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WGP > SEC Filings for WGP > Form 10-K on 28-Mar-2013All Recent SEC Filings

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Form 10-K for WESTERN GAS EQUITY PARTNERS, LP


28-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE SUMMARY

We were formed by Anadarko in September 2012 by converting WGR Holdings, LLC into a master limited partnership and changing its name to Western Gas Equity Partners, LP. We closed our IPO in December 2012 and own WES GP and a significant limited partner interest in WES, a growth-oriented Delaware master limited partnership ("MLP") organized by Anadarko to own, operate, acquire and develop midstream energy assets. Our consolidated financial statements include the consolidated financial results of WES due to our 100% ownership interest in WES GP and WES GP's control of WES. Our only cash-generating assets consist of our partnership interests in WES, and we currently have no independent operations. WES currently owns assets located in East, West and South Texas, the Rocky Mountains (Colorado, Utah and Wyoming), and the Mid-Continent (Kansas and Oklahoma) and is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, NGLs and crude oil for Anadarko and its consolidated subsidiaries, as well as for third-party producers and customers. As of December 31, 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, one intrastate natural gas pipeline and interests accounted for under the equity method in two gas gathering systems and a crude oil pipeline. See also Note 13-Subsequent Events in the Notes to Consolidated Financial Statements under Item 8 within this Form 10-K.

Significant financial highlights during the year ended December 31, 2012, include the following:

On December 12, 2012, we closed our IPO of 19,758,150 common units, including 2,577,150 common units issued upon the exercise of the underwriters' over-allotment option in full, at a price of $22.00 per common unit. We used $409.4 million of the net proceeds from our IPO to purchase 8,722,966 common units from WES, and to make a corresponding capital contribution to WES on behalf of WES GP to allow WES GP to maintain its 2.0% general partner interest in WES, in exchange for 178,019 general partner units, in each case at a price of $46.00 per unit.

WES issued $670.0 million aggregate principal amount of 4.000% Senior Notes due 2022. Net proceeds were used to repay all amounts then outstanding under the revolving credit facility ("WES RCF") and the note payable to Anadarko, with the remaining net proceeds used for general partnership purposes. See Liquidity and Capital Resources within this Item 7 for additional information.

WES issued 5,000,000 common units to the public, generating net proceeds of $216.4 million, including WES GP's proportionate capital contribution to maintain its 2.0% general partner interest. Net proceeds were used for general partnership purposes, including the funding of capital expenditures. See Equity Offerings under Items 1 and 2 of this Form 10-K for additional information.

WES completed the acquisition of Anadarko's MGR assets located in Southwestern Wyoming in January and the acquisition of Anadarko's then remaining 24% interest in Chipeta in August. See Acquisitions under Items 1 and 2 of this Form 10-K for additional information.

WES announced two growth projects: (i) the expansion of its processing capacity by 300 MMcf/d at the Wattenberg system with the construction of the Lancaster plant, and (ii) the construction of a new 200 MMcf/d cryogenic processing plant in the Maverick Basin, referred to as the Brasada plant. Startup is anticipated in the first quarter of 2014 for the Lancaster plant and the second quarter of 2013 for the Brasada plant. See Liquidity and Capital Resources within this Item 7 for additional information.

WES raised its distribution to $0.52 per unit for the fourth quarter of 2012, representing a 4% increase over the distribution for the third quarter of 2012, an 18% increase over the distribution for the fourth quarter of 2011, and its fifteenth consecutive quarterly increase.


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Significant operational highlights during the year ended December 31, 2012, include the following:

Throughput attributable to WES totaled 2,432 MMcf/d for the year ended December 31, 2012, representing a 9% increase compared to the year ended December 31, 2011.

Gross margin (total revenues less cost of product) attributable to WES averaged $0.55 per Mcf for the year ended December 31, 2012, representing a 5% decrease compared to the year ended December 31, 2011.

WES'S OPERATIONS

The following discussion analyzes our financial condition and results of operations and should be read in conjunction with our consolidated financial statements, and notes to consolidated financial statements, in which Western Gas Partners, LP is fully consolidated, which are included in Item 8 of this Form 10-K. For purposes of this report, references to "WGP," "we," "us," "our," or "Western Gas Equity Partners" refers to Western Gas Equity Partners, LP in its individual capacity or to Western Gas Equity Partners, LP and its subsidiaries, as the context requires. Our general partner, Western Gas Equity Holdings, LLC (the "general partner" or "GP"), is a wholly owned subsidiary of Anadarko Petroleum Corporation. The general partner of Western Gas Partners, LP ("WES") is Western Gas Holdings, LLC ("WES GP"), our wholly owned subsidiary. "WGP and Affiliates" refers to subsidiaries of Anadarko, including WGP in its individual capacity, and "affiliates" refers to subsidiaries of Anadarko, excluding WGP and its consolidated subsidiaries, and includes the interests in Fort Union Gas Gathering, LLC ("Fort Union"), White Cliffs Pipeline, LLC ("White Cliffs") and Rendezvous Gas Services, LLC ("Rendezvous").

Because we own and control WES GP and our general partner is owned and controlled by Anadarko, WES's acquisitions of assets from Anadarko have been 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 did not correlate to the total acquisition price paid by WES (see Note 2-Acquisitions in the Notes to the Consolidated Financial Statements under Item 8 of this Form 10-K). Further, after an acquisition of assets from Anadarko, we, by virtue of our consolidation of WES, may be required to recast our financial statements to include the activities of such assets as of the date of common control. Our consolidated financial statements for periods prior to the acquisition of the WES assets from Anadarko 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. For ease of reference, we refer to the historical financial results of the WES assets prior to the acquisitions from Anadarko as being "our" historical financial results.

WES's results are driven primarily by the volumes of natural gas and NGLs WES gathers, processes, treats or transports through its systems. For the year ended December 31, 2012, approximately 79% of total revenues and 68% of throughput (excluding equity investment revenues and throughput) were attributable to transactions with Anadarko.

In WES's gathering operations, it 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.

WES received significant dedications from its largest customer, Anadarko, solely with respect to its Wattenberg, Dew, Pinnacle, Haley, Helper, Clawson and Hugoton gathering systems. Specifically, pursuant to the terms of WES's applicable gathering agreements, Anadarko has dedicated 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 the year ended December 31, 2012, approximately 66% of WES's gross margin was attributed to fee-based contracts, under which a fixed fee is received based on the volume or 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


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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 the year ended December 31, 2012, approximately 34% 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 its percent-of-proceeds and keep-whole contracts is hedged under commodity price swap agreements with Anadarko. For the year ended December 31, 2012, approximately 97% of WES's gross margin was derived from either long-term, fee-based contracts or from percent-of-proceeds or keep-whole agreements that were hedged with commodity price swap agreements. See Note 5-Transactions with Affiliates in the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K.

WES also has indirect exposure to commodity price risk in that persistent low natural gas prices have caused and may continue to cause current or potential customers to delay drilling or shut in production in certain areas, which would reduce the volumes of natural gas available for WES's systems. WES also bears a limited degree of commodity price risk through settlement of natural gas imbalances. Please read Item 7A of this Form 10-K.

As a result of acquisitions from Anadarko and third parties, our results of operations, financial position and cash flows may vary significantly for 2012, 2011 and 2010 as compared to future periods. Please see the caption Items Affecting the Comparability of Financial Results-Western Gas Partnership, LP, set forth below in this Item 7.

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 (as defined below) and (6) Distributable cash flow (as defined below).

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, WES 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, 2012, WES added 139 receipt points to its systems with initial throughput of approximately 1.7 MMcf/d per receipt point.

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 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 WES's acquisition of its assets, certain of these expenses are incurred under and governed by WES's services and secondment agreement with Anadarko.


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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, to the annual budget approved by WES GP's board of directors, 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 the WES assets include amounts attributable to costs incurred on WES's behalf and allocations of general and administrative costs by Anadarko and WES GP to WES. For periods subsequent to the acquisition of the WES assets, Anadarko is no longer compensated for corporate services through a management services fee. Instead, allocations and reimbursements of general and administrative expenses are determined by Anadarko in its reasonable discretion, in accordance with WES's partnership agreement and WES's omnibus agreement. Amounts required to be reimbursed to Anadarko under WES's omnibus agreement also include those expenses attributable to its 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 New York Stock Exchange; and

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

See further detail under Items Affecting the Comparability of Financial Results -Western Gas Partners, LP - General and administrative expenses below and Note 5-Transactions with Affiliates in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.

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 WES's omnibus agreement (which cap is no longer effective), 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 WES's 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.


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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 Distributable cash flow 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 generally accepted accounting principles in the United States ("GAAP"). Furthermore, while Distributable cash flow is a measure WES uses to assess its ability to make distributions to its unitholders, it 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. 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 and Distributable cash flow should not be considered in isolation or as a substitute for analysis of WES's results as reported under GAAP. Our definitions of Adjusted EBITDA and Distributable cash flow may not be comparable to similarly titled measures of other companies in WES's 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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Index to Financial Statements

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:

                                                              Year Ended December 31,
thousands                                              2012             2011            2010
Reconciliation of Adjusted EBITDA to Net income
attributable to Western Gas Partners, LP
Adjusted EBITDA attributable to Western Gas
Partners, LP                                       $     327,690     $   324,323     $   265,024
Less:
Distributions from equity investees                       20,660          15,999          10,973
Non-cash equity-based compensation expense (1)            73,508          13,754           4,787
Expenses in excess of omnibus cap                              -               -             133
Interest expense                                          42,060          30,345          18,794
Income tax expense                                         1,258          19,018          21,702
Depreciation, amortization and impairments (2)           114,932         109,151          88,188
Other expense (2)                                          1,665           3,683           2,393
Add:
Equity income, net                                        16,111          11,261           7,628
Interest income, net - affiliates                         16,900          28,560          20,243
Other income (2) (3)                                         368           2,049             267

Net income attributable to Western Gas Partners,
LP                                                 $     106,986     $   174,243     $   146,192

Reconciliation of Adjusted EBITDA to Net cash
provided by operating activities
Adjusted EBITDA attributable to Western Gas
Partners, LP                                       $     327,690     $   324,323     $   265,024
Adjusted EBITDA attributable to noncontrolling
interests of
Western Gas Partners, LP                                  17,214          16,850          13,823
Interest income (expense), net                          (25,160)         (1,785)           1,449
Expenses in excess of omnibus cap                              -               -           (133)
Non-cash equity based compensation expense (1)          (69,791)        (10,264)         (2,220)
Debt-related amortization and other items, net             2,319           3,110           1,705
Current income tax expense                                 (553)        (16,414)        (12,114)
Other income (expense), net (3)                          (1,292)         (1,628)         (2,122)
Distributions from equity investees less than
(in excess of) equity income, net                        (4,549)         (4,738)         (3,345)
Changes in operating working capital of Western
Gas Partners, LP:
Accounts receivable and natural gas imbalance
receivable                                              (14,219)        (13,260)             802
Accounts payable, accrued liabilities and
natural gas imbalance payable                             11,622          29,625             601
Other                                                      3,392           1,352             279

Net cash provided by operating activities          $     246,673     $   327,171     $   263,749

Cash flow information of Western Gas Partners,
LP
Net cash provided by operating activities          $     246,673     $   327,171     $   263,749
Net cash used in investing activities              $ (1,071,127)     $ (472,951)     $ (885,507)
Net cash provided by financing activities          $   1,017,876     $   345,265     $   578,848

(1) Includes $69.8 million of equity-based compensation associated with the Incentive Plan (as defined in Note 1-Summary of Significant Accounting Policies and further described in Note 6-Equity Based Compensation in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K), paid and contributed by Anadarko during the year ended December 31, 2012.

(2) 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.

(3) Excludes income of $1.6 million for each of the years ended December 31, 2012, 2011 and 2010, respectively, related to a component of a gas processing agreement accounted for as a capital lease. See Note 2-Acquisitions in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.


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Index to Financial Statements
Year Ended December 31, thousands except Coverage ratio 2012 2011 2010 Reconciliation of Distributable cash flow to Net income attributable to Western Gas Partners, LP and calculation of the Coverage ratio
Distributable cash flow $ 264,435 $ 281,975 $ 237,769 Less:
Distributions from equity investees 20,660 15,999 10,973 Non-cash equity-based compensation expense (1) 73,508 13,754 4,787 Expenses in excess of omnibus cap - - 133 Interest expense, net (non-cash settled) 326 - - Income tax expense 1,258 19,018 21,702 Depreciation, amortization and impairments (2) 114,932 109,151 88,188 Other expense (2) 1,665 3,683 2,393 Add:
Equity income, net 16,111 11,261 7,628 Cash paid for maintenance capital expenditures (2) (3) 31,730 28,293 24,854 Capitalized interest 6,196 420 - Cash paid for income taxes 495 190 507 Other income (2) (4) 368 2,049 267 Interest income, net (non-cash settled) - 11,660 3,343

Net income attributable to Western Gas Partners, LP $ 106,986 $ 174,243 $ 146,192

Distributions declared (5)
Limited partners of WES $ 190,123 General partner of WES 30,358

Total $ 220,481

Coverage ratio 1.20 x

. . .

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