SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

WESTERN GAS RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		84-1127613
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1099 18th Street, Suite 1200, Denver, Colorado		80202
(Address of principal executive offices)		(Zip Code)
(303) 452-5603
Registrant’s telephone number, including area code
No Changes
(Former name, former address and former fiscal year, if changed since last report).

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  ý   No  o

 

On May 1, 2004, there were 36,819,669 shares of the registrant’s Common Stock outstanding.

 

 

Western Gas Resources, Inc.

Form 10-Q

Table of Contents

 

PART I - Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheet - March 31, 2004 and December 31, 2003
	Consolidated Statement of Cash Flows - Three Months Ended March 31, 2004 and 2003
	Consolidated Statement of Operations - Three Months Ended March 31, 2004 and 2003
	Consolidated Statement of Changes in Stockholders’ Equity - Three Months Ended March 31, 2004
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II - Other Information
Item 1.	Legal Proceedings
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Item 6.	Exhibits and Reports on Form 8-K
Signatures

 

2

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.      FINANCIAL STATEMENTS

 

WESTERN GAS RESOURCES, INC.

CONSOLIDATED BALANCE SHEET

(Dollars in thousands, except share data)

 

		March 31, 2004			December 31, 2003
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	31,767		$	26,116
Trade accounts receivable, net		252,645			262,509
Inventory		30,432			70,304
Assets from price risk management activities		10,941			17,149
Other		3,767			11,225
Total current assets		329,552			387,303
Property and equipment:
Gas gathering, processing and transportation		1,045,972			1,028,176
Oil and gas properties and equipment (successful efforts method)		349,499			329,555
Construction in progress		133,898			134,751
		1,529,369			1,492,482
Less:  Accumulated depreciation, depletion and amortization		(509,132		)	(495,721		)
Total property and equipment, net		1,020,237			996,761
Other assets:
Gas purchase contracts (net of accumulated amortization of $39,365 and $38,937, respectively)		28,790			29,219
Assets from price risk management activities		1,343			1,466
Equity investments		39,766			39,289
Other		5,705			6,486
Total other assets		75,604			76,460
TOTAL ASSETS		$	1,425,393		$	1,460,524
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	321,093		$	303,186
Accrued expenses		41,883			42,136
Liabilities from price risk management activities		13,281			10,603
Dividends payable		2,554			3,056
Total current liabilities		378,811			358,981
Long-term debt		245,000			339,000
Liabilities from price risk management activities		1,112			1,304
Other long-term liabilities		22,600			22,057
Deferred income taxes payable, net		189,506			176,673
Total liabilities		837,029			898,015
Stockholders’ equity:
Preferred Stock; 10,000,000 shares authorized: $2.625 cumulative convertible preferred stock, par value $.10; 1,260,000 and 2,060,000 issued and outstanding, respectively ($62,285,200 aggregate liquidation preference)		126			206
Common stock, par value $.10; 100,000,000 shares authorized; 35,313,300 and 34,135,901 shares issued, respectively		3,549			3,438
Treasury stock, at cost; 25,016 common shares in treasury		(788		)	(788		)
Additional paid-in capital		387,391			385,019
Retained earnings		199,637			173,076
Accumulated other comprehensive income		(1,551		)	1,558
Total stockholders’ equity		588,364			562,509
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,425,393		$	1,460,524

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3

 

WESTERN GAS RESOURCES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

		Three Months Ended March 31,
		2004			2003
Reconciliation of net income to net cash provided by operating activities:
Net income		$	29,088		$	23,375
Add income items that do not affect cash:
Depreciation, depletion and amortization		22,626			18,143
Loss on the sale of property and equipment		—			281
Deferred income taxes		10,465			17,183
Non-cash change in fair value of derivatives		6,219			4,163
Cumulative effect of change in accounting principle		(4,714		)	6,724
Compensation expense from re-priced options		181			241
Other non-cash items, net		(2,940		)	2,114
Adjustments to working capital to arrive at net cash provided by operating activities:
(Increase) decrease in trade accounts receivable		9,939			(173,095		)
Decrease in product inventory		39,927			20,308
Decrease in other current assets		642			26,797
(Increase) in other assets and liabilities, net		(171		)	(343		)
Increase in accounts payable		17,907			178,528
Increase (decrease) in accrued expenses		7,932			(9,117		)
Net cash provided by operating activities		137,101			115,302
Cash flows from investing activities:
Purchases of property and equipment		(36,955		)	(57,076		)
Proceeds from the dispositions of property and equipment		315			41
Net cash used in investing activities		(36,640		)	(57,035		)
Cash flows from financing activities:
Proceeds from exercise of common stock options		2,918			1,268
Payments on revolving credit facility		(354,850		)	(391,800		)
Borrowings on long-term debt		—			25,000
Borrowings under revolving credit facility		260,850			316,700
Debt issue costs		—			(95		)
Payments for redemption of preferred stock		(672		)	—
Dividends paid		(3,056		)	(3,464		)
Net cash used in financing activities		(94,810		)	(52,391		)
Net increase in cash and cash equivalents		5,651			5,876
Cash and cash equivalents at beginning of period		26,116			7,312
Cash and cash equivalents at end of period		$	31,767		$	13,188

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4

 

WESTERN GAS RESOURCES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share and per share amounts)

 

		Three Months Ended March 31,
		2004			2003
Revenues:
Sale of gas		$	665,198		$	793,270
Sale of natural gas liquids		92,915			92,049
Gathering, processing and transportation revenue		16,829			19,777
Price risk management activities		(5,368		)	(17,694		)
Other		1,642			704
Total revenues		771,216			888,106
Costs and expenses:
Product purchases		657,342			771,602
Plant and transportation operating expense		21,934			21,922
Oil and gas exploration and production expense		17,110			12,511
Depreciation, depletion and amortization		22,626			18,143
Loss on sale of assets		—			281
Selling and administrative expense		9,946			10,592
(Earnings) from equity investments		(1,926		)	(1,562		)
Interest expense		5,802			6,814
Total costs and expenses		732,834			840,303
Income before taxes		38,382			47,803
Provision for income taxes:
Current		3,543			521
Deferred		10,465			17,183
Total provision for income taxes		14,008			17,704
Income before cumulative effect of changes in accounting principles		24,374			30,099
Cumulative effect of changes in accounting principles net of tax of $2,710 and net of tax benefit of $3,967, respectively		4,714			(6,724		)
Net income		29,088			23,375
Preferred stock requirements		(816		)	(1,811		)
Income attributable to common stock		$	28,272		$	21,564
Net income per share of common stock before cumulative effect of changes in accounting principles		$	.69		$	.85
Cumulative effect of changes in accounting principles		$	.14		$	(.20	)
Earnings per share of common stock		$	.83		$	.65
Weighted average shares of common stock outstanding		34,182,950			33,087,680
Income attributable to common stock - assuming dilution		$	29,088		$	23,375
Earnings per share of common stock - assuming dilution		$	.79		$	.63
Weighted average shares of common stock outstanding - assuming dilution		36,825,805			37,163,098

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5

 

WESTERN GAS RESOURCES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except share amounts)

 

		$2.625 Cumulative Convertible Preferred Stock		Shares of Common Stock		Shares of Common Stock in Treasury		$2.625 Cumulative Convertible Preferred Stock			Common Stock			Treasury Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income Net of Tax			Total Stock- holders’ Equity
Balance at December 31, 2003		2,060,000		34,135,901		25,016		$	206		$	3,438		$	(788	)	$	385,019		$	173,076		$	1,558		$	562,509
Comprehensive income:
Net income, first quarter of 2004		—		—		—		—			—			—			—			29,088			—			29,088
Translation adjustments		—		—		—		—			—			—			—			—			(1,528		)	(1,528		)
Other comprehensive income
From equity investees		—		—		—		—			—			—			—			—			(983		)	(983		)
Reclassification adjustment for settled contracts		—		—		—		—			—			—			—			—			2,266			2,266
Changes in fair value of outstanding hedge positions		—		—		—		—			—			—			—			—			(2,850		)	(2,850		)
Reduction to estimated ineffectiveness		—		—		—		—			—			—			—			—			(14		)	(14		)
Fair value of new hedge positions		—		—		—		—			—			—			—			—			—			—
Change in accumulated derivative comprehensive income		—		—		—		—			—			—			—			—			(598		)	(598		)
Total comprehensive income, net of tax		—		—		—		—			—			—			—			—			—			25,979
Stock options exercised		—		117,195		—		—			12			—			2,906			—			—			2,918
Effect of re-priced options		—		—		—		—			—			—			181			—			—			181
Officer loans forgiven		—		—		—		—			—			—			—			—			—			—
Tax benefit related to stock options exercised		—		—		—		—			—			—			—			—			—			—
Dividends declared on common stock		—		—		—		—			—			—			—			(1,765		)	—			(1,765		)
Dividends declared on $2.625 cumulative convertible preferred stock		—		—		—		—			—			—			—			(789		)	—			(789		)
Conversion of $2.625 cumulative convertible preferred stock		(786,751	)	1,060,204		—		(79		)	99			—			(46		)	—			—			(26		)
Redemption of $2.625 cumulative convertible preferred stock		(13,249	)	—		—		(1		)	—			—			(669		)	27			—			(643		)
Balance at March 31, 2004		1,260,000		35,313,300		25,016		$	126		$	3,549		$	(788	)	$	387,391		$	199,637		$	(1,551	)	$	588,364

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6

 

WESTERN GAS RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

GENERAL

 

We have prepared the accompanying unaudited interim consolidated financial statements under the rules and regulations of the Securities and Exchange Commission, or SEC.  As provided by such rules and regulations, we have condensed or omitted certain information and notes normally included in annual financial statements prepared in conformity with accounting principles generally accepted in the United States of America.

 

The interim consolidated financial statements presented herein should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003.  The interim consolidated financial statements as of March 31, 2004 and for the three-month periods ended March 31, 2004 and 2003 included herein are unaudited but reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly present the results for such periods.  The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results of operations expected for the year ended December 31, 2004.

 

Prior period amounts in the interim consolidated financial statements and notes have been reclassified as appropriate to conform to the presentation used in 2004, including items associated with Price risk management activities.

 

EARNINGS PER SHARE OF COMMON STOCK

 

Earnings per share of common stock are computed by dividing income attributable to common stock by the weighted average shares of common stock outstanding.  In addition, earnings per share of common stock - assuming dilution is computed by dividing income attributable to common stock by the weighted average shares of common stock outstanding as adjusted for potential common shares.  Income attributable to common stock is net income less preferred stock dividends.  We declared preferred stock dividends of $789,000 and $1.8 million for the three months ended March 31, 2004 and 2003, respectively.  Common stock options and our $2.625 cumulative convertible preferred stock are potential common shares.  In December 2003, we issued a notice of redemption for a total of 800,000 shares of our $2.625 cumulative convertible preferred stock.  The holders of these shares had the right to convert them into shares of our common stock in lieu of receiving the redemption price in cash.   In January 2004, we issued an additional 989,622 shares of common stock and paid $672,000 in cash proceeds to complete this redemption.  The following is a reconciliation of the weighted average shares of common stock outstanding to the weighted average common shares outstanding – assuming dilution.  In the first quarter of 2004, we declared dividends on outstanding common stock of $0.05 per share and dividends on outstanding preferred stock of $0.65625 per share.

 

		Quarter Ended March 31,
		2004		2003
Weighted average shares of common stock outstanding		34,182,950		33,087,680
Potential common shares from:
Common stock options		907,764		603,719
$2.625 Cumulative convertible preferred stock		1,735,091		3,471,699
Weighted average shares of common stock outstanding - assuming dilution		36,825,805		37,163,098

 

The numerators and the denominators for these periods were adjusted to reflect these potential shares and any related preferred dividends in calculating fully diluted earnings per share.

 

ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Included in Accumulated other comprehensive income at March 31, 2004 were unrealized losses of $2.9 million from the fair value of derivatives designated as cash flow hedges and unrealized gains of $1.4 million of cumulative foreign currency translation adjustments.  In the first quarter of 2004, we discontinued cash flow hedge accounting treatment on our hedges of equity butane production which utilized crude oil puts as a surrogate.  The value of these hedging instruments will remain in Accumulated other comprehensive income and will be reclassified to our results of operations as the underlying transactions occur.  A loss of $318,000 was included in Accumulated other comprehensive income at March 31, 2004 for these items.

 

7

 

Included in Accumulated other comprehensive income at March 31, 2003 were unrealized losses of $10.3 million from the fair value of derivatives designated as cash flow hedges and unrealized gains of $3.2 million of cumulative foreign currency translation adjustments.

 

Revenue Recognition

 

In the Gas Gathering, Processing and Treating segment, we recognize revenue for our services at the time the service is performed. We record revenue from our gas and NGL marketing activities, including sales of our equity production, upon transfer of title to the product.  These revenues are recorded on a gross sales versus sales net of purchases basis as we obtain title to all the gas and NGLs that we buy including third-party purchases, and bear the risk of loss and credit exposure on these transactions.  Gas imbalances on our production are accounted for using the sales method.  For our marketing activities, we utilize mark-to-market accounting.  Under mark-to-market accounting, the expected margin to be realized over the term of the transaction is recorded in the month of origination.  To the extent that a transaction is not fully hedged or there is any hedge ineffectiveness, additional gains or losses associated with the transaction may be reported in future periods.  In the Transportation segment, we realize revenue on a monthly basis from firm capacity contracts under which the shipper pays for transport capacity whether or not the capacity is used and from interruptible contracts where a fee is charged based upon volumes received into the pipeline.

 

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES

 

Depreciation, Depletion and Amortization for Oil and Gas Properties

 

We follow the successful efforts method of accounting for oil and gas exploration and production activities.  Producing properties and related equipment are depleted and depreciated by the units-of-production method based on estimated proved reserves.  In the fourth quarter of 2003, we conducted a review of our oil and gas producing properties, which included an evaluation of the geologic formations and production history for these properties.  This review indicated that the cash flows from individual wells in our operating areas were not largely independent of the cash flows of other wells producing in the same field or coal seam.  As a result of this review we redefined the asset groupings for the calculation of depreciation and depletion from a well-by-well basis to a field wide basis for each of the Jonah, Pinedale and Sand Wash fields and to a grouping of all wells drilled into related coal seams for the Powder River Basin.

 

The change in the asset groupings for depreciation and depletion purposes is treated as a change in accounting principle.  Accordingly, the Accumulated depreciation, depletion, and amortization for these assets has been recalculated under the new asset groupings.  The cumulative effect of the change in depreciation and depletion method of $4.7 million, net of tax, or $0.13 per common share assuming dilution, is presented in the Consolidated Statement of Operations under the caption Cumulative effect of changes in accounting principles, net of tax.  This change resulted in an increase in Depreciation expense of  $310,000, or $0.01 per share of common stock, in the first quarter of 2004.

 

If we had adopted the change in asset groupings for depreciation and depletion purposes on January 1, 2003, we estimate that Depreciation, depletion and amortization expense in the first quarter of 2003 would have been $527,000 lower than reported on the Consolidated Statement of Operations.  The estimated pro forma effect of a January 1, 2003 change in depreciation and depletion methodology would have been $5.5 million in net income and $0.15 in earnings per share of common stock.  For 2003, earnings per share after the cumulative effect of change in accounting principle for asset retirement obligations was $.63 per share.  If we had adopted the change in asset groupings for depreciation and depletion purposes on January 1, 2003, earnings per share would have been $.78 per share.

 

Accounting for Asset Retirement Obligations

 

In June 2001, the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations.”  SFAS No. 143 was effective for fiscal years beginning after June 15, 2002.  SFAS No. 143 established accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost.  We adopted SFAS No. 143 on January 1, 2003 and recorded an $11.5 million increase to Property and equipment, a $4.4 million increase to Accumulated depreciation, depletion and amortization, a $17.8 million increase to Other long-term liabilities and a $6.7 million non-cash, net of tax, loss from the Cumulative effect of a change in accounting principle. 

 

SUBSEQUENT EVENT

 

Conversion of Preferred Stock

 

On March 16, 2004, we issued a notice of redemption for all our outstanding  $2.625 cumulative convertible preferred stock, or approximately 1,260,000 shares.  On April 20, 2004, a total of 1,556,791 common shares were issued and $391,000 was paid in cash to complete the redemption of our $2.625 cumulative convertible preferred stock.  After the completion of the notice of redemption, the $2.625 cumulative convertible preferred stock was delisted from trading on the New York Stock Exchange.

 

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The net loss recognized in earnings through Sale of residue gas and Sale of natural gas liquids during the first three months of 2004 from hedging activities was $743,000, and we recognized a loss from hedge ineffectiveness of $21,000. In the first quarter of 2004, we determined in our quarterly effectiveness testing that our hedges of equity butane production which utilized crude oil puts as a surrogate are no longer effective hedges.  Therefore, in the first quarter of 2004, we discontinued cash flow hedge accounting treatment on these instruments.  The value of these hedging instruments will remain in Accumulated other comprehensive income and will be reclassified to our results of operations as the underlying transactions occur.  A loss of $318,000 was included in Accumulated other

 

8

 

comprehensive income at March 31, 2004 for these items.  Our remaining hedges for our other products are expected to continue to be “highly effective” under SFAS No. 133 in the future.

 

The gains and losses currently reflected in Accumulated other comprehensive income will be reclassified to earnings based on the actual sales of the hedged gas or NGLs.  Based on prices as of March 31, 2004, approximately $2.9 million of losses in Accumulated other comprehensive income will be reclassified to earnings in 2004.

 

SUPPLEMENTARY CASH FLOW INFORMATION

 

Interest paid was $3.0 million and $3.1 million for the three months ended March 31, 2004 and 2003, respectively.  No income taxes were paid in the three months ended March 31, 2004.  A total of $4.9 million was paid in income taxes in the three months ended March 31, 2003.

 

STOCK COMPENSATION

 

As permitted under SFAS No. 123, “Accounting for Stock-Based Compensation”, we have elected to continue to measure compensation costs for stock-based employee compensation plans as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”  We have complied with the pro forma disclosure requirements of SFAS No. 123 as required under the pronouncement.  We realize an income tax benefit from the exercise of non-qualified stock options related to the amount by which the market price at the date of exercise exceeds the option price.  This tax benefit is credited to additional paid-in capital.

 

We are required to record compensation expense (if not previously accrued) equal to the number of unexercised re-priced options multiplied by the amount by which our stock price at the end of any quarter exceeds $21.00 per share.  We had options covering 24,219 and 59,500 common shares outstanding at March 31, 2004 and 2003, respectively, which were treated as repriced options.  Based on our stock price at March 31, 2004 of $50.85 per share and our stock price at March 31, 2003 of $32.55 per share, expense of $181,000 and $147,000, respectively, was recorded in the three months ended March 31, 2004 and 2003.

 

SFAS No. 123 requires pro forma disclosures for each quarter that a statement of operations is presented.  The following is a summary of the options to purchase our common stock granted during the quarters ended March 31, 2004 and 2003, respectively.

 

		Quarter Ended March 31,
		2004		2003
2002 Plan		17,500		30,000

 

The following is a summary of the weighted average fair value per share of the options granted during the quarters ended March 31, 2004 and 2003, respectively.

 

		Quarter Ended March 31,
		2004			2003
2002 Plan		$	22.53		18.28

 

These values for the options granted during the quarter ended March 31, 2004 were estimated using the Black-Scholes option-pricing model with the following assumptions:

 

		2002 Plan
Risk-free interest rate		3.57		%
Expected life (in years)		7
Expected volatility		44		%
Expected dividends (quarterly)		$	0.05

 

Under SFAS No. 123, the fair market value of the options at the grant date is amortized over the appropriate vesting period for purposes of calculating compensation expense.  If we had recorded compensation expense for our grants under our stock-based compensation plans consistent with the fair value method under this pronouncement,

 

9

 

our net income, income attributable to common stock, earnings per share of common stock and earnings per share of common stock - assuming dilution would approximate the pro forma amounts below (dollars in thousands, except per share amounts):

 

		Quarter Ended March 31,
		2004 As Reported			2004 Pro Forma			2003 As Reported			2003 Pro Forma
Net income		$	29,088		$	27,946		$	23,375		$	22,610
Net income attributable to common stock		28,272			27,130			21,564			20,799
Earnings per share of common stock		0.83			0.79			0.65			0.63
Earnings per share of common stock - assuming dilution		0.79			0.76			0.63			0.61
Stock-based employee compensation cost, net of related tax effects, included in net income		$	115		$	—		$	92		$	—
Stock-based employee compensation cost, net of related tax effects, includable in net income if the fair value based method had been applied		$	—		$	1,257		$	—		$	857

 

SEGMENT REPORTING

 

We operate in four principal business segments, as follows:  Gas Gathering, Processing and Treating; Exploration and Production; Marketing; and Transportation.  Management separately monitors these segments for performance against our internal forecast, and these segments are consistent with our internal financial reporting package.  These segments have been identified based upon the differing products and services, regulatory environment and the expertise required for these operations.

 

Gas Gathering, Processing and Treating.  In this segment, we connect producers’ wells (including those of our Exploration and Production segment) to our gathering systems for delivery to our processing or treating plants, process the natural gas to extract NGLs and treat the natural gas in order to meet pipeline specifications.  In some areas, where no processing is required, we gather and compress producers’ gas and deliver it to pipelines for further delivery to market.  Except for volumes taken in kind by our producers, the Marketing segment sells the residue gas and NGLs extracted at most of our facilities.  In this segment, we recognize revenue for our services at the time the service is performed.  Included in this segment is our Powder River coal bed methane gathering operations, which gathers gas from producers, including our Exploration and Production segment.  In 2003, this service for the Exploration and Production segment was performed under a percentage-of-proceeds contract and in 2004, this service is performed under a fee-based contract.  The change of contract type has no effect on the Operating profit of either the Gas Gathering, Processing and Treating segment or the Exploration and Production segment.

 

Substantially all gas flowing through our gathering, processing and treating facilities is supplied under three types of contracts providing for the purchase, treating or processing of natural gas for periods ranging from one month to twenty years or in some cases for the life of the oil and gas lease.  Approximately 65% of our plant facilities’ gross margin, or revenues at the plant less product purchases, for the month of March 2004 was under percentage-of-proceeds agreements in which we are typically responsible for the marketing of the gas and NGLs.  Under these agreements, we pay producers a specified percentage of the net proceeds received from the sale of the gas and the NGLs.

 

Approximately 19% of our plant facilities’ gross margin for the month of March 2004 was under contracts that are primarily fee-based from which we receive a set fee for each Mcf of gas gathered and/or processed. This type of contract provides us with a steady revenue stream that is not dependent on commodity prices, except to the extent that low prices may cause a producer to delay drilling.

 

Approximately 16% of our plant facilities’ gross margin for the month of March 2004 was under contracts with "keepwhole" arrangements or wellhead purchase contracts.  Under these contracts, we retain the NGLs recovered by the processing facility and keep the producers whole by returning to the producers at the tailgate of the plant an amount of residue gas equal on a Btu basis to the natural gas received at the plant inlet.  The "keepwhole" component of the contracts permits us to benefit when the value of the NGLs is greater as a liquid than as a portion of the residue gas stream.  However, we are adversely affected when the value of the NGLs is lower as a liquid than as a portion of the residue gas stream.

 

Exploration and Production.  The activities of the Exploration and Production segment include the exploration and development of gas properties in the Rocky Mountain area, including those where our gathering and/or processing facilities are located.  The Marketing segment sells the majority of the production from these properties.

 

10

 

Marketing. Our Marketing segment buys and sells gas and NGLs in the United States and Canada from and to a variety of customers.  In this segment, revenues for sales of product are recognized at the time the gas or NGLs are delivered to the customer and are sensitive to changes in the market prices of the underlying commodities.  The marketing of products purchased from third-parties typically results in low operating margins relative to the sales price.  We sell our products under agreements with varying terms and conditions in order to match seasonal and other changes in demand.  This segment also markets gas and NGLs produced by our gathering, processing, treating and production assets.  Also included in this segment are our Canadian marketing operations, which are conducted through our wholly-owned subsidiary WGR Canada, Inc. and are immaterial for separate presentation.

 

Transportation.  The Transportation segment reflects the operations of Western’s MIGC, Inc. and MGTC, Inc.  pipelines.   The majority of the revenue presented in this segment is derived from transportation of residue gas for our Marketing segment and other third parties.  In this segment, we realize revenue on a monthly basis from firm capacity contracts under which the shipper pays for transport capacity whether or not the capacity is used and from interruptible contracts where a fee is charged based upon volumes received into the pipeline.  The Transportation segments’ firm capacity contracts range in duration from seven months to fourteen years.

 

Segment Information. The following tables set forth our segment information as of and for the three months ended March 31, 2004 and 2003 (dollars in thousands).  Due to our integrated operations, the use of allocations in the determination of business segment information is necessary.  Inter-segment revenues are valued at prices comparable to those of unaffiliated customers.  Prior period amounts in the interim segment information have been reclassified to conform to the presentation used in 2004.

 

		Gas Gathering, Processing and Treating			Exploration and Production			Marketing			Trans- portation			Corporate			Elim- inating Entries			Total
Quarter Ended March 31, 2004
Revenues from unaffiliated customers
Sale of gas		$	924		$	2,239		$	659,824		$	562		$	—		$	—		$	663,549
Sale of natural gas liquids		1			—			95,298			—			8			—			95,307
Equity hedges:
Residue		149			1,500			—			—			—			—			1,649
Liquids		(2,392		)	—			—			—			—			—			(2,392		)
Gathering, processing and transportation revenue		14,926			—			—			1,743			160			—			16,829
Total revenues from unaffiliated customers		13,608			3,739			755,122			2,305			168			—			774,942
Inter-segment revenues		257,637			55,931			12,805			3,434			15			(329,822		)	—
Price risk management activities		(21		)	—			(5,347		)	—			—			—			(5,368		)
Interest income		—			—			—			—			4,009			(4,009		)	—
Other, net		341			1			(2		)	—			1,302			—			1,642
Total revenues		271,565			59,671			762,578			5,739			5,494			(333,831		)	771,216
Product purchases		215,578			628			759,868			1,581			—			(320,313		)	657,342
Plant operating and transportation expense		20,164			248			(242		)	1,760			935			(931		)	21,934
Oil and gas exploration and production expense		—			25,681			—			—			—			(8,571		)	17,110
Earnings from equity investments		(1,926		)	—			—			—			—			—			(1,926		)
Operating profit		37,749			33,114			2,952			2,398			4,559			(4,016		)	76,756
Depreciation, depletion and amortization		9,000			10,992			17			416			2,201			—			22,626
Selling and administrative expense		—			—			—			—			9,960			(14		)	9,946
(Gain) loss from sale of assets		—			—			—			—			—			—			—
Interest expense		—			35			95			(63		)	9,744			(4,009		)	5,802
Segment profit		$	28,749		$	22,087		$	2,840		$	2,045		$	(17,346	)	$	7		$	38,382
Identifiable assets
Other allocated assets		$	5,974		$	4,737		$	60,172		$	27,152		$	319,475		$	(52,120	)	$	365,390
Investment in others		—			—			—			—			483,720			(443,954		)	39,766
Capital assets		623,219			304,721			17			38,503			54,346			(569		)	1,020,237
Total identifiable assets		$	629,193		$	309,458		$	60,189		$	65,655		$	857,541		$	(496,643	)	$	1,425,393

 

11

 

		Gas Gathering, Processing and Treating			Exploration and Production			Marketing			Trans- portation			Corporate			Elim- inating Entries			Total
Quarter Ended March 31, 2003
Revenues from unaffiliated customers
Sale of gas		$	1,054		$	920		$	798,759		$	296		$	—		$	—		$	801,029
Sale of natural gas liquids		4			—			96,937			—									96,941
Equity hedges:
Residue		(968		)	(6,791		)	—			—			—			—			(7,759		)
Liquids		(4,892		)	—			—			—			—			—			(4,892		)
Gathering, processing and transportation revenue		17,904			—			—			1,838			35			—			19,777
Total revenues from unaffiliated customers		13,102			(5,871		)	895,696			2,134			35			—			905,096
Inter-segment revenues		302,037			63,342			11,967			3,874			33			(381,253		)	—
Price risk management activities		(777		)	(2,045		)	(14,872		)	—			—			—			(17,694		)
Interest income		—			8			—			2			2,339			(2,349		)	—
Other, net		584			15			—			—			105			—			704
Total revenues		314,946			55,449			892,791			6,010			2,512			(383,602		)	888,106
Product purchases		264,287			388			877,927			201			—			(371,201		)	771,602
Plant operating and transportation expense		20,199			101			80			1,747			601			(806		)	21,922
Oil and gas exploration and production expense		—			21,561			—			—			—			(9,050		)	12,511
Earnings from equity investments		(1,562		)	—			—			—			—			—			(1,562		)
Operating profit		32,022			33,399			14,784			4,062			1,911			(2,545		)	83,633
Depreciation, depletion and amortization		7,535			8,420			35			433			1,720			—			18,143
Selling and administrative expense		—			—			—			—			10,606			(14		)	10,592
(Gain) loss from sale of assets		(92		)	—			—			—			373			—			281
Interest expense		1			—			40			(24		)	9,146			(2,349		)	6,814
Segment profit		$	24,578		$	24,979		$	14,709		$	3,653		$	(19,934	)	$	(182	)	$	47,803
Identifiable assets
Other allocated assets		$	(2,215	)	$	3,424		$	107,202		$	1,306		$	478,446		$	(51,330	)	$	536,833
Investment in others		2,914			—			—			3,731			53,714			(36,174		)	24,185
Capital assets		587,781			225,573			1,637			42,142			54,432			7			911,572
Total identifiable assets		$	588,480		$	228,997		$	108,839		$	47,179		$	586,592		$	(87,497	)	$	1,472,590

 

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

 

Our payment obligations under the revolving credit facility, the master shelf agreement and the senior subordinated notes, or collectively the financing facilities, are fully and unconditionally guaranteed by our significant subsidiaries to the extent allowed by applicable law. These guarantees are joint and several and, in the case of the senior subordinated notes, are subordinated in right of payment to senior debt of the guarantors.

 

During the three months ended March 31, 2004 and 2003, the guarantors of our payment obligations under the financing facilities were Lance Oil & Gas Company, Inc., Western Gas Resources-Texas, Inc., Mountain Gas Resources, Inc., MIGC, Inc., MGTC, Inc. and Western Gas Wyoming, L.L.C., or collectively, the guarantor subsidiaries.

 

Our subsidiaries that did not guarantee our payment obligations under the financing facilities during the three months ended March 31, 2004 and 2003 included Western Power Services, Inc., Western Gas Resources-Westana, Inc., WGR Canada, Inc., Western Gas Resources – Sand Wash, Inc., Mountain Gas Transportation, Inc., and Setting Sun Pipeline Corporation, or collectively, the non-guarantor subsidiaries.

 

Presented below is condensed consolidating financial information for Western Gas Resources, Inc., or the Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries.  Balance sheet data are presented as of

 

12

 

March 31, 2004 and 2003.  The Statement of Operations and Statement of Cash Flows data are presented for the three months ended March 31, 2004 and 2003.

 

For purposes of the following tables, the Parent Company’s investments in its subsidiaries are accounted for using the equity method of accounting.  Net income of guarantor and non-guarantor subsidiaries is, therefore, reflected in the Parent Company column under Earnings from equity investments.  Selling and administrative expense and Provision for income taxes are primarily reflected in the Parent Company column.  The Consolidating Entries eliminate the investments in the subsidiaries and other inter-company transactions for consolidated reporting purposes.

 

Supplemental Condensed Consolidating Balance Sheet

As of March 31, 2004

 

		Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Entries			Total
ASSETS
Current assets:
Cash and cash equivalents		$	21,367		$	10,316		$	84		$	—		$	31,767
Trade accounts receivable, net		136,813			107,276			10,872			(2,316		)	252,645
Inventory		13,740			1,741			14,951			—			30,432
Assets from price risk management activities		10,941			—			—			—			10,941
Other		3,799			(1,009		)	977			—			3,767
Total current assets		186,660			118,324			26,884			(2,316		)	329,552
Total property and equipment, net		422,755			515,517			82,641			(676		)	1,020,237
Other assets:
Gas purchase contracts, net		7,302			21,488			—			—			28,790
Assets from price risk management activities		1,343			—			—			—			1,343
Other assets		55,480			20			8			(49,803		)	5,705
Investments in subsidiaries		614,362			37,397			2,369			(614,362		)	39,766
Total other assets		678,487			58,905			2,377			(664,165		)	75,604
Total assets		$	1,287,902		$	692,746		$	111,902		$	(667,157	)	$	1,425,393
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	243,037		$	52,413		$	28,883		$	(3,240	)	$	321,093
Accrued expenses		23,912			15,577			2,394			—			41,883
Liabilities from price risk management activities		13,281			—			—			—			13,281
Dividends payable		2,554			—			—			—			2,554
Total current liabilities		282,784			67,990			31,277			(3,240		)	378,811
Long-term debt		245,000			44,967			4,836			(49,803		)	245,000
Other long-term liabilities		11,736			10,026			838			—			22,600
Liabilities from price risk management activities		1,112			—			—			—			1,112
Deferred income taxes payable		158,906			29,666			5,989			(5,055		)	189,506
Total liabilities		699,538			152,649			42,940			(58,098		)	837,029
Total stockholders’ equity		588,364			540,097			68,962			(609,059		)	588,364
Total liabilities and stockholders’ equity		$	1,287,902		$	692,746		$	111,902		$	(667,157	)	$	1,425,393

 

Supplemental Condensed Consolidating Statement of Operations

For the Quarter Ended March 31, 2004

 

		Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Entries			Total
Total revenues		$	941,328		$	104,163		$	59,557		$	(333,832	)	$	771,216
Costs and expenses:
Product purchases		890,751			33,005			52,371			(318,785		)	657,342
Plant operating expense		15,729			7,907			757			(2,459		)	21,934
Oil and gas exploration and production costs		288			25,246			147			(8,571		)	17,110
Depreciation, depletion and amortization		8,137			13,336			1,153			—			22,626
Selling and administrative expense		9,351			536			74			(15		)	9,946
Earnings from equity investments		(27,070		)	(1,384		)	(542		)	27,070			(1,926		)
Interest expense		5,760			3,951			93			(4,002		)	5,802
Total costs and expenses		902,946			82,597			54,053			(306,762		)	732,834
Income before income taxes		38,382			21,566			5,504			(27,070		)	38,382
Total provision for income taxes		14,008			—			—			—			14,008
Income before cumulative change in accounting principle		24,374			21,566			5,504			(27,070		)	24,374
Cumulative effect of change in accounting principle		4,714			—			—			—			4,714
Net income		$	29,088		$	21,566		$	5,504		$	(27,070	)	$	29,088

 

13

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the Quarter Ended March 31, 2004

 

		Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Entries			Total
Net cash provided by operating activities		$	93,866		$	28,302		$	16,232		$	(1,299	)	$	137,101
Cash flows from investing activities:
Purchases of property and equipment, including acquisitions		(17,172		)	(18,111		)	(2,972		)	1,300			(36,955		)
Proceeds from the disposition of property and equipment		117			3			196			(1		)	315
Other net cash from investing activities		14,995			—			(14,995		)	—			—
Net cash used in investing activities		(2,060		)	(18,108		)	(17,771		)	1,299			(36,640		)
Cash flows from financing activities:
Payments on revolving credit facility		(354,850		)	—			—			—			(354,850		)
Borrowings under revolving credit facility		260,850			—			—			—			260,850
Dividends paid		(3,056		)	—			—			—			(3,056		)
Other net cash from financing activities		2,246			—			—			—			2,246
Net cash used in financing activities		(94,810		)	—			—			—			(94,810		)
Net increase in cash and cash equivalents		(3,004		)	10,194			(1,539		)	—			5,651
Cash and cash equivalents at beginning of year		24,371			122			1,623			—			26,116
Cash and cash equivalents at end of year		$	21,367		$	10,316		$	84		$	—		$	31,767

 

Supplemental Condensed Consolidating Balance Sheet

As of December 31, 2003

(000s)

 

		Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Entries			Total
ASSETS
Current assets:
Cash and cash equivalents		$	24,371		$	122		$	1,623		$	—		$	26,116
Trade accounts receivable, net		149,889			99,485			14,786			(1,651		)	262,509
Inventory		46,670			1,686			21,948			—			70,304
Assets held for sale		—			—			—			—			—
Assets from price risk management activities		17,149			—			—			—			17,149
Other		9,782			(149		)	1,592			—			11,225
Total current assets		247,861			101,144			39,949			(1,651		)	387,303
Total property and equipment, net		410,456			504,824			80,858			623			996,761
Other assets:
Gas purchase contracts, net		7,386			21,833			—			—			29,219
Assets from price risk management activities		1,466			—			—			—			1,466
Other assets		78,123			(15		)	8			(71,630		)	6,486
Investments in subsidiaries		578,640			36,013			3,276			(578,640		)	39,289
Total other assets		665,615			57,831			3,284			(650,270		)	76,460
Total assets		$	1,323,932		$	663,799		$	124,091		$	(651,298	)	$	1,460,524
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	233,708		$	43,447		$	28,597		$	(2,566	)	$	303,186
Accrued expenses		16,145			23,544			2,447			—			42,136
Liabilities from price risk management activities		10,603			—			—			—			10,603
Dividends payable		3,056			—			—			—			3,056
Total current liabilities		263,512			66,991			31,044			(2,566		)	358,981
Long-term debt		339,000			44,967			19,931			(64,898		)	339,000
Other long-term liabilities		11,534			9,698			825			—			22,057
Liabilities from price risk management activities		1,304			—			—			—			1,304
Deferred income taxes payable		146,073			29,805			5,989			(5,194		)	176,673
Total liabilities		761,423			151,461			57,789			(72,658		)	898,015
Total stockholders’ equity		562,509			512,338			66,302			(578,640		)	562,509
Total liabilities and stockholders’ equity		$	1,323,932		$	663,799		$	124,091		$	(651,298	)	$	1,460,524

 

14

 

Supplemental Condensed Consolidating Statement of Operations

For the Quarter Ended March 31, 2003

 

		Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Entries			Total
Total revenues		$	1,114,829		$	100,477		$	60,225		$	(387,425	)	$	888,106
Costs and expenses:
Product purchases		1,074,918			17,672			53,912			(374,900		)	771,602
Plant operating expense		14,911			7,424			700			(1,113		)	21,922
Oil and gas exploration and production costs		279			21,282			—			(9,050		)	12,511
Depreciation, depletion and amortization		7,240			10,367			536			—			18,143
Selling and administrative expense		10,181			349			76			(14		)	10,592
(Gain) loss on sale of assets		281			—			—			—			281
Earnings from equity investments		(47,592		)	(993		)	(569		)	47,592			(1,562		)
Interest expense		6,808			2,314			40			(2,348		)	6,814
Total costs and expenses		1,067,026			58,415			54,695			(339,833		)	840,303
Income before income taxes		47,083			42,062			5,530			(47,592		)	47,803
Total provision for income taxes		17,704			—			—			—			17,704
Income before cumulative change in accounting principle		30,099			42,062			5,530			(47,592		)	30,099
Cumulative effect of change in accounting principle		(6,724		)	—			—			—			(6,724		)
Net income		$	23,375		$	42,062		$	5,530		$	(47,592	)	$	23,375

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the Quarter Ended March 31, 2003

 

		Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Entries			Total
Net cash provided by operating activities		$	105,022		$	10,022		$	4,081		$	(3,823	)	$	115,302
Cash flows from investing activities:
Purchases of property and equipment, including acquisitions		(46,042		)	(10,471		)	(707		)	144			(57,076		)
Proceeds from the disposition of property and equipment		137			48			—			(144		)	41
Other net cash from investing activities		4,680			—			(4,680		)	—			—
Net cash from investing activities		(41,225		)	(10,423		)	(5,387		)	—			(57,035		)
Cash flows from financing activities:
Payments on revolving credit facility		(391,800		)	—			—			—			(391,800		)
Borrowings under revolving credit facility		316,700			—			—			—			316,700
Dividends paid		(3,464		)	—			—			—			(3,464		)
Other net cash from financing activities		26,173			—			—			—			26,173
Net cash used in financing activities		(52,391		)	—			—			—			(52,391		)
Net increase in cash and cash equivalents		11,406			(401		)	(1,306		)	(3,823		)	5,876
Cash and cash equivalents at beginning of year		7,138			128			46			—			7,312
Cash and cash equivalents at end of year		$	18,544		$	(273	)	$	(1,260	)	$	(3,823	)	$	13,188

 

LEGAL PROCEEDINGS

 

United States of America and ex rel. Jack J. Grynberg v. Western Gas Resources, Inc., et al., United States District Court, District of Colorado, Civil Action No. 97-D-1427.  As reported in our Form 10-K for the year ended December 31, 2003, in October 2002,The Company is a defendant in litigation filed on June 30, 1997, along with over 300 natural gas companies in 72 separate actions filed by Mr. Grynberg on behalf of the federal government.  The allegations made by Mr. Grynberg are that established gas measurement and royalty calculation practices improperly deprived the federal government of appropriate natural gas royalties and violate 31 U. S. C. 3729 (a) (7) of the False Claims Act.  The cases have been consolidated to the United States District Court for the District of Wyoming.  Discovery on the jurisdictional issues is being completed to determine if this matter qualifies as a qui tam (or class) action.  On October 9, 2002, the court dismissed Mr. Grynberg’s valuation claims, and his appeal against this decision was also unsuccessful.  The Company believes that Mr. Grynberg’s remaining claims are baseless and without merit and intends to vigorously contest the allegations in this case.

 

Price, et al. v. Gas Pipelines, Western Gas Resources, Inc., et al., District Court, Stevens County, Kansas, Case No. 99-C-30.  As reported in our Form 10-K for the year ended December 31, 2003, the Company is a defendant in litigation filed on September 23, 1999, along with numerous other natural gas companies, in which Mr. Price is claiming an under measurement of gas and Btu volumes throughout the country.  The Company along with other natural gas companies filed a motion to dismiss for failure to state a claim.  The court denied these motions to dismiss.   The court denied plaintiff’s motion for certification as a class and, in the second quarter of 2003, the plaintiff amended and refiled for certification as a class.  On May 12, 2003, Mr. Price filed a further claim, Will Price et al v. Western Gas Resources, Inc. et al., District Court, Stevens County, Kansas, Case No. 03C23, relating to certain matters previously removed from the foregoing action.  The Company believes that Mr. Price’s claims are without merit and intends to vigorously contest the allegations in this case.

 

In the Matter of the Appeal of Lance Oil & Gas Company from a Decision by the Department of Revenue, Docket No. 2003-44, Before the State Board of Equalization for the State of Wyoming.  As reported in our Form 10-K for the year ended December 31, 2003, the Wyoming Department of Revenue has conducted an audit of our wholly-owned subsidiary Lance Oil & Gas Company, Inc. for the period from January 1, 1998 through December 31, 1999.  On March 24, 2003, the Department of Revenue notified us that it had assessed additional severance taxes and increased taxable value for ad valorem tax purposes.  The additional severance and ad valorem taxes claimed by the Department of Revenue amount to $196,000 and $351,000, respectively, together with statutory interest.  On April 23, 2003, we filed a Notice of Appeal with the Wyoming State Board of Equalization.  On April 21, 2004, we reached a settlement with the Wyoming Department of Revenue for the periods 1998 through 2003.  We have accrued a total of $617,000 in the first quarter of 2004 for this settlement.

 

Price Reporting to Gas Trade Publications.   As reported in our Form 10-K for the year ended December 31, 2003, in the third quarter of 2003, we learned that several employees in our marketing department furnished inaccurate information regarding natural gas transactions to energy publications, which compile and report energy index prices.  We discovered the inaccuracies during a review of our marketing activities, which was being conducted in response to a subpoena issued by the Commodity Futures Trading Commission, or CFTC.  These employees have identified inaccuracies associated with reporting of natural gas transactions primarily related to points in Texas.  We have discontinued the practice of reporting pricing information to the industry publications.  In conjunction with our investigation into this matter, we released one manager in our marketing department.  The outcome of this matter and the amount of any fines to be assessed is uncertain.  Given the uncertainty surrounding the amounts of any fines to be assessed, we have not accrued any amounts related to this matter as of March 31, 2004.

 

Other Litigation.   We are involved in various other litigation and administrative proceedings arising in the normal course of business.  In the opinion of our management, any liabilities that may result from these claims will not, individually or in the aggregate, have a material adverse effect on our financial position, results of operations or cash flow.

 

Retirement Plan.  As reported in our Form 10-K for the year ended December 31, 2003, we provide a Retirement Plan for our present and past employees, or participants.  The purpose of the Retirement Plan is to provide a method for the participants to save towards their retirement.  Beginning in January 1989, the participants were given the option to invest their contributions in the Western Gas Fund.  The Western Gas Fund is comprised of shares of our common stock, purchased in the open market by the trustee, Fidelity Management Trust Company, and short-term investments. A participant’s ownership in the Western Gas Fund is measured in Units rather than in shares of common stock.  To effectuate participant investment elections and therefore purchases and sales of Units, the trustee purchases and sells the common stock in the open market at market prices.

 

We are required to register the shares of our common stock purchased by the trustee of the Retirement Plan under the Securities Act.  Although all the purchases by the trustee were made in the open market and in a manner consistent with the Retirement Plan and the investment elections of the participants, we have determined that approximately 467,000 shares of our common stock purchased by the trustee beginning August 14, 2001 and ending August 14, 2002 (the “Rescission Period”) may not have been properly registered in accordance with the Securities Act.  These shares were purchased at an average price of $31.92 per share for total value of $14.9 million.  As a result of this determination, we filed a registration statement on Form S-3 with the SEC providing for a rescission offer to certain of the plan participants as described below.  This registration statement was filed in April 2004 and has not been declared effective by the SEC.

 

Any participant who elected to allocate a percentage of such participant’s funds in the Retirement Plan to the purchase of Units in the Western Gas Fund at any time during the Rescission Period, and who still holds those Units during the period of the rescission offer, may direct a sale of those Units to us at the price the participant paid for the Units, plus interest.  This election would be beneficial to any participant who purchased Units at a price higher than our stock price at the end of the period of the rescission offer.  At March 31, 2004, our common stock price was $50.85 per share and the Western Gas Fund held approximately 136,400 shares of our common stock.  The trustee of the Western Gas Fund sold the remaining 333,600 shares of our common stock acquired during the Rescission Period.  If a participant has already directed and caused the sale of those Units purchased during the Rescission Period at a loss, then the trustee or the participant may receive from us, the price paid for those Units, plus interest, less the sale proceeds.  This election would be beneficial to any participant who sold Units at a loss.

 

While we are unable to estimate the cost or results of the rescission offer, we do not expect the costs to have a material adverse effect on our financial position, results of operations or cash flows.   We also believe that the amounts subject to the rescission offer are immaterial for separate classification on the Consolidated Balance Sheet at March 31, 2004 and at December 31, 2003.

 

Recently Issued Accounting Pronouncements.

 

SFAS No. 141 and SFAS No. 142.  SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Intangible Assets” were issued in June 2001 and became effective for the Company on July 1, 2001 and January 1, 2002, respectively.  SFAS No. 141 requires companies to disaggregate and report separately from goodwill certain intangible assets.  SFAS No. 142 establishes new guidelines for accounting for goodwill and other intangible assets.  Under SFAS No. 142, goodwill and certain other intangible assets are not amortized, but rather are reviewed annually for impairment.  One interpretation being considered relative to these standards is that oil and gas mineral rights held under lease and other contractual arrangements representing the right to extract such reserves for both undeveloped and developed leaseholds should be classified separately from oil and gas properties, as intangible assets on the Consolidated Balance Sheet.  In addition, the disclosures required by SFAS No. 141 and No. 142 relative to intangibles would be included in the Notes to Consolidated Financial Statements.  Historically, we have included these oil and gas mineral rights held under lease and other contractual arrangements representing the right to extract such reserves as part of the Oil and gas properties and equipment, even after SFAS No. 141 and No. 142 became effective.

 

If we applied the interpretation of SFAS No. 141 and No. 142 described above, only the Consolidated Balance Sheet classification of oil and gas leaseholds would be affected.  Our results of operations and cash flows would not be affected, since these oil and gas mineral rights held under lease and other contractual arrangements representing the right to extract such reserves would continue to be amortized in accordance with accounting rules for oil and gas companies provided in SFAS No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies.”

 

At March 31, 2004, we had undeveloped leaseholds of $55.3 million that would be classified on the Consolidated Balance Sheet as “intangible undeveloped leaseholds” and developed leaseholds of $33.1 million that would be classified as “intangible developed leaseholds” if the interpretation currently being considered was applied.  We will continue to classify our oil and gas mineral rights held under lease and other contractual rights representing the right to extract such reserves as tangible oil and gas properties until further guidance is provided.

 

15

 

FIN 46.  In January 2003, the FASB issued Interpretation No. 46, or “FIN 46”, “Consolidation of Variable Interest Entities.”  FIN 46, as amended by FIN 46r, provides guidance on how to identify a variable interest entity, or VIE, and determine when the assets, liabilities, and results of operations of a VIE need to be included in a company’s consolidated financial statements.  FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders in a VIE.  The provisions of FIN 46 were effective immediately for all VIEs created after January 31, 2003.  For VIEs created before February 1, 2003, the provisions of FIN 46, as amended, were effective on January 1, 2004.   After evaluating this accounting pronouncement and our operations, we determined that we did not have any interests in any VIEs, hence the adoption of FIN 46 did not have any impact on our financial position, results of operations or cash flows.

 

EITF 01-08.  In January 2004, the Emerging Issues Task Force issued EITF 01-08, “Determining Whether an Arrangement Contains a Lease.”  The task force reached final consensus that assets, which are built to provide services to one specific customer, should be evaluated for potential treatment as capital leases.  We have entered into a binding agreement to construct and operate a new refrigeration straddle plant that will provide services to the owner of an interstate pipeline.  This new facility is expected to be operational in the fourth quarter of 2004.  We are evaluating this contract and the provisions of EITF 01-08 to determine the appropriate accounting treatment.

 

16