointly by Pioneer Natural Resources Corporation (51%) and Anadarko (49%). The Satanta plant processes NGLs and helium, and delivers residue gas into the Kansas Gas Services and Southern Star pipelines.

East Texas

Dew gathering system. The 323-mile Dew gathering system is located in Anderson, Freestone, Leon and Robertson Counties of East Texas. The system provides gathering, dehydration and compression services and ultimately delivers into the Pinnacle gas treating system for any required treating. The Dew gathering system has 9 compressor stations with 36,480 combined horsepower.

Customers. Anadarko is the only shipper on the Dew gathering system.

Supply. As of September 30, 2012, Anadarko had approximately 830 producing wells in the Bossier play and controlled approximately 112,000 gross acres in the area.

Delivery points. The Dew gathering system has delivery points with PGT, which is the primary delivery point and is described in more detail below, and Kinder Morgan’s Tejas pipeline.

Pinnacle gathering system. The Pinnacle gathering system includes a 267-mile Pinnacle gathering system and the Bethel treating plant. The Pinnacle system provides sour gas gathering and treating service in Anderson, Freestone, Leon, Limestone and Robertson Counties of East Texas. The Bethel treating plant, located in Anderson County, has total carbon dioxide treating capacity of 502 MMcf/d and 20 LTD of sulfur treating capacity.

 

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Customers. Anadarko is the largest shipper on the Pinnacle gathering system with approximately 91% of system throughput for the nine months ended September 30, 2012. The remaining throughput on the system during that period was from four third-party shippers.

Supply. The Pinnacle gathering system is well-positioned to provide gathering and treating services to the five-county area over which it extends, including the Cotton Valley Lime formations, which contain relatively high concentrations of sulfur and carbon dioxide. Total installed sulfur treating capacity is 20 LTD and WES believes the Pinnacle gathering system is well positioned to benefit from future sour gas production in the area.

Delivery points. The Pinnacle gathering system is connected to the following pipelines:

 

   

Atmos Texas pipeline;

 

   

Enbridge Pipelines (East Texas) LP pipeline;

 

   

Energy Transfer Fuels pipeline;

 

   

Enterprise Texas Pipeline, LP pipeline;

 

   

ETC Texas Pipeline, Ltd pipeline; and

 

   

Kinder Morgan Tejas pipeline.

These pipelines provide transportation to the Carthage, Waha and Houston Ship Channel market hubs in Texas.

West Texas

Haley gathering system. The 120-mile Haley gathering system provides gathering and dehydration services in Loving County, Texas and gathers a portion of Anadarko’s production from the Delaware Basin.

Customers. Anadarko’s production represented approximately 66% of the Haley gathering system’s throughput for the nine months ended September 30, 2012. The remaining throughput was attributable to Anadarko’s partner in the Haley area.

Supply. In the greater Delaware Basin, Anadarko has access to approximately 359,000 gross acres as of September 30, 2012, a portion of which is gathered by the Haley gathering system.

Delivery points. The Haley gathering system has multiple delivery points. The primary delivery points are to the El Paso Natural Gas pipeline or the Enterprise GC, LP pipeline for ultimate delivery into Energy Transfer’s Oasis pipeline. WES also has the ability to deliver into Southern Union Energy Services’ pipeline for further delivery into the Oasis pipeline. The pipelines at these delivery points provide transportation to both the Waha and Houston Ship Channel markets.

Assets Under Construction

For a description of our assets under construction, please read “—Western Gas Partners, LP—Overview—WES’s Primary Growth Drivers—Organic growth projects.”

Competition

The midstream services business is very competitive. WES’s competitors include other midstream companies, producers, and intrastate and interstate pipelines. Competition for natural gas and NGL volumes is primarily based on reputation, commercial terms, reliability, service levels, location, available capacity, capital expenditures and fuel efficiencies. However, a substantial portion of WES’s throughput volumes on a majority of

 

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the WES systems are owned or controlled by Anadarko. In addition, Anadarko has dedicated future production to WES from its acreage surrounding WES’s Wattenberg, Dew/Pinnacle, Haley, Helper, Clawson and Hugoton gathering systems. WES believes that its assets that are located outside of the dedicated areas are geographically well positioned to retain and attract third-party volumes due to our competitive rates.

WES believes the primary advantages of its assets are their proximity to established and/or new production, and the service flexibility they provide to producers. WES believes it can provide the services that producers and other customers require to connect, gather and process their natural gas efficiently, at competitive and flexible contract terms.

Gathering Systems and Processing Plants

The following table summarizes the primary competitors for WES’s gathering systems and processing plants at September 30, 2012.

 

System

  

Competitor(s)

Bison treating facility

   Thunder Creek Gas Services and Fort Union

Chipeta processing plant

   QEP and Kinder Morgan, Inc.

Dew and Pinnacle gathering systems

   ETC Texas Pipeline, Ltd., Enbridge Pipelines (East Texas) LP, XTO Energy and Kinder Morgan Tejas Pipeline, LP

Fort Union gathering system

   Bison treating facility (carbon dioxide treating services only), MIGC, Thunder Creek Gas Services, and TransCanada

Granger gathering system and processing plant

  

Williams Field Services, Enterprise/TEPPCO and QEP

Haley gathering system

   Anadarko’s Delaware Basin Joint Venture, Enterprise GC, LP, Targa Midstream Services, LP and Southern Union Energy Services Company

Helper and Clawson gathering systems

  

QEP

Hilight gathering system and processing plant

   DCP Midstream and Merit Energy

Hugoton gathering system

   ONEOK Gas Gathering Company, DCP Midstream Partners, LP, Pioneer Natural Resources and Linn Energy

Newcastle gathering system and processing plant

   DCP Midstream

Platte Valley gathering system and processing plant

   DCP Midstream and AKA Energy

Red Desert system

   Williams Field Services and QEP

Rendezvous gas services

   Enterprise/TEPPCO

Wattenberg gathering system and processing plant

   DCP Midstream and AKA Energy

Transportation

MIGC competes with other pipelines that service the regional market and transport gas volumes from the Powder River Basin to Glenrock, Wyoming. MIGC competitors seek to attract and connect new gas volumes throughout the Powder River Basin, including certain of the volumes currently being transported on the MIGC pipeline. Competitive factors include commercial terms, available capacity, fuel efficiencies, the interconnected

 

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pipelines and gas quality issues. MIGC’s major competitors are Thunder Creek Gas Services, TransCanada’s Bison pipeline, which commenced operations in January 2011, and the Fort Union gathering system. The White Cliffs pipeline faces no direct competition from other pipelines, although shippers could sell crude oil in local markets rather than ship to Cushing, Oklahoma.

Safety and Maintenance

The pipelines WES uses to gather and transport natural gas and NGLs are subject to regulation by the PHMSA, of the DOT pursuant to the Natural Gas Pipeline Safety Act of 1968, as amended (“NGPSA”) with respect to natural gas and Hazardous Liquids Pipeline Safety Act of 1979, as amended (“HLPSA”), with respect to NGLs. Both the NGPSA and the HLPSA have been amended by the 2011 Pipeline Safety Act, which was reauthorized and amended by the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006. The NGPSA regulates safety requirements in the design, construction, operation and maintenance of natural gas and NGL pipeline facilities, while the 2011 Pipeline Safety Act establishes mandatory inspections for all U.S. hazardous liquid and natural gas transportation pipelines and some gathering lines in high-population areas.

These pipeline safety laws are subject to further amendment, with the potential for more onerous obligations and stringent standards being imposed on pipeline owners and operators. For example, on January 3, 2012, President Obama signed the 2011 Pipeline Safety Act, which act requires increased safety measures for gas and hazardous liquids transportation pipelines. Among other things, the 2011 Pipeline Safety Act directs the Secretary of Transportation to promulgate rules or standards relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, and leak detection system installation. The 2011 Pipeline Safety Act also directs owners and operators of interstate and intrastate gas transmission pipelines to verify their records confirming the maximum allowable pressure of pipelines in certain class locations and high consequence areas, requires promulgation of regulations for conducting tests to confirm the material strength of pipe operating above 30% of specified minimum yield strength in high consequence areas, and increases the maximum penalty for violation of pipeline safety regulations from $1 million to $2 million. On August 13, 2012, the PHMSA published a proposed rulemaking consistent with the signed act that, once finalized, will increase the maximum administrative civil penalties for violation of the pipeline safety laws and regulations after January 3, 2012 to $200,000 per violation per day of violation, with a maximum of $2,000,000 for a related series of violations. These civil penalty and the safety enhancement requirements and other provisions of the 2011 Pipeline Safety Act could require WES to install new or modified safety controls, pursue additional capital projects, or conduct maintenance programs on an accelerated basis, any or all of which tasks could result in WES incurring increased operating costs that could be significant and have a material adverse effect on WES’s results of operations or financial position.

The PHMSA has developed regulations implementing the 2011 Pipeline Safety Act that require transportation pipeline operators to implement integrity management programs, including more frequent inspections and other measures to ensure pipeline safety in “high consequence areas,” such as high population areas, areas unusually sensitive to environmental damage and commercially navigable waterways. WES, or the entities in which it owns an interest, inspect its pipelines regularly in compliance with state and federal maintenance requirements. Nonetheless, the adoption of new or amended regulations by PHMSA that result in more stringent or costly pipeline integrity management or safety standards could have a significant adverse effect on WES and similarly situated midstream operators. For instance, in August 2011, PHMSA published an advance notice of proposed rulemaking in which the agency is seeking public comment on a number of changes to regulations governing the safety of gas transmission pipelines and gathering lines, including, for example, (i) revising the definitions of “high consequence areas” and “gathering lines”; (ii) strengthening integrity management requirements as they apply to existing regulated operators and to currently exempt operators should certain exemptions be removed; (iii) strengthening requirements on the types of gas transmission pipeline integrity assessment methods that may be selected for use by operators; (iv) imposing gas transmission integrity management requirements on onshore gas gathering lines; (v) requiring the submission of annual, incident and safety-related conditions reports by operators of all gathering lines; and (vi) enhancing the current requirements for internal corrosion control of gathering lines.

 

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States are largely preempted by federal law from regulating pipeline safety for interstate lines but most are certified by the DOT to assume responsibility for enforcing federal intrastate pipeline regulations and inspection of intrastate pipelines. In practice, because states can adopt stricter standards for intrastate pipelines than those imposed by the federal government for interstate lines, states vary considerably in their authority and capacity to address pipeline safety. WES does not anticipate any significant difficulty in complying with applicable state laws and regulations. WES’s pipelines have operations and maintenance plans designed to keep the facilities in compliance with pipeline safety requirements.

In addition, WES is subject to a number of federal and state laws and regulations, including OSHA, and comparable state statutes, the purposes of which are to protect the health and safety of workers, both generally and within the pipeline industry. In addition, the OSHA hazard communication standard, the EPA’s community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require that information be maintained concerning hazardous materials used or produced in WES operations and that such information be provided to employees, state and local government authorities and citizens. WES and the entities in which it owns an interest are also subject to OSHA Process Safety Management regulations, as well as the EPA’s Risk Management Program (“RMP”), which are designed to prevent or minimize the consequences of catastrophic releases of toxic, reactive, flammable or explosive chemicals. These regulations apply to any process which involves a chemical at or above specified thresholds or any process which involves flammable liquid or gas in excess of 10,000 pounds. WES believes that it is in material compliance with all applicable laws and regulations relating to worker health and safety.

Regulation of Operations

Regulation of pipeline gathering and transportation services, natural gas sales and transportation of NGLs may affect certain aspects of WES’s business and the market for WES products and services.

Interstate Transportation Pipeline Regulation

MIGC, an interstate natural gas transportation system owned by WES, is subject to regulation by FERC under the NGA. Under the NGA, FERC has authority to regulate natural gas companies that provide natural gas pipeline transportation services in interstate commerce. Federal regulation extends to such matters as the following:

 

   

rates, services, and terms and conditions of service;

 

   

types of services MIGC may offer to its customers;

 

   

certification and construction of new facilities;

 

   

acquisition, extension, disposition or abandonment of facilities;

 

   

maintenance of accounts and records;

 

   

internet posting requirements for available capacity, discounts and other matters;

 

   

pipeline segmentation to allow multiple simultaneous shipments under the same contract;

 

   

capacity release to create a secondary market for MIGC’s transportation services;

 

   

relationships between affiliated companies involved in certain aspects of the natural gas business;

 

   

initiation and discontinuation of services;

 

   

market manipulation in connection with interstate sales, purchases or transportation of natural gas and NGLs; and

 

   

participation by interstate pipelines in cash management arrangements.

 

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Natural gas companies are prohibited from charging rates that have been determined not to be just and reasonable by FERC. In addition, FERC prohibits natural gas companies from unduly preferring or unreasonably discriminating against any person with respect to pipeline rates or terms and conditions of service.

The rates and terms and conditions for WES’s interstate pipeline services are set forth in FERC-approved tariffs. Pursuant to FERC’s jurisdiction over rates, existing rates may be challenged by complaint or by action of FERC under Section 5 of the NGA, and proposed rate increases may be challenged by protest. The outcome of any successful complaint or protest against WES’s rates could have an adverse impact on revenues associated with providing transportation service.

On October 16, 2008, FERC issued Order No. 717, which promulgated new standards of conduct for transmission providers to regulate the manner in which interstate natural gas pipelines may interact with their marketing affiliates based on an employee separation approach. Order No. 717 implements revised standards of conduct that include three primary rules: (1) the “independent functioning rule,” which requires transmission function and marketing function employees to operate independently of each other; (2) the “no-conduit rule,” which prohibits passing transmission function information to marketing function employees; and (3) the “transparency rule,” which imposes posting requirements to help detect any instances of undue preference. FERC also clarified in Order No. 717 that existing waivers to the standards of conduct (such as those held by MIGC) shall continue in full force and effect. FERC has issued a number of orders clarifying certain provisions of the Standards of Conduct under Order No. 717, however the subsequent orders did not substantively alter the Standards of Conduct.

In May 2005, FERC issued a policy statement permitting the inclusion of an income tax allowance in the cost of service-based rates of a pipeline organized as a tax pass-through partnership entity, if the pipeline proves that the ultimate owner of its equity interests has an actual or potential income tax liability on public utility income. The policy statement also provides that whether a pipeline’s owners have such actual or potential income tax liability will be reviewed by FERC on a case-by-case basis. In August 2005, FERC dismissed requests for rehearing of its policy statement. The new tax allowance policy and a related order were appealed to the D.C. Circuit. The D.C. Circuit issued an order on May 29, 2007 in which it denied these appeals and upheld FERC’s tax allowance policy and the application of that policy on all points subject to appeal. The D.C. Circuit denied rehearing of the May 29, 2007 decision on August 20, 2007, and the D.C. Circuit’s decision is final. Whether a pipeline’s owners have actual or potential income tax liability will be reviewed by FERC on a case-by-case basis. How the policy statement affirmed by the D.C. Circuit is applied in practice to pipelines owned by publicly traded partnerships could impose limits on a pipeline’s ability to include a full income tax allowance in its cost of service.

On April 17, 2008, FERC issued a proposed policy statement regarding the composition of proxy groups for determining the appropriate return on equity for natural gas and oil pipelines using FERC’s Discounted Cash Flow (“DCF”) model. In the policy statement, which modified a proposed policy statement issued in July 2007, FERC concluded (1) master limited partnerships should be included in the proxy group used to determine return on equity for both oil and natural gas pipelines; (2) there should be no cap on the level of distributions included in FERC’s current DCF methodology; (3) Institutional Brokers’ Estimate System forecasts should remain the basis for the short-term growth forecast used in the DCF calculation; (4) the long-term growth component of the DCF model should be limited to fifty percent of long-term gross domestic product; and (5) there should be no modification to the current two-thirds and one-third weighting of the short-term and long-term growth components, respectively. FERC also concluded that the policy statement should govern all gas and oil rate proceedings involving the establishment of return on equity that are pending before FERC. FERC’s policy determinations applicable to master limited partnerships are subject to further modification, and it is possible that these policy determinations may have a negative impact on MIGC’s rates in the future.

On August 8, 2005, Congress enacted the Energy Policy Act of 2005 (“EPAct 2005”). Among other matters, EPAct 2005 amends the NGA to add an anti-manipulation provision which makes it unlawful for any entity to engage in prohibited behavior in contravention of rules and regulations to be prescribed by FERC and,

 

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furthermore, provides FERC with additional civil penalty authority. On January 19, 2006, FERC issued Order No. 670, a rule implementing the anti-manipulation provision of EPAct 2005, and subsequently denied rehearing. The rules make it unlawful for any entity, directly or indirectly in connection with the purchase or sale of natural gas subject to the jurisdiction of FERC or the purchase or sale of transportation services subject to the jurisdiction of FERC to (1) use or employ any device, scheme or artifice to defraud; (2) make any untrue statement of material fact or omit to make any such statement necessary to make the statements made not misleading or (3) engage in any act or practice that operates as a fraud or deceit upon any person. The new anti-manipulation rules apply to interstate gas pipelines and storage companies and intrastate gas pipelines and storage companies that provide interstate services, as well as otherwise non-jurisdictional entities to the extent the activities are conducted “in connection with” gas sales, purchases or transportation subject to FERC jurisdiction. The new anti-manipulation rules do not apply to activities that relate only to intrastate or other non-jurisdictional sales or gathering, but only to the extent such transactions do not have a “nexus” to jurisdictional transactions. EPAct 2005 also amends the NGA and the Natural Gas Policy Act of 1978 (“NGPA”) to give FERC authority to impose civil penalties for violations of these statutes, up to $1.0 million per day per violation for violations occurring after August 8, 2005. In connection with this enhanced civil penalty authority, FERC issued a policy statement on enforcement to provide guidance regarding the enforcement of the statutes, orders, rules and regulations it administers, including factors to be considered in determining the appropriate enforcement action to be taken. Should WES fail to comply with all applicable FERC-administered statutes, rules, regulations and orders, it could be subject to substantial penalties and fines.

In 2007, FERC took steps to enhance its market oversight and monitoring of the natural gas industry by issuing several rulemaking orders designed to promote gas price transparency and to prevent market manipulation. On December 26, 2007, FERC issued a final rule on the annual natural gas transaction reporting requirements, as amended by subsequent orders on rehearing, or Order No. 704. Order No. 704 requires buyers and sellers of natural gas above a de minimis level, including entities not otherwise subject to FERC jurisdiction, to submit on May 1 of each year an annual report to FERC describing their aggregate volumes of natural gas purchased or sold at wholesale in the prior calendar year to the extent such transactions utilize, contribute to or may contribute to the formation of price indices. Order No. 704 also requires market participants to indicate whether they report prices to any index publishers and, if so, whether their reporting complies with FERC’s policy statement on price reporting. It is the responsibility of the reporting entity to determine which individual transactions should be reported based on the guidance of Order No. 704 as clarified in orders on clarification and rehearing.

Order No. 720, issued on November 20, 2008, increases the Internet posting obligations of interstate pipelines, and also requires “major non-interstate” pipelines (defined as pipelines with annual deliveries of more than 50 million MMBtu) to post on the Internet the daily volumes scheduled for each receipt and delivery point on their systems with a design capacity of 15,000 MMBtu per day or greater. In October 2011, Order 720, as clarified by orders on clarification and rehearing, was vacated by the Court of Appeals for the Fifth Circuit with respect to its application to non-interstate pipelines. In December 2011, the Fifth Circuit confirmed that Order 720, as clarified, remained applicable to interstate pipelines with respect to the additional posting requirements.

On May 20, 2010, FERC issued Order No. 735, which requires intrastate pipelines providing transportation services under Section 311 of the NGPA and Hinshaw pipelines operating under Section 1(c) of the NGA to report on a quarterly basis more detailed transportation and storage transaction information, including: rates charged by the pipeline under each contract; receipt and delivery points and zones or segments covered by each contract; the quantity of natural gas the shipper is entitled to transport, store, or deliver; the duration of the contract; and whether there is an affiliate relationship between the pipeline and the shipper. Order No. 735 further requires that such information must be supplied through a new electronic reporting system and will be posted on FERC’s website, and that such quarterly reports may not contain information redacted as privileged. Order No. 735 also extends FERC’s periodic review of the rates charged by the subject pipelines from three years to five years. FERC promulgated this rule after determining that such transactional information would help shippers make more informed purchasing decisions and would improve the ability of both shippers and FERC to

 

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monitor actual transactions for evidence of market power or undue discrimination. Order No. 735 became effective on April 1, 2011. On December 16, 2010, FERC issued Order No. 735-A, which generally reaffirmed Order No. 735, with certain modifications. FERC has issued a Notice of Proposed Rulemaking to consider issues related to existing semiannual storage reporting requirements for both interstate pipelines and section 311 and Hinshaw pipelines.

In 2008, FERC also took action to ease restrictions on the capacity release market, in which shippers on interstate pipelines can transfer to one another their rights to pipeline and/or storage capacity. Among other things, Order No. 712, as modified on rehearing, removes the price ceiling on short-term capacity releases of one year or less, allows a shipper releasing gas storage capacity to tie the release to the purchase of the gas inventory and the obligation to deliver the same volume at the expiration of the release, and facilitates Asset Management Agreements (“AMAs”) by exempting releases under qualified AMAs from: the competitive bidding requirements for released capacity; FERC’s prohibition against tying releases to extraneous conditions; and the prohibition on capacity brokering.

Gathering Pipeline Regulation

Section 1(b) of the NGA exempts natural gas gathering facilities from the jurisdiction of FERC. WES believes that its natural gas pipelines meet the traditional tests that FERC has used to determine that a pipeline is a gathering pipeline and is, therefore, not subject to FERC jurisdiction; although FERC has not made any determinations with respect to the jurisdictional status of any of our pipelines other than MIGC. The distinction between FERC-regulated transmission services and federally unregulated gathering services, however, has been the subject of substantial litigation, so the classification and regulation of WES’s gathering facilities are subject to change based on future determinations by FERC, the courts or Congress. State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements and complaint-based rate regulation. FERC makes jurisdictional determinations on a case-by-case basis. In recent years, FERC has regulated the gathering activities of interstate pipeline transmission companies more lightly, which has resulted in a number of such companies transferring gathering facilities to unregulated affiliates. As a result of these activities, natural gas gathering may begin to receive greater regulatory scrutiny at both the state and federal levels. WES’s natural gas gathering operations could be adversely affected should they be subject to more stringent application of state or federal regulation of rates and services. WES’s natural gas gathering operations also may be or become subject to additional safety and operational regulations relating to the design, installation, testing, construction, operation, replacement and management of gathering facilities. Additional rules and legislation pertaining to these matters are considered or adopted from time to time. WES cannot predict what effect, if any, such changes might have on its operations, but the industry could be required to incur additional capital expenditures and increased costs depending on future legislative and regulatory changes.

WES’s natural gas gathering operations are subject to ratable take and common purchaser statutes in most of the states in which it operates. These statutes generally require WES’s gathering pipelines to take natural gas without undue discrimination as to source of supply or producer. These statutes are designed to prohibit discrimination in favor of one producer over another producer or one source of supply over another source of supply. The regulations under these statutes can have the effect of imposing some restrictions on WES’s ability as an owner of gathering facilities to decide with whom WES contracts to gather natural gas. The states in which WES operates has adopted a complaint-based regulation of natural gas gathering activities, which allows natural gas producers and shippers to file complaints with state regulators in an effort to resolve grievances relating to gathering access and rate discrimination. WES cannot predict whether such a complaint will be filed against it in the future. Failure to comply with state regulations can result in the imposition of administrative, civil and criminal remedies. To date, there has been no adverse effect to WES’s systems due to these regulations.

During the 2007 legislative session, the Texas State Legislature passed H.B. 3273 (“Competition Bill”) and H.B. 1920 (the “LUG Bill”). The Texas Competition Bill and LUG Bill contain provisions applicable to gathering facilities. The Competition Bill allows the TRRC, the ability to use either a cost-of-service method or a

 

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market-based method for setting rates for natural gas gathering in formal rate proceedings. It also gives the TRRC specific authority to enforce its statutory duty to prevent discrimination in natural gas gathering, to enforce the requirement that parties participate in an informal complaint process and to punish purchasers, transporters and gatherers for taking discriminatory actions against shippers and sellers. The LUG Bill modifies the informal complaint process at the TRRC with procedures unique to lost and unaccounted for gas issues. It extends the types of information that can be requested and gives the TRRC the authority to make determinations and issue orders in specific situations. Both the Competition Bill and the LUG Bill became effective September 1, 2007. WES cannot predict what effect, if any, either the Competition Bill or the LUG Bill might have on its gathering operations.

Pipeline Safety Legislation

On January 3, 2012, the President signed into law the 2011 Pipeline Safety Act. This legislation provides a four-year reauthorization of the federal pipeline safety programs administered by the PHMSA. The Act increases the maximum amount of civil penalties the United States can seek from pipeline owners or operators who violate pipeline safety rules and regulations. It authorizes PHMSA (i) to extend existing integrity management requirements to additional pipelines beyond high-consequence areas, subject to Congressional review, and (ii) to require installation of automatic and remote-controlled shut-off valves on newly constructed transmission pipelines and for ones that are entirely replaced. The Act also imposes new notification and reporting requirements. Many specific requirements will be developed as part of future regulations. While WES cannot predict how DOT will implement the Act and other regulatory initiatives relating to pipeline safety, these provisions could have a material effect on WES’s operations and could subject WES to more comprehensive and stringent safety requirements and greater penalties for violations of safety rules.

Health Care Reform

In March 2010, the Patient Protection and Affordable Care Act (“PPACA”) and the Health Care and Education Reconciliation Act of 2010 (“HCERA”), which makes various amendments to certain aspects of the PPACA, were signed into law. The HCERA, together with PPACA, are referred to as the “Acts.” Among numerous other items, the Acts reduce the tax benefits available to an employer that receives the Medicare Part D tax benefit, impose excise taxes on high-cost health plans, and provide for the phase-out of the Medicare Part D coverage gap. These changes are not expected to have a material impact on WES’s financial condition, results of operations or cash flows.

Financial Reform Legislation

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), signed into law in 2010, requires most derivative transactions to be centrally cleared and/or executed on an exchange, and additional capital and margin requirements will be prescribed for most non-cleared trades starting. Non-financial entities which enter into certain derivatives contracts are exempted from the central clearing requirement; however, (i) all derivatives transactions must be reported to a central repository, (ii) the entity must obtain approval of derivative transactions from the appropriate committee of its board and (iii) the entity must notify the CFTC of its ability to meet its financial obligations before such exemption will be allowed. The CFTC has issued proposed regulations that set out the circumstances under which certain end users could elect to be exempt from the clearing requirements of the Act; however, WES cannot predict at this time whether and to what extent any such exemption, once finalized in regulations, would be applicable to its activities. While WES cannot currently predict the impact of this legislation, it will continue to monitor the potential impact of this new law as the resulting regulations emerge over the next several months and years.

 

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Environmental Matters

General

WES’s operations are subject to stringent federal, state and local laws and regulations relating to the protection of the environment. These laws and regulations can restrict or impact WES’s business activities in many ways, such as:

 

   

requiring the acquisition of various permits to conduct regulated activities;

 

   

requiring the installation of pollution-control equipment or otherwise restricting the way WES can handle or dispose of its wastes;

 

   

limiting or prohibiting construction activities in sensitive areas, such as wetlands, coastal regions or areas inhabited by endangered or threatened species; and

 

   

requiring investigatory and remedial actions to mitigate or eliminate pollution conditions caused by WES’s operations or attributable to former operations.

In addition, WES’s operations and construction activities are subject to state, county and local ordinances that restrict the time, place or manner in which those activities may be conducted so as to reduce or mitigate nuisance-type conditions, such as, for example, excessive levels of dust or noise or increased traffic congestion, requiring WES to take curative actions to reduce or mitigate such conditions. However, the performance of such actions have not had a material adverse effect on WES’s results of operations.

Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of investigatory and remedial obligations and the issuance of orders enjoining future operations or imposing additional compliance requirements. Also, certain environmental statutes impose strict, and in some cases, joint and several liability for costs required to clean up and restore sites where hydrocarbons or wastes have been disposed or otherwise released. Consequently, WES may be subject to environmental liability at its currently owned or operated facilities for conditions caused by others prior to its involvement.

WES has implemented programs and policies designed to keep its pipelines, plants and other facilities in compliance with existing environmental laws and regulations and WES does not believe that its compliance with such legal requirements will have a material adverse effect on its business, financial condition, results of operations or cash flows. Nonetheless, the trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and thus, there can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation and actual future expenditures may be significantly in excess of the amounts WES currently anticipates. WES tries to anticipate future regulatory requirements that might be imposed and plan accordingly to remain in compliance with changing environmental laws and regulations and to minimize the costs of such compliance. While WES believes that it is in substantial compliance with existing environmental laws and regulations, there is no assurance that the current conditions will continue in the future.

Below is a discussion of several of the material environmental laws and regulations that relate to WES’s business.

Hazardous Substances and Wastes

CERCLA and comparable state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include current and prior owners or operators of the site where a release of hazardous substances occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these “responsible persons” may be subject to strict and joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. CERCLA also

 

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authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment. Wes generates materials in the course of its ordinary operations that are regulated as “hazardous substances” under CERCLA or similar state laws and, as a result, may be jointly and severally liable under CERCLA, or such laws, for all or part of the costs required to clean up sites at which these hazardous substances have been released into the environment.

WES also generates solid wastes, including hazardous wastes, which are subject to the requirements of the federal Resource Conservation and Recovery Act, as amended (“RCRA”), and comparable state statutes. While RCRA regulates both solid and hazardous wastes, it imposes strict requirements on the generation, storage, treatment, transportation and disposal of hazardous wastes. In the ordinary course of WES’s operations, WES generates wastes constituting solid waste and, in some instances, hazardous wastes. While certain petroleum production wastes are excluded from RCRA’s hazardous waste regulations, it is possible that these wastes will in the future be designated as “hazardous wastes” and be subject to more rigorous and costly disposal requirements, which could have a material adverse effect on WES’s maintenance capital expenditures and operating expenses.

WES owns or leases properties where petroleum hydrocarbons are being or have been handled for many years. WES has generally utilized operating and disposal practices that were standard in the industry at the time, although petroleum hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by WES, or on or under the other locations where these petroleum hydrocarbons and wastes have been transported for treatment or disposal. In addition, certain of these properties have been operated by third parties whose treatment and disposal or release of petroleum hydrocarbons and other wastes was not under WES’s control. These properties and the wastes disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under these laws, WES could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater) or to perform remedial operations to prevent future contamination.

Air Emissions

The federal Clean Air Act, as amended, and comparable state laws and regulations restrict the emission of air pollutants from various industrial sources, including WES’s compressor stations, and also impose various monitoring and reporting requirements. Such laws and regulations may require that WES obtains pre-approval for the construction or modification of certain projects or facilities, obtain and strictly comply with air permits containing various emissions and operational limitations and utilize specific emission control technologies to limit emissions. WES’s failure to comply with these requirements could subject it to monetary penalties, injunctions, conditions or restrictions on operations and, potentially, criminal enforcement actions. WES may be required to incur certain capital expenditures in the future for air pollution control equipment in connection with obtaining and maintaining permits and approvals for air emissions. For example, on August 16, 2012, the EPA published final rules that establish new air emission control requirements for natural gas and natural gas liquid production, processing and transportation activities, including New Source Performance Standards to address emissions of sulfur dioxide and volatile organic compounds, and a separate set of emission standards to address hazardous air pollutants frequently associated with production and processing activities. Among other things, the rules establish specific requirements regarding emissions from compressors and controllers at natural gas gathering and boosting stations and processing plants together with dehydrators and storage tanks at natural gas processing plants, compressor stations and gathering and boosting stations. In addition, the rules establish new requirements for leak detection and repair of leaks at natural gas processing plants that exceed 500 parts per million in concentration. WES is currently reviewing this new rule and assessing its potential impacts on WES’s operations. Compliance with these requirements may require modifications to certain of WES’s operations, including the installation of new equipment to control emissions from WES’s compressors that could result in significant costs, including increased capital expenditures and operating costs, and could adversely impact WES’s business.

 

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Climate Change

In response to findings that emissions of carbon dioxide, methane, and other GHG present an endangerment to public health and the environment because emissions of such gases are contributing to the warming of the earth’s atmosphere and other climatic changes, the EPA has adopted regulations under existing provisions of the federal Clean Air Act that require a reduction in emissions of GHG from motor vehicles and also trigger construction and operating permit review for GHG emissions from certain stationary sources. In addition, the EPA has adopted rules requiring the monitoring and reporting of GHGs from certain sources, including, among others, onshore and offshore oil and natural gas production and onshore oil and natural gas processing, transmission, storage, and distribution activities, which may include certain of WES’s operations, on an annual basis. WES is monitoring GHG emissions from its operations in accordance with the GHG emissions reporting rule and believes that its monitoring activities are in substantial compliance with applicable reporting obligations.

In addition, Congress has from time to time considered legislation to reduce emissions of GHG, and numerous states have taken measures to reduce emissions of GHG. Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal. The adoption of any legislation or regulations that requires reporting of GHG or otherwise limits emissions of GHG from WES’s equipment and operations could require it to incur costs to reduce emissions of GHG associated with WES’s operations or could adversely affect demand for the natural gas and NGLs it gathers and processes. Finally, some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate change that could have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events; if such effects were to occur, they could have an adverse effect on WES’s midstream operations.

Water Discharges

The Clean Water Act, and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants or dredged and fill material into state waters as well as waters of the U.S. and adjacent wetlands. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of permits issued by the EPA, the Army Corps of Engineers or an analogous state agency. Spill prevention, control and countermeasure requirements of federal laws require appropriate containment berms and similar structures to help prevent the contamination of regulated waters in the event of a hydrocarbon spill, rupture or leak. In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws. WES believes that compliance with existing permits and foreseeable new permit requirements will not have a material adverse effect on its financial condition, results of operations or cash flows.

Hydraulic Fracturing

Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations such as shales. The process involves the injection of water, sand, and chemicals under pressure into the formation to fracture the surrounding rock and stimulate production. Hydraulic fracturing typically is regulated by state oil and natural gas commissions but the EPA has asserted federal regulatory authority pursuant to the Safe Drinking Water Act over certain hydraulic fracturing activities involving the use of diesel and recently released draft permitting guidance for hydraulic fracturing that uses diesel in fracturing fluids in those states where the EPA is the permitting authority. In addition, legislation has been introduced before Congress to provide for federal regulation of hydraulic fracturing under the Safe Drinking Water Act and to require disclosure of the chemicals used in the hydraulic fracturing process.

 

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Moreover, some states, including Colorado, Texas and Wyoming, where WES operates, have adopted, and other states are considering adopting, regulations that could impose more stringent permitting, public disclosure, and well construction requirements on hydraulic fracturing operations or otherwise seek to ban fracturing activities altogether. In the event that new or more stringent federal, state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where WES’s oil and natural gas exploration and production customers operate, those customers could incur potentially significant added costs to comply with such requirements and experience delays or curtailment in the pursuit of production activities, which could reduce demand for WES’s gathering and processing services.

In addition, certain governmental reviews are either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. For example, on May 11, 2012, the Bureau of Land Management issued a proposed rule that would require public disclosure of chemicals used in hydraulic fracturing operations, and impose other operational requirements for all hydraulic fracturing operations on federal lands, including Native American trust lands. Additionally, the EPA has commenced a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater, with initial results expected to be available by late 2012 and final results by 2014. Moreover, the EPA is developing effluent standards for the treatment and disposal of wastewater resulting from hydraulic fracturing activities and plans to propose these standards by 2014. Also, the U.S. Department of the Interior has released a draft rule regarding hydraulic fracturing on federal lands that would require disclosure of chemicals used in the fracturing process and establish minimum criteria for well-bore integrity and disposal of flowback water generated during the fracturing process. These ongoing or proposed studies, depending on the degree to which they are pursued and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the federal Safe Drinking Water Act or other regulatory mechanisms, which events could delay or curtail production of natural gas by exploration and production operators, some of which are WES’s customers, and thus reduce demand for WES’s midstream services.

Endangered Species

The Endangered Species Act, as amended (“ESA”), restricts activities that may affect endangered or threatened species or their habitats. While some of WES’s pipelines may be located in areas that are designated as habitats for endangered or threatened species, WES believes that it is in substantial compliance with the ESA. If endangered species are located in areas of the underlying properties where WES wishes to conduct development activities, such work could be prohibited or delayed or expensive mitigation may be required. Moreover, as a result of a settlement approved by the U.S. District Court for the District of Columbia on September 9, 2011, the U.S. Fish and Wildlife Service is required to consider listing more than 250 species as endangered under the ESA. Under the September 9, 2011 settlement, the U.S. Fish and Wildlife Service is required to review and address the needs of more than 250 species on the candidate list over a 6 year period. The designation of previously unprotected species as threatened or endangered in areas where WES or its oil and natural gas exploration and production customers operate could cause WES or its customers to incur increased costs arising from species protection measures and could result in delays or limitations in WES’s customers’ performance of operations, which could reduce demand for WES’s midstream services.

Title to Properties and Rights-of-Way

WES’s real property is classified into two categories: (1) parcels that it owns in fee and (2) parcels in which its interest derives from leases, easements, rights-of-way, permits or licenses from landowners or governmental authorities, permitting the use of such land for its operations. Portions of the land on which WES’s plants and other major facilities are located are owned by it in fee title, and WES believes that it has satisfactory title to these lands. The remainder of the land on which WES’s plant sites and major facilities are located are held by it pursuant to surface leases between WES, as lessee, and the fee owner of the lands, as lessors. WES has leased or owned these lands for many years without any material challenge known to it relating to the title to the land upon which the assets are located, and WES believes that it has satisfactory leasehold estates or fee ownership of such

 

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lands. WES has no knowledge of any challenge to the underlying fee title of any material lease, easement, right-of-way, permit or license held by it or to its title to any material lease, easement, right-of-way, permit or lease, and WES believes that it has satisfactory title to all of its material leases, easements, rights-of-way, permits and licenses.

Some of the leases, easements, rights-of-way, permits and licenses transferred to WES by Anadarko required the consent of the grantor of such rights, which in certain instances is a governmental entity. WES GP has obtained sufficient third-party consents, permits and authorizations for the transfer of the assets necessary to enable WES to operate its business in all material respects. With respect to any remaining consents, permits or authorizations that have not been obtained, WES has determined these will not have material adverse effect on the operation of its business should it fail to obtain such consents, permits or authorization in a reasonable time frame.

Anadarko may hold record title to portions of certain assets as WES makes the appropriate filings in the jurisdictions in which such assets are located and obtain any consents and approvals as needed. Such consents and approvals would include those required by federal and state agencies or other political subdivisions. In some cases, Anadarko temporarily holds record title to property as nominee for WES’s benefit and in other cases may, on the basis of expense and difficulty associated with the conveyance of title, may cause its affiliates to retain title, as nominee for WES’s benefit, until a future date. WES anticipates that there will be no material change in the tax treatment of its common units resulting from Anadarko holding the title to any part of such assets subject to future conveyance or as its nominee.

Employees

We and our general partner have no employees. To conduct WES’s operations, Anadarko, on behalf of WES GP, employed as of September 30, 2012 approximately 380 employees. We believe that our and WES’s relationship with Anadarko’s employees is satisfactory.

Legal Proceedings

Western Gas Equity Partners, LP

We are not a party to any legal proceedings other than legal proceedings arising in the ordinary course of our business.

Western Gas Partners, LP

From time to time, WES is involved in legal, tax, regulatory and other proceedings in various forums regarding performance, contracts and other matters that arise in the ordinary course of business. WES’s management is not aware of any such proceeding for which a final disposition could have a material adverse effect on WES’s results of operations, cash flows or financial condition.

 

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MANAGEMENT

Our general partner will manage our operations and activities, including, among other things, establishing the quarterly cash distribution levels for our common units and the reserves that it believes prudent to maintain for the proper conduct of our business. Our general partner will not receive any management fee or other compensation in connection with its management of our business but will be entitled to be reimbursed for all direct and indirect expenses incurred on our behalf.

We control and manage WES through our ownership of its general partner, WES GP. The officers of our general partner are also officers of WES GP, and our officers, as well as the employees that operate WES, are Anadarko employees. Five of our directors are affiliated with Anadarko and are also directors of WES GP. Our remaining three directors will be independent directors as defined by the NYSE. At least one of our independent directors will be appointed prior to the date our common units are listed for trading on the NYSE, a second independent director will be appointed within 90 days of the completion of this offering and the third independent director will be appointed within one year of the completion of this offering. Anadarko is the sole member of our general partner and will have the right to appoint our entire board of directors. Furthermore, because we are the sole member of WES GP, Anadarko has the right to appoint the entire board of directors of WES GP. The board of WES GP is responsible for overseeing WES GP’s role as the general partner of WES.

Directors and Executive Officers

The following table sets forth certain information for the executive officers and members of the boards of directors of our general partner and WES GP. Directors will serve until their successors are duly elected and qualified or until the earlier of their death, resignation, removal or disqualification. Officers serve at the discretion of the board of directors. Ages shown are as of November 1, 2012.

 

Name

   Age   

Position with Our
General Partner

  

Position with WES’s
General Partner

Robert G. Gwin

   49    Chairman of the Board    Chairman of the Board

Donald R. Sinclair

   55    President, Chief Executive Officer and Director    President, Chief Executive Officer and Director

Benjamin M. Fink

   42    Senior Vice President, Chief Financial Officer and Treasurer    Senior Vice President, Chief Financial Officer and Treasurer

Danny J. Rea

   54    Senior Vice President and Chief Operating Officer    Senior Vice President and Chief Operating Officer

Philip H. Peacock

   41    Vice President, General Counsel and Corporate Secretary    Vice President, General Counsel and Corporate Secretary

Milton Carroll

   62    —      Director

Anthony R. Chase

   57    —      Director

James R. Crane

   58    —      Director

Charles A. Meloy

   52    Director    Director

Robert K. Reeves

   54    Director    Director

David J. Tudor

   53    —      Director

R. A. Walker

   55    Director    Director

Robert G. Gwin. Robert G. Gwin serves as Chairman of the board of directors of our general partner. Mr. Gwin has served as a director of WES GP since August 2007 and has served as non-executive Chairman of the Board of WES GP since October 2009. He also served as Chief Executive Officer of WES GP from August 2007 to January 2010 and as President from August 2007 to September 2009. He has served as Senior Vice President, Finance and Chief Financial Officer of Anadarko since March 2009, and prior to that position had served as Senior Vice President of Anadarko since March 2008. He previously served as Vice President, Finance

 

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and Treasurer of Anadarko since January 2006. Since 2011, Mr. Gwin has served as a director of LyondellBasell Industries N.V., where he serves as a member of the audit committee and as Chairman of the nominating and governance committee. Mr. Gwin holds a Bachelor of Science degree from the University of Southern California and a Master of Business Administration degree from the Fuqua School of Business at Duke University, and he is a Chartered Financial Analyst.

Donald R. Sinclair. Donald R. Sinclair serves as the President and Chief Executive Officer of our general partner and as a member of the board of directors of our general partner. Mr. Sinclair has served as President and a director of WES GP since October 2009 and as Chief Executive Officer since January 2010. Prior to becoming President and a director of WES GP, Mr. Sinclair was a founding partner and served as President of Ceritas Energy, LLC, a midstream energy company headquartered in Houston with operations in Texas, Wyoming and Utah from February 2003 to September 2009. Earlier in his career, Mr. Sinclair was President of Duke Energy Trading and Marketing LLC, one of the nation’s largest marketers of natural gas and wholesale electric power, and served as Chairman of the Energy Risk Committee for Duke Energy Corporation. Prior to joining Duke, Mr. Sinclair served as Senior Vice President of Tenneco Energy and as President of Tenneco Energy Resources. Previously, as one of the original principals and officers at Dynegy (formerly NGC Corporation), he served for eight years in various officer positions, including Senior Vice President and Chief Risk Officer where he was in charge of all risk management activities and commercial operations. Mr. Sinclair earned a Bachelor of Business Administration degree from Texas Tech University.

Benjamin M. Fink. Benjamin M. Fink serves as Senior Vice President, Chief Financial Officer and Treasurer of our general partner. Mr. Fink has served as the Senior Vice President and Chief Financial Officer of WES GP since May 2009, and as Senior Vice President, Chief Financial Officer and Treasurer of WES GP since November 2010. He was Director, Finance of Anadarko from April 2007 to May 2009, during which time he was responsible for principal oversight of the finance operations of an Anadarko subsidiary, Anadarko Algeria Company, LLC. From August 2006 to April 2007, he served as an independent financial consultant to Anadarko in its Beijing, China and Rio de Janeiro, Brazil offices. From April 2001 until June 2006, he held executive management positions at Prosoft Learning Corporation, including serving as its President and Chief Executive Officer from November 2004 until that company’s sale in June 2006. From 2000 to 2001 he co-founded and served as Chief Operating Officer and Chief Financial Officer of Meta4 Group Limited, an online direct marketer based in Hong Kong and Tokyo. Previously, he held positions of increasing responsibility at Prudential Capital Group and Prudential Asset Management Asia, where he focused on the negotiation, structuring and execution of private debt and equity investments. He holds a Bachelor of Science degree in Economics from the Wharton School of the University of Pennsylvania, and he is a Chartered Financial Analyst.

Danny J. Rea. Danny J. Rea serves as Senior Vice President and Chief Operating Officer of our general partner. Mr. Rea has served as Senior Vice President and Chief Operating Officer of WES GP since August 2007 and as Vice President, Midstream of Anadarko since May 2007. He also served as a director of WES GP from August 2007 to September 2009. Previously, Mr. Rea served as Manager, Midstream Services of Anadarko from May 2004 to May 2007 and Manager, Gas Field Services from August 2000 to May 2004. Mr. Rea joined Anadarko as an engineer in 1981 and has held positions of increasing responsibility over his 31 years at Anadarko. He holds a Bachelor of Science degree in Petroleum Engineering from Louisiana Tech University, and a Master of Business Administration degree from the University of Houston. He served on the board of directors for the Wyoming Pipeline Authority from March 2006 until March 2010 and is a member of the Gas Processors Association and the Society of Petroleum Engineers.

Philip H. Peacock. Philip H. Peacock serves as Vice President, General Counsel and Corporate Secretary of our general partner. Mr. Peacock has served as Vice President, General Counsel and Corporate Secretary of WES GP since August 2012. Prior to joining WES GP, Mr. Peacock was a partner practicing corporate and securities law at the law firm of Andrews Kurth LLP, which he joined in August 2003.

 

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Mr. Peacock holds a Bachelor of Arts degree from Princeton University, a Master of Arts degree from the University of Houston, and a Juris Doctor degree from the University of Virginia. He is licensed to practice law in the state of Texas and serves on the Board of Directors of The Children’s Fund, Inc.

Milton Carroll. Milton Carroll has served as a director of WES GP and as Chairman of the special committee of the board of directors since April 2008. Mr. Carroll currently serves as Chairman of Houston-based CenterPoint Energy, Inc., where he has been a director since 1992. Mr. Carroll is Chairman and founder of Instrument Products, Inc., an oil-tool manufacturing company in Houston, Texas. He also serves as Chairman of Health Care Services Corporation (a Chicago-based company operating through its Blue Cross and Blue Shield divisions in Illinois, Texas, Oklahoma and New Mexico), as a director of Halliburton Company, where he serves as a member of the compensation committee and the nominating and corporate governance committee, as a director of LyondellBasell Industries N.V., where he serves as a member of the nominating and governance committee and as Chairman of the compensation committee, and as a director of LRR Energy, L.P., where he serves as a member of the special committee and the audit committee. Mr. Carroll also served as a director of EGL, Inc. from May 2003 until August 2007 and as a director of the general partner of DCP Midstream Partners, LP from December 2005 to December 2006. Mr. Carroll holds a Bachelor of Science degree in Industrial Technology from Texas Southern University.

Anthony R. Chase. Anthony R. Chase has served as a director of WES GP and as a member of the special and audit committees of the board of directors since April 2008. He is Chairman and Chief Executive Officer of ChaseSource, L.P., a Houston-based staffing firm. He served as an Executive Vice President of Crest Investment Company, a Houston-based private equity firm, from January 2009 until December 2009. Prior to these positions, he had most recently served as the Chairman and Chief Executive Officer of ChaseCom, L.P., a global customer relationship management and staffing services company until its sale in 2007 to AT&T. Mr. Chase has also been a Professor of Law at the University of Houston since 1991. Mr. Chase currently serves as a director of AVI Biopharma, Inc. From 1999 to August 2010, he served as a director of Cornell Companies, where he served as a member of the audit committee, and as lead director from May 2008 to August 2010. In January 2012, Mr. Chase became Chairman of the Greater Houston Partnership. From July 2004 to July 2008, he served as a director of the Federal Reserve Bank of Dallas, and also served as its Deputy Chairman from 2006 until his departure in July 2008. Mr. Chase holds Bachelor of Arts, Masters of Business Administration and Juris Doctor degrees from Harvard University.

James R. Crane. James R. Crane has served as a director of WES GP and as a member of the special and audit committees of the board of directors since April 2008. In November 2011, Mr. Crane became the principal owner and Chairman of the Houston Astros Baseball Club. Mr. Crane is also the Chairman and CEO of Crane Capital Group Inc., an investment management company he founded. Prior to that time, he was Founder, Chairman and Chief Executive Officer of EGL, Inc., a global transportation, supply chain management and information services company, from 1984 until its sale in August 2007. Crane Capital Group currently invests in transportation, power distribution, real estate and asset management. Its holdings include Crane Worldwide Logistics, a premier global provider of customized transportation and logistics services with 54 offices in 20 countries, and Champion Energy Services, a retail electric provider. In February 2012, Mr. Crane was appointed to the board of directors of Nabors Industries Ltd., an international drilling contractor and well-services provider. From February 2010 to February 2012, he served as a director of Fort Dearborn Life Insurance Company, a subsidiary of Health Care Service Corporation, and from 1999 to November 2007 he served as a director of HCC Insurance Holdings, Inc. Mr. Crane holds a Bachelor of Science degree in Industrial Safety from the University of Central Missouri.

Charles A. Meloy. Charles A. Meloy serves as a member of the board of directors of our general partner. Mr. Meloy has served as a director of WES GP since February 2009, and as Senior Vice President, U.S. Onshore Exploration and Production of Anadarko since July 2012. Mr. Meloy previously served as Senior Vice President, Worldwide Operations of Anadarko from December 2006 to July 2012. Before joining Anadarko, he served as Vice President of Exploration and Production at Kerr-McGee Corporation, prior to its acquisition by Anadarko.

 

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At Kerr-McGee, Mr. Meloy was Vice President of Gulf of Mexico exploration, production and development from 2004 to 2005, Vice President and Managing Director of North Sea operations from 2002 to 2004, and held several other deepwater Gulf of Mexico management positions beginning in 1999. Earlier in his career, Mr. Meloy held various planning, operations, deepwater and reservoir engineering positions with Oryx Energy Company and its predecessor, Sun Oil Company. He earned a bachelor’s degree in chemical engineering from Texas A&M University and is a member of the Society of Petroleum Engineers and Texas Professional Engineers. Mr. Meloy is a member of the Board of Directors of the Independent Producers of America Association.

Robert K. Reeves. Robert K. Reeves serves as a member of the board of directors of our general partner. Mr. Reeves has served as a director of WES GP since August 2007 and as Senior Vice President, General Counsel and Chief Administrative Officer of Anadarko since January 2007. He previously served as Senior Vice President, Corporate Affairs & Law and Chief Governance Officer of Anadarko beginning in 2004. He has also served as a director of Key Energy Services, Inc., a publicly traded oil field services company, since October 2007. Prior to joining Anadarko, he served as Executive Vice President, Administration and General Counsel of North Sea New Ventures from 2003 to 2004 and as Executive Vice President, General Counsel and Secretary of Ocean Energy, Inc. and its predecessor companies from 1997 to 2003. Mr. Reeves holds a Bachelor of Science degree in Business Administration and a Juris Doctor degree from Louisiana State University.

David J. Tudor. David J. Tudor has served as a director of WES GP and as Chairman of the audit committee and a member of the special committee of the board of directors since April 2008. Since 1999, Mr. Tudor has been the President and Chief Executive Officer of ACES Power Marketing, an Indianapolis-based commodity risk management company owned by 19 generation and transmission cooperatives throughout the U.S. Prior to joining ACES Power Marketing, Mr. Tudor was the Executive Vice President & Chief Operating Officer of PG&E Energy Trading, where he managed commercial operations in the U.S. and Canada. He also currently serves as a director of Wabash Valley Power Association’s Board Risk Oversight Committee and as an external member of the Risk Oversight Committee of the East Kentucky Power Cooperative. Mr. Tudor holds a Bachelor of Science degree in Accounting from David Lipscomb University.

R. A. Walker. R. A. Walker serves as a member of the board of directors of our general partner. Mr. Walker has served as a director of WES GP since August 2007. He also served as non-executive Chairman of the board of directors of WES GP from August 2007 to September 2009. Since May 2012, Mr. Walker has served as President and Chief Executive Officer and a director of Anadarko. Mr. Walker previously served as Anadarko’s President and Chief Operating Officer from February 2010 to May 2012 and as Chief Operating Officer beginning in March 2009, having joined the company in 2005 as Senior Vice President and Chief Financial Officer. Prior to joining Anadarko, he was a Managing Director for the Global Energy Group of UBS Investment Bank from 2003 to 2005. Mr. Walker is a director of CenterPoint Energy, Inc., where he serves on the audit committee and the finance committee. Mr. Walker also serves on the Board of the Houston Museum of Natural Science.

Board Committees

Audit Committee. Our general partner’s board of directors will establish an audit committee to be effective upon the closing of this offering. Ultimately, the three independent members of our general partner’s board of directors will serve on the audit committee that reviews our external financial reporting, is responsible for engaging our independent auditors and reviews procedures for internal auditing and the adequacy of our internal accounting controls. The members of the audit committee will meet the independence standards established by the NYSE and the SEC. Upon the completion of this offering, we will have three members of the audit committee.

Special Committee. Our general partner’s board of directors will establish a special committee under our partnership agreement. The special committee will consist of two or more members and will be charged with reviewing specific matters that our general partner’s board of directors believes may involve conflicts of interest. The special committee will determine if the resolution of any conflict of interest submitted to it is fair and

 

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reasonable to us. In addition to satisfying certain other requirements, the members of the special committee must meet the independence standards for service on an audit committee of a board of directors, which standards are established by the NYSE and the SEC. Any matters approved by the special committee will be conclusively deemed to be fair and reasonable to us, approved by all of our unitholders and not a breach by us of any duties we may owe to our unitholders.

Compensation Committee. Our general partner’s board of directors performs the functions of compensation committee. Its responsibilities will include making compensation decisions for the independent directors.

Other Committees. Our general partner’s board of directors may establish other committees from time to time to facilitate its oversight of our management.

Election of Directors

Our general partner’s limited liability company agreement establishes a board of directors that will be responsible for the oversight of our business and operations. Our general partner’s board of directors will be elected by a voting member majority, as defined in the limited liability company agreement.

Compensation of Directors

No additional remuneration will be paid to officers of our general partner who also serve as directors. We anticipate that each independent director will receive a combination of cash and restricted or phantom common units as compensation for services rendered, including attending meetings of the board of directors and committee meetings. In addition, each independent director will be reimbursed for his out-of-pocket expenses in connection with attending meetings of the board of directors or its committees. Each director will be fully indemnified for his actions associated with being a director to the fullest extent permitted under Delaware law.

Executive Compensation Discussion and Analysis

Because our only cash-generating assets are partnership interests in WES, we expect that the officers of our general partner will devote a substantial majority of their time to WES’s business. We expect the amount of time that the officers of our general partner devote to our business as opposed to WES’s business in future periods will not be substantial unless significant changes are made to the nature of our business. Accordingly, our general partner has no current intention of providing its officers with any compensation for services rendered to us in addition to the compensation that such officers receive as officers of WES GP. The following discussion relates to the compensation of the executive officers of WES GP as it relates to their services performed on behalf of WES.

Overview

WES does not directly employ any of the persons responsible for managing its business, and WES does not have a compensation committee of the board of directors. WES GP manages WES’s operations and activities, and its board of directors and officers make compensation decisions on WES’s behalf.

The compensation (other than the long-term incentive plan benefits described below) of Anadarko’s employees that perform services on WES’s behalf, including WES’s executive officers, is approved by Anadarko’s management. Awards under the Western Gas Partners, LP 2008 Long-Term Incentive Plan (the “LTIP”) are recommended by Anadarko’s management and approved by the board of directors of WES GP. WES’s reimbursement to Anadarko for the compensation of executive officers is governed by, and subject to the limitations contained in, the WES omnibus agreement and is based on Anadarko’s methodology used for allocating general and administrative expenses to WES. Under the WES omnibus agreement, general and administrative expenses allocated to WES are determined by Anadarko in its reasonable discretion in accordance with WES’s partnership agreement and the WES omnibus agreement.

 

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WES’s “named executive officers” for 2011 were Donald R. Sinclair (the principal executive officer), Benjamin M. Fink (the principal financial officer and principal accounting officer), Danny J. Rea (the principal operating officer) and Amanda M. McMillian (the vice president, general counsel and corporate secretary through August 6, 2012). Compensation paid or awarded by WES in 2011 with respect to the named executive officers reflects only the portion of compensation expense that is allocated to WES pursuant to Anadarko’s allocation methodology and subject to the terms of the WES omnibus agreement. Anadarko has the ultimate decision-making authority with respect to the total compensation of the named executive officers and, subject to the terms of the WES omnibus agreement, the portion of such compensation that is allocated to WES pursuant to Anadarko’s allocation methodology. Generally, once Anadarko has established the aggregate amount to be paid or awarded to the named executive officers with respect to each element of compensation for services rendered to both WES GP and Anadarko, such aggregate amount is multiplied by an allocation percentage for each named executive officer. Each allocation percentage is established based on a periodic, good-faith estimate made by each named executive officer and is reviewed by the chairman of WES GP’s board of directors. The resulting amount represents both the amount reimbursed to Anadarko by WES pursuant to the terms of the WES omnibus agreement and the number reflected in the Summary Compensation Table below. Notwithstanding the foregoing, perquisites are not currently allocated to WES, and bonus amounts under the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table are capped consistent with the methodology set forth in the services and secondment agreement for all employees whose compensation is allocated to WES.

The following table presents the estimated percentage of time (“time allocation”) that WES GP’s named executive officers devoted to WES during the year ended December 31, 2011 (the percentage representing the time devoted to the business of WES relative to time devoted to the businesses of WES and Anadarko in the aggregate):

 

Officers of WES GP

  Time
Allocated
    Anadarko Corporate
Officer

Donald R. Sinclair

    75.0   Yes

Benjamin M. Fink

    90.0   No

Danny J. Rea

    40.0   Yes

Amanda M. McMillian (through August 6, 2012)

    50.0   No

The following discussion relating to compensation paid by Anadarko is based on information provided to us by Anadarko and does not purport to be a complete discussion and analysis of Anadarko’s executive compensation philosophy and practices. For a more complete analysis of the compensation programs and philosophies utilized at Anadarko, please read “Compensation Discussion and Analysis” contained within Anadarko’s proxy statement, filed with the SEC on March 23, 2012. With the exception of the grants under the LTIP and awards made under the Incentive Plan, the elements of compensation discussed below (and Anadarko’s decisions with respect to the levels of such compensation) are not subject to approvals by the board of directors of WES GP, including the audit or special committee thereof.

Elements of Compensation

The primary elements of Anadarko’s compensation program are a combination of annual cash and long-term equity-based compensation. For 2011, the principal elements of compensation for WES’s named executive officers are as follows:

 

   

base salary;

 

   

annual cash incentives;

 

   

equity-based compensation, which includes equity-based compensation under Anadarko’s 2008 Omnibus Incentive Compensation Plan (the “Omnibus Plan”), the LTIP and/or the Incentive Plan; and

 

   

Anadarko’s other benefits, including welfare and retirement benefits, severance benefits and change of control benefits, plus other benefits on the same basis as other eligible Anadarko employees.

 

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Base salary. Anadarko’s management establishes base salaries to provide a fixed level of income for WES’s named executive officers for their level of responsibility (which may or may not be related to WES’s business), their relative expertise and experience, and in some cases their potential for advancement. As discussed above, a portion of the base salaries of WES’s named executive officers is allocated to WES based on Anadarko’s methodology used for allocating general and administrative expenses.

Annual cash incentives (bonuses). Anadarko’s management made annual cash awards to WES’s named executive officers in 2012 for their performance during the year ended December 31, 2011, under the 2011 Anadarko annual incentive program (“AIP”), which is part of the Omnibus Plan. Annual cash incentive awards are used by Anadarko to motivate and reward its executives and employees for the achievement of Anadarko objectives aligned with value creation and/or to recognize individual contributions to Anadarko’s performance. The AIP puts a portion of an executive’s compensation at risk by linking potential annual compensation to Anadarko’s achievement of specific performance metrics during the year related to operational, financial and safety measures internal to Anadarko. The AIP bonuses paid to WES’s named executive officers were determined by Anadarko management after taking into account each such employee’s contribution toward achievement of Anadarko’s established performance metrics.

The portion of any annual cash awards allocable to WES is based on Anadarko’s methodology used for allocating general and administrative expenses, subject to the limitations established in the WES omnibus agreement. Anadarko’s general policy is to pay these awards during the first quarter of each calendar year for the prior year’s performance.

Long-term incentive awards under the Omnibus Plan. Anadarko periodically makes equity-based awards under the Omnibus Plan to align the interests of its executive officers and employees with those of Anadarko stockholders by emphasizing the long-term growth in Anadarko’s value. For 2011, the annual equity awards generally consisted of a combination of (1) stock options, (2) time-based restricted stock units or shares of restricted stock and (3) performance units. This award structure is intended to provide a combination of equity-based vehicles that is performance-based in absolute and relative terms, while also encouraging retention. The costs allocated to WES for the named executive officers’ compensation includes an allocation of expense associated with a portion of these awards in accordance with the allocation mechanisms in the WES omnibus agreement.

The Incentive Plan. WES GP has adopted the Amended and Restated Western Gas Holdings, LLC Equity Incentive Plan for the executive officers of WES GP. The awards of unit appreciation rights, unit value rights and distribution equivalent rights made under this plan were designed to provide incentive compensation to encourage superior performance. For a description of this plan, please read “—Amended and Restated Western Gas Holdings, LLC Equity Incentive Plan” below.

Other benefits. In addition to the compensation discussed above, Anadarko also provides other benefits to the named executive officers who are also Anadarko corporate officers, including the following:

 

   

retirement benefits to match competitive practices in Anadarko’s industry, including participation in Anadarko’s employee savings plan, savings restoration plan, retirement plan and retirement restoration plan;

 

   

severance benefits under the Anadarko Officer Severance Plan;

 

   

certain change of control benefits under key employee change of control contracts;

 

   

director and officer indemnification agreements;

 

   

a limited number of perquisites, including financial counseling, tax preparation and estate planning, an executive physical program, management life insurance, and personal excess liability insurance; and

 

   

benefits, including medical, dental, vision, flexible spending accounts, paid time off, life insurance and disability coverage, which are also provided to all other eligible U.S.-based Anadarko employees.

 

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For a more detailed summary of Anadarko’s executive compensation program and the benefits provided thereunder, please read “Compensation Discussion and Analysis” contained within Anadarko’s proxy statement, filed with the SEC on March 23, 2012.

Role of Executive Officers in Executive Compensation

Anadarko’s management determines the compensation for each of WES’s named executive officers. The board of directors of WES GP determines compensation for the independent, non-management directors of WES GP’s board of directors, as well as any grants made under the LTIP and the Incentive Plan. None of WES’s named executive officers provides compensation recommendations to the Anadarko compensation committee or Anadarko’s management team regarding compensation.

Compensation Mix

WES believes that the mix of base salary, cash awards, awards under the Omnibus Plan, the LTIP and the Incentive Plan, and other compensation fit Anadarko’s and WES’s overall compensation objectives. WES believes this mix of compensation provides competitive compensation opportunities to align and drive employee performance in support of its business strategies, as well as Anadarko’s, and to attract, motivate and retain high-quality talent with the skills and competencies required by WES and Anadarko.

Western Gas Partners, LP 2008 Long-Term Incentive Plan

General. In April 2008, WES GP adopted the Western Gas Partners, LP 2008 Long-Term Incentive Plan for employees and directors of WES GP and its affiliates, including Anadarko, who perform services for WES. The summary of the LTIP contained herein does not purport to be complete and is qualified in its entirety by reference to the LTIP, the terms of which have been previously filed by WES with the SEC. The LTIP provides for the grant of unit awards, restricted units, phantom units, unit options, unit appreciation rights, distribution equivalent rights and substitute awards. Subject to adjustment for certain events, an aggregate of 2,250,000 common units may be delivered pursuant to awards under the LTIP. Units that are cancelled, forfeited or are withheld to satisfy WES GP’s tax withholding obligations or payment of an award’s exercise price are available for delivery pursuant to other awards. The LTIP is administered by WES GP’s board of directors. The LTIP has been designed to promote the interests of WES and its unitholders by strengthening its ability to attract, retain and motivate qualified individuals to serve as directors and employees.

Unit awards. WES GP’s board of directors may grant unit awards to eligible individuals under the LTIP. A unit award is an award of common units that are fully vested upon grant and are not subject to forfeiture.

Restricted units and phantom units. A restricted unit is a common unit that is subject to forfeiture. Upon vesting, the forfeiture restrictions lapse and the recipient holds a common unit that is no longer subject to forfeiture. A phantom unit is a notional unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of WES GP’s board of directors, cash equal to the fair market value of a common unit. WES GP’s board of directors may make grants of restricted and phantom units under the LTIP that contain such terms, consistent with the LTIP, as the board may determine are appropriate, including the period over which restricted or phantom units will vest. The board may, in its discretion, base vesting on the grantee’s completion of a period of service or upon the achievement of specified financial objectives or other criteria. In addition, the restricted and phantom units will vest automatically upon a change of control of WES GP (as defined in the LTIP) or as otherwise described in the award agreement. WES GP’s board of directors approved phantom unit grants to each of Messrs. Carroll, Chase, Crane and Tudor in connection with their service on the board. The phantom units granted to each of these directors in 2011 had a grant-date value of approximately $70,000. These phantom units vest on the first anniversary of the date of grant and have tandem distribution equivalent rights. Also, Mr. Sinclair received a phantom unit grant in November 2011 with an allocated grant-date value of $356,265. Mr. Sinclair’s phantom units vest in one-third increments over a three-year period commencing on the first anniversary of the grant date.

 

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If a grantee’s employment or membership on the board of directors terminates for any reason, the grantee’s restricted and phantom units will be automatically forfeited unless and to the extent that the award agreement or the board provides otherwise.

Distributions made by WES with respect to awards of restricted units may, in the board’s discretion, be subject to the same vesting requirements as the restricted units. The board, in its discretion, may also grant tandem distribution equivalent rights with respect to phantom units.

Unit options and unit appreciation rights. The LTIP also permits the grant of options covering common units and unit appreciation rights. Unit options represent the right to purchase a number of common units at a specified exercise price. Unit appreciation rights represent the right to receive the appreciation in the value of a number of common units over a specified exercise price, either in cash or in common units as determined by the WES GP board. Unit options and unit appreciation rights may be granted to such eligible individuals and with such terms as the WES GP board may determine, consistent with the LTIP; however, a unit option or unit appreciation right must have an exercise price greater than or equal to the fair market value of a common unit on the date of grant. No unit options or unit appreciation rights were granted during 2011.

Distribution equivalent rights. Distribution equivalent rights are rights to receive all or a portion of the distributions otherwise payable on units during a specified time. Distribution equivalent rights may be granted alone or in combination with another award.

Source of common units. Common units to be delivered with respect to awards may be newly issued units, common units acquired by WES GP in the open market, common units already owned by WES GP or WES, common units acquired by WES GP directly from WES, or any other person or any combination of the foregoing. WES GP is entitled to reimbursement by WES for the cost incurred in acquiring such common units. With respect to unit options, WES GP is entitled to reimbursement from WES for the difference between the cost it incurs in acquiring these common units and the proceeds it receives from an optionee at the time of exercise. Thus, WES bears the cost of the unit options. If WES issues new common units with respect to these awards, the total number of common units outstanding will increase, and WES GP will remit the proceeds it receives from a participant, if any, upon exercise of an award to WES. With respect to any awards settled in cash, WES GP is entitled to reimbursement by WES for the amount of the cash settlement.

Amendment or termination of long-term incentive plan. WES GP’s board of directors, in its discretion, may terminate the LTIP at any time with respect to the common units for which a grant has not previously been made. The LTIP will automatically terminate on the earlier of the 10th anniversary of the date it was initially adopted by WES GP or when common units are no longer available for delivery pursuant to awards under the LTIP. WES GP’s board of directors will also have the right to alter or amend the LTIP or any part of it from time to time or to amend any outstanding award made under the LTIP, provided, however, that no change in any outstanding award may be made that would materially impair the rights of the participant without the consent of the affected participant, and/or result in taxation to the participant under Section 409A of the Internal Revenue Code of 1986, as amended, unless otherwise determined by WES GP’s board of directors.

Amended and Restated Western Gas Holdings, LLC Equity Incentive Plan

General. WES GP adopted the Amended and Restated Western Gas Holdings, LLC Equity Incentive Plan (the “Incentive Plan”) to provide incentive compensation to key executives of WES GP to encourage the superior performance of WES and WES GP. The summary of the Incentive Plan and related award grants contained herein does not purport to be complete and is qualified in its entirety by reference to the Incentive Plan, the terms of which have been previously filed by WES with the SEC. The Incentive Plan provides for the grant of unit appreciation rights, unit value rights and distribution equivalent rights and is administered by WES GP’s board of directors. The costs of these awards are allocated within and subject to the reimbursement provisions of the WES omnibus agreement.

 

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We anticipate that this offering will result in the vesting of all unvested awards under the Incentive Plan, that all awards under the Incentive Plan will be settled in cash in connection with this offering and that the Incentive Plan will be terminated immediately upon such settlement. Amounts that become payable under the Incentive Plan in connection with this offering will be contributed to WES GP by Anadarko pursuant to a contribution agreement to be entered into between us, WES GP and Anadarko. Please read “Certain Relationships and Related Party Transactions—Agreements Entered Into or to be Entered Into in Connection with this Offering—Contribution Agreement.”

The following table summarizes information regarding the unit value rights (“UVRs”), unit appreciation rights (“UARs”) and dividend equivalent rights (“DERs”) issued under the Incentive Plan for the year ended December 31, 2011:

 

     UVRs     UARs      DERs  

Outstanding at beginning of year

     42,035        75,369         75,369   

Granted

     —          —           —     

Vested and settled (1)

     (27,344     —           —     

Forfeited

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at end of year

     14,691        75,369         75,369   
  

 

 

   

 

 

    

 

 

 

Weighted average intrinsic per-unit value at December 31, 2011

   $ 65.24      $ 579.54         —   (2) 

 

(1) UARs and DERs remain outstanding upon vesting until they are settled in cash, are forfeited or expire. As of December 31, 2011, 14,691 of the outstanding UARs were unvested.
(2) As of December 31, 2011, the DERs had no attributed value as WES GP had not previously declared or paid distributions.

Unit appreciation rights. A unit appreciation right is the economic equivalent of a stock appreciation right so it does not include a participant’s pro rata share of the value of WES GP as of the grant date. WES GP’s board of directors has the authority to determine the executives to whom unit appreciation rights may be granted, the number of unit appreciation rights to be granted to each participant, the period over and the conditions, if any, under which the unit appreciation rights may become vested or forfeited, and such other terms and conditions as the board may establish with respect to such awards.

Vesting of unit appreciation rights. The initial grants of unit appreciation rights under the Incentive Plan provided for vesting (x) in one-third increments over a three-year period commencing on the first anniversary of the grant date (or in the case of the initial 2009 grant to WES’s current CEO, Mr. Sinclair, in two equal installments on the second and fourth anniversaries of the grant date) or (y) immediately upon the occurrence of any of the following events, if they occur earlier: (1) a change of control of WES GP or Anadarko; (2) the closing of an initial public offering of WES GP; (3) termination of employment with WES GP and its affiliates (including Anadarko) due to involuntary termination (with or without cause); (4) death; (5) disability as defined under Section 409A of the Internal Revenue Code of 1986, as amended; or (6) an unforeseeable emergency as defined in the Incentive Plan.

Payment of unit appreciation rights. Upon the exercise of their unit appreciation rights, the participants will receive a lump-sum cash payment (less any applicable withholding taxes) for each unit appreciation right exercised. Pursuant to the applicable award agreements, the value of the unit appreciation rights will be equal to the excess of (1) an amount calculated by dividing the “determined value” by 1,000,000, over (2) the applicable unit appreciation right exercise price.

Donald R. Sinclair, our Chief Executive Officer, holds              vested unit appreciation rights and 14,691 unit appreciation rights that will vest in connection with this offering, and we estimate that he will receive a cash payment in the amount of $             upon the exercise of those rights. Benjamin M. Fink, our Chief Financial

 

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Officer, holds              vested unit appreciation rights, and we estimate that he will receive a cash payment in the amount of $             upon exercise of those rights. Danny J. Rea, our Chief Operating Officer, holds              vested unit appreciation rights, and we estimate that he will receive a cash payment in the amount of $             upon exercise of those rights. Amanda M. McMillian, our former General Counsel, holds              vested unit appreciation rights, and we estimate that she will receive a cash payment in the amount of $             upon exercise of those rights. Each such payment will be made net of applicable withholding taxes.

Unit value rights. A unit value right imparts to a participant his or her pro rata share of the value of WES GP at the time of grant. WES GP’s board of directors has the authority to determine the executives to whom unit value rights may be granted, the number of unit value rights to be granted to each participant, the period over and the conditions, if any, under which the unit value rights may become vested or forfeited, and such other terms and conditions as the board may establish with respect to such awards.

Vesting of unit value rights. The initial grants of unit value rights provided for vesting on the same terms as those provided for the unit appreciation rights (described above). All unit value rights, other than certain of Mr. Sinclair’s unit value rights, have vested and been settled. Mr. Sinclair’s unvested unit value rights will vest in connection with this offering and we therefore estimate that he will receive a lump sum cash payment in the amount of $             (less any applicable withholding taxes).

Distribution equivalent rights. Grants of unit appreciation rights and unit value rights included an equal number of distribution equivalent rights, which entitle the holder to receive with respect to each unit appreciation right and unit value right awarded an amount in cash or incentive units equal in value to the distributions made by WES GP to its members during the period an award is outstanding.

Vesting of distribution equivalent rights. WES GP’s board of directors has the authority to determine the restrictions and vesting provisions for any distribution equivalent rights. The initial grants of distribution equivalent rights provided for vesting immediately upon the occurrence of any of the following events: (1) a change of control of WES GP or Anadarko; (2) the closing of an initial public offering of WES GP; (3) termination of employment with WES GP and its affiliates (including Anadarko) due to involuntary termination (with or without cause); (4) death; (5) disability as defined under Section 409A of the Internal Revenue Code of 1986, as amended; (6) the date three days in advance of the 10th anniversary of the grant date; or (7) an unforeseeable emergency as defined in the Incentive Plan.

Payment of distribution equivalent rights. Each outstanding distribution equivalent right is currently unvested but will vest in connection with this offering, and the value of each distribution equivalent right will be equal to (i) the total aggregate amount of any distributions paid by WES GP to its members divided by (ii) 1,000,000.

Mr. Sinclair holds              distribution equivalent rights that will vest in connection with this offering, and we estimate that he will receive a cash payment in the amount of $             upon such vesting. Mr. Fink holds              distribution equivalent rights that will vest in connection with this offering, and we estimate that he will receive a cash payment in the amount of $             upon such vesting. Mr. Rea holds              distribution equivalent rights that will vest in connection with this offering, and we estimate that he will receive a cash payment in the amount of $             upon such vesting. Ms. McMillian holds              distribution equivalent rights that will vest in connection with this offering, and we estimate that she will receive a cash payment in the amount of $             upon such vesting. Each such payment will be made net of applicable withholding taxes.

Clawback policies. In the event that we or WES GP are required to file a material accounting restatement due to the material noncompliance of us or WES GP, as a result of the misconduct of a participant in the Incentive Plan, we may require that participant to repay any or all of the amounts that were paid to that participant under the Incentive Plan.

 

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Western Gas Equity Partners, LP Long-Term Incentive Plan

We will adopt the Western Gas Equity Partners, LP Long-Term Incentive Plan (the “WGP LTIP”) for the employees, directors and consultants of our general partner and its affiliates who perform services for us. The WGP LTIP will consist of all or any of the following five components: restricted units, phantom units, unit options, unit appreciation rights and distribution equivalent rights. The WGP LTIP will limit the number of units that may be delivered pursuant to awards to              million units. Units withheld to satisfy exercise prices or tax withholding obligations are available for delivery pursuant to other awards. The WGP LTIP will be administered by the board of directors of our general partner.

The board of directors of our general partner may terminate or amend the WGP LTIP at any time with respect to any units for which a grant has not yet been made. The board of directors of our general partner also has the right to alter or amend the WGP LTIP or any part of the plan from time to time, including increasing the number of units that may be granted subject to unitholder approval as may be required by the exchange upon which the common units are listed at that time, if any. However, no change in any outstanding grant may be made that would materially reduce the benefits of the participant without the consent of the participant. The WGP LTIP will expire upon the earlier of the 10th anniversary of its adoption by our general partner, its termination by the board of directors or when no units remain available under the plan for awards. Awards then outstanding will continue pursuant to the terms of their grants.

Restricted Units. A restricted unit is a common unit that vests over a period of time and that during such time is subject to forfeiture. In the future, the board may determine to make grants of restricted units under the plan to employees, directors and consultants containing such terms as the board determines. The board will determine the period over which restricted units granted to participants will vest. The board, in its discretion, may base its determination upon the achievement of specified financial objectives or other events. In addition, the restricted units will vest upon a change in control, as defined in the WGP LTIP. Distributions made on restricted units may be subjected to the same vesting provisions as the restricted unit. If a grantee’s employment, consulting or membership on the board of directors terminates for any reason, the grantee’s restricted units will be automatically forfeited unless, and to the extent, the board or the terms of the award agreement provide otherwise.

Common units to be delivered as restricted units may be common units acquired by us in the open market, common units acquired by us from any other person or any combination of the foregoing. If we issue new common units upon the grant of the restricted units, the total number of common units outstanding will increase.

 

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We intend the restricted units under the WGP LTIP to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation of our common units. Therefore, participants will not pay any consideration for the common units they receive, and we will receive no remuneration for the units.

Phantom Units. A phantom unit entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of the board, cash equivalent to the value of a common unit. In the future, the board may determine to make grants of phantom units under the WGP LTIP to employees, consultants and directors containing such terms as the board determines. The board will determine the period over which phantom units granted to participants will vest. The board, in its discretion, may base its determination upon the achievement of specified financial objectives or other events. In addition, the phantom units will vest upon a change in control. If a grantee’s employment, consulting or membership on the board of directors terminates for any reason, the grantee’s phantom units will be automatically forfeited unless, and to the extent, the board or the terms of the award agreement provide otherwise.

Executive Compensation

WES does not directly employ any of the persons responsible for managing or operating its business and has no compensation committee. Instead, WES is managed by WES GP, the executive officers of which are employees of Anadarko. WES’s reimbursement for the compensation of executive officers is governed by the WES omnibus agreement and the services and secondment agreement previously filed with the SEC by WES.

Summary Compensation Table

The following table summarizes the compensation amounts expensed by WES for its named executive officers for the fiscal years ended December 31, 2011, 2010 and 2009. Except as specifically noted, the amounts included in the table below reflect the expense allocated to WES by Anadarko pursuant to the WES omnibus agreement. For a discussion of the allocation percentages in effect for 2011, please read “—Executive Compensation Discussion and Analysis—Overview” above.

 

Name and Principal Position

  Year     Salary
($) (1)
    Bonus
($)
    Stock
Awards
($) (2)
    Option
Awards
($) (3)
    Non-Equity
Incentive Plan
Compensation
($) (4)
    All Other
Compensation
($) (5)
    Total
($)
 

Donald R. Sinclair (6)

    2011        246,779        —          534,435        181,899        177,681        106,296        1,247,090   

President

    2010        227,163        —          492,248        122,400        163,558        86,640        1,092,009   

and Chief Executive Officer

    2009        56,250        —          750,000        —          60,750        24,750        891,750   

Benjamin M. Fink (7)

    2011        253,506        —          160,420        45,860        136,893        109,220        705,899   

Senior Vice President,

    2010        225,728        —          84,129        78,330        121,893        85,870        595,950   

Chief Financial Officer and Treasurer

    2009        120,762        —          421,120        50,132        72,363        49,069        713,446   

Danny J. Rea

    2011        115,154        —          191,658        130,336        82,911        49,603        569,662   

Senior Vice President

    2010        109,400        —          205,506        94,603        78,768        41,732        530,009   

and Chief Operating Officer

    2009        110,416        —          191,170        82,511        78,970        38,681        501,748   

Amanda M. McMillian

    2011        103,171        —          60,765        17,374        43,332        44,439        269,081   

Vice President, General Counsel

    2010        104,798        —          27,222        25,361        44,015        39,953        241,349   

and Corporate Secretary

    2009        98,960        —          27,531        29,961        35,673        35,105        227,230   

 

(1) The amounts in this column reflect the base salary compensation allocated to WES by Anadarko for the fiscal years ended December 31, 2011, 2010 and 2009.
(2)

The amounts in this column reflect the expected allocation to WES of the grant date fair value, computed in accordance with generally accepted accounting principles, for non-option stock awards granted pursuant to the Incentive Plan, the LTIP and the Omnibus Plan. The awards granted by WES GP in prior years were valued by multiplying the number of units awarded by the current per-unit valuation on the date of grant, assuming no forfeitures. The value per unit was based on the estimated fair value of WES GP using a hybrid discounted cash flow and multiples valuation methodology. For awards of phantom units granted under the LTIP, the grant date value is determined by multiplying the number of

 

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  phantom units awarded by the per-unit closing price of WES’s common units on the date of grant. For a discussion of valuation assumptions for the awards under the Omnibus Plan, see Note 14. Share-Based Compensation of the Notes to Consolidated Financial Statements included under Item 8 of Anadarko’s Form 10-K for the year ended December 31, 2011. For information regarding the non-option stock awards granted to WES’s named executive officers in 2011, please read the Grants of Plan-Based Awards Table.
(3) The amounts in this column reflect the expected allocation to WES of the grant date fair value, computed in accordance with generally accepted accounting principles, for option awards granted pursuant to the Incentive Plan and the Omnibus Plan. See note (2) above for valuation assumptions. For information regarding the option awards granted to WES’s named executive officers in 2011, please read the Grants of Plan-Based Awards Table.
(4) The amounts in this column reflect the compensation under the Anadarko annual incentive program allocated to WES for the fiscal years ended December 31, 2011, 2010 and 2009. The 2011 amounts represent payments which were earned in 2011 and paid in early 2012, the 2010 amounts represent payments which were earned in 2010 and paid in early 2011 and the 2009 amounts represent the payments which were earned in 2009 and paid in early 2010.
(5) The amounts in this column reflect the compensation expenses related to Anadarko’s retirement and savings plans that were allocated to WES for the fiscal years ended December 31, 2011, 2010 and 2009. The 2011 allocated expenses are detailed in the table below:

 

Name

   Retirement
Plan
Expense
     Savings
Plan
Expense
 

Donald R. Sinclair

   $ 85,184       $ 21,112   

Benjamin M. Fink

   $ 87,536       $ 21,684   

Danny J. Rea

   $ 39,752       $ 9,851   

Amanda M. McMillian

   $ 35,613       $ 8,826   

 

(6) Mr. Sinclair was appointed President of WES GP on October 1, 2009, and Chief Executive Officer on January 11, 2010.
(7) Mr. Fink was appointed Senior Vice President, Chief Financial Officer of WES GP on May 21, 2009, and also Treasurer effective November 17, 2010.

Grants of Plan-Based Awards in 2011

The following table sets forth information concerning annual incentive awards, stock options, unit appreciation rights, unit value rights, restricted stock shares, restricted stock units and performance units granted during 2011 to each of the named executive officers. Except for amounts in the column entitled Exercise or Base Price of Option Awards, the dollar amounts and number of securities included in the table below reflect an allocation based upon the time allocation methodology previously discussed in “—Executive Compensation Discussion and Analysis—Overview”, but also take into account any known future changes in the applicable officer’s allocation of time to WES’s business.

 

    Estimated Future Payouts
Under Non-Equity Incentive Plan
Awards (1)
    Estimated Future Payouts
Under Equity Incentive Plan
Awards (2)
    All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#) (3)
    All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#) (4)
    Exercise or
Base Price
of Option
Awards
($/Sh)
    Grant Date
Fair Value
of Stock
and Option
Awards
($) (5)
 

Name and Grant Date

  Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
($)
    Target
($)
    Maximum
($)
         

Donald R. Sinclair

                   

—  

    —          148,067        177,681                 

11/16/2011

                  6,344        78.95        181,899   

11/16/2011

                2,257            178,170   

11/16/2011

                9,896            356,265   

Benjamin M. Fink

                   

—  

    —          114,078        136,893                 

3/4/2011

                  1,571        81.02        45,860   

3/4/2011

                1,980            160,420   

Danny J. Rea

                   

—  

    —          69,092        82,911                 

11/8/2011

                  4,287        83.95        130,336   

11/8/2011

                1,334            112,023   

11/8/2011

          217        805        1,610              79,635   

Amanda M. McMillian

                   

—  

    —          36,110        43,332                 

3/4/2011

                  595        81.02        17,374   

3/4/2011

                750            60,765   

 

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(1) Reflects the estimated 2011 cash payouts allocable to WES under Anadarko’s annual incentive program. If threshold levels of performance are not met, then the payout can be zero. The maximum value reflects the maximum amount allocable to WES consistent with the methodologies set forth in the services and secondment agreement. The expense allocated to WES for the actual bonus payouts under the annual incentive program for 2011 is reflected in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. For additional discussion of Anadarko’s annual incentive program please read “Compensation Discussion and Analysis—Analysis of 2011 Compensation Actions—Performance-Based Annual Cash Incentives (Bonuses)” contained within Anadarko’s proxy statement, filed with the SEC on March 23, 2012.
(2) Reflects the estimated future payout allocable to WES under Anadarko’s performance units awarded in 2011. Certain executives may earn from 0% to 200% of the targeted award based on Anadarko’s relative total shareholder return performance over a specified performance period. Fifty percent of this award is tied to a two-year performance period and the remaining fifty percent is tied to a three-year performance period. If earned, the awards are to be paid in cash. The threshold value represents the minimum payment (other than zero) that may be earned. For additional discussion of Anadarko’s performance unit awards please read section “Compensation Discussion and Analysis—Analysis of 2011 Compensation Actions—Equity Compensation” contained within Anadarko’s proxy statement, filed with the SEC on March 23, 2012.
(3) Reflects the allocable number of phantom units, restricted stock shares and restricted stock units awarded in 2011 under the LTIP and the Incentive Plan. These awards vest equally over three years, beginning with the first anniversary of the grant date. Named executive officers receive distribution equivalent rights on the phantom units, dividends on the restricted stock shares and dividend equivalents on the restricted stock units.
(4) Reflects the allocable number of Anadarko stock options each named executive officer was awarded in 2011. These awards vest equally over three years, beginning with the first anniversary of the date of grant. The stock options have a term of seven years.
(5) The amounts included in the Grant Date Fair Value of Stock and Option Awards column represent the expected allocation to WES of the grant date fair value of the awards made to named executive officers in 2011 computed in accordance with GAAP. The value ultimately realized by the executive upon the actual vesting of the award(s) or the exercise of the stock option(s) may or may not be equal to the determined value. The awards granted by WES GP in prior years were valued by multiplying the number of units awarded by the current per-unit valuation on the date of grant, assuming no forfeitures. The value per unit was based on the estimated fair value of the general partner using a hybrid discounted cash flow and multiples valuation methodology. For awards of phantom units granted under the LTIP, the grant date value is determined by multiplying the number of phantom units awarded by the per-unit closing price of WES common units on the date of grant. For a discussion of valuation assumptions for the awards under the Omnibus Plan, see Note 14. Share-Based Compensation of the Notes to Consolidated Financial Statements under Item 8 of Anadarko’s Form 10-K for the year ended December 31, 2011.

 

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Outstanding Equity Awards at Fiscal Year-End 2011

The following table reflects outstanding equity awards as of December 31, 2011, for each of the named executives, including Anadarko, WES GP, and WES awards. The market values shown are based on Anadarko’s closing stock price on December 31, 2011, of $76.33, unless otherwise noted. Except for amounts in the column entitled Option Exercise Price, the dollar amounts and number of securities included in the table below reflect an allocation based upon each named executive officer’s allocation of time to WES’s business on December 31, 2011.

 

                      Stock Awards  
    Option Awards (1)     Restricted Stock Shares/Units
and Unit Value Rights (2)
    Equity incentive Plan Awards
Performance Units (3)
 
    Number of Securities
Underlying
Unexercised Options
    Option
Exercise
Price
($)
    Option
Expiration
Date
    Number of
Shares or
Units of Stock
That Have
Not Vested

(#)
    Market Value
of Shares or
Units of Stock
That Have
Not Vested

($)
    Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

(#)
    Market
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

($)
 

Name

  Exercisable
(#)
    Unexercisable
(#)
             

Donald R. Sinclair

    1,822        3,643        62.09        11/17/2017         7,500        375,000  (5)     
    —          6,344        78.95        11/16/2018         1,018        218,870  (6)     
    7,500        7,500        50.00        10/1/2019  (4)      1,762        134,493        
    509        1,018        215.00        11/17/2020  (4)      2,257        172,277        
            9,896        408,408  (7)     

Benjamin M. Fink

    1,598        —          65.99        3/13/2015         600        45,798        
    3,333        1,667        33.07        3/6/2016         792        60,453        
    944        1,886        72.11        3/5/2017         1,980        151,133        
    —          1,571        81.02        3/4/2018         3,001        150,050  (5)     
    5,999        3,001        50.00        5/21/2019  (4)         

Danny J. Rea

    2,000        —          43.56        11/15/2012         467        35,646         1,456        111,136   
    2,300        —          48.90        12/1/2013         1,179        89,993         1,288        98,313   
    4,240        —          59.87        11/6/2014         1,334        101,824         1,844        140,753   
    7,640        —          35.18        11/4/2015             805        61,446   
    2,053        1,027        65.44        11/10/2016            
    1,393        2,786        63.34        11/9/2017            
    4,000        —          50.00        4/2/2018  (4)         
    —          4,287        83.95        11/8/2018            

Amanda M. McMillian

    1,544        772        33.07        3/6/2016         278        21,220        
    300        600        72.11        3/5/2017         252        19,235        
    —          595        81.02        3/4/2018         750        57,248        
    2,500        —          50.00        4/2/2018  (4)         

 

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(1) The table below shows the vesting dates for the respective unexercisable stock options and unit appreciation rights listed in the above Outstanding Equity Awards Table:

 

Vesting Date

   Donald R. Sinclair      Benjamin M. Fink      Danny J. Rea      Amanda M. McMillian  

03/04/2012

     —           524         —           199   

03/05/2012

     —           943         —           300   

03/06/2012

     —           1,667         —           772   

05/21/2012

     —           3,001         —           —     

11/08/2012

     —           —           1,429         —     

11/09/2012

     —           —           1,393         —     

11/10/2012

     —           —           1,027         —     

11/16/2012

     2,115         —           —           —     

11/17/2012

     2,330         —           —           —     

03/04/2013

     —           523         —           198   

03/05/2013

     —           943         —           300   

10/01/2013

     7,500         —           —           —     

11/08/2013

     —           —           1,429         —     

11/09/2013

     —           —           1,393         —     

11/16/2013

     2,114         —           —           —     

11/17/2013

     2,331         —           —           —     

03/04/2014

     —           524         —           198   

11/08/2014

     —           —           1,429         —     

11/16/2014

     2,115         —           —           —     

 

(2) The table below shows the vesting dates for the respective phantom units, restricted stock shares, restricted stock units and unit value rights listed in the above Outstanding Equity Awards Table:

 

Vesting Date

   Donald R. Sinclair      Benjamin M. Fink      Danny J. Rea      Amanda M. McMillian  

03/04/2012

     —           660         —           250   

03/05/2012

     —           396         —           126   

03/06/2012

     —           600         —           278   

05/21/2012

     —           3,001         —           —     

11/08/2012

     —           —           445         —     

11/09/2012

     —           —           589         —     

11/10/2012

     —           —           467         —     

11/16/2012

     4,051         —           —           —     

11/17/2012

     1,390         —           —           —     

03/04/2013

     —           660         —           250   

03/05/2013

     —           396         —           126   

10/01/2013

     7,500         —           —           —     

11/08/2013

     —           —           445         —     

11/09/2013

     —           —           590         —     

11/16/2013

     4,051         —           —           —     

11/17/2013

     1,390         —           —           —     

03/04/2014

     —           660         —           250   

11/08/2014

     —           —           444         —     

11/16/2014

     4,051         —           —           —     

 

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(3) The table below shows the performance periods for the respective performance units listed in the above Outstanding Equity Awards Table. The number of outstanding units disclosed are calculated based on WES’s performance to date for each award. The estimated payout percentages reflect relative performance ranking as of December 31, 2011, and are not necessarily indicative of what the payout percentage earned will be at the end of the performance period. For awards that were granted in 2011 with performance periods beginning in 2012, target payout has been assumed.

 

Performance Period

   Performance to
Date Payout %
    Danny J. Rea
Performance
Units
 

1/1/2009 to 12/31/2011

     182     1,456   

1/1/2010 to 12/31/2011

     92     644   

1/1/2010 to 12/31/2012

     92     644   

1/1/2011 to 12/31/2012

     146     922   

1/1/2011 to 12/31/2013

     146     922   

1/1/2012 to 12/31/2013

     100     402   

1/1/2012 to 12/31/2014

     100     403   

 

(4) These awards represent grants of unit appreciation rights under the Incentive Plan. The intrinsic per-unit value as of December 31, 2011 was $634.00 less the applicable exercise price.
(5) These awards represent grants of unit value rights under the Incentive Plan. The market value for these awards on December 31, 2011 is based on the maximum per-unit value specified under the applicable award agreements of $50.00.
(6) This award represents a grant of unit value rights under the Incentive Plan. The market value for this award on December 31, 2011 is based on the maximum per-unit value specified under the applicable award agreement of $215.00.
(7) This award represents a grant of phantom units under the LTIP. The market value for this award is the closing common unit price for WES on December 31, 2011 of $41.27.

Option Exercises and Stock Vested in 2011

The following table reflects Anadarko option awards and WES GP unit appreciation rights exercised in 2011 and Anadarko stock awards and WES GP, unit value rights that vested in 2011. The dollar amounts and number of securities included in the table below reflect an allocation based upon the time allocation previously discussed in “—Overview” above.

 

     Option Awards      Stock Awards  

Name

   Number of Shares
Acquired on
Exercise

(#)
     Value
Realized  on
Exercise

($) (1)
     Number of Shares
Acquired on
Vesting

(#) (2)
     Value
Realized  on
Vesting

($) (1)
 

Donald R. Sinclair

     —           —           8,890         551,690   

Benjamin M. Fink

     —           —           4,955         304,746   

Danny J. Rea

     —           —           6,514         471,311   

Amanda M. McMillian

     —           —           2,058         137,764   

 

(1) The value realized reflects the taxable value to the named executive officer as of the date of the option or unit appreciation right exercise or of the vesting of restricted stock or unit value right. For options and restricted stock, the actual value ultimately realized by the named executive officer may be more or less than the value realized calculated in the above table depending on the timing in which the named executive officer held or sold the stock associated with the exercise or vesting occurrence.
(2) Shares acquired on vesting include restricted stock shares or units, performance units, or unit value rights whose restrictions lapsed during 2011.

 

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Pension Benefits for 2011

Anadarko maintains both funded, tax-qualified defined benefit pension plans and unfunded nonqualified pension benefit plans. The nonqualified pension benefit plans are designed to provide for supplementary pension benefits due to limitations imposed by the Internal Revenue Code that restrict the amount of benefits payable under tax-qualified plans. WES’s named executive officers are eligible to participate in these plans. Under the WES omnibus agreement, a portion of the annual expense related to these plans is allocated to WES by Anadarko. The allocated expense for each named executive officer is included in the All Other Compensation column of the Summary Compensation Table. WES has not included a pension benefits table because the pension benefits accrued through December 31, 2011 may be tied significantly to years of service with Anadarko prior to the time such employee began providing services to WES and are not reflective of the expenses allocated to WES. For additional discussion on Anadarko’s pension benefits, please read “Compensation Discussion and Analysis—Indirect Compensation Elements—Retirement Benefits” contained within Anadarko’s proxy statement, filed with the SEC on March 23, 2012.

Nonqualified Deferred Compensation for 2011

Anadarko maintains a deferred compensation plan and a savings restoration plan for certain employees, including WES’s named executive officers. The deferred compensation plan allows certain employees to voluntarily defer receipt of up to 75% of their salary and/or up to 100% of their annual incentive bonus payments. The savings restoration plan accrues a benefit substantially equal to the amount that, in the absence of certain Internal Revenue Code limitations, would have been allocated to their account as matching contributions under Anadarko’s 401(k) Plan. Pursuant to the terms of the WES omnibus agreement, a portion of the expense related to these plans is allocated to WES by Anadarko. The allocated expense for each named executive officer is included in the All Other Compensation column of the Summary Compensation Table. WES has not included a nonqualified deferred compensation table because the value of an employee’s balance may be tied significantly to contributions made prior to the time such employee began providing services to WES and is not reflective of the expenses allocated to WES. For additional discussion on Anadarko’s pension benefits please read “Compensation Discussion and Analysis—Indirect Compensation Elements—Retirement Benefits” contained within Anadarko’s proxy statement, filed with the SEC on March 23, 2012.

Potential Payments Upon Termination or Change of Control

In the event of termination of employment with WES GP by reason of: (A) a Change of Control of either WES GP or Anadarko; (B) the closing of an initial public offering of WES GP; (C) the involuntary termination of employment with WES GP or its affiliates (with or without cause); (D) death; (E) disability, as defined under Section 409A of the Internal Revenue Code of 1986, as amended; or (F) an unforeseeable emergency, and assuming that the employee remains employed by Anadarko, the only payments triggered are the accelerated vesting of unvested awards under both the Incentive Plan and the LTIP.

A Change of Control of WES GP is defined as any one of the following occurrences: (a) any “person” or “group” within the meaning of those terms as used in Sections 13(d) and 14(d)(2) of the Exchange Act, other than an affiliate of WES GP, shall become the beneficial owner, by way of merger, consolidation, recapitalization, reorganization or otherwise, of 50% or more of the combined voting power of the equity interests in WES GP; (b) the members of WES GP approve, in one or a series of transactions, a plan of complete liquidation of WES GP; or (c) the sale or other disposition by WES GP of all or substantially all of its assets in one or more transactions to any person other than an affiliate of WES GP. For the definition of a Change of Control of Anadarko, please read “Potential Payments Upon Termination or Change of Control” contained within Anadarko’s proxy statement, filed with the SEC on March 23, 2012.

 

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The award values under these plans as of December 31, 2011 are set forth in the table immediately below, and reflect an allocation of value based upon each named executive officer’s allocation of time to WES’s business on December 31, 2011.

 

Name

   Accelerated
LTIP and
Incentive Plan
Awards (1)
 

Donald R. Sinclair (2)

   $ 5,808,672   

Benjamin M. Fink

   $ 1,902,380   

Danny J. Rea

   $ —     

Amanda M. McMillian

   $ —     

 

(1) Unit value rights are valued based on the maximum value specified under the award agreement. Unit appreciation rights are valued based on the December 31, 2011 intrinsic per-unit value of $634.00 less the applicable exercise price. WES GP phantom units are valued based on the closing common unit price for WES on December 31, 2011, of $41.27.
(2) For awards of phantom units granted under the LTIP, the grant date value is determined by multiplying the number of phantom units awarded by the per-unit closing price of WES common units on the date of grant.

WES has not entered into any employment agreements with its named executive officers, nor does it manage any severance plans. However, WES’s named executive officers are eligible for certain benefits provided by Anadarko. Currently, WES is not allocated any expense for these agreements or plans, but for disclosure purposes WES presents allocated expenses of the potential payments provided by Anadarko in the event of termination or change of control of Anadarko. Values reflect each named executive officer’s allocation of time to WES’s business on December 31, 2011, and exclude those benefits generally provided to all salaried employees. For additional discussion related to these termination scenarios, please read “Compensation Discussion and Analysis—Indirect Compensation Elements—Severance Benefits” contained within Anadarko’s proxy statement, filed with the SEC on March 23, 2012.

The following tables reflect the expenses that may be allocated to WES by Anadarko as of December 31, 2011, in connection with potential payments to WES’s named executive officers under existing contracts, agreements, plans or arrangements, whether written or unwritten, with Anadarko, for various scenarios involving a change of control of Anadarko or termination of employment from Anadarko for each named executive officer, assuming a December 31, 2011, termination date, and, where applicable, using the closing price of Anadarko’s common stock of $76.33 (as reported on the NYSE as of December 31, 2011). For general definitions that apply to the termination of employment from Anadarko scenarios detailed below, please read “Potential Payments Upon Termination or Change of Control” contained within Anadarko’s proxy statement, filed with the SEC on March 23, 2012. Actual amounts will be determinable only upon the termination or Change in Control event. As of December 31, 2011, none of our executive officers were eligible for retirement; accordingly, no table is included for this event.

Involuntary For Cause or Voluntary Termination

 

     Mr. Sinclair      Mr. Fink      Mr. Rea      Ms. McMillian  

Cash Severance

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total (1)

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In the event Messrs. Sinclair and Fink are involuntarily terminated with cause, the vesting of their unvested unit value rights and unit appreciation rights granted under the Incentive Plan would also be accelerated. For Messrs. Sinclair and Fink, the accelerated value of these awards would be $5,400,254 and $1,902,380, respectively. Unit appreciation rights are valued based on the December 31, 2011, intrinsic per-unit value of $634.00, less the applicable exercise price. The unit value rights are valued based on the maximum value specified under the award agreement.

 

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Involuntary Not For Cause Termination

 

    Mr. Sinclair     Mr. Fink     Mr. Rea     Ms. McMillian  

Cash Severance (1)

  $ 702,000      $ —        $ 322,400      $ —     

Pro-rata Bonus for 2011 (2)

  $ 177,681      $ —        $ 82,911      $ —     

Accelerated Anadarko Equity Compensation (3)

  $ 358,605      $ 337,474      $ 501,643      $ 133,533   

Accelerated WES Equity Compensation (4)

  $ 5,400,254      $ 1,902,380      $ —        $ —     

Health and Welfare Benefits (5)

  $ 42,871      $ —        $ 20,432      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 6,681,411      $ 2,239,854      $ 927,386      $ 133,533   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Messrs. Sinclair’s and Rea’s values assume two times base salary plus one times target bonus multiplied by their allocation percentages in effect as of December 31, 2011. No values have been disclosed for the other named executive officers as they receive the same benefits as generally provided to all salaried employees.
(2) Payment, if provided, will be paid at the end of the performance period based on actual performance. The values for Messrs. Sinclair and Rea reflect the allocated portion of their actual bonuses awarded under Anadarko’s annual incentive program for 2011. For additional discussion of this program please read “Compensation Discussion and Analysis—Analysis of 2011 Compensation Actions—Performance-Based Annual Cash Incentives (Bonuses)” contained within Anadarko’s proxy statement, filed with the SEC on March 23, 2012. No values have been disclosed for the other named executive officers as they receive the same benefits as generally provided to all salaried employees.
(3) Reflects the in-the-money value of unvested stock options, the estimated current value of unvested performance units and the value of unvested restricted stock shares and restricted stock units, under Anadarko equity plans, all as of December 31, 2011. In the event of an involuntary termination, unvested performance units would be paid after the end of the applicable performance periods based on actual performance. All values reflect each named executive officer’s allocation percentage in effect as of December 31, 2011.
(4) Reflects the in-the-money value of unvested unit appreciation rights and the value of unvested unit value rights granted under the Incentive Plan. Unit appreciation rights are valued based on the December 31, 2011, intrinsic per-unit value of $634.00, less the applicable exercise price. Unit value rights are valued based on the maximum value specified under the award agreement. All values reflect each named executive officer’s allocation percentage in effect as of December 31, 2011.
(5) Messrs. Sinclair’s and Rea’s values represent 24 months of health and welfare benefit coverage. These amounts are present values determined in accordance with GAAP. These values reflect their allocation percentage in effect as of December 31, 2011. No values have been disclosed for the other named executive officers as they receive the same benefits as generally provided to all salaried employees.

 

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Change of Control: Involuntary Termination or Voluntary For Good Reason

 

    Mr. Sinclair     Mr. Fink     Mr. Rea     Ms. McMillian  

Cash Severance (1)

  $ 1,361,550      $ —        $ 684,400      $ —     

Pro-rata Bonus for 2011 (2)

  $ 177,681      $ —        $ 82,911      $ —     

Accelerated Anadarko Equity Compensation (3)

  $ 358,605      $ 337,474      $ 459,427      $ 133,533   

Accelerated WES Equity Compensation (4)

  $ 5,808,672      $ 1,902,380      $ —        $ —     

Supplemental Pension Benefits (5)

  $ —        $ —        $ —        $ —     

Nonqualified Deferred Compensation (6)

  $ 84,510      $ —        $ 40,320      $ —     

Health and Welfare Benefits (7)

  $ 66,472      $ —        $ 32,554      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 7,857,490      $ 2,239,854      $ 1,299,612      $ 133,533   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Messrs. Sinclair’s and Rea’s values assume 2.9 times the sum of base salary plus the highest bonus paid in the past three years and reflect their allocation percentages in effect as of December 31, 2011, per the terms of their key employee change of control agreements with Anadarko. No values have been disclosed for the other named executive officers as they receive the same benefits as generally provided to all salaried employees.
(2) Messrs. Sinclair’s and Rea’s values assume the full-year equivalent of their highest annual bonus allocated to WES over the past three years. No values have been disclosed for the other named executive officers as they receive the same benefits as generally provided to all salaried employees.
(3) Reflects the in-the-money value of unvested stock options, the target value of unvested performance units, and the value of unvested restricted stock shares and restricted stock units, granted under Anadarko equity plans, all as of December 31, 2011. All values reflect each named executive officer’s allocation percentage in effect as of December 31, 2011.
(4) Reflects the in-the-money value of unvested unit appreciation rights and the value of unvested unit value rights, granted under the Incentive Plan. Unit appreciation rights are valued based on the December 31, 2011, intrinsic per-unit value of $634.00, less the applicable exercise price. Unit value rights are valued based on the maximum value specified under the award agreement. WES phantom units are valued based on the closing common unit price for WES on December 31, 2011, of $41.27. All values reflect each named executive officer’s allocation percentage in effect as of December 31, 2011.
(5) Under the terms of their change of control agreements, Messrs. Sinclair and Rea would receive a special retirement benefit enhancement that is equivalent to the additional supplemental pension benefits that would have accrued under Anadarko’s retirement plan assuming they were eligible for subsidized early retirement benefits and include additional special pension credits. The value of this benefit has not been included in the above table because it may be tied significantly to years of service with Anadarko prior to the time such employee began providing service to WES. If Anadarko were to allocate this expense to WES, assuming their allocation percentages in effect as of December 31, 2011, the expense would be as follows: Mr. Sinclair—$134,210 and Mr. Rea—$470,115.
(6) Messrs. Sinclair’s and Rea’s values reflect an additional three years of employer contributions into the savings restoration plan at their current contribution rate to the Plan and are based on their allocation percentages in effect as of December 31, 2011, per the terms of their key employee change of control agreements with Anadarko. No values have been disclosed for the other named executive officers as they are not eligible for this additional benefit.
(7) Messrs. Sinclair’s and Rea’s values represent 36 months of health and welfare benefit coverage. All amounts are present values determined in accordance with GAAP and reflect their allocation percentages in effect as of December 31, 2011. No values have been disclosed for the other named executive officers as they receive the same benefits as generally provided to all salaried employees.

 

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Disability

 

    Mr. Sinclair     Mr. Fink     Mr. Rea     Ms. McMillian  

Cash Severance

  $ —        $ —        $ —        $ —     

Pro-rata Bonus for 2011 (1)

  $ —        $ —        $ —        $ —     

Accelerated Anadarko Equity Compensation (2)

  $ 358,605      $ 337,474      $ 459,427      $ 133,533   

Accelerated WES Equity Compensation (3)

  $ 5,400,254      $ 1,902,380      $ —        $ —     

Health and Welfare Benefits (4)

  $ 160,178      $ 180,203      $ 75,832      $ 38,948   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,919,037      $ 2,420,057      $ 535,259      $ 172,481   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) There are no special arrangements related to the payment of a pro-rata bonus in the event of disability. Payments are paid pursuant to the standards established under Anadarko’s annual incentive program for all salaried employees.
(2) Reflects the in-the-money value of unvested stock options, the target value of unvested performance units, and the value of unvested restricted stock shares and restricted stock units granted under Anadarko equity plans, all as of December 31, 2011. All values reflect each named executive officer’s allocation percentage in effect as of December 31, 2011.
(3) Reflects the in-the-money value of unvested unit appreciation rights and the value of unvested unit value rights granted under the Incentive Plan. Unit appreciation rights are valued based on the December 31, 2011 intrinsic per-unit value of $634.00, less the applicable exercise price. Unit value rights are valued based on the maximum value specified under the award agreement. All values reflect each named executive officer’s allocation percentage in effect as of December 31, 2011.
(4) Values reflect the continuation of additional death benefit coverage provided to certain employees of Anadarko until age 65. All amounts are present values determined in accordance with GAAP and reflect each named executive officer’s allocation percentage in effect as of December 31, 2011.

Death

 

    Mr. Sinclair     Mr. Fink     Mr. Rea     Ms. McMillian  

Cash Severance

  $ —        $ —        $ —        $ —     

Pro-rata Bonus for 2011 (1)

  $ —        $ —        $ —        $ —     

Accelerated Anadarko Equity Compensation (2)

  $ 358,605      $ 337,474      $ 459,427      $ 133,533   

Accelerated WES Equity Compensation (3)

  $ 5,400,254      $ 1,902,380      $ —        $ —     

Life Insurance Proceeds (4)

  $ 849,725      $ 802,310      $ 390,244      $ 346,939   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 6,608,584      $ 3,042,164      $ 849,671      $ 480,472   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) There are no special arrangements related to the payment of a pro-rata bonus in the event of death. Payments are paid pursuant to the standards established under Anadarko’s annual incentive program for all salaried employees.
(2) Reflects the in-the-money value of unvested stock options, the target value of unvested performance units, and the value of unvested restricted stock shares and restricted stock units granted under Anadarko equity plans, all as of December 31, 2011. All values reflect each named executive officer’s allocation percentage in effect as of December 31, 2011.
(3) Reflects the in-the-money value of unvested unit appreciation rights and the value of unvested unit value rights granted under the Incentive Plan. Unit appreciation rights are valued based on the December 31, 2011, intrinsic per-unit value of $634.00, less the applicable exercise price. Unit value rights are valued based on the maximum value specified under the award agreement. All values reflect each named executive officer’s allocation percentage in effect as of December 31, 2011.

 

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(4) Values include amounts payable under additional death benefits provided to certain employees of Anadarko. These liabilities are not insured, but are self-funded by Anadarko. Proceeds are not exempt from federal taxes. Values shown include an additional tax gross-up amount to equate benefits with nontaxable life insurance proceeds. Values are based on each named executive officer’s allocation percentage in effect as of December  31, 2011, and exclude death benefit proceeds from programs available to all employees.

Compensation of WES GP Directors

Officers or employees of Anadarko who also serve as directors of WES GP do not receive additional compensation for their service as a director of WES GP. Non-employee directors of WES GP receive compensation for their board service and for attending meetings of the board of directors of WES GP and committees of the board pursuant to the director compensation plan approved by WES GP’s board of directors. Such compensation consists of the following:

 

   

an annual retainer of $60,000 for each board member;

 

   

an annual retainer of $2,000 for each member of the audit committee ($20,000 for the committee chair);

 

   

an annual retainer of $2,000 for each member of the special committee ($20,000 for the committee chair);

 

   

a fee of $2,000 for each board meeting attended;

 

   

a fee of $2,000 for each committee meeting attended; and

 

   

annual grants of phantom units with a value of approximately $70,000 on the date of grant, all of which vest 100% on the first anniversary of the date of grant (with vesting to be accelerated upon a change of control of WES GP or Anadarko). The non-employee directors received such a grant of phantom units on May 24, 2011.

In addition, each non-employee director is reimbursed for out-of-pocket expenses in connection with attending meetings of the board of directors or committees and for costs associated with participation in continuing director education programs. Each director is fully indemnified by WES, pursuant to individual indemnification agreements and WES’s partnership agreement, for actions associated with being a director to the fullest extent permitted under Delaware law.

The following table sets forth information concerning total director compensation earned during the 2011 fiscal year by each non-employee director:

 

Name

   Fees Earned or
Paid in Cash
     Stock
Awards (1)
     Option
Awards
     Non-Equity
Incentive Plan
Compensation
     All Other
Compensation
     Total  

Milton Carroll

   $ 103,000       $ 70,014       $ —         $ —         $ —         $ 173,014   

Anthony R. Chase

     93,000         70,014         —           —           —           163,014   

James R. Crane

     87,000         70,014         —           —           —           157,014   

David J. Tudor

     113,000         70,014         —           —           —           183,014   

 

(1) The amounts included in the Stock Awards column represent the grant date fair value of non-option awards made to directors in 2011, computed in accordance with GAAP. For a discussion of valuation assumptions, see Note 5. Transactions with Affiliates in the Notes to Consolidated Financial Statements under Item 8 of Anadarko’s Form 10-K for the year ended December 31, 2011. As of December 31, 2011, each of the non-employee directors had 1,993 outstanding phantom units.

 

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The following table contains the grant date fair value of phantom unit awards made to each non-employee director during 2011:

 

Name

   Grant Date      Phantom Units
(#)
     Grant Date Fair
Value of Stock and
Option Awards

($) (1)
 

Milton Carroll

     May 24         1,993         70,014   

Anthony R. Chase

     May 24         1,993         70,014   

James R. Crane

     May 24         1,993         70,014   

David J. Tudor

     May 24         1,993         70,014   

 

(1) The amounts included in the Grant Date Fair Value of Stock and Option Awards column represent the grant date fair value of the awards made to non-employee directors in 2011 computed in accordance with GAAP. The value ultimately realized by a director upon the actual vesting of the award(s) may or may not be equal to the determined value.

Compensation Committee Interlocks and Insider Participation

As previously discussed, neither WES GP’s nor our board of directors is required to maintain, and neither does maintain, a compensation committee. Messrs. Gwin, Meloy, Sinclair, Reeves and Walker, who are directors of WES GP and our general partner, are also executive or corporate officers of Anadarko. However, all compensation decisions with respect to each of these persons are made by Anadarko and none of these individuals receives any compensation directly from WES or WES GP for their service as a director.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of the common units of each of Western Gas Equity Partners, LP and Western Gas Partners, LP that, upon the consummation of this offering and assuming an initial public offering price of $         per common unit and that the underwriters do not exercise their over-allotment option to purchase 2,250,000 additional common units, will be owned by:

 

   

each person or group of persons known to us to be a beneficial owner of 5% or more of the then outstanding units;

 

   

each member of the board of directors of our general partner;

 

   

each named executive officer of our general partner; and

 

   

all directors and executive officers of our general partner as a group.

 

     Beneficially Owned After Offering  
     Western Gas Equity
Partners, LP
     Western Gas Partners, LP  

Name and address of beneficial owner (1)(2)

   Common
Units
   Percentage of
Common Units
     Common
Units
     Percentage of
Common Units
 

Anadarko Petroleum Corporation (2)(3)

        %         46,340,947         45.6

Western Gas Resources, Inc. (2)(3)

        %         46,340,947         45.6

WGP (2)(3)

        %         46,340,947         45.6

Robert G. Gwin

        %         10,000         *   

Donald R. Sinclair

        %         114,536         *   

Benjamin M. Fink

        %         1,887         *   

Danny J. Rea

        %         16,613         *   

Philip H. Peacock

        %         —           —     

Charles A. Meloy

        %         3,000         *   

Robert K. Reeves

        %         9,000         *   

R. A. Walker

        %         6,900         *   

Amanda M. McMillian (4)

        %         1,470         *   

Directors and executive officers as a group (8 persons)

        %         161,936         *   

 

* Less than 1%
(1) Unless otherwise indicated, the address for all beneficial owners in this table is 1201 Lake Robbins Drive, The Woodlands, Texas 77380.
(2) In the event that we were to raise in excess of $282.5 million in net proceeds of this offering, we would use the additional net proceeds to acquire additional WES common units. In addition, as described in “Prospectus Summary—Our Structure,” we would issue additional WGP common units to Anadarko.
(3) Anadarko is the ultimate parent company of Western Gas Resources, Inc. and our general partner. Anadarko may, therefore, be deemed to beneficially own limited partner interests in us held by Western Gas Resources, Inc. and the WES common units held by us. Western Gas Resources, Inc. owns a 100% interest in our general partner and a     % limited partner interest in us and may, therefore, be deemed to own the WES units held by us.
(4) Ms. McMillian resigned from her position with WES GP effective August 6, 2012 but remains employed by Anadarko.

 

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Anadarko Petroleum Corporation

The following table sets forth, as of September 10, 2012, the number of shares of common stock of Anadarko owned by each of the named executive officers and directors of our general partner and all directors and executive officers of our general partner as a group.

 

Name and Address of Beneficial Owner (1)

   Shares of
Common
Stock Owned
Directly or
Indirectly (2)
     Shares
Underlying
Options
Exercisable
Within 60
Days (2)
     Total Shares
of Common
Stock
Beneficially
Owned

(2) (3) (4)
     Percentage of
Total Shares
of Common
Stock
Beneficially
Owned

(2) (3) (4)
 

Robert G. Gwin

     30,785         376,670         407,455         *   

Donald R. Sinclair

     2,754         7,678         10,432         *   

Benjamin M. Fink

     12,209         10,009         22,218         *   

Danny J. Rea

     9,505         53,688         63,193         *   

Philip H. Peacock

     2,170         —           2,170         *   

Charles A. Meloy

     66,817         143,853         210,670         *   

Robert K. Reeves

     106,946         336,132         443,078         *   

R. A. Walker

     107,944         563,819         671,763         *   

Amanda M. McMillian (5)

     5,652         6,227         11,879         *   

Directors and executive officers as a group (8 persons)

     339,130         1,491,849         1,830,979         *   

 

* Less than 1%
(1) Unless otherwise indicated, the address for all beneficial owners in this table is 1201 Lake Robbins Drive, The Woodlands, Texas 77380.
(2) As of September 10, 2012, there were 505,980,961 shares of Anadarko Petroleum Corporation common stock issued and outstanding.
(3) Does not include unvested restricted stock units of Anadarko Petroleum Corporation held by the following directors and executive officers of our general partner in the amounts indicated: Robert G. Gwin—38,684; Donald R. Sinclair—5,358; Danny J. Rea—7,450; Charles A. Meloy—65,023; Robert K. Reeves—43,575; R. A. Walker—79,236; and a total of 239,326 unvested restricted stock units are held by the directors and executive officers of our general partner as a group. Restricted stock units typically vest equally over three years beginning on the first anniversary of the date of grant, and upon vesting are payable in Anadarko common stock, subject to applicable tax withholding. Holders of restricted stock units receive dividend equivalents on the units, but do not have voting rights. Generally, a holder will forfeit any unvested restricted units if he or she terminates voluntarily or is terminated for cause prior to the vesting date. Holders of restricted stock units have the ability to defer such awards.
(4) Includes unvested shares of restricted common stock of Anadarko Petroleum Corporation held by the following directors and executive officers of our general partner in the amounts indicated: Benjamin M. Fink—5,420; Amanda M. McMillian—2,948; Philip H. Peacock—2,170; and a total of 10,538 unvested shares of restricted common stock are held by the directors and executive officers of our general partner as a group. Restricted stock awards typically vest equally over three years beginning on the first anniversary of the date of grant. Holders of restricted stock receive dividends on the shares and also have voting rights. Generally, a holder of restricted stock will forfeit any unvested restricted shares if he or she terminates voluntarily or is terminated for cause prior to the vesting date.
(5) Ms. McMillian resigned from her position with WES GP effective August 6, 2012 but remains employed by Anadarko.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Our Relationship with WES and WES GP

We own and control WES GP, the general partner of WES. WES is a growth-oriented Delaware limited partnership organized by Anadarko Petroleum Corporation (NYSE: APC) to own, operate, acquire and develop midstream energy assets. Our only cash-generating assets consist of our partnership interests in WES, which upon the completion of this offering will consist of the following:

 

   

2,075,553 WES general partner units, representing a 2.0% general partner interest in WES;

 

   

all of the incentive distribution rights in WES, which entitle us to receive increasing percentages, up to the maximum level of 48.0%, of any incremental cash distributed by WES as certain target distribution levels are reached in any quarter; and

 

   

46,340,947 WES common units, representing a 44.7% limited partner interest in WES.

We were formed in September 2012 upon the conversion of our predecessor, WGR Holdings, LLC, into a Delaware limited partnership. As of September 30, 2012, we owned 40,573,239 WES common units and, indirectly through our 100% membership interest in WES GP, 1,957,845 WES general partner units and all of the incentive distribution rights.

We control, manage and operate WES through our ownership of WES GP. The officers of our general partner are also officers of WES GP and our general partner’s employees operate WES’s business. Five of our directors are affiliated with Anadarko and are also directors of WES GP. Our remaining three directors will be independent directors as defined by the NYSE. We also appoint the directors of WES GP.

Indemnification of Directors and Officers

Under our partnership agreement and subject to specified limitations, we will indemnify to the fullest extent permitted by Delaware law, from and against all losses, claims, damages or similar events, any of our or our affiliates’ directors or officers, or any person who is or was serving at our general partner’s request as a director, officer, member, employee, partner, manager, fiduciary or trustee of any other person.

Any indemnification under our partnership agreement will only be out of our assets. We are authorized to purchase insurance against liabilities asserted against us and expenses incurred by persons for our activities, regardless of whether we would have the power to indemnify the person against liabilities under our partnership agreement.

Agreements Entered Into or to be Entered Into in Connection with this Offering

Working Capital Facility

On November 1, 2012, we entered into a $30.0 million working capital facility with Anadarko as the lender. The facility is available exclusively to fund our working capital borrowings. Borrowings under the facility will mature on November 1, 2017 and will bear interest at LIBOR plus 1.50%. We believe that we will have adequate financing over the next twelve months to meet currently anticipated expenditures, and we currently have no plans to use the working credit facility or any other financing sources during that period.

Unit Purchase Agreement

Prior to the closing of this offering, we anticipate that we, WES GP and WES will enter into a Unit Purchase Agreement outlining the terms under and conditions on which we will purchase WES common units and WES GP will purchase WES general partner units with the net proceeds of this offering. We anticipate that the WES common units and general partner units will be purchased at a discount to the then-current trading price of WES common units.

 

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Contribution Agreement—Incentive Plan

In connection with this offering and the termination of the Incentive Plan, we, WES GP and Anadarko will enter into a contribution agreement pursuant to which Anadarko will agree to contribute cash to WES GP in an amount equal to the aggregate amount to be paid to the participants in the Incentive Plan.

Related Party Transactions of Western Gas Partners, LP

We, WES and other parties entered into various agreements with Anadarko in connection with and subsequent to WES’s initial public offering in May 2008. These agreements address the acquisition of assets and the assumption of liabilities by WES and its subsidiaries as well as financing and commercial arrangements. These agreements were not the result of arm’s-length negotiations and, as such, they or underlying transactions may not be based on terms as favorable as those that could have been obtained from unaffiliated third parties.

The WES RCF, the WES Notes and the Indemnification Agreement

Pursuant to the terms of the WES RCF and the indentures governing the WES Notes, the obligations of WES under such debt agreements are recourse to WES GP. In turn, a wholly owned subsidiary of Anadarko agreed to indemnify WES GP against claims, damages, loses, liabilities, costs or expenses which WES GP may incur by reason of, or arising out of, any proceeding against WES or WES GP under the WES RCF and the WES Notes to the extent not satisfied by the assets of WES.

WES Omnibus Agreement

In connection with WES’s initial public offering, WES and WES GP entered into the WES omnibus agreement with Anadarko that addresses the following matters:

 

   

Anadarko’s obligation to indemnify WES for certain liabilities and WES’s obligation to indemnify Anadarko for certain liabilities;

 

   

WES’s obligation to reimburse Anadarko for expenses incurred or payments made on WES’s behalf in conjunction with Anadarko’s provision of general and administrative services to WES, including salary and benefits of Anadarko personnel, WES’s public company expenses, general and administrative expenses and salaries and benefits of the executive management of WES GP who are employees of Anadarko (see “—Administrative services and reimbursement” below for details regarding certain agreements for amounts reimbursed in 2011); and

 

   

WES’s obligation to reimburse Anadarko for all insurance coverage expenses it incurs or payments it makes with respect to WES’s assets.

 

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The table below reflects the categories of expenses for which WES was obligated to reimburse Anadarko pursuant to the WES omnibus agreement for the year ended December 31, 2011:

 

     Year Ended
December 31, 2011
 
     (in thousands)  

Reimbursement of general and administrative expenses

   $ 11,754   

Reimbursement of public company expenses

   $ 7,735   

Reimbursement of direct expenses related to acquisitions

   $ —     

Reimbursement of commitment fees

   $ —     

Any or all of the provisions of the WES omnibus agreement are terminable by Anadarko at its option if WES GP is removed as the general partner of WES without cause and WES units held by us are not voted in favor of that removal. The WES omnibus agreement will also generally terminate in the event of a change of control of WES or WES GP.

Administrative services and reimbursement. Under the WES omnibus agreement, WES reimburses Anadarko for the payment of certain operating expenses and for the provision of various general and administrative services for WES’s benefit with respect to its initial assets and for subsequent acquisitions. The WES omnibus agreement further provides that WES reimburses Anadarko for all expenses it incurs or payments it makes with respect to WES’s assets.

Pursuant to these arrangements, Anadarko performs centralized corporate functions for WES, such as legal; accounting; treasury; cash management; investor relations; insurance administration and claims processing; risk management; health, safety and environmental; information technology; human resources; credit; payroll; internal audit; tax; and marketing and midstream administration. WES reimburses Anadarko for expenses it incurs or payments it makes on WES’s behalf, including salaries and benefits of Anadarko personnel, WES’s public company expenses, WES’s general and administrative expenses and salaries and benefits of the executive management of WES GP who are also employees of Anadarko.

Under the WES omnibus agreement, WES’s reimbursement to Anadarko for certain general and administrative expenses it allocates to WES was initially capped at $6.0 million annually. This cap was subsequently modified due to the acquisition of additional assets and was $6.9 million for 2009 and $9.0 million for the year ending December 31, 2010. For the year ending December 31, 2011, and thereafter, Anadarko, in accordance with WES’s partnership agreement and the WES omnibus agreement, has determined and will continue to determine in its reasonable discretion amounts to be allocated to WES for services provided under the WES omnibus agreement, and such allocations will not be subject to an annual cap.

Indemnification with respect to WES’s initial assets. Under the WES omnibus agreement, Anadarko agreed to indemnify WES against certain environmental, title and operational matters associated with WES’s initial assets. WES has claimed no indemnities under the WES omnibus agreement prior to the date hereof. Other than with respect to certain tax liabilities attributable to assets or liabilities retained by Anadarko, the indemnification obligations under the WES omnibus agreement have expired.

Indemnification Agreements with Directors and Officers

WES GP has entered into indemnification agreements with each of its officers and directors (each, an “Indemnitee”). Each indemnification agreement provides that WES GP will indemnify and hold harmless each Indemnitee against all expense, liability and loss (including attorney’s fees, judgments, fines or penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by the Indemnitee in connection with serving in their capacity as officers and directors of WES GP (or of any subsidiary of our general partner) or in any capacity at the request of WES GP or its board of directors to the fullest extent permitted by applicable

 

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law, including Section 18-108 of the Delaware Limited Liability Company Act in effect on the date of the agreement or as such laws may be amended to provide more advantageous rights to the Indemnitee. The indemnification agreements also provide that WES GP must advance payment of certain expenses to the Indemnitee, including fees of counsel, in advance of final disposition of any proceeding subject to receipt of an undertaking from the Indemnitee to return such advance if it is ultimately determined that the Indemnitee is not entitled to indemnification.

Through the date hereof, there have been no payments or claims to Anadarko related to indemnifications and no payments or claims have been received from Anadarko related to indemnifications.

Services and Secondment Agreement

In connection with WES’s initial public offering, Anadarko and WES GP entered into a services and secondment agreement, pursuant to which specified employees of Anadarko are seconded to WES GP to provide operating, routine maintenance and other services with respect to assets WES owns and operates under the direction, supervision and control of WES GP. Pursuant to the services and secondment agreement, WES GP reimburses Anadarko for services provided by the seconded employees. The initial term of the services and secondment agreement extends through May 2018 and the term will automatically extend for additional twelve-month periods unless either party provides 180 days written notice of termination before the applicable twelve-month period expires.

Tax Sharing Agreement

In connection with WES’s initial public offering, WES entered into a tax sharing agreement pursuant to which WES reimburses Anadarko for WES’s estimated share of taxes from all forms of taxation, excluding taxes imposed by the United States, borne by Anadarko on WES’s behalf as a result of WES’s results being included in a combined or consolidated tax return filed by Anadarko with respect to periods including and subsequent to WES’s acquisition of its initial assets. Anadarko may use its tax attributes to cause its combined or consolidated group, of which WES may be a member for this purpose, to owe no tax. Nevertheless, WES is required to reimburse Anadarko for the estimated share of taxes that WES would have owed had the attributes not been available or used for our benefit, regardless of whether Anadarko pays taxes for the period.

Related-Party Acquisition Agreements

Since its initial public offering, WES entered into eight separate transactions to acquire assets from Anadarko. For a discussion of the consideration paid in such acquisitions, please read “Business—Western Gas Partners, LP—Overview—WES’s Primary Growth Drivers.” Pursuant to the acquisition agreements entered into in connection with such acquisitions, Anadarko has agreed to indemnify WES and its affiliates (other than any of the entities controlled by Anadarko), shareholders, unitholders, members, directors, officers, employees, agents and representatives against certain losses resulting from any breach of Anadarko’s representations, warranties, covenants or agreements, and for certain other matters. WES has agreed to indemnify Anadarko and its affiliates (other than WES and its security holders, officers, directors and employees) and their respective security holders, officers, directors and employees against certain losses resulting from any breach of WES’s representations, warranties, covenants or agreements made in such agreements.

The board of directors of WES GP approved the acquisition of the Powder River assets, the Chipeta assets, the Granger assets, the Wattenberg assets, the Bison assets, MGR and AWC, based in part on the recommendations in favor of the acquisitions from, and the granting of special approval under WES’s partnership agreement by, the board’s special committee. The special committee, a committee of independent members of WES GP’s board of directors, retained independent legal and financial advisors to assist it in evaluating and negotiating the acquisitions. In recommending the approval of the acquisitions, the special committee based its decision, in part, on the independent financial advisors’ written opinions representing that the consideration to be paid by us to Anadarko was fair.

 

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Chipeta LLC Agreement

In connection with WES’s acquisition of its initial 51% membership interest in Chipeta, WES became party to Chipeta’s limited liability company agreement, as amended and restated, as of July 23, 2009 (the “Chipeta LLC agreement”), together with Anadarko and a third-party member. Among other things, the Chipeta LLC agreement provides the following:

 

   

Chipeta’s members will be required from time to time to make capital contributions to Chipeta to the extent approved by the members in connection with Chipeta’s annual budget;

 

   

Chipeta will distribute available cash, as defined in the Chipeta LLC agreement, if any, to its members quarterly in accordance with those members’ membership interests; and

 

   

Chipeta’s membership interests are subject to significant restrictions on transfer.

Upon acquisition of its initial 51% membership interest in Chipeta, WES became the managing member of Chipeta. As managing member, WES manages the day-to-day operations of Chipeta and receives a management fee from the other members, which is intended to compensate the managing member for the performance of its duties. WES may be removed as the managing member only if it is grossly negligent or fraudulent, breaches its primary duties or fails to respond in a commercially reasonable manner to written business proposals from the other members, and such behavior, breach or failure has a material adverse effect to Chipeta. Effective August 1, 2012, WES acquired Anadarko’s remaining 24% membership interest in Chipeta, receiving distributions related to the additional interest beginning July 1, 2012, and Anadarko ceased to be a party to the Chipeta LLC agreement.

Note Receivable from Anadarko

Concurrent with the closing of WES’s May 2008 initial public offering, WES loaned $260.0 million to Anadarko in exchange for a 30-year note bearing interest at a fixed annual rate of 6.50%, payable quarterly.

Note Payable to Anadarko

In December 2008, WES entered into a five-year $175.0 million term loan agreement with Anadarko. The interest rate was fixed at 4.00% until November 2010. The term loan agreement was amended in December 2010 to fix the interest rate at 2.82% through maturity in 2013. During the year ended December 31, 2011, WES incurred approximately $4.9 million in interest on the loan. In June 2012, the note payable to Anadarko was repaid in full.

Commodity Price Swap Agreements

WES has commodity price swap agreements with Anadarko to mitigate exposure to commodity price volatility that would otherwise be present as a result of the purchase and sale of natural gas, condensate or NGLs. Notional volumes for each of the commodity price swap agreements are not specified. Instead, the commodity price swap agreements apply to the actual volumes of natural gas, condensate and NGLs purchased and sold at the Hilight, Hugoton, Newcastle, Granger and Wattenberg assets, with various expiration dates through September 2015. In December 2011, WES extended the commodity price swap agreements for the Hilight and Newcastle assets through December 2013. In December 2011, WES also entered into commodity price swap agreements related to the acquisition of MGR, with forward-starting effective dates beginning January 2012.

Gas Gathering and Processing Agreements

WES has significant gas gathering and processing arrangements with affiliates of Anadarko on a majority of its systems. Approximately 75% and 76% of its gathering, transportation and treating throughput and 64% and 59% of its processing throughput for the year ended December 31, 2011 and the nine months ended September 30, 2012 was attributable to natural gas production owned or controlled by Anadarko, in each case exclusive of its equity investment throughput.

 

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Gas Purchase and Sale Agreements

Substantially all natural gas, NGLs and condensate on WES’s systems are sold to Anadarko Energy Services Company (“AESC”), Anadarko’s marketing affiliate. In addition, WES purchases natural gas from AESC pursuant to gas purchase agreements. WES’s gas purchase and sale agreements with AESC are generally one-year contracts, subject to annual renewal.

Summary of Affiliate Transactions

Revenues from affiliates include amounts earned by WES from services provided to Anadarko as well as from the sale of residue gas, condensate and NGLs to Anadarko and its affiliates. In addition, WES purchases natural gas from an affiliate of Anadarko pursuant to gas purchase agreements. Operating and maintenance expense includes amounts accrued for or paid to affiliates for the operation of WES’s assets, whether in providing services to affiliates or to third parties, including field labor, measurement and analysis, and other disbursements. A portion of WES’s general and administrative expenses is paid by Anadarko, which results in affiliate transactions pursuant to the reimbursement provisions of the WES omnibus agreement. Affiliate expenses do not inherently bear a direct relationship to affiliate revenues, and third-party expenses do not necessarily bear a direct relationship to third-party revenues.

The following table summarizes affiliate transactions, including transactions with Anadarko and its affiliates:

 

     Nine Months
Ended
September 30,
2012
     Year Ended December 31,  
        2011      2010      2009  
     (in thousands)  

Revenues (1)

   $ 507,473       $ 648,997       $ 571,628       $ 521,850   

Cost of product (1)

     115,603         83,722         95,667         94,999   

Operation and maintenance (2)

     38,040         51,339         46,379         41,444   

General and administrative (3)

     29,421         31,855         23,807         27,408   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

     183,064         166,916         165,853         163,851   

Interest income (4)

     12,675         28,560         20,243         20,717   

Interest expense (5)

     2,684         4,935         6,924         9,096   

Contributions from noncontrolling interest owners and Anadarko

     12,588         16,476         2,019         34,011   

Distributions to noncontrolling interest owners and Anadarko

     6,528         9,437         6,476         5,410   

 

(1) Represents amounts recognized under gathering, treating or processing agreements, and purchase and sale agreements.
(2) Represents expenses incurred under the services and secondment agreement, as applicable.
(3) Represents general and administrative expense incurred under the WES omnibus agreement, as applicable.
(4) Represents interest income recognized on the note receivable from Anadarko. This line item also includes interest income, net on affiliate balances related to the MGR assets, Bison assets, White Cliffs investment and Wattenberg assets for periods prior to the acquisition of such assets. Beginning December 7, 2011, Anadarko discontinued charging interest on intercompany balances. The outstanding affiliate balances on the WES assets prior to acquisition were entirely settled through an adjustment to parent net equity.
(5) Represents interest expense recognized on the note payable to Anadarko.

Conflicts of Interest

Conflicts of interest exist and may arise in the future as a result of the relationships between WES GP and its affiliates, including us and Anadarko, on the one hand, and WES and its limited partners, on the other hand.

 

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The directors and officers of WES GP have duties to manage WES GP in a manner beneficial to us. At the same time, WES GP has a duty to manage WES in a manner beneficial to WES and its unitholders.

Whenever a conflict arises between WES GP or its affiliates, on the one hand, and WES and its limited partners, on the other hand, WES GP will resolve the conflict. WES’s partnership agreement contains provisions that modify and limit WES GP’s duties to WES’s unitholders. WES’s partnership agreement also restricts the remedies available to its unitholders for actions taken by WES GP that, without those limitations, might constitute breaches of fiduciary duties otherwise applicable under state law.

WES GP will not be in breach of its obligations under WES’s partnership agreement or its duties to WES or WES’s unitholders if the resolution of the conflict is any of the following:

 

   

approved by the special committee of WES GP, although WES GP is not obligated to seek such approval;

 

   

approved by the vote of a majority of the outstanding WES common units, excluding any common units owned by WES GP or any of its affiliates, including us;

 

   

on terms no less favorable to WES than those generally being provided to or available from unrelated third parties; or

 

   

fair and reasonable to WES, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

WES GP may, but is not required to, seek the approval of such resolution from the special committee of its board of directors. In connection with a situation involving a conflict of interest, any determination by WES GP involving the resolution of the conflict of interest must be made in good faith, provided that, if WES GP does not seek approval from the special committee and its board of directors determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the third and fourth bullet points above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of WES or any of its limited partner, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Unless the resolution of a conflict is specifically provided for in WES’s partnership agreement, WES GP or the special committee may consider any factors that it determines in good faith to be appropriate when resolving a conflict. WES’s partnership agreement provides that for someone to act in good faith, that person must reasonably believe he is acting in the best interests of the partnership.

Material Provisions of Our General Partner’s Limited Liability Company Agreement

Our general partner’s management and operations are governed by its limited liability company agreement, which will be filed as an exhibit to the registration statement of which this prospectus is a part. The limited liability company agreement establishes a board of directors that will be responsible for the oversight of our business and operations. Our general partner’s board of directors will be appointed by Anadarko Petroleum Corporation, as sole member.

 

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CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

Conflicts of Interest

Conflicts of interest exist and may arise in the future as a result of the relationships among us, Anadarko Petroleum Corporation, WES and our and their respective general partners and affiliates on the one hand, and us and our limited partners, on the other hand. Like WES, our general partner is controlled by Anadarko Petroleum Corporation. Accordingly, Anadarko Petroleum Corporation has the ability to elect, remove and replace the directors and officers of our general partner and the directors and officers of the general partner of WES. The directors and officers of our general partner have duties to manage our general partner in a manner beneficial to its owner, Anadarko Petroleum Corporation. At the same time, our general partner has a duty to manage us in a manner beneficial to us and our unitholders.

Certain of the executive officers and non-independent directors of our general partner also serve as executive officers and directors of the general partner of WES. Consequently, these directors and officers may encounter situations in which their obligations to WES, on the one hand, and us, on the other hand, are in conflict.

Whenever a conflict of interest arises between our general partner or its affiliates, on the one hand, and us or any other partner, on the other hand, our general partner will resolve that conflict. Our partnership agreement contains provisions that modify and limit our general partner’s state-law fiduciary duties to our unitholders. Our partnership agreement also restricts the remedies available to unitholders for actions taken that, without those limitations, might constitute breaches of fiduciary duty under applicable state law.

Our general partner will not be in breach of its obligations under our partnership agreement or its duties to us or our unitholders if the resolution of the conflict is:

 

   

approved by the special committee, although our general partner is not obligated to seek such approval;

 

   

approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner or any of its affiliates;

 

   

on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or

 

   

fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

Our general partner may, but is not required to, seek the approval of such resolution from the special committee. If our general partner does not seek approval from the special committee and its board of directors determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the third and fourth bullet points above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or us, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Unless the resolution of a conflict is specifically provided for in our partnership agreement, our general partner or the special committee may consider any factors it determines in good faith to consider when resolving the conflict. When our partnership agreement requires someone to act in good faith, it requires that person to believe that he is acting in the best interests of the partnership, unless the context otherwise requires.

Conflicts of interest could arise in the situations described below, among others.

 

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Actions taken by our general partner may affect the amount of cash available for distribution to our unitholders.

The amount of cash that is available for distribution to our unitholders is affected by decisions of our general partner regarding such matters as:

 

   

the expenses associated with being a publicly traded partnership and other general and administrative expenses;

 

   

interest expense related to future indebtedness, including under our working capital facility;

 

   

expenditures, at our election, to maintain or increase our general partner interest in WES;

 

   

reserves our general partner believes are prudent to maintain for the proper conduct of our business or to provide for future distributions;

 

   

the issuance of additional common units; and

 

   

a decision by our general partner’s board of directors to limit or modify the incentive distributions we are entitled to receive.

We do not have any officers or employees and rely solely on officers and employees of our general partner. In addition, all of our general partner’s officers also serve as executive officers of WES GP.

Affiliates of our general partner conduct businesses and activities of their own in which we have no economic interest. If these separate activities are significantly greater than our activities, there could be material competition for the time and effort of the officers and employees who provide services to our general partner. The officers of our general partner are not required to work full time on our affairs.

We will reimburse our general partner and its affiliates for expenses.

We will reimburse our general partner and its affiliates for costs incurred in managing and operating us, including costs incurred in rendering corporate staff and support services to us. Our partnership agreement provides that our general partner will determine the expenses that are allocable to us in good faith. Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Reimbursement of Expenses.”

Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements so that the other party has recourse only to our assets, and not against our general partner or its assets. Our partnership agreement provides that any action taken by our general partner to limit its liability or our liability is not a breach of our general partner’s fiduciary duties, even if we could have obtained more favorable terms without the limitation on liability.

Unitholders will have no right to enforce obligations of our general partner and its affiliates under agreements with us.

Any agreements between us on the one hand, and our general partner and its affiliates, on the other, will not grant to our unitholders, separate and apart from us, the right to enforce the obligations of our general partner and its affiliates in our favor.

Contracts between us, on the one hand, and our general partner and its affiliates, on the other, will not be the result of arm’s-length negotiations.

Our partnership agreement allows our general partner to determine, in good faith, any amounts to pay itself or its affiliates for any services rendered to us. Our general partner may also enter into additional contractual arrangements with any of its affiliates on our behalf. Neither our partnership agreement nor any of the other

 

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agreements, contracts and arrangements between us, on the one hand, and our general partner and its affiliates, on the other, are or will be the result of arm’s-length negotiations.

Our general partner will determine, in good faith, the terms of any of these transactions entered into after the sale of common units in this offering.

Common units are subject to our general partner’s call right.

Our general partner may exercise its right to call and purchase common units as provided in our partnership agreement or assign this right to one of its affiliates or to us. Our general partner may use its own discretion, free of state-law fiduciary duty restrictions, in determining whether to exercise this right. As a result, a common unitholder may have his common units purchased from him at an undesirable time or price. Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Limited Call Right.”

We may not choose to retain separate counsel for ourselves or for the holders of common units.

The attorneys, independent accountants and others who have performed services for us regarding this offering have been retained by our general partner. Attorneys, independent accountants and others who will perform services for us are selected by our general partner or the special committee, if established, and may perform services for our general partner and its affiliates. We may retain separate counsel for ourselves or the holders of our common units in the event of a conflict of interest between our general partner and its affiliates, on the one hand, and us or the holders of our units, on the other, depending on the nature of the conflict. We do not intend to do so in most cases.

Fiduciary Duties

Our general partner may be accountable to us and our unitholders as a fiduciary. Fiduciary duties owed to unitholders by our general partner are prescribed by law and our partnership agreement. The Delaware Act provides that Delaware limited partnerships may, in their partnership agreements, modify, restrict or expand the fiduciary duties otherwise owed by a general partner to limited partners and the partnership.

Our partnership agreement contains various provisions modifying and restricting the fiduciary duties that might otherwise be owed by our general partner. We have adopted these restrictions to allow our general partner or its affiliates to engage in transactions with us that would otherwise be prohibited by state-law fiduciary duty standards and to take into account the interests of other parties in addition to our interests when resolving conflicts of interest. We believe this is appropriate and necessary because our general partner’s board of directors has fiduciary duties to manage our general partner in a manner beneficial to its owners, as well as to you. Without these modifications, the general partner’s ability to make decisions involving conflicts of interest would be restricted. The modifications to the fiduciary standards enable our general partner to take into consideration all parties involved in the proposed action, so long as the resolution is fair and reasonable to us as described below. These modifications also enable our general partner to attract and retain experienced and capable directors. These modifications are detrimental to the unitholders because they restrict the remedies available to unitholders for actions that, without those limitations, might constitute breaches of fiduciary duty, as described below, and permit our general partner to take into account the interests of third parties in addition to our interests when resolving conflicts of interest. The following is a summary of the material restrictions of the fiduciary duties owed by our general partner to the limited partners:

 

State-law fiduciary duty standards

Fiduciary duties are generally considered to include an obligation to act in good faith and with due care and loyalty. The duty of care, in the absence of a provision in a partnership agreement providing otherwise, would generally require a general partner to act for the partnership in the same manner as a prudent person would act on his

 

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own behalf. The duty of loyalty, in the absence of a provision in a partnership agreement providing otherwise, would generally prohibit a general partner of a Delaware limited partnership from taking any action or engaging in any transaction where a conflict of interest is present.

 

  The Delaware Act generally provides that a limited partner may institute legal action on behalf of the partnership to recover damages from a third party where a general partner has refused to institute the action or where an effort to cause a general partner to do so is not likely to succeed. In addition, the statutory or case law of some jurisdictions may permit a limited partner to institute legal action on behalf of himself and all other similarly situated limited partners to recover damages from a general partner for violations of its fiduciary duties to the limited partners.

 

Partnership agreement modified standards

Our partnership agreement contains provisions that waive or consent to conduct by our general partner and its affiliates that might otherwise raise issues about compliance with fiduciary duties or applicable law. For example, our partnership agreement provides that when our general partner is acting in its capacity as our general partner, as opposed to in its individual capacity, it must act in “good faith” and will not be subject to any other standard under applicable law. In addition, when our general partner is acting in its individual capacity, as opposed to in its capacity as our general partner, it may act without any fiduciary obligation to us or the unitholders whatsoever. These standards reduce the obligations to which our general partner would otherwise be held.

 

  In addition to the other more specific provisions limiting the obligations of our general partner, our partnership agreement further provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners or their assignees for errors of judgment or for any acts or omissions unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that the general partner or its officers and directors acted in bad faith or engaged in fraud or willful misconduct, or in the case of a criminal matter, acted with the knowledge that such conduct was unlawful.

 

  Special provisions regarding affiliated transactions. Our partnership agreement generally provides that affiliated transactions and resolutions of conflicts of interest not involving a vote of unitholders and that are not approved by the special committee of the board of directors of our general partner must be:

 

   

on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or

 

   

“fair and reasonable” to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

 

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  If our general partner does not seek approval from the special committee and its board of directors determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the bullet points above, then it will be presumed that, in making its decision, the board of directors, which may include board members affected by the conflict of interest, acted in good faith and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. These standards reduce the obligations to which our general partner would otherwise be held.

 

Rights and remedies of unitholders

The Delaware Act generally provides that a limited partner may institute legal action on behalf of the partnership to recover damages from a third party where a general partner has refused to institute the action or where an effort to cause a general partner to do so is not likely to succeed. These actions include actions against a general partner for breach of its fiduciary duties or of the partnership agreement. In addition, the statutory or case law of some jurisdictions may permit a limited partner to institute legal action on behalf of himself and all other similarly situated limited partners to recover damages from a general partner for violations of its fiduciary duties to the limited partners.

By purchasing our common units, each unitholder automatically agrees to be bound by the provisions in our partnership agreement, including the provisions discussed above. This is in accordance with the policy of the Delaware Act favoring the principle of freedom of contract and the enforceability of partnership agreements. The failure of a limited partner or assignee to sign a partnership agreement does not render the partnership agreement unenforceable against that person.

We must indemnify our general partner and its officers, directors, managers and certain other specified persons, to the fullest extent permitted by law, against liabilities, costs and expenses incurred by our general partner or these other persons. We must provide this indemnification unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that these persons acted in bad faith or engaged in fraud or willful misconduct. We must also provide this indemnification for criminal proceedings unless our general partner or these other persons acted with knowledge that their conduct was unlawful. Thus, our general partner could be indemnified for its negligent acts if it met the requirements set forth above. To the extent these provisions purport to include indemnification for liabilities arising under the Securities Act, in the opinion of the SEC, such indemnification is contrary to public policy and, therefore, unenforceable. Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Indemnification.”

 

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DESCRIPTION OF THE COMMON UNITS

The Common Units

The common units are limited partner interests in us. The holders of common units are entitled to participate in partnership distributions and exercise the rights or privileges available to limited partners under our partnership agreement. For a description of the rights and preferences of holders of common units in and to partnership distributions, please read “Our Cash Distribution Policy and Restrictions on Distributions.” For a description of the rights and privileges of limited partners under our partnership agreement, including voting rights, please read “The Partnership Agreement of Western Gas Equity Partners, LP.”

Transfer Agent and Registrar

Duties

Computershare Trust Company, N.A. will serve as the registrar and transfer agent for the common units. We will pay all fees charged by the transfer agent for transfers of common units except the following that must be paid by unitholders:

 

   

surety bond premiums to replace lost or stolen certificates, taxes and other governmental charges;

 

   

special charges for services requested by a unitholder; and

 

   

other similar fees or charges.

There will be no charge to unitholders for disbursements of our cash distributions. We will indemnify the transfer agent, its agents and each of their stockholders, directors, officers and employees against all claims and losses that may arise out of acts performed or omitted for its activities in that capacity, except for any liability due to any gross negligence or intentional misconduct of the indemnified person or entity.

Resignation or Removal

The transfer agent may resign, by notice to us, or be removed by us. The resignation or removal of the transfer agent will become effective upon our appointment of a successor transfer agent and registrar and its acceptance of the appointment. If no successor has been appointed and accepted the appointment within 30 days after notice of the resignation or removal, our general partner may act as the transfer agent and registrar until a successor is appointed.

Transfer of Common Units

By transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited partner with respect to the common units transferred when such transfer and admission are reflected in our books and records. Each transferee:

 

   

represents that the transferee has the capacity, power and authority to become bound by our partnership agreement;

 

   

automatically agrees to be bound by the terms and conditions of, and is deemed to have executed, our partnership agreement; and

 

   

is deemed to have given the consents and approvals contained in our partnership agreement, such as the approval of all transactions and agreements that we are entering into in connection with our formation and this offering.

A transferee will become a substituted limited partner of our partnership for the transferred common units automatically upon the recording of the transfer on our books and records. Our general partner will cause any transfers to be recorded on our books and records no less frequently than quarterly.

 

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We may, at our discretion, treat the nominee holder of a common unit as the absolute owner. In that case, the beneficial holder’s rights are limited solely to those that it has against the nominee holder as a result of any agreement between the beneficial owner and the nominee holder.

Common units are securities that are transferable according to the laws governing the transfer of securities. In addition to other rights acquired upon transfer, the transferor gives the transferee the right to become a substituted limited partner in our partnership for the transferred common units.

Until a common unit has been transferred on our books, we and the transfer agent may treat the record holder of the unit as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulations.

Comparison of Rights of Holders of WES’s Common Units and Our Common Units

Our common units and WES’s common units are unlikely to trade in simple relation or proportion to one another. Instead, while the trading prices of our common units and WES’s common units are likely to follow generally similar broad trends, the trading prices may diverge because, among other things, we participate in WES’s incentive distribution rights and WES’s common unitholders do not.

Based on the current cash distribution policy of WES, as well as our expected level of expenses and reserves that our general partner believes prudent to maintain, we expect that our initial quarterly distribution will be $         per common unit. If WES is successful in implementing its business strategy and increasing distributions to its limited partners, we generally would expect to increase distributions to our unitholders, although the timing and amount of any such increased distributions will not necessarily be comparable to any increased WES distributions. We will pay our unitholders a prorated distribution for the first quarter that we are a publicly traded partnership. This distribution will be paid for the period beginning on the closing date of this offering and ending on the last day of that fiscal quarter. Therefore, assuming that we become a publicly traded partnership after September 30, 2012 and before December 31, 2012, we will pay you a distribution for the period from the closing date of this offering to and including December 31, 2012. We expect to pay this cash distribution on or about February 25, 2013. However, we cannot assure you that any distributions will be declared or paid. The common units offered hereby are not entitled to arrearages in distributions. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

In the event that (i) we purchase less than the aggregate number of WES common units and general partner units assumed in “Our Cash Distribution Policy and Restrictions on Distributions” and (ii) solely as a direct result of such reduction in the number of purchased units, we do not have sufficient available cash to distribute our initial quarterly distribution to all of our common unitholders (including Anadarko) in any quarter during the forecast period, Anadarko will agree to forgo distributions on the common units that it receives in this offering in an amount sufficient to permit the purchasers of common units in this offering to receive the full initial quarterly distribution in such quarter. Anadarko will agree to forgo such distributions, as applicable, until the first completed quarter in which our available cash is sufficient to pay the full initial quarterly distribution on all of our outstanding common units. In addition, if in any subsequent quarter we have available cash in excess of the amount required to pay our initial quarterly distribution on all of our common units (including those held by Anadarko), we will distribute to Anadarko the lesser of (i) the amount by which available cash exceeds the available cash required to pay our initial quarterly distribution on all of our common units (including those held by Anadarko) and (ii) the amount of distributions forgone by Anadarko that have not yet been repaid.

 

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The following table compares certain features of WES’s common units and our common units and assumes that we purchase at least the aggregate number of WES common units and general partner units assumed in “Our Cash Distribution Policy and Restrictions on Distributions.”

 

    

WES’s Common Units

  

Our Common Units

Distributions and Incentive Distribution Rights

  

WES pays its limited partners and general partner quarterly distributions equal to the cash it receives from its operations, less certain reserves for expenses and other uses of cash. WES GP currently has a 2.0% general partner interest in WES and owns the incentive distribution rights in WES.

   We expect to pay our limited partners quarterly distributions equal to the cash we receive from WES, less certain reserves for expenses and other uses of cash. We do not have incentive distribution rights. As a result, distributions to our common unitholders will be based on their respective ownership interests.

Subordinated Units

   At its initial public offering, WES issued subordinated units. During the subordination period, WES’s common units had priority over other units to the initial quarterly distribution from WES’s Distributable cash flow. In addition, during the subordination period, WES’s common units carried arrearage rights, which are similar to cumulative rights on preferred stock. On August 15, 2011, pursuant to the terms of WES’s partnership agreement, all of its subordinated units converted into common units on a one-for-one basis in connection with the expiration of the subordination period.    We do not have subordinated units. As a result, our common units carry no rights to arrearages. Please read “Prospectus Summary—Our Structure.”

Taxation of Entity and Entity Owners

     
   WES is a pass-through entity that is not subject to an entity-level federal income tax.    Similarly, we are a pass-through entity that is not subject to an entity-level federal income tax.
   WES expects that holders of its common units will benefit for a period of time from tax basis adjustments and remedial allocations of deductions so that they will be allocated a relatively small amount of federal taxable income compared to the cash distributed to them during that period.    We also expect that holders of our common units will benefit for a period of time from tax basis adjustments and remedial allocations of deductions. However, our ownership of WES’s incentive distribution rights will cause more taxable income to be allocated to us. As a result, if WES is successful in increasing its distributions over time, our income allocations from the incentive distribution rights will increase and, therefore, our ratio of federal taxable income to cash distributions will increase.

 

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WES’s Common Units

  

Our Common Units

   WES common unitholders receive Schedule K-1s from WES reflecting the unitholders’ share of WES’s items of income, gain, loss and deduction at the end of each fiscal year.    Similarly, our common unitholders will receive Schedule K-1s from us reflecting the unitholders’ share of our items of income, gain, loss and deduction at the end of each fiscal year.

Assets and Operations

   WES and its subsidiaries own, operate, acquire and develop midstream energy assets that expand their business and operations.    We currently have no independent operations. Our only cash-generating assets are our partnership interests in WES, which upon the closing of this offering, will consist of 46,340,947 common units, representing a 44.7% limited partner interest in WES, 2,075,553 general partner units, representing a 2.0% general partner interest in WES and the incentive distribution rights in WES. Accordingly, our financial performance and our ability to pay cash distributions to our unitholders is directly dependent upon the performance of WES.

Limitation on Issuance of Additional Units

     
   WES may issue an unlimited number of additional partnership interests and other equity securities without obtaining unitholder approval.    Similarly, we may issue an unlimited number of additional partnership interests and other equity securities without obtaining unitholder approval.

 

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THE PARTNERSHIP AGREEMENT OF WESTERN GAS EQUITY PARTNERS, LP

The following is a summary of the material provisions of our partnership agreement. The form of our partnership agreement is included in this prospectus as Appendix A and will be adopted contemporaneously with the closing of this offering.

We summarize the following provisions of our partnership agreement elsewhere in this prospectus:

 

   

with regard to distributions of available cash, please read “Our Cash Distribution Policy and Restrictions on Distributions” and “Provisions of Our Partnership Agreement Relating to Cash Distributions;”

 

   

with regard to the rights of holders of common units, please read “Description of the Common Units;”

 

   

with regard to the duties of our general partner, please read “Conflicts of Interest and Fiduciary Duties;” and

 

   

with regard to allocations of taxable income and taxable loss, please read “Material U.S. Federal Income Tax Consequences.”

Organization and Duration

We were formed in September 2012 by converting WGR Holdings, LLC into a limited partnership and changing its name to Western Gas Equity Partners, LP. We have a perpetual existence.

Purpose

Under our partnership agreement we are permitted to engage, directly or indirectly, in any business activity that is approved by our general partner and that lawfully may be conducted by a limited partnership organized under Delaware law; provided, however, that our general partner may not cause us to engage, directly or indirectly, in any business activity that our general partner determines would cause us to be treated as an association taxable as a corporation or otherwise taxable as an entity for federal income tax purposes.

Although our general partner has the ability to cause us, our affiliates or our subsidiaries to engage in activities other than the ownership of partnership interests in WES, our general partner has no current plans to do so and may decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interest of us or our limited partners. Our general partner is authorized in general to perform all acts it determines to be necessary or appropriate to carry out our purposes and to conduct our business. For a further description of limits on our business, please read “Certain Relationships and Related Party Transactions.”

Power of Attorney

Each limited partner, and each person who acquires a unit from a unitholder, by accepting the unit, automatically grants to our general partner and, if appointed, a liquidator, a power of attorney to, among other things, execute and file documents required for our qualification, continuance or dissolution. The power of attorney also grants our general partner the authority to amend, and to grant consents and waivers under, our partnership agreement.

Capital Contributions

Our unitholders are not obligated to make additional capital contributions, except as described below under “—Limited Liability.”

 

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Limited Liability

Assuming that a limited partner does not participate in the control of our business within the meaning of the Delaware Act and that he otherwise acts in conformity with the provisions of our partnership agreement, his liability under the Delaware Act will be limited, subject to possible exceptions, to the amount of capital he is obligated to contribute to us for his common units plus his share of any undistributed profits and assets. If it were determined, however, that the right, or exercise of the right, by the limited partners as a group:

 

   

to remove or replace our general partner,

 

   

to approve some amendments to our partnership agreement, or

 

   

to take other action under our partnership agreement,

constituted “participation in the control” of our business for the purposes of the Delaware Act, then our limited partners could be held personally liable for our obligations under the laws of Delaware, to the same extent as our general partner. This liability would extend to persons who transact business with us who reasonably believe that the limited partner is a general partner. Neither our partnership agreement nor the Delaware Act specifically provides for legal recourse against our general partner if a limited partner were to lose limited liability through any fault of our general partner. While this does not mean that a limited partner could not seek legal recourse, we know of no precedent for this type of a claim in Delaware case law.

Under the Delaware Act, a limited partnership may not make a distribution to a partner if, after the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specific property of the partnership, would exceed the fair value of the assets of the limited partnership. For the purpose of determining the fair value of the assets of a limited partnership, the Delaware Act provides that the fair value of property subject to liability for which recourse of creditors is limited will be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds the nonrecourse liability. The Delaware Act provides that a limited partner who receives a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Act will be liable to the limited partnership for the amount of the distribution for three years. Under the Delaware Act, a substituted limited partner of a limited partnership is liable for the obligations of his assignor to make contributions to the partnership, except that such person is not obligated for liabilities unknown to him at the time he became a limited partner and that could not be ascertained from the partnership agreement.

Limitations on the liability of limited partners for the obligations of a limited partner have not been clearly established in many jurisdictions. While we currently have no operations distinct from WES, if in the future, by our ownership in an operating company or otherwise, it were determined that we were conducting business in any state without compliance with the applicable limited partnership or limited liability company statute, or that the right or exercise of the right by the limited partners as a group to remove or replace our general partner, to approve some amendments to our partnership agreement, or to take other action under our partnership agreement constituted “participation in the control” of our business for purposes of the statutes of any relevant jurisdiction, then the limited partners could be held personally liable for our obligations under the law of that jurisdiction to the same extent as our general partner under the circumstances. We will operate in a manner that our general partner considers reasonable and necessary or appropriate to preserve the limited liability of the limited partners.

Voting Rights

The following is a summary of the unitholder vote required for the matters specified below. The holders of a majority of the outstanding units, represented in person or by proxy, will constitute a quorum unless any action by the unitholders requires approval by holders of a greater percentage of the units, in which case the quorum will be the greater percentage. In voting their units, our general partner and its affiliates will have no fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interests of us or the limited partners.

 

Issuance of additional units

No approval right.

 

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Amendment of our partnership agreement

Certain amendments may be made by our general partner without the approval of our unitholders. Other amendments generally require the approval of a majority of our outstanding units. Please read “—Amendments to Our Partnership Agreement.”

 

Merger of our partnership or the sale of all or substantially all of our assets

A majority of our outstanding units in certain circumstances. Please read “—Merger, Sale or Other Disposition of Assets.”

 

Dissolution

A majority of our outstanding units. Please read “—Termination and Dissolution.”

 

Reconstitution upon dissolution

A majority of our outstanding units. Please read “—Termination and Dissolution.”

 

Withdrawal of our general partner

Under most circumstances, the approval of a majority of our outstanding units, excluding units held by our general partner and its affiliates, is required for the withdrawal of the general partner prior to June 30, 2018 in a manner that would cause our dissolution. Please read “—Withdrawal or Removal of the General Partner.”

 

Removal of our general partner

Not less than 80% of our outstanding units, including units held by our general partner and its affiliates. Please read “—Withdrawal or Removal of the General Partner.”

 

Transfer of the general partner interest

Our general partner may transfer all, but not less than all, of its general partner interest in us without a vote of our unitholders to (i) an affiliate (other than an individual) or (ii) another entity in connection with its merger or consolidation with or into, or sale of all or substantially all of its assets to, such entity. The approval of a majority of the units, excluding units held by our general partner and its affiliates, is required in other circumstances for a transfer of the general partner interest to a third party prior to June 30, 2018. Please read “—Transfer of General Partner Interest.”

Transfer of Ownership Interests in Our General Partner

At any time, Anadarko Petroleum Corporation, as sole member of our general partner, may sell or transfer all or part of its ownership interest in our general partner without the approval of our unitholders.

Issuance of Additional Securities

Our partnership agreement authorizes us to issue an unlimited number of additional limited partner interests and other equity securities for the consideration and on the terms and conditions established by our general partner in its sole discretion without the approval of our unitholders.

It is possible that we will fund acquisitions through the issuance of additional units or other equity securities. Holders of any additional units we issue will be entitled to share equally with the then-existing holders of units in our cash distributions. In addition, the issuance of additional partnership interests may dilute the value of the interests of the then-existing holders of units in our net assets.

 

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In accordance with Delaware law and the provisions of our partnership agreement, we may also issue additional partnership interests that have special voting rights to which the common units are not entitled.

Amendments to Our Partnership Agreement

General

Amendments to our partnership agreement may be proposed only by or with the consent of our general partner. However, our general partner will have no duty or obligation to propose any amendment and may decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interests of us or the limited partners. To adopt a proposed amendment, other than the amendments discussed below, our general partner must seek written approval of the holders of the number of units required to approve the amendment or call a meeting of the limited partners to consider and vote upon the proposed amendment. Except as described below, an amendment must be approved by a majority of our outstanding units.

Prohibited Amendments

No amendment may be made that would:

 

  (1) enlarge the obligations of any limited partner without its consent, unless approved by at least a majority of the type or class of limited partner interests so affected, or

 

  (2) enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable by us to our general partner or any of its affiliates without the consent of our general partner, which may be given or withheld in its sole discretion.

The provision of our partnership agreement preventing the amendments having the effects described in clauses (1) or (2) above can be amended upon the approval of the holders of at least 90% of the outstanding units (including units owned by our general partner and its affiliates). Upon completion of this offering, Anadarko, the owner of our general partner, will own approximately     % of our outstanding common units.

No Unitholder Approval

Our general partner may generally make amendments to our partnership agreement without the approval of any limited partner or assignee to reflect:

 

  (1) a change in our name, the location of our principal place of business, our registered agent or its registered office,

 

  (2) the admission, substitution, withdrawal or removal of partners in accordance with our partnership agreement,

 

  (3) a change that our general partner determines is necessary or advisable for us to qualify or to continue our qualification as a limited partnership or a partnership in which the limited partners have limited liability under the laws of any state or to ensure that we will not be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes,

 

  (4) an amendment that is necessary, in the opinion of our counsel, to prevent us or our general partner or its directors, officers, agents or trustees, from in any manner being subjected to the provisions of the Investment Company Act, the Investment Advisors Act of 1940, or “plan asset” regulations adopted under the Employee Retirement Income Security Act of 1974, whether or not substantially similar to plan asset regulations currently applied or proposed,

 

  (5) an amendment that our general partner determines to be necessary or appropriate in connection with the authorization of additional partnership securities or rights to acquire partnership securities,

 

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  (6) any amendment expressly permitted in our partnership agreement to be made by our general partner acting alone,

 

  (7) an amendment effected, necessitated or contemplated by a merger agreement that has been approved under the terms of our partnership agreement,

 

  (8) any amendment that our general partner determines to be necessary or appropriate to reflect and account for the formation by us, or our investment in, any corporation, partnership or other entity, as otherwise permitted by our partnership agreement,

 

  (9) a change in our fiscal year or taxable year and related changes,

 

  (10) a merger with or conveyance to another limited liability entity that is newly formed and has no assets, liabilities or operations at the time of the merger or conveyance other than those it receives by way of the merger or conveyance, or

 

  (11) any other amendments substantially similar to any of the matters described in (1) through (10) above.

In addition, our general partner may make any amendment to our partnership agreement without the approval of any limited partner or assignee that it determines:

 

  (1) does not adversely affect our limited partners (or any particular class of limited partners) in any material respect,

 

  (2) to be necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute,

 

  (3) to be necessary or appropriate to facilitate the trading of our limited partner interests or to comply with any rule, regulation, guideline or requirement of any securities exchange on which such limited partner interests are or will be listed for trading,

 

  (4) to be necessary or appropriate for any action taken by our general partner relating to splits or combinations of units under the provisions of our partnership agreement, or

 

  (5) is required to effect the intent of the provisions of our partnership agreement or are otherwise contemplated by our partnership agreement.

Opinion of Counsel and Unitholder Approval

Our general partner will not be required to obtain an opinion of counsel that an amendment will not result in a loss of limited liability to the limited partners or result in WES or our being treated as an entity for federal income tax purposes if one of the amendments described above under “—No Unitholder Approval” should occur. No other amendments to our partnership agreement will become effective without the approval of holders of at least 90% of the outstanding units, unless we obtain an opinion of counsel to the effect that the amendment will not affect the limited liability under applicable law of any of our limited partners. Any amendment that reduces the voting percentage required to take any action must be approved by the affirmative vote of limited partners constituting not less than the voting requirement sought to be reduced.

In addition to the above restrictions, any amendment that would have a material adverse effect on the rights or preferences of any type or class of outstanding units in relation to other classes of units will require the approval of at least a majority of the type or class of units so affected. Any amendment that reduces the voting percentage required to take any action must be approved by the affirmative vote of limited partners whose aggregate outstanding units constitute not less than the voting requirement sought to be reduced.

 

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Merger, Sale or Other Disposition of Assets

Our partnership agreement generally prohibits our general partner, without the prior approval of a majority of our outstanding units, from causing us to, among other things, sell, exchange or otherwise dispose of all or substantially all of our assets in a single transaction or a series of related transactions, including by way of merger, consolidation or other combination, or approving on our behalf the sale, exchange or other disposition of all or substantially all of the assets of WES and its subsidiaries. Our general partner may, however, mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets without that approval. Our general partner may also sell all or substantially all of our assets under a foreclosure or other realization upon those encumbrances without that approval.

A merger, consolidation or conversion of us requires the prior consent of the general partner. In addition, our partnership agreement provides that, to the maximum extent permitted by law, our general partner will have no duty or obligation to consent to any merger, consolidation or conversion of us and may decline to do so free of any fiduciary duty or obligation whatsoever to us, or any of our unitholders. Further, in declining to consent to a merger, consolidation or conversion, our general partner will not be required to act in good faith or pursuant to any other standard imposed by our partnership agreement, any other agreement, under the Delaware Act or any other law, rule or regulation or at equity.

If conditions specified in our partnership agreement are satisfied, our general partner may merge us or any of our subsidiaries into, or convey some or all of our assets to, a newly formed entity if the sole purpose of that merger or conveyance is to effect a mere change in our legal form into another limited liability entity. Our unitholders are not entitled to dissenters’ rights of appraisal under our partnership agreement or applicable Delaware law in the event of a merger or consolidation, a sale of substantially all of our assets or any other transaction or event.

Termination or Dissolution

We will continue as a limited partnership until terminated under our partnership agreement. We will dissolve upon:

 

  (1) the election of our general partner to dissolve us, if approved by a majority of our outstanding units,

 

  (2) there being no limited partners, unless we are continued without dissolution in accordance with applicable Delaware law,

 

  (3) the entry of a decree of judicial dissolution of us, or

 

  (4) the withdrawal or removal of our general partner or any other event that results in its ceasing to be our general partner other than by reason of a transfer of its general partner interest in accordance with our partnership agreement or withdrawal or removal of our general partner following approval and admission of a successor.

Upon a dissolution under clause (4) above, the holders of a majority of our outstanding units may also elect, within specific time limitations, to continue our business on the same terms and conditions described in our partnership agreement by appointing as a successor general partner an entity approved by the holders of a majority of the outstanding units, subject to our receipt of an opinion of counsel to the effect that:

 

  (1) the action would not result in the loss of limited liability of any limited partner, and

 

  (2) neither our partnership nor WES would be treated as an association taxable as a corporation or otherwise be taxable as an entity for federal income tax purposes upon the exercise of that right to continue.

 

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Liquidation and Distribution of Proceeds

Upon our dissolution, unless we are reconstituted and continued as a new limited partnership, the person authorized to wind up our affairs (the liquidator) will, acting with all of the powers of our general partner that the liquidator deems necessary or desirable in its judgment, liquidate our assets. The proceeds of the liquidation will be applied as follows:

 

   

first, towards the payment of all of our creditors and the settlement of or creation of a reserve for contingent liabilities; and

 

   

then, to all partners in accordance with the positive balance in the respective capital accounts.

If the liquidator determines that a sale would be impractical or would cause a loss to our partners, it may defer liquidation of our assets for a reasonable period of time or distribute assets to partners in kind if it determines that a sale would be impractical or would cause undue loss to the partners.

Withdrawal or Removal of the General Partner

Except as described below, our general partner has agreed not to withdraw voluntarily as our general partner prior to June 30, 2018 without obtaining the approval of the holders of at least 80% of the outstanding units, including units held by our general partner and its affiliates, voting as a single class, and furnishing an opinion of counsel regarding limited liability and tax matters. On or after June 30, 2018, our general partner may withdraw as general partner without first obtaining approval of any unitholder by giving 90 days’ written notice, and that withdrawal will not constitute a violation of our partnership agreement. In addition, our general partner may withdraw without unitholder approval upon 90 days’ notice to our limited partners if at least 50% of our outstanding common units are held or controlled by one person and its affiliates other than our general partner and its affiliates.

Upon the voluntary withdrawal of our general partner, the holders of a majority of our outstanding units, excluding units held by the withdrawing general partner and its affiliates, may elect a successor to that withdrawing general partner. If a successor is not elected, or is elected but an opinion of counsel regarding limited liability and tax matters cannot be obtained, we will be dissolved, wound up and liquidated, unless within 180 days after that withdrawal, the holders of a majority of the outstanding units, excluding units held by the withdrawing general partner and its affiliates, agree in writing to continue our business and to appoint a successor general partner. Please read “—Termination and Dissolution” above.

Our general partner may not be removed unless that removal is approved by the vote of the holders of not less than 80% of our outstanding units, including units held by our general partner and its affiliates, and we receive an opinion of counsel regarding limited liability and tax matters. Any removal of our general partner is also subject to the approval of a successor general partner by the vote of the holders of a majority of the outstanding units. The ownership of more than 20% of our outstanding units by our general partner and its affiliates would give it the practical ability to prevent its removal. Upon completion of this offering, Anadarko Petroleum Corporation, the owner of our general partner, will own approximately     % of our outstanding units.

In addition, we will be required to reimburse the departing general partner for all amounts due the departing general partner, including, without limitation, all employee-related liabilities, including severance liabilities, incurred for the termination of any employees employed by the departing general partner or its affiliates for our benefit.

Transfer of General Partner Interest

Except for transfer by our general partner of all, but not less than all, of its general partner interests in us to:

 

   

an affiliate of the general partner (other than an individual); or

 

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another entity as part of the merger or consolidation of the general partner with or into another entity or the transfer by the general partner of all or substantially all of its assets to another entity,

our general partner may not transfer all or any part of its general partner interest in us to another person prior to June 30, 2018 without the approval of the holders of at least a majority of the outstanding units, excluding units held by our general partner and its affiliates. As a condition of this transfer, the transferee must assume the rights and duties of the general partner to whose interest that transferee has succeeded, agree to be bound by the provisions of our partnership agreement and furnish an opinion of counsel regarding limited liability and tax matters.

On or after June 30, 2018, our general partner may transfer all or any of its general partner interest in us without obtaining approval of any unitholder.

Change of Management Provisions

Our partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove our general partner as general partner or otherwise change management. If any person or group other than our general partner and its affiliates acquires beneficial ownership of 20% or more of any class of our units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply to (i) any person or group that acquires the units from our general partner or its affiliates, (ii) any transferees of that person or group approved by our general partner, or (iii) any person or group that acquires 20% of any class of units with the prior approval of the board of directors of our general partner.

Limited Call Right

If at any time not more than 20% of the then-issued and outstanding limited partner interests of any class are held by persons other than our general partner and its affiliates, our general partner will have the right, which it may assign in whole or in part to any of its affiliates or to us, to acquire all, but not less than all, of the remaining limited partner interests of the class held by unaffiliated persons as of a record date to be selected by our general partner, on at least ten but not more than 60 days’ notice. The purchase price in the event of such a purchase will be not less than the then current market price of the common units. Upon completion of this offering, our current owner, Anadarko Petroleum Corporation, will own approximately     % of our common units.

As a result of our general partner’s right to purchase outstanding limited partner interests, a holder of limited partner interests may have his limited partner interests purchased at an undesirable time or price. The tax consequences to a unitholder of the exercise of this call right are the same as a sale by that unitholder of his units in the market. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units.”

Meetings; Voting

Except as described below regarding a person or group owning 20% or more of units then outstanding, unitholders on the record date will be entitled to notice of, and to vote at, meetings of our limited partners and to act upon matters for which approvals may be solicited. Common units that are owned by non-citizen assignees will be voted by our general partner on behalf of such non-citizen assignees, and our general partner will distribute the votes on those common units in the same ratios as the votes of limited partners on other units are cast.

Our general partner does not anticipate that any meeting of unitholders will be called in the foreseeable future. Any action that is required or permitted to be taken by the unitholders may be taken either at a meeting of the unitholders or without a meeting if consents in writing describing the action so taken are signed by holders of the number of units as would be necessary to authorize or take that action at a meeting. Meetings of the unitholders may be called by our general partner or by unitholders owning at least 20% of the outstanding units.

 

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Unitholders may vote either in person or by proxy at meetings. The holders of a majority of the outstanding units, represented in person or by proxy, will constitute a quorum unless any action by the unitholders requires approval by holders of a greater percentage of the units, in which case the quorum will be the greater percentage.

Each record holder of a unit has a vote according to his percentage interest in us, although additional limited partner interests having special voting rights could be issued. Please read “—Issuance of Additional Securities” above. However, if at any time any person or group, other than our general partner and its affiliates, or a direct or subsequently approved transferee of our general partner or its affiliates, acquires, in the aggregate, beneficial ownership of 20% or more of any class of units then outstanding, that person or group will lose voting rights on all of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes, determining the presence of a quorum or for other similar purposes. For more information on persons and groups to which this loss of voting rights does not apply, please read “—Change of Management Provisions” above. Common units held in nominee or street name account will be voted by the broker or other nominee in accordance with the instruction of the beneficial owner unless the arrangement between the beneficial owner and his nominee provides otherwise.

Any notice, demand, request, report or proxy material required or permitted to be given or made to record holders of common units under our partnership agreement will be delivered to the record holder by us or by the transfer agent.

Status as Limited Partner

By transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited partner with respect to the common units transferred when such transfer and admission is reflected in our books and records. Except as described under “—Limited Liability” above, the common units will be fully paid, and unitholders will not be required to make additional contributions.

Non-Citizen Assignees; Redemption

If we are or become subject to federal, state or local laws or regulations that, in the reasonable determination of our general partner, create a substantial risk of cancellation or forfeiture of any property that we have an interest in because of the nationality, citizenship or other related status of any limited partner, we may redeem the units held by the limited partner or assignee at their current market price. To avoid any cancellation or forfeiture, our general partner may require each limited partner or assignee to furnish information about his nationality, citizenship or related status. If a limited partner or assignee fails to furnish information about his nationality, citizenship or other related status within 30 days after a request for the information or our general partner determines after receipt of the information that the limited partner or assignee is not an eligible citizen, the limited partner or assignee may be treated as a non-citizen assignee. In addition to other limitations on the rights of an assignee that is not a substituted limited partner, a non-citizen assignee does not have the right to direct the voting of his units and may not receive distributions in kind upon our liquidation.

Indemnification

Under our partnership agreement, in most circumstances, we will indemnify the following persons, to the fullest extent permitted by law, from and against all losses, claims, damages or similar events:

 

   

our general partner,

 

   

any departing general partner,

 

   

any person who is or was an affiliate of our general partner or any departing general partner,

 

   

any person who is or was a member, partner, officer, director, employee, agent or trustee of our general partner or any departing general partner or any affiliate of our general partner or any departing general partner,

 

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any person who is or was serving at the request of our general partner or any departing general partner or any affiliate of our general partner or any departing general partner as an officer, director, employee, member, partner, agent or trustee of another person, or

 

   

any person designated by our general partner.

Any indemnification under these provisions will only be out of our assets. Unless it otherwise agrees, our general partner will not be personally liable for, or have any obligation to contribute or loan funds or assets to us to enable it to effectuate, indemnification. We may purchase insurance against liabilities asserted against and expenses incurred by persons for our activities, regardless of whether we would have the power to indemnify the person against liabilities under our partnership agreement.

Reimbursement of Expenses

Our partnership agreement requires us to reimburse our general partner for all direct and indirect expenses it incurs or payments it makes on our behalf and all other expenses allocable to us or otherwise incurred by our general partner in connection with operating our business. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. The general partner is entitled to determine in good faith the expenses that are allocable to us.

Books and Reports

Our general partner is required to keep appropriate books of our business at our principal offices. The books will be maintained for both tax and financial reporting purposes on an accrual basis. For fiscal reporting and tax reporting purposes, our year ends on December 31 each year.

We will furnish or make available to record holders of units, within 120 days after the close of each fiscal year, an annual report containing audited financial statements and a report on those financial statements by our independent public accountants. Except for our fourth quarter, we will also furnish or make available summary financial information within 90 days after the close of each quarter.

We will furnish each record holder of a unit with information reasonably required for tax reporting purposes within 90 days after the close of each calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of partners can be avoided. Our ability to furnish this summary information to unitholders will depend on the cooperation of unitholders in supplying us with specific information. Every unitholder will receive information to assist him in determining his federal and state tax liability and filing his federal and state income tax returns, regardless of whether he supplies us with information.

Right to Inspect Our Books and Records

Our partnership agreement provides that a limited partner can, for a purpose reasonably related to his interest as a limited partner, upon reasonable written demand and at his own expense, have furnished to him:

 

   

a current list of the name and last known address of each partner,

 

   

a copy of our tax returns,

 

   

information as to the amount of cash, and a description and statement of the agreed value of any other property or services, contributed or to be contributed by each partner and the date on which each became a partner,

 

   

copies of our partnership agreement, the certificate of limited partnership of the partnership, related amendments and powers of attorney under which they have been executed;

 

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information regarding the status of our business and financial condition; and

 

   

any other information regarding our affairs as is just and reasonable.

Our general partner may, and intends to, keep confidential from the limited partners trade secrets or other information the disclosure of which our general partner believes is not in our best interests or which we are required by law or by agreements with third parties to keep confidential.

Registration Rights

Under our partnership agreement, we have agreed to register for resale under the Securities Act and applicable state securities laws any units or other partnership securities proposed to be sold by our general partner or any of its affiliates or their assignees if an exemption from the registration requirements is not otherwise available. We are obligated to pay all expenses incidental to the registration, excluding underwriting discounts and commissions. Please read “Units Eligible for Future Sale.”

 

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THE PARTNERSHIP AGREEMENT OF WESTERN GAS PARTNERS, LP

The following is a summary of the material provisions of WES’s partnership agreement. The partnership agreement, including all amendments and restatements thereto, is located in WES’s public filings with the SEC, available at www.sec.gov. We will provide prospective investors with a copy of WES’s partnership agreement upon request at no charge.

Organization and Duration

WES’s partnership was organized in August 2007 and has a perpetual existence.

Purpose

WES’s purpose, as set forth in its partnership agreement, is limited to any business activity that is approved by its general partner and that lawfully may be conducted by a limited partnership organized under Delaware law; provided, that its general partner shall not cause it to engage, directly or indirectly, in any business activity that the general partner determines would cause WES to be treated as an association taxable as a corporation or otherwise taxable as an entity for federal income tax purposes.

Although WES GP has the ability to cause WES and its subsidiaries to engage in activities other than the business of gathering, compressing, treating and transporting natural gas, NGLs and crude oil WES GP has no current plans to do so and may decline to do so free of any fiduciary duty or obligation whatsoever to WES or the limited partners, including any duty to act in good faith or in the best interests of WES or the limited partners. WES GP is generally authorized to perform all acts it determines to be necessary or appropriate to carry out WES’s purposes and to conduct its business.

Power of Attorney

Each limited partner, and each person who acquires a unit from a unitholder, by accepting the common unit, automatically grants to WES GP and, if appointed, a liquidator, a power of attorney to, among other things, execute and file documents required for WES’s qualification, continuance or dissolution. The power of attorney also grants WES GP the authority to amend, and to make consents and waivers under, WES’s partnership agreement.

Cash Distributions

WES’s partnership agreement specifies the manner in which WES will make cash distributions to holders of its common units and other partnership securities as well as to WES GP in respect of its general partner interest and its incentive distribution rights.

Capital Contributions

Unitholders are not obligated to make additional capital contributions, except as described below under “—Limited Liability.”

If WES issues additional units, its general partner has the right, but not the obligation, to contribute a proportionate amount of capital to WES to maintain its 2.0% general partner interest. WES GP’s 2.0% interest, and the percentage of WES’s cash distributions to which it is entitled, will be proportionately reduced if WES issues additional units in the future and WES GP does not contribute a proportionate amount of capital to WES to maintain its 2.0% general partner interest. WES GP will be entitled to make a capital contribution in order to maintain its 2.0% general partner interest in the form of the contribution to WES of common units based on the current market value of the contributed common units.

 

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Voting Rights

The following is a summary of the unitholder vote required for approval of the matters specified below. General partner units are not deemed outstanding units for purposes of voting rights and such units represent a non-voting general partner interest. Matters that require the approval of a “unit majority” require the approval of a majority of the common units and Class B units, if any, voting as a single class.

In voting their common units, WES GP and its affiliates will have no fiduciary duty or obligation whatsoever to WES or the limited partners, including any duty to act in good faith or in the best interests of WES or the limited partners.

 

Issuance of additional units

No approval right.

 

Amendment of the partnership agreement

Certain amendments may be made by the general partner without the approval of the unitholders. Other amendments generally require the approval of a unit majority. Please read “—Amendment of the Partnership Agreement.”

 

Merger of WES or the sale of all or substantially all of its assets

Unit majority in certain circumstances. Please read “—Merger, Consolidation, Conversion, Sale or Other Disposition of Assets.”

 

Dissolution of WES

Unit majority. Please read “—Termination and Dissolution.”

 

Continuation of WES upon dissolution

Unit majority. Please read “—Termination and Dissolution.”

 

Withdrawal of the general partner

Under most circumstances, the approval of a majority of the common units, excluding common units held by WES GP and its affiliates, is required for the withdrawal of WES GP prior to June 30, 2018 in a manner that would cause a dissolution of WES. Please read “—Withdrawal or Removal of the General Partner.”

 

Removal of the general partner

Not less than 66 2/3% of the outstanding common units, voting as a single class, including units held by WES GP and its affiliates. Please read “—Withdrawal or Removal of the General Partner.”

 

Transfer of the general partner interest

WES GP may transfer all, but not less than all, of its general partner interest in WES without a vote of WES’s unitholders to an affiliate or another person in connection with its merger or consolidation with or into, or sale of all or substantially all of its assets to, such person. The approval of a majority of the common units, excluding common units held by the general partner and its affiliates, is required in other circumstances for a transfer of the general partner interest to a third party prior to June 30, 2018. Please read “—Transfer of General Partner Units.”

 

Transfer of incentive distribution rights

Except for transfers to an affiliate or another person as part of WES GP’s merger or consolidation, sale of all or substantially all of its assets or the sale of all of the ownership interests in such holder, the approval of a majority of the common units, excluding common units

 

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held by the general partner and its affiliates, is required in most circumstances for a transfer of the incentive distribution rights to a third party prior to June 30, 2018. Please read “—Transfer of Incentive Distribution Rights.”

 

Transfer of ownership interests in our general partner

No approval required at any time. Please read “—Transfer of Ownership Interests in the General Partner.”

Limited Liability

Assuming that a limited partner does not participate in the control of WES’s business within the meaning of the Delaware Act and that he otherwise acts in conformity with the provisions of WES’s partnership agreement, his liability under the Delaware Act will be limited, subject to possible exceptions, to the amount of capital he is obligated to contribute to WES for his common units plus his share of any undistributed profits and assets. However, if it were determined that the right, or exercise of the right, by the limited partners as a group:

 

   

to remove or replace the general partner;

 

   

to approve some amendments to WES’s partnership agreement; or

 

   

to take other action under WES’s partnership agreement;

constituted “participation in the control” of WES’s business for the purposes of the Delaware Act, then the limited partners could be held personally liable for WES’s obligations under the laws of Delaware, to the same extent as the general partner. This liability would extend to persons who transact business with WES under the reasonable belief that the limited partner is a general partner. Neither WES’s partnership agreement nor the Delaware Act specifically provides for legal recourse against the general partner if a limited partner were to lose limited liability through any fault of the general partner. While this does not mean that a limited partner could not seek legal recourse, WES knows of no precedent for this type of a claim in Delaware case law.

Under the Delaware Act, a limited partnership may not make a distribution to a partner if, after the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specific property of the partnership, would exceed the fair value of the assets of the limited partnership. For the purpose of determining the fair value of the assets of a limited partnership, the Delaware Act provides that the fair value of property subject to liability for which recourse of creditors is limited shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds the nonrecourse liability. The Delaware Act provides that a limited partner who receives a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Act shall be liable to the limited partnership for the amount of the distribution for three years. Under the Delaware Act, a substituted limited partner of a limited partnership is liable for the obligations of his assignor to make contributions to the partnership, except that such person is not obligated for liabilities unknown to him at the time he became a limited partner and that could not be ascertained from the partnership agreement.

WES’s subsidiaries conduct business in six states and WES may have subsidiaries that conduct business in other states in the future. Maintenance of WES’s limited liability as a limited partner of the operating partnership may require compliance with legal requirements in the jurisdictions in which the operating partnership conducts business, including qualifying WES’s subsidiaries to do business there.

Limitations on the liability of limited partners for the obligations of a limited partnership have not been clearly established in many jurisdictions. If, by virtue of our partnership interest in WES’s operating partnership or otherwise, it were determined that WES was conducting business in any state without compliance with the applicable limited partnership or limited liability company statute, or that the right or exercise of the right by the limited partners as a group to remove or replace the general partner, to approve some amendments to WES’s

 

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partnership agreement, or to take other action under WES’s partnership agreement constituted “participation in the control” of WES for purposes of the statutes of any relevant jurisdiction, then the limited partners could be held personally liable for WES’s obligations under the law of that jurisdiction to the same extent as the general partner under the circumstances. WES will operate in a manner that the general partner considers reasonable and necessary or appropriate to preserve the limited liability of the limited partners.

Issuance of Additional Securities

WES’s partnership agreement authorizes it to issue an unlimited number of additional partnership securities for the consideration and on the terms and conditions determined by WES GP without the approval of the unitholders.

It is possible that WES will fund acquisitions through the issuance of additional common units or other partnership securities. Holders of any additional common units WES issues will be entitled to share equally with the then-existing holders of common units in WES’s distributions of available cash. In addition, the issuance of additional common units or other partnership securities may dilute the value of the interests of the then-existing holders of common units in WES’s net assets.

In accordance with Delaware law and the provisions of WES’s partnership agreement, WES may also issue additional partnership securities that, as determined by WES GP, may have special voting rights to which the common units are not entitled. In addition, WES’s partnership agreement does not prohibit its subsidiaries from issuing equity securities, which may effectively rank senior to the common units.

Upon issuance of additional partnership securities (other than the issuance of partnership securities issued in connection with a reset of the incentive distribution target levels relating to WES GP’s incentive distribution rights or the issuance of partnership securities upon conversion of outstanding partnership securities), WES GP will be entitled, but not required, to make additional capital contributions to the extent necessary to maintain its 2.0% general partner interest in WES. WES GP’s 2.0% interest in WES will be reduced if WES issues additional units in the future and its general partner does not contribute a proportionate amount of capital to WES to maintain its 2.0% general partner interest. Moreover, WES GP will have the right, which it may from time to time assign in whole or in part to any of its affiliates, to purchase common units or other partnership securities whenever, and on the same terms that, WES issues those securities to persons other than WES GP and its affiliates, to the extent necessary to maintain the percentage interest of the general partner and its affiliates, including such interest represented by common that existed immediately prior to each issuance. The holders of common units will not have preemptive rights to acquire additional common units or other partnership securities.

Amendment of WES’s Partnership Agreement

General

Amendments to WES’s partnership agreement may be proposed only by or with the consent of WES GP. However, WES GP will have no duty or obligation to propose any amendment and may decline to do so free of any fiduciary duty or obligation whatsoever to WES or the limited partners, including any duty to act in good faith or in the best interests of WES or the limited partners. In order to adopt a proposed amendment, other than the amendments discussed below, WES GP is required to seek written approval of the holders of the number of units required to approve the amendment or to call a meeting of the limited partners to consider and vote upon the proposed amendment. Except as described below, an amendment must be approved by a unit majority.

Prohibited Amendments

No amendment may be made that would:

 

   

enlarge the obligations of any limited partner without its consent, unless approved by at least a majority of the type or class of limited partner interests so affected; or

 

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enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable by WES to its general partner or any of its affiliates without the consent of WES GP, which consent may be given or withheld at its option.

The provision of WES’s partnership agreement preventing the amendments having the effects described in the clauses above can be amended upon the approval of the holders of at least 90% of the outstanding units, voting as a single class (including units owned by WES GP and its affiliates). Upon completion of this offering, WES GP and its affiliates will own approximately 45.8% of WES’s outstanding common units.

No Unitholder Approval

WES GP may generally make amendments to its partnership agreement without the approval of any limited partner or assignee to reflect:

 

   

a change in WES’s name, the location of its principal place of business, its registered agent or its registered office;

 

   

the admission, substitution, withdrawal or removal of partners in accordance with WES’s partnership agreement;

 

   

a change that WES GP determines to be necessary or appropriate to qualify or continue WES’s qualification as a limited partnership or a partnership in which the limited partners have limited liability under the laws of any state or to ensure that neither WES nor the operating partnership nor any of its subsidiaries will be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes;

 

   

an amendment that is necessary, in the opinion of WES’s counsel, to prevent WES or its general partner or its directors, officers, agents or trustees from in any manner being subjected to the provisions of the Investment Company Act, the Investment Advisors Act of 1940 or “plan asset” regulations adopted under the Employee Retirement Income Security Act of 1974, or ERISA, whether or not substantially similar to plan asset regulations currently applied or proposed;

 

   

an amendment that WES GP determines to be necessary or appropriate for the authorization of additional partnership securities or the right to acquire partnership securities, including any amendment that WES GP determines is necessary or appropriate in connection with:

 

   

the adjustments of the initial quarterly distribution, first target distribution, second target distribution and third target distribution in connection with the reset of WES GP’s incentive distribution rights; or

 

   

any modification of the incentive distribution rights made in connection with the issuance of additional partnership securities or rights to acquire partnership securities, provided that, any such modifications and related issuance of partnership securities have received approval by a majority of the members of the special committee of WES GP;

 

   

any amendment expressly permitted in WES’s partnership agreement to be made by its general partner acting alone;

 

   

an amendment effected, necessitated or contemplated by a merger agreement that has been approved under the terms of WES’s partnership agreement;

 

   

any amendment that WES GP determines to be necessary or appropriate for the formation by WES of, or our investment in, any corporation, partnership or other entity, as otherwise permitted by WES’s partnership agreement;

 

   

a change in WES’s fiscal year or taxable year and related changes;

 

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conversions into, mergers with or conveyances to another limited liability entity that is newly formed and has no assets, liabilities or operations at the time of the conversion, merger or conveyance other than those it receives by way of the conversion, merger or conveyance; or

 

   

any other amendments substantially similar to any of the matters described in the clauses above.

In addition, WES GP may make amendments to its partnership agreement, without the approval of any limited partner, if WES GP determines that those amendments:

 

   

do not adversely affect the limited partners (or any particular class of limited partners) in any material respect;

 

   

are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute;

 

   

are necessary or appropriate to facilitate the trading of limited partner interests or to comply with any rule, regulation, guideline or requirement of any securities exchange on which the limited partner interests are or will be listed for trading;

 

   

are necessary or appropriate for any action taken by WES GP relating to splits or combinations of units under the provisions of its partnership agreement; or

 

   

are required to effect the intent expressed in this prospectus or the intent of the provisions of WES’s partnership agreement or are otherwise contemplated by its partnership agreement.

Opinion of Counsel and Unitholder Approval

WES GP will not be required to obtain an opinion of counsel that an amendment will neither result in a loss of limited liability to the limited partners nor result in WES being treated as an entity for federal income tax purposes in connection with any of the amendments. No other amendments to WES’s partnership agreement will become effective without the approval of holders of at least 90% of the outstanding units, voting as a single class, unless WES first obtains an opinion of counsel to the effect that the amendment will not affect the limited liability under applicable law of any of WES’s limited partners.

In addition to the above restrictions, any amendment that would have a material adverse effect on the rights or preferences of any type or class of outstanding units in relation to other classes of units will require the approval of at least a majority of the type or class of units so affected. Any amendment that reduces the voting percentage required to take any action is required to be approved by the affirmative vote of limited partners whose aggregate outstanding units constitute not less than the voting requirement sought to be reduced.

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

A merger, consolidation or conversion of WES requires the prior consent of its general partner. However, WES GP will have no duty or obligation to consent to any merger, consolidation or conversion and may decline to do so free of any fiduciary duty or obligation whatsoever to WES or the limited partners, including any duty to act in good faith or in the best interest of WES or the limited partners.

In addition, WES’s partnership agreement generally prohibits WES GP, without the prior approval of the holders of a unit majority, from causing WES to, among other things, sell, exchange or otherwise dispose of all or substantially all of WES’s assets in a single transaction or a series of related transactions, including by way of merger, consolidation or other combination, or approving on WES’s behalf the sale, exchange or other disposition of all or substantially all of the assets of WES’s subsidiaries. WES GP may, however, mortgage, pledge, hypothecate or grant a security interest in all or substantially all of its assets without such approval. WES GP may also sell all or substantially all of WES’s assets under a foreclosure or other realization upon those encumbrances without such approval. Finally, WES GP may consummate any merger without the prior approval

 

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of WES’s unitholders if WES is the surviving entity in the transaction, WES GP has received an opinion of counsel regarding limited liability and tax matters, the transaction would not result in a material amendment to WES’s partnership agreement, each of WES’s units will be an identical unit of WES’s partnership following the transaction and the partnership securities to be issued do not exceed 20% of WES’s outstanding partnership securities immediately prior to the transaction.

If the conditions specified in WES’s partnership agreement are satisfied, WES GP may convert WES or any of its subsidiaries into a new limited liability entity or merge us or any of its subsidiaries into, or convey all of WES’s assets to, a newly formed entity, if the sole purpose of that conversion, merger or conveyance is to effect a mere change in WES’s legal form into another limited liability entity, WES GP has received an opinion of counsel regarding limited liability and tax matters and the governing instruments of the new entity provide the limited partners and WES GP with the same rights and obligations as contained in WES’s partnership agreement. WES’s unitholders are not entitled to dissenters’ rights of appraisal under WES’s partnership agreement or applicable Delaware law in the event of a conversion, merger or consolidation, a sale of substantially all of WES’s assets or any other similar transaction or event.

Termination and Dissolution

WES will continue as a limited partnership until terminated under its partnership agreement. WES will dissolve upon:

 

   

the election of WES GP to dissolve WES, if approved by the holders of units representing a unit majority;

 

   

there being no limited partners, unless WES is continued without dissolution in accordance with applicable Delaware law;

 

   

the entry of a decree of judicial dissolution of WES; or

 

   

the withdrawal or removal of WES GP or any other event that results in its ceasing to be WES GP other than by reason of a transfer of its general partner interest in accordance with WES’s partnership agreement or its withdrawal or removal following the approval and admission of a successor.

Upon a dissolution under the last clause above, the holders of a unit majority may also elect, within specific time limitations, to continue WES’s business on the same terms and conditions described in its partnership agreement by appointing as a successor general partner an entity approved by the holders of units representing a unit majority, subject to our receipt of an opinion of counsel to the effect that:

 

   

the action would not result in the loss of limited liability of any limited partner; and

 

   

neither WES, WES’s operating partnership nor any of WES’s other subsidiaries would be treated as an association taxable as a corporation or otherwise be taxable as an entity for federal income tax purposes upon the exercise of that right to continue.

Liquidation and Distribution of Proceeds

Upon WES’s dissolution, unless WES is continued as a new limited partnership, the liquidator authorized to wind up WES’s affairs will, acting with all of the powers of WES GP that are necessary or appropriate, liquidate WES’s assets and apply the proceeds of the liquidation. The liquidator may defer liquidation or distribution of WES’s assets for a reasonable period of time or distribute assets to partners in kind if it determines that a sale would be impractical or would cause undue loss to WES’s partners.

 

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Withdrawal or Removal of the General Partner

Except as described below, WES GP has agreed not to withdraw voluntarily as its general partner prior to June 30, 2018 without obtaining the approval of the holders of at least a majority of the outstanding common units, excluding common units held by the general partner and its affiliates, and furnishing an opinion of counsel regarding limited liability and tax matters. On or after June 30, 2018, WES GP may withdraw as general partner without first obtaining approval of any unitholder by giving 90 days’ written notice, and that withdrawal will not constitute a violation of WES’s partnership agreement. Notwithstanding the information above, WES GP may withdraw without unitholder approval upon 90 days’ notice to the limited partners if at least 50% of the outstanding common units are held or controlled by one unitholder and its affiliates, other than the general partner and its affiliates. In addition, WES’s partnership agreement permits WES GP, in some instances, to sell or otherwise transfer all of its general partner interest in WES without the approval of the unitholders. Please read “—Transfer of General Partner Units” and “—Transfer of Incentive Distribution Rights.”

Upon withdrawal of WES GP under any circumstances, other than as a result of a transfer by WES GP of all or a part of its general partner interest in WES, the holders of a unit majority, voting as separate classes, may select a successor to that withdrawing general partner. If a successor is not elected, or is elected but an opinion of counsel regarding limited liability and tax matters cannot be obtained, WES will be dissolved, wound up and liquidated, unless within a specified period after that withdrawal, the holders of a unit majority agree in writing to continue WES’s business and to appoint a successor general partner. Please read “—Termination and Dissolution.”

WES GP may not be removed unless that removal is approved by the vote of the holders of not less than 66 2/3% of the outstanding units, voting together as a single class, including units held by WES GP and its affiliates, and WES receives an opinion of counsel regarding limited liability and tax matters. Any removal of WES GP is also subject to the approval of a successor general partner by the vote of the holders of a majority of the outstanding common units, voting as a single class, and the outstanding subordinated units, voting as a single class. The ownership of more than 33 1/3% of the outstanding units by WES GP and its affiliates would give them the practical ability to prevent WES GP’s removal. Upon completion of this offering, WES GP and its affiliates will own 45.8% of WES’s outstanding common units.

WES’s partnership agreement also provides that if its general partner is removed as its general partner under circumstances where cause does not exist and the units held by the general partner and its affiliates are not voted in favor of that removal:

 

   

any existing arrearages in payment of the initial quarterly distribution on the common units will be extinguished; and

 

   

WES GP will have the right to convert its general partner interest and its incentive distribution rights into common units or to receive cash in exchange for those interests based on the fair market value of those interests at that time.

In the event of the removal of a general partner under circumstances where cause exists or withdrawal of a general partner where that withdrawal violates WES’s partnership agreement, a successor general partner will have the option to purchase the general partner interest and incentive distribution rights of the departing general partner for a cash payment equal to the fair market value of those interests. Under all other circumstances where a general partner withdraws or is removed by the limited partners, the departing general partner will have the option to require the successor general partner to purchase the general partner interest of the departing general partner and its incentive distribution rights for fair market value. In each case, this fair market value will be determined by agreement between the departing general partner and the successor general partner. If no agreement is reached, an independent investment banking firm or other independent expert selected by the departing general partner and the successor general partner will determine the fair market value. Or, if the departing general partner and the successor general partner cannot agree upon an expert, then an expert chosen by agreement of the experts selected by each of them will determine the fair market value.

 

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If the option described above is not exercised by either the departing general partner or the successor general partner, the departing general partner’s general partner interest and its incentive distribution rights will automatically convert into common units equal to the fair market value of those interests as determined by an investment banking firm or other independent expert selected in the manner described in the preceding paragraph.

In addition, WES will be required to reimburse the departing general partner for all amounts due to the departing general partner, including, without limitation, all employee-related liabilities, including severance liabilities incurred as a result of the termination of any employees employed for WES’s benefit by the departing general partner or its affiliates.

Transfer of General Partner Units

Except for transfer by WES GP of all, but not less than all, of its general partner units to:

 

   

an affiliate of WES GP (other than an individual); or

 

   

another entity as part of the merger or consolidation of WES GP with or into another entity or the transfer by WES GP of all or substantially all of its assets to another entity,

WES GP may not transfer all or any of its general partner units to another person prior to June 30, 2018 without the approval of the holders of at least a majority of the outstanding common units, excluding common units held by WES GP and its affiliates. As a condition of this transfer, the transferee must assume, among other things, the rights and duties of WES GP, agree to be bound by the provisions of WES’s partnership agreement and furnish an opinion of counsel regarding limited liability and tax matters.

WES GP and its affiliates may, at any time, transfer units to one or more persons, without unitholder approval.

Transfer of Ownership Interests in the General Partner

At any time, Anadarko and its affiliates may sell or transfer all or part of its partnership interests in WES GP to an affiliate or third party without the approval of WES’s unitholders.

Transfer of Incentive Distribution Rights

WES GP or its affiliates or a subsequent holder may transfer its incentive distribution rights to an affiliate of the holder (other than an individual) or another entity as part of the merger or consolidation of such holder with or into another entity, the sale of all of the ownership interest in the holder or the sale of all or substantially all of the holder’s assets to that entity without the prior approval of the unitholders; provided that, in the case of the sale of ownership interests in the holder, the initial holder of the incentive distribution rights continues to remain the general partner following such sale. Prior to June 30, 2018, other transfers of incentive distribution rights will require the affirmative vote of holders of a majority of the outstanding common units, excluding common units held by WES GP and its affiliates. On or after June 30, 2018, the incentive distribution rights will be freely transferable.

Change of Management Provisions

WES’s partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove WES GP as our general partner or from otherwise changing WES’s management. If any person or group, other than WES GP and its affiliates, acquires beneficial ownership of 20% or more of any class of units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply to any person or group that acquires the units directly from WES GP or its affiliates or any transferee of that person or group that is approved by WES GP or to any person or group who acquires the units with the prior approval of the board of directors of WES GP.

 

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WES’s partnership agreement also provides that if its general partner is removed as its general partner under circumstances where cause does not exist and units held by WES GP and its affiliates are not voted in favor of that removal:

 

   

any existing arrearages in payment of the initial quarterly distribution on the common units will be extinguished; and

 

   

WES GP will have the right to convert its general partner units and its incentive distribution rights into common units or to receive cash in exchange for those interests based on the fair market value of those interests at that time.

Limited Call Right

If at any time WES GP and its affiliates own more than 80% of the then-issued and outstanding limited partner interests of any class, WES GP will have the right, which it may assign in whole or in part to any of its affiliates or to WES, to acquire all, but not less than all, of the limited partner interests of the class held by unaffiliated persons as of a record date to be selected by WES GP, on at least 10, but not more than 60, days’ notice. The purchase price in the event of this purchase is the greater of:

 

   

the highest cash price paid by WES GP or any of its affiliates for any limited partner interests of the class purchased within the 90 days preceding the date on which WES GP first mails notice of its election to purchase those limited partner interests; and

 

   

the current market price as of the date three days before the date the notice is mailed.

As a result of WES GP’s right to purchase outstanding limited partner interests, a holder of limited partner interests may have his limited partner interests purchased at a price that may be lower than market prices at various times prior to such purchase or lower than a unitholder may anticipate the market price to be in the future. The tax consequences to a unitholder of the exercise of this call right are the same as a sale by that unitholder of his common units in the market.

Non-U.S. and Non-Taxpaying Assignees; Redemption

WES GP, acting on WES’s behalf, may at any time require any or all unitholders to certify:

 

   

that the unitholder is a U.S. individual or an entity subject to U.S. federal income taxation on the income generated by WES; or

 

   

that, if the unitholder is a U.S. entity not subject to U.S. federal income taxation on the income generated by WES, as in the case, for example, of a mutual fund taxed as a regulated investment company or a partnership, all the entity’s owners are U.S. individuals or entities subject to United States federal income taxation on the income generated by WES.

This certification can be changed in any manner WES GP determines is necessary or appropriate to implement its original purpose.

If a unitholder fails to furnish:

 

   

the required certification within 30 days after request; or

 

   

provides a false certification; then

WES will have the right, which it may assign to any of its affiliates, to acquire all but not less than all of the units held by such unitholder. Further, WES GP may elect not to make distributions or allocate income or loss to such unitholder.

 

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The purchase price in the event of such an acquisition for each unit held by such unitholder will be the lesser of:

 

  (1) the price paid by such unitholder for the relevant unit; and

 

  (2) the average of the daily closing prices of the units for the prior 20 consecutive trading days.

The purchase price will be paid in cash or by delivery of a promissory note, as determined by WES GP. Any such promissory note will bear interest at the rate of 5% annually and be payable in three equal annual installments of principal and accrued interest, commencing one year after the redemption date.

Meetings; Voting

Except as described below regarding a person or group owning 20% or more of any class of units then outstanding, record holders of units on the record date will be entitled to notice of, and to vote at, meetings of WES’s limited partners and to act upon matters for which approvals may be solicited.

WES GP does not anticipate that any meeting of its unitholders will be called in the foreseeable future. Any action that is required or permitted to be taken by the unitholders may be taken either at a meeting of the unitholders or without a meeting, if consents in writing describing the action so taken are signed by holders of the number of units necessary to authorize or take that action at a meeting. Meetings of the unitholders may be called by WES GP or by unitholders owning at least 20% of the outstanding units of the class for which a meeting is proposed. Unitholders may vote either in person or by proxy at meetings. The holders of a majority of the outstanding units of the class or classes for which a meeting has been called, represented in person or by proxy, will constitute a quorum, unless any action by the unitholders requires approval by holders of a greater percentage of the units, in which case the quorum will be the greater percentage.

Each record holder of a unit has a vote according to his percentage interest in WES, although additional limited partner interests having special voting rights could be issued. Please read “—Issuance of Additional Securities.” However, if at any time any person or group, other than WES GP and its affiliates, or a direct or subsequently approved transferee of WES GP or its affiliates, acquires, in the aggregate, beneficial ownership of 20% or more of any class of units then outstanding, that person or group will lose voting rights on all of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes, determining the presence of a quorum or for other similar purposes. Common units held in nominee or street name account will be voted by the broker or other nominee in accordance with the instruction of the beneficial owner unless the arrangement between the beneficial owner and his nominee provides otherwise.

Any notice, demand, request, report or proxy material required or permitted to be given or made to record holders of common units under WES’s partnership agreement will be delivered to the record holder by WES or by the transfer agent.

Status as Limited Partner

By transfer of common units in accordance with WES’s partnership agreement, each transferee of common units shall be admitted as a limited partner with respect to the common units transferred when such transfer and admission are reflected in WES’s books and records. Except as described under “—Limited Liability,” the common units will be fully paid, and unitholders will not be required to make additional contributions.

Non-Citizen Assignees; Redemption

If WES is or becomes subject to federal, state or local laws or regulations that, in the reasonable determination of its general partner, create a substantial risk of cancellation or forfeiture of any property that WES has an interest in because of the nationality, citizenship or other related status of any limited partner, WES may redeem the units held by that limited partner at their current market price. In order to avoid any cancellation or forfeiture, WES GP may require each limited partner to furnish information about his nationality, citizenship

 

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or related status. If a limited partner fails to furnish information about his nationality, citizenship or other related status within 30 days of a request for the information or WES GP determines after receipt of the information that the limited partner is not an eligible citizen, the limited partner may be treated as a non-citizen assignee. A non-citizen assignee is entitled to an interest equivalent to that of a limited partner for the right to share in allocations and distributions from WES, including liquidating distributions. A non-citizen assignee does not have the right to direct the voting of his units and may not receive distributions in-kind upon WES’s liquidation.

Indemnification

Under WES’s partnership agreement, in most circumstances, WES will indemnify the following persons, to the fullest extent permitted by law, from and against all losses, claims, damages or similar events:

 

   

WES GP;

 

   

any departing general partner;

 

   

any person who is or was an affiliate of a general partner or any departing general partner;

 

   

any person who is or was a director, officer, member, partner, fiduciary or trustee of any entity set forth in the preceding three bullet points;

 

   

any person who is or was serving as director, officer, member, partner, fiduciary or trustee of another person at the request of WES GP or any departing general partner; and

 

   

any person designated by WES GP.

Any indemnification under these provisions will only be out of WES’s assets. Unless WES GP otherwise agrees, it will not be personally liable for, or have any obligation to contribute or lend funds or assets to WES to enable it to effectuate, indemnification. WES may purchase insurance against liabilities asserted against and expenses incurred by persons for its activities, regardless of whether WES would have the power to indemnify the person against liabilities under WES’s partnership agreement.

Reimbursement of Expenses

WES’s partnership agreement requires WES to reimburse its general partner for all direct and indirect expenses WES incurs or payments it makes on WES’s behalf and all other expenses allocable to WES or otherwise incurred by WES GP in connection with the operation of its business. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for WES or on its behalf and expenses allocated to WES GP by its affiliates. WES GP is entitled to determine in good faith the expenses that are allocable to WES.

Books and Reports

WES GP is required to keep appropriate books of WES’s business at its principal offices. These books will be maintained for both tax and financial reporting purposes on an accrual basis. For tax and fiscal reporting purposes, WES’s fiscal year is the calendar year.

WES will furnish or make available to record holders of its common units, within 120 days after the close of each fiscal year, an annual report containing audited combined financial statements and a report on those combined financial statements by its independent public accountants. Except for WES’s fourth quarter, WES will also furnish or make available summary financial information within 90 days after the close of each quarter.

WES will furnish each record holder with information reasonably required for tax reporting purposes within 90 days after the close of each calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of partners can be avoided. WES’s ability to furnish this summary information to its unitholders will depend on their cooperation in supplying WES with specific

 

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information. Every unitholder will receive information to assist him in determining his federal and state tax liability and in filing his federal and state income tax returns, regardless of whether he supplies WES with the necessary information.

Right to Inspect Books and Records

WES’s partnership agreement provides that a limited partner can, for a purpose reasonably related to his interest as a limited partner, upon reasonable written demand stating the purpose of such demand and at his own expense, have furnished to him:

 

   

a current list of the name and last known address of each partner;

 

   

a copy of WES’s tax returns;

 

   

information as to the amount of cash, and a description and statement of the agreed value of any other property or services, contributed or to be contributed by each partner and the date on which each partner became a partner;

 

   

copies of WES’s partnership agreement, its certificate of limited partnership and related amendments and powers of attorney under which they have been executed;

 

   

information regarding the status of WES’s business and its financial condition; and

 

   

any other information regarding WES’s affairs as is just and reasonable.

WES GP may, and intends to, keep confidential from the limited partners’ trade secrets or other information the disclosure of which WES GP believes in good faith is not in WES’s best interests or that WES us required by law or by agreements with third parties to keep confidential.

Registration Rights

Under WES’s partnership agreement, WES has agreed to register for resale under the Securities Act and applicable state securities laws any common units or other partnership securities proposed to be sold by its general partner or any of its affiliates or their assignees if an exemption from the registration requirements is not otherwise available. These registration rights continue for two years following any withdrawal or removal of WES GP as general partner. WES is obligated to pay all expenses incidental to the registration, excluding underwriting discounts and fees.

 

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UNITS ELIGIBLE FOR FUTURE SALE

After the sale of the common units offered hereby, assuming the underwriters do not exercise their over-allotment option and an initial offering price of $             per common unit, Anadarko and its affiliates will hold an aggregate of                  common units. The sale of these units could have an adverse impact on the price of the common units or on any trading market that may develop.

Rule 144

The common units sold in this offering will generally be freely transferable without restriction or further registration under the Securities Act. However, any common units held by an “affiliate” of ours may not be resold publicly except in compliance with the registration requirements of the Securities Act or under an exemption from the registration requirements of the Securities Act pursuant to Rule 144 or otherwise. Rule 144 permits securities acquired by our affiliates to be sold into the market in an amount that does not exceed, during any three-month period, the greater of:

 

   

1.0% of the total number of the class of securities outstanding; or

 

   

the average weekly reported trading volume of the common units for the four calendar weeks prior to the sale.

Sales under Rule 144 by our affiliates are also subject to specific manner of sale provisions, holding period requirements, notice requirements and the availability of current public information about us. A person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale, and who has beneficially owned common units for at least six months (provided we are in compliance with the current public information requirement) or one year (regardless of whether we are in compliance with the current public information requirement), would be entitled to sell those common units under Rule 144 without regard to the volume limitations, manner of sale provisions and notice requirements of Rule 144.

Our Partnership Agreement and Registration Rights

Our partnership agreement provides that we may issue an unlimited number of partnership interests of any type without a vote of the unitholders. Any issuance of additional common units or other equity interests would result in a corresponding decrease in the proportionate ownership interest in us represented by, and could adversely affect the cash distributions to and market price of, common units then outstanding. See “The Partnership Agreement of Western Gas Equity Partners, LP—Issuance of Additional Securities.”

Under our partnership agreement, our general partner and its affiliates have the right to cause us to register under the Securities Act and applicable state securities laws the offer and sale of any units that they hold. Subject to the terms and conditions of our partnership agreement, these registration rights allow our general partner and its affiliates or their assignees holding any units or other partnership securities to require registration of any of these units or other partnership securities and to include any of these units in a registration by us of other units, including units offered by us or by any unitholder. Our general partner will continue to have these registration rights for two years after it ceases to be our general partner. In connection with any registration of this kind, we will indemnify each unitholder participating in the registration and its officers, directors and controlling persons from and against any liabilities under the Securities Act or any applicable state securities laws arising from the registration statement or prospectus. We will bear all costs and expenses incidental to any registration, excluding any underwriting discounts. Our general partner and its affiliates also may sell their units or other partnership interests in private transactions at any time, subject to compliance with applicable laws.

Lock-Up Agreements

Anadarko, our partnership, our general partner and its affiliates, including their respective executive officers and directors, have agreed not to sell any common units they beneficially own for a period of 180 days from the date of this prospectus, subject to certain exceptions.

 

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Registration Statement on Form S-8

We intend to file a registration statement on Form S-8 under the Securities Act following this offering to register all common units issued or reserved for issuance under the WGP LTIP. We expect to file this registration statement as soon as practicable after this offering. Common units covered by the registration statement on Form S-8 will be eligible for sale in the public market, subject to applicable vesting requirements and the terms of applicable lock-up agreements described above.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

This section summarizes the material U.S. federal income tax consequences that may be relevant to prospective common unitholders. This discussion is based upon current provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), existing and proposed U.S. Treasury regulations thereunder (the “Treasury Regulations”), and current administrative rulings and court decisions, all of which are subject to change. Changes in these authorities may cause the federal income tax consequences to a prospective common unitholder to vary substantially from those described below. Unless the context otherwise requires, references in this section to “we” or “us” are references to Western Gas Equity Partners, LP.

Legal conclusions contained in this section, unless otherwise noted, are the opinion of Bingham McCutchen LLP insofar as they related to matters of U.S. federal income tax law and are based on the accuracy of representations made by us and by WES to them for this purpose. However, this section does not address all federal income tax matters that affect us or our common unitholders. Furthermore, this section focuses on common unitholders who are individual citizens or residents of the United States (for federal income tax purposes), whose functional currencies are the U.S. dollar and who hold units as capital assets (generally, property that is held for investment). This section has limited applicability to corporations, partnerships, entities treated as partnerships for federal income tax purposes, estates, trusts, non-resident aliens or other common unitholders subject to specialized tax treatment, such as tax-exempt institutions, non-U.S. persons, IRAs, employee benefit plans, real estate investment trusts or mutual funds. Special considerations applicable to dealers in securities or currencies, security traders, persons whose functional currency is not the U.S. dollar, persons holding their units as part of a “straddle”, “hedge”, “conversion transaction”, or other risk reduction transaction, and persons who are deemed to sell their units under the constructive sale provisions of the Code, are not discussed. In addition, the discussion only comments to a limited extent on state, local, and foreign tax consequences. Accordingly, because each common unitholder may have unique circumstances beyond the scope of the discussion herein, we encourage each common unitholder to consult such unitholder’s own tax advisor in analyzing the federal, state, local and non-U.S. tax consequences that are particular to that unitholder resulting from ownership or disposition of its units and potential changes in applicable tax laws.

No ruling has been or will be requested from the IRS regarding any matter affecting us or prospective common unitholders. Instead, we are relying on opinions and advice of Bingham McCutchen LLP with respect to the matters described herein. Unlike a ruling, an opinion of counsel represents only that counsel’s best legal judgment and does not bind the IRS or the courts. Accordingly, the opinions and statements made herein may not be sustained by a court if contested by the IRS. Any such contest of the matters described herein may materially and adversely impact the market for our units and the prices at which such units trade. In addition, our costs of any contest with the IRS will be borne indirectly by our common unitholders because the costs will reduce our cash available for distribution. Furthermore, our tax treatment, or the tax treatment of an investment in us, may be significantly modified by future legislative or administrative changes or court decisions, which might be retroactively applied.

For the reasons described below, Bingham McCutchen LLP has not rendered an opinion with respect to the following specific federal income tax issues: (1) the treatment of a common unitholder whose units are loaned to a short seller to cover a short sale of units (please read “—Tax Consequences of Unit Ownership—Treatment of Short Sales”); (2) whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations (please read “—Disposition of Units—Allocations Between Transferors and Transferees”); and (3) whether our method for taking into account Section 743 adjustments is sustainable in certain cases (please read “—Tax Consequences of Unit Ownership—Section 754 Election” and “—Uniformity of Units”).

 

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Taxation of the Partnership

Partnership Status

We expect to be treated as a partnership for federal income tax purposes and, therefore, generally will not be liable for federal income taxes. Instead, as described below, each of our common unitholders will take into account its respective share of our items of income, gain, loss and deduction in computing its federal income tax liability as if the common unitholder had earned such income directly, even if no cash distributions are made to the common unitholder. Distributions by us to a common unitholder generally will not give rise to income or gain taxable to such unitholder, unless the amount of cash distributed to a common unitholder exceeds the unitholder’s adjusted tax basis in its units.

Section 7704 of the Code generally provides that publicly traded partnerships will be treated as corporations for federal income tax purposes. However, if 90% or more of a partnership’s gross income for every taxable year it is publicly traded consists of “qualifying income,” the partnership may continue to be treated as a partnership for federal income tax purposes (the “Qualifying Income Exception”). Qualifying income includes (i) income and gains derived from the refining, transportation, storage, processing and marketing of crude oil, natural gas and products thereof (including NGLs), (ii) interest (other than from a financial business), (iii) dividends, (iv) gains from the sale of real property (v) gains from the sale or other disposition of capital assets held for the production of qualifying income and (vi) our allocable share of such income from WES.

We estimate that approximately             % of our current gross income is not qualifying income; however, this estimate could change from time to time. Based upon and subject to this estimate, the factual representations made by us, by WES and by our general partner regarding the composition of our income and the other representations set forth below, and a review of the applicable legal authorities, Bingham McCutchen LLP is of the opinion that we and WES will each be treated as a partnership and each of our and WES’s partnership or limited liability company subsidiaries will be treated as a partnership or will be disregarded as an entity separate from us or WES, as applicable, for federal income tax purposes. In rendering its opinion, Bingham McCutchen LLP has relied on factual representations made by us and our general partner. The representations made by us, by WES and by our general partner upon which Bingham McCutchen LLP has relied include, without limitation:

(a) Neither we nor WES nor any of our or WES’s partnership or limited liability company subsidiaries has elected to be treated as a corporation for federal income tax purposes; and

(b) For each taxable year, more than 90% of our and WES’s gross income has been and will be income of a character that Bingham McCutchen LLP has opined is “qualifying income” within the meaning of Section 7704(d) of the Code.

We believe that these representations are true and will be true in the future.

If we fail to meet the Qualifying Income Exception, other than a failure that is determined by the IRS to be inadvertent and that is cured within a reasonable time after discovery (in which case the IRS may also require us to make adjustments with respect to our common unitholders or pay other amounts), we will be treated as transferring all of our assets, subject to liabilities, to a newly formed corporation, on the first day of the year in which we fail to meet the Qualifying Income Exception, in return for stock in that corporation and then distributed that stock to our common unitholders in liquidation of their units. This deemed contribution and liquidation will not result in the recognition of taxable income by our common unitholders or us so long as our liabilities do not exceed the tax basis of our assets. Thereafter, we would be treated as an association taxable as a corporation for federal income tax purposes.

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time, members of the U.S. Congress propose and consider substantive changes to the

 

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existing federal income tax laws that affect publicly traded partnerships. Currently, one such legislative proposal would eliminate the qualifying income exception upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. We are unable to predict whether any such changes will ultimately be enacted. However, it is possible that a change in law could affect us and may be applied retroactively. Any such changes could negatively impact the value of an investment in our units.

If for any reason we are taxable as a corporation in any taxable year, our items of income, gain, loss and deduction would be taken into account by us in determining the amount of our liability for federal income tax, rather than being passed through to our common unitholders. Moreover, if WES were taxable as a corporation in any given year, our share of WES’s items of income, gain, loss and deduction would generally not be passed through to us, and WES would be subject to tax on its income at corporate rates. In addition, any distribution made to a common unitholder (or by WES to us, as applicable) would be treated as (i) taxable dividend income to the extent of our current and accumulated earnings and profits, then (ii) a nontaxable return of capital to the extent of the common unitholder’s tax basis in our units (or, if applicable, our tax basis in our interest in WES), and thereafter (iii) taxable capital gain. Accordingly, taxation of us or of WES as a corporation would result in a material reduction in a unitholder’s cash flow and after-tax return and thus would likely result in a substantial reduction of the value of the units.

The remainder of this discussion is based on the opinion of Bingham McCutchen LLP that we and WES will each be treated as a partnership for federal income tax purposes.

Tax Consequences of Unit Ownership

Limited Partner Status

Common unitholders who are admitted as limited partners of the partnership, assignees who have executed and delivered transfer applications, and are awaiting admission, and common unitholders whose units are held in street name or by a nominee and who have the right to direct the nominee in the exercise of all substantive rights attendant to the ownership of units, will be treated as partners of the partnership for federal income tax purposes.

As there is no direct or indirect controlling authority addressing assignees of common units who are entitled to execute and deliver transfer applications and thereby become entitled to direct the exercise of attendant rights, but who fail to execute and deliver transfer applications, Bingham McCutchen LLP’s opinion does not extend to these persons. Furthermore, a purchaser or other transferee of common units who does not execute and deliver a transfer application may not receive some federal income tax information or reports furnished to record holders of common units unless the common units are held in a nominee or street name account and the nominee or broker has executed and delivered a transfer application for those common units. A beneficial owner of common units whose units have been transferred to a short seller to complete a short sale would appear to lose his status as a partner with respect to those units for federal income tax purposes. Please read “—Treatment of Short Sales.”

Income, gain, deductions or losses are not reportable by a unitholder who is not a partner for federal income tax purposes, and any cash distributions received by a unitholder who is not a partner for federal income tax purposes would therefore appear to be fully taxable as ordinary income. These holders are urged to consult their own tax advisors with respect to their tax consequences of holding common units. References to “unitholders” in the discussion that follows are to persons who are treated as partners in Western Gas Equity Partners, LP for federal income tax purposes.

Flow-Through of Taxable Income

Subject to the discussion below under “—Entity-Level Collections of Unitholder Taxes”, we will not pay any federal income tax. Rather, each common unitholder will be required to report on its income tax return its share of our income, gains, losses and deductions for our taxable year or years ending with or within its taxable

 

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year without regard to whether we make cash distributions to such unitholder. Consequently, we may allocate income to a common unitholder even if that unitholder has not received a cash distribution. Each unitholder will be required to include in income its allocable share of our income, gains, losses and deductions for our taxable year ending on or with its taxable year. Our taxable year ends on December 31.

Ratio of Taxable Income to Distributions

We estimate that a purchaser of common units in this offering who owns those common units from the date of closing of this offering through the record date for distributions for the period ending December 31, 2014, will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed with respect to that period. Thereafter, we anticipate that the ratio of taxable income to cash distributions to the common unitholders will increase. Moreover, if WES is successful in increasing Distributable cash flow over time, our income allocations from incentive distribution rights will increase, and, therefore, our ratio of taxable income to cash distributions will further increase. These estimates are based upon the assumption that earnings from operations will approximate the amount required to make the initial quarterly distribution on all units and other assumptions with respect to capital expenditures, cash flow, net working capital and anticipated cash distributions. These estimates and assumptions are subject to, among other things, numerous business, economic, regulatory, legislative, competitive and political uncertainties beyond our control. Further, the estimates are based on current tax law and tax reporting positions that we will adopt and with which the IRS could disagree. Accordingly, we cannot assure you that these estimates will prove to be correct. The actual ratio of taxable income to cash distributions could be higher or lower than expected, and any differences could be material and could materially affect the value of the common units. For example, the ratio of taxable income to cash distributions to a purchaser of common units in this offering will be higher, and perhaps substantially higher, than our estimate with respect to the period described above if:

 

   

WES’s earnings from operations exceeds the amount required to maintain the current quarterly distribution amount on all of WES’s units, yet WES only distributes the current quarterly distribution amount on its units; or

 

   

WES makes a future offering of common units and uses the proceeds of the offering in a manner that does not produce substantial additional deductions during the period described above, such as to repay indebtedness outstanding at the time of this offering or to acquire property that is not eligible for depreciation or amortization for federal income tax purposes or that is depreciable or amortizable at a rate significantly slower than the rate applicable to WES’s assets at the time of this offering.

Basis of Units

A common unitholder’s tax basis in its units initially will be the amount it paid for those units plus its initial share of our liabilities. That basis generally will be (i) increased by the common unitholder’s share of our income and any increases in such unitholder’s share of our nonrecourse liabilities, and (ii) decreased, but not below zero, by distributions to it, by its share of our losses, any decreases in its share of our nonrecourse liabilities and its share of our expenditures that are neither deductible nor required to be capitalized.

Treatment of Distributions

Distributions made by us to a common unitholder generally will not be taxable to the common unitholder for federal income tax purposes, except to the extent the amount of any such cash distribution exceeds its tax basis in its common units immediately before the distribution. Our cash distributions in excess of a unitholder’s tax basis in its units generally will be considered to be gain from the sale or exchange of common units, taxable in accordance with the rules described under “—Disposition of Units” below.

Any reduction in a common unitholder’s share of our “nonrecourse liabilities” (liabilities for which no partner, including our general partner, bears the economic risk of loss) will be treated as a distribution by us of

 

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cash to that common unitholder. A decrease in a common unitholder’s percentage interest in us because of our issuance of additional units will decrease the common unitholder’s share of our nonrecourse liabilities. For purposes of the foregoing, a common unitholder’s share of our nonrecourse liabilities generally will be based upon that common unitholder’s share of the unrealized appreciation (or depreciation) in our assets, to the extent thereof, with any excess liabilities allocated based on the common unitholder’s share of our profits. Please read “—Disposition of Units.”

A non-pro rata distribution of money or property (including a deemed distribution described above) may cause a common unitholder to recognize ordinary income, if the distribution reduces the common unitholder’s share of our “unrealized receivables,” including depreciation recapture and/or substantially appreciated “inventory items,” both as defined in Section 751 of the Code (“Section 751 Assets”). To the extent of such reduction, the common unitholder would be deemed to receive its proportionate share of the Section 751 Assets and exchange such assets with us in return for an allocable portion of the non-pro rata distribution. This latter deemed exchange generally will result in the common unitholder’s realization of ordinary income in an amount equal to the excess of (1) the non-pro rata portion of that distribution over (2) the common unitholder’s tax basis (generally zero) in the Section 751 Assets deemed to be relinquished in the exchange.

To the extent our distributions cause a common unitholder’s “at-risk” amount to be less than zero at the end of any taxable year, the common unitholder must recapture any losses deducted in previous years. Please read “—Limitations on Deductibility of Losses.”

Limitations on Deductibility of Losses

The deduction by a common unitholder of its share of our losses will be limited to the lesser of (i) the common unitholder’s tax basis in its units, and (ii) in the case of a common unitholder who is an individual, estate, trust or corporation (if more than 50% of the corporation’s stock is owned directly or indirectly by or for five or fewer individuals or a specific type of tax exempt organization), the amount for which the common unitholder is considered to be “at risk” with respect to our activities. In general, a common unitholder will be at risk to the extent of its tax basis in its units, reduced by (1) any portion of that basis attributable to the common unitholder’s share of our liabilities, (2) any portion of that basis representing amounts otherwise protected against loss because of a guarantee, stop loss agreement or similar arrangement and (3) any amount of money the common unitholder borrows to acquire or hold its units, if the lender of those borrowed funds owns an interest in us, is related to another common unitholder or can look only to the units for repayment.

A common unitholder subject to the basis and at risk limitations must recapture losses deducted in previous years to the extent that distributions (including distributions as a result of a reduction in a common unitholder’s share of nonrecourse liabilities) cause the common unitholder’s at risk amount to be less than zero at the end of any taxable year. Losses disallowed to a common unitholder or recaptured as a result of these limitations will carry forward and will be allowable as a deduction in a later year to the extent that the common unitholder’s tax basis or at risk amount, whichever is the limiting factor, is subsequently increased. Upon a taxable disposition of units, any gain recognized by a common unitholder can be offset by losses that were previously suspended by the at risk limitation but not losses suspended by the basis limitation. Any loss previously suspended by the at risk limitation in excess of that gain can no longer be used and will not be available to offset a unitholder’s salary or active business income.

In addition to the basis and at-risk limitations on the deductibility of losses, the passive activity loss limitations generally provide that individuals, estates, trusts, some closely held corporations and personal service corporations are permitted to deduct losses from “passive activities” (generally, trade or business activities in which the taxpayer does not materially participate) only to the extent of the taxpayer’s income from those passive activities. Moreover, “portfolio income” such as general investment income from dividends and interest is specifically excluded from the passive loss calculations, and the passive loss limitations are applied separately with respect to each publicly traded partnership. Consequently, any passive losses we generate will be available

 

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to offset only our passive income generated in the future and will not be available to offset our portfolio income, a common unitholder’s income from other passive activities or investments, including investments in other publicly traded partnerships, or a common unitholder’s salary or active business income. Passive losses that are not deductible because they exceed a common unitholder’s share of income we generate may be deducted in full when the unitholder disposes of all of its units in a fully taxable transaction with an unrelated party. The passive activity loss rules are applied after other applicable limitations on deductions, including the at-risk and basis limitations.

The passive loss rules are required to be applied separately with respect to items attributable to each separate publicly traded partnership. The application of this requirement to a WGP unitholder who is also a WES unitholder is uncertain. It is possible that amounts allocated to a WGP unitholder that are attributable to WGP’s interest in WES may be combined with amounts allocated directly to a WES unitholder. Alternatively, such amounts may need to be treated as attributable to interests in separate publicly traded partnerships. If you hold interest in both WGP and WES, you should consult your own tax advisor regarding the application of the passive loss rules.

Limitations on Interest Deductions

The deductibility of a non-corporate taxpayer’s “investment interest expense” is generally limited to the amount of that taxpayer’s “net investment income.” Investment interest expense includes:

 

   

interest on indebtedness properly allocable to property held for investment;

 

   

interest expense attributed to portfolio income; and

 

   

the portion of interest expense incurred to purchase or carry an interest in a passive activity to the extent attributable to portfolio income.

The computation of a common unitholder’s investment interest expense will take into account interest on any margin account borrowing or other loan incurred to purchase or carry a unit. Net investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible expenses other than interest directly connected with the production of investment income. Such term generally does not include qualified dividend income (if applicable) or gains attributable to the disposition of property held for investment. A common unitholder’s share of a publicly traded partnership’s portfolio income and, according to the IRS, net passive income will be treated as investment income for purposes of the investment interest expense limitation.

Entity-Level Collections of Unitholder Taxes

If we are required or elect under applicable law to pay any federal, state, local or non-U.S. tax on behalf of any current or former common unitholder, we are authorized to pay those taxes from our funds and treat the payment as a distribution of cash to the unitholder on whose behalf the payment was made. If the payment is made on behalf of a person whose identity cannot be determined, we are authorized to treat the payment as a distribution to all current unitholders. We are authorized to amend our partnership agreement in the manner necessary to maintain uniformity of intrinsic tax characteristics of units and to adjust later distributions, so that after giving effect to these distributions, the priority and characterization of distributions otherwise applicable under our partnership agreement is maintained as nearly as is practicable. Payments by us as described above could give rise to an overpayment of tax on behalf of a common unitholder, in which event the common unitholder may be entitled to claim a refund of the overpayment amount. Common unitholders are urged to consult their tax advisors to determine the consequences to them of any tax payment we make on their behalf.

 

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Allocation of Income, Gain, Loss and Deduction

In general, if we have a net profit, our items of income, gain, loss and deduction will be allocated among our common unitholders in accordance with their percentage interests in us. If we have a net loss, our items of income, gain, loss and deduction will be allocated first among our common unitholders in accordance with their percentage interests in us to the extent of their positive capital accounts and thereafter to our general partner.

Specified items of our income, gain, loss and deduction will be allocated under Section 704(c) of the Code to account for any difference between the tax basis and fair market value of our assets at the time of this offering, referred to in this discussion as “Contributed Property.” The effect of these allocations, referred to as Section 704(c) Allocations, to a unitholder purchasing common units from us in this offering will be essentially the same as if the tax bases of our assets were equal to their fair market value at the time of such offering. In the event we issue additional common units or engage in certain other transactions in the future “Reverse Section 704(c) Allocations,” similar to the Section 704(c) Allocations described above, will be made to all holders of partnership interests, including purchasers of common units in an offering, to account for the difference, at the time of the future transaction, between the “book” basis for purposes of maintaining capital accounts and the fair market value of all property held by us at the time of the future transaction. In addition, items of recapture income will be allocated to the extent possible to the unitholder who was allocated the deduction giving rise to that recapture income in order to minimize the recognition of ordinary income by other unitholders. Finally, although we do not expect that our operations will result in the creation of negative capital accounts, if negative capital accounts nevertheless result, items of our income and gain will be allocated in an amount and manner to eliminate the negative balance as quickly as possible.

An allocation of items of our income, gain, loss or deduction, other than an allocation required by Section 704(c) of the Code to eliminate the difference between a partner’s “book” capital account, credited with the fair market value of Contributed Property, and “tax” capital account, credited with the tax basis of Contributed Property, referred to in this discussion as the “Book-Tax Disparity,” will generally be given effect for federal income tax purposes in determining a partner’s share of an item of income, gain, loss or deduction only if the allocation has “substantial economic effect.” In any other case, a partner’s share of an item will be determined on the basis of its interest in us, which will be determined by taking into account all the facts and circumstances, including:

 

   

our partners’ relative contributions to us;

 

   

the interests of all of our partners in our profits and losses;

 

   

the interest of all of our partners in our cash flow; and

 

   

the rights of all of our partners to distributions of capital upon liquidation.

Bingham McCutchen LLP is of the opinion that, with the exception of the issues described in “—Section 754 Election” and “—Disposition of Units—Allocations Between Transferors and Transferees,” allocations under our partnership agreement will be given effect for federal income tax purposes in determining a partner’s share of an item of income, gain, loss or deduction.

Treatment of Short Sales

A common unitholder whose units are loaned to a “short seller” to cover a short sale of units may be treated as having disposed of those units. If so, such common unitholder would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition. As a result, during this period any of our income, gain, loss or deduction with respect to those units would not be reportable by the common unitholder, any cash distributions received by the unitholder as to those units would be fully taxable, and all of these distributions would appear to be ordinary income.

 

 

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Because there is no direct or indirect controlling authority on the issue relating to partnership interests, Bingham McCutchen LLP has not rendered an opinion regarding the tax treatment of a common unitholder whose units are loaned to a short seller to cover a short sale of our units. Common unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from loaning their units. The IRS has previously announced that it is studying issues relating to the tax treatment of short sales of partnership interests. Please also read “—Disposition of Units—Recognition of Gain or Loss.”

Treatment of Liquidation and Termination

In general, if we liquidate or terminate the Partnership and sell all of the partnership’s assets, any gain or loss recognized upon such sale generally will be allocated among our common unitholders in the manner described under “—Allocation of Income, Gain, Loss and Deduction.” Please read “—Treatment of Distributions” for a discussion of the termination of any distributions that may result from a liquidation of the partnership. For a general discussion of the events and circumstances of a liquidation and termination of the Partnership, please read “The Partnership Agreement of Western Gas Equity Partners, LP—Termination of Dissolution” and “The Partnership Agreement of Western Gas Equity Partners, LP—Liquidation and Distribution of Proceeds.”

Alternative Minimum Tax

Each unitholder will be required to take into account its distributive share of any items of our income, gain, loss or deduction for purposes of the alternative minimum tax. The current alternative minimum tax rate for non-corporate taxpayers is 26% on the first $175,000 of alternative minimum taxable income in excess of the exemption amount and 28% on any additional alternative minimum taxable income. Prospective common unitholders are urged to consult with their tax advisors as to the impact of an investment in our units on their alternative minimum tax liability.

Tax Rates

Under current law, the highest marginal federal income tax rate applicable to ordinary income of individuals is 35% and the highest marginal federal income tax rate applicable to long-term capital gains (generally, capital gains on certain assets held for more than 12 months) of individuals is 15%. However, absent new legislation extending the current rates, beginning January 1, 2013, the highest marginal federal income tax rate applicable to ordinary income and long-term capital gains of individuals will increase to 39.6% and 20%, respectively. These rates are subject to change by new legislation at any time.

A 3.8% Medicare tax on certain net investment income earned by individuals, estates, and trusts will apply for taxable years beginning after December 31, 2012. For these purposes, net investment income generally includes a common unitholder’s allocable share of our income and gain realized by a common unitholder from a sale of units. In the case of an individual, the tax will be imposed on the lesser of (i) the common unitholder’s net investment income, or (ii) the amount by which the common unitholder’s modified adjusted gross income exceeds $250,000 (if the common unitholder is married and filing jointly or a surviving spouse), $125,000 (if the common unitholder is married and filing separately) or $200,000 (in any other case). In the case of an estate or trust, the tax will be imposed on the lesser of (i) undistributed net investment income or (ii) the excess adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.

Section 754 Election

We have made the election permitted by Section 754 of the Code that permits us to adjust the tax bases in our assets as to specific purchased units under Section 743(b) of the Code to reflect the unit purchase price. The

 

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Section 743(b) adjustment separately applies to each purchaser of units based upon the values and bases of our assets at the time of the relevant purchase. The Section 743(b) adjustment does not apply to a person who purchases units directly from us. For purposes of this discussion, a common unitholder’s basis in our assets will be considered to have two components: (1) its share of the tax basis in our assets as to all common unitholders (“common basis”) and (2) its Section 743(b) adjustment to that tax basis (which may be positive or negative).

Where the remedial allocation method is adopted (which we will generally adopt as to our properties), the Treasury Regulations under Section 743 of the Code require a portion of the Section 743(b) adjustment that is attributable to recovery property under Section 168 of the Code whose book basis is in excess of its tax basis to be depreciated over the remaining cost recovery period for the property’s unamortized Book-Tax Disparity. Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property subject to depreciation under Section 167 of the Code, rather than cost recovery deductions under Section 168 of the Code, is generally required to be depreciated using either the straight-line method or the 150% declining balance method. Under our partnership agreement, our general partner is authorized to take a position to preserve the uniformity of units even if that position is not consistent with these and any other Treasury Regulations. Please read “—Uniformity of Units.”

Although Bingham McCutchen LLP is unable to opine as to the validity of this approach because there is no direct or indirect controlling authority on this issue, we intend to depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the property’s unamortized Book-Tax Disparity, or treat that portion as non-amortizable to the extent attributable to property which is not amortizable. This method is consistent with the regulations under Section 743 of the Code but is arguably inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected to directly apply to a material portion of our assets. The IRS may challenge our position with respect to depreciating or amortizing the Section 743(b) adjustment we take to preserve the uniformity of the units.

A Section 754 election is advantageous if the transferee’s tax basis in his units is higher than the units’ share of the aggregate tax basis of our assets immediately prior to the transfer. In that case, as a result of the election, the transferee would have, among other items, a greater amount of depreciation deductions and his share of any gain or loss on a sale of our assets would be less. Conversely, a Section 754 election is disadvantageous if the transferee’s tax basis in its units is lower than those units’ share of the aggregate tax basis of our assets immediately prior to the transfer. Thus, the fair market value of the units may be affected either favorably or unfavorably by the election. A basis adjustment is required regardless of whether a Section 754 election is made in the case of a transfer of an interest in us if we have a substantial built-in loss immediately after the transfer, or if we distribute property and have a substantial basis reduction. Generally a built-in loss or a basis reduction is substantial if it exceeds $250,000.

The calculations involved in the Section 754 election are complex and will be made on the basis of assumptions as to the value of our assets and other matters. The IRS could seek to reallocate some or all of any Section 743(b) adjustment we allocated to our assets or the assets owned by WES subject to depreciation to goodwill or nondepreciable assets. Goodwill, as an intangible asset, is generally nonamortizable or amortizable over a longer period of time or under a less accelerated method than our tangible assets. We cannot assure any common unitholder that the determinations we make will not be successfully challenged by the IRS or that the resulting deductions will not be reduced or disallowed altogether. Should the IRS require a different tax basis adjustment to be made, and should, in our opinion, the expense of compliance exceed the benefit of the election, we may seek permission from the IRS to revoke our Section 754 election. If permission is granted, a subsequent purchaser of units may be allocated more income than it would have been allocated had the election not been revoked.

 

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Tax Treatment of Operations

Accounting Method and Taxable Year

We will use the year ending December 31 as our taxable year and the accrual method of accounting for federal income tax purposes. Each common unitholder will be required to include in income its share of our income, gain, loss and deduction for each taxable year ending within or with its taxable year. In addition, a common unitholder who has a taxable year ending on a date other than December 31 and who disposes of all of its units following the close of our taxable year but before the close of its taxable year must include its share of our income, gain, loss and deduction in income for its taxable year, with the result that it will be required to include in income for its taxable year its share of more than twelve months of our income, gain, loss and deduction. Please read “—Disposition of Units—Allocations Between Transferors and Transferees.”

Tax Basis, Depreciation and Amortization

The tax basis of our and WES’s assets will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on the disposition of these assets. The federal income tax burden associated with the difference between the fair market value of our assets and their tax basis immediately prior to an offering will be borne by our partners holding interests in us prior to the offering. Please read “—Tax Consequences of Unit Ownership—Allocation of Income, Gain, Loss and Deduction.”

If we or WES dispose of depreciable property by sale, foreclosure or otherwise, all or a portion of any gain, determined by reference to the amount of depreciation previously deducted and the nature of the property, may be subject to the recapture rules and taxed as ordinary income rather than capital gain. Similarly, a common unitholder who has taken cost recovery or depreciation deductions with respect to property we own or WES owns will likely be required to recapture some or all of those deductions as ordinary income upon a sale of its interest in us. Please read “—Tax Consequences of Unit Ownership—Allocation of Income, Gain, Loss and Deduction” and “—Disposition of Units—Recognition of Gain or Loss.”

The costs we incur in offering and selling our units (called “syndication expenses”) must be capitalized and cannot be deducted currently, ratably or upon our termination. While there are uncertainties regarding the classification of costs as organization expenses, which may be amortized by us, and as syndication expenses, which may not be amortized by us, the underwriting discounts and commissions we incur will be treated as syndication expenses.

Valuation and Tax Basis of Our Properties

The federal income tax consequences of the ownership and disposition of units will depend in part on our estimates of the relative fair market values and the initial tax bases of our or WES’s assets. Although we may from time to time consult with professional appraisers regarding valuation matters, we will make many of the relative fair market value estimates ourselves. These estimates and determinations of tax basis are subject to challenge and will not be binding on the IRS or the courts. If the estimates of fair market value or basis are later found to be incorrect, the character and amount of items of income, gain, loss or deduction previously reported by common unitholders could change, and common unitholders could be required to adjust their tax liability for prior years and incur interest and penalties with respect to those adjustments.

Disposition of Units

Recognition of Gain or Loss

A common unitholder will be required to recognize gain or loss on a sale of units equal to the difference between the common unitholder’s amount realized and the unitholder’s tax basis for the units sold. A common unitholder’s amount realized will equal the sum of the cash or the fair market value of other property it receives

 

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plus its share of our liabilities with respect to such units. Because the amount realized includes a common unitholder’s share of our liabilities, the gain recognized on the sale of units could result in a tax liability in excess of any cash received from the sale.

Prior distributions from us in excess of cumulative net taxable income for a unit that decreased a common unitholder’s tax basis in that unit will, in effect, become taxable income if the unit is sold at a price greater than the common unitholder’s tax basis in that unit, even if the price received is less than the common unitholder’s original cost.

Except as noted below, gain or loss recognized by a common unitholder, other than a “dealer” in units, on the sale or exchange of a unit held will generally be taxable as capital gain or loss. Capital gain recognized by an individual on the sale of units held for more than twelve months will generally be taxed at favorable rates. However, a portion of this gain or loss, which will be substantial, will be separately computed and taxed as ordinary income or loss under Section 751 of the Code to the extent attributable to assets giving rise to depreciation recapture or other “unrealized receivables” or to “inventory items” we or WES own. The term “unrealized receivables” includes potential recapture items, including depreciation recapture. Ordinary income attributable to unrealized receivables, inventory items and depreciation recapture may exceed net taxable gain realized upon the sale of a unit and may be recognized even if there is a net taxable loss realized on the sale of a unit. Thus, a common unitholder may recognize both ordinary income and a capital loss upon a sale of units. Capital losses may offset capital gains and no more than $3,000 of ordinary income per year, in the case of individuals, and may only be used to offset capital gains in the case of a corporation.

The IRS has ruled that a partner who acquires interests in a partnership in separate transactions must combine those interests and maintain a single adjusted tax basis for all those interests. Upon a sale or other disposition of less than all of those interests, a portion of that tax basis must be allocated to the interests sold using an “equitable apportionment” method, which generally means that the tax basis allocated to the interest sold equals an amount that bears the same relation to the partner’s tax basis in its entire interest in the partnership as the value of the interest sold bears to the value of the partner’s entire interest in the partnership.

Treasury Regulations under Section 1223 of the Code allow a selling common unitholder who can identify units transferred with an ascertainable holding period to elect to use the actual holding period of the units transferred. Thus, according to the ruling discussed above, a common unitholder will be unable to select high or low basis units to sell as would be the case with corporate stock, but, according to the Treasury Regulations, it may designate specific units sold for purposes of determining the holding period of units transferred. A common unitholder electing to use the actual holding period of units transferred must consistently use that identification method for all subsequent sales or exchanges of our units. A common unitholder considering the purchase of additional units or a sale of units purchased in separate transactions is urged to consult its tax advisor as to the possible consequences of this ruling and application of the Treasury Regulations.

Specific provisions of the Code affect the taxation of some financial products and securities, including partnership interests, by treating a taxpayer as having sold an “appreciated” partnership interest, one in which gain would be recognized if it were sold, assigned or terminated at its fair market value, if the taxpayer or related persons enter(s) into:

 

   

a short sale;

 

   

an offsetting notional principal contract; or

 

   

a futures or forward contract with respect to the partnership interest or substantially identical property.

Moreover, if a taxpayer has previously entered into a short sale, an offsetting notional principal contract or a futures or forward contract with respect to the partnership interest, the taxpayer will be treated as having sold that position if the taxpayer or a related person then acquires the partnership interest or substantially identical

 

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property. The Secretary of the Treasury is also authorized to issue regulations that treat a taxpayer that enters into transactions or positions that have substantially the same effect as the preceding transactions as having constructively sold the financial position.

Allocations Between Transferors and Transferees

In general, our taxable income or loss will be determined annually, will be prorated on a monthly basis and will be subsequently apportioned among the common unitholders in proportion to the number of units owned by each of them as of the opening of the applicable exchange on the first business day of the month (the “Allocation Date”). However, gain or loss realized on a sale or other disposition of our assets or, in the discretion of the general partner, any other extraordinary item of income, gain, loss or deduction will be allocated among the common unitholders on the Allocation Date in the month in which such income, gain, loss or deduction is recognized. As a result, a common unitholder transferring units may be allocated income, gain, loss and deduction realized after the date of transfer.

Although simplifying conventions are contemplated by the Code and most publicly traded partnerships use similar simplifying conventions, the use of this method may not be permitted under existing Treasury Regulations. Recently, however, the Department of the Treasury and the IRS issued proposed Treasury Regulations that provide a safe harbor pursuant to which a publicly traded partnership may use a similar monthly simplifying convention to allocate tax items among transferor and transferee common unitholders, although such tax items must be prorated on a daily basis. Existing publicly traded partnerships are entitled to rely on these proposed Treasury Regulations; however, they are not binding on the IRS and are subject to change until final Treasury Regulations are issued. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we have adopted. Accordingly, Bingham McCutchen LLP is unable to opine on the validity of this method of allocating income and deductions between transferee and transferor common unitholders. If this method is not allowed under the Treasury Regulations, or only applies to transfers of less than all of the common unitholder’s interest, our taxable income or losses might be reallocated among the common unitholders. We are authorized to revise our method of allocation between transferee and transferor common unitholders, as well as among common unitholders whose interests vary during a taxable year, to conform to a method permitted under future Treasury Regulations.

A common unitholder who owns units at any time during a quarter and who disposes of units prior to the record date set for a cash distribution for that quarter will be allocated items of our income, gain, loss and deduction attributable to that quarter but will not be entitled to receive that cash distribution.

Notification Requirements

A common unitholder who sells or purchases any units is generally required to notify us in writing of that transaction within 30 days after the transaction (or, if earlier, January 15 of the year following the transaction in the case of a seller). Upon receiving such notifications, we are required to notify the IRS of that transaction and to furnish specified information to the transferor and transferee. Failure to notify us of a transfer of units may, in some cases, lead to the imposition of penalties. However, these reporting requirements do not apply to a sale by an individual who is a citizen of the United States and who effects the sale or exchange through a broker who will satisfy such requirements.

Constructive Termination

We will be considered to have terminated our partnership for federal income tax purposes if there are sales or exchanges which, in the aggregate, constitute 50% or more of the total interests in our capital and profits within a twelve-month period. Immediately following this offering, Anadarko Petroleum Corporation will indirectly own more than 50% of the total interests in our capital and profits. Therefore, a transfer of all or a portion of Anadarko Petroleum Corporation’s indirect interests in us could result in a termination of our

 

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partnership for federal income tax purposes. For purposes of measuring whether the 50% threshold is reached, multiple sales of the same interests are counted only once. A constructive termination results in the closing of our taxable year for all unitholders. In the case of a common unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may result in more than twelve months of our taxable income or loss being includable in such common unitholder’s taxable income for the year of termination. A constructive termination occurring on a date other than December 31 will result in us filing two tax returns (and unitholders could receive two Schedule K-1s if the relief discussed below is not available) for one fiscal year and the cost of the preparation of these returns will be borne by all unitholders. A termination currently would not affect our classification as a partnership for federal income tax purposes, but instead, we would be treated as a new partnership for tax purposes. We would be required to make new tax elections after a constructive termination, including a new election under Section 754 of the Code, and a constructive termination would result in a deferral of our deductions for depreciation. A constructive termination could also result in penalties if we were unable to determine that the termination had occurred. Moreover, a constructive termination might either accelerate the application of, or subject us to, any tax legislation enacted before the termination. The IRS has recently announced a publicly traded technical termination relief program whereby a publicly traded partnership that constructively terminates may be allowed to provide one Schedule K-1 to unitholders for the fiscal year notwithstanding two partnership tax years.

As a result of this offering and the transactions related thereto, we will be treated as a new partnership for federal income tax purposes and as having transferred our existing interests in WES. The transfer of our interests in WES along with the transfer of other publicly held units of WES may result in the termination of WES as a partnership for federal income tax purposes. Similarly, a constructive termination of us as a partnership for federal income tax purposes as described above may result in the termination of WES as a partnership for federal income tax purposes due to the deemed transfer of our interests in WES as a result of our termination. If WES determines that there have occurred sales or exchanges which, in the aggregate, constitute 50% or more of the total interests in its capital and profits within a twelve-month period, whether as a result of our termination or otherwise, WES would be treated as having terminated as a partnership for federal income tax purposes. A constructive termination of WES as a partnership for federal income tax purposes could result in a deferral of depreciation deductions allowable in computing its taxable income, which would affect our share of the taxable income of WES and, therefore, could increase the amount of taxable income to be allocated to our unitholders. Although the amount of the increase cannot be estimated because it depends upon numerous factors, including the time of the termination, the amount could be material.

Uniformity of Units

Because we cannot match transferors and transferees of units, we must maintain uniformity of the economic and tax characteristics of the units to a purchaser of these units. In the absence of uniformity, we may be unable to completely comply with a number of federal income tax requirements, both statutory and regulatory. A lack of uniformity could result from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6), which is not anticipated to apply to a material portion of our assets. Any non-uniformity could have a negative impact on the value of the units. Please read “—Tax Consequences of Unit Ownership—Section 754 Election.”

If necessary to preserve the uniformity of our units, our partnership agreement permits our general partner to take positions in filing our tax returns even when contrary to a literal application of regulations like the one described above. These positions may include reducing for some common unitholders the depreciation, amortization or loss deductions to which they would otherwise be entitled or reporting a slower amortization of Section 743(b) adjustments for some common unitholders than that to which they would otherwise be entitled. The general partner does not anticipate needing to take such positions, but if they were necessary, Bingham McCutchen LLP would be unable to opine as to validity of such filing positions in the absence of direct and controlling authority.

 

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A common unitholder’s basis in units is reduced by its share of our deductions (whether or not such deductions were claimed on an individual income tax return) so that any position that we take that understates deductions will overstate the common unitholder’s basis in its units, and may cause the common unitholder to understate gain or overstate loss on any sale of such units. Please read “—Disposition of Units—Recognition of Gain or Loss” above and “—Tax Consequences of Unit Ownership—Section 754 Election” above. The IRS may challenge one or more of any positions we take to preserve the uniformity of units. If such a challenge were sustained, the uniformity of units might be affected, and, under some circumstances, the gain from the sale of units might be increased without the benefit of additional deductions.

Tax-Exempt Organizations and Other Investors

Ownership of units by employee benefit plans, other tax-exempt organizations, non-resident aliens, non-U.S. corporations and other non-U.S. persons raises issues unique to those investors and, as described below, may have substantially adverse tax consequences to them. Prospective common unitholders who are tax-exempt entities or non-U.S. persons should consult their tax advisor before investing in our units. Employee benefit plans and most other tax-exempt organizations, including IRAs and other retirement plans, are subject to federal income tax on unrelated business taxable income. Virtually all of our income will be unrelated business taxable income and will be taxable to a tax-exempt common unitholder.

Non-resident aliens and foreign corporations, trusts or estates that own units will be considered to be engaged in business in the United States because of their ownership of our units. Consequently, they will be required to file federal tax returns to report their share of our income, gain, loss or deduction and pay federal income tax at regular rates on their share of our net income or gain. Moreover, under rules applicable to publicly traded partnerships, distributions to non-U.S. common unitholders are subject to withholding at the highest applicable effective tax rate. Each non-U.S. common unitholder must obtain a taxpayer identification number from the IRS and submit that number to our transfer agent on a Form W-8BEN or applicable substitute form in order to obtain credit for these withholding taxes. A change in applicable law may require us to change these procedures.

In addition, because a foreign corporation that owns units will be treated as engaged in a United States trade or business, that corporation may be subject to the United States branch profits tax at a rate of 30%, in addition to regular federal income tax, on its share of our income and gain to the extent referenced in earnings and profits, and as adjusted for changes in the foreign corporation’s “U.S. net equity.” That tax may be reduced or eliminated by an income tax treaty between the United States and the country in which the foreign corporate common unitholder is a “qualified resident.” In addition, this type of common unitholder is subject to special information reporting requirements under Section 6038C of the Code.

A foreign common unitholder who sells or otherwise disposes of a unit will be subject to federal income tax on gain realized from the sale or disposition of that unit to the extent the gain is effectively connected with a U.S. trade or business of the foreign common unitholder. Under a ruling published by the IRS, interpreting the scope of “effectively connected income,” a foreign common unitholder would be considered to be engaged in a trade or business in the U.S. by virtue of the U.S. activities of the partnership, and part or all of that common unitholder’s gain would be effectively connected with that common unitholder’s indirect U.S. trade or business. Moreover, under the Foreign Investment in Real Property Tax Act, a foreign common unitholder generally will be subject to federal income tax upon the sale or disposition of a unit if (i) it owned (directly or constructively applying certain attribution rules) more than 5% of our units at any time during the five-year period ending on the date of such disposition and (ii) 50% or more of the fair market value of all of our assets consisted of U.S. real property interests at any time during the shorter of the period during which such common unitholder held the units or the 5-year period ending on the date of disposition. Currently, more than 50% of our assets consist of U.S. real property interests and we do not expect that to change in the foreseeable future. Therefore, foreign common unitholders may be subject to federal income tax on gain from the sale or disposition of their units. Recent changes in law may affect certain foreign unitholders. Please read “—Administrative Matters—Additional Withholding Requirements.”

 

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Administrative Matters

Information Returns and Audit Procedures

We intend to furnish to each common unitholder, within 90 days after the close of each calendar year, specific tax information, including a Schedule K-1, which describes its share of our income, gain, loss and deduction for our preceding taxable year. In preparing this information, which will not be reviewed by counsel, we will take various accounting and reporting positions, some of which have been mentioned earlier, to determine each common unitholder’s share of income, gain, loss and deduction. We cannot assure our common unitholders that those positions will yield a result that conforms to the requirements of the Code, Treasury Regulations or administrative interpretations of the IRS.

Neither we nor Bingham McCutchen LLP can assure prospective common unitholders that the IRS will not successfully contend in court that those positions are impermissible, and such a contention could negatively affect the value of the units. The IRS may audit our federal income tax information returns. Adjustments resulting from an IRS audit may require each common unitholder to adjust a prior year’s tax liability, and possibly may result in an audit of its own return. Any audit of a common unitholder’s return could result in adjustments not related to our returns as well as those related to its returns.

Partnerships generally are treated as entities separate from their owners for purposes of federal income tax audits, judicial review of administrative adjustments by the IRS and tax settlement proceedings. The tax treatment of partnership items of income, gain, loss and deduction are determined in a partnership proceeding rather than in separate proceedings with the partners. The Code requires that one partner be designated as the “Tax Matters Partner” for these purposes, and our partnership agreement designates our general partner.

The Tax Matters Partner will make some elections on our behalf and on behalf of common unitholders. In addition, the Tax Matters Partner can extend the statute of limitations for assessment of tax deficiencies against common unitholders for items in our returns. The Tax Matters Partner may bind a common unitholder with less than a 1% profits interest in us to a settlement with the IRS unless that common unitholder elects, by filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which all the common unitholders are bound, of a final partnership administrative adjustment and, if the Tax Matters Partner fails to seek judicial review, judicial review may be sought by any common unitholder having at least a 1% interest in profits or by any group of common unitholders having in the aggregate at least a 5% interest in profits. However, only one action for judicial review will go forward, and each common unitholder with an interest in the outcome may participate in that action.

A common unitholder must file a statement with the IRS identifying the treatment of any item on its federal income tax return that is not consistent with the treatment of the item on our return. Intentional or negligent disregard of this consistency requirement may subject a common unitholder to substantial penalties.

Additional Withholding Requirements

Withholding taxes may apply to certain types of payments made to “foreign financial institutions” (as specially defined in the Code) and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on interest, dividends and other fixed or determinable annual or periodical gains, profits and income from sources within the United States (“FDAP Income”), or gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States paid to a foreign financial institution or to a non-financial foreign entity, unless (i) the foreign financial institution undertakes certain diligence and reporting, (ii) the non-financial foreign entity either certifies it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner or (iii) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in clause (i) above, it must enter into an agreement with the U.S. Treasury requiring, among other things, that it undertake to identify accounts held by certain U.S. persons or U.S.-owned foreign entities, annually report

 

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certain information about such accounts, and withhold 30% on payments to non-compliant foreign financial institutions and certain other account holders.

Although these rules currently apply to applicable payments made after December 31, 2012, the IRS has issued proposed Treasury Regulations providing that the withholding provisions described above will generally apply to payments of FDAP Income made on or after January 1, 2014, and to payments of relevant gross proceeds made on or after January 1, 2015.

The proposed Treasury Regulations described above will not be effective until they are issued in their final form. It is not possible to determine whether the proposed regulations will be finalized in their current form or at all. Each prospective unitholder should consult its own tax advisor regarding the applicability of these withholding provisions to an investment in our common units.

Nominee Reporting

Persons who hold an interest in us as a nominee for another person are required to furnish to us:

(1) the name, address and taxpayer identification number of the beneficial owner and the nominee;

(2) a statement regarding whether the beneficial owner is:

(a) a non-U.S. person;

(b) a non-U.S. government, an international organization or any wholly owned agency or instrumentality of either of the foregoing; or

(c) a tax-exempt entity;

(3) the amount and description of units held, acquired or transferred for the beneficial owner; and

(4) specific information including the dates of acquisitions and transfers, means of acquisitions and transfers, and acquisition cost for purchases, as well as the amount of net proceeds from sales.

Brokers and financial institutions are required to furnish additional information, including whether they are U.S. persons and specific information on units they acquire, hold or transfer for their own account. A penalty of $100 per failure, up to a maximum of $1.5 million per calendar year, is imposed by the Code for failure to report that information to us. The nominee is required to supply the beneficial owner of the units with the information furnished to us.

Accuracy-Related Penalties

An additional tax equal to 20% of the amount of any portion of an underpayment of tax that is attributable to one or more specified causes, including negligence or disregard of rules or regulations, substantial understatements of income tax and substantial valuation misstatements, is imposed by the Code. No penalty will be imposed, however, for any portion of an underpayment if it is shown that there was a reasonable cause for the underpayment of that portion and that the taxpayer acted in good faith regarding the underpayment of that portion.

For individuals, a substantial understatement of income tax in any taxable year exists if the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return for the taxable year or $5,000 ($10,000 for most corporations). The amount of any understatement subject to penalty generally is reduced if any portion is attributable to a position adopted on the return:

(1) for which there is, or was, “substantial authority”; or

(2) as to which there is a reasonable basis and the relevant facts of that position are adequately disclosed on the return.

 

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If any item of income, gain, loss or deduction included in the distributive shares of common unitholders might result in that kind of an “understatement” of income for which no “substantial authority” exists, we must disclose the relevant facts on our return. In addition, we will make a reasonable effort to furnish sufficient information for common unitholders to make adequate disclosure on their returns and to take other actions as may be appropriate to permit common unitholders to avoid liability for this penalty. More stringent rules apply to “tax shelters,” which we do not believe includes us, or any of our investments, plans or arrangements.

A substantial valuation misstatement exists if (a) the value of any property, or the adjusted tax basis of any property, claimed on a tax return is 150% or more of the amount determined to be the correct amount of the valuation or adjusted tax basis, (b) the price for any property or services (or for the use of property) claimed on any such return with respect to any transaction between persons described in Code Section 482 is 200% or more (or 50% or less) of the amount determined under Section 482 to be the correct amount of such price, or (c) the net Code Section 482 transfer price adjustment for the taxable year exceeds the lesser of $5 million or 10% of the taxpayer’s gross receipts. No penalty is imposed unless the portion of the underpayment attributable to a substantial valuation misstatement exceeds $5,000 ($10,000 for a corporation other than an S corporation or a personal holding company). The penalty is increased to 40% in the event of a gross valuation misstatement. We do not anticipate making any valuation misstatements.

In addition, the 20% accuracy-related penalty also applies to any portion of an underpayment of tax that is attributable to transactions lacking economic substance. To the extent that such transactions are not disclosed, the penalty imposed is increased to 40%. Additionally, there is no reasonable cause defense to the imposition of this penalty to such transactions.

Reportable Transactions

If we were to engage in a “reportable transaction,” we (and possibly our common unitholders and others) would be required to make a detailed disclosure of the transaction to the IRS. A transaction may be a reportable transaction based upon any of several factors, including the fact that it is a type of tax avoidance transaction publicly identified by the IRS as a “listed transaction” or that it produces certain kinds of losses for partnerships, individuals, S corporations, and trusts in excess of $2 million in any single tax year, or $4 million in any combination of six successive tax years. Our participation in a reportable transaction could increase the likelihood that our federal income tax information return (and possibly our common unitholders’ tax return) would be audited by the IRS. Please read “—Information Returns and Audit Procedures.”

Moreover, if we were to participate in a reportable transaction with a significant purpose to avoid or evade tax, or in any listed transaction, our common unitholders may be subject to the following additional consequences:

 

   

accuracy-related penalties with a broader scope, significantly narrower exceptions, and potentially greater amounts than described above at “—Accuracy-Related Penalties”;

 

   

for those persons otherwise entitled to deduct interest on federal tax deficiencies, nondeductibility of interest on any resulting tax liability; and

 

   

in the case of a listed transaction, an extended statute of limitations.

We do not expect to engage in any “reportable transactions.”

 

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State, Local and Other Tax Considerations

In addition to federal income taxes, common unitholders will be subject to other taxes, including state and local income taxes, unincorporated business taxes, and estate, inheritance or intangibles taxes that may be imposed by the various jurisdictions in which we or WES conduct business or own property or in which the common unitholder is a resident. Moreover, we or WES may also own property or do business in other states in the future that impose income or similar taxes on nonresident individuals. Although an analysis of those various taxes is not presented here, each prospective common unitholder should consider their potential impact on its investment in us.

It is the responsibility of each common unitholder to investigate the legal and tax consequences, under the laws of pertinent states and localities, of its investment in us. Bingham McCutchen LLP has not rendered an opinion on the state, local, or non-U.S. tax consequences of an investment in us. We strongly recommend that each prospective common unitholder consult, and depend on, its own tax counsel or other advisor with regard to those matters. It is the responsibility of each common unitholder to file all tax returns that may be required of it.

 

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INVESTMENT IN OUR COMMON UNITS

BY EMPLOYEE BENEFIT PLANS

An investment in our common units by an employee benefit plan is subject to certain additional considerations because the investments of these plans are subject to the fiduciary responsibility and prohibited transaction provisions of the Employee Retirement Income Security Act of 1974, as amended, or ERISA, as well as the prohibited transaction restrictions imposed by Section 4975 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and may be subject to provisions under certain other laws or regulations that are similar to ERISA or the Internal Revenue Code (collectively, “Similar Laws”). As used herein, the term “employee benefit plan” includes, but is not limited to, qualified pension, profit-sharing, and stock bonus plans, certain Keogh plans, certain simplified employee pension plans, and tax-deferred annuities, IRAs and other arrangements established or maintained by an employer or employee organization, and entities whose underlying assets are considered to include “plan assets” of such plans, accounts and arrangements.

General Fiduciary Matters

ERISA and the Internal Revenue Code impose certain duties on persons who are fiduciaries of an employee benefit plan that is subject to Title I of ERISA or Section 4975 of the Internal Revenue Code (an “ERISA Plan”) and prohibit certain transactions involving the assets of an ERISA Plan and its fiduciaries or other interested parties. Under ERISA and the Internal Revenue Code, any person who exercises any discretionary authority or control over the administration of an ERISA Plan or the management or disposition of the assets of an ERISA Plan, or who renders investment advice for a fee or other compensation to an ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan. In considering an investment in our common units, among other things, consideration should be given to:

 

   

whether the investment is prudent under Section 404(a)(1)(B) of ERISA and any other applicable Similar Laws;

 

   

whether in making the investment, the employee benefit plan will satisfy the diversification requirements of Section 404(a)(1)(C) of ERISA and any other applicable Similar Laws;

 

   

whether the investment is permitted under the terms of the applicable documents governing the employee benefit plan;

 

   

whether making the investment will comply with the delegation of control and prohibited transaction provisions under Section 406 of ERISA, Section 4975 of the Internal Revenue Code and other applicable Similar Laws (see the discussion under “—Prohibited Transaction Issues” below);

 

   

whether in making the investment, the employee benefit plan will be considered to hold, as plan assets, (1) only the investment in our common units or (2) an undivided interest in our underlying assets (see the discussion under “—Plan Asset Issues” below); and

 

   

whether the investment will result in recognition of unrelated business taxable income by the employee benefit plan and, if so, the potential after-tax investment return. Please read “Material U.S. Federal Income Tax Consequences—Tax-Exempt Organizations and Other Investors.”

The person with investment discretion with respect to the assets of an employee benefit plan should determine whether an investment in our common units is authorized by the appropriate governing instruments and whether such investment is otherwise a proper investment for the employee benefit plan or IRA.

Prohibited Transaction Issues

Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibit employee benefit plans, and certain IRAs that are not considered part of an employee benefit plan, from engaging in specified transactions, referred to as prohibited transactions involving “plan assets” with parties that are “parties in interest” under ERISA or “disqualified persons” under the Internal Revenue Code with respect to the employee benefit plan or

 

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IRA, unless an exemption is applicable. A party in interest or disqualified person who engages in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Internal Revenue Code. In addition, the fiduciary of the ERISA Plan that engaged in such a prohibited transaction may be subject to excise taxes, penalties and liabilities under ERISA and the Internal Revenue Code.

Plan Asset Issues

In addition to considering whether the purchase of our common units is a prohibited transaction, a fiduciary of an employee benefit plan should consider whether the plan will, by investing in our common units, be deemed to own an undivided interest in our assets, with the result that our general partner also would be a fiduciary of the plan and our operations would be subject to the regulatory restrictions of ERISA, including its prohibited transaction rules, as well as the prohibited transaction rules of the Internal Revenue Code and any other applicable Similar Laws.

The Department of Labor regulations provide guidance with respect to whether the assets of an entity in which employee benefit plans acquire equity interests would be deemed “plan assets” under certain circumstances. Under these regulations, an entity’s underlying assets generally would not be considered to be “plan assets” if, among other things:

 

   

(a) the equity interests acquired by the employee benefit plan are “publicly offered securities”—i.e., the equity interests are part of a class of securities that are widely held by 100 or more investors independent of the issuer and each other, “freely transferable” (as defined in the applicable Department of Labor regulations), and either part of a class of securities registered pursuant to certain provisions of the federal securities laws or sold to the plan as part of a public offering under certain conditions;

 

   

(b) the entity is an “operating company”—i.e., it is primarily engaged in the production or sale of a product or service other than the investment of capital either directly or through a majority owned subsidiary or subsidiaries; or

 

   

(c) there is no significant investment by benefit plan investors, which is defined to mean that, immediately after the most recent acquisition of an equity interest in an entity by an employee benefit plan, less than 25% of the total value of each class of equity interest, disregarding certain interests held by our general partner, its affiliates, and certain other persons is held by employee benefit plans that are subject to part 4 of Title I of ERISA (which excludes governmental plans and non-electing church plans) and/or Section 4975 of the Internal Revenue Code and IRAs.

With respect to an investment in our common units, we believe that our assets should not be considered “plan assets” under these regulations because it is expected that the investment will satisfy the requirements in (a) and (b) above and may also satisfy the requirements in (c) above (although we do not monitor the level of investment by benefit plan investors as required for compliance with (c)).

The foregoing discussion of issues arising for employee benefit plan investments under ERISA, the Internal Revenue Code and applicable Similar Laws is general in nature and is not intended to be all inclusive, nor should it be construed as legal advice. In light of the complexity of these rules and the excise taxes, penalties and liabilities that may be imposed on persons involved in non-exempt prohibited transactions or other violations, plan fiduciaries contemplating a purchase of our common units should consult with their own counsel regarding the consequences of such purchase under ERISA, the Internal Revenue Code and Similar Laws.

 

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UNDERWRITING

Barclays Capital Inc. and Citigroup Global Markets Inc. are acting as the representatives of the underwriters and the joint book-running managers of this offering. Under the terms of an underwriting agreement, which will be filed as an exhibit to the registration statement, each of the underwriters named below has severally agreed to purchase from us the respective number of common units shown opposite its name below:

 

Underwriters    Number of
Common Units
 

Barclays Capital Inc.

  

Citigroup Global Markets Inc.

  
  

 

 

 

Total

     15,000,000   

The underwriting agreement provides that the underwriters’ obligation to purchase the common units depends on the satisfaction of the conditions contained in the underwriting agreement including:

 

   

the obligation to purchase all of the common units offered hereby (other than those common units covered by their option to purchase additional common units as described below), if any of the common units are purchased;

 

   

the representations and warranties made by us to the underwriters are true;

 

   

there is no material change in our business or the financial markets; and

 

   

we deliver customary closing documents to the underwriters.

Commissions and Expenses

The following table summarizes the underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional common units. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay to us for the common units.

 

     No
Exercise
   Full
Exercise

Per common unit

     

Total

     

We will pay a structuring fee equal to     % of the gross proceeds from this offering (including any proceeds from the exercise of the option to purchase additional common units) to Barclays Capital Inc. and Citigroup Global Markets Inc. for the evaluation, analysis and structuring of our partnership.

The representatives of the underwriters have advised us that the underwriters propose to offer the common units directly to the public at the public offering price on the cover of this prospectus and to selected dealers, which may include the underwriters, at such offering price less a selling concession not in excess of $         per common unit. After the offering, the representatives may change the offering price and other selling terms. Sales of common units made outside of the United States may be made by affiliates of the underwriters.

The expenses of the offering that are payable by us are estimated to be $         (excluding underwriting discounts and commissions and the structuring fee).

Option to Purchase Additional Common Units

We have granted the underwriters an option exercisable for 30 days after the date of the underwriting agreement, to purchase, from time to time, in whole or in part, up to an aggregate of 2,250,000 common units at the public offering price less underwriting discounts and commissions. This option may be exercised if the underwriters sell more than 15,000,000 common units in connection with this offering. To the extent that this

 

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option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional common units based on the underwriter’s underwriting commitment in the offering as indicated in the table at the beginning of this Underwriting Section.

Lock-Up Agreements

We, our general partner and certain of its affiliates and the directors and executive officers of our general partner have agreed that, without the prior written consent of each of Barclays Capital Inc. and Citigroup Global Markets Inc., we and they will not directly or indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any of our common units (including, without limitation, common units that may be deemed to be beneficially owned by us or them in accordance with the rules and regulations of the SEC and common units that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for common units, (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic consequences of ownership of the common units, (3) make any demand for or exercise any right or file or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any common units or securities convertible, exercisable or exchangeable into common units or any of our other securities, or (4) publicly disclose the intention to do any of the foregoing for a period of 180 days after the date of this prospectus.

Barclays Capital Inc. and Citigroup Global Markets Inc., in their sole discretion, may release the common units and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice. When determining whether or not to release common units and other securities from lock-up agreements, Barclays Capital Inc. and Citigroup Global Markets Inc. will consider, among other factors, the holder’s reasons for requesting the release, the number of common units and other securities for which the release is being requested and market conditions at the time.

As described below under “—Directed Unit Program,” any participants in the Directed Unit Program shall be subject to a 25-day lock up with respect to any common units sold to them pursuant to that program. This lock up will have similar restrictions and an identical extension provision as the lock-up agreement described above. Any common units sold in the Directed Unit Program to the directors or officers of our general partner shall be subject to the lock-up agreement described above.

Offering Price Determination

Prior to this offering, there has been no public market for our common units. The initial public offering price will be negotiated among the representatives and us. In determining the initial public offering price of our common units, the representatives will consider:

 

   

the history and prospects for the industry in which we compete;

 

   

our financial information;

 

   

the ability of our management and our business potential and earning prospects;

 

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the prevailing securities markets at the time of this offering; and

 

   

the recent market prices of, and the demand for, publicly traded common units of generally comparable companies.

Indemnification

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities incurred in connection with the directed unit program referred to below, and to contribute to payments that the underwriters may be required to make for these liabilities.

Directed Unit Program

At our request, the underwriters have reserved for sale at the initial public offering price up to                      common units offered hereby for officers, directors, employees and certain other persons associated with us. The number of common units available for sale to the general public will be reduced to the extent such persons purchase such reserved common units. Any reserved common units not so purchased will be offered by the underwriters to the general public on the same basis as the other common units offered hereby. Any participants in this program will be prohibited from selling, pledging or assigning any common units sold to them pursuant to this program for a period of 25 days after the date of the underwriting agreement. This 25-day lock up period shall be extended with respect to our issuance of an earnings release or if a material news or a material event relating to us occurs, in the same manner as described above under “—Lock-Up Agreements.”

Stabilization, Short Positions and Penalty Bids

The representatives may engage in stabilizing transactions, short sales and purchases to cover positions created by short sales, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common units, in accordance with Regulation M under the Securities Exchange Act of 1934:

 

   

Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

 

   

A short position involves a sale by the underwriters of common units in excess of the number of common units the underwriters are obligated to purchase in the offering, which creates the syndicate short position. This short position may be either a covered short position or a naked short position. In a covered short position, the number of common units involved in the sales made by the underwriters in excess of the number of common units they are obligated to purchase is not greater than the number of common units that they may purchase by exercising their option to purchase additional common units. In a naked short position, the number of common units involved is greater than the number of common units in their option to purchase additional common units. The underwriters may close out any short position by either exercising their option to purchase additional common units and/or purchasing common units in the open market. In determining the source of common units to close out the short position, the underwriters will consider, among other things, the price of common units available for purchase in the open market as compared to the price at which they may purchase common units through their option to purchase additional common units. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the common units in the open market after pricing that could adversely affect investors who purchase in the offering.

 

   

Syndicate covering transactions involve purchases of the common units in the open market after the distribution has been completed in order to cover syndicate short positions.

 

   

Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common units originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

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These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common units or preventing or retarding a decline in the market price of the common units. As a result, the price of the common units may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The NYSE or otherwise and, if commenced, may be discontinued at any time.

Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common units. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

Electronic Distribution

A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of common units for sale to online brokerage account holders. Any such allocation for online distributions will be made by the representatives on the same basis as other allocations.

Other than the prospectus in electronic format, the information on any underwriter’s or selling group member’s web site and any information contained in any other web site maintained by an underwriter or selling group member is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as underwriter or selling group member and should not be relied upon by investors.

New York Stock Exchange

We have applied to list our common units for quotation on the NYSE under the symbol “WGP.” The underwriters have undertaken to sell the common units in this offering to a minimum of 2,000 beneficial owners in round lots of 100 or more units to meet the NYSE distribution requirements for trading.

Discretionary Sales

The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the total number of common units offered by them.

Stamp Taxes

If you purchase common units offered by this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus.

Relationships

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. The underwriters and their affiliates have in the past, and may in the future, perform investment banking, commercial banking, advisory and other services for us and our respective affiliates from time to time for which they have received, and may in the future receive, customary fees and expenses.

 

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In addition, in the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investment and securities activities may involve securities and instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long or short positions in such securities and instruments.

FINRA

Because the Financial Industry Regulatory Authority, Inc. (“FINRA”), is expected to view the common units offered hereby as interests in a direct participation program, the offering is being made in compliance with Rule 2310 of the FINRA Rules. Investor suitability with respect to the common units should be judged similarly to the suitability with respect to other securities that are listed for trading on a national securities exchange.

Selling Restrictions

European Economic Area

In relation to each member state of the European Economic Area that has implemented the Prospectus Directive (each, a “relevant member state”), other than Germany, with effect from and including the date on which the Prospectus Directive is implemented in that relevant member state, an offer of securities described in this prospectus may not be made to the public in that relevant member state other than:

 

   

to any legal entity which is a qualified investor as defined in the Prospectus Directive;

 

   

to fewer than 100 or, if the relevant member state has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the relevant dealer or dealers nominated by the issuer for any such offer; or

 

   

in any other circumstances falling within Article 3(2) of the Prospectus Directive;

provided that no such offer of securities shall require us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive.

For purposes of this provision, the expression an “offer of securities to the public” in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the expression may be varied in that member state by any measure implementing the Prospectus Directive in that member state, and the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the relevant member state), and includes any relevant implementing measure in each relevant member state. The expression “2010 PD Amending Directive” means Directive 2010/73/EU.

We have not authorized and do not authorize the making of any offer of securities through any financial intermediary on their behalf, other than offers made by the underwriters with a view to the final placement of the securities as contemplated in this prospectus. Accordingly, no purchaser of the securities, other than the underwriters, is authorized to make any further offer of the securities on behalf of us or the underwriters.

United Kingdom

We may constitute a “collective investment scheme” as defined by section 235 of the Financial Services and Markets Act 2000, or FSMA, that is not a “recognized collective investment scheme” for the purposes of FSMA,

 

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or CIS, and that has not been authorized or otherwise approved. As an unregulated scheme, it cannot be marketed in the United Kingdom to the general public, except in accordance with FSMA. This prospectus is only being distributed in the United Kingdom to, and is only directed at:

(i) if we are a CIS and are marketed by a person who is an authorized person under FSMA, (a) investment professionals falling within Article 14(5) of the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001, as amended, or the CIS Promotion Order, or (b) high net worth companies and other persons falling within Article 22(2)(a) to (d) of the CIS Promotion Order; or

(ii) otherwise, if marketed by a person who is not an authorized person under FSMA, (a) persons who fall within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended, or Financial Promotion Order, or (b) Article 49(2)(a) to (d) of the Financial Promotion Order; and

(iii) in both cases (i) and (ii) to any other person to whom it may otherwise lawfully be made, (all such persons together being referred to as “relevant persons”). The common units are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such common units will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this prospectus or any of its contents.

An invitation or inducement to engage in investment activity (within the meaning of Section 21 of FSMA) in connection with the issue or sale of any common units which are the subject of the offering contemplated by this prospectus will only be communicated or caused to be communicated in circumstances in which Section 21(1) of FSMA does not apply to us.

Switzerland

This prospectus is being communicated in Switzerland to a small number of selected investors only. Each copy of this prospectus is addressed to a specifically named recipient and may not be copied, reproduced, distributed or passed on to third parties. The common units are not being offered to the public in Switzerland, and neither this prospectus, nor any other offering materials relating to the common units may be distributed in connection with any such public offering.

We have not been registered with the Swiss Financial Market Supervisory Authority FINMA as a foreign collective investment scheme pursuant to Article 120 of the Collective Investment Schemes Act of June 23, 2006, or the CISA. Accordingly, the common units may not be offered to the public in or from Switzerland, and neither this prospectus, nor any other offering materials relating to the common units may be made available through a public offering in or from Switzerland. The common units may only be offered and this prospectus may only be distributed in or from Switzerland by way of private placement exclusively to qualified investors (as this term is defined in the CISA and its implementing ordinance).

Germany

This document has not been prepared in accordance with the requirements for a securities or sales prospectus under the German Securities Prospectus Act (Wertpapierprospektgesetz), the German Sales Prospectus Act (Verkaufsprospektgesetz), or the German Investment Act (Investmentgesetz). Neither the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht—BaFin) nor any other German authority has been notified of the intention to distribute our common units in Germany. Consequently, our common units may not be distributed in Germany by way of public offering, public advertisement or in any similar manner and this document and any other document relating to the offering, as well as information or statements contained therein, may not be supplied to the public in Germany or used in connection with any offer for subscription of our common units to the public in Germany or any other means of public marketing. Our common units are being offered and sold in Germany only to qualified investors which are

 

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referred to in Section 3, paragraph 2 no. 1, in connection with Section 2, no. 6, of the German Securities Prospectus Act, Section 8f paragraph 2 no. 4 of the German Sales Prospectus Act, and in Section 2 paragraph 11 sentence 2 no. 1 of the German Investment Act. This document is strictly for use of the person who has received it. It may not be forwarded to other persons or published in Germany.

The offering does not constitute an offer to sell or the solicitation or an offer to buy our common units in any circumstances in which such offer or solicitation is unlawful.

Netherlands

Our common units may not be offered or sold, directly or indirectly, in the Netherlands, other than to qualified investors (gekwalificeerde beleggers) within the meaning of Article 1:1 of the Dutch Financial Supervision Act (Wet op het financieel toezicht).

 

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LEGAL MATTERS

The validity of the common units will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas, and the legal matters described under “Material U.S. Federal Income Tax Consequences” will be passed upon by Bingham McCutchen LLP, Washington, D.C. Certain legal matters in connection with the common units offered hereby will be passed upon for the underwriters by Latham & Watkins, LLP, Houston, Texas.

EXPERTS

The consolidated financial statements of Western Gas Equity Partners, LP as of December 31, 2011 and 2010, and for each of the years in the three-year period ended December 31, 2011, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-l regarding the common units. This prospectus does not contain all of the information found in the registration statement. For further information regarding us and the common units offered by this prospectus, you may desire to review the full registration statement, including its exhibits and schedules, filed under the Securities Act. The registration statement of which this prospectus forms a part, including its exhibits and schedules, may be inspected and copied at the public reference room maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of the materials may also be obtained from the SEC at prescribed rates by writing to the public reference room maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site on the Internet at http://www.sec.gov. Our registration statement, of which this prospectus constitutes a part, can be downloaded from the SEC’s web site.

We intend to furnish our unitholders annual reports containing our audited combined financial statements and to furnish or make available to our unitholders quarterly reports containing our unaudited interim financial information for the first three fiscal quarters of each of our fiscal years.

FORWARD-LOOKING STATEMENTS

We have made in this prospectus supplement and in the reports and documents incorporated by reference herein, and may from time to time otherwise make in other public filings, press releases and statements by our management, forward-looking statements concerning our operations, economic performance and financial condition. These forward-looking statements include statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions or variations on such expressions.

Although we and our general partner believe that the expectations reflected in such forward-looking statements are reasonable, neither we nor our general partner can give any assurance that such expectations will prove to have been correct. These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following:

 

   

our ability to pay distributions to our unitholders;

 

   

our expected receipt of distributions from WES;

 

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WES’s assumptions about the energy market;

 

   

WES’s future throughput, including Anadarko’s production, which is gathered or processed by or transported through its assets;

 

   

operating results;

 

   

competitive conditions;

 

   

technology;

 

   

the availability of capital resources to fund acquisitions, capital expenditures and other contractual obligations of WES, and WES’s ability to access those resources from Anadarko or through the debt or equity capital markets;

 

   

the supply of and demand for, and the price of oil, natural gas, NGLs and other products or services;

 

   

the weather;

 

   

inflation;

 

   

the availability of goods and services;

 

   

general economic conditions, either internationally or nationally, or in the jurisdictions in which we are doing business;

 

   

changes in environmental and safety regulation; environmental risks; regulations by FERC and liability under federal and state laws and regulations;

 

   

legislative or regulatory changes affecting our or WES’s status as a partnership for federal income tax purposes;

 

   

changes in the financial or operational condition of our sponsor, Anadarko;

 

   

changes in Anadarko’s capital program, strategy or desired areas of focus;

 

   

WES’s commitments to capital projects;

 

   

the ability of WES to utilize the WES RCF;

 

   

the creditworthiness of Anadarko or other WES counterparties, including financial institutions, operating partners and other parties;

 

   

our and WES’s ability to repay debt;

 

   

conflicts of interest between WES, its general partner and us and our general partner;

 

   

WES’s ability to maintain and/or obtain rights to operate our assets on land owned by third parties;

 

   

WES’s ability to acquire assets on acceptable terms; and

 

   

non-payment or non-performance of Anadarko or WES’s other significant customers, including under its gathering, processing and transportation agreements and its $260.0 million note receivable from Anadarko.

The risk factors and other factors incorporated by reference in this prospectus supplement could cause our actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

INDEX TO FINANCIAL STATEMENTS

 

Unaudited Pro Forma Condensed Consolidated Financial Statements:

 

Introduction

    F-2   

Unaudited Pro Forma Condensed Consolidated Statement of Income for the year ended December  31, 2011

    F-3   

Unaudited Pro Forma Condensed Consolidated Statement of Income for the nine months ended September 30, 2012

    F-4   

Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2012

    F-5   

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

    F-6   

Audited Consolidated Financial Statements:

 

Report of Independent Registered Public Accounting Firm

    F-7   

Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009

    F-8   

Consolidated Balance Sheets as of December 31, 2011 and 2010

    F-9   

Consolidated Statements of Equity and Partners’ Capital for the years ended December  31, 2011, 2010 and 2009

    F-10   

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

    F-11   

Notes to Consolidated Financial Statements

    F-12   

Unaudited Consolidated Financial Statements:

 

Consolidated Statements of Income for the nine months ended September 30, 2012 and 2011

    F-41   

Consolidated Balance Sheets as of September 30, 2012, and December 31, 2011

    F-42   

Consolidated Statement of Equity and Partners’ Capital for the nine months ended September  30, 2012

    F-43   

Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

    F-44   

Notes to Consolidated Financial Statements

    F-45   

 

F-1


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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

INTRODUCTION TO UNAUDITED PRO FORMA

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma condensed consolidated financial statements of Western Gas Equity Partners, LP for the year ended December 31, 2011, and as of and for the nine months ended September 30, 2012, should be read in conjunction with the accompanying notes, as well as with the historical consolidated financial statements and the notes thereto. For purposes of these unaudited pro forma condensed consolidated financial statements, “WGP” refers to Western Gas Equity Partners, LP and its consolidated subsidiaries, including Western Gas Partners, LP (together with its subsidiaries, “WES”) and Western Gas Holdings, LLC (individually as the general partner of WES, “WES GP”). “Anadarko” refers to Anadarko Petroleum Corporation and its consolidated subsidiaries, excluding WGP. “Affiliates” refers to wholly owned subsidiaries of Anadarko, excluding WGP.

These unaudited pro forma condensed consolidated financial statements are based upon the historical consolidated financial statements of WGP and have been prepared as if the transactions to be effected at the closing of WGP’s initial public offering occurred on September 30, 2012, in the case of the pro forma condensed consolidated balance sheet and as of January 1, 2011, in the case of the pro forma condensed consolidated statements of income for the year ended December 31, 2011, and for the nine months ended September 30, 2012.

Prior to its September 2012 conversion to a limited partnership legal form, WGP was WGR Holdings, LLC, a single-member limited liability company. The separate existence as a limited liability company is disregarded as a separate legal entity for U.S. federal income tax purposes. As such, WGR Holdings, LLC is treated as a division of Anadarko and included in Anadarko’s consolidated income tax return for federal and state tax purposes. After the conversion in September 2012, but before the closing of this offering, WGP will continue to be treated as a division of Anadarko and disregarded for U.S. federal income tax purposes. The unaudited pro forma condensed consolidated financial statements have been prepared based on the assumption that, upon WGP’s initial public offering, it will be treated as a partnership for U.S. federal and state income tax purposes and therefore will not be subject to U.S. federal income taxes and state income taxes, except for the Texas margin tax.

The pro forma financial adjustments, as discussed in detail in Note 2—Pro Forma Adjustments, are based on currently available information and certain assumptions and estimates; therefore, the actual financial effects of these transactions may differ from the pro forma financial adjustments. Notwithstanding, WGP management believes these estimates and assumptions provide a reasonable basis for the presentation of the significant financial effects of transactions that are expected to have a continuing impact on WGP. In addition, the management of WGP considers the pro forma financial adjustments factually supportable and representative of the expected impact of items that will occur as a result of the closing of WGP’s initial public offering. The pro forma financial adjustments do not include the effects of any exercise by the underwriters of their 30-day option to purchase up to 2,250,000 additional common units.

The unaudited pro forma condensed consolidated financial statements are not necessarily indicative of the results that would have occurred if WGP had completed the contemplated transactions at the closing of its initial public offering on the dates indicated, nor are they indicative of the future operating results of WGP.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 2011

(UNAUDITED)

 

thousands except unit and per-unit amounts   Western Gas
Equity Partners, LP
Historical
    Pro Forma
Adjustments
        Western Gas
Equity Partners, LP
Pro Forma
 

Revenues—affiliates

       

Gathering, processing and transportation of natural gas

  $ 217,852      $ —          $ 217,852  

Natural gas, natural gas liquids and condensate sales

    417,547        —            417,547  

Equity income and other, net

    13,598        —            13,598  
 

 

 

   

 

 

     

 

 

 

Total revenues—affiliates

    648,997        —            648,997  

Revenues—third parties

       

Gathering, processing and transportation of natural gas

    83,477        —            83,477  

Natural gas, natural gas liquids and condensate sales

    84,836        —            84,836  

Other, net

    5,955        —            5,955  
 

 

 

   

 

 

     

 

 

 

Total revenues—third parties

    174,268        —            174,268  
 

 

 

   

 

 

     

 

 

 

Total revenues

    823,265       —            823,265  
 

 

 

   

 

 

     

 

 

 

Operating expenses

       

Cost of product (1)

    327,371        —            327,371  

Operation and maintenance (1)

    119,104        —            119,104  

General and administrative (1)

    39,114        —            39,114   

Property and other taxes

    16,579        —            16,579  

Depreciation, amortization and impairments

    111,904        —            111,904  
 

 

 

   

 

 

     

 

 

 

Total operating expenses

    614,072        —            614,072   
 

 

 

   

 

 

     

 

 

 

Operating income

    209,193        —            209,193   

Interest income, net—affiliates

    28,560        —            28,560  

Interest expense (2)

    (30,345 )       —            (30,345

Other income (expense), net

    (44 )       —            (44
 

 

 

   

 

 

     

 

 

 

Income before income taxes

    207,364        —            207,364   

Income tax expense

    45,664        (26,646   (c)     19,018   
 

 

 

   

 

 

     

 

 

 

Net income

    161,700        26,646          188,346   

Net income attributable to WES public unitholders and other noncontrolling interests

    86,057        —            86,057  
 

 

 

   

 

 

     

 

 

 

Net income attributable to Western Gas Equity Partners, LP

  $ 75,643     $ 26,646       $ 102,289  
 

 

 

   

 

 

     

 

 

 

Limited Partners’ Interest in Net Income:

       

Net income attributable to Western Gas Equity
Partners, LP

        $ 102,289   

Pre-acquisition net income allocated to Anadarko (3)

          (34,084 )  
       

 

 

 

Limited partners’ interest in net income

        $ 68,205   

Net income per common unit—basic and diluted

        $     

Weighted average number of common units outstanding—basic and diluted

       

 

(1) 

Cost of product includes product purchases from Anadarko (as defined in the Introduction) of $83.7 million. Operation and maintenance includes charges from Anadarko of $51.3 million. Historical general and administrative includes charges from Anadarko of $31.9 million.

(2) 

Includes affiliate (as defined in the Introduction) interest expense of $4.9 million.

(3) 

Includes pre-acquisition net income representing the results attributable to the Bison and Mountain Gas Resources, LLC (“MGR”) assets prior to their acquisition by WES.

See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2012

(UNAUDITED)

 

thousands except unit and per-unit amounts   Western Gas
Equity Partners, LP
Historical
    Pro Forma
Adjustments
        Western Gas
Equity Partners, LP
Pro Forma
 

Revenues—affiliates

       

Gathering, processing and transportation of natural gas

  $ 170,461      $ —          $ 170,461   

Natural gas, natural gas liquids and condensate sales

    324,793        —            324,793   

Equity income and other, net

    12,219        —            12,219   
 

 

 

   

 

 

     

 

 

 

Total revenues—affiliates

    507,473        —            507,473   

Revenues—third parties

       

Gathering, processing and transportation of natural gas

    65,388        —            65,388   

Natural gas, natural gas liquids and condensate sales

    62,025        —            62,025   

Other, net

    1,717        —            1,717   
 

 

 

   

 

 

     

 

 

 

Total revenues—third parties

    129,130        —            129,130   
 

 

 

   

 

 

     

 

 

 

Total revenues

    636,603        —            636,603   
 

 

 

   

 

 

     

 

 

 

Operating expenses

       

Cost of product (1)

    254,719        —            254,719   

Operation and maintenance (1)

    97,041        —            97,041   

General and administrative (1)

    34,233        —            34,233   

Property and other taxes

    14,998        —            14,998   

Depreciation, amortization and impairments

    81,270        —            81,270   
 

 

 

   

 

 

     

 

 

 

Total operating expenses

    482,261        —            482,261   
 

 

 

   

 

 

     

 

 

 

Operating income

    154,342        —            154,342   

Interest income, net—affiliates

    12,675        —            12,675   

Interest expense (2)

    (30,118     —            (30,118

Other income (expense), net

    (287     —            (287
 

 

 

   

 

 

     

 

 

 

Income before income taxes

    136,612        —            136,612   

Income tax expense

    29,902        (29,203   (c)     699   
 

 

 

   

 

 

     

 

 

 

Net income

    106,710        29,203          135,913   

Net income attributable to WES public unitholders and other noncontrolling interests

    71,258        —            71,258   
 

 

 

   

 

 

     

 

 

 

Net income attributable to Western Gas Equity Partners, LP

  $ 35,452      $ 29,203        $ 64,655   
 

 

 

   

 

 

     

 

 

 

Limited Partners’ Interest in Net Income:

       

Net income attributable to Western Gas Equity Partners, LP

        $ 64,655   

Pre-acquisition net income allocated to Anadarko (3)

          —     
       

 

 

 

Limited partners’ interest in net income

        $ 64,655   

Net income per common unit—basic and diluted

        $     

Weighted average number of common units outstanding—basic and diluted

       

 

(1) 

Cost of product includes product purchases from Anadarko of $115.6 million. Operation and maintenance includes charges from Anadarko of $38.0 million. Historical general and administrative includes charges from Anadarko of $29.4 million.

(2) 

Includes affiliate interest expense of $2.7 million.

(3) 

Includes pre-acquisition net income representing the results attributable to the Bison and MGR assets prior to their acquisition by WES.

See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2012

(UNAUDITED)

 

thousands    Western Gas
Equity Partners, LP
Historical
     Pro Forma
Adjustments
         Western Gas
Equity Partners, LP
Pro Forma
 

ASSETS

          

Current Assets

          

Cash and cash equivalents

   $ 47,494       $ 300,000      (a)    $ 329,994   
        (17,500   (b)   

Accounts receivable, net

     21,359         —             21,359   

Other current assets (1)

     9,386         —             9,386   
  

 

 

    

 

 

      

 

 

 

Total current assets

     78,239         282,500           360,739   

Notes receivable—Anadarko

     260,000         —             260,000   

Property, plant and equipment

          

Cost

     3,014,825         —             3,014,825   

Less accumulated depreciation

     671,902         —             671,902   
  

 

 

    

 

 

      

 

 

 

Net property, plant and equipment

     2,342,923         —             2,342,923   

Goodwill and other intangible assets

     139,988         —             139,988   

Equity investments

     105,813         —             105,813   

Other assets

     26,981         —             26,981   
  

 

 

    

 

 

      

 

 

 

Total assets

   $ 2,953,944       $ 282,500         $ 3,236,444   
  

 

 

    

 

 

      

 

 

 

LIABILITIES, EQUITY AND PARTNERS’ CAPITAL

          

Current liabilities

          

Accounts and natural gas imbalance payables (2)

   $ 85,992       $ —           $ 85,992   

Accrued ad valorem taxes

     15,021         —             15,021   

Income taxes payable

     185         —             185   

Accrued liabilities (3)

     108,883         —             108,883   

Dividend payable—Anadarko (4)

     64,806         —             64,806   
  

 

 

    

 

 

      

 

 

 

Total current liabilities

     274,887         —             274,887   

Long-term debt—third parties

     1,010,435         —             1,010,435   

Deferred income taxes

     446,045         (444,658   (c)      1,387   

Dividend payable—Anadarko (4)

     11,245         —             11,245   

Asset retirement obligations and other

     69,722         —             69,722   
  

 

 

    

 

 

      

 

 

 

Total long-term liabilities

     1,537,447         (444,658        1,092,789   
  

 

 

    

 

 

      

 

 

 

Total liabilities

     1,812,334         (444,658        1,367,676   

Equity and partners’ capital

          

Net investment by Anadarko

     108,978         444,658      (c)      —     
        (553,636   (d)   

Common unitholders—public

     —           300,000      (a)      282,500   
        (17,500   (b)   

Common unitholders—Anadarko

     —           553,636      (d)      553,636   

Noncontrolling interests

     1,032,632         —             1,032,632   
  

 

 

    

 

 

      

 

 

 

Total equity and partners’ capital

     1,141,610         727,158           1,868,768   
  

 

 

    

 

 

      

 

 

 

Total liabilities, equity and partners’ capital

   $ 2,953,944       $ 282,500         $ 3,236,444   
  

 

 

    

 

 

      

 

 

 

 

(1) 

Other current assets includes natural gas imbalance receivables from affiliates of $0.4 million.

(2) 

Accounts and natural gas imbalance payables includes amounts payable to affiliates of $68.3 million.

(3) 

Accrued liabilities includes amounts payable to affiliates of $19.0 million.

(4) 

Associated with the Western Gas Holdings, LLC Equity Incentive Plan, as amended and restated.

See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited pro forma condensed consolidated financial statements are based on the historical consolidated financial statements of Western Gas Equity Partners, LP and present the impact of transactions to be effected at the closing of its initial public offering as if such transactions occurred on September 30, 2012, in the case of the pro forma condensed consolidated balance sheet and as of January 1, 2011, in the case of the pro forma condensed consolidated statements of income for the year ended December 31, 2011, and for the nine months ended September 30, 2012. Refer to the Introduction to these unaudited pro forma condensed consolidated financial statements for discussion regarding the conversion of WGR Holdings, LLC to Western Gas Equity Partners, LP.

Upon completion of this offering, Western Gas Equity Partners, LP anticipates incurring incremental general and administrative expenses of approximately $3.0 million per year as a result of becoming a publicly traded partnership, including expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; and registrar and transfer agent fees. The unaudited pro forma condensed consolidated financial statements do not reflect these incremental general and administrative expenses.

2. PRO FORMA ADJUSTMENTS

The following pro forma adjustments are included in the Western Gas Equity Partners, LP unaudited pro forma condensed consolidated financial statements:

 

  a) The assumed gross proceeds to Western Gas Equity Partners, LP for the sale of 15,000,000 common units at an assumed initial public price of $             per common unit.

 

  b) The payment of underwriting discounts and structuring fee of an aggregate of $16.5 million, together with estimated offering expenses of $1.0 million, for a total of $17.5 million.

 

  c) The elimination of historical current and deferred income taxes as a result of the conversion of WGR Holdings, LLC to a limited partnership for tax purposes. Texas margin taxes have not been eliminated and will continue to be borne by Western Gas Equity Partners, LP subsequent to the closing of this offering.

 

  d) The conversion of adjusted net investment by Anadarko to partners’ capital of the limited partnership.

3. PRO FORMA NET INCOME PER COMMON UNIT

Pro forma basic and diluted net income per common unit is calculated by dividing the limited partners’ interest in net income by the number of common units expected to be outstanding at the closing of the offering. Pro forma net income per common unit is calculated assuming that pro forma cash distributions are equal to the pro forma net income attributable to Western Gas Equity Partners, LP. Pro forma net income attributable to Western Gas Equity Partners, LP for periods prior to the acquisition of assets from Anadarko, through WGP’s partnership interests in WES, is not allocated to the limited partners of WGP for purposes of calculating pro forma net income per common unit. As a result, pre-acquisition net income, representing the results attributable to the Bison assets and MGR assets prior to their acquisition by WES, has been excluded from pro forma net income attributable to Western Gas Equity Partners, LP for purposes of pro forma net income per common unit in these accompanying pro forma condensed consolidated financial statements.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Anadarko Petroleum Corporation:

We have audited the accompanying consolidated balance sheets of Western Gas Equity Partners, LP (the Partnership) and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, equity and partners’ capital, and cash flows for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western Gas Equity Partners, LP and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Houston, Texas

September 14, 2012

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

CONSOLIDATED STATEMENTS OF INCOME

 

    Year Ended December 31,  
thousands   2011     2010     2009  

Revenues—affiliates

     

Gathering, processing and transportation of natural gas and natural gas liquids

  $ 217,852      $ 192,286      $ 181,477   

Natural gas, natural gas liquids and condensate sales

    417,547        369,903        330,855   

Equity income and other, net

    13,598        9,439        9,518   
 

 

 

   

 

 

   

 

 

 

Total revenues—affiliates

    648,997        571,628        521,850   

Revenues—third parties

     

Gathering, processing and transportation of natural gas and natural gas liquids

    83,477        60,987        64,989   

Natural gas, natural gas liquids and condensate sales

    84,836        26,134        30,790   

Other, net

    5,955        4,525        2,135   
 

 

 

   

 

 

   

 

 

 

Total revenues—third parties

    174,268        91,646        97,914   
 

 

 

   

 

 

   

 

 

 

Total revenues

    823,265        663,274        619,764   
 

 

 

   

 

 

   

 

 

 

Operating expenses

     

Cost of product (1)

    327,371        246,476        238,874   

Operation and maintenance (1)

    119,104        103,887        106,590   

General and administrative (1)

    39,114        29,640        33,171   

Property and other taxes

    16,579        14,273        14,173   

Depreciation, amortization and impairments

    111,904        91,010        90,692   
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    614,072        485,286        483,500   
 

 

 

   

 

 

   

 

 

 

Operating income

    209,193        177,988        136,264   

Interest income, net—affiliates

    28,560        20,243        20,717   

Interest expense (2)

    (30,345 )       (18,794 )       (9,955 )  

Other income (expense), net

    (44 )       (538 )       1,628   
 

 

 

   

 

 

   

 

 

 

Income before income taxes

    207,364        178,899        148,654   

Income tax expense

    45,664        51,464        39,667   
 

 

 

   

 

 

   

 

 

 

Net income

    161,700        127,435        108,987   

Net income attributable to WES public unitholders and other noncontrolling interests

    86,057        63,495        36,772   
 

 

 

   

 

 

   

 

 

 

Net income attributable to Western Gas Equity Partners, LP

  $ 75,643      $ 63,940      $ 72,215   
 

 

 

   

 

 

   

 

 

 

 

(1) 

Cost of product includes product purchases from Anadarko (as defined in Note 1) of $83.7 million, $95.7 million and $95.0 million for the years ended December 31, 2011, 2010 and 2009, respectively. Operation and maintenance includes charges from Anadarko of $51.3 million, $46.4 million and $41.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. General and administrative includes charges from Anadarko of $31.9 million, $23.8 million and $27.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. See Note 5.

(2) 

Includes affiliate (as defined in Note 1) interest expense of $4.9 million, $6.9 million and $9.1 million for years ended December 31, 2011, 2010 and 2009, respectively. See Note 11.

See accompanying Notes to Consolidated Financial Statements.

 

F-8


Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

CONSOLIDATED BALANCE SHEETS

 

      December 31,  
thousands    2011      2010  

ASSETS

     

Current assets

     

Cash and cash equivalents

   $ 226,559       $ 27,074   

Accounts receivable, net (1)

     22,703         11,607   

Other current assets (2)

     7,186         5,944   
  

 

 

    

 

 

 

Total current assets

     256,448         44,625   

Note receivable—Anadarko

     260,000         260,000   

Plant, property and equipment

     

Cost

     2,638,013         2,239,808   

Less accumulated depreciation

     585,789         486,046   
  

 

 

    

 

 

 

Net property, plant and equipment

     2,052,224         1,753,762   

Goodwill and other intangible assets

     134,994         82,136   

Equity investments

     109,817         114,462   

Other assets

     24,143         8,109   
  

 

 

    

 

 

 

Total assets

   $ 2,837,626       $ 2,263,094   
  

 

 

    

 

 

 

LIABILITIES, EQUITY AND PARTNERS’ CAPITAL

     

Current liabilities

     

Accounts and natural gas imbalance payables (3)

   $ 26,588       $ 17,058   

Accrued ad valorem taxes

     8,186         6,262   

Income taxes payable

     495         160   

Accrued liabilities (4)

     41,315        28,240  

Dividend payable—Anadarko (5)

     35,638        6,979  
  

 

 

    

 

 

 

Total current liabilities

     112,222         58,699   

Long-term debt—third parties

     494,178         299,000   

Note payable—Anadarko

     175,000         175,000   

Deferred income taxes

     513,100         491,680   

Dividend payable—Anadarko (5)

     9,003        7,558  

Asset retirement obligations and other

     67,169         48,499  
  

 

 

    

 

 

 

Total long-term liabilities

     1,258,450         1,021,737   
  

 

 

    

 

 

 

Total liabilities

     1,370,672         1,080,436   

Partners’ capital

     528,873         369,837   

Noncontrolling interests

     938,081        812,821   
  

 

 

    

 

 

 

Total equity and partners’ capital

     1,466,954         1,182,658   
  

 

 

    

 

 

 

Total liabilities, equity and partners’ capital

   $ 2,837,626       $ 2,263,094   
  

 

 

    

 

 

 

 

(1) 

Accounts receivable, net includes amounts receivable from affiliates (as defined in Note 1) of zero and $1.8 million as of December 31, 2011 and 2010, respectively.

(2) 

Other current assets includes natural gas imbalance receivables from affiliates of $0.5 million and zero as of December 31, 2011 and 2010, respectively.

(3) 

Accounts and natural gas imbalance payables includes amounts payable to affiliates of $5.9 million and $1.5 million as of December 31, 2011 and 2010, respectively.

(4) 

Accrued liabilities includes amounts payable to affiliates of $0.3 million and $0.6 million as of December 31, 2011 and 2010, respectively.

(5) 

Associated with the Equity Incentive Plan. See Note 6.

See accompanying Notes to Consolidated Financial Statements.

 

F-9


Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

CONSOLIDATED STATEMENTS OF EQUITY AND PARTNERS’ CAPITAL

 

thousands    Partners’
Capital
    Noncontrolling
Interests
    Total  

Balance at December 31, 2008

   $ 1,084,795     $ 358,099     $ 1,442,894  

Net income

     72,215       36,772       108,987  

Dividend payable—Anadarko (1)

     (667     —          (667

WES equity transactions, net (3)

     —          113,468       113,468  

Contributions from noncontrolling interest owners and Anadarko

     20,544       19,718       40,262  

Distributions to noncontrolling interest owners and Anadarko

     (2,926 )     (30,688     (33,614

Acquisition from affiliates

     (101,451 )     —          (101,451

Net contributions from (distributions to) Anadarko

     (160,750 )     —          (160,750

Non-cash equity-based compensation and other

     (589     342        (247
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

   $ 911,171     $ 497,711     $ 1,408,882  

Net income

     63,940       63,495       127,435  

Dividend payable—Anadarko (1)

     (11,371     —          (11,371

WES equity transactions, net (3)

     —          304,351       304,351   

Contributions from noncontrolling interest owners and
Anadarko

     —          2,053       2,053  

Distributions to noncontrolling interest owners and Anadarko

     —          (55,079     (55,079

Acquisitions from affiliates

     (734,780     —          (734,780

Net contributions from (distributions to) Anadarko

     (85,853     —          (85,853

Contribution of other assets from Anadarko

     10,715       —          10,715  

Elimination of net deferred tax liabilities

     214,464       —          214,464  

Non-cash equity-based compensation and other

     1,551        290        1,841   
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

   $ 369,837     $ 812,821      $ 1,182,658  

Net income

     75,643       86,057       161,700  

Dividend payable—Anadarko (1)

     (30,101     —          (30,101

Conversion of subordinated units (2)

     160,407        (160,407     —     

WES equity transactions, net (3)

     31,623        255,289       286,912   

Contributions from noncontrolling interest owners and Anadarko

     —          33,637       33,637  

Distributions to noncontrolling interest owners and Anadarko

     —          (89,557     (89,557

Acquisition from affiliates

     (25,000     —          (25,000

Contributions of equity-based compensation to WES by Anadarko

     9,689       (23     9,666  

Net contributions from (distributions to) Anadarko

     (84,724     —          (84,724

Contributions of other assets from Anadarko

     29       —          29  

Elimination of net deferred tax liabilities

     22,072       —          22,072  

Non-cash equity-based compensation and other

     (602     264        (338
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 528,873     $ 938,081      $ 1,466,954  
  

 

 

   

 

 

   

 

 

 

 

(1) 

Associated with the Equity Incentive Plan. See Note 6.

(2) 

Includes $93.6 million of tax associated with WES equity transactions that occurred prior to the one-for-one conversion of WES subordinated units to common units in August 2011. See Note 4.

(3) 

Includes the impact of WES’s public equity offerings and units issued in connection with acquisitions of assets from Anadarko as described in Note 2. Partners’ capital and noncontrolling interest include $18.4 million and $23.0 million, respectively, of tax associated with WES equity transactions for the year ended December 31, 2011. Noncontrolling interests include $34.1 million and $6.6 million of tax associated with WES equity transactions for the years ended December 31, 2010 and 2009, respectively. The $31.6 million increase to partners’ capital, together with net income attributable to Western Gas Equity Partners, LP totaled $107.3 million for the year ended December 31, 2011.

See accompanying Notes to Consolidated Financial Statements.

 

F-10


Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  
thousands    2011     2010     2009  

Cash flows from operating activities

      

Net income

   $ 161,700      $ 127,435      $ 108,987   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation, amortization and impairments

     111,904        91,010        90,692   

Deferred income taxes

     (24,699 )       (3,068 )       (8,785 )  

Changes in assets and liabilities:

      

(Increase) decrease in accounts receivable, net

     (881 )       424        2,669   

Increase (decrease) in accounts and natural gas imbalance payables and accrued liabilities, net

     23,092        2,734        (14,267 )  

Change in other items, net

     2,106        2,796        7,126   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     273,222        221,331        186,422   

Cash flows from investing activities

      

Capital expenditures

     (142,946 )       (138,000     (121,295

Acquisitions from affiliates

     (28,837 )       (734,780     (101,451

Acquisitions from third parties

     (301,957 )       (18,047 )       —     

Investments in equity affiliates

     (93 )       (310 )       (382 )  

Proceeds from sale of assets to affiliates

     382        2,805        —     

Proceeds from sale of assets to third parties

     500        2,825        —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (472,951 )       (885,507     (223,128

Cash flows from financing activities

      

Borrowings, net of debt issuance costs

     1,055,939        660,000        101,451   

Repayments of debt

     (869,000 )       (361,000     (101,451

Revolving credit facility issuance costs

     —          (12 )       (4,263 )  

Proceeds from issuance of WES common and general partner units, net of offering expenses

     328,345        338,483        120,080   

Contributions from noncontrolling interest owners and Anadarko

     33,637        2,053        40,262   

Distributions to noncontrolling interest owners and Anadarko

     (89,557 )       (55,079 )       (33,614 )  

Net contributions from (distributions to) Anadarko

     (60,150 )       36,821        (51,849
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     399,214        621,266        70,616   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     199,485        (42,910 )       33,910   

Cash and cash equivalents at beginning of period

     27,074        69,984        36,074   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 226,559      $ 27,074      $ 69,984   
  

 

 

   

 

 

   

 

 

 
      

Supplemental disclosures

      

Elimination of net deferred tax liabilities

   $ (46,121   $ 52,743      $ (115,209

Dividend payable—Anadarko

   $ 30,101      $ 11,371      $ 667   

Contribution of assets from Anadarko

   $ 29      $ 7,827      $ —     

Increase (decrease) in accrued capital expenditures

   $ 5,402      $ 5,218      $ 13,390   

Interest paid

   $ 25,828      $ 16,497      $ 9,372   

Interest received

   $ 16,900      $ 16,900      $ 16,900   

Taxes paid

   $ 190      $ 507      $ —     

See accompanying Notes to Consolidated Financial Statements.

 

F-11


Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General. Western Gas Equity Partners, LP is a Delaware limited partnership formed in September 2012 to own three types of partnership interests in Western Gas Partners, LP, a publicly traded partnership. Western Gas Partners, LP (together with its subsidiaries, “WES”) is a Delaware master limited partnership formed by Anadarko Petroleum Corporation (NYSE: APC) in 2007 to own, operate, acquire and develop midstream energy assets. WES closed its initial public offering to become publicly traded in 2008. Western Gas Equity Partners, LP was formed by converting WGR Holdings, LLC into a limited partnership and changing its name.

For purposes of these consolidated financial statements, “WGP” refers to Western Gas Equity Partners, LP and its consolidated subsidiaries, including Western Gas Holdings, LLC and WES. The “General Partner” or “WES GP” refers to Western Gas Holdings, LLC, individually as the general partner of WES, and excludes WES itself. “Anadarko” or “Parent” refers to Anadarko Petroleum Corporation and its consolidated subsidiaries, excluding WGP. “Affiliates” refers to wholly owned and partially owned subsidiaries of Anadarko, excluding WGP, and includes the interests in Fort Union Gas Gathering, LLC (“Fort Union”), White Cliffs Pipeline, LLC (“White Cliffs”) and Rendezvous Gas Services, LLC (“Rendezvous”).

The three types of partnership interests in WES owned by WGP are as follows: (i) a 2.0% general partner interest in WES, through a consolidated subsidiary, WES GP; (ii) all of the incentive distribution rights in WES, which entitle WGP to receive increasing percentages, up to the maximum level of 48.0%, of any incremental cash distributed by WES as certain target distribution levels are reached in any quarter; and (iii) 100% of the non-public limited partner interest in WES. WES GP owns a 2.0% general partner interest in WES, which constitutes substantially all of its business, which primarily is to manage the affairs and operations of WES. Refer to Note 4 for a discussion on Anadarko’s holdings of WES equity.

WES is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, NGLs and crude oil for Anadarko, as well as third-party producers and customers. Including the effect of the acquisition of Mountain Gas Resources, LLC (“MGR”), as described in Note 2, the assets of WGP, through its partnership interests in WES, include thirteen gathering systems, seven natural gas treating facilities, ten natural gas processing facilities, two NGL pipelines, one interstate gas pipeline, one intrastate gas pipeline, and three separate interests in Fort Union, White Cliffs and Rendezvous, which are accounted for under the equity method. These assets are located in East and West Texas, the Rocky Mountains (Colorado, Utah and Wyoming), and the Mid-Continent (Kansas and Oklahoma).

Basis of presentation. The accompanying consolidated financial statements of WGP have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The consolidated financial statements include the accounts of WGP and entities in which it holds a controlling financial interest. Investments in non-controlled entities over which WES, or WGP through its investment in WES, exercises significant influence are accounted for under the equity method. All significant intercompany transactions have been eliminated. The information furnished herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the consolidated financial statements.

The consolidated financial results of WES are included in WGP’s financial statements due to WGP’s 100% ownership interest in WES GP and WES GP’s control of WES. Throughout these notes to consolidated financial statements, and to the extent material, any differences between the consolidated financial results of WGP and WES are identified as those of WGP as a standalone parent and its subsidiaries, excluding WES.

 

F-12


Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

WGP has no independent operations or material assets other than its partnership interests in WES. WGP’s consolidated financial statements differ from those of WES primarily as a result of: (i) the presentation of noncontrolling interest ownership in WGP (attributable to the publicly held limited partner interests in WES), (ii) the elimination of WES GP’s investment in WES with WES GP’s underlying capital account and (iii) the recognition of the liabilities for awards issued pursuant to the Western Gas Holdings, LLC Equity Incentive Plan, as amended and restated (see Note 6). Refer to Income Taxes within this Note 1 for a description of the accounting for income taxes in the accompanying consolidated financial statements of WGP.

WGP noncontrolling interests. The interests in Chipeta Processing LLC (“Chipeta”), held by Anadarko and a third-party member, and the publicly held limited partner interests in WES are reflected as noncontrolling interests in the consolidated financial statements for all periods presented.

Chipeta. In July 2009, WES acquired a 51% interest in Chipeta and became party to Chipeta’s limited liability company agreement, as amended and restated (the “Chipeta LLC agreement”) (see Notes 2 and 3). As of December 31, 2011, Chipeta is owned 51% by WES, 24% by Anadarko and 25% by a third-party member. See Note 13.

WES. During the second quarter of 2008, WES completed its initial public offering of 20.8 million common units (representing a 38.4% limited partner interest) for net proceeds of $315.2 million ($343.4 million less $28.2 million for underwriting discounts and other offering expenses). Concurrent with WES’s initial public offering, Anadarko contributed assets to WES in exchange for an aggregate 59.6% initial limited partner interest (consisting of common and subordinated units) in WES, a 2% general partner interest and incentive distribution rights. All proceeds from the sale of the common units to the public were reported as noncontrolling interests in the consolidated balance sheet, including $160.4 million, net of tax of $93.6 million, transferred to partners’ capital when the WES subordinated units converted to common units in August 2011. Refer to Note 4 for a discussion of the WES subordinated unit conversion.

The difference between WGP’s carrying value of its investment in WES and the underlying book value of common units issued by WES is accounted for as an equity transaction. Thus, subsequent to the expiration of the subordination period, if WES issues common units at a price different than WGP’s per-unit carrying value, any resulting premium or discount is reflected as an adjustment to partners’ capital.

Presentation of WES assets. References to “WES assets,” as of December 31, 2011, refer to the assets indirectly owned by WGP through its partnership interests in WES, including the effect of the acquisition of MGR as described in Note 2. Because Anadarko controls WES through its ownership and control of WES GP, WES’s acquisition of assets from Anadarko is considered a transfer of net assets between entities under common control (see Note 2). As a result of common control asset acquisitions, WES, and WGP by virtue of its consolidation of WES, may be required to recast its financial statements to include the activities of the newly acquired commonly controlled assets as of the date of common control.

The consolidated financial statements for periods prior to the acquisition of the WES assets, the results for which are included within these consolidated financial statements for all periods presented, have been prepared from Anadarko’s historical cost-basis accounts and may not necessarily be indicative of the actual results of operations that would have occurred if WES had owned the assets during the periods reported.

Use of estimates. In preparing financial statements in accordance with GAAP, management makes informed judgments and estimates that affect the amounts reported in the consolidated financial statements and the notes

 

F-13


Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

thereto. Management evaluates its estimates and related assumptions regularly, utilizing historical experience and other methods considered reasonable under the circumstances. Changes in facts and circumstances or additional information, may result in revised estimates and actual results may differ from these estimates. Effects on the business, financial condition and results of operations resulting from revisions to estimates are recognized when the facts that give rise to the revision become known.

Fair value. The fair-value-measurement standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard characterizes inputs used in determining fair value according to a hierarchy that prioritizes inputs based on the degree to which they are observable. The three levels of the fair value hierarchy are as follows:

Level 1—Inputs represent quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).

Level 3—Inputs that are not observable from objective sources, such as management’s internally developed assumptions used in pricing an asset or liability (for example, an estimate of future cash flows used in management’s internally developed present value of future cash flows model that underlies the fair value measurement).

Nonfinancial assets and liabilities initially measured at fair value include certain assets and liabilities acquired in a third-party business combination, assets and liabilities exchanged in non-monetary transactions, long-lived assets (asset groups), goodwill and other intangibles, initial recognition of asset retirement obligations, and initial recognition of environmental obligations assumed in a third-party acquisition. Impairment analyses for long-lived assets, goodwill and other intangibles, and the initial recognition of asset retirement obligations and environmental obligations use Level 3 inputs. When WES is required to measure fair value, and there is not a market-observable price for the asset or liability or a market-observable price for a similar asset or liability, WES utilizes the cost, income, or market valuation approach depending on the quality of information available to support management’s assumptions.

The fair value of debt is the estimated amount that WES would have to pay to repurchase its debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on quoted market prices for identical instruments, if available, or average valuations of similar debt instruments at the balance sheet date. See Note 11.

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable reported on the consolidated balance sheets approximate fair value due to the short-term nature of these items.

Cash equivalents. WES considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Bad-debt reserve. WES revenues are primarily from Anadarko, for which no credit limit is maintained. WES analyzes its exposure to bad debt on a customer-by-customer basis for its third-party accounts receivable

 

F-14


Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

and may establish credit limits for significant third-party customers. At December 31, 2011 and 2010, third-party accounts receivable are shown net of the associated bad-debt reserve of $17,000.

Natural gas imbalances. The consolidated balance sheets include natural gas imbalance receivables and payables resulting from differences in gas volumes received into the WES systems and gas volumes delivered by WES to its customers. Natural gas volumes owed to or by WES that are subject to monthly cash settlement are valued according to the terms of the contract as of the balance sheet dates, and reflect market index prices. Other natural gas volumes owed to or by WES are valued at the weighted average cost of natural gas as of the balance sheet dates and are settled in-kind. As of December 31, 2011, natural gas imbalance receivables and payables were approximately $2.3 million and $3.1 million, respectively. As of December 31, 2010, natural gas imbalance receivables and payables were approximately $0.4 million and $2.6 million, respectively. Changes in natural gas imbalances are reported in equity income and other, net or cost of product in the consolidated statements of income.

Inventory. The cost of NGLs inventories is determined by the weighted average cost method on a location-by-location basis. Inventory is stated at the lower of weighted-average cost or market value and is reported in other current assets in the consolidated balance sheets.

Property, plant and equipment. Property, plant and equipment are generally stated at the lower of historical cost less accumulated depreciation or at fair value, if impaired. Because acquisitions of assets from Anadarko are transfers of net assets between entities under common control, the assets acquired from Anadarko are initially recorded at Anadarko’s historic carrying value. The difference between the carrying value of net assets acquired from Anadarko and the consideration paid is recorded as an adjustment to equity and partners’ capital.

Assets acquired in a business combination or non-monetary exchange with a third party are initially recorded at fair value. All construction-related direct labor and material costs are capitalized. The cost of renewals and betterments that extend the useful life of property, plant and equipment is also capitalized. The cost of repairs, replacements and major maintenance projects that do not extend the useful life or increase the expected output of property, plant and equipment is expensed as incurred.

Depreciation is computed over the asset’s estimated useful life using the straight-line method or half-year convention method, based on estimated useful lives and salvage values of assets. Uncertainties that may impact these estimates include, but are not limited to, changes in laws and regulations relating to environmental matters, including air and water quality, restoration and abandonment requirements, economic conditions and supply and demand in the area. When assets are placed into service, management makes estimates with respect to useful lives and salvage values. However, subsequent events could cause a change in estimates, thereby impacting future depreciation amounts.

Management evaluates the ability to recover the carrying amount of its long-lived assets to determine whether its long-lived assets have been impaired. Impairments exist when the carrying amount of an asset exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. When alternative courses of action to recover the carrying amount of a long-lived asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the long-lived asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset’s carrying amount over its estimated fair value, such that the asset’s carrying amount is adjusted to its estimated fair value with an offsetting charge to impairment expense.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

During the year ended December 31, 2011, an impairment of $7.3 million was recognized for certain equipment and materials. The costs of the equipment and materials, previously capitalized as assets under construction and related to a Red Desert complex (see Note 2) expansion project, were deemed no longer recoverable as the expansion project was indefinitely postponed by Anadarko management. Subsequent to the project evaluation and impairment, the remaining fair value of the equipment and materials, approximately $10.6 million, was reclassified from within property, plant and equipment to other assets on the consolidated balance sheet as of December 31, 2011. Also during 2011, following an evaluation of future cash flows, an impairment of $3.0 million was recognized for a transportation pipeline. This asset was impaired to fair value, estimated using Level 3 fair-value inputs.

During the year ended December 31, 2010, an impairment of $0.6 million was recognized related to a compressor sold during the year to a third party, and $0.3 million of impairment due to cancelled capital projects and additional costs recorded on a project previously impaired to salvage value. During the year ended December 31, 2009, an impairment of $6.1 million was recognized for an idle pipeline for which no future cash flows were expected.

Capitalized interest. Interest is capitalized as part of the historical cost of constructing assets for significant projects that are in progress. Capitalized interest is determined by multiplying WES’s weighted-average borrowing cost on debt by the average amount of qualifying costs incurred. Once the construction of an asset subject to interest capitalization is completed and the asset is placed in service, the associated capitalized interest is expensed through depreciation or impairment, together with other capitalized costs related to that asset.

Goodwill and other intangible assets. Goodwill represents the allocated portion of Anadarko’s midstream goodwill attributed to the assets WGP, through its partnership interests in WES, acquired from Anadarko. The carrying value of Anadarko’s midstream goodwill represents the excess of the purchase price of an entity over the estimated fair value of the identifiable assets acquired and liabilities assumed by Anadarko. Accordingly, the goodwill balance does not reflect, and in some cases is significantly different than, the difference between the consideration WES paid for its acquisitions from Anadarko and the fair value of the net assets on the acquisition date. The consolidated balance sheets as of December 31, 2011 and 2010, include goodwill of $82.1 million, none of which is deductible for tax purposes.

Goodwill is evaluated for impairment annually, as of October 1, or more often as facts and circumstances warrant. The first step in the goodwill impairment test is to compare the fair value of each reporting unit to which goodwill has been assigned to the carrying amount of net assets, including goodwill, of the respective reporting unit. WES has allocated goodwill on its two reporting units: (i) gathering and processing and (ii) transportation. If the carrying amount of the reporting unit exceeds its fair value, step two in the goodwill impairment test requires goodwill to be written down to its implied fair value through a charge to operating expense based on a hypothetical purchase price allocation. No goodwill impairment has been recognized in the accompanying consolidated financial statements. The carrying value of goodwill after such an impairment would represent a Level 3 fair value measurement.

WES assesses intangible assets, as described in Note 9, for impairment together with related underlying long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairments exist when the carrying amount of an asset exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. When alternative courses of action to recover the carrying amount of a long-lived asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

amount of the long-lived asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset’s carrying amount over its estimated fair value such that the asset’s carrying amount is adjusted to its estimated fair value with an offsetting charge to operating expense. No intangible asset impairment has been recognized in the accompanying consolidated financial statements.

Equity-method investments. The following table presents the activity of WES’s equity investments in Fort Union, White Cliffs and Rendezvous:

 

      Equity Investments  
thousands    Fort Union (1)     White Cliffs (2)     Rendezvous (3)  

Balance at December 31, 2009

   $ 20,060      $ 1,284      $ 78,216   

Investment earnings, net of amortization

     5,723        917        988   

Contributions

     310        —          —     

Distributions

     (4,665 )       (1,270 )       (5,038 )  

Acquisition of additional 9.6% interest from third party

     —          18,047        —     

Other

     —          —          (110 )  
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

   $ 21,428      $ 18,978      $ 74,056   

Investment earnings, net of amortization

     6,067        4,023        1,171   

Contributions

     —          93        —     

Distributions

     (5,227 )       (5,384 )       (5,388 )  
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 22,268      $ 17,710      $ 69,839   
  

 

 

   

 

 

   

 

 

 

 

(1) 

WES has a 14.81% interest in Fort Union, a joint venture which owns a gathering pipeline and treating facilities in the Powder River Basin. Anadarko is the construction manager and physical operator of the Fort Union facilities. Certain business decisions, including, but not limited to, decisions with respect to significant expenditures or contractual commitments, annual budgets, material financings, dispositions of assets or amending the owners’ firm gathering agreements, require 65% or unanimous approval of the owners. Each of the joint venture members has pledged its respective equity interest to the administrative agent of Fort Union’s credit agreement.

(2) 

WES has a 10% interest in White Cliffs, a limited liability company which owns a crude oil pipeline that originates in Platteville, Colorado and terminates in Cushing, Oklahoma and became operational in June 2009. The third-party majority owner is the manager of the White Cliffs operations. Certain business decisions, including, but not limited to, approval of annual budgets and decisions with respect to significant expenditures, contractual commitments, acquisitions, material financings, dispositions of assets or admitting new members, require more than 75% approval of the members.

(3) 

WES has a 22% interest in Rendezvous, a limited liability company that operates gas gathering facilities in southwestern Wyoming. Certain business decisions, including, but not limited to, decisions with respect to significant expenditures or contractual commitments, annual budgets, material financings, dispositions of assets or amending the members’ gas servicing agreements, require unanimous approval of the members.

The investment balance at December 31, 2011, includes $2.7 million and $47.9 million for the purchase price allocated to the investment in Fort Union and Rendezvous, respectively, in excess of the historic cost basis of Western Gas Resources, Inc. (entity that owned the interests in Fort Union and Rendezvous, which Anadarko acquired in August 2006). This excess balance is attributable to the difference between the fair value and book value of their gathering and treating facilities (at the time Western Gas Resources, Inc. was acquired by Anadarko) and is being amortized over the remaining estimated useful life of those facilities.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The White Cliffs investment balance at December 31, 2011, is $10.4 million less than WES’s underlying equity in White Cliffs’ net assets as of December 31, 2011, primarily due to WES recording the acquisition of its initial 0.4% interest in White Cliffs at Anadarko’s historic carrying value. This difference is being amortized to equity income over the remaining estimated useful life of the White Cliffs pipeline.

Management evaluates its equity-method investments for impairment whenever events or changes in circumstances indicate that the carrying value of such investments may have experienced a decline in value that is other than temporary. When evidence of loss in value has occurred, management compares the estimated fair value of the investment to the carrying value of the investment to determine whether the investment has been impaired. Management assesses the fair value of equity-method investments using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third-party comparable sales and discounted cash flow models. If the estimated fair value is less than the carrying value, the excess of the carrying value over the estimated fair value is recognized as an impairment loss.

Asset retirement obligations. Management recognizes a liability based on the estimated costs of retiring tangible long-lived assets. The liability is recognized at fair value, measured using discounted expected future cash outflows for the asset retirement obligation when the obligation originates, which generally is when an asset is acquired or constructed. The carrying amount of the associated asset is increased commensurate with the liability recognized. Over time, the discounted liability is accreted through accretion expense to its expected settlement value. Subsequent to the initial recognition, the liability is also adjusted for any changes in the expected value of the retirement obligation (with a corresponding adjustment to property, plant and equipment) until the obligation is settled. Revisions in estimated asset retirement obligations may result from changes in estimated inflation rates, discount rates, asset retirement costs and the estimated timing of settling asset retirement obligations. See Note 10.

Environmental expenditures. WES expenses environmental expenditures related to conditions caused by past operations that do not generate current or future revenues. Environmental expenditures related to operations that generate current or future revenues are expensed or capitalized, as appropriate. Liabilities are recorded when the necessity for environmental remediation or other potential environmental liabilities becomes probable and the costs can be reasonably estimated. Accruals for estimated losses from environmental remediation obligations are recognized no later than at the time of the completion of the remediation feasibility study. These accruals are adjusted as additional information becomes available or as circumstances change. Costs of future expenditures for environmental-remediation obligations are not discounted to their present value. See Note 12.

Segments. Because WGP reflects its ownership interest in WES on a consolidated basis, and has no independent operations or material assets outside those of WES, WGP’s segment analysis and presentation is the same as WES. WES’s operations are organized into a single operating segment, the assets of which consist of natural gas, NGLs and crude oil gathering and processing systems, treating facilities, pipelines and related plants and equipment.

Revenues and cost of product. Under its fee-based gathering, treating and processing arrangements, WES is paid a fixed fee based on the volume and thermal content of natural gas and recognizes revenues for its services in the month such services are performed. Producers’ wells are connected to WES’s gathering systems for delivery of natural gas to the processing or treating plants, where the natural gas is processed to extract NGLs and condensate or treated in order to satisfy pipeline specifications. In some areas, where no processing is required, the producers’ gas is gathered and delivered to pipelines for market delivery. Under percent-of-proceeds contracts, revenue is recognized when the natural gas, NGLs or condensate are sold and the related purchases are recorded as a percentage of the product sale.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

WES purchases natural gas volumes at the wellhead for gathering and processing. As a result, WES has volumes of NGLs and condensate to sell and volumes of residue gas to either sell, to use for system fuel or to satisfy keep-whole obligations. In addition, depending upon specific contract terms, condensate and NGLs recovered during gathering and processing are either returned to the producer or retained and sold. Under keep-whole contracts, when condensate or NGLs are retained and sold, producers are kept whole for the condensate or NGL volumes through the receipt of a thermally equivalent volume of residue gas. The keep-whole contract conveys an economic benefit to WES when the combined value of the individual NGLs is greater in the form of liquids than as a component of the natural gas stream; however, WES is adversely impacted when the value of the NGLs is lower as liquids than as a component of the natural gas stream. Revenue is recognized from the sale of condensate and NGLs upon transfer of title and related purchases are recorded as cost of product.

WES earns transportation revenues through firm contracts that obligate each of its customers to pay a monthly reservation or demand charge regardless of the pipeline capacity used by that customer. An additional commodity usage fee is charged to the customer based on the actual volume of natural gas transported. Transportation revenues are also generated from interruptible contracts pursuant to which a fee is charged to the customer based on volumes transported through the pipeline. Revenues for transportation of natural gas and NGLs are recognized over the period of firm transportation contracts or, in the case of usage fees and interruptible contracts, when the volumes are received into the pipeline. From time to time, certain revenues may be subject to refund pending the outcome of rate matters before the Federal Energy Regulatory Commission (the “FERC”) and reserves are established where appropriate.

Proceeds from the sale of residue gas, NGLs and condensate are reported as revenues from natural gas, natural gas liquids and condensate in the consolidated statements of income. Revenues attributable to the fixed-fee component of gathering and processing contracts as well as demand charges and commodity usage fees on transportation contracts are reported as revenues from gathering, processing and transportation of natural gas and natural gas liquids in the consolidated statements of income.

Equity-based compensation. Grants made under equity-based compensation plans result in equity-based compensation expense, which is determined by reference to the fair value of equity compensation. For equity-based awards ultimately settled through the issuance of units or stock, the fair value is measured as of the date of the relevant equity grant. For liability-based awards issued and ultimately settled in cash, the fair value of the relevant equity grant is revised periodically based on the estimated fair value of WES GP using a discounted cash flow estimate and multiples-valuation terminal value. See Note 6.

Income taxes. Prior to its September 2012 conversion to a limited partnership legal form, WGP was WGR Holdings, LLC, a single-member Delaware limited liability company treated as a division of Anadarko and disregarded for U.S. federal income tax purposes. As such, WGR Holdings, LLC is included in Anadarko’s consolidated income tax return for federal and state income tax purposes. In addition to WES’s historic Texas margin tax expense and liabilities, the accompanying consolidated financial statements of WGP include income tax expense and liabilities incurred by WGR Holdings, LLC, computed on a separate-return basis.

Deferred federal and state income taxes included in the accompanying consolidated financial statements are attributable to temporary differences between the financial statement carrying amount and tax basis of WGP’s investment in WES. WGP’s accounting policy is to “look through” its investment in WES for purposes of calculating deferred income tax asset and liability balances attributable to WGP’s partnership interests in WES. The application of such accounting policy resulted in no deferred income taxes being recognized for the book and tax basis difference in WES goodwill, which is non-deductible for tax purposes for all periods presented.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Other assets. For all periods presented, other assets on the consolidated balance sheets include a $0.7 million receivable recognized in conjunction with the capital lease component of a processing agreement assumed in connection with the MGR acquisition. The agreement, in which WES is the lessor, extends through November 2014. Other assets also includes $4.6 million related to the unguaranteed residual value of the processing plant included in the processing agreement, based on a measurement of fair value estimated when the plant was acquired by Anadarko in 2006. Interest income related to the capital lease is recorded to other income (expense), net on the accompanying consolidated statements of income.

Recently issued accounting standard not yet adopted. In September 2011, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) that permits an initial assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount for goodwill impairment testing purposes. Thus, determining a reporting unit’s fair value is not required unless, as a result of the qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than its carrying amount. This ASU is effective prospectively beginning January 1, 2012. Adoption of this ASU will have no impact on the accompanying consolidated financial statements.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACQUISITIONS

The following table presents the acquisitions completed by WES during the years ended December 31, 2011, 2010 and 2009, and identifies the funding sources for such acquisitions:

 

thousands except unit and percent amounts    Acquisition
Date
     Percentage
Acquired
    Borrowings      Cash
On Hand
     WES
Common
Units Issued
     WES
GP Units
Issued
 

Chipeta (1)

     07/01/09         51   $ 101,451      $ 4,638        351,424        7,172  

Granger (2)

     01/29/10         100     210,000        31,680        620,689        12,667  

Wattenberg (3)

     08/02/10         100     450,000        23,100        1,048,196        21,392  

White Cliffs (4)

     09/28/10         10     —           38,047        —           —     

Platte Valley (5)

     02/28/11         100     303,000        602        —           —     

Bison (6)

     07/08/11         100     —           25,000        2,950,284        60,210  

 

(1) 

The assets acquired from Anadarko include a 51% membership interest in Chipeta, together with an associated NGL pipeline. These assets provide processing and transportation services in the Greater Natural Buttes area in Uintah County, Utah. Chipeta owns a natural gas processing plant with two processing trains: a refrigeration unit and a cryogenic unit. In addition, in November 2009, Chipeta acquired the Natural Buttes plant including a compressor station and processing plant from a third party for $9.1 million, of which $4.5 million was contributed by the noncontrolling interest owners to fund their proportionate share. The 51% membership interest in Chipeta and associated NGL pipeline are referred to collectively as the “Chipeta assets” and the acquisition is referred to as the “Chipeta acquisition.”

(2) 

The assets acquired from Anadarko include (i) the Granger gathering system with related compressors and other facilities, and (ii) the Granger complex, consisting of cryogenic trains, a refrigeration train, an NGLs fractionation facility and ancillary equipment. These assets, located in southwestern Wyoming, are referred to collectively as the “Granger assets” and the acquisition as the “Granger acquisition.”

(3) 

The assets acquired from Anadarko include the Wattenberg gathering system and related facilities, including the Fort Lupton processing plant. These assets, located in the Denver-Julesburg Basin, north and east of Denver, Colorado, are referred to collectively as the “Wattenberg assets” and the acquisition as the “Wattenberg acquisition.”

(4) 

White Cliffs owns a crude oil pipeline that originates in Platteville, Colorado and terminates in Cushing, Oklahoma, which became operational in June 2009. The acquisition of the 0.4% interest in White Cliffs and related purchase option from Anadarko combined with the acquisition of an additional 9.6% interest in White Cliffs from a third party, are referred to collectively as the “White Cliffs acquisition.” The membership interest in White Cliffs is referred to as the “White Cliffs investment.”

(5) 

The assets acquired from a third party include (i) a natural gas gathering system and related compression and other ancillary equipment, and (ii) cryogenic gas processing facilities. These assets, located in the Denver-Julesburg Basin, are referred to collectively as the “Platte Valley assets” and the acquisition as the “Platte Valley acquisition.” See further information below, including the final allocation of the purchase price in August 2011.

(6) 

The Bison gas treating facility acquired from Anadarko is located in the Powder River Basin in northeastern Wyoming, and includes (i) three amine treating units, (ii) compressor units, and (iii) generators. These assets are referred to collectively as the “Bison assets” and the acquisition as the “Bison acquisition.” The Bison assets are the only treating and delivery point into the third-party-owned Bison pipeline. Anadarko began construction of the Bison assets in 2009 and placed them in service in June 2010. See further information below.

Platte Valley acquisition. The Platte Valley acquisition has been accounted for under the acquisition method of accounting. The Platte Valley assets and liabilities were recorded in the consolidated balance sheet at their

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACQUISITIONS (CONTINUED)

 

estimated fair values as of the acquisition date. Results of operations attributable to the Platte Valley assets were included in the consolidated statements of income beginning on the acquisition date in the first quarter of 2011.

The table below reflects the final allocation of the purchase price, including a $1.6 million adjustment to intangible assets recorded in August 2011, to the assets acquired and liabilities assumed in the Platte Valley acquisition:

 

thousands       

Property, plant and equipment

   $ 264,521  

Intangible assets

     53,754  

Asset retirement obligations and other liabilities

     (16,318
  

 

 

 

Total purchase price

   $ 301,957  
  

 

 

 

The purchase price allocation is based on an assessment of the fair value of the assets acquired and liabilities assumed in the Platte Valley acquisition, after consideration of post-closing purchase price adjustments. The fair values of the plant and processing facilities, related equipment, and intangible assets acquired were based on the market, cost and income approaches. The liabilities assumed include certain amounts associated with environmental contingencies estimated by management. All fair-value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and thus represent Level 3 inputs. For more information regarding the intangible assets presented in the table above, see Note 9.

The following table presents the pro forma condensed financial information as if the Platte Valley acquisition had occurred on January 1, 2011:

 

thousands    Year Ended
December 31, 2011
 

Revenues

   $ 839,304  

Net income

     164,426   

Net income attributable to Western Gas Equity Partners, LP

     78,369   

The pro forma information is presented for illustration purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisition been completed at the assumed date, nor is it necessarily indicative of future operating results of the combined entity. Pro forma information in the table above includes $83.4 million of revenues and $59.1 million of operating expenses, excluding depreciation, amortization and impairments, attributable to the Platte Valley assets that are included in the consolidated statement of income for the year ended December 31, 2011. The pro forma adjustments reflect pre-acquisition results of the Platte Valley assets for January and February 2011, including (a) estimated revenues and expenses; (b) estimated depreciation and amortization based on the purchase price allocated to property, plant and equipment and other intangible assets and estimated useful lives; (c) elimination of $0.7 million of acquisition-related costs; and (d) interest on the WES borrowings under its revolving credit facility to finance the Platte Valley acquisition. The pro forma adjustments include estimates and assumptions based on currently available information. Management believes the estimates and assumptions are reasonable, and the relative effects of the transactions are properly reflected. The pro forma information does not reflect any cost savings or other synergies anticipated as a result of the acquisition, nor does it reflect any future acquisition related expenses. Pro forma information is not presented for periods ended on or before December 31, 2010, as it is not practical to determine revenues and cost of product for periods prior to January 1, 2011, the effective date of the gathering and processing agreement with the seller.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACQUISITIONS (CONTINUED)

 

MGR acquisition. On January 13, 2012, WES completed the acquisition of Anadarko’s 100% ownership interest in MGR which owns the Red Desert complex, a 22% interest in Rendezvous and related facilities, effective January 1, 2012. The Red Desert complex includes the Patrick Draw processing plant, the Red Desert processing plant, 1,295 miles of gathering lines and related facilities. Rendezvous owns a 338-mile mainline gathering system serving the Jonah and Pinedale Anticline fields in southwestern Wyoming, which delivers gas to the Granger complex and other locations. These assets are referred to collectively as the “MGR assets” and the acquisition as the “MGR acquisition.” Consideration paid includes: (i) $159.6 million of cash on hand, (ii) $299.0 million borrowings on WES’s senior unsecured revolving credit facility, and (iii) the issuance of 632,783 WES common units and 12,914 WES GP units.

3. WES DISTRIBUTIONS

WES’s partnership agreement requires it to distribute all of its available cash (as defined in WES’s partnership agreement) to unitholders of record on the applicable record date within 45 days of the end of each quarter. WES declared the following cash distributions to its unitholders, including distributions to WGP, for the periods presented (see also Note 13):

 

thousands except per-unit amounts

Quarters Ended

   Total Quarterly
Distribution
per Unit
     Total Cash
Distribution
     Date of
Distribution

2009

        

March 31

   $ 0.300      $ 17,030      May 2009

June 30

   $ 0.310      $ 17,718      August 2009

September 30

   $ 0.320      $ 18,289      November 2009

December 31

   $ 0.330      $ 21,393      February 2010

2010

        

March 31

   $ 0.340      $ 22,042      May 2010

June 30

   $ 0.350      $ 24,378      August 2010

September 30

   $ 0.370      $ 26,381      November 2010

December 31

   $ 0.380      $ 30,564      February 2011

2011

        

March 31

   $ 0.390      $ 33,168      May 2011

June 30

   $ 0.405      $ 36,063      August 2011

September 30

   $ 0.420      $ 40,323      November 2011

December 31 (1)

   $ 0.440      $ 43,027      February 2012

 

(1) 

On January 18, 2012, the board of directors of WES GP declared a cash distribution to WES unitholders of $0.44 per unit, or $43.0 million in aggregate, including incentive distributions. The cash distribution was paid on February 13, 2012, to unitholders of record at the close of business on February 1, 2012.

Available cash. The amount of available cash (as defined in WES’s partnership agreement) generally is all cash on hand at the end of the quarter, plus, at the discretion of WES GP, working capital borrowings made subsequent to the end of such quarter, less the amount of cash reserves established by WES GP to provide for the proper conduct of WES’s business, including reserves to fund future capital expenditures, to comply with applicable laws, debt instruments or other agreements (such as the Chipeta LLC agreement), or to provide funds for distributions to its unitholders and to WES GP for any one or more of the next four quarters. Working capital borrowings generally include borrowings made under a credit facility or similar financing arrangement. It is intended that working capital borrowings be repaid within 12 months. In all cases, working capital borrowings are used solely for working capital purposes or to fund distributions to partners.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3. WES DISTRIBUTIONS (CONTINUED)

 

General partner interest in WES and incentive distribution rights. WES GP is currently entitled to 2.0% of all quarterly distributions made by WES. WES GP is entitled to incentive distributions if the amount distributed by WES with respect to any quarter exceeds specified target levels shown below:

 

    

Total Quarterly Distribution
Target Amount

   Marginal Percentage
Interest in Distributions
 
      Unitholders     General Partner  

Minimum quarterly distribution

   $0.300      98.0     2.0

First target distribution

   up to $0.345      98.0     2.0

Second target distribution

   above $0.345 up to $0.375      85.0     15.0

Third target distribution

   above $0.375 up to $0.450      75.0     25.0

Thereafter

   above $0.450      50.0     50.0

The table above assumes that WES GP maintains its 2.0% general partner interest, that there are no arrearages on WES common units, and that WES GP continues to own the incentive distribution rights. The maximum distribution sharing percentage of 50.0% includes distributions paid to WES GP on its 2.0% general partner interest and does not include any distributions that it may receive on WES common units that it owns or may acquire.

4. EQUITY AND PARTNERS’ CAPITAL

Holdings of WES equity. WES’s common units are listed on the New York Stock Exchange under the symbol “WES.” As of December 31, 2011, Anadarko, through its ownership of WGP, indirectly held 1,839,613 general partner units of WES, representing a 2.0% general partner interest in WES, 39,789,221 common units representing a 43.3% limited partner interest in WES, and 100% of WES’s incentive distribution rights. The public held 50,351,778 WES common units, representing a 54.7% interest in WES. See Note 13.

Equity offerings. WES completed the following public offerings of its common units during 2009, 2010 and 2011 (see also Note 13):

 

thousands except unit and per-unit amounts    WES
Common
Units Issued (2)
     WES GP
Units (3)
     Price Per
Unit
     Underwriting
Discount and
Other Offering
Expenses
     Net
Proceeds to
WES
 

December 2009 equity offering

     6,900,000         140,817       $ 18.20      $ 5,500      $ 122,539   

May 2010 equity offering (1)

     4,558,700         93,035         22.25        4,427        99,074   

November 2010 equity offering

     8,415,000         171,734         29.92        10,325        246,729   

March 2011 equity offering

     3,852,813         78,629         35.15        5,621        132,569   

September 2011 equity offering

     5,750,000         117,347         35.86        7,655        202,748   

 

(1) 

Refers collectively to the May 2010 equity offering issuance, and the June 2010 exercise of the underwriters’ over-allotment option.

(2) 

Includes the issuance of 900,000 WES common units, 558,700 WES common units, 915,000 WES common units, 302,813 WES common units and 750,000 WES common units pursuant to the exercise, in full or in part, of the underwriters’ over-allotment options granted in connection with the December 2009, May 2010, November 2010, March 2011 and September 2011 equity offerings, respectively.

(3) 

Represents general partner units of WES issued to WES GP in exchange for WES GP’s proportionate capital contribution to maintain its 2.0% general partner interest.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4. EQUITY AND PARTNERS’ CAPITAL (CONTINUED)

 

Conversion of WES subordinated units. Concurrent with the closing of the WES initial public offering in 2008, Anadarko contributed the initial assets of WES in exchange for a 2.0% general partnership interest in WES, 5,725,431 common units of WES, 26,536,306 subordinated units of WES, and 100% of the incentive distribution rights. Based on the terms of WES’s partnership agreement, the subordination period ends after WES has earned and paid at least $1.20 (the minimum quarterly distribution on an annualized basis) on each outstanding common and subordinated unit of WES, as well as the corresponding distribution on WES GP’s 2.0% interest for each of three consecutive, non-overlapping four quarter periods ending on or after June 30, 2011. From its inception through June 30, 2011, WES paid equal distributions per unit on its common, subordinated and general partner units. Upon payment of the cash distribution for the second quarter of 2011 by WES, the financial requirements for the conversion of all subordinated units were satisfied. As a result, the 26,536,306 subordinated units of WES were converted on August 15, 2011, on a one-for-one basis, into WES common units. Upon the conversion, $160.4 million, net of tax of $93.6 million, related to pre-conversion changes in WGP’s ownership interest in WES was transferred from noncontrolling interests to partners’ capital. The conversion did not impact the amount of the cash distribution paid or the total number of WES’s outstanding units representing limited partner interests.

5. TRANSACTIONS WITH AFFILIATES

Affiliate transactions. Revenues from affiliates include amounts earned by WES from services provided to Anadarko as well as from the sale of residue gas, condensate and NGLs to Anadarko. In addition, WES purchases natural gas from an affiliate of Anadarko pursuant to gas purchase agreements. Operating and maintenance expense includes amounts accrued for or paid to affiliates for the operation of the WES assets, whether in providing services to affiliates or to third parties, including field labor, measurement and analysis, and other disbursements. A portion of WES’s general and administrative expenses is paid by Anadarko, which results in affiliate transactions pursuant to the reimbursement provisions of the WES omnibus agreement. Affiliate expenses do not bear a direct relationship to affiliate revenues, and third-party expenses do not bear a direct relationship to third-party revenues. See Note 2 for further information related to contributions of assets to WES by Anadarko.

Cash management. Anadarko operates a cash management system whereby excess cash from most of its subsidiaries (including WGP), held in separate bank accounts, is generally swept to centralized accounts. Prior to the acquisitions of the WES assets, third-party sales and purchases related to such assets were received or paid in cash by Anadarko within its centralized cash management system. Anadarko charged or credited WES interest at a variable rate on outstanding affiliate balances for the periods these balances remained outstanding. The outstanding affiliate balances were entirely settled through an adjustment to equity and partners’ capital in connection with the acquisition of the WES assets. Subsequent to the acquisition of the WES assets, transactions related to such assets are cash settled directly with third parties and with Anadarko affiliates, and affiliate-based interest expense on current intercompany balances is not charged. Chipeta cash settles its transactions directly with third parties and Anadarko, as well as with the other subsidiaries of WES.

Note receivable from and note payable to Anadarko. In May 2008, WES loaned $260.0 million to Anadarko in exchange for a 30-year note bearing interest at a fixed annual rate of 6.50%, payable quarterly. The fair value of the note receivable from Anadarko was approximately $303.7 million and $258.9 million at December 31, 2011 and 2010, respectively. The fair value of the note reflects consideration of credit risk and any premium or discount for the differential between the stated interest rate and quarter-end market interest rate, based on quoted market prices of similar debt instruments.

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

 

In December 2008, WES entered into a term loan agreement with Anadarko, discussed further in Note 11. Also see Note 13 for transactions occurring subsequent to December 31, 2011.

Commodity price swap agreements. WES has commodity price swap agreements with Anadarko to mitigate exposure to commodity price volatility that would otherwise be present as a result of the purchase and sale of natural gas, condensate or NGLs. Notional volumes for each of the swap agreements are not specifically defined; instead, the commodity price swap agreements apply to the actual volume of natural gas, condensate and NGLs purchased and sold at the Hilight, Hugoton, Newcastle, Granger and Wattenberg assets, with various expiration dates through September 2015. In December 2011, WES extended the commodity price swap agreements for the Hilight and Newcastle assets through December 2013. The commodity price swap agreements do not satisfy the definition of a derivative financial instrument and, therefore, are not required to be re-measured at fair value. See Note 13 for commodity price swap agreements entered into in December 2011, related to the MGR acquisition, with forward-starting effective dates beginning January 2012.

Below is a summary of the fixed price ranges on WES’s outstanding commodity price swap agreements as of December 31, 2011:

 

per barrel except natural gas    Year Ended December 31,  
   2012      2013      2014      2015  

Ethane

   $ 18.21              29.78      $ 18.32              30.10      $ 18.36              30.53      $ 18.41      

Propane

   $ 45.23              53.28      $ 45.90              55.84      $ 46.47              52.37      $ 47.08      

Isobutane

   $ 57.50              67.22      $ 60.44              68.11      $ 61.24              69.23      $ 62.09      

Normal butane

   $ 52.40              62.92      $ 53.20              66.37      $ 53.89              64.78      $ 54.62      

Natural gasoline

   $ 69.77              85.15      $ 70.89              92.23      $ 71.85              79.74      $ 72.88      

Condensate

   $ 72.73              78.52      $ 74.04              83.93      $ 75.22              79.56      $ 76.47              78.61  

Natural gas (per MMbtu)

   $ 4.15              5.97      $ 3.75              6.09      $ 5.32              6.20      $ 5.50              5.96  

The following table summarizes realized gains and losses on WES’s commodity price swap agreements as reflected in the consolidated financial statements:

 

      Year Ended December 31,  
thousands    2011     2010     2009  

Gains (losses) on commodity price swap agreements related to sales: (1)

      

Natural gas sales

   $ 33,845     $ 20,200     $ 18,446  

Natural gas liquids sales

     (36,802     2,953       2,196  
  

 

 

   

 

 

   

 

 

 

Total

     (2,957     23,153       20,642  

Losses on commodity price swap agreements related to purchases (2)

     (27,234     (23,344     (16,538
  

 

 

   

 

 

   

 

 

 

Net gains (losses) on commodity price swap agreements

   $ (30,191   $ (191   $ 4,104  
  

 

 

   

 

 

   

 

 

 

 

(1) 

Reported in affiliate natural gas, NGLs and condensate sales in the consolidated statements of income in the period in which the related sale is recorded.

(2) 

Reported in cost of product in the consolidated statements of income in the period in which the related purchase is recorded.

Gas gathering and processing agreements. WES has significant gas gathering and processing arrangements with affiliates of Anadarko on a majority of its systems. Approximately 75%, 73% and 76% of WES’s gathering, transportation and treating throughput (excluding equity investment throughput) for the years ended

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

 

December 31, 2011, 2010 and 2009, respectively, was attributable to natural gas production owned or controlled by Anadarko. Approximately 64%, 66% and 58% of WES’s processing throughput (excluding equity investment throughput) for the years ended December 31, 2011, 2010 and 2009, respectively, was attributable to natural gas production owned or controlled by Anadarko.

In connection with the MGR acquisition, WES entered into 10-year, fee-based gathering and processing agreements with Anadarko effective December 1, 2011, for all affiliate throughput on the MGR assets.

Gas purchase and sale agreements. WES sells substantially all of its natural gas, NGLs, and condensate to Anadarko Energy Services Company (“AESC”), Anadarko’s marketing affiliate. In addition, WES purchases natural gas from AESC pursuant to gas purchase agreements. WES’s gas purchase and sale agreements with AESC are generally one-year contracts, subject to annual renewal.

WES Omnibus agreement. Pursuant to the WES omnibus agreement, Anadarko performs centralized corporate functions for WES, such as legal; accounting; treasury; cash management; investor relations; insurance administration and claims processing; risk management; health, safety and environmental; information technology; human resources; credit; payroll; internal audit; tax; marketing; and midstream administration. Prior to expiration on December 31, 2010, WES’s reimbursement to Anadarko for certain general and administrative expenses allocated to WES was capped at $9.0 million and $6.9 million for the years ended December 31, 2010 and 2009, respectively. Expenses in excess of the cap for the years ended December 31, 2010 and 2009, were recorded as capital contributions from Anadarko and did not impact WES’s cash flows. Additionally, for the years ended December 31, 2010 and 2009, WES reimbursed Anadarko $8.0 million and $7.5 million, respectively, for public company expenses not subject to the cap previously contained in the WES omnibus agreement.

For the year ended December 31, 2011, and thereafter, Anadarko, in accordance with the WES partnership and omnibus agreements, determined, in its reasonable discretion, amounts to be allocated to WES in exchange for services provided under the WES omnibus agreement. Such amount was $19.5 million for the year ended December 31, 2011, comprised of $11.8 million of allocated general and administrative expenses and $7.7 million of public company expenses. See Summary of affiliate transactions below.

Services and secondment agreement. Pursuant to the services and secondment agreement, specified employees of Anadarko are seconded to provide operating, routine maintenance and other services with respect to the assets owned and operated by WES under the direction, supervision and control of Anadarko. Pursuant to the services and secondment agreement, WES reimburses Anadarko for services provided by the seconded employees. The initial term of the services and secondment agreement extends through May 2018 and the term will automatically extend for additional twelve-month periods unless either party provides 180 days written notice of termination before the applicable twelve-month period expires. The consolidated financial statements include costs allocated by Anadarko pursuant to the services and secondment agreement for periods including and subsequent to the acquisition of the WES assets.

Tax sharing agreement. Pursuant to a tax sharing agreement, WES reimburses Anadarko for its estimated share of applicable taxes. United States federal income taxes attributable to WES income are directly borne by Anadarko through its filing of a combined or consolidated tax return with respect to periods including and subsequent to the acquisition of the WES assets. Anadarko may use its own tax attributes to reduce or eliminate the tax liability of its combined or consolidated group, which may include WES as a member. However, under this circumstance, WES nevertheless is required to reimburse Anadarko for its allocable share of taxes that would have been owed had tax attributes not been available to Anadarko.

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

 

Allocation of costs. Prior to the acquisition of the WES assets, the consolidated financial statements include costs allocated by Anadarko in the form of a management services fee, which approximated the general and administrative costs incurred by Anadarko attributable to WES assets. This management services fee was allocated to WES based on its proportionate share of Anadarko’s assets and revenues or other contractual arrangements. Management believes these allocation methodologies are reasonable.

The employees supporting the WES operations are employees of Anadarko. Anadarko charges WES its allocated share of personnel costs, including costs associated with Anadarko’s equity-based compensation plans, non-contributory defined pension and postretirement plans and defined contribution savings plan, through the management services fee or pursuant to the WES omnibus agreement and services and secondment agreement described above. In general, WES’s reimbursement to Anadarko under the WES omnibus agreement or services and secondment agreements is either (i) on an actual basis for direct expenses Anadarko incurs on behalf of WES, or (ii) based on an allocation of salaries and related employee benefits between WES and Anadarko based on estimates of time spent on each entity’s business and affairs. Most general and administrative expenses charged to WES by Anadarko are attributed to WES on an actual basis, and do not include any mark-up or subsidy component. With respect to allocated costs, management believes the allocation method employed is reasonable. Although it is not practical to determine what the amount of these direct and allocated costs would be if WES were to directly obtain these services, management believes that aggregate costs charged to WES by Anadarko are reasonable.

Equipment purchase and sale. In September 2010, WES sold idle compressors with a net carrying value of $2.6 million to Anadarko for $2.8 million in cash. The gain on the sale was recorded as an adjustment to partners’ capital. In November 2010, WES purchased compressors with a net carrying value of $0.4 million from Anadarko for $0.4 million in cash.

In November 2011, WES purchased equipment with a net carrying value of $2.0 million from Anadarko for $3.8 million in cash, with the difference recorded as an adjustment to partners’ capital.

Also see Note 13 for transactions occurring subsequent to December 31, 2011.

Summary of affiliate transactions. Affiliate transactions include revenue from affiliates, reimbursement of operating expenses and purchases of natural gas. The following table summarizes affiliate transactions, including transactions with Anadarko and its affiliates:

 

     Year Ended December 31,  
thousands    2011      2010      2009  

Revenues (1)

   $ 648,997      $ 571,628      $ 521,850  

Cost of product (1)

     83,722        95,667        94,999  

Operation and maintenance (2)

     51,339        46,379        41,444  

General and administrative (3)

     31,855        23,807        27,408  
  

 

 

    

 

 

    

 

 

 

Operating expenses

     166,916        165,853        163,851  

Interest income, net (4)

     28,560        20,243        20,717  

Interest expense (5)

     4,935        6,924        9,096  

Contributions from noncontrolling interest owners and Anadarko

     16,476        2,019        34,011  

Distributions to noncontrolling interest owners and Anadarko

     9,437        6,476        5,410  

 

(1) 

Represents amounts recognized under gathering, treating or processing agreements, and purchase and sale agreements.

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

 

(2) 

Represents expenses incurred under the services and secondment agreement for periods including and subsequent to the acquisition of the WES assets, as well as expenses incurred by Anadarko on a historical basis related to WES assets prior to the acquisition of such assets by WES.

(3) 

Represents general and administrative expense incurred under the WES omnibus agreement for periods including and subsequent to the acquisition of the WES assets, as well as a management services fee not within the scope of the WES omnibus agreement for reimbursement of expenses incurred by Anadarko for periods prior to the acquisition of the WES assets.

(4) 

Represents interest income recognized on the note receivable from Anadarko. This line item also includes interest income, net on affiliate balances related to the MGR assets, Bison assets, White Cliffs investment and Wattenberg assets for periods prior to the acquisition of such assets. Beginning December 7, 2011, Anadarko discontinued charging interest on intercompany balances. The outstanding affiliate balances on the WES assets prior to their acquisition were entirely settled through an adjustment to equity and partners’ capital.

(5) 

Represents interest expense recognized on the note payable to Anadarko. In June 2012, the note payable to Anadarko was repaid in full. See Note 13.

Concentration of credit risk. Anadarko was the only customer from whom revenues exceeded 10% of the consolidated revenues for all periods presented on the consolidated statements of income.

6. EQUITY-BASED COMPENSATION

Long-term incentive plan. Phantom unit awards are granted under the Western Gas Partners, LP 2008 Long-Term Incentive Plan (the “LTIP”). The LTIP was adopted by WES GP and permits the issuance of up to 2,250,000 units, of which 2,160,848 units remain available for future issuance as of December 31, 2011. Upon vesting of each phantom unit, the holder will receive WES common units or, at the discretion of WES GP’s board of directors, cash in an amount equal to the market value of WES common units on the vesting date. Equity-based compensation expense attributable to grants made under the LTIP impact the cash flows from operating activities only to the extent cash payments are made to a participant in lieu of issuance of WES common units to the participant. WES amortizes equity-based compensation expense attributable to awards granted under the LTIP over the vesting periods applicable to the awards.

WES GP awarded phantom units under the LTIP primarily to WES GP’s Chief Executive Officer and independent directors in 2011, and primarily to independent directors in 2010 and 2009. The phantom units awarded to the independent directors vest one year from the grant date, while all other awards are subject to graded vesting over a three-year service period. Compensation expense attributable to the phantom units granted under the LTIP is recognized entirely by WES over the vesting period and was $0.3 million, $0.3 million and $0.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011, there was $0.6 million of unrecognized compensation expense attributable to the LTIP, of which $0.5 million will be allocated to WES, and is expected to be recognized over a weighted-average period of 2.3 years.

The following table summarizes LTIP award activity for the years ended December 31, 2011, 2010 and 2009:

 

    2011     2010     2009  
    Weighted-
Average
Grant-Date
Fair Value
    Units     Weighted-
Average
Grant-Date
Fair Value
    Units     Weighted-
Average
Grant-Date
Fair Value
    Units  

Phantom units outstanding at beginning of year

  $ 20.19       17,503     $ 15.02       21,970     $ 16.50       30,304  

Vested

  $ 20.51       (15,119   $ 15.02       (19,751   $ 16.50       (30,304

Granted

  $ 35.66       21,594     $ 20.94       15,284     $ 15.02       21,970  
   

 

 

     

 

 

     

 

 

 

Phantom units outstanding at end of year

  $ 33.92       23,978     $ 20.19       17,503     $ 15.02       21,970  
   

 

 

     

 

 

     

 

 

 

 

F-29


Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

6. EQUITY-BASED COMPENSATION (CONTINUED)

 

Equity incentive plan and Anadarko incentive plans. WGP’s general and administrative expense includes equity-based compensation costs allocated by Anadarko to WES under the WES omnibus agreement for grants made pursuant to: (i) Western Gas Holdings, LLC Equity Incentive Plan, as amended and restated (the “Incentive Plan”) and (ii) the Anadarko Petroleum Corporation 1999 Stock Incentive Plan and the Anadarko Petroleum Corporation 2008 Omnibus Incentive Compensation Plan (Anadarko’s plans are referred to collectively as the “Anadarko Incentive Plans”).

General and administrative expense for the years ended December 31, 2011, 2010 and 2009 includes approximately $13.9 million, $5.4 million and $4.1 million, respectively, of equity-based compensation expense allocated to WES by Anadarko for grants made pursuant to the Incentive Plan and Anadarko Incentive Plans. A portion of these expenses are allocated to WES by Anadarko as a component of compensation expense for the executive officers of WES GP and other employees pursuant to the WES omnibus and services and secondment agreements. These amounts exclude compensation expense associated with the LTIP.

Under the Incentive Plan, participants are granted Unit Value Rights (“UVRs”), Unit Appreciation Rights (“UARs”) and Dividend Equivalent Rights (“DERs”). UVRs and UARs outstanding under the Incentive Plan were collectively valued at $634.00 per unit and $215.00 per unit as of December 31, 2011 and 2010, respectively. The UVRs and UARs either vest ratably over three years or vest in two equal installments on the second and fourth anniversaries of the grant date, or earlier in connection with certain other events. Upon the occurrence of a UVR vesting event, each participant will receive a lump-sum cash payment (net of any applicable withholding taxes) for each UVR. The UVRs may not be sold or transferred except to WES GP, Anadarko or any of its affiliates. Upon the occurrence of a UAR vesting event, each participant will receive a lump-sum cash payment (net of any applicable withholding taxes) for each UAR that is exercised prior to (i) the 90th day after a participant’s voluntary termination, or (ii) the 10th anniversary of the grant date, whichever occurs first. DERs granted under the Incentive Plan vest upon the occurrence of certain events, become payable no later than 30 days subsequent to vesting and expire 10 years from the date of grant. Subject to adjustment for certain events as defined in the Incentive Plan, an aggregate of 100,000 UARs, 100,000 UVRs and 100,000 DERs may be granted pursuant to awards under the Incentive Plan, of which 24,631 remain available for future issuance as of December 31, 2011.

For liability-based awards issued under the Incentive Plan and ultimately settled in cash, the fair value of the relevant equity grant is revised periodically based on the estimated fair value of WES GP using a discounted cash flow estimate and multiples-valuation terminal value. Anadarko, the parent company of WGP, directs the issuance of equity-based awards to its employees, so the fair value of the outstanding awards under the Incentive Plan is classified as dividend payable to Anadarko within current liabilities for vested awards which have not been cash-settled, and as long-term liabilities for unvested awards which are outstanding, in the accompanying consolidated financial statements of WGP. Equity-based compensation expense attributable to grants made under the Incentive Plan will impact the cash flows from operating activities only to the extent cash payments are made to Incentive Plan participants who provided services to WES pursuant to the WES omnibus agreement. Equity-based compensation granted under the Anadarko Incentive Plans does not impact the cash flows from operating activities.

As of December 31, 2011, WES estimates that $5.5 million of unrecognized compensation expense attributable to the Incentive Plan will be allocated to WES over a weighted-average period of 1.4 years. In addition, WES estimates that $3.7 million of unrecognized compensation expense attributable to the Anadarko Incentive Plans, excluding performance-based awards, will be allocated to WES over a weighted-average period of 2.0 years. As of December 31, 2011, the compensation cost related to performance-based awards under the Anadarko Incentive Plans that could be allocated to WES during the next three years is approximately $0.1 million.

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

6. EQUITY-BASED COMPENSATION (CONTINUED)

 

The following table summarizes Incentive Plan award activity for the years ended December 31, 2011, 2010 and 2009:

 

     UVRs     UARs     DERs  

Outstanding at December 31, 2008

     50,000       50,000       50,000  

Granted

     30,000       30,000       30,000   

Vested and settled (1)

     (16,667     —          —     

Forfeited

     (6,666 )     (6,666 )     (6,666
  

 

 

   

 

 

   

 

 

 

Outstanding at December 31, 2009

     56,667       73,334       73,334   
  

 

 

   

 

 

   

 

 

 

Granted

     2,035       2,035       2,035   

Vested and settled (1)

     (16,667     —          —     

Forfeited

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Outstanding at December 31, 2010

     42,035       75,369       75,369   
  

 

 

   

 

 

   

 

 

 

Granted

     —          —          —     

Vested and settled (1)

     (27,344     —          —     

Forfeited

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Outstanding at December 31, 2011

     14,691       75,369       75,369   
  

 

 

   

 

 

   

 

 

 

Weighted average intrinsic per-unit value as of:

      

December 31, 2009

   $ 50.00     $ 17.00       —  (2) 

December 31, 2010

   $ 57.99     $ 160.54       —  (2) 

December 31, 2011

   $ 65.24     $ 579.54       —  (2) 

 

(1) 

UARs and DERs remain outstanding upon vesting until they are settled in cash, forfeited, or expire. As of December 31, 2011, 60,678 of the outstanding UARs and 3,334 of the DERs were vested. As of December 31, 2010, 33,334 of the outstanding UARs and 3,334 of the DERs were vested. As of December 31, 2009, 16,667 of the outstanding UARs and 3,334 of the DERs were vested.

(2) 

The DERs have no attributed value since WES GP has not declared or paid distributions since its inception.

7. INCOME TAXES

The components of the income tax expense (benefit) are as follows:

 

     Year Ended December 31,  
thousands    2011     2010     2009  

Current income tax expense (benefit)

      

Federal income tax expense (benefit)

   $ 65,601     $ 50,606     $ 45,112  

State income tax expense

     4,762       3,926       3,340  
  

 

 

   

 

 

   

 

 

 

Total current income tax expense (benefit)

     70,363       54,532       48,452  
  

 

 

   

 

 

   

 

 

 

Deferred income tax expense (benefit)

      

Federal income tax expense (benefit)

     (24,075     (2,450     (7,800

State income tax expense (benefit)

     (624     (618     (985
  

 

 

   

 

 

   

 

 

 

Total deferred income tax expense (benefit)

     (24,699     (3,068     (8,785
  

 

 

   

 

 

   

 

 

 

Total income tax expense

   $ 45,664     $ 51,464     $ 39,667  
  

 

 

   

 

 

   

 

 

 

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7. INCOME TAXES (CONTINUED)

 

Total income taxes differed from the amounts computed by applying the statutory income tax rate to income before income taxes. The sources of these differences are as follows:

 

     Year Ended December 31,  
thousands except percentages    2011     2010     2009  

Income before income taxes

   $ 207,364     $ 178,899     $ 148,654  

Statutory tax rate

     0     0     0
  

 

 

   

 

 

   

 

 

 

Tax computed at statutory rate

   $ —        $ —        $ —     

Adjustments resulting from:

      

Non-deductible goodwill

     1,484       7,366       1,196  

Federal taxes on income attributable to APC’s investment in WES

     23,872       21,574       15,713  

State taxes on income attributable to APC’s investment in WES (net of federal benefit)

     1,290       822       599  

Federal taxes on income attributable to WES assets pre-acquisition

     18,354       20,678       21,407  

State taxes on income attributable to WES assets pre-acquisition (net of federal benefit)

     —          724       852  

Texas margin tax expense (benefit)

     664       300       (100
  

 

 

   

 

 

   

 

 

 

Income tax expense

   $ 45,664     $ 51,464     $ 39,667  
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     22     29     27

The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are as follows:

 

     December 31,  
thousands    2011     2010  

Credit carryforwards

   $ 14     $ 14  

Other

     —          2  
  

 

 

   

 

 

 

Net current deferred income tax assets

     14       16  
  

 

 

   

 

 

 

Depreciable property

     (83,566     (100,889

Credit carryforwards

     556       570  

Investment in WES and its equity affiliates

     (430,204     (391,155

Other

     114       (206
  

 

 

   

 

 

 

Net long-term deferred income tax liabilities

     (513,100     (491,680
  

 

 

   

 

 

 

Total net deferred income tax liabilities

   $ (513,086   $ (491,664
  

 

 

   

 

 

 

Credit carryforwards, which are available for utilization on future income tax returns, consist of $0.6 million of state income tax credits that expire in 2026.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8. PROPERTY, PLANT AND EQUIPMENT

A summary of the historical cost of property, plant and equipment is as follows:

 

     Estimated
Useful  Life
     December 31,  
thousands       2011      2010  

Land

     n/a      $ 364      $ 364  

Gathering systems

     5 to 47 years         2,437,152        2,102,219  

Pipelines and equipment

     15 to 45 years         90,883        89,778  

Assets under construction

     n/a         104,687        44,388  

Other

     3 to 25 years         4,927        3,059  
     

 

 

    

 

 

 

Total property, plant and equipment

        2,638,013        2,239,808  

Accumulated depreciation

        585,789        486,046  
     

 

 

    

 

 

 

Net property, plant and equipment

      $ 2,052,224      $ 1,753,762  
     

 

 

    

 

 

 

The cost of property classified as “Assets under construction” is excluded from capitalized costs being depreciated. These amounts represent property that is not yet suitable to be placed into productive service as of the respective balance sheet date. In addition, property, plant and equipment cost, as well as third-party accrued liability balances in the consolidated balance sheets include $15.0 million and $9.6 million of accrued capital as of December 31, 2011 and 2010, respectively, representing estimated capital expenditures for which invoices had not yet been processed. Also see Note 13 for transactions occurring subsequent to December 31, 2011.

9. OTHER INTANGIBLE ASSETS

The intangible asset balance in the consolidated balance sheets represents the fair value, net of amortization, related to the contracts assumed by WES in connection with the Platte Valley acquisition in February 2011, which dedicate certain customers’ field production to the acquired gathering and processing system. These long-term contracts provide an extended commercial relationship with the existing customers whereby WES will have the opportunity to gather and process future production from the customers’ acreage. These contracts are generally limited, however, by the quantity and production life of the underlying natural gas resource base.

At December 31, 2011, the carrying value of WES’s customer relationship intangible assets was $52.9 million, net of $0.9 million of accumulated amortization, and was included in goodwill and other intangible assets in the consolidated balance sheets. Customer relationships are amortized on a straight-line basis over 50 years, which is the estimated productive life of the reserves covered by the underlying acreage ultimately expected to be produced and gathered or processed through WES’s assets subject to current contractual arrangements. No intangible asset impairment has been recognized in the accompanying consolidated financial statements (see Note 1).

Estimated future amortization for these intangible assets over the next five years is as follows:

 

thousands    Future
Amortization
 

2012

   $ 1,075  

2013

     1,075  

2014

     1,075  

2015

     1,075  

2016

     1,075  

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

10. ASSET RETIREMENT OBLIGATIONS

The following table provides a summary of changes in asset retirement obligations:

 

     Year Ended December 31,  
thousands        2011             2010      

Carrying amount of asset retirement obligations at beginning of year

   $ 44,777     $ 55,862  

Liabilities incurred

     15,390       800  

Liabilities settled

     —          (104

Accretion expense

     3,781       3,740  

Revisions in estimated liabilities

     (679     (15,521
  

 

 

   

 

 

 

Carrying amount of asset retirement obligations at end of year

   $ 63,269     $ 44,777  
  

 

 

   

 

 

 

The increase in asset retirement obligations for the year ended December 31, 2011, was primarily a result of the liabilities incurred in connection with the acquisition of the Platte Valley assets (see Note 2). Revisions in estimates for the year ended December 31, 2010, related primarily to a decrease in the inflation rate.

11. DEBT AND INTEREST EXPENSE

The following table presents outstanding debt as of December 31, 2011 and 2010 (also see Note 13):

 

     December 31, 2011      December 31, 2010  
thousands    Principal      Carrying
Value
     Fair Value      Principal      Carrying
Value
     Fair Value  

Revolving credit facility

   $ —         $ —         $ —         $ 49,000      $ 49,000      $ 49,000  

5.375% Senior Notes due 2021

     500,000        494,178        499,950        —           —           —     

Wattenberg term loan

     —           —           —           250,000        250,000        250,000  

Note payable to Anadarko

     175,000        175,000        174,528        175,000        175,000        168,116  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt outstanding (1)

   $ 675,000      $ 669,178      $ 674,478      $ 474,000      $ 474,000      $ 467,116  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The consolidated balance sheets include accrued interest expense of $2.7 million and $1.3 million as of December 31, 2011 and 2010, respectively, which is included in accrued liabilities.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11. DEBT AND INTEREST EXPENSE (CONTINUED)

 

Debt activity. The following table presents debt activity for the years ended December 31, 2011 and 2010:

 

thousands    Carrying Value  

Balance as of December 31, 2009

   $ 175,000  

Revolving credit facility borrowings

     410,000  

Repayment of revolving credit facility

     (361,000

Revolving credit facility borrowings—Swingline

     10,000  

Repayment of revolving credit facility—Swingline

     (10,000

Issuance of Wattenberg term loan

     250,000  
  

 

 

 

Balance as of December 31, 2010

   $ 474,000  

Revolving credit facility borrowings

     570,000  

Repayment of revolving credit facility

     (619,000

Repayment of Wattenberg term loan

     (250,000

Revolving credit facility borrowings—Swingline

     30,000  

Repayment of revolving credit facility—Swingline

     (30,000

Issuance of 5.375% Senior Notes due 2021

     500,000  

Other and changes in debt discount

     (5,822
  

 

 

 

Balance as of December 31, 2011

   $ 669,178  
  

 

 

 

5.375% Senior Notes due 2021. In May 2011, WES completed the offering of $500.0 million aggregate principal amount of 5.375% Senior Notes due 2021 (the “Notes”) at a price to the public of 98.778% of the face amount of the Notes. Including the effects of the issuance and underwriting discounts, the effective interest rate is 5.648%. Interest on the Notes is paid semi-annually on June 1 and December 1 of each year, with payments commencing on December 1, 2011. Proceeds from the offering of the Notes (net of the underwriting discount of $3.3 million and debt issuance costs) were used to repay the then-outstanding balance on WES’s revolving credit facility, with the remainder used for general partnership purposes.

The Notes mature on June 1, 2021, unless redeemed at a redemption price that includes a make-whole premium. WES may redeem the Notes in whole or in part, at any time before March 1, 2021, at a redemption price equal to the greater of (i) 100% of the principal amount of the Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on such Notes (exclusive of interest accrued to the redemption date) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined in the indenture governing the Notes) plus 40 basis points, plus, in either case, accrued and unpaid interest, if any, on the principal amount being redeemed to such redemption date. On or after March 1, 2021, the Notes will be redeemable and repayable, at any time in whole, or from time to time in part, at a price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued interest on the Notes to be redeemed to the date of redemption.

The Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of the wholly owned subsidiaries of WES (the “Subsidiary Guarantors”). The Subsidiary Guarantors’ guarantees will be released if the Subsidiary Guarantors are released from their obligations under WES’s revolving credit facility. Also see Note 13 for transactions occurring subsequent to December 31, 2011.

The Notes indenture contains customary events of default including, among others, (i) default in any payment of interest on any debt securities when due that continues for 30 days; (ii) default in payment, when due, of principal of or premium, if any, on the Notes at maturity; and (iii) certain events of bankruptcy or insolvency

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11. DEBT AND INTEREST EXPENSE (CONTINUED)

 

with respect to WES. The indenture governing the Notes also contains covenants that limit, among other things, the ability of WES and the Subsidiary Guarantors to (i) create liens on their principal properties; (ii) engage in sale and leaseback transactions; and (iii) merge or consolidate with another entity or sell, lease or transfer substantially all of their properties or assets to another entity. At December 31, 2011, WES was in compliance with all covenants under the Notes.

Note payable to Anadarko. In December 2008, WES entered into a five-year $175.0 million term loan agreement with Anadarko. The interest rate was fixed at 4.00% until November 2010. The term loan agreement was amended in December 2010 to fix the interest rate at 2.82% through maturity in 2013. WES has the option, at any time, to repay the outstanding principal amount in whole or in part. Also see Note 13 for transactions occurring subsequent to December 31, 2011.

The provisions of the five-year term loan agreement contain customary events of default, including (i) non-payment of principal when due or non-payment of interest or other amounts within three business days of when due, (ii) certain events of bankruptcy or insolvency with respect to WES and (iii) a change of control. At December 31, 2011, WES was in compliance with all covenants under this agreement.

Revolving credit facility. In March 2011, WES entered into an amended and restated $800.0 million senior unsecured revolving credit facility (the “WES RCF”) and borrowed $250.0 million under the WES RCF to repay the Wattenberg term loan (described below). The WES RCF amended and restated its $450.0 million credit facility, which was originally entered into in October 2009. The WES RCF matures in March 2016 and bears interest at London Interbank Offered Rate (“LIBOR”) plus applicable margins currently ranging from 1.30% to 1.90%, or an alternate base rate equal to the greatest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.5%, or (c) LIBOR plus 1%, plus applicable margins currently ranging from 0.30% to 0.90%. The interest rate was 1.80% and 3.26% at December 31, 2011 and 2010, respectively. WES is required to pay a quarterly facility fee currently ranging from 0.20% to 0.35% of the commitment amount (whether used or unused), based upon the senior unsecured debt rating of WES. The facility fee rate was 0.25% and 0.50% at December 31, 2011 and 2010, respectively.

The WES RCF contains covenants that limit, among other things, the ability of WES and certain of its subsidiaries to incur additional indebtedness, grant certain liens, merge, consolidate or allow any material change in the character of its business, sell all or substantially all of the WES assets, make certain transfers, enter into certain affiliate transactions, make distributions or other payments other than distributions of available cash under certain conditions and use proceeds other than for partnership purposes. The WES RCF also contains various customary covenants, customary events of default and certain financial tests as of the end of each quarter, including a maximum consolidated leverage ratio (which is defined as the ratio of consolidated indebtedness as of the last day of a fiscal quarter to Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“Consolidated EBITDA”) for the most recent four consecutive fiscal quarters ending on such day) of 5.0 to 1.0, or a consolidated leverage ratio of 5.5 to 1.0 with respect to quarters ending in the 270-day period immediately following certain acquisitions, and a minimum consolidated interest coverage ratio (which is defined as the ratio of Consolidated EBITDA for the most recent four consecutive fiscal quarters to consolidated interest expense for such period) of 2.0 to 1.0.

All amounts due under the WES RCF are unconditionally guaranteed by the wholly owned subsidiaries of WES. WES will no longer be required to comply with the minimum consolidated interest coverage ratio, as well as the subsidiary guarantees and certain of the aforementioned covenants, if it obtains two of the following three ratings: BBB- or better by Standard & Poor’s, Baa3 or better by Moody’s Investors Service, or BBB- or better by

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11. DEBT AND INTEREST EXPENSE (CONTINUED)

 

Fitch Ratings. At December 31, 2011, WES was in compliance with all covenants under the WES RCF. As of December 31, 2011, no amounts were outstanding under the WES RCF, and $800.0 million was available for borrowing. See Note 2 for borrowing activity under the WES RCF in January 2012, related to the MGR acquisition. Also see Note 13 for transactions occurring subsequent to December 31, 2011.

Wattenberg term loan. In connection with the Wattenberg acquisition, in August 2010 WES borrowed $250.0 million under a three-year term loan from a group of banks (“Wattenberg term loan”). The Wattenberg term loan incurred interest at LIBOR plus a margin ranging from 2.50% to 3.50% depending on the consolidated leverage ratio of WES as defined in the Wattenberg term loan agreement. WES repaid the Wattenberg term loan in March 2011 using borrowings from the WES RCF and recognized $1.3 million of accelerated amortization expense related to its early repayment.

Interest-rate swap agreement. WES entered into a forward-starting interest-rate swap agreement in March 2011 to mitigate the risk of rising interest rates prior to the issuance of the Notes. In May 2011, WES issued the Notes and terminated the swap agreement, realizing a loss of $1.9 million, which is included in other income (expense), net in the accompanying consolidated statements of income.

Interest expense. The following table summarizes the amounts included in interest expense:

 

     Year Ended December 31,  
thousands    2011     2010      2009  

Third Parties

       

Interest expense on long-term debt

   $ 20,533     $ 8,530      $ 304  

Amortization of debt issuance costs and commitment fees (1)

     5,297       3,340        555  

Capitalized interest

     (420     —           —     
  

 

 

   

 

 

    

 

 

 

Total interest expense—third parties

     25,410       11,870        859  
  

 

 

   

 

 

    

 

 

 

Affiliates

       

Interest expense on notes payable to Anadarko (2)

     4,935       6,828        8,953  

Credit facility commitment fees

     —          96        143  
  

 

 

   

 

 

    

 

 

 

Total interest expense—affiliates

     4,935       6,924        9,096  
  

 

 

   

 

 

    

 

 

 

Interest expense

   $ 30,345     $ 18,794      $ 9,955  
  

 

 

   

 

 

    

 

 

 

 

(1) 

For the year ended December 31, 2011, includes $0.5 million of amortization of the original issue discount and underwriters’ fees related to the Notes.

(2) 

In June 2012, the note payable to Anadarko was repaid in full. See Note 13.

12. COMMITMENTS AND CONTINGENCIES

Environmental obligations. WGP, through its partnership interests in WES, is subject to various environmental-remediation obligations arising from federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. As of December 31, 2011, the consolidated balance sheet included a $1.7 million current liability and a $1.6 million long-term liability for remediation and reclamation obligations, included in third-party accrued liabilities and asset retirement obligations and other, respectively. As of December 31, 2010, the consolidated balance sheet included a $0.6 million current liability and a $0.9 million long-term liability for remediation and reclamation obligations, included in third-party accrued liabilities and asset retirement obligations and other, respectively. The recorded obligations do not include any anticipated insurance recoveries.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

Substantially all of the payments related to these obligations are expected to be made over the next five years. Management regularly monitors the remediation and reclamation process and the liabilities recorded and believes its environmental obligations are adequate to fund remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not differ materially from recorded amounts nor materially affect the overall results of operations, cash flows or financial condition. There can be no assurance, however, that current regulatory requirements will not change, or past non-compliance with environmental issues will not be discovered.

Litigation and legal proceedings. In March 2011, DCP Midstream LP (“DCP”) filed a lawsuit against Anadarko and others, including a subsidiary, Kerr-McGee Gathering LLC, in Weld County District Court (the “Court”) in Colorado, alleging that Anadarko and its affiliates diverted gas from DCP’s gathering and processing facilities in breach of certain dedication agreements. In addition to various claims against Anadarko, DCP is claiming unjust enrichment and other damages against Kerr-McGee Gathering LLC, the entity which holds the Wattenberg assets. Anadarko countersued DCP asserting that DCP has not properly allocated values and charges to Anadarko for the gas that DCP gathers and/or processes, and seeks a judgment that DCP has no valid gathering or processing rights to much of the gas production it is claiming, in addition to other claims. In July 2011, the Court denied the defendants’ motion to dismiss without ruling on the merits and the case is proceeding to the discovery phase. Trial is set for October 2013. Management does not believe the outcome of this proceeding will have a material effect on the financial condition, results of operations or cash flows of WGP. Management intends to vigorously defend this litigation. Furthermore, without regard to the merit of DCP’s claims, management believes that it has adequate contractual indemnities covering the claims against it in this lawsuit.

In addition, from time to time, WGP, through its partnership interests in WES, is involved in legal, tax, regulatory and other proceedings in various forums regarding performance, contracts and other matters that arise in the ordinary course of business. Management is not aware of any such proceeding for which a final disposition could have a material adverse effect on the financial condition, results of operations or cash flows of WGP.

Other commitments. WES has short-term payment obligations, or commitments, related to its capital spending programs, as well as those of its unconsolidated affiliates. As of December 31, 2011, WES had unconditional payment obligations for services to be rendered, or products to be delivered in connection with its capital projects of approximately $30.2 million, primarily related to the construction of a second cryogenic train at the Chipeta plant, all of which will be spent in 2012. Also see Note 13 for matters occurring subsequent to December 31, 2011.

Lease commitments. Anadarko, on behalf of WES, has entered into lease agreements for corporate offices, shared field offices and a warehouse supporting the operations of its subsidiaries. The leases for the shared field offices extend through 2018, and the lease for the warehouse extends through March 2012 and includes an early termination clause. The lease for the WES corporate offices expires in January 2012, and during 2011, Anadarko entered into a new agreement for the corporate offices that extends through March 2017. Anadarko, on behalf of WES, continues to lease certain other compression equipment under leases expiring through January 2015. Rent expense associated with the office, warehouse and equipment leases was $4.1 million, $7.7 million and $10.2 million for the years ended December 31, 2011, 2010 and 2009, respectively.

In addition, during 2010, Anadarko and Kerr-McGee Gathering LLC purchased an aggregate $44.5 million of previously leased compression equipment used at the Granger and Wattenberg assets, which terminated the leases and associated lease expense. The purchased compression equipment was contributed to WES pursuant to provisions of the contribution agreements for the Granger and the Wattenberg acquisitions.

 

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WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

The amounts in the table below represent existing contractual operating lease obligations as of December 31, 2011, that may be assigned or otherwise charged pursuant to the reimbursement provisions of the WES omnibus agreement:

 

thousands    Operating Leases  

2012

   $ 261  

2013

     228  

2014

     168  

2015

     168  

2016

     168  

Thereafter

     103  
  

 

 

 

Total

   $ 1,096  
  

 

 

 

13. SUBSEQUENT EVENTS

Acquisitions

MGR. Refer to Note 2 for a description of the MGR acquisition in January 2012. In conjunction with the MGR acquisition, WES entered into commodity price swap agreements with Anadarko that do not contain fixed notional volumes, each effective for one year beginning January 1, 2012, and extending through December 31, 2016. Below is a summary of the fixed prices for these commodity price swap agreements:

 

     Year Ended December 31,  
per barrel except natural gas    2012      2013      2014      2015      2016  

Ethane

   $ 26.87      $ 25.34      $ 24.10      $ 23.41      $ 23.11  

Propane

   $ 57.97      $ 55.59      $ 53.78      $ 52.99      $ 52.90  

Isobutane

   $ 80.98      $ 77.66      $ 75.13      $ 74.02      $ 73.89  

Normal butane

   $ 71.15      $ 68.24      $ 66.01      $ 65.04      $ 64.93  

Natural gasoline

   $ 89.51      $ 85.84      $ 83.04      $ 81.82      $ 81.68  

Condensate

   $ 89.51      $ 85.84      $ 83.04      $ 81.82      $ 81.68  

Natural gas (per MMbtu)

   $ 3.62      $ 4.17      $ 4.45      $ 4.66      $ 4.87  

Chipeta. On August 1, 2012, WES closed on the acquisition of Anadarko’s remaining 24% membership interest in Chipeta, which provides WES the right to begin receiving distributions related to the additional interest beginning July 1, 2012. Subsequent to the acquisition, WES holds a 75% interest in Chipeta, with the remaining 25% interest held by a third party. Consideration paid for the 24% membership interest consisted of: (i) $128.3 million of cash on hand and (ii) the issuance of 151,235 common units and 3,086 general partner units. In connection with the acquisition, WES also entered into Amendment No. 8 to the First Amended and Restated Agreement of Limited Partnership, effective August 1, 2012. As with previous acquisitions from Anadarko, the amendment permits WES to make a special one-time cash distribution to an affiliate of Anadarko in an amount equal to the cash consideration.

Equity Issuance and Distributions

Public offering. In June 2012, WES issued 5,000,000 common units to the public, generating net proceeds of $216.6 million, including WES GP’s proportionate capital contribution to maintain its 2.0% general partner interest. Net proceeds are being used for general purposes, including the funding of capital expenditures.

Distributions. On April 19, 2012, the board of directors of WES GP declared a cash distribution to WES’s unitholders of $0.46 per unit, or $46.1 million in aggregate, including incentive distributions. The cash distribution was paid on May 14, 2012, to WES unitholders of record at the close of business on April 30, 2012.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

13. SUBSEQUENT EVENTS (CONTINUED)

 

On July 19, 2012, the board of directors of WES GP declared a cash distribution to WES’s unitholders of $0.48 per unit, or $52.4 million in aggregate, including incentive distributions. The cash distribution was paid on August 13, 2012, to WES unitholders of record at the close of business on July 31, 2012.

Debt Financing

Debt offering. In June 2012, WES completed the offering of $520.0 million aggregate principal amount of 4.000% Senior Notes due 2022 (the “2022 Notes”) at a price to the public of 99.194% of the face amount. Including the effects of the issuance and underwriting discounts, the effective interest rate is 4.189%. Interest will be paid semi-annually on January 1 and July 1 of each year, commencing on January 1, 2013. The 2022 Notes will mature on July 1, 2022, unless redeemed, in whole or in part, at any time prior to maturity, at a redemption price that includes a make-whole premium. Proceeds (net of underwriting discount of $3.4 million and debt issuance costs) were used to repay all amounts then outstanding under the WES RCF and the $175.0 million note payable to Anadarko (see below).

The 2022 Notes indenture contains customary events of default including, among others, (i) default for 30 days in the payment of interest when due on the 2022 Notes; (ii) default in payment, when due, of principal of or premium, if any, on the 2022 Notes at maturity, upon redemption or otherwise; and (iii) certain events of bankruptcy or insolvency. The 2022 Notes indenture also contains covenants that limit, among other things, WES’s ability, as well as that of certain of its subsidiaries, to (i) create liens on its principal properties; (ii) engage in sale and leaseback transactions; and (iii) merge or consolidate with another entity or sell, lease or transfer substantially all of its properties or assets to another entity.

Release of Subsidiary Guarantors. On June 13, 2012, following the receipt of a second investment grade rating as defined in the WES RCF, the guarantees provided by WES’s wholly owned subsidiaries under the WES RCF and the Notes were released. As a result, WES is no longer subject to certain of the restrictive covenants associated with the WES RCF, including the maintenance of an interest coverage ratio and adherence to covenants that limit, among other things, WES, and certain of WES’s subsidiaries’ ability to dispose of assets and make certain investments or payments.

Note payable to Anadarko. In June 2012, the note payable to Anadarko was repaid in full with proceeds from the issuance of the 2022 Notes.

Other

Assets Under Construction. During the first quarter of 2012, the board of directors of WES GP approved the continued construction by WES of the Brasada and Lancaster gas processing facilities in South Texas and northeast Colorado, respectively, which were previously under construction by Anadarko. WES agreed to reimburse Anadarko for $18.9 million of certain expenditures Anadarko incurred in 2011 related to the Brasada and Lancaster plants. In February 2012, these expenditures were transferred to WES and a corresponding current payable was established, which is expected to be repaid during 2012.

Other commitments. WES has short-term payment obligations, or commitments, related to its capital spending programs, as well as those of its unconsolidated affiliates. As of June 30, 2012, WES had unconditional payment obligations for services to be rendered, or products to be delivered in connection with its capital projects of approximately $56.6 million, primarily related to the construction of a second cryogenic train at the Chipeta plant and the continued construction of the Brasada and Lancaster plants, a majority of which will be spent in 2012.

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

     Nine Months Ended
September 30,
 
thousands    2012     2011  

Revenues—affiliates

    

Gathering, processing and transportation of natural gas and natural gas liquids

   $ 170,461     $ 161,665  

Natural gas, natural gas liquids and condensate sales

     324,793       310,337  

Equity income and other, net

     12,219       9,279  
  

 

 

   

 

 

 

Total revenues—affiliates

     507,473       481,281  

Revenues—third parties

    

Gathering, processing and transportation of natural gas and natural gas liquids

     65,388       60,767  

Natural gas, natural gas liquids and condensate sales

     62,025       61,463  

Other, net

     1,717       4,557  
  

 

 

   

 

 

 

Total revenues—third parties

     129,130       126,787  
  

 

 

   

 

 

 

Total revenues

     636,603       608,068  
  

 

 

   

 

 

 

Operating expenses

    

Cost of product (1)

     254,719       240,765  

Operation and maintenance (1)

     97,041       87,859  

General and administrative (1)

     34,233       24,630  

Property and other taxes

     14,998       13,302  

Depreciation, amortization and impairments

     81,270       78,413  
  

 

 

   

 

 

 

Total operating expenses

     482,261       444,969  
  

 

 

   

 

 

 

Operating income

     154,342       163,099  

Interest income, net—affiliates

     12,675       18,992  

Interest expense (2)

  

 

 

 

(30,118

 

 

 

 

 

(21,738

 

Other expense, net

  

 

 

 

 

 

(287

 

 

 

 

 

 

 

 

(895

 

 

  

 

 

   

 

 

 

Income before income taxes

  

 

 

 

136,612

 

 

 

 

 

 

159,458

 

 

Income tax expense

  

 

 

 

 

 

29,902

 

 

 

 

 

 

 

 

 

36,000

 

 

 

  

 

 

   

 

 

 

Net income

     106,710       123,458  

Net income attributable to WES public unitholders and other noncontrolling interests

  

 

 

 

71,258

 

 

 

 

 

 

64,016

 

 

  

 

 

   

 

 

 

Net income attributable to Western Gas Equity Partners, LP

   $ 35,452     $ 59,442  
  

 

 

   

 

 

 

 

(1) 

Cost of product includes product purchases from Anadarko (as defined in Note 1) of $115.6 million and $59.7 million for the nine months ended September 30, 2012 and 2011, respectively. Operation and maintenance includes charges from Anadarko of $38.0 million and $38.7 million for the nine months ended September 30, 2012 and 2011, respectively. General and administrative includes charges from Anadarko of $29.4 million and $19.5 million for the nine months ended September 30, 2012 and 2011, respectively. See Note 5.

(2) 

Includes affiliate (as defined in Note 1) interest expense of $2.7 million and $3.7 million for the nine months ended September 30, 2012 and 2011, respectively. See Note 7.

See accompanying Notes to Consolidated Financial Statements.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

thousands    September 30,
2012
     December 31,
2011
 

ASSETS

     

Current assets

     

Cash and cash equivalents

   $ 47,494       $ 226,559   

Accounts receivable, net

     21,359         22,703   

Other current assets (1)

     9,386         7,186   
  

 

 

    

 

 

 

Total current assets

     78,239         256,448   

Note receivable—Anadarko

     260,000         260,000   

Plant, property and equipment

     

Cost

     3,014,825         2,638,013   

Less accumulated depreciation

     671,902         585,789   
  

 

 

    

 

 

 

Net property, plant and equipment

     2,342,923         2,052,224   

Goodwill

     87,936         82,136   

Other intangible assets

     52,052         52,858   

Equity investments

     105,813         109,817   

Other assets

     26,981         24,143   
  

 

 

    

 

 

 

Total assets

   $ 2,953,944       $ 2,837,626   
  

 

 

    

 

 

 

LIABILITIES, EQUITY AND PARTNERS’ CAPITAL

     

Current liabilities

     

Accounts and natural gas imbalance payables (2)

   $ 85,992       $ 26,588   

Accrued ad valorem taxes

     15,021         8,186   

Income taxes payable

     185         495   

Accrued liabilities (3)

     108,883         41,315   

Dividend payable—Anadarko (4)

     64,806         35,638   
  

 

 

    

 

 

 

Total current liabilities

     274,887         112,222   

Long-term debt—third parties

     1,010,435         494,178   

Note payable—Anadarko

     —           175,000   

Deferred income taxes

     446,045         513,100   

Dividend payable—Anadarko (4)

     11,245         9,003   

Asset retirement obligations and other

     69,722         67,169   
  

 

 

    

 

 

 

Total long-term liabilities

     1,537,447         1,258,450   
  

 

 

    

 

 

 

Total liabilities

     1,812,334         1,370,672   

Partners’ capital

     108,978         528,873   

Noncontrolling interests

     1,032,632         938,081   
  

 

 

    

 

 

 

Total equity and partners’ capital

     1,141,610         1,466,954   
  

 

 

    

 

 

 

Total liabilities, equity and partners’ capital

   $ 2,953,944       $ 2,837,626   
  

 

 

    

 

 

 

 

(1) 

Other current assets includes natural gas imbalance receivables from affiliates of $0.4 million and $0.5 million as of September 30, 2012, and December 31, 2011, respectively.

(2) 

Accounts and natural gas imbalance payables includes amounts payable to affiliates of $68.3 million and $5.9 million as of September 30, 2012, and December 31, 2011, respectively.

(3) 

Accrued liabilities includes amounts payable to affiliates of $19.0 million and $0.3 million as of September 30, 2012, and December 31, 2011, respectively. See Note 5.

(4) 

Associated with the Equity Incentive Plan. See Note 5.

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

CONSOLIDATED STATEMENT OF EQUITY AND PARTNERS’ CAPITAL

(UNAUDITED)

 

thousands    Partners’
Capital
    Noncontrolling
Interests
    Total  

Balance at December 31, 2011

   $ 528,873     $ 938,081     $ 1,466,954  

Net income

     35,452       71,258       106,710  

WES equity transactions, net (1)

     33,396       159,090       192,486  

Contributions from noncontrolling interest owners and Anadarko

     —         26,888       26,888  

Distributions to noncontrolling interest owners and Anadarko

     —         (86,193     (86,193

Acquisition from affiliates

     (458,764     —         (458,764

Acquisition of additional 24% interest in Chipeta (1)

     (43,909     (77,195     (121,104

Contributions of equity-based compensation to WES by Anadarko

     2,757       —         2,757  

Net contributions from (distributions to) Anadarko

     (55,389     —         (55,389

Net distributions of other assets to Anadarko

     (10,767     (23     (10,790

Dividend payable – Anadarko (2)

     (31,410     —         (31,410

Elimination of net deferred tax liabilities

     106,504       —         106,504  

Non-cash equity-based compensation and other

     2,235       726       2,961  
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ 108,978     $ 1,032,632     $ 1,141,610  
  

 

 

   

 

 

   

 

 

 

 

(1)

The $10.5 million decrease to partners’ capital resulting from the WES equity transactions, net and WES’s acquisition of Anadarko’s remaining 24% membership interest in Chipeta in August 2012 (see Note 2), together with net income attributable to Western Gas Equity Partners, LP totaled $24.9 million for the nine months ended September 30, 2012.

(2) 

Associated with the Equity Incentive Plan. See Note 5.

See accompanying Notes to Consolidated Financial Statements.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Nine Months Ended
September 30,
 
thousands    2012     2011  

Cash flows from operating activities

    

Net income

   $ 106,710      $ 123,458   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, amortization and impairments

     81,270        78,413   

Deferred income taxes

     (32,326     (16,788 )  

Changes in assets and liabilities:

    

(Increase) decrease in accounts receivable, net

     4,931        (17,172 )  

Increase (decrease) in accounts and natural gas imbalance payables and accrued liabilities, net

     71,432        30,359   

Change in other items, net

     752        3,214   
  

 

 

   

 

 

 

Net cash provided by operating activities

     232,769        201,484   

Cash flows from investing activities

    

Capital expenditures

     (294,596     (78,573 )  

Acquisitions from affiliates

     (605,960     (25,000

Acquisitions from third parties

     —          (301,957 )  

Investments in equity affiliates

     (147     (93 )  

Proceeds from sale of assets to affiliates

     760        382   
  

 

 

   

 

 

 

Net cash used in investing activities

     (899,943     (405,241 )  

Cash flows from financing activities

    

Borrowings, net of debt issuance costs

     885,291       1,055,939   

Repayments of debt

     (549,000     (869,000 )  

Proceeds from issuance of WES common and general partner units, net of offering expenses

     211,965        328,376   

Contributions from noncontrolling interest owners and Anadarko

     26,888        16,876   

Distributions to noncontrolling interest owners and Anadarko

     (86,193     (61,151 )  

Net contributions from (distributions to) Anadarko

     (842     (42,900
  

 

 

   

 

 

 

Net cash provided by financing activities

     488,109        428,140   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     (179,065     224,383   

Cash and cash equivalents at beginning of period

     226,559       27,074   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 47,494      $ 251,457   
  

 

 

   

 

 

 

Supplemental disclosures

    

Elimination of net deferred tax liabilities

   $ 106,504      $ 22,072   

Dividend payable—Anadarko

   $ 31,412      $ 10,849   

Transfer of Brasada and Lancaster capital expenditures

   $ 19,197     $ —     

Net distributions to (contributions from) Anadarko of other assets

   $ 10,790     $ (66

Increase (decrease) in accrued capital expenditures

   $ 43,265     $ 9,650   

Interest paid, net of capitalized interest

   $ 16,460      $ 9,974   

Interest received

   $ 12,675      $ 12,675   

Taxes paid

   $ 495     $ 190   

See accompanying Notes to Consolidated Financial Statements.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

General. Western Gas Equity Partners, LP is a Delaware limited partnership formed in September 2012 to own three types of partnership interests in Western Gas Partners, LP, a publicly traded partnership. Western Gas Partners, LP (together with its subsidiaries, “WES”) is a Delaware master limited partnership formed by Anadarko Petroleum Corporation (NYSE: APC) in 2007 to own, operate, acquire and develop midstream energy assets. WES closed its initial public offering to become publicly traded in 2008. Western Gas Equity Partners, LP was formed by converting WGR Holdings, LLC into a limited partnership and changing its name.

For purposes of these consolidated financial statements, “WGP” refers to Western Gas Equity Partners, LP and its consolidated subsidiaries, including Western Gas Holdings, LLC and WES. The “General Partner” or “WES GP” refers to Western Gas Holdings, LLC, individually as the general partner of WES, and excludes WES itself. “Anadarko” or refers to Anadarko Petroleum Corporation and its consolidated subsidiaries, excluding WGP. “Affiliates” refers to wholly owned and partially owned subsidiaries of Anadarko, excluding WGP, and includes the interests in Fort Union Gas Gathering, LLC (“Fort Union”), White Cliffs Pipeline, LLC (“White Cliffs”) and Rendezvous Gas Services, LLC (“Rendezvous”). “Equity investment throughput” refers to WGP’s 14.81% share of Fort Union and 22% share of Rendezvous gross volumes, and excludes WGP’s 10% share of White Cliffs pipeline volumes, all held by WGP through its partnership interests in WES as next described.

The three types of partnership interests in WES owned by WGP are as follows: (i) a 2.0% general partner interest in WES, through a consolidated subsidiary, WES GP; (ii) all of the incentive distribution rights in WES, which entitle WGP to receive increasing percentages, up to the maximum level of 48.0%, of any incremental cash distributed by WES as certain target distribution levels are reached in any quarter; and (iii) 100% of the non-public limited partner interest in WES. WES GP owns a 2.0% general partner interest in WES, which constitutes substantially all of its business, which primarily is to manage the affairs and operations of WES. Refer to Note 4 for a discussion on Anadarko’s holdings of WES equity.

WES is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, NGLs and crude oil for Anadarko, as well as third-party producers and customers. The assets of WGP, through its partnership interests in WES, include thirteen gathering systems, seven natural gas treating facilities, ten natural gas processing facilities, two NGL pipelines, one interstate gas pipeline, one intrastate gas pipeline, and three separate interests in Fort Union, White Cliffs and Rendezvous, which are accounted for under the equity method. These assets are located in East and West Texas, the Rocky Mountains (Colorado, Utah and Wyoming), and the Mid-Continent (Kansas and Oklahoma). WES also has facilities currently under construction in South Texas and northeast Colorado.

Basis of presentation. The accompanying consolidated financial statements of WGP have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The consolidated financial statements include the accounts of WGP and entities in which it holds a controlling financial interest. Investments in non-controlled entities over which WES, or WGP through its investment in WES, exercises significant influence are accounted for under the equity method. All significant intercompany transactions have been eliminated.

The consolidated financial results of WES are included in WGP’s financial statements due to WGP’s 100% ownership interest in WES GP and WES GP’s control of WES. In July 2009, WES acquired a 51% membership interest in Chipeta Processing LLC (“Chipeta”) and became party to Chipeta’s limited liability company agreement, as amended and restated (see Notes 2 and 3). On August 1, 2012, WES closed on the acquisition of Anadarko’s remaining 24% membership interest in Chipeta. Prior to this transaction, the interests in Chipeta held by Anadarko

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)

 

and a third-party member were reflected as noncontrolling interests in the consolidated financial statements. The acquisition of Anadarko’s remaining 24% interest was accounted for on a prospective basis as WES acquired an additional interest in an already-consolidated entity. As such, beginning August 1, 2012, the consolidated financial statements reflect the total membership interest in Chipeta of 75%. The 25% membership interest held by the third-party member reflected as noncontrolling interests in the consolidated financial statements for all periods presented. Throughout these notes to consolidated financial statements, and to the extent material, any differences between the consolidated financial results of WGP and WES are identified as those of WGP as a standalone parent and its subsidiaries, excluding WES.

WGP has no independent operations or material assets other than its partnership interests in WES. WGP’s consolidated financial statements differ from those of WES primarily as a result of: (i) the presentation of noncontrolling interest ownership in WGP (attributable to the publicly held limited partner interests in WES), (ii) the elimination of WES GP’s investment in WES with WES GP’s underlying capital account and (iii) the recognition of the liabilities for awards issued pursuant to the Western Gas Holdings, LLC Equity Incentive Plan, as amended and restated (see Note 5). The difference between WGP’s carrying value of its investment in WES and the underlying book value of common units issued by WES is accounted for as an equity transaction. If WES issues common units at a price different than WGP’s carrying value per unit, the premium or deficiency is reflected as an adjustment to partners’ capital.

The information furnished herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the consolidated financial statements. The accompanying consolidated financial statements, along with the notes thereto, should be read in conjunction with WGP’s annual consolidated financial statements.

Presentation of WES assets. References to “WES assets,” as of September 30, 2012, refer to the assets indirectly owned by WGP, through its partnership interests in WES. Because Anadarko controls WES through its ownership and control of WES GP, WES’s acquisition of assets from Anadarko is considered a transfer of net assets between entities under common control (see Note 2). As a result of common control asset acquisitions, WES, and WGP by virtue of its consolidation of WES, may be required to recast its financial statements to include the activities of the newly acquired commonly controlled assets as of the date of common control.

The consolidated financial statements for periods prior to the acquisition of the WES assets, the results for which are included within these consolidated financial statements for all periods presented, have been prepared from Anadarko’s historical cost-basis accounts and may not necessarily be indicative of the actual results of operations that would have occurred if WES had owned the assets during the periods reported.

In preparing financial statements in accordance with GAAP, management makes informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. Management evaluates its estimates and related assumptions regularly, utilizing historical experience and other methods considered reasonable under the particular circumstances. Changes in facts and circumstances or additional information may result in revised estimates and actual results may differ from these estimates. Effects on the business, financial condition and results of operations resulting from revisions to estimates are recognized when the facts that give rise to the revision become known.

Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)

 

Accordingly, the accompanying consolidated financial statements and notes should be read in conjunction with WGP’s consolidated financial statements for the year ended December 31, 2011. Management believes that the disclosures made are adequate to make the information not misleading. Certain prior-period amounts have been reclassified to conform to the current-year presentation.

Recently adopted accounting standard. In May 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that further addresses fair value measurement accounting and related disclosure requirements. The ASU clarifies the FASB’s intent regarding the application of existing fair value measurement and disclosure requirements, changes the fair value measurement requirements for certain financial instruments, and sets forth additional disclosure requirements for other fair value measurements. The ASU is to be applied prospectively and is effective for periods beginning after December 15, 2011. WGP adopted the ASU effective January 1, 2012. The adoption of the requirements of the ASU, which expanded disclosures, had no effect on the accompanying consolidated financial statements.

2. ACQUISITIONS

The following table presents the acquisitions completed by WES during 2012 and 2011, and identifies the funding sources for such acquisitions:

 

thousands except unit and percent amounts    Acquisition
Date
     Percentage
Acquired
    Borrowings      Cash
On Hand
     WES
Common
Units Issued
     WES
GP Units
Issued
 

Platte Valley (1)

     02/28/11         100   $ 303,000      $ 602        —           —     

Bison (2)

     07/08/11         100     —           25,000        2,950,284        60,210  

MGR (3)

     01/13/12         100     299,000        159,587        632,783        12,914  

Chipeta (4)

     08/01/12         24     —           128,250        151,235        3,086  

 

(1) 

The assets acquired from a third party include (i) a natural gas gathering system and related compression and other ancillary equipment, and (ii) cryogenic gas processing facilities. These assets, located in the Denver-Julesburg Basin, are referred to collectively as the “Platte Valley assets” and the acquisition as the “Platte Valley acquisition.” An adjustment to intangible assets of $1.6 million was recorded in August 2011, representing the final allocation of the purchase price.

(2) 

The Bison gas treating facility acquired from Anadarko is located in the Powder River Basin in northeastern Wyoming and includes (i) three amine treating units, (ii) compressor units, and (iii) generators. These assets are referred to collectively as the “Bison assets” and the acquisition as the “Bison acquisition.” The Bison assets are the only treating and delivery point into the third-party-owned Bison pipeline. Anadarko began construction of the Bison assets in 2009 and placed them in service in June 2010.

(3) 

Mountain Gas Resources LLC (“MGR”), acquired from Anadarko, owns (i) the Red Desert complex, located in the greater Green River Basin in southwestern Wyoming, including the Patrick Draw processing plant, the Red Desert processing plant, gathering lines, and related facilities, (ii) a 22% interest in Rendezvous, which owns a gathering system serving the Jonah and Pinedale Anticline fields in southwestern Wyoming, and (iii) certain additional midstream assets and equipment. These assets are collectively referred to as the “MGR assets” and the acquisition as the “MGR acquisition.” See further information below.

(4) 

On August 1, 2012, WES acquired Anadarko’s remaining 24% membership interest in Chipeta (as described in Note 1), with distributions related to the additional interest beginning July 1, 2012, bringing its total membership interest in Chipeta to 75%. The 25% membership interest held by a third party is reflected as noncontrolling interests in the consolidated financial statements for all periods presented.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2. ACQUISITIONS (CONTINUED)

 

Platte Valley acquisition. The Platte Valley acquisition was accounted for under the acquisition method of accounting, whereby the Platte Valley assets and liabilities were recorded in the consolidated balance sheet at their estimated fair value as of the acquisition date. Results of operations attributable to the Platte Valley assets were included in the consolidated statements of income beginning on the acquisition date in the first quarter of 2011. The intangible asset balance in the consolidated balance sheets represents the fair value, net of amortization, related to the contracts assumed by WES in connection with the Platte Valley acquisition in February 2011, which dedicate certain customers’ field production to the acquired gathering and processing system.

The following table presents the unaudited pro forma condensed financial information as if the Platte Valley acquisition had occurred on January 1, 2011:

 

thousands    Nine Months Ended
September 30, 2011
 

Revenues

   $ 624,107   

Net income

     126,184   

Net income attributable to Western Gas Equity Partners, LP

     62,168   

The pro forma information is presented for illustration purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisition been completed at the assumed date, nor is it necessarily indicative of future operating results of the combined entity. Pro forma information in the table above includes $58.7 million of revenues and $40.1 million of expenses attributable to the Platte Valley assets and is included in the consolidated statement of income for the nine months ended September 30, 2011. The pro forma adjustments reflect pre-acquisition results of the Platte Valley assets for January and February 2011, including (a) estimated revenues and expenses; (b) estimated depreciation and amortization based on the preliminary purchase price allocated to property, plant and equipment and other intangible assets and estimated useful lives; (c) elimination of $0.7 million of acquisition-related costs; and (d) interest on borrowings under the WES RCF of $303.0 million to finance the Platte Valley acquisition. The pro forma adjustments include estimates and assumptions based on currently available information. Management believes the estimates and assumptions are reasonable, and the relative effects of the transactions are properly reflected. The pro forma information does not reflect any cost savings or other synergies anticipated as a result of the acquisition, nor does it reflect any future acquisition related expenses. Pro forma information is not presented for periods ended on or before December 31, 2010, as it is not practical to determine revenues and cost of product for periods prior to January 1, 2011, the effective date of the gathering and processing agreement with the seller.

MGR acquisition. Other assets on the consolidated balance sheets include a receivable of $0.5 million and $0.7 million as of September 30, 2012, and December 31, 2011, respectively, recognized in conjunction with the capital lease component of a processing agreement assumed in connection with the MGR acquisition by WES. The agreement, in which WES is the lessor, extends through December 2014. For all periods presented, other assets also include $4.6 million related to the unguaranteed residual value of the processing plant included in the processing agreement, based on a measurement of fair value estimated when the plant was acquired by Anadarko in 2006. Interest income related to the capital lease is recorded to other expense, net on the accompanying consolidated statements of income.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

3. WES DISTRIBUTIONS

WES’s partnership agreement requires it to distribute all of its available cash (as defined in WES’s partnership agreement) to unitholders of record on the applicable record date within 45 days of the end of each quarter. WES declared the following cash distributions to its unitholders, including distributions to WGP, for the periods presented:

 

thousands except per-unit amounts

Quarters Ended

   Total Quarterly
Distribution
per Unit
     Total Cash
Distribution
     Date of
Distribution

2011

        

March 31

   $ 0.390      $ 33,168      May 2011

June 30

   $ 0.405      $ 36,063      August 2011

September 30

   $ 0.420       $ 40,323       November 2011

2012

        

March 31

   $ 0.460      $ 46,053      May 2012

June 30 (1)

   $ 0.480      $ 52,425      August 2012

September 30 (1)

   $ 0.500       $ 56,346       November 2012

 

(1) 

On October 11, 2012, the board of directors of WES GP declared a cash distribution to WES unitholders of $0.50 per unit, or $56.3 million in aggregate, including incentive distributions. The cash distribution is payable on November 13, 2012, to unitholders of record at the close of business on October 31, 2012.

4. EQUITY AND PARTNERS’ CAPITAL

Holdings of WES equity. As of September 30, 2012, Anadarko, through its ownership of WGP, indirectly held 1,957,845 general partner units of WES representing a 2.0% general partner interest in WES, 40,573,239 WES common units representing a 41.4% limited partner interest in WES, and 100% of the WES incentive distribution rights. The public held 55,361,112 WES common units, representing a 56.6% limited partner interest in WES.

Equity offerings. WES completed the following public offerings of its common units during 2011 and 2012:

 

thousands except unit and per-unit amounts    WES
Common
Units Issued (1)
     WES GP
Units (2)
     Price Per
Unit
     Underwriting
Discount and
Other Offering
Expenses
     Net
Proceeds
to WES
 

March 2011 equity offering

     3,852,813          78,629        $ 35.15      $ 5,621      $ 132,569   

September 2011 equity offering

     5,750,000          117,347          35.86        7,655        202,748   

June 2012 equity offering

     5,000,000          102,041          43.88        7,435         216,442   

 

(1) 

Includes the issuance of 302,813 WES common units and 750,000 WES common units pursuant to the exercise, in full or in part, of the underwriters’ over-allotment options granted in connection with the March 2011 and September 2011 equity offerings, respectively.

(2) 

Represents general partner units of WES issued to WES GP in exchange for WES GP’s proportionate capital contribution to maintain its 2.0% general partner interest.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

4. EQUITY AND PARTNERS’ CAPITAL (CONTINUED)

 

WES Common and general partner units. WES’s common units are listed on the New York Stock Exchange under the symbol “WES.” The following table summarizes WES common and general partner units issued during the nine months ended September 30, 2012:

 

     WES Common
Units
     WES General
Partner Units
     Total  

Balance at December 31, 2011

     90,140,999        1,839,613        91,980,612  

MGR acquisition

     632,783        12,914        645,697  

Long-Term Incentive Plan awards

     9,334        191        9,525  

June 2012 equity offering

     5,000,000        102,041        5,102,041  

Chipeta acquisition

     151,235         3,086         154,321   
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2012

     95,934,351         1,957,845         97,892,196   
  

 

 

    

 

 

    

 

 

 

5. TRANSACTIONS WITH AFFILIATES

Affiliate transactions. Revenues from affiliates include amounts earned by WES from services provided to Anadarko as well as from the sale of residue, condensate and NGLs to Anadarko. In addition, WES purchases natural gas from an affiliate of Anadarko pursuant to gas purchase agreements. Operating and maintenance expense includes amounts accrued for or paid to affiliates for the operation of the WES assets, whether in providing services to affiliates or to third parties, including field labor, measurement and analysis, and other disbursements. A portion of WES’s general and administrative expenses is paid by Anadarko, which results in affiliate transactions pursuant to the reimbursement provisions of the WES omnibus agreement. Affiliate expenses do not bear a direct relationship to affiliate revenues, and third-party expenses do not bear a direct relationship to third-party revenues. See Note 2 for further information related to contributions of assets to WES by Anadarko.

Cash management. Anadarko operates a cash management system whereby excess cash from most of its subsidiaries (including WGP), held in separate bank accounts, is generally swept to centralized accounts. Prior to the acquisitions of the WES assets, third-party sales and purchases related to such assets were received or paid in cash by Anadarko within its centralized cash management system. Anadarko charged or credited WES interest at a variable rate on outstanding affiliate balances for the periods these balances remained outstanding. The outstanding affiliate balances were entirely settled through an adjustment to equity and partners’ capital in connection with the acquisition of the WES assets. Subsequent to the acquisition of the WES assets from Anadarko, transactions related to such assets are cash settled directly with third parties and with Anadarko affiliates, and affiliate-based interest expense on current intercompany balances is not charged. Chipeta cash settles its transactions directly with third parties and Anadarko, as well as with the other subsidiaries of WES.

Note receivable from and amounts payable to Anadarko. In May 2008, WES loaned $260.0 million to Anadarko in exchange for a 30-year note bearing interest at a fixed annual rate of 6.50%, payable quarterly. The fair value of the note receivable from Anadarko was approximately $326.7 million and $303.7 million at September 30, 2012, and December 31, 2011, respectively. The fair value of the note reflects consideration of credit risk and any premium or discount for the differential between the stated interest rate and quarter-end market interest rate, based on quoted market prices of similar debt instruments. Accordingly, the fair value of the note receivable from Anadarko is measured using Level 2 inputs.

In addition, in December 2008, WES entered into a five-year $175.0 million term loan agreement with Anadarko, which was repaid in full in June 2012 using the proceeds from the 4.000% Senior Notes due 2022 (the “2022 Notes”). See Note 7.

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

 

During the first quarter of 2012, the board of directors of WES GP approved the continued construction of the Brasada and Lancaster gas processing facilities in South Texas and northeast Colorado, respectively, which were previously under construction by Anadarko. WES agreed to reimburse Anadarko for $18.9 million of certain expenditures Anadarko incurred in 2011 related to the construction of the Brasada and Lancaster plants, and $0.3 million of related capitalized interest. In February 2012, these expenditures were transferred to WES and a corresponding current payable was established, which is expected to be repaid by WES during the fourth quarter of 2012.

Commodity price swap agreements. WES has commodity price swap agreements with Anadarko to mitigate exposure to commodity price volatility that would otherwise be present as a result of the purchase and sale of natural gas, condensate or NGLs. Notional volumes for each of the commodity price swap agreements are not specifically defined; instead, the commodity price swap agreements apply to the actual volume of natural gas, condensate and NGLs purchased and sold at the Granger, Hilight, Hugoton, Newcastle, MGR and Wattenberg assets, with various expiration dates through December 2016. The commodity price swap agreements do not satisfy the definition of a derivative financial instrument and, therefore, are not required to be re-measured at fair value. WES has not entered into any new commodity price swap agreements since the fourth quarter of 2011.

Below is a summary of the fixed price ranges on WES’s outstanding commodity price swap agreements as of September 30, 2012:

 

     Year Ended December 31,  
per barrel except natural gas    2012      2013      2014      2015      2016  

Ethane

   $ 18.21 – 29.78      $ 18.32 – 30.10      $ 18.36 – 30.53      $ 18.41 – 23.41      $ 23.11  

Propane

   $ 45.23 – 57.97      $ 45.90 – 55.84      $ 46.47 – 53.78      $ 47.08 – 52.99      $ 52.90  

Isobutane

   $ 57.50 – 80.98      $ 60.44 – 77.66      $ 61.24 – 75.13      $ 62.09 – 74.02      $ 73.89  

Normal butane

   $ 52.40 – 71.15      $ 53.20 – 68.24      $ 53.89 – 66.01      $ 54.62 – 65.04      $ 64.93  

Natural gasoline

   $ 69.77 – 89.51      $ 70.89 – 92.23      $ 71.85 – 83.04      $ 72.88 – 81.82      $ 81.68  

Condensate

   $ 72.73 – 89.51      $ 74.04 – 85.84      $ 75.22 – 83.04      $ 76.47 – 81.82      $ 81.68  

Natural gas (per MMbtu)

   $ 3.62   –   5.97      $ 3.75   –   6.09      $ 4.45   –   6.20      $ 4.66   –   5.96      $ 4.87  

The following table summarizes realized gains and losses on WES’s commodity price swap agreements as reflected in the consolidated financial statements:

 

     Nine Months Ended
September 30,
 
thousands    2012     2011  

Gains (losses) on commodity price swap agreements related to sales: (1)

    

Natural gas sales

   $ 30,728     $ 24,079  

Natural gas liquids sales

     46,020       (25,736
  

 

 

   

 

 

 

Total

     76,748       (1,657

Losses on commodity price swap agreements related to purchases (2)

     (70,342     (19,377
  

 

 

   

 

 

 

Net gains (losses) on commodity price swap agreements

   $ 6,406     $ (21,034
  

 

 

   

 

 

 

 

(1) 

Reported in affiliate natural gas, NGLs and condensate sales in the consolidated statements of income in the period in which the related sale is recorded.

(2) 

Reported in cost of product in the consolidated statements of income in the period in which the related purchase is recorded.

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

 

Gas gathering and processing agreements. WES has significant gas gathering and processing arrangements with affiliates of Anadarko on a majority of its systems. Approximately 76% and 75% of WES’s gathering, transportation and treating throughput (excluding equity investment throughput) for the nine months ended September 30, 2012 and 2011, respectively, was attributable to natural gas production owned or controlled by Anadarko. Approximately 59% and 64% of WES’s processing throughput (excluding equity investment throughput) for the nine months ended September 30, 2012 and 2011, respectively, was attributable to natural gas production owned or controlled by Anadarko.

In connection with the MGR acquisition, WES entered into 10-year, fee-based gathering and processing agreements with Anadarko effective December 1, 2011, for all affiliate throughput on the MGR assets.

Equity incentive plan and Anadarko incentive plans. Equity-based compensation costs are allocated by Anadarko to WES under the WES omnibus agreement for grants made pursuant to (i) the Western Gas Holdings, LLC Equity Incentive Plan, as amended and restated (the “Incentive Plan”) and (ii) the Anadarko Petroleum Corporation 1999 Stock Incentive Plan and the Anadarko Petroleum Corporation 2008 Omnibus Incentive Compensation Plan (Anadarko’s plans are referred to collectively as the “Anadarko Incentive Plans”).

Under the Incentive Plan, participants are granted Unit Value Rights (“UVRs”), Unit Appreciation Rights (“UARs”) and Dividend Equivalent Rights (“DERs”). For these equity-based awards issued under the Incentive Plan and ultimately settled in cash, the fair value of the relevant equity grant is revised periodically based on the estimated fair value of WES GP using a discounted cash flow estimate and multiples-valuation terminal value. Anadarko, the parent company of WGP, directs the issuance of equity-based awards to its employees, so the fair value of the outstanding awards under the Incentive Plan is classified as dividend payable to Anadarko within current liabilities for vested awards which have not been cash-settled, and as long-term liabilities for unvested awards which are outstanding, in the accompanying consolidated financial statements of WGP. UVRs and UARs outstanding under the Incentive Plan were collectively valued at $1,053 per unit and $634 per unit as of September 30, 2012, and December 31, 2011, respectively. General and administrative expense in the accompanying consolidated statements of income includes $16.4 million and $6.3 million for the nine months ended September 30, 2012 and 2011, respectively, of equity-based compensation expense allocated to WES by Anadarko for grants made pursuant to the Incentive Plan and Anadarko Incentive Plans.

Equipment purchase and sale. During the three months ended September 30, 2012, WES purchased equipment with a net carrying value of $5.0 million from Anadarko for $12.2 million in cash, with the difference recorded as an adjustment to partners’ capital. Also during the three months ended September 30, 2012, WES sold pipe and equipment with a net carrying value of $0.4 million to Anadarko for $0.8 million in cash. The gain on sale was recorded as an adjustment to partner’s capital. In June 2012, WES purchased equipment with a net carrying value of $1.2 million from Anadarko for $2.2 million in cash, with the difference recorded as an adjustment to partners’ capital. In March 2012, WES purchased equipment with a net carrying value of $0.6 million from Anadarko for $4.5 million in cash, with the difference recorded as an adjustment to partners’ capital.

Capital expenditures transfer. As described in Note receivable from and amounts payable to Anadarko above, during 2011 Anadarko incurred certain expenditures related to the construction of the Brasada and Lancaster gas processing facilities, which were transferred to WES in the first quarter of 2012 and are included in the balance of property, plant and equipment as of September 30, 2012. See Note 6.

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

 

Summary of affiliate transactions. Affiliate transactions include revenue from affiliates, reimbursement of operating expenses and purchases of natural gas. The following table summarizes affiliate transactions, including transactions with Anadarko and its affiliates:

 

     Nine Months Ended
September 30,
 
thousands    2012      2011  

Revenues (1)

   $ 507,473       $ 481,281   

Cost of product (1)

     115,603         59,682   

Operation and maintenance (2)

     38,040         38,692   

General and administrative (3)

     29,421         19,473   
  

 

 

    

 

 

 

Operating expenses

     183,064         117,847   

Interest income, net (4)

     12,675         18,992   

Interest expense (5)

     2,684         3,701   

Contributions from noncontrolling interest owners and Anadarko

     12,588         8,266   

Distributions to noncontrolling interest owners and Anadarko

     6,528         5,882   

 

(1) 

Represents amounts recognized under gathering, treating or processing agreements, and purchase and sale agreements.

(2) 

Represents expenses incurred under the services and secondment agreement for periods including and subsequent to the date of the acquisition of the WES assets, as well as expenses incurred by Anadarko on a historical basis related to WES assets prior to the acquisition of such assets by WES.

(3) 

Represents general and administrative expense incurred under the WES omnibus agreement for periods including and subsequent to the date of the acquisition of the WES assets, as well as a management services fee not within the scope of the WES omnibus agreement for reimbursement of expenses incurred by Anadarko for periods prior to the acquisition of the WES assets.

(4) 

Represents interest income recognized on the note receivable from Anadarko. This line item also includes interest income, net on affiliate balances related to the Bison and MGR assets for periods prior to the acquisition of such assets. Beginning December 7, 2011, Anadarko discontinued charging interest on intercompany balances. The outstanding affiliate balances on the WES assets prior to their acquisition were entirely settled through an adjustment to equity and partners’ capital.

(5) 

Represents interest expense recognized on the note payable to Anadarko (see Note 7) and interest imputed on the reimbursement payable to Anadarko for certain expenditures Anadarko incurred in 2011 related to the construction of the Brasada and Lancaster Plants (see Note receivable from and amounts payable to Anadarko within this Note 5). In June 2012, the note payable to Anadarko was repaid in full.

Concentration of credit risk. Anadarko was the only customer from whom revenues exceeded 10% of the consolidated revenues for all periods presented on the consolidated statements of income.

 

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Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

6. PROPERTY, PLANT AND EQUIPMENT

A summary of the historical cost of property, plant and equipment is as follows:

 

thousands    Estimated
Useful Life
     September 30,
2012
     December 31,
2011
 

Land

     n/a       $ 501       $ 364  

Gathering systems

     5 to 47 years         2,529,475         2,437,152  

Pipelines and equipment

     15 to 45 years         91,126         90,883  

Assets under construction

     n/a         387,026         104,687  

Other

     3 to 25 years         6,697         4,927  
     

 

 

    

 

 

 

Total property, plant and equipment

        3,014,825         2,638,013  

Accumulated depreciation

        671,902         585,789  
     

 

 

    

 

 

 

Net property, plant and equipment

      $ 2,342,923       $ 2,052,224  
     

 

 

    

 

 

 

The cost of property classified as “Assets under construction” is excluded from capitalized costs being depreciated. These amounts represent property that is not yet suitable to be placed into productive service as of the respective balance sheet date. Assets under construction includes $18.9 million related to the transfer of the Brasada and Lancaster gas processing facilities (see Note 5), and $0.3 million of related capitalized interest. In addition, property, plant and equipment cost and third-party accrued liability balances in the consolidated balance sheets each include $58.2 million and $15.0 million of accrued capital as of September 30, 2012, and December 31, 2011, respectively, representing estimated capital expenditures for which invoices had not yet been processed.

7. DEBT AND INTEREST EXPENSE

The following table presents outstanding debt as of September 30, 2012, and December 31, 2011:

 

     September 30, 2012      December 31, 2011  
thousands    Principal      Carrying
Value
     Fair Value      Principal      Carrying
Value
     Fair Value  

4.000% Senior Notes due 2022

   $ 520,000      $ 515,897      $ 519,728       $ —         $ —         $ —     

5.375% Senior Notes due 2021

     500,000        494,538         499,950        500,000        494,178        499,950  

Note payable to Anadarko

     —           —           —           175,000        175,000        174,528  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt outstanding (1)

   $ 1,020,000      $ 1,010,435       $ 1,019,678       $ 675,000      $ 669,178      $ 674,478  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The consolidated balance sheets include accrued interest expense of $14.3 million and $2.7 million as of September 30, 2012, and December 31, 2011, respectively, which is included in accrued liabilities.

Fair value of debt. The fair value of debt reflects any premium or discount for the difference between the stated interest rate and the quarter-end market interest rate, and is based on quoted market prices for identical instruments, if available, or based on valuations of similar debt instruments. Accordingly, the fair value of the debt instruments in the table above is measured using Level 2 inputs.

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

7. DEBT AND INTEREST EXPENSE (CONTINUED)

 

Debt activity. The following table presents debt activity for the nine months ended September 30, 2012:

 

thousands    Carrying Value  

Balance as of December 31, 2011

   $ 669,178  

Revolving credit facility borrowings

     374,000  

Issuance of 4.000% Senior Notes due 2022

     520,000  

Repayment of revolving credit facility

     (374,000

Repayment of Note payable to Anadarko

     (175,000

Revolving credit facility borrowings—Swingline

     20,000  

Repayment of revolving credit facility—Swingline

     (20,000

Other and changes in debt discount

     (3,743
  

 

 

 

Balance as of September 30, 2012

   $ 1,010,435  
  

 

 

 

4.000% Senior Notes due 2022. In June 2012, WES completed the offering of $520.0 million aggregate principal amount of the 2022 Notes at a price to the public of 99.194% of the face amount. Including the effects of the issuance and underwriting discounts, the effective interest rate is 4.207%. Interest will be paid semi-annually on January 1 and July 1 of each year, commencing on January 1, 2013. The 2022 Notes will mature on July 1, 2022, unless redeemed, in whole or in part, at any time prior to maturity, at a redemption price that includes a make-whole premium. Proceeds (net of underwriting discount of $3.4 million and debt issuance costs) were used to repay all amounts then outstanding under revolving credit facility (“WES RCF”) and the $175.0 million note payable to Anadarko (see below).

The 2022 Notes indenture contains customary events of default including, among others, (i) default for 30 days in the payment of interest when due on the 2022 Notes; (ii) default in payment, when due, of principal of or premium, if any, on the 2022 Notes at maturity, upon redemption or otherwise; and (iii) certain events of bankruptcy or insolvency. The 2022 Notes indenture also contains covenants that limit, among other things, the ability of WES, as well as that of certain of its subsidiaries, to (i) create liens on its principal properties; (ii) engage in sale and leaseback transactions; and (iii) merge or consolidate with another entity or sell, lease or transfer substantially all of its properties or assets to another entity. At September 30, 2012, WES was in compliance with all covenants under the 2022 Notes.

Refer to Note 9 for a discussion of the additional offering of 2022 Notes in October 2012.

5.375% Senior Notes due 2021. In May 2011, WES completed the offering of $500.0 million aggregate principal amount of 5.375% Senior Notes due 2021 (the “2021 Notes”) at a price to the public of 98.778% of the face amount. Including the effects of the issuance and underwriting discounts, the effective interest rate is 5.648%.

Upon issuance, the 2021 Notes were fully and unconditionally guaranteed on a senior unsecured basis by each of the wholly owned subsidiaries of WES (the “Subsidiary Guarantors”). The Subsidiary Guarantors’ guarantees were immediately released on June 13, 2012, upon the Subsidiary Guarantors becoming released from their obligations under the WES RCF, as discussed below. At September 30, 2012, WES was in compliance with all covenants under the 2021 Notes.

Note payable to Anadarko. In December 2008, WES entered into a five-year $175.0 million term loan agreement with Anadarko. The term loan agreement was amended in December 2010 to fix the interest rate at 2.82% through maturity in 2013. In June 2012, the note payable to Anadarko was repaid in full with proceeds from the issuance of the 2022 Notes.

 

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Table of Contents
Index to Financial Statements

WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

7. DEBT AND INTEREST EXPENSE (CONTINUED)

 

Revolving credit facility. In March 2011, WES entered into an amended and restated $800.0 million senior unsecured WES RCF which matures in March 2016 and bears interest at London Interbank Offered Rate (“LIBOR”) plus applicable margins currently ranging from 1.30% to 1.90%, or an alternate base rate equal to the greatest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.5%, or (c) LIBOR plus 1%, in each case plus applicable margins currently ranging from 0.30% to 0.90%. The interest rate was 1.71% and 1.80% at September 30, 2012, and December 31, 2011, respectively. WES is required to pay a quarterly facility fee currently ranging from 0.20% to 0.35% of the commitment amount (whether used or unused), based upon the senior unsecured debt rating of WES. The facility fee rate was 0.25% at September 30, 2012, and December 31, 2011.

On June 13, 2012, following the receipt of a second investment grade rating as defined in the WES RCF, the guarantees provided by the wholly owned subsidiaries of WES were released, and WES is no longer subject to certain of the restrictive covenants associated with the WES RCF, including the maintenance of an interest coverage ratio and adherence to covenants that limit, among other things, the ability of WES, and certain of its subsidiaries, to dispose of assets and make certain investments or payments. WES did not have outstanding borrowings under the $800.0 million WES RCF as of September 30, 2012, and had $0.3 million in outstanding letters of credit issued under the facility. At September 30, 2012, WES was in compliance with all remaining covenants under the WES RCF.

The 2022 Notes, the 2021 Notes and obligations under the WES RCF are recourse to WES GP. In turn, WES GP has been indemnified by a wholly owned subsidiary of Anadarko against any claims made against WES GP under the 2022 Notes, the 2021 Notes and/or the WES RCF.

Working capital facility. Refer to Note 9 for a discussion of the working capital facility entered into on November 1, 2012.

Wattenberg term loan. WES repaid the $250.0 million Wattenberg term loan in full in March 2011 using borrowings from the WES RCF and recognized $1.3 million of accelerated amortization expense related to its early repayment.

Interest rate agreements. In May 2012, WES entered into U.S. Treasury Rate lock agreements to mitigate the risk of rising interest rates prior to the issuance of the 2022 Notes. The rate lock agreements were settled simultaneously with the issuance of the 2022 Notes in June 2012, realizing a loss of $1.7 million, which is included in other expense, net in the accompanying consolidated statements of income.

In March 2011, WES entered into a forward-starting interest-rate swap agreement to mitigate the risk of rising interest rates prior to the issuance of the 2021 Notes. In May 2011, WES issued the 2021 Notes and terminated the swap agreement, realizing a loss of $1.9 million, which is included in other expense, net in the accompanying consolidated statements of income.

 

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WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

7. DEBT AND INTEREST EXPENSE (CONTINUED)

 

Interest expense. The following table summarizes the amounts included in interest expense:

 

     Nine Months Ended
September 30,
 
thousands    2012     2011  

Third parties

    

Interest expense on long-term debt

   $ 28,036     $ 13,889  

Amortization of debt issuance costs and commitment fees (1)

     3,225       4,282  

Capitalized interest

     (3,827     (134
  

 

 

   

 

 

 

Total interest expense—third parties

     27,434       18,037  
  

 

 

   

 

 

 

Affiliates

    

Interest expense on note payable to Anadarko (2)

     2,440       3,701  

Interest expense, net on affiliate balances (3)

     244        
  

 

 

   

 

 

 

Total interest expense—affiliates

     2,684       3,701  
  

 

 

   

 

 

 

Interest expense

   $ 30,118     $ 21,738  
  

 

 

   

 

 

 

 

(1) 

Amortization of the original issue discount and underwriters’ fees related to the 2022 Notes and 2021 Notes was $0.8 million for the nine months ended September 30, 2012, and related to the 2021 Notes was $0.3 million for the nine months ended September 30, 2011.

(2) 

In June 2012, the note payable to Anadarko was repaid in full. See Note payable to Anadarko within this Note 7.

(3)

Imputed interest expense on the reimbursement payable to Anadarko for certain expenditures Anadarko incurred in 2011 related to the construction of the Brasada and Lancaster plants. See Note 5.

8. COMMITMENTS AND CONTINGENCIES

Litigation and legal proceedings. In March 2011, DCP Midstream LP (“DCP”) filed a lawsuit against Anadarko and others, including a subsidiary, Kerr-McGee Gathering LLC, in Weld County District Court (the “Court”) in Colorado, alleging that Anadarko and its affiliates diverted gas from DCP’s gathering and processing facilities in breach of certain dedication agreements. In addition to various claims against Anadarko, DCP is claiming unjust enrichment and other damages against Kerr-McGee Gathering LLC, the entity which holds the Wattenberg assets. Anadarko countersued DCP asserting that DCP has not properly allocated values and charges to Anadarko for the gas that DCP gathers and/or processes, and seeks a judgment that DCP has no valid gathering or processing rights to much of the gas production it is claiming, in addition to other claims. In July 2011, the Court denied the defendants’ motion to dismiss without ruling on the merits and the case is in the discovery phase. Trial is set for April 2014. Management does not believe the outcome of this proceeding will have a material effect on the financial condition, results of operations or cash flows of WGP. Management intends to vigorously defend this litigation. Furthermore, without regard to the merit of DCP’s claims, management believes that it has adequate contractual indemnities covering the claims against it in this lawsuit.

In addition, from time to time, WGP, through its partnership interests in WES, is involved in legal, tax, regulatory and other proceedings in various forums regarding performance, contracts and other matters that arise in the ordinary course of business. Management is not aware of any such proceeding for which a final disposition could have a material adverse effect on the financial condition, results of operations or cash flows of WGP.

 

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WESTERN GAS EQUITY PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

8. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

Other commitments. WES has short-term payment obligations, or commitments, related to its capital spending programs, as well as those of its unconsolidated affiliates. As of September 30, 2012, WES had unconditional payment obligations for services to be rendered, or products to be delivered in connection with its capital projects of approximately $78.8 million, which includes 100% of obligations related to Chipeta. A majority of these payment obligations will be paid in the next twelve months, and relate primarily to the continued construction of the Brasada and Lancaster plants (see Note 5) and capital projects at Chipeta.

Lease commitments. Anadarko, on behalf of WES, has entered into lease agreements for corporate offices, shared field offices and a warehouse supporting the operations of its subsidiaries. The leases for the shared field offices extend through 2018, and the lease for the warehouse extends through February 2014 and includes an early termination clause. During 2011, Anadarko entered into a lease agreement for the WES corporate offices that extends through March 2017. Anadarko, on behalf of WES, continues to lease certain other compression equipment under leases expiring through January 2015.

Rent expense associated with the office, warehouse and equipment leases was $2.3 million and $3.1 million for the nine months ended September 30, 2012 and 2011, respectively.

9. SUBSEQUENT EVENTS

In October 2012, WES issued an additional $150.0 million in aggregate principal amount of 4.000% Senior Notes due 2022 (the “New Notes”), at a price to the public of 105.178% of the face amount. The New Notes were offered as additional notes under the indenture governing the 2022 Notes issued in June 2012 (described in Note 7) and are treated as a single class of securities with the 2022 Notes under such indenture. Interest on the New Notes accrues from June 28, 2012, the date the 2022 Notes were issued, and will be payable semi-annually in arrears on January 1 and July 1 of each year, commencing January 1, 2013. Including the effects of the issuance premium and underwriting fees, the effective interest rate of the New Notes is 3.527%. Proceeds from issuance of the New Notes (net of underwriting fees of $1.0 million and debt issuance costs) will be used for general partnership purposes, which may include the funding of capital expenditures.

On November 1, 2012, WGP entered into a $30.0 million working capital facility with Anadarko as the lender. The facility is available exclusively to fund WGP’s working capital borrowings. Borrowings under the facility will mature on November 1, 2017, and will bear interest at LIBOR plus 1.50%.

 

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Appendix A

FORM OF FIRST AMENDED AND RESTATED AGREEMENT OF

LIMITED PARTNERSHIP OF WESTERN GAS EQUITY PARTNERS, LP

To be filed by amendment.

 

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Appendix B

GLOSSARY OF TERMS

backhaul: Refers to pipeline transportation service in which the nominated gas flow from receipt point to delivery point is in the opposite direction as the pipeline’s physical gas flow.

Bbls: Barrels.

Bbls/d: Barrels per day.

Bcf/d: One billion cubic feet per day.

condensate: A natural gas liquid with a low vapor pressure, mainly composed of propane, butane, pentane and heavier hydrocarbon fractions.

dry gas: A gas primarily composed of methane and ethane where heavy hydrocarbons and water either do not exist or have been removed through processing.

end-use markets: The ultimate users/consumers of transported energy products.

forward-haul: Refers to pipeline transportation service in which the nominated gas flow from receipt point to delivery point is in the same direction as the pipeline’s physical gas flow.

MBbls: one thousand barrels.

MBbls/d: one thousand barrels per day.

MMBtu: One million British Thermal Units.

MMBtu/d: One million British Thermal Units per day.

MMcf: One million cubic feet of natural gas.

MMcf/d: One million cubic feet of natural gas per day.

NGLs: Natural gas liquids. The combination of ethane, propane, butane and natural gasolines that when removed from natural gas become liquid under various levels of higher pressure and lower temperature.

play: A proven geological formation that contains commercial amounts of petroleum and/or natural gas.

receipt point: The point where production is received by or into a gathering system or transportation pipeline.

residue: The natural gas remaining after being processed or treated.

sour gas: Gas containing more than four parts per million of hydrogen sulfide.

tailgate: Refers to the point at which processed natural gas and/or natural gas liquids leave a processing facility for end-use markets.

wellhead: The equipment at the surface of a well used to control the well’s pressure; the point at which the hydrocarbons and water exit the ground.

 

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LOGO

Western Gas Equity Partners, LP

15,000,000 Common Units

Representing Limited Partner Interests

 

 

Prospectus

                    , 2012

 

 

Barclays

Citigroup

You should rely only on the information contained in this prospectus or any free writing prospectus Western Gas Equity Partners, LP may authorize to be delivered to you. Until                     , 2012 (25 days after the date of this prospectus, federal securities laws may require all dealers that effect transactions in the common units, whether or not participating in this offering, to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 


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Index to Financial Statements

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution

Set forth below are the expenses (other than underwriting discounts and the structuring fee payable to Barclays Capital Inc. and Citigroup Global Markets Inc.) expected to be incurred by the registrant in connection with the issuance and distribution of the securities registered hereby. With the exception of the Securities and Exchange Commission registration fee, the FINRA filing fee and the NYSE listing fee, the amounts set forth below are estimates.

 

SEC registration fee

   $ 49,411   

FINRA filing fee

     54,838   

NYSE listing fee

     *   

Printing and engraving expenses

     *   

Fees and expenses of legal counsel

     *   

Accounting fees and expenses

     *   

Transfer agent and registrar fees

     *   

Miscellaneous

     *   
  

 

 

 

Total

   $ *   
  

 

 

 

 

* To be provided by amendment.

 

Item 14. Indemnification of Directors and Officers

The section of the prospectus entitled “The Partnership Agreement of Western Gas Equity Partners, LP—Indemnification” discloses that we will generally indemnify officers, directors and affiliates of the general partner to the fullest extent permitted by the law against all losses, claims, damages or similar events and is incorporated herein by this reference.

Our general partner will enter into indemnification agreements (each, an “Indemnification Agreement”) with each of its officers and directors (each, an “Indemnitee”). Each Indemnification Agreement provides that our general partner will indemnify and hold harmless each Indemnitee against all expense, liability and loss (including attorneys’ fees, judgments, fines or penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by the Indemnitee in connection with serving in his or her capacity as an officer or director of our general partner (or of any subsidiary of our general partner) or in any capacity at the request of our general partner or its board of directors to the fullest extent permitted by applicable law, including Section 18-108 of the Delaware Limited Liability Company Act in effect on the date of the agreement or as such laws may be amended to provide more advantageous rights to the Indemnitee. Each Indemnification Agreement also provides that the general partner must advance payment of certain expenses to the Indemnitee, including fees of counsel, in advance of final disposition of any proceeding subject to receipt of an undertaking from the Indemnitee to return such advance if it is ultimately determined that the Indemnitee is not entitled to indemnification.

Anadarko’s bylaws provide that it must indemnify to the fullest extent permitted by applicable law any person made, or threatened to be made, a party in any action, suit or proceeding (whether civil, criminal, administrative, arbitrative or investigative), by reason of the fact that he or she is or was one of Anadarko’s directors or officers or by reason of the fact that such director or officer, at Anadarko’s request, is or was serving as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity. Anadarko is not required to indemnify anyone in connection with any proceeding initiated by such person unless it was authorized by our board of directors or is brought to enforce the right to indemnification.

 

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Anadarko has also entered into individual indemnification agreements with each of its directors and certain executive officers. These agreements indemnify these individuals to the fullest extent permitted by law against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of Anadarko.

The underwriting agreement to be entered into in connection with the sale of the securities offered pursuant to this registration statement, the form of which is to be filed as an exhibit to this registration statement, provides for indemnification of Anadarko and our general partner, their officers and directors and any person who controls Anadarko and our general partner, including indemnification for liabilities under the Securities Act.

 

Item 15. Recent Sales of Unregistered Securities

None.

 

Item 16. Exhibits

The following documents are filed as exhibits to this registration statement:

 

Exhibit
Number

       

Description

  1.1 **   

  Form of Underwriting Agreement (including Form of Lock-Up Agreement)
  2.1     

  Contribution, Conveyance and Assumption Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, Anadarko Petroleum Corporation, WGR Holdings, LLC, Western Gas Resources, Inc., WGR Asset Holding Company LLC, Western Gas Operating, LLC and WGR Operating, LP, dated as of May 14, 2008 (incorporated by reference to Exhibit 10.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
  2.2#     

  Contribution Agreement, dated as of November 11, 2008, by and among Western Gas Resources, Inc., WGR Asset Holding Company LLC, WGR Holdings, LLC, Western Gas Holdings, LLC, Western Gas Partners, LP, Western Gas Operating, LLC and WGR Operating, LP. (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on November 13, 2008, File No. 001-34046)
  2.3#     

  Contribution Agreement, dated as of July 10, 2009, by and among Western Gas Resources, Inc., WGR Asset Holding Company LLC, Anadarko Uintah Midstream, LLC, WGR Holdings, LLC, Western Gas Holdings, LLC, WES GP, Inc., Western Gas Partners, LP, Western Gas Operating, LLC and WGR Operating, LP. (incorporated by reference to Exhibit 2.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on July 23, 2009, File No. 001-34046)
  2.4#     

  Contribution Agreement, dated as of January 29, 2010 by and among Western Gas Resources, Inc., WGR Asset Holding Company LLC, Mountain Gas Resources LLC, WGR Holdings, LLC, Western Gas Holdings, LLC, WES GP, Inc., Western Gas Partners, LP, Western Gas Operating, LLC and WGR Operating, LP. (incorporated by reference to Exhibit 2.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on February 3, 2010 File No. 001-34046)
  2.5#     

  Contribution Agreement, dated as of July 30, 2010, by and among Western Gas Resources, Inc., WGR Asset Holding Company LLC, WGR Holdings, LLC, Western Gas Holdings, LLC, WES GP, Inc., Western Gas Partners, LP, Western Gas Operating, LLC and WGR Operating, LP. (incorporated by reference to Exhibit 2.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on August 5, 2010, File No. 001-34046)
  2.6#     

  Purchase and Sale Agreement, dated as of January 14, 2011, by and among Western Gas Partners, LP, Kerr-McGee Gathering LLC and Encana Oil & Gas (USA) Inc. (incorporated by reference to Exhibit 2.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on January 18, 2011 File No. 001-34046)

 

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Exhibit
Number

       

Description

  2.7#     

  Contribution Agreement, dated as of December 15, 2011, by and among Western Gas Resources, Inc., WGR Asset Holding Company LLC, WGR Holdings, LLC, Western Gas Holdings, LLC, WES GP, Inc., Western Gas Partners, LP, Western Gas Operating, LLC and WGR Operating, LP. (incorporated by reference to Exhibit 2.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on December 15, 2011, File No. 001-34046)
  3.1  

  Certificate of Limited Partnership of Western Gas Equity Partners, LP
  3.2 **   

  Form of First Amended and Restated Agreement of Limited Partnership of Western Gas Equity Partners, LP (included as Appendix A to the Prospectus)
  3.3  

  Certificate of Formation of Western Gas Equity Holdings, LLC
  3.4 **   

  Form of First Amended and Restated Limited Liability Company Agreement of Western Gas Equity Holdings, LLC
  3.5     

 

Certificate of Limited Partnership of Western Gas Partners, LP (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Registration Statement on Form S-1 filed on October 15, 2007, File No. 333-146700)

  3.6     

  First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated May 14, 2008 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
  3.7     

  Amendment No. 1 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP dated December 19, 2008 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on December 24, 2008, File No. 001-34046)
  3.8     

  Amendment No. 2 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated as of April 15, 2009 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on April 20, 2009, File No. 001-34046)
  3.9     

  Amendment No. 3 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP dated July 22, 2009 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on July 23, 2009, File No. 001-34046)
  3.10     

  Amendment No. 4 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP dated January 29, 2010 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on February 3, 2010, File No. 001-34046)
  3.11     

  Amendment No. 5 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated August 2, 2010 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on August 5, 2010, File No. 001-34046)
  3.12     

  Amendment No. 6 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated July 8, 2011 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on July 8, 2011, File No. 001-34046)
  3.13     

  Amendment No. 7 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated January 13, 2012 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on January 17, 2012, File No. 001-34046)
  3.14     

  Amendment No. 8 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated August 1, 2012 (incorporated by reference to Exhibit 3.10 to Western Gas Partners, LP’s Quarterly Report on Form 10-Q filed on August 2, 2012, File No. 001-34046)
  3.15     

  Certificate of Formation of Western Gas Holdings, LLC (incorporated by reference to Exhibit 3.3 to Western Gas Partners, LP’s Registration Statement on Form S-1 filed on October 15, 2007, File No. 333-146700)

 

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Index to Financial Statements

Exhibit
Number

     

Description

  3.16  

  Amended and Restated Limited Liability Company Agreement of Western Gas Holdings, LLC, dated as of May 14, 2008 (incorporated by reference to Exhibit 3.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
  4.1  

  Indenture, dated as of May 18, 2011, among Western Gas Partners, LP, as Issuer, the Subsidiary Guarantors named therein, as Guarantors, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 18, 2011, File No. 001-34046)
  4.2  

  First Supplemental Indenture, dated as of May 18, 2011, among Western Gas Partners, LP, as Issuer, the Subsidiary Guarantors named therein, as Guarantors, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 18, 2011, File No. 001-34046)
  4.3  

  Form of 5.375% Senior Notes due 2021 (incorporated by reference to Exhibit 4.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 18, 2011, File No. 001-34046)
  4.4  

  Fourth Supplemental Indenture, dated as of June 28, 2012, among Western Gas Partners, LP, as Issuer, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on June 28, 2012, File No. 001-34046)
  4.5  

  Form of 4.0% Senior Notes due 2022 (incorporated by reference to Exhibit 4.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on June 28, 2012, File No. 001-34046)
  5.1**  

  Opinion of Vinson & Elkins L.L.P. as to the legality of the securities being registered
  8.1**  

  Opinion of Bingham McCutchen LLP relating to tax matters
10.1**  

  Form of Unit Purchase Agreement
10.2*  

  Working Capital Loan Agreement between Anadarko Petroleum Corporation and Western Gas Equity Partners, LP, dated as of November 1, 2012
10.3**  

  Form of Indemnification Agreement
10.4**  

  Form of Western Gas Equity Partners, LP Long-Term Incentive Plan
10.5**  

  Contribution Agreement, dated as of                 , 20    , by and among Anadarko Petroleum Corporation, Western Gas Equity Partners, LP and Western Gas Equity Holdings, LLC
10.6  

  Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC and Anadarko Petroleum Corporation, dated as of May 14, 2008 (incorporated by reference to Exhibit 10.3 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
10.7  

  Amendment No. 1 to Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, and Anadarko Petroleum Corporation, dated as of December 19, 2008 (incorporated by reference to Exhibit 10.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on December 24, 2008, File No. 001-34046)
10.8  

  Amendment No. 2 to Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, and Anadarko Petroleum Corporation, dated as of July 22, 2009 (incorporated by reference to Exhibit 10.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on July 23, 2009, File No. 001-34046)
10.9  

  Amendment No. 3 to Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, and Anadarko Petroleum Corporation, dated as of December 31, 2009 (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on January 7, 2010, File No. 001-34046)

 

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Exhibit
Number

       

Description

  10.10     

  Amendment No. 4 to Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, and Anadarko Petroleum Corporation, dated as of January 29, 2010 (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on February 3, 2010, File No. 001-34046)
  10.11     

  Amendment No. 5 to Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, and Anadarko Petroleum Corporation, dated as of August 2, 2010 (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on August 5, 2010, File No. 001-34046)
  10.12     

  Services and Secondment Agreement between Western Gas Holdings, LLC and Anadarko Petroleum Corporation dated May 14, 2008 (incorporated by reference to Exhibit 10.4 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
  10.13     

  Tax Sharing Agreement by and among Anadarko Petroleum Corporation and Western Gas Partners, LP, dated as of May 14, 2008 (incorporated by reference to Exhibit 10.5 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
  10.14     

  Anadarko Petroleum Corporation Fixed Rate Note due 2038 (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
  10.15     

  Form of Commodity Price Swap Agreement (filed as Exhibit 10.3 to the Partnership’s Form 10-Q for the quarter ended March 31, 2010)
  10.16     

  Form of Indemnification Agreement by and between Western Gas Holdings, LLC, its Officers and Directors (incorporated by reference to Exhibit 10.10 to Amendment No. 2 to Western Gas Partners, LP’s Registration Statement on Form S-1 filed on January 23, 2008, File No. 333-146700)
  10.17     

  Western Gas Partners, LP 2008 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.13 to Western Gas Partners, LP’s Quarterly Report on Form 10-Q filed on June 13, 2008, File No. 001-34046)
  10.18     

  Form of Award Agreement under the Western Gas Partners, LP 2008 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.9 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
  10.19     

  Amended and Restated Western Gas Holdings, LLC Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to Western Gas Partners, LP’s Current Report on Form 8-K filed on December 24, 2008, File No. 001-34046)
  10.20     

  Form of Amended and Restated Award Agreement under Western Gas Holdings, LLC Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to Western Gas Partners, LP’s Current Report on Form 8-K filed on December 24, 2008, File No. 001-34046)
  10.21†     

  Amended and Restated Limited Liability Company Agreement of Chipeta Processing LLC effective July 23, 2009 (incorporated by reference to Exhibit 10.4 to Western Gas Partners, LP’s Quarterly Report on Form 10-Q filed on November 12, 2009, File No. 001-34046)
  10.22     

  Amended and Restated Revolving Credit Agreement, dated as of March 24, 2011, among Western Gas Partners, LP, Wells Fargo Bank National Association, as the administrative agent and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on March 29, 2011, File No. 001-34046)
  10.23     

  Indemnification Agreement dated May 18, 2011, between Western Gas Holdings, LLC and Western Gas Resources, Inc. (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Quarterly Report on Form 10-K filed on May 3, 2012, File No. 001-34046)

 

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Exhibit
Number

     

Description

21.1**  

  List of Subsidiaries of Western Gas Equity Partners, LP
23.1*  

  Consent of KPMG LLP
23.2**  

  Consent of Vinson & Elkins L.L.P. (contained in Exhibit 5.1)
23.3**  

  Consent of Bingham McCutchen LLP (contained in Exhibit 8.1)
24.1*  

  Powers of Attorney (contained on the signature page to this Registration Statement)

 

* Filed herewith.
** To be filed by amendment.
# Pursuant to Item 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
Portions of this exhibit, which was previously filed with the Securities and Exchange Commission, were omitted pursuant to a request for confidential treatment. The omitted portions were filed separately with the Securities and Exchange Commission.

 

Item 17. Undertakings

The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

The undersigned registrant hereby undertakes that, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to this offering required to be filed pursuant to Rule 424;

(ii) Any free writing prospectus relating to this offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

(iii) The portion of any other free writing prospectus relating to this offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

(iv) Any other communication that is an offer in this offering made by the undersigned registrant to the purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for

 

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indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

 

  (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

  (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

  (3) For the purpose of determining liability under the Securities Act, each prospectus filed pursuant to Rule 424(b) as a part of this registration statement shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in this registration statement or in a prospectus that is part of this registration statement or made in a document incorporated or deemed incorporated by reference into this registration statement or a prospectus that is part of this registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in this registration statement or a prospectus that was part of this registration statement or made in any such document immediately prior to such date of first use.

The undersigned registrant undertakes to send to each common unitholder, at least on an annual basis, a detailed statement of any transactions with Anadarko Petroleum Corporation, Western Gas Equity Holdings, LLC or any of their affiliates and of fees, commissions, compensation and other benefits paid, or accrued to Anadarko Petroleum Corporation, Western Gas Equity Holdings, LLC or any of their affiliates for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed.

The registrant undertakes to provide to the common unitholders the financial statements required by Form 10-K for the first full fiscal year of operations of the partnership.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of The Woodlands, State of Texas, on November 5, 2012.

 

Western Gas Equity Partners, LP
By:   Western Gas Equity Holdings, LLC,
  its General Partner
By:  

/s/    Donald R. Sinclair

 

Donald R. Sinclair

 

President and Chief Executive Officer

Each person whose signature appears below appoints Donald R. Sinclair, Benjamin M. Fink, Danny J. Rea and Philip H. Peacock, and each of them, any of whom may act without the joinder of the other, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments thereto) to this Registration Statement and any Registration Statement (including any amendment thereto) for this offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or would do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute and substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/    Robert G. Gwin        

Robert G. Gwin

  

Chairman of the Board

  November 5, 2012

/s/    Donald R. Sinclair        

Donald R. Sinclair

  

President, Chief Executive Officer
and Director (Principal Executive Officer)

  November 5, 2012

/s/    Benjamin M. Fink        

Benjamin M. Fink

  

Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) (Principal Accounting Officer)

  November 5, 2012

/s/    R. A. Walker        

R. A. Walker

  

Director

  November 5, 2012

/s/    Charles A. Meloy        

Charles A. Meloy

  

Director

  November 5, 2012

/s/    Robert K. Reeves        

Robert K. Reeves

  

Director

  November 5, 2012

 

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EXHIBIT INDEX

 

Exhibit
Number

       

Description

  1.1 **   

  Form of Underwriting Agreement (including Form of Lock-Up Agreement)
  2.1     

  Contribution, Conveyance and Assumption Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, Anadarko Petroleum Corporation, WGR Holdings, LLC, Western Gas Resources, Inc., WGR Asset Holding Company LLC, Western Gas Operating, LLC and WGR Operating, LP, dated as of May 14, 2008 (incorporated by reference to Exhibit 10.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
  2.2#     

  Contribution Agreement, dated as of November 11, 2008, by and among Western Gas Resources, Inc., WGR Asset Holding Company LLC, WGR Holdings, LLC, Western Gas Holdings, LLC, Western Gas Partners, LP, Western Gas Operating, LLC and WGR Operating, LP. (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on November 13, 2008, File No. 001-34046)
  2.3#     

  Contribution Agreement, dated as of July 10, 2009, by and among Western Gas Resources, Inc., WGR Asset Holding Company LLC, Anadarko Uintah Midstream, LLC, WGR Holdings, LLC, Western Gas Holdings, LLC, WES GP, Inc., Western Gas Partners, LP, Western Gas Operating, LLC and WGR Operating, LP. (incorporated by reference to Exhibit 2.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on July 23, 2009, File No. 001-34046)
  2.4#     

  Contribution Agreement, dated as of January 29, 2010 by and among Western Gas Resources, Inc., WGR Asset Holding Company LLC, Mountain Gas Resources LLC, WGR Holdings, LLC, Western Gas Holdings, LLC, WES GP, Inc., Western Gas Partners, LP, Western Gas Operating, LLC and WGR Operating, LP. (incorporated by reference to Exhibit 2.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on February 3, 2010 File No. 001-34046)
  2.5#     

  Contribution Agreement, dated as of July 30, 2010, by and among Western Gas Resources, Inc., WGR Asset Holding Company LLC, WGR Holdings, LLC, Western Gas Holdings, LLC, WES GP, Inc., Western Gas Partners, LP, Western Gas Operating, LLC and WGR Operating, LP. (incorporated by reference to Exhibit 2.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on August 5, 2010, File No. 001-34046)
  2.6#     

  Purchase and Sale Agreement, dated as of January 14, 2011, by and among Western Gas Partners, LP, Kerr-McGee Gathering LLC and Encana Oil & Gas (USA) Inc. (incorporated by reference to Exhibit 2.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on January 18, 2011 File No. 001-34046)
  2.7#     

  Contribution Agreement, dated as of December 15, 2011, by and among Western Gas Resources, Inc., WGR Asset Holding Company LLC, WGR Holdings, LLC, Western Gas Holdings, LLC, WES GP, Inc., Western Gas Partners, LP, Western Gas Operating, LLC and WGR Operating, LP. (incorporated by reference to Exhibit 2.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on December 15, 2011, File No. 001-34046)
  3.1  

  Certificate of Limited Partnership of Western Gas Equity Partners, LP
  3.2 **   

  Form of First Amended and Restated Agreement of Limited Partnership of Western Gas Equity Partners, LP (included as Appendix A to the Prospectus)
  3.3  

  Certificate of Formation of Western Gas Equity Holdings, LLC
  3.4 **   

  Form of First Amended and Restated Limited Liability Company Agreement of Western Gas Equity Holdings, LLC
  3.5     

  Certificate of Limited Partnership of Western Gas Partners, LP (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Registration Statement on Form S-1 filed on October 15, 2007, File No. 333-146700)

 

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Exhibit
Number

       

Description

  3.6     

  First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated May 14, 2008 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
  3.7     

  Amendment No. 1 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP dated December 19, 2008 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on December 24, 2008, File No. 001-34046)
  3.8     

  Amendment No. 2 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated as of April 15, 2009 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on April 20, 2009, File No. 001-34046)
  3.9     

  Amendment No. 3 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP dated July 22, 2009 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on July 23, 2009, File No. 001-34046)
  3.10     

  Amendment No. 4 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP dated January 29, 2010 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on February 3, 2010, File No. 001-34046)
  3.11     

  Amendment No. 5 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated August 2, 2010 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on August 5, 2010, File No. 001-34046)
  3.12     

  Amendment No. 6 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated July 8, 2011 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on July 8, 2011, File No. 001-34046)
  3.13     

  Amendment No. 7 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated January 13, 2012 (incorporated by reference to Exhibit 3.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on January 17, 2012, File No. 001-34046)
  3.14     

  Amendment No. 8 to First Amended and Restated Agreement of Limited Partnership of Western Gas Partners, LP, dated August 1, 2012 (incorporated by reference to Exhibit 3.10 to Western Gas Partners, LP’s Quarterly Report on Form 10-Q filed on August 2, 2012, File No. 001-34046)
  3.15     

  Certificate of Formation of Western Gas Holdings, LLC (incorporated by reference to Exhibit 3.3 to Western Gas Partners, LP’s Registration Statement on Form S-1 filed on October 15, 2007, File No. 333-146700)
  3.16     

  Amended and Restated Limited Liability Company Agreement of Western Gas Holdings, LLC, dated as of May 14, 2008 (incorporated by reference to Exhibit 3.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
  4.1     

  Indenture, dated as of May 18, 2011, among Western Gas Partners, LP, as Issuer, the Subsidiary Guarantors named therein, as Guarantors, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 18, 2011, File No. 001-34046)
  4.2     

  First Supplemental Indenture, dated as of May 18, 2011, among Western Gas Partners, LP, as Issuer, the Subsidiary Guarantors named therein, as Guarantors, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 18, 2011, File No. 001-34046)
  4.3     

  Form of 5.375% Senior Notes due 2021 (incorporated by reference to Exhibit 4.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 18, 2011, File No. 001-34046)

 

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Index to Financial Statements

Exhibit
Number

     

Description

  4.4  

  Fourth Supplemental Indenture, dated as of June 28, 2012, among Western Gas Partners, LP, as Issuer, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on June 28, 2012, File No. 001-34046)
  4.5  

  Form of 4.0% Senior Notes due 2022 (incorporated by reference to Exhibit 4.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on June 28, 2012, File No. 001-34046)
  5.1**  

  Opinion of Vinson & Elkins L.L.P. as to the legality of the securities being registered
  8.1**  

  Opinion of Bingham McCutchen LLP relating to tax matters
10.1**  

  Form of Unit Purchase Agreement
10.2*  

  Working Capital Loan Agreement between Anadarko Petroleum Corporation and Western Gas Equity Partners, LP, dated as of November 1, 2012
10.3**  

  Form of Indemnification Agreement
10.4**  

  Form of Western Gas Equity Partners, LP Long-Term Incentive Plan
10.5**  

  Contribution Agreement, dated as of                 , 20    , by and among Anadarko Petroleum Corporation, Western Gas Equity Partners, LP and Western Gas Equity Holdings, LLC
10.6  

  Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC and Anadarko Petroleum Corporation, dated as of May 14, 2008 (incorporated by reference to Exhibit 10.3 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
10.7  

  Amendment No. 1 to Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, and Anadarko Petroleum Corporation, dated as of December 19, 2008 (incorporated by reference to Exhibit 10.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on December 24, 2008, File No. 001-34046)
10.8  

  Amendment No. 2 to Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, and Anadarko Petroleum Corporation, dated as of July 22, 2009 (incorporated by reference to Exhibit 10.2 to Western Gas Partners, LP’s Current Report on Form 8-K filed on July 23, 2009, File No. 001-34046)
10.9  

  Amendment No. 3 to Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, and Anadarko Petroleum Corporation, dated as of December 31, 2009 (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on January 7, 2010, File No. 001-34046)
10.10  

  Amendment No. 4 to Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, and Anadarko Petroleum Corporation, dated as of January 29, 2010 (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on February 3, 2010, File No. 001-34046)
10.11  

  Amendment No. 5 to Omnibus Agreement by and among Western Gas Partners, LP, Western Gas Holdings, LLC, and Anadarko Petroleum Corporation, dated as of August 2, 2010 (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on August 5, 2010, File No. 001-34046)
10.12  

  Services and Secondment Agreement between Western Gas Holdings, LLC and Anadarko Petroleum Corporation dated May 14, 2008 (incorporated by reference to Exhibit 10.4 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
10.13  

  Tax Sharing Agreement by and among Anadarko Petroleum Corporation and Western Gas Partners, LP, dated as of May 14, 2008 (incorporated by reference to Exhibit 10.5 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)

 

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Index to Financial Statements

Exhibit
Number

     

Description

10.14  

  Anadarko Petroleum Corporation Fixed Rate Note due 2038 (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
10.15  

  Form of Commodity Price Swap Agreement (filed as Exhibit 10.3 to the Partnership’s Form 10-Q for the quarter ended March 31, 2010)
10.16  

  Form of Indemnification Agreement by and between Western Gas Holdings, LLC, its Officers and Directors (incorporated by reference to Exhibit 10.10 to Amendment No. 2 to Western Gas Partners, LP’s Registration Statement on Form S-1 filed on January 23, 2008, File No. 333-146700)
10.17  

  Western Gas Partners, LP 2008 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.13 to Western Gas Partners, LP’s Quarterly Report on Form 10-Q filed on June 13, 2008, File No. 001-34046)
10.18  

  Form of Award Agreement under the Western Gas Partners, LP 2008 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.9 to Western Gas Partners, LP’s Current Report on Form 8-K filed on May 14, 2008, File No. 001-34046)
10.19  

  Amended and Restated Western Gas Holdings, LLC Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to Western Gas Partners, LP’s Current Report on Form 8-K filed on December 24, 2008, File No. 001-34046)
10.20  

  Form of Amended and Restated Award Agreement under Western Gas Holdings, LLC Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to Western Gas Partners, LP’s Current Report on Form 8-K filed on December 24, 2008, File No. 001-34046)
10.21†  

  Amended and Restated Limited Liability Company Agreement of Chipeta Processing LLC effective July 23, 2009 (incorporated by reference to Exhibit 10.4 to Western Gas Partners, LP’s Quarterly Report on Form 10-Q filed on November 12, 2009, File No. 001-34046)
10.22  

  Amended and Restated Revolving Credit Agreement, dated as of March 24, 2011, among Western Gas Partners, LP, Wells Fargo Bank National Association, as the administrative agent and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Current Report on Form 8-K filed on March 29, 2011, File No. 001-34046)
10.23  

  Indemnification Agreement dated May 18, 2011, between Western Gas Holdings, LLC and Western Gas Resources, Inc. (incorporated by reference to Exhibit 10.1 to Western Gas Partners, LP’s Quarterly Report on Form 10-K filed on May 3, 2012, File No. 001-34046)
21.1**  

  List of Subsidiaries of Western Gas Equity Partners, LP
23.1*  

  Consent of KPMG LLP
23.2**  

  Consent of Vinson & Elkins L.L.P. (contained in Exhibit 5.1)
23.3**  

  Consent of Bingham McCutchen LLP (contained in Exhibit 8.1)
24.1*  

  Powers of Attorney (contained on the signature page to this Registration Statement)

 

* Filed herewith.
** To be filed by amendment.
# Pursuant to Item 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
Portions of this exhibit, which was previously filed with the Securities and Exchange Commission, were omitted pursuant to a request for confidential treatment. The omitted portions were filed separately with the Securities and Exchange Commission.

 

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