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WES > SEC Filings for WES > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for WESTERN GAS PARTNERS LP

Form 10-Q for WESTERN GAS PARTNERS LP


7-Nov-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, included in our 2012 Form 10-K (which were recast in our Current Report on Form 8-K, as filed with the Securities and Exchange Commission, or "SEC," on May 13, 2013, to reflect the results of the acquisition of the Non-Operated Marcellus Interest), and our other public filings and press releases. Unless the context otherwise requires, references to "we," "us," "our," the "Partnership" or "Western Gas Partners" refer to Western Gas Partners, LP and its subsidiaries. Our general partner, Western Gas Holdings, LLC (the "general partner" or "GP"), is owned by Western Gas Equity Partners, LP ("WGP"), a consolidated subsidiary of Anadarko Petroleum Corporation. Western Gas Equity Holdings, LLC is WGP's general partner and a wholly owned subsidiary of Anadarko Petroleum Corporation. "Anadarko" refers to Anadarko Petroleum Corporation and its consolidated subsidiaries, excluding the Partnership and our general partner, and "affiliates" refers to wholly owned and partially owned subsidiaries of Anadarko excluding the Partnership, 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 our 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 assumptions about the energy market;

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

operating results;

competitive conditions;

technology;

availability of capital resources to fund acquisitions, capital expenditures and other contractual obligations, and our 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;

availability of goods and services;


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general economic conditions, either internationally or domestically or in the jurisdictions in which we are doing business;

changes in regulations at the federal, state and local level or the inability to timely obtain or maintain permits that could affect our and our 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 status as a partnership for federal income tax purposes;

changes in the financial or operational condition of Anadarko;

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

our commitments to capital projects;

ability to utilize our revolving credit facility ("RCF");

creditworthiness of Anadarko or our other counterparties, including financial institutions, operating partners, and other parties;

our ability to repay debt;

our ability to mitigate commodity price risks inherent in our percent-of-proceeds and keep-whole contracts;

conflicts of interest among us, our general partner, WGP and its general partner, and affiliates, including Anadarko;

our ability to maintain and/or obtain rights to operate our assets on land owned by third parties;

our ability to acquire assets on acceptable terms;

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

timing, amount and terms of 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 are a growth-oriented Delaware master limited partnership organized by Anadarko to own, operate, acquire and develop midstream energy assets. We currently own 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 are 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 September 30, 2013, we owned and operated thirteen natural gas gathering systems, eight natural gas treating facilities, eight natural gas processing facilities, three NGL pipelines and three natural gas pipelines. In addition, we 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. We also had the Lancaster processing facility under construction in Northeast Colorado at the end of the third quarter of 2013.

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

We issued $250.0 million aggregate principal amount of 2.600% Senior Notes due 2018. Net proceeds were used to repay amounts then outstanding under our revolving credit facility. See Liquidity and Capital Resources within this Item 2 for additional information.

We completed construction and commenced operations in June 2013 of the 200 MMcf/d Brasada gas processing plant and related facilities in the Eagleford shale area of South Texas.

We announced a project to expand the processing capacity at our Lancaster plant, which is currently under construction, by another 300 MMcf/d with a second cryogenic processing train.

We completed the acquisition of a 25% interest in the Mont Belvieu JV, which is constructing NGL fractionators located in Mont Belvieu, Texas, and the acquisition of Overland Trail Transmission, LLC, which owns and operates an intrastate pipeline connecting our Red Desert and Granger complexes in southwestern Wyoming. See Acquisitions below.

We issued 7,058,350 common units to the public, generating net proceeds of $427.3 million, including the general partner's proportionate capital contribution to maintain its 2.0% general partner interest. Net proceeds were used to repay a portion of the amount outstanding under our revolving credit facility, with the remaining net proceeds used for general partnership purposes, including the funding of capital expenditures.

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

We raised our distribution to $0.58 per unit for the third quarter of 2013, representing a 4% increase over the distribution for the second quarter of 2013, a 16% increase over the distribution for the third quarter of 2012, and our eighteenth consecutive quarterly increase.

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

Throughput attributable to Western Gas Partners, LP totaled 3,285 MMcf/d and 3,111 MMcf/d for the three and nine months ended September 30, 2013, respectively, representing a 16% and a 13% increase, respectively, compared to the same periods in 2012.

Gross margin (total revenues less cost of product) attributable to Western Gas Partners, LP averaged $0.59 per Mcf and $0.57 per Mcf for the three and nine months ended September 30, 2013, respectively, representing a 9% and 6% increase, respectively, compared to the same periods in 2012.


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                                  ACQUISITIONS

Acquisitions. The following table presents our acquisitions during 2012 and
2013, and identifies the funding sources for such acquisitions.
thousands except
unit and               Acquisition   Percentage                        Cash           Common        GP Units
  percent amounts         Date        Acquired       Borrowings       On Hand      Units Issued      Issued
MGR (1)                 01/13/2012         100 %   $    299,000     $ 159,587          632,783       12,914
Chipeta (2)             08/01/2012          24 %              -       128,250          151,235        3,086
Non-Operated
Marcellus
Interest (3)            03/01/2013       33.75 %        250,000       215,500          449,129            -
Anadarko-Operated
Marcellus
Interest (4)            03/08/2013       33.75 %        133,500             -                -            -
Mont Belvieu JV (5)     06/05/2013          25 %              -        78,129                -            -
OTTCO (6)               09/03/2013         100 %         27,500             -                -            -

(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."

(2) We 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). We received distributions related to the additional interest beginning July 1, 2012. This transaction brought our 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) We 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 the common units, our general partner purchased 9,166 general partner units for consideration of $0.5 million in order to maintain its 2.0% general partner interest in us.

(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.

(6) We acquired Overland Trail Transmission, LLC ("OTTCO"), a Delaware limited liability company, from a third party. OTTCO owns and operates an intrastate pipeline which connects our Red Desert and Granger complexes in southwestern Wyoming. The assets acquired are referred to as the "OTTCO pipeline" and the acquisition as the "OTTCO acquisition." See Note 2-Acquisitions in the Notes to Consolidated Financial Statements under Item 1 of this Form 10-Q.


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Presentation of Partnership assets. References to the "Partnership assets" refer collectively to the assets owned by us, as of September 30, 2013. Because Anadarko controls us through its ownership and control of WGP, which owns our general partner, each of our acquisitions of assets from Anadarko has been considered a transfer of net assets between entities under common control. As such, the Partnership assets we acquired from Anadarko were initially recorded at Anadarko's historic carrying value, which did not correlate to the total acquisition price paid by us (see Note 2-Acquisitions in the Notes to Consolidated Financial Statements under Item 1 of this Form 10-Q). Further, after an acquisition of assets from Anadarko, we may be required to recast our financial statements to include the activities of such assets as of the date of common control.
The historical financial statements previously filed with the SEC have been recast in this Form 10-Q to include the results attributable to the Non-Operated Marcellus Interest as if we owned such assets for all periods presented. The consolidated financial statements for periods prior to our acquisition of the Partnership 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 we had owned the assets during the periods reported.

                                EQUITY OFFERINGS

Equity offerings. We completed the following public equity offerings during 2012
and 2013:
                                                                                 Underwriting
                                                                                 Discount and
thousands except unit           Common           GP Units       Price Per       Other Offering         Net
  and per-unit amounts     Units Issued (1)     Issued (2)        Unit             Expenses          Proceeds
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               13,203        424,733

(1) Includes the issuance of 915,000 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 issued to the general partner in exchange for the general partner's proportionate capital contribution to maintain its 2.0% general partner interest.

Other equity offerings. Pursuant to our registration statement filed with the SEC in August 2012 authorizing the issuance of up to an aggregate of $125.0 million of common units (the "Continuous Offering Program"), we initiated trades totaling 218,750 common units during the three and nine months ended September 30, 2013, at an average price per unit of $58.22, generating gross proceeds of $12.7 million (including our general partner's proportionate capital contribution and before $0.1 million of invoiced offering expenses), of which $2.7 million had been received as of September 30, 2013.
On December 12, 2012, in connection with the closing of the WGP initial public offering ("IPO"), we sold 8,722,966 common units to WGP and 178,019 general partner units to our general partner, in each case at a price of $46.00 per unit, pursuant to a unit purchase agreement among us, our general partner and WGP. The sale of common units and general partner units resulted in aggregate proceeds to us of $409.4 million. We used the net proceeds from this offering for general partnership purposes, including the funding of capital expenditures.


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                             RESULTS OF OPERATIONS
                               OPERATING RESULTS

The following tables and discussion present a summary of our results of
operations:
                                                  Three Months Ended          Nine Months Ended
                                                     September 30,               September 30,
thousands                                         2013          2012          2013          2012
Gathering, processing and transportation of
natural gas and natural gas liquids            $ 130,781     $  93,933     $ 343,471     $ 278,966
Natural gas, natural gas liquids and
condensate sales                                 141,326       136,106       402,616       386,818
Equity income and other, net                       5,894         4,695        16,787        13,936
Total revenues (1)                               278,001       234,734       762,874       679,720
Total operating expenses (1)                     187,813       173,422       538,523       491,907
Operating income                                  90,188        61,312       224,351       187,813
Interest income, net - affiliates                  4,225         4,225        12,675        12,675
Interest expense                                 (13,018 )     (10,977 )     (37,483 )     (30,118 )
Other income (expense), net                          439           522         1,612          (287 )
Income before income taxes                        81,834        55,082       201,155       170,083
Income tax expense                                    58         5,080         4,431        14,588
Net income                                        81,776        50,002       196,724       155,495
Net income attributable to noncontrolling
interests                                          3,376         3,423         7,467        11,956
Net income attributable to Western Gas
Partners, LP                                   $  78,400     $  46,579     $ 189,257     $ 143,539
Key performance metrics (2)
Gross margin                                   $ 184,485     $ 145,627     $ 492,815     $ 425,001
Adjusted EBITDA attributable to Western Gas
Partners, LP                                   $ 125,174     $  97,494     $ 328,749     $ 279,813
Distributable cash flow                        $ 105,881     $  74,778     $ 274,794     $ 229,429

(1) Revenues include amounts earned from services provided to our affiliates, as well as from the sale of residue, condensate and NGLs to our affiliates. Operating expenses include amounts charged by our affiliates for services as well as reimbursement of amounts paid by affiliates to third parties on our behalf. See Note 5-Transactions with Affiliates in the Notes to Consolidated Financial Statements under Item 1 of this Form 10-Q.

(2) Gross margin, Adjusted EBITDA and Distributable cash flow are defined under the caption Key Performance Metrics within this Item 2. Such caption also includes reconciliations of Adjusted EBITDA and Distributable cash flow to their most directly comparable financial measures calculated and presented in accordance with generally accepted accounting principles in the United States ("GAAP").

For purposes of the following discussion, any increases or decreases "for the three months ended September 30, 2013" refer to the comparison of the three months ended September 30, 2013, to the three months ended September 30, 2012; any increases or decreases "for the nine months ended September 30, 2013" refer to the comparison of the nine months ended September 30, 2013, to the nine months ended September 30, 2012; and any increases or decreases "for the three and nine months ended September 30, 2013" refer to both the comparisons for the three and nine months ended September 30, 2013.


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Throughput
                                          Three Months Ended                Nine Months Ended
                                             September 30,                     September 30,
                                                             Inc/                             Inc/
throughput in MMcf/d                  2013        2012      (Dec)       2013       2012      (Dec)
Gathering, treating and
transportation (1)                   1,844       1,576        17  %    1,746      1,598         9  %
Processing (2)                       1,397       1,228        14  %    1,320      1,182        12  %
Equity investment (3)                  221         236        (6 )%      211        236       (11 )%
Total throughput (4)                 3,462       3,040        14  %    3,277      3,016         9  %
Throughput attributable to
noncontrolling interests               177         204       (13 )%      166        254       (35 )%
Total throughput attributable to
Western Gas Partners, LP             3,285       2,836        16  %    3,111      2,762        13  %

(1) Excludes average NGL pipeline volumes of 25 MBbls/d and 22 MBbls/d for the three and nine months ended September 30, 2013, respectively, and 22 MBbls/d and 25 MBbls/d for the three and nine months ended September 30, 2012, respectively. Includes 100% of Wattenberg system volumes for all periods presented and throughput beginning March 2013 attributable to the Anadarko-Operated Marcellus Interest.

(2) Consists of 100% of Chipeta, Hilight and Platte Valley system volumes, 100% of the Granger and Red Desert complex volumes, and 50% of Newcastle volumes.

(3) Represents our 14.81% share of Fort Union and 22% share of Rendezvous gross volumes, and excludes our 10% share of average White Cliffs pipeline volumes consisting of 6 MBbls/d and 7 MBbls/d for the three and nine months ended September 30, 2013, respectively, and 6 MBbls/d for both the three and nine months ended September 30, 2012.

(4) Includes affiliate, third-party and equity-investment volumes.

Gathering, treating and transportation throughput increased by 268 MMcf/d and 148 MMcf/d for the three and nine months ended September 30, 2013, respectively, due to increased volumes at the Non-Operated Marcellus Interest and additional throughput from the Anadarko-Operated Marcellus Interest beginning in March 2013. These increases were partially offset by decreases at the Bison facility resulting from reduced drilling activity in the area and at MIGC due to the expiration of a firm transportation agreement effective September 2012. Processing throughput increased by 169 MMcf/d and 138 MMcf/d for the three and nine months ended September 30, 2013, respectively, primarily due to throughput increases at Chipeta, the start-up of the Brasada plant in June 2013, and an increase in volumes at the Red Desert complex due to additional well connections during the period. In addition, for the nine months ended September 30, 2013, increased volumes processed at a plant included in the MGR acquisition ("the Granger straddle plant") contributed to the increase. These increases were partially offset by a decrease in throughput at the Granger complex due to natural production declines in the area.
Equity investment volumes decreased by 15 MMcf/d and 25 MMcf/d for the three and nine months ended September 30, 2013, respectively, primarily due to lower throughput at the Fort Union system due to production declines in the area.

Natural Gas Gathering, Processing and Transportation Revenues

                                       Three Months Ended                     Nine Months Ended
                                          September 30,                          September 30,
                                                            Inc/                                   Inc/
thousands except percentages      2013          2012       (Dec)        2013          2012        (Dec)
Gathering, processing and
transportation of natural
gas and natural gas liquids    $ 130,781     $ 93,933         39 %   $ 343,471     $ 278,966         23 %


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Revenues from gathering, processing and transportation of natural gas and natural gas liquids increased by $36.8 million for the three months ended September 30, 2013, primarily due to increases of $9.1 million, $7.2 million, and $7.2 million at the Non-Operated Marcellus Interest, the Wattenberg system, and Chipeta, respectively, due to higher throughput, an increase of $6.1 million due to the start-up of the Brasada plant in June 2013, and an increase of $4.7 million due to the addition of the Anadarko-Operated Marcellus Interest beginning in March 2013.
Revenues from gathering, processing and transportation of natural gas and . . .

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