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WGP > SEC Filings for WGP > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for WESTERN GAS EQUITY PARTNERS, LP


6-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion analyzes our financial condition and results of operations and should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements, which are included under Part I, Item 1 of this quarterly report, as well as our historical consolidated financial statements, and the notes thereto, which are included in

Part I, Item 8 of our 2012 Form 10-K as filed with the Securities and Exchange
Commission, or "SEC," on March 28, 2013, and other public filings and press releases. Unless the context otherwise requires, references to "WGP," "we," "us," "our," or "Western Gas Equity Partners" refer 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 ("WGP 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. "Anadarko" refers to Anadarko Petroleum Corporation and its consolidated subsidiaries, excluding us and WGP GP. "WGP and Affiliates" refers to subsidiaries of Anadarko, including us in our individual capacity, and "affiliates" refers to subsidiaries of Anadarko excluding us, 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 WES's 14.81% share of Fort Union and 22% share of Rendezvous gross volumes.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made in this report, and may from time to time otherwise make in other public filings, press releases and discussions by management, forward-looking statements concerning our operations, economic performance and financial condition. These statements can be identified by the use of forward-looking terminology including "may," "will," "believe," "expect," "anticipate," "estimate," "continue," or other similar words. These statements discuss future expectations, contain projections of results of operations or financial condition or include other "forward-looking" information. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will be realized.

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 risks and uncertainties:

our ability to pay distributions to our unitholders;

our expected receipt of, and the amounts of, distributions from WES;

WES's and Anadarko's assumptions about the energy market;

WES's future throughput, including Anadarko's production, which is gathered or processed by or transported through WES's assets;

operating results of WES;

competitive conditions;

technology;

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;

supply of, demand for, and the price of, oil, natural gas, NGLs and related products or services;

weather;

inflation;


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availability of goods and services;

general economic conditions, either internationally or domestically or in the jurisdictions in which WES is doing business;

changes in environmental and safety regulation; environmental risks; regulations by the Federal Energy Regulatory Commission ("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 WES or Anadarko;

changes in WES's or Anadarko's capital program, strategy or desired areas of focus;

WES's commitments to capital projects;

ability of WES to utilize WES's revolving credit facility ("WES RCF");

creditworthiness of Anadarko or WES's other counterparties, including financial institutions, operating partners, and other parties;

our and WES's ability to repay debt;

WES's ability to mitigate commodity price risks inherent in its percent-of-proceeds and keep-whole contracts;

conflicts of interest between WES, WES GP, WGP and WGP GP, and affiliates, including Anadarko;

WES's ability to maintain and/or obtain rights to operate its assets on land owned by third parties;

WES's or WGP's ability to acquire assets on acceptable terms;

non-payment or non-performance of Anadarko or WES's other significant customers, including under WES's gathering, processing and transportation agreements and its $260.0 million note receivable from Anadarko;

timing, amount and terms of our or WES's future issuances of equity and debt securities; and

other factors discussed below, in "Risk Factors" included in our 2012 Form 10-K, in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates," in our quarterly reports on Form 10-Q and elsewhere in our other public filings and press releases.

The risk factors and other factors noted throughout or incorporated by reference in this report could cause our actual results to differ materially from those contained in any forward-looking statement. 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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EXECUTIVE SUMMARY

We were formed by Anadarko in September 2012 by converting WGR Holdings, LLC into a 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 organized by Anadarko to own, operate, acquire and develop midstream energy assets. WES currently owns assets located in East, West and South Texas, the Rocky Mountains (Colorado, Utah and Wyoming), north-central Pennsylvania, 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 March 31, 2013, WES's owned and operated assets consisted of twelve gathering systems, seven natural gas treating facilities, seven natural gas processing facilities, one NGL pipeline, one interstate natural gas pipeline, and one intrastate natural gas pipeline. In addition, WES had interests in five non-operated gathering systems, three operated processing systems, one operated gathering system, and one NGL pipeline, with separate interests accounted for under the equity method in two gas gathering systems and a crude oil pipeline.

Significant financial highlights during the first three months of 2013 include the following:

We raised our distribution to $0.17875 per unit for the first quarter of 2013, representing an 8% increase over the non-prorated distribution for the fourth quarter of 2012.

WES completed the acquisition of Anadarko's 33.75% interest (non-operated) in the Liberty and Rome gas gathering systems in north-central Pennsylvania. WES also completed the acquisition of a 33.75% interest in each of the Larry's Creek, Seely and Warrensville gas gathering systems from a third party, also in north-central Pennsylvania. See Acquisitionsbelow.

WES raised its distribution to $0.54 per unit for the first quarter of 2013, representing a 4% increase over the distribution for the fourth quarter of 2012, a 17% increase over the distribution for the first quarter of 2012, and its sixteenth consecutive quarterly increase.

Significant operational highlights during the first three months of 2013 include the following:

Throughput attributable to WES totaled 2,906 MMcf/d for the three months ended March 31, 2013, representing a 7% increase compared to the three months ended March 31, 2012.

Gross margin (total revenues less cost of product) attributable to WES averaged $0.55 per Mcf for both the three months ended March 31, 2013 and 2012.


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ACQUISITIONS

Acquisitions. The following table presents the acquisitions completed by WES during 2013 and 2012, and identifies the funding sources for such acquisitions.

                                                                                                            WES
thousands except unit and            Acquisition       Percentage                          Cash            Common             WES GP
  percent amounts                       Date            Acquired         Borrowings       On Hand       Units Issued       Units Issued
MGR (1)                                  01/13/12              100 %    $    299,000     $ 159,587            632,783             12,914
Chipeta (2)                              08/01/12               24 %               -       128,250            151,235              3,086
Non-Operated Marcellus Interest
(3)                                      03/01/13            33.75 %         250,000       215,500            449,129                  -
Anadarko-Operated Marcellus
Interest (4)                             03/08/13            33.75 %         133,500         1,369                  -                  -

(1) The assets acquired from Anadarko consist of (i) the Red Desert complex, which is located in the greater Green River Basin in southwestern Wyoming, and includes the Patrick Draw processing plant with a capacity of 125 MMcf/d, the Red Desert processing plant with a capacity of 48 MMcf/d, 1,295 miles of gathering lines, and related facilities, (ii) a 22% interest in Rendezvous, which owns a 338-mile mainline 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." 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.

(2) WES acquired Anadarko's then remaining 24% membership interest in Chipeta (as described in Note 1-Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements under Item 1 of this Form 10-Q). WES received distributions related to the additional interest beginning July 1, 2012. This transaction brought WES's total membership interest in Chipeta to 75%. The remaining 25% membership interest in Chipeta held by a third-party member is reflected as noncontrolling interests in our consolidated financial statements for all periods presented.

(3) WES acquired Anadarko's 33.75% interest (non-operated) in the Liberty and Rome gas gathering systems, serving production from the Marcellus shale in north-central Pennsylvania. The interest acquired is referred to as the "Non-Operated Marcellus Interest" and the acquisition as the "Non-Operated Marcellus Interest acquisition." In connection with the issuance of WES common units, WES issued 9,166 general partner units to WES GP for consideration of $0.5 million in order to maintain WES GP's 2.0% general partner interest in WES.

(4) The interest acquired from a third party includes a 33.75% interest in each of the Larry's Creek, Seely and Warrensville gas gathering systems, which are operated by Anadarko and serve production from the Marcellus shale in north-central Pennsylvania. The interest acquired is referred to as the "Anadarko-Operated Marcellus Interest" and the acquisition as the "Anadarko-Operated Marcellus Interest acquisition." See Note 2-Acquisitions in the Notes to Consolidated Financial Statements under Item 1 of this Form 10-Q.

Presentation of WES assets. References to "WES assets" refer collectively to the assets indirectly owned by WGP, through its partnership interests in WES, as of March 31, 2013. Because Anadarko controls WES through its ownership and control of WGP, which owns WES GP, each of WES's acquisitions of assets from Anadarko has been considered a transfer of net assets between entities under common control. As such, WES assets 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 Consolidated Financial Statements under Item 1 of this Form 10-Q). Further, as a result of common control asset acquisitions, WES and WGP (by virtue of its consolidation of WES) may be required to recast their financial statements to include the activities of such assets as of the date of common control.

WGP's historical financial statements include the results attributable to the Non-Operated Marcellus Interest as if WES owned such assets for all periods presented. The consolidated financial statements for periods prior to WES's acquisition of WES assets from Anadarko, including the Non-Operated Marcellus Interest, 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.


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EQUITY OFFERINGS

WGP initial public offering. On December 12, 2012, we closed our IPO of 17,181,000 common units at a price of $22.00 per common unit. In connection with the IPO, the underwriters exercised in full their option to purchase an additional 2,577,150 common units, resulting in an aggregate offering of 19,758,150 common units. Pursuant to a unit purchase agreement among us, WES and WES GP, we used $409.4 million of the net proceeds from the IPO to purchase 8,722,966 WES common units, and made 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 WES general partner units, in each case at a price of $46.00 per unit.

WES equity offerings

Public equity offering. In June 2012, WES completed a public offering of 5,000,000 common units representing limited partner interests in WES, and issued 102,041 general partner units to WES GP in exchange for WES GP's proportionate capital contribution to maintain its 2.0% general partner interest. The price per unit was $43.88, generating proceeds to WES of $216.4 million (net of $7.4 million for the underwriting discount and other offering expenses), including WES GP's proportionate capital contribution. The net proceeds were used for general partnership purposes, including the funding of capital expenditures.

Other equity offerings. In August 2012, WES filed a registration statement with the SEC authorizing the issuance of up to $125.0 million of WES 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 March 31, 2013, WES had not issued any common units under this registration statement.

ITEMS AFFECTING THE COMPARABLITY OF OUR FINANCIAL RESULTS TO THOSE OF WES

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. As a result, our results of operations do not differ materially from the results of operations of WES, which are reconciled below. The primary items which result in differences between our and WES's results of operations and cash flows are summarized below.

Income taxes. Prior to our conversion from WGR Holdings, LLC to a limited partnership in September 2012, we were a single-member limited liability company. 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 included in our consolidated financial statements, reflects our income tax expense and liability on a separate-return basis.

The deferred federal and state income taxes included in our consolidated financial statements are primarily attributable to the temporary differences between the financial statement carrying amount of our investment in WES and our outside tax basis with respect to our partnership interests in WES. When determining the deferred income tax asset and liability balances attributable to our partnership interests in WES, we applied an accounting policy that looks through our 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 our investment in WES in our consolidated financial statements.

Upon the completion of our IPO in December 2012, we became a master limited partnership for U.S. federal and state income tax purposes and therefore are not subject to U.S. federal and state income taxes, except for Texas margin tax.


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General and administrative expenses. As a separate publicly traded partnership, we incur general and administrative expenses which are separate from, and in addition to, those incurred by WES. In connection with our IPO in December 2012, we entered into an omnibus agreement with WGP GP and Anadarko that governs the following: (i) our obligation to reimburse Anadarko for expenses incurred or payments made on our behalf in conjunction with Anadarko's provision of general and administrative services to us, including our public company expenses and general and administrative expenses; (ii) our obligation to pay Anadarko, in quarterly installments, an administrative services fee of $250,000 per year (subject to an annual increase as described in the agreement); and (iii) our obligation to reimburse Anadarko for all insurance coverage expenses it incurs or payments it makes with respect to our assets. Such expenses are recorded as capital contributions from Anadarko and do not impact our cash flows.

Noncontrolling interests. The publicly held common units of WES are reflected as noncontrolling interests in our 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. In addition, in March 2013, WES acquired a 33.75% interest in the Liberty and Rome gas gathering systems from AMM, a wholly owned subsidiary of Anadarko Petroleum Corporation. As part of the consideration paid, WES issued 449,129 WES common units to AMM. The limited partner interest in WES held by AMM is reflected within noncontrolling interests in our consolidated financial statements for the three months ended March 31, 2013.

Distributions. Our partnership agreement requires that we distribute all of our available cash (as defined in our partnership agreement) within 55 days of the end of each quarter. 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 from WES. Our cash flow and resulting ability to make cash distributions are therefore completely dependent upon WES's ability to make cash distributions with respect to our partnership 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.

On January 21, 2013, the board of directors of WGP GP declared a prorated quarterly distribution of $0.03587 per unit, or $7.9 million in aggregate, for the fourth quarter of 2012. The distribution was the first declared by us and corresponded to a quarterly distribution of $0.165 per unit, or $0.66 per unit on an annualized basis. The initial distribution was prorated for the 20-day period from the date of the closing of our IPO on December 12, 2012, through the end of the quarter, pursuant to the terms of WGP's partnership agreement. The cash was paid on February 21, 2013, to WGP unitholders of record at the close of business on February 1, 2013.

Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan. Concurrently with our IPO, WGP GP adopted the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan ("WGP LTIP"). The WGP LTIP permits the issuance of up to 3,000,000 of our common units, of which all remained available for future issuance as of December 31, 2012. Upon vesting of each phantom unit, the holder will receive common units of WGP or, at the discretion of WGP GP's board of directors, cash in an amount equal to the market value of common units of WGP on the vesting date. Equity-based compensation expense attributable to grants made under the WGP LTIP impact cash flows from operating activities only to the extent cash payments are made to a participant in lieu of issuance of WGP common units to the participant. Stock-based compensation expense attributable to awards granted under the WGP LTIP will be amortized over the vesting periods applicable to the awards. During the three months ended March 31, 2013, WGP GP awarded phantom units under the WGP LTIP to its independent directors, which will vest one year from grant date in January 2014.

Working capital facility. On November 1, 2012, we entered into a $30.0 million working capital facility ("WGP WCF") 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 London Interbank Offered Rate ("LIBOR") plus 1.50%. The interest rate was 1.70% and 1.71% at March 31, 2013, and December 31, 2012, respectively.

We are required to reduce all borrowings under the WGP WCF to zero for a period of at least 15 consecutive days during the twelve month period commencing on November 1, 2012, and during the twelve month period commencing on each anniversary thereof. As of March 31, 2013, we had no outstanding borrowings under the WGP WCF. At March 31, 2013, we were in compliance with all covenants under the WGP WCF.


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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 reconciled as follows:

                                                             Three Months Ended
                                                                 March 31,
   thousands                                                2013           2012
   Net income attributable to WES                         $  50,657      $  53,651
   Incremental income tax expense (1)                             -        (12,266 )
   Limited partner interests in WES not held by WGP (2)     (17,130 )      (24,331 )
   General and administrative expenses                       (1,265 )            -
   Other income                                                  53              -

   Net income attributable to WGP                         $  32,315      $  17,054

(1) The income tax expense recorded in the financial statements of WGR Holdings, LLC, and now reflected in the consolidated financial statements of WGP, reflects our pre-IPO income tax expense and liability on a separate-return basis. Upon the completion of our IPO in December 2012, we became a partnership for U.S. federal and state income tax purposes and therefore are subsequently not subject to U.S. federal and state income taxes, except for Texas margin tax.

(2) Represents the portion of net income allocated to the limited partner interests in WES not held by WGP. As of March 31, 2013 and 2012, publicly held limited partner interests represented a 51.6% and 54.4% interest in WES, respectively. As of March 31, 2013, AMM held a 0.4% limited partner interest in WES.

Reconciliation of net cash provided by operating and financing activities. The difference between net cash provided by operating activities for WGP and WES and the net cash provided by financing activities for WGP and WES are reconciled as follows:

                                                                  Three Months Ended
                                                                      March 31,
thousands                                                        2013           2012
WES net cash provided by operating activities                  $ 129,955      $ 118,720
Income taxes (1)                                                       -        (24,187 )
General and administrative expenses                                 (901 )            -
Non-cash equity-based compensation expense                            54              -
Other income                                                          53              -

WGP net cash provided by operating activities                  $ 129,161      $  94,533


WES net cash provided by financing activities                  $ 285,468      $ 233,408
Proceeds from issuance of WES general partner units (2)             (500 )            -
Offering expenses from the issuance of WGP common units (3)       (2,367 )            -
Distributions to WGP unitholders (4)                              (7,852 )            -
Distributions to WES unitholders (5)                              65,657         43,027
Distributions to WES noncontrolling interest owners (5) (6)      (28,789 )      (22,155 )
Net contributions from (distributions to) Anadarko (7)                18          3,315

WGP net cash provided by financing activities                  $ 311,635      $ 257,595

(1) The income tax expense recorded in the financial statements of WGR Holdings, LLC, and now reflected in the consolidated financial statements of WGP, reflects our pre-IPO income tax expense and liability on a separate-return basis. Upon the completion of our IPO in December 2012, we became a partnership for U.S. federal and state income tax purposes and therefore are subsequently not subject to U.S. federal and state income taxes, except for . . .

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