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WGP > SEC Filings for WGP > Form 10-Q on 1-Aug-2013All Recent SEC Filings

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Form 10-Q for WESTERN GAS EQUITY PARTNERS, LP


1-Aug-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"), Rendezvous Gas Services, LLC ("Rendezvous"), and a joint venture, Enterprise EF78 LLC ("Mont Belvieu JV"). "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 regulations at the federal, state and local level or WES's inability to timely obtain or maintain permits that could affect WES's and WES's customers' activities; 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 its 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 June 30, 2013, WES owned and operated thirteen natural gas gathering systems, eight natural gas treating facilities, eight natural gas processing facilities, three NGL pipelines, one interstate natural gas pipeline and one intrastate natural gas pipeline. In addition, WES had interests in five non-operated natural gas gathering systems, one operated natural gas gathering system and three operated natural gas processing facilities, with separate interests accounted for under the equity method in two natural gas gathering systems, a crude oil pipeline and two NGL fractionators currently under construction. WES also had the Lancaster processing facility under construction in Northeast Colorado at the end of the second quarter of 2013.

Significant financial highlights during the first six months of 2013 included the following:

We raised our distribution to $0.1975 per unit for the second quarter of 2013, representing a 10% increase over the distribution for the first quarter of 2013.

WES completed construction and commenced start-up operations in June 2013 of the 200 MMcf/d Brasada gas processing plant in the Eagleford shale area of South Texas.

WES announced a project to expand the processing capacity at the Lancaster plant by 300 MMcf/d with the construction of a second cryogenic processing train. Startup is anticipated in the first quarter of 2015.

WES completed the acquisition of a 25% interest in the Mont Belvieu JV, which is constructing two NGL fractionators located in Mont Belvieu, Texas. See Acquisitions below.

WES issued 7,015,000 common units to the public, generating net proceeds of $424.9 million, including WES GP's proportionate capital contribution to maintain its 2.0% general partner interest. Net proceeds from this offering were used to repay a portion of the amount outstanding under the WES revolving credit facility, with the remaining net proceeds used for general partnership purposes, including the funding of capital expenditures.

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

WES raised its distribution to $0.56 per unit for the second quarter of 2013, representing a 4% increase over the distribution for the first quarter of 2013, a 17% increase over the distribution for the second quarter of 2012, and its seventeenth consecutive quarterly increase.

Significant operational highlights during the first six months of 2013 included the following:

Throughput attributable to WES totaled 3,139 MMcf/d and 3,023 MMcf/d for the three and six months ended June 30, 2013, respectively, representing a 15% and an 11% increase, respectively, compared to the same periods in 2012.

Gross margin (total revenues less cost of product) attributable to WES averaged $0.55 per Mcf for both the three and six months ended June 30, 2013, representing a 4% and 2% decrease, respectively, compared to the same periods in 2012.


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ACQUISITIONS

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

                                                                                                                                        WES
                                                           Acquisition         Percentage                             Cash             Common               WES GP
thousands except unit and 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              -                    -                    -
Mont Belvieu JV (5)                                             06/05/13                25%                 -         78,129                    -                    -

(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-Description of Business and Basis of Presentation 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 GP purchased 9,166 general partner units 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 consisted of 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.

(5) The acquisition from a third party consisted of a 25% interest in Enterprise EF78 LLC, an entity formed to design, construct, and own two fractionators located in Mont Belvieu, Texas. The interest acquired is accounted for under the equity method of accounting and is referred to as the "Mont Belvieu JV" and the acquisition as the "Mont Belvieu JV 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 June 30, 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 19,758,150 common units at a price of $22.00 per common unit. 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 offerings. WES completed the following public equity offerings during 2012 and 2013:

                                                                                                            Underwriting
                                                       WES                  WES                             Discount and             Net
                                                      Common             GP Units         Price Per        Other Offering          Proceeds
thousands except unit and per-unit amounts       Units Issued (1)       Issued (2)          Unit              Expenses              to WES
June 2012 equity offering                                5,000,000         102,041      $      43.88      $          7,468      $     216,409
May 2013 equity offering                                 7,015,000         143,163             61.18                13,059            424,878

(1) Includes the issuance of 915,000 WES common units pursuant to the full exercise of the underwriters' over-allotment option granted in connection with the May 2013 equity offering.

(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.

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 June 30, 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 on our behalf. 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, 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 and six months ended June 30, 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.

In addition, on April 17, 2013, the board of directors of WGP GP declared a cash distribution to WGP unitholders of $0.17875 per common unit, or $39.1 million in aggregate, for the first quarter of 2013. The distribution was paid on May 22, 2013, to WGP unitholders of record at the close of business on April 30, 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"). 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 impacts 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 six months ended June 30, 2013, WGP GP awarded phantom units under the WGP LTIP to its independent directors, which will vest one year from the grant date in January 2014.


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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 June 30, 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 June 30, 2013, we had no outstanding borrowings under the WGP WCF. At June 30, 2013, we were in compliance with all covenants under the WGP WCF.

Reconciliation of net income attributable to Western Gas Partners, LP to net income attributable to Western Gas Equity Partners, LP. The differences between net income attributable to Western Gas Partners, LP and net income attributable to Western Gas Equity Partners, LP are reconciled as follows:

                                                  Three Months Ended                Six Months Ended
                                                      June  30,                         June 30,
thousands                                        2013             2012            2013            2012
Net income attributable to WES               $    60,200       $  43,309       $ 110,857       $  96,960
Incremental income tax expense (1)                     -          (7,850)              -         (20,116)
Limited partner interests in WES not held
by WGP (2)                                       (24,562)        (16,789)        (41,692)        (41,120)
. . .
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