UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-34046

WESTERN GAS PARTNERS, LP

Delaware (State or other jurisdiction of incorporation or organization)		26-1075808 (I.R.S. Employer Identification No.)
1201 Lake Robbins Drive The Woodlands, Texas (Address of principal executive offices)		77380 (Zip Code)

(832) 636-6000
(Registrant’s telephone number, including area code)

          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 þ No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
		(Do not check if smaller reporting company)

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

          There were 54,889,781 common units outstanding as of April 30, 2011.

 

 

TABLE OF CONTENTS

PART I				FINANCIAL INFORMATION		Page
		Item 1.		Financial Statements
				Consolidated Statements of Income for the three months ended March 31, 2011 and 2010			3
				Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010			4
				Consolidated Statement of Equity and Partners’ Capital for the three months ended March 31, 2011			5
				Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010			6
				Notes to Unaudited Consolidated Financial Statements			7
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
				Cautionary Note Regarding Forward-Looking Statements			24
				Executive Summary			25
				Acquisitions			26
				Equity Offerings			27
				Results of Operations			28
				Operating Results			28
				Liquidity and Capital Resources			37
				Contractual Obligations			41
				Off-Balance Sheet Arrangements			41
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			41
		Item 4.		Controls and Procedures			42
PART II				OTHER INFORMATION
		Item 1.		Legal Proceedings			42
		Item 1A.		Risk Factors			42
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			43
		Item 6.		Exhibits			43

DEFINITIONS

          As generally used within the energy industry and in this quarterly report on Form 10-Q, the identified terms have the following meanings:

          Barrel or Bbl: 42 U.S. gallons measured at 60 degrees Fahrenheit.

          Bcf/d: One billion cubic feet per day.

          Btu: British thermal unit; the approximate amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

          Condensate: A natural gas liquid with a low vapor pressure mainly composed of propane, butane, pentane and heavier hydrocarbon fractions.

          Cryogenic: The fractionation process in which liquefied gases, such as liquid nitrogen or liquid helium, are used to bring volumes to very low temperatures (below approximately –238 degrees Fahrenheit) to separate natural gas liquids from natural gas. Through cryogenic processing, more natural gas liquids are extracted than when traditional refrigeration methods are used.

          Drip condensate: Heavier hydrocarbon liquids that fall out of the natural gas stream and are recovered in the gathering system without processing.

          Fractionation: The process of applying various levels of higher pressure and lower temperature to separate a stream of natural gas liquids into ethane, propane, normal butane, isobutane and natural gasoline.

          Imbalance: Imbalances result from (i) differences between gas volumes nominated by customers and gas volumes received from those customers and (ii) differences between gas volumes received from customers and gas volumes delivered to those customers.

          MMBtu: One million British thermal units.

          MMBtu/d: One million British thermal units per day.

          MMcf/d: One million cubic feet per day.

          Natural gas liquid(s) or NGL(s): The combination of ethane, propane, normal butane, isobutane and natural gasolines that, when removed from natural gas, become liquid under various levels of higher pressure and lower temperature.

          Pounds per square inch, absolute: The pressure resulting from a one pound-force applied to an area of one square inch, including local atmospheric pressure. All volumes presented herein are based on a standard pressure base of 14.73 pounds per square inch, absolute.

          Residue gas: The natural gas remaining after being processed or treated.

PART I. FINANCIAL INFORMATION

(unaudited, in thousands, except per-unit amounts)

		Three Months Ended
		March 31,
		2011				2010(1)
Revenues – affiliates
Gathering, processing and transportation of natural gas and natural gas liquids		$	48,610			$	45,468
Natural gas, natural gas liquids and condensate sales			53,201				59,678
Equity income and other			2,708				1,598
Total revenues – affiliates			104,519				106,744
Revenues – third parties
Gathering, processing and transportation of natural gas and natural gas liquids			12,520				11,447
Natural gas, natural gas liquids and condensate sales			18,204				10,194
Other, net			750				551
Total revenues – third parties			31,474				22,192
Total revenues			135,993				128,936
Operating expenses (2)
Cost of product			46,820				41,973
Operation and maintenance			20,862				22,391
General and administrative			6,698				6,068
Property and other taxes			3,959				3,619
Depreciation, amortization and impairments			19,558				17,719
Total operating expenses			97,897				91,770
Operating income			38,096				37,166
Interest income – affiliates			4,225				4,230
Interest expense (3)			(6,111	)			(3,528	)
Other income (expense), net			1,760				20
Income before income taxes			37,970				37,888
Income tax expense			32				5,556
Net income			37,938				32,332
Net income attributable to noncontrolling interests			2,954				1,894
Net income attributable to Western Gas Partners, LP		$	34,984			$	30,438
Limited partner interest in net income:
Net income attributable to Western Gas Partners, LP		$	34,984			$	30,438
Pre-acquisition net income allocated to Parent			—				(6,306	)
General partner interest in net income (4)			(1,448	)			(483	)
Limited partner interest in net income (4)		$	33,536			$	23,649
Net income per common unit – basic and diluted		$	0.43			$	0.37
Net income per subordinated unit – basic and diluted		$	0.41			$	0.37
Net income per limited partner unit – basic and diluted		$	0.43			$	0.37

See accompanying notes to the unaudited consolidated financial statements.

WESTERN GAS PARTNERS, LP

(unaudited, in thousands, except number of units)

		March 31,				December 31,
		2011				2010
ASSETS
Current assets
Cash and cash equivalents		$	30,841			$	27,074
Accounts receivable, net – third parties			17,792				9,140
Accounts receivable, net – affiliates			1,335				1,750
Other current assets			5,875				5,220
Total current assets			55,843				43,184
Long-term assets
Note receivable – Anadarko			260,000				260,000
Plant, property and equipment
Cost			2,004,955				1,727,231
Less accumulated depreciation			386,565				367,881
Net property, plant and equipment			1,618,390				1,359,350
Goodwill and other intangible assets			115,546				60,236
Equity investments			40,109				40,406
Other assets			5,119				2,361
Total assets		$	2,095,007			$	1,765,537
LIABILITIES, EQUITY AND PARTNERS’ CAPITAL
Current liabilities
Accounts and natural gas imbalance payables – third parties		$	16,030			$	13,695
Accounts and natural gas imbalance payables – affiliates			1,112				1,480
Accrued ad valorem taxes			9,939				5,986
Income taxes payable			250				160
Accrued liabilities – third parties			19,760				20,280
Accrued liabilities – affiliates			264				593
Total current liabilities			47,355				42,194
Long-term liabilities
Long-term debt – third parties			470,000				299,000
Note payable – Anadarko			175,000				175,000
Deferred income taxes			676				733
Asset retirement obligations and other			60,079				43,542
Total long-term liabilities			705,755				518,275
Total liabilities			753,110				560,469
Commitments and contingencies (Note 9)
Equity and partners’ capital
Common units (54,889,781 and 51,036,968 units issued and outstanding at March 31, 2011 and December 31, 2010, respectively)			944,009				810,717
Subordinated units (26,536,306 units issued and outstanding at March 31, 2011 and December 31, 2010)			283,249				282,384
General partner units (1,661,757 and 1,583,128 units issued and outstanding at March 31, 2011 and December 31, 2010, respectively)			24,627				21,505
Total partners’ capital			1,251,885				1,114,606
Noncontrolling interests			90,012				90,462
Total equity and partners’ capital			1,341,897				1,205,068
Total liabilities, equity and partners’ capital		$	2,095,007			$	1,765,537

See accompanying notes to the unaudited consolidated financial statements.

WESTERN GAS PARTNERS, LP

(unaudited, in thousands)

		Partners’ Capital
		Limited Partners								General				Noncontrolling
		Common				Subordinated				Partner				Interests				Total
Balance at December 31, 2010		$	810,717			$	282,384			$	21,505			$	90,462			$	1,205,068
Issuance of common and general partner units, net of offering expenses			130,032				—				2,764				—				132,796
Net income			22,587				10,949				1,448				2,954				37,938
Contributions from noncontrolling interest owners			—				—				—				960				960
Distributions to noncontrolling interest owners			—				—				—				(4,364	)			(4,364	)
Distributions to unitholders			(19,394	)			(10,084	)			(1,086	)			—				(30,564	)
Non-cash equity-based compensation and other			67				—				(4	)			—				63
Balance at March 31, 2011		$	944,009			$	283,249			$	24,627			$	90,012			$	1,341,897

See accompanying notes to the unaudited consolidated financial statements.

WESTERN GAS PARTNERS, LP

(unaudited, in thousands)

		Three Months Ended
		March 31,
		2011				2010(1)
Cash flows from operating activities
Net income		$	37,938			$	32,332
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and impairments			19,558				17,719
Deferred income taxes			(58	)			(1,785	)
Changes in assets and liabilities:
Increase in accounts receivable, net			(8,251	)			(4,773	)
Increase in accounts and natural gas imbalance payables and accrued liabilities			5,887				9,729
Change in other items, net			(10	)			(763	)
Net cash provided by operating activities			55,064				52,459
Cash flows from investing activities
Capital expenditures			(13,923	)			(6,931	)
Acquisition from affiliates			—				(241,680	)
Acquisition from third parties			(303,602	)			—
Investments in equity affiliates			(93	)			—
Proceeds from sale of assets to affiliate			153				—
Net cash used in investing activities			(317,465	)			(248,611	)
Cash flows from financing activities
Borrowings under revolving credit facility, net of issuance costs			556,340				209,987
Repayments of revolving credit facility			(139,000	)			—
Repayment of Wattenberg term loan			(250,000	)			—
Proceeds from issuance of common and general partner units, net of $5.4 million in offering and other expenses			132,796				—
Distributions to unitholders			(30,564	)			(21,393	)
Contributions from noncontrolling interest owners			960				1,985
Distributions to noncontrolling interest owners			(4,364	)			(2,806	)
Net distributions to Parent			—				(6,382	)
Net cash provided by financing activities			266,168				181,391
Net increase (decrease) in cash and cash equivalents			3,767				(14,761	)
Cash and cash equivalents at beginning of period			27,074				69,984
Cash and cash equivalents at end of period		$	30,841			$	55,223
Supplemental disclosures
(Decrease) increase in accrued capital expenditures		$	(726	)		$	135
Interest paid		$	5,009			$	2,671
Interest received		$	4,225			$	4,225

See accompanying notes to the unaudited consolidated financial statements.

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

          Description of business. Western Gas Partners, LP (the “Partnership”) is a Delaware limited partnership formed in August 2007. As of March 31, 2011, the Partnership’s assets included eleven gathering systems, six natural gas treating facilities, seven natural gas processing facilities, one natural gas liquids (“NGL”) pipeline, one interstate pipeline and noncontrolling interests in Fort Union Gas Gathering, L.L.C. (“Fort Union”) and White Cliffs Pipeline, L.L.C. (“White Cliffs”). The Partnership’s assets are located in East and West Texas, the Rocky Mountains (Colorado, Utah and Wyoming) and the Mid-Continent (Kansas and Oklahoma). The Partnership is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, NGLs and crude oil for Anadarko Petroleum Corporation and its consolidated subsidiaries and third-party producers and customers.

          For purposes of these financial statements, the “Partnership” refers to Western Gas Partners, LP and its consolidated subsidiaries; “Anadarko” or “Parent” refers to Anadarko Petroleum Corporation and its consolidated subsidiaries, excluding the Partnership and the general partner; and “affiliates” refers to wholly owned and partially owned subsidiaries of Anadarko, excluding the Partnership, and also refers to Fort Union and White Cliffs. The Partnership’s general partner is Western Gas Holdings, LLC, a wholly owned subsidiary of Anadarko.

          Basis of presentation. The accompanying consolidated financial statements of the Partnership have been prepared in accordance with the accounting principles generally accepted in the United States. The consolidated financial statements include the accounts of the Partnership and entities in which it holds a controlling financial interest. All significant intercompany transactions have been eliminated. Investments in non-controlled entities over which the Partnership exercises significant influence are accounted for under the equity method. The Partnership records its 50% proportionate share of the assets, liabilities, revenues and expenses attributed to the Newcastle system.

          The information furnished herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of financial position as of March 31, 2011 and December 31, 2010, results of operations for the three months ended March 31, 2011 and 2010, statement of equity and partners’ capital for the three months ended March 31, 2011 and statements of cash flows for the three months ended March 31, 2011 and 2010. The Partnership’s financial results for the three months ended March 31, 2011 are not necessarily indicative of the expected results for the full year ending December 31, 2011.

          The accompanying consolidated financial statements of the Partnership have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations, although management believes that the disclosures made are adequate to make the information not misleading. Management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements and the notes thereto. These estimates are evaluated on an ongoing basis, utilizing historical experience and other methods considered reasonable under the particular circumstances. Although these estimates are based on management’s knowledge and the best available information at the time, changes may result in revised estimates and actual results may differ from these estimates. Effects on the Partnership’s business, financial position and results of operations resulting from revisions to estimates are recognized when the facts that give rise to the revision become known.

          The accompanying unaudited consolidated financial statements and notes should be read in conjunction with the Partnership’s annual report on Form 10-K, as filed with the SEC on February 24, 2011.

          Acquisitions. During 2010 and 2011, the Partnership completed the following acquisitions:

          Granger acquisition. In January 2010, the Partnership acquired certain midstream assets from Anadarko for (i) approximately $241.7 million in cash, which was financed primarily with a $210.0 million draw on the Partnership’s revolving credit facility and $31.7 million of cash on hand, as well as (ii) the issuance of 620,689 common units and 12,667 general partner units. The assets acquired include Anadarko’s entire 100% ownership interest in the following assets located in Southwestern Wyoming: (i) the Granger gathering system with related compressors and other facilities, and (ii) the Granger complex, consisting of two cryogenic trains, a refrigeration train, an NGLs fractionation facility and ancillary equipment. These assets are referred to collectively as the “Granger assets” and the acquisition is referred to as the “Granger acquisition.”

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

          Wattenberg acquisition. In August 2010, the Partnership acquired certain midstream assets from Anadarko for (i) $473.1 million in cash, which was funded with $250.0 million of borrowings under a bank-syndicated unsecured term loan, $200.0 million of borrowings under the Partnership’s revolving credit facility and $23.1 million of cash on hand; as well as (ii) the issuance of 1,048,196 common units and 21,392 general partner units. The assets acquired represent a 100% ownership interest in Kerr-McGee Gathering LLC, which owns the Wattenberg gathering system and related facilities, including the Fort Lupton processing plant. These assets, located in the Denver-Julesburg Basin, north and east of Denver, Colorado, are referred to collectively as the “Wattenberg assets” and the acquisition as the “Wattenberg acquisition.”

          White Cliffs acquisition. In September 2010, the Partnership and Anadarko closed a series of related transactions through which the Partnership acquired a 10% member interest in White Cliffs. Specifically, the Partnership acquired Anadarko’s 100% ownership interest in Anadarko Wattenberg Company, LLC (“AWC”) for $20.0 million in cash (the “AWC acquisition”). AWC owned a 0.4% interest in White Cliffs and held an option to increase its interest in White Cliffs. Also, in a series of concurrent transactions, AWC acquired an additional 9.6% interest in White Cliffs from a third party for $18.0 million in cash, subject to post-closing adjustments. White Cliffs owns a crude oil pipeline that originates in Platteville, Colorado and terminates in Cushing, Oklahoma and became operational in June 2009. The Partnership’s acquisition of the 0.4% interest in White Cliffs and related purchase option from Anadarko and the acquisition of an additional 9.6% interest in White Cliffs were funded with cash on hand and are referred to collectively as the “White Cliffs acquisition.” The Partnership’s interest in White Cliffs is referred to as the “White Cliffs investment.”

          Platte Valley acquisition. On February 28, 2011, the Partnership acquired the Platte Valley gathering system and processing plant from a third party. These assets are located in the Denver-Julesburg Basin and consist of (i) a natural gas gathering system and related compression and other ancillary equipment; and (ii) cryogenic gas processing facilities. These assets are referred to collectively as the “Platte Valley assets” and the acquisition as the “Platte Valley acquisition.” The $303.6 million acquisition price was funded primarily by borrowings under the Partnership’s revolving credit facility.

          The Platte Valley acquisition is accounted for under the acquisition method of accounting. Under this method of accounting, the Partnership’s historical operating results for periods prior to the acquisition remain unchanged. At the date of the acquisition, the assets and liabilities of the Partnership continue to be recorded based upon their historical costs and the Platte Valley assets and liabilities are recorded at their estimated fair values. Results of operations attributable to the Platte Valley assets were included in the Partnership’s consolidated statement of income beginning on the acquisition date in the first quarter of 2011.

          The following is a preliminary allocation of the purchase price to the assets acquired and liabilities assumed in the Platte Valley acquisition as of the acquisition date (in thousands).

Property, plant and equipment		$	250,703
Other assets			13,818
Intangible assets			55,399
Asset retirement obligations and other liabilities			(16,318	)
Total purchase price		$	303,602

          The purchase price allocation is based on a preliminary assessment of the fair value of the assets acquired and liabilities assumed in the Platte Valley acquisition. The assessment of the fair values of the plant and processing facilities and related equipment acquired were based on market, cost and income approaches. The liabilities assumed include certain amounts associated with environmental contingencies estimated by management. The purchase price allocation is preliminary and is subject to change pending post-closing purchase price adjustments; finalizing fair value estimates; and completing evaluations of property, plant and equipment, intangible assets, asset retirement obligations, contractual arrangements and legal and environmental matters as additional information becomes available and is assessed by the Partnership.

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

          The following table presents the unaudited pro forma condensed financial information as if the Platte Valley acquisition occurred on January 1, 2011 (in thousands).

		Three Months
		Ended
		March 31, 2011
Revenues		$	152,032
Net income		$	40,517
Net income attributable to Western Gas Partners, LP		$	37,563
Earnings per limited partner unit – basic and diluted		$	0.46

          The pro forma information is presented for illustration purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisition been completed at the assumed date, nor is it necessarily indicative of future operating results of the combined entity. The Partnership’s pro forma information includes $9.2 million of revenues and $6.3 million of expenses attributable to the Platte Valley assets and included in the Partnership’s consolidated statement of income for the three-months ended March 31, 2011. The pro forma adjustments reflect pre-acquisition results of the Platte Valley assets for January and February 2011, including: (a) estimated revenues and expenses; (b) estimated depreciation and amortization based on the preliminary purchase price allocated to property, plant and equipment and other intangible assets and estimated useful lives; (c) elimination of $0.6 million of acquisition-related costs included in general and administrative expenses in the consolidated statement of income; and (d) interest on the Partnership’s $303.0 million of borrowings under its revolving credit facility to finance the Platte Valley acquisition. The pro forma adjustments include estimates and assumptions based on currently available information. Management believes the estimates and assumptions are reasonable, and the significant effects of the transactions are properly reflected. The pro forma information does not reflect any cost savings or other synergies anticipated as a result of the acquisition or any future acquisition related expenses. Pro forma information is not presented for periods ending on or before December 31, 2010 as it is not practical to determine revenues and cost of product for periods prior to January 1, 2011, the effective date of the gathering and processing agreement with the seller related to a majority of the throughput at the Platte Valley assets.

          Presentation of Partnership acquisitions. References to the “Partnership Assets” refer collectively to the assets owned by the Partnership as of March 31, 2011. Because of Anadarko’s control of the Partnership through its ownership of the general partner, each acquisition of Partnership Assets, except for the acquisitions of the Platte Valley assets and a 9.6% interest in White Cliffs, was considered a transfer of net assets between entities under common control. As a result, after each acquisition of assets from Anadarko, the Partnership is required to revise its financial statements to include the activities of the Partnership Assets as of the date of common control. Anadarko acquired the Wattenberg assets in connection with its August 10, 2006 acquisition of Kerr-McGee Corporation, and made its initial investment in White Cliffs on January 29, 2007.

          The Partnership’s historical financial statements for the three months ended March 31, 2010, as presented in the Partnership’s quarterly report on Form 10-Q for the quarter ended March 31, 2010, have been recast in this quarterly report on Form 10-Q to include the results attributable to the Wattenberg assets and the 0.4% interest in White Cliffs as if the Partnership owned such assets for all periods presented. Unless otherwise noted, references to “periods prior to our acquisition of the Partnership Assets” and similar phrases refer to periods prior to July 2010 with respect to the Wattenberg assets and periods prior to September 2010 with respect to the White Cliffs investment. References to “periods including and subsequent to our acquisition of the Partnership Assets” and similar phrases refer to periods including and subsequent to July 2010 with respect to the Wattenberg assets and periods including and subsequent to September 2010 with respect to the White Cliffs investment. The consolidated financial statements for periods prior to the Partnership’s acquisition of the Partnership Assets 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 the Partnership had owned the assets during the periods reported.

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

          Net income attributable to the Partnership Assets for periods prior to the Partnership’s acquisition of such assets is not allocated to the limited partners for purposes of calculating net income per limited partner unit. In addition, certain amounts in prior periods have been reclassified to conform to the current presentation. Specifically, during the quarter ended September 30, 2010, the Partnership revised its presentation to report the effects of commodity price swap agreements attributable to purchases in cost of product in its consolidated statements of income and net gains and losses on commodity price swap agreements related to purchases have been reclassified for all periods to conform to the current presentation. The following table presents the impact to the historical consolidated statements of income attributable to the Wattenberg assets and 0.4% interest in White Cliffs as well as the reclassification of the impact of commodity price swap agreements related to purchases (in thousands):

		Three Months Ended March 31, 2010
		Partnership				Wattenberg				White
		Historical				Assets				Cliffs				Reclassification				Combined
Revenues		$	94,319			$	35,037			$	40			$	(460	)		$	128,936
Net income			24,808				7,483				41				—				32,332

          Equity offerings. The Partnership completed the following public equity offerings during 2010 and 2011:

          May 2010 equity offering. In May and June 2010, the Partnership closed its equity offering of 4,558,700 common units to the public at a price of $22.25 per unit, including the issuance of 558,700 common units to the public pursuant to the exercise of the underwriters’ over-allotment option granted in connection with the equity offering. The May and June 2010 issuances are referred to collectively as the “May 2010 equity offering.” In connection with the May 2010 equity offering, the Partnership issued 93,035 general partner units to its general partner. Net proceeds from the offering of approximately $99.1 million, including the general partner’s proportionate capital contribution to maintain its 2.0% interest, and cash on hand were used to repay $100.0 million outstanding under the Partnership’s revolving credit facility.

          November 2010 equity offering. In November 2010, the Partnership closed a public offering of 8,415,000 common units at a price of $29.92 per unit, including the issuance of 915,000 common units to the public pursuant to the partial exercise of the underwriters’ over-allotment option granted in connection with that offering. The November 2010 issuances are referred to collectively as the “November 2010 equity offering.” In connection with the November 2010 equity offering, the Partnership issued 171,734 general partner units to its general partner, representing the general partner’s proportionate capital contribution to maintain its 2.0% interest. Net proceeds from the offering of approximately $246.7 million were primarily used to repay $246.0 million outstanding under the Partnership’s revolving credit facility.

          March 2011 equity offering. On March 4, 2011, the Partnership closed a public offering of 3,550,000 common units at a price of $35.15 per unit. On March 31, 2011, the Partnership issued an additional 302,813 common units to the public pursuant to the partial exercise of the underwriters’ over-allotment option granted in connection with that offering. The March 4, 2011 and March 31, 2011 issuances are referred to collectively as the “March 2011 equity offering.” In connection with the March 2011 equity offering, the Partnership issued 78,629 general partner units to its general partner in exchange for $2.8 million, representing the general partner’s proportionate capital contribution to maintain its 2.0% interest. Net proceeds from the offering of approximately $132.8 million were primarily used to repay amounts outstanding under the Partnership’s revolving credit facility.

          Limited partner and general partner units. The Partnership’s common units are listed on the New York Stock Exchange under the symbol “WES.” The following table summarizes common, subordinated and general partner units issued during the three months ended March 31, 2011 (in thousands):

		Limited Partner Units								General
		Common				Subordinated				Partner Units				Total
Balance at December 31, 2010			51,037				26,536				1,583				79,156
March 2011 equity offering			3,853				—				79				3,932
Balance at March 31, 2011			54,890				26,536				1,662				83,088

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

          Anadarko holdings of Partnership equity. As of March 31, 2011, Anadarko held 1,661,757 general partner units representing a 2% general partner interest in the Partnership, 100% of the Partnership’s IDRs, 10,302,631 common units and 26,536,306 subordinated units. Anadarko owned an aggregate 44.3% limited partner interest in the Partnership based on its holdings of common and subordinated units. The public held 44,587,150 common units, representing a 53.7% limited partner interest in the Partnership.

2. PARTNERSHIP DISTRIBUTIONS

          The partnership agreement requires that, within 45 days subsequent to the end of each quarter, the Partnership distribute all of its available cash (as defined in the partnership agreement) to unitholders of record on the applicable record date. The Partnership declared the following cash distributions to its unitholders for the periods presented (in thousands, except per-unit data):

		Total Quarterly
		Distribution				Total Cash				Date of
Quarters Ended		per Unit				Distribution				Distribution
March 31, 2010		$	0.34			$	22,042			May 2010
March 31, 2011(1)		$	0.39			$	33,168			May 2011

3. NET INCOME PER LIMITED PARTNER UNIT

          The Partnership’s net income for periods including and subsequent to the Partnership’s acquisitions of the Partnership Assets is allocated to the general partner and the limited partners, including any subordinated unitholders, in accordance with their respective ownership percentages, and when applicable, giving effect to incentive distributions allocable to the general partner. The Partnership’s net income allocable to the limited partners is allocated between the common and subordinated unitholders by applying the provisions of the partnership agreement that govern actual cash distributions as if all earnings for the period had been distributed. Specifically, net income equal to the amount of available cash (as defined by the partnership agreement) is allocated to the general partner, common unitholders and subordinated unitholders consistent with actual cash distributions, including incentive distributions allocable to the general partner. Undistributed earnings (net income in excess of distributions) or undistributed losses (available cash in excess of net income) are then allocated to the general partner, common unitholders and subordinated unitholders in accordance with their respective ownership percentages during each period.

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

          Basic and diluted net income per limited partner unit is calculated by dividing the limited partners’ interest in net income by the weighted average number of limited partner units outstanding during the period. The common units issued in connection with acquisitions and equity offerings during 2010 and 2011 are included on a weighted-average basis for periods they were outstanding. Management currently expects that the subordinated units will convert to common units on August 15, 2011. The following table illustrates the Partnership’s calculation of net income per unit for common and subordinated limited partner units (in thousands, except per-unit information):

		Three Months Ended
		March 31,
		2011				2010(1)
Net income attributable to Western Gas Partners, LP		$	34,984			$	30,438
Pre-acquisition net income allocated to Parent			—				(6,306	)
General partner interest in net income			(1,448	)			(483	)
Limited partner interest in net income		$	33,536			$	23,649
Net income allocable to common units		$	22,587			$	13,741
Net income allocable to subordinated units			10,949				9,908
Limited partner interest in net income		$	33,536			$	23,649
Net income per limited partner unit – basic and diluted
Common units		$	0.43			$	0.37
Subordinated units		$	0.41			$	0.37
Total limited partner units		$	0.43			$	0.37
Weighted average limited partner units outstanding – basic and diluted
Common units			52,145				36,803
Subordinated units			26,536				26,536
Total limited partner units			78,681				63,339

4. TRANSACTIONS WITH AFFILIATES

          Affiliate transactions. Revenues from affiliates include amounts earned by the Partnership from midstream services provided to Anadarko as well as from the sale of residue gas, condensate and NGLs to Anadarko. A portion of the Partnership’s operating expenses are paid by Anadarko, which also results in affiliate transactions pursuant to the reimbursement provisions of the omnibus agreement described below. In addition, the Partnership purchases natural gas from an affiliate of Anadarko pursuant to gas purchase agreements. Operating expenses include all amounts accrued or paid to affiliates for the operation of the Partnership Assets, whether in providing services to affiliates or to third parties, including field labor, measurement and analysis, and other disbursements. Affiliate expenses do not bear a direct relationship to affiliate revenues and third-party expenses do not bear a direct relationship to third-party revenues. For example, the Partnership’s affiliate expenses are not necessarily those expenses attributable to generating affiliate revenues.

          Contribution of Partnership Assets. Effective in January 2010, Anadarko contributed the Granger assets to the Partnership, in July 2010 Anadarko contributed the Wattenberg assets to the Partnership, and in September 2010 Anadarko sold AWC, including its 0.4% interest in White Cliffs, to the Partnership. See Note 1—Description of Business and Basis of Presentation—Acquisitions.

          Cash management. Anadarko operates a cash management system whereby excess cash from most of its subsidiaries, held in separate bank accounts, is generally swept to centralized accounts. Prior to our acquisition of the Partnership Assets, third-party sales and purchases related to such assets were received or paid in cash by Anadarko within its centralized cash management system. Anadarko charged or credited the Partnership interest at a variable rate on outstanding affiliate balances for the periods these balances remained outstanding. The outstanding affiliate balances were entirely settled through an adjustment to parent net investment in connection with the acquisition of the Partnership Assets. Subsequent to our acquisition of the Partnership Assets, the Partnership cash-settles transactions related to such assets directly with third parties and with Anadarko affiliates and affiliate-based interest expense on current intercompany balances is not charged.

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

          Note receivable from Anadarko. Concurrent with the closing of the Partnership’s May 2008 initial public offering, the Partnership loaned $260.0 million to Anadarko in exchange for a 30-year note bearing interest at a fixed annual rate of 6.50%. Interest on the note is payable quarterly. The fair value of the note receivable from Anadarko was approximately $262.4 million and $258.9 million at March 31, 2011 and December 31, 2010, respectively. The fair value of the note reflects consideration of credit risk and any premium or discount for the differential between the stated interest rate and quarter-end market interest rate, based on quoted market prices of similar debt instruments.

          Note payable to Anadarko. Concurrent with the closing of the Powder River acquisition in December 2008, the Partnership entered into a five-year, $175.0 million term loan agreement with Anadarko. The interest rate was fixed at 4.00% through November 2010 and is fixed at 2.82% thereafter. See Note 8—Debt and Interest Expense—Note payable to Anadarko for additional information.

          Commodity price swap agreements. The Partnership entered into commodity price swap agreements with Anadarko to mitigate exposure to commodity price volatility that would otherwise be present as a result of the purchase and sale of natural gas, condensate or NGLs. Below is a summary of the periods over which the Partnership’s commodity swap agreements are effective for each asset or system.

Assets		Effective				Expiration
Hilight and Newcastle systems (1)		January 2009				December 2012
Granger assets		January 2010				December 2014
Wattenberg assets		July 2010				June 2015
Hugoton system (2)		October 2010				September 2015

          Below is a summary of the fixed price ranges on the Partnership’s commodity price swap agreements outstanding as of March 31, 2011.

		Year Ending December 31,
		2011				2012				2013				2014				2015
		(per barrel)
Ethane		$	17.95 -   29.31			$	18.21 -   29.78			$	18.32 -   30.10			$	18.36 -   30.53			$	18.41
Propane		$	44.25 -   50.07			$	45.23 -   53.28			$	45.90 -   51.56			$	46.47 -   52.37			$	47.08
Isobutane		$	58.18 -   66.03			$	57.50 -   67.22			$	60.44 -   68.11			$	61.24 -   69.23			$	62.09
Normal butane		$	51.25 -   61.82			$	52.40 -   62.92			$	53.20 -   63.74			$	53.89 -   64.78			$	54.62
Natural gasoline		$	68.19 -   75.99			$	69.77 -   85.15			$	70.89 -   78.42			$	71.85 -   79.74			$	72.88
Condensate		$	68.87 -   75.33			$	72.73 -   78.52			$	74.04 -   78.07			$	75.22 -   79.56			$	76.47 -    78.61
		(per MMbtu)
Natural gas		$	4.12 -   5.94			$	4.15 -   5.97			$	5.14 -   6.09			$	5.32 -   6.20			$	5.50 -   5.96

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

          Notional volumes for each of the swap agreements are not specifically defined; instead, the commodity price swap agreements apply to the actual volume of natural gas, condensate and NGLs purchased and sold at the Hilight, Hugoton, Newcastle, Granger and Wattenberg assets. Because the notional volumes are not fixed, the commodity price swap agreements do not satisfy the definition of a derivative financial instrument at inception and, therefore, are not required to be measured at fair value. The Partnership reports its realized gains and losses on the commodity price swap agreements related to sales in natural gas, natural gas liquids and condensate sales in its consolidated statements of income in the period in which the associated revenues are recognized. The Partnership reports its realized gains and losses on the commodity price swap agreements related to purchases in cost of product in its consolidated statements of income in the period in which the associated purchases are recorded. The following table summarizes gains and losses on commodity price swap agreements (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Gains (losses) on commodity price swap agreements:
Natural gas sales		$	6,808			$	275
Natural gas liquids sales			(5,841	)			(2,201	)
Gains (losses), net on commodity price swap agreements related to sales			967				(1,926	)
Gains (losses), net on commodity price swap agreements related to purchases			(6,206	)			460
Gains (losses), net on commodity price swap agreements		$	(5,239	)		$	(1,466	)

          Chipeta LLC agreement. In connection with the Partnership’s acquisition of its 51% membership interest in Chipeta Processing LLC (“Chipeta”), the Partnership became party to Chipeta’s limited liability company agreement, as amended and restated as of July 23, 2009, together with Anadarko and the third-party member.

          Gas gathering and processing agreements. The Partnership has significant gas gathering and/or processing arrangements with affiliates of Anadarko on all of its systems, with the exception of the Platte Valley, Hilight and Newcastle systems. Approximately 80% of the Partnership’s gathering and transportation throughput for both the three months ended March 31, 2011 and 2010 was attributable to natural gas production owned or controlled by Anadarko. Approximately 74% and 77% of the Partnership’s processing throughput for the three months ended March 31, 2011 and 2010, respectively, was attributable to natural gas production owned or controlled by Anadarko.

          Gas purchase and sale agreements. The Partnership sells substantially all of its natural gas, NGLs and condensate to Anadarko Energy Services Company (“AESC”), Anadarko’s marketing affiliate. In addition, the Partnership purchases natural gas from AESC pursuant to gas purchase agreements. The Partnership’s gas purchase and sale agreements with AESC are generally one-year contracts, subject to annual renewal.

          Omnibus agreement. Pursuant to the omnibus agreement, Anadarko and the general partner perform centralized corporate functions for the Partnership, such as legal, accounting, treasury, cash management, investor relations, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, tax, marketing and midstream administration. The Partnership’s reimbursement to Anadarko for certain general and administrative expenses allocated to the Partnership was capped at $9.0 million for the year ended December 31, 2010. The cap under the omnibus agreement expired on December 31, 2010. For the year ending December 31, 2011 and thereafter, Anadarko, in accordance with the partnership agreement and omnibus agreement, will determine in its reasonable discretion amounts to be allocated to the Partnership in exchange for services provided under the omnibus agreement.

          Services and secondment agreement. Pursuant to the services and secondment agreement, specified employees of Anadarko are seconded to the general partner to provide operating, routine maintenance and other services with respect to the assets owned and operated by the Partnership under the direction, supervision and control of the general partner. Pursuant to the services and secondment agreement, the Partnership reimburses Anadarko for services provided by the seconded employees. The initial term of the services and secondment agreement extends through May 2018 and the term will automatically extend for additional twelve-month periods unless either party provides 180 days written notice of termination before the applicable twelve-month period expires. The consolidated financial statements of the Partnership include costs allocated by Anadarko pursuant to the services and secondment agreement.

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

          Tax sharing agreement. Pursuant to a tax sharing agreement, the Partnership reimburses Anadarko for the Partnership’s estimated share of non-U.S. federal taxes borne by Anadarko on behalf of the Partnership as a result of the Partnership’s results being included in a combined or consolidated tax return filed by Anadarko with respect to periods including and subsequent to the Partnership’s acquisition of the Partnership Assets. Anadarko may use its tax attributes to cause its combined or consolidated group, of which the Partnership may be a member for this purpose, to owe no tax. Nevertheless, the Partnership is required to reimburse Anadarko for its estimated share of non-U.S. federal tax the Partnership would have owed had the attributes not been available or used for the Partnership’s benefit, regardless of whether Anadarko pays taxes for the period.

          Allocation of costs. Prior to the Partnership’s acquisition of the Partnership Assets, the consolidated financial statements of the Partnership include costs allocated by Anadarko in the form of a management services fee, which approximated the general and administrative costs attributable to the Partnership Assets. This management services fee was allocated to the Partnership based on its proportionate share of Anadarko’s assets and revenues or other contractual arrangements. Management believes these allocation methodologies are reasonable.

          The employees supporting the Partnership’s operations are employees of Anadarko. Anadarko charges the Partnership its allocated share of personnel costs, including costs associated with Anadarko’s equity-based compensation plans, non-contributory defined pension and postretirement plans and defined contribution savings plan, through the management services fee or pursuant to the omnibus agreement and services and secondment agreement described above. In general, the Partnership’s reimbursement to Anadarko under the omnibus agreement or services and secondment agreements is either (i) on an actual basis for direct expenses Anadarko and the general partner incur on behalf of the Partnership or (ii) based on an allocation of salaries and related employee benefits between the Partnership, the general partner and Anadarko based on estimates of time spent on each entity’s business and affairs. The vast majority of direct general and administrative expenses charged to the Partnership by Anadarko are attributed to the Partnership on an actual basis, excluding any mark-up or subsidy charged or received by Anadarko. With respect to allocated costs, management believes that the allocation method employed by Anadarko is reasonable. While it is not practicable to determine what these direct and allocated costs would be on a stand-alone basis if the Partnership were to directly obtain these services, management believes these costs would be substantially the same.

          Long-term incentive plan. The general partner awarded phantom units primarily to the general partner’s independent directors under the Western Gas Partners, LP 2008 Long-Term Incentive Plan (“LTIP”), in May 2010 and 2009. The phantom units awarded to the independent directors vest one year from the grant date. Compensation expense attributable to the phantom units granted under the LTIP is recognized entirely by the Partnership over the vesting period and was approximately $0.1 million for both the three months ended March 31, 2011 and 2010. There was no LTIP award activity for the three months ended March 31, 2011 or 2010.

          Equity incentive plan and Anadarko incentive plans. The Partnership’s general and administrative expenses include equity-based compensation costs allocated by Anadarko to the Partnership for grants made pursuant to the Western Gas Holdings, LLC Equity Incentive Plan as amended and restated (“Incentive Plan”) as well as the Anadarko Petroleum Corporation 1999 Stock Incentive Plan and the Anadarko Petroleum Corporation 2008 Omnibus Incentive Compensation Plan (Anadarko’s plans are referred to collectively as the “Anadarko Incentive Plans”). The Partnership’s general and administrative expense for the three months ended March 31, 2011 and 2010 included approximately $2.0 million and $0.9 million, respectively, of equity-based compensation expense for grants made pursuant to the Incentive Plan and Anadarko Incentive Plans allocated to the Partnership by Anadarko as a component of compensation expense for the executive officers of the Partnership’s general partner and other employees pursuant to the omnibus agreement and services and secondment agreement. These amounts exclude compensation expense associated with the LTIP.

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

          Summary of affiliate transactions. As described above, affiliate transactions include revenue from affiliates, reimbursement of operating expenses and purchases of natural gas. The following table summarizes affiliate transactions, including transactions with the general partner (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Revenues		$	104,519			$	106,744
Operating expenses			30,179				32,715
Interest income			4,225				4,230
Interest expense			1,234				1,785
Distributions to unitholders			15,085				12,239
Contributions from noncontrolling interest owners			960				1,985
Distributions to noncontrolling interest owners			3,014				1,375

5. CONCENTRATION OF CREDIT RISK

          Anadarko was the only customer from whom revenues exceeded 10% of the Partnership’s consolidated revenues for the three months ended March 31, 2011 and 2010. The percentage of revenues from Anadarko and the Partnership’s other customers are as follows:

		Three Months Ended
		March 31,
		2011				2010
Anadarko			75	%			82	%
Other customers			25	%			18	%
Total			100	%			100	%

6. PROPERTY, PLANT AND EQUIPMENT

          A summary of the historical cost of the Partnership’s property, plant and equipment is as follows (dollars in thousands):

		Estimated
		useful life				March 31, 2011				December 31, 2010
Land			n/a			$	354			$	354
Gathering systems			5 to 39 years				1,896,376				1,621,633
Pipelines and equipment			30 to 34.5 years				83,653				83,613
Assets under construction			n/a				21,774				18,928
Other			3 to 25 years				2,798				2,703
Total property, plant and equipment							2,004,955				1,727,231
Accumulated depreciation							386,565				367,881
Total net property, plant and equipment						$	1,618,390			$	1,359,350

          The cost of property classified as “Assets under construction” is excluded from capitalized costs being depreciated. This amount represents property that is not yet suitable to be placed into productive service as of the balance sheet date. In addition, property, plant and equipment cost as well as accrued liabilities – third parties balances in the Partnership’s consolidated balance sheets include $4.8 million and $5.5 million of accrued capital as of March 31, 2011 and December 31, 2010, respectively, representing estimated capital expenditures for which invoices had not yet been processed.

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

7. GOODWILL AND OTHER INTANGIBLE ASSETS

          Goodwill. The Partnership’s consolidated balance sheets as of March 31, 2011 and December 31, 2010 include goodwill of $60.2 million. Goodwill represents the allocated portion of Anadarko’s midstream goodwill attributed to the assets the Partnership has acquired from Anadarko. The carrying value of Anadarko’s midstream goodwill represents the excess of the purchase price of an entity over the estimated fair value of the identifiable assets acquired and liabilities assumed by Anadarko. Accordingly, the Partnership’s goodwill balance does not reflect, and in some cases is significantly higher than, the difference between the consideration the Partnership paid for its acquisitions from Anadarko and the fair value of the net assets on the acquisition date. None of the Partnership’s goodwill is deductible for tax purposes. No goodwill impairment has been recognized in these unaudited consolidated financial statements.

          Other intangible assets. Intangible assets represent the estimated economic value assigned to certain contracts entered into or assumed in connection with the Platte Valley acquisition in February 2011. The value assigned to customer contracts primarily consists of the estimated economic value related to the contracts assumed by the Partnership that dedicate certain customers’ field production to the acquired gathering and processing system. These contracts ensure an extended commercial relationship with the existing customers and provide the Partnership with a high probability of additional production from the customers’ acreage. However, these contracts are generally limited by the quantity and production life of the underlying natural gas resource base.

          At March 31, 2011, the carrying value of the Partnership’s customer relationship intangible assets was $55.3 million, net of $89,000 of accumulated amortization, and is included in goodwill and other intangible assets in the Partnership’s consolidated balance sheets. Customer relationships are amortized on a straight-line basis over 50 years, which is the estimated productive life of the reserves covered by the underlying acreage ultimately expected to be produced and gathered or processed through the Partnership’s assets subject to current contractual arrangements. Estimated future amortization for these intangible assets is as follows (in thousands):

		Future
		amortization
April - December 2011		$	835
2012			1,108
2013			1,108
2014			1,108
2015			1,108

          The Partnership assesses intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairments exist when the carrying amount of an asset exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. When alternative courses of action to recover the carrying amount of a long-lived asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the long-lived asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset’s carrying amount over its estimated fair value such that the asset’s carrying amount is adjusted to its estimated fair value with an offsetting charge to operating expense. A reduction of the carrying value of intangible assets would represent a Level 3 fair value measure.

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

8. DEBT AND INTEREST EXPENSE

          The following table presents the Partnership’s outstanding debt as of March 31, 2011 and December 31, 2010 (in thousands):

 

		March 31, 2011				December 31, 2010
Revolving credit facility		$	470,000			$	49,000
Wattenberg term loan			—				250,000
Note payable to Anadarko			175,000				175,000
Total debt outstanding		$	645,000			$	474,000

          The following table presents the debt activity of the Partnership for the three months ended March 31, 2011 (in thousands):

 

		Principal
Balance as of December 31, 2010		$	474,000
Borrowings under revolving credit facility			560,000
Repayments under revolving credit facility			(139,000	)
Repayment of Wattenberg term loan			(250,000	)
Borrowing under revolving credit facility – Swingline			10,000
Repayment under revolving credit facility – Swingline			(10,000	)
Balance as of March 31, 2011		$	645,000

          Note payable to Anadarko. In December 2008, the Partnership entered into a five-year $175.0 million term loan agreement with Anadarko in order to finance the cash portion of the consideration paid for the Powder River acquisition. The interest rate was fixed at 4.00% until November 2010. The term loan agreement was amended in December 2010 to fix the interest rate at 2.82% through maturity of the note in 2013. The Partnership has the option, at any time, to repay the outstanding principal amount in whole or in part.

          The provisions of the five-year term loan agreement contain customary events of default, including (i) non-payment of principal when due or non-payment of interest or other amounts within three business days of when due, (ii) certain events of bankruptcy or insolvency with respect to the Partnership and (iii) a change of control. At March 31, 2011, the Partnership was in compliance with all covenants under the five-year term loan agreement.

          Revolving credit facility. In March 2011, the Partnership entered into an amended and restated $800.0 million senior unsecured revolving credit facility (the “revolving credit facility”) and borrowed $250.0 million under the revolving credit facility to repay the Wattenberg term loan (described below). The revolving credit facility amended and restated the Partnership’s $450.0 million credit facility, which was originally entered into in October 2009. The revolving credit facility matures in March 2016 and bears interest at London Interbank Offered Rate, or “LIBOR,” plus applicable margins ranging from 1.30% to 1.90%, or an alternate base rate equal to the greatest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.5%, and (c) LIBOR plus 1%, plus applicable margins ranging from 0.30% to 0.90%. The interest rate was 1.95% at March 31, 2011. The Partnership is required to pay a quarterly facility fee ranging from 0.20% to 0.35% of the commitment amount (whether used or unused), based upon the Partnership’s consolidated leverage ratio, as defined in the revolving credit facility. The facility fee rate was 0.30% at March 31, 2011.

          The revolving credit facility contains covenants that limit, among other things, the ability of the Partnership and certain of its subsidiaries to incur additional indebtedness, grant certain liens, merge, consolidate or allow any material change in the character of its business, sell all or substantially all of the Partnership’s assets, make certain transfers, enter into certain affiliate transactions, make distributions or other payments other than distributions of available cash under certain conditions and use proceeds other than for partnership purposes. The revolving credit facility also contains various customary covenants, customary events of default and certain financial tests as of the end of each quarter, including a maximum consolidated leverage ratio (which is defined as the ratio of consolidated indebtedness as of the last day of a fiscal quarter to consolidated EBITDA for the most recent four consecutive fiscal quarters ending on such day) of 5.0 to 1.0, or a consolidated leverage ratio of 5.5 to 1.0 with respect to quarters ending in the 270-day period immediately following certain acquisitions,

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

and a minimum consolidated interest coverage ratio (which is defined as the ratio of consolidated EBITDA for the most recent four consecutive fiscal quarters to consolidated interest expense for such period) of 2.0 to 1.0. All amounts due under the revolving credit facility are unconditionally guaranteed by our wholly owned subsidiaries. The Partnership will no longer be required to comply with the minimum consolidated interest coverage ratio as well as the subsidiary guarantees and certain of the aforementioned covenants, if the Partnership obtains two of the following three ratings: BBB- or better by Standard and Poor’s, Baa3 or better by Moody’s Investors Service or BBB- or better by Fitch Ratings Ltd. As of March 31, 2011, $470.0 million was outstanding under the revolving credit facility, $330.0 million was available for borrowing and the Partnership was in compliance with all covenants thereunder.

          Wattenberg term loan. In connection with the Wattenberg acquisition, in August 2010 the Partnership borrowed $250.0 million under a three-year term loan from a group of banks (“Wattenberg term loan”). The Wattenberg term loan incurred interest at LIBOR plus a margin ranging from 2.50% to 3.50% depending on the Partnership’s consolidated leverage ratio as defined in the Wattenberg term loan agreement. The Partnership repaid the Wattenberg term loan in March 2011 using borrowings from its revolving credit facility and recognized $1.3 million of accelerated amortization expense related to the early repayment of the loan.

          Fair value of debt. The fair value of the Partnership’s debt under the revolving credit facility and the five-year term loan agreement approximates the carrying value of those instruments at March 31, 2011 and December 31, 2010. The fair value of debt reflects any premium or discount for the difference between the stated interest rate and quarter-end market interest rate.

          Interest-rate swap agreement. The Partnership entered into a forward-starting interest-rate swap agreement in March 2011 to mitigate the risk of rising interest rates on existing variable-rate debt expected to be refinanced during 2011. Pursuant to the agreement, the Partnership will pay a fixed interest rate of 2.32% and receive three-month LIBOR on $150.0 million notional amount from May 2011 to May 2016. The swap agreement includes a provision that requires the termination of the swap at the start of the reference period. The Partnership does not apply hedge accounting to its interest-rate swap agreements. The fair value of the swap agreement was a $1.7 million gain on March 31, 2011, based on Level 2 fair value inputs. Such amount is included in other income, net in the unaudited consolidated income statement and other current assets in the unaudited consolidated balance sheet.

          Interest expense. The following table summarizes the amounts included in interest expense (in thousands):

 

		Three Months Ended
		March 31,
		2011				2010
Third parties
Interest expense on revolving credit facility and Wattenberg term loan		$	2,676			$	977
Amortization of debt issuance costs and commitment fees			2,201				766
Total interest expense – third parties			4,877				1,743
Affiliates
Interest expense on notes payable to Anadarko			1,234				1,750
Credit facility commitment fees			—				35
Total interest expense – affiliates			1,234				1,785
Interest expense		$	6,111			$	3,528

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

9. COMMITMENTS AND CONTINGENCIES

          Environmental obligations. The Partnership is subject to various environmental-remediation obligations arising from federal, state and local laws and regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. As of March 31, 2011, the Partnership’s consolidated balance sheet included a $0.9 million current liability and a $2.4 million long-term liability for remediation and reclamation obligations, included in Accrued liabilities — third parties and Asset retirement obligations and other, respectively. As of December 31, 2010, the Partnership’s consolidated balance sheet included a $0.4 million current liability and a $0.5 million long-term liability for remediation and reclamation obligations. The recorded obligations do not include any anticipated insurance recoveries. Substantially all of the payments related to these obligations are expected to be made over the next five years. Management regularly monitors the remediation and reclamation process and the liabilities recorded and believes the Partnership’s recorded environmental obligations are adequate to fund remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not differ materially from recorded amounts nor materially affect the Partnership’s overall results of operations, cash flows or financial condition. There can be no assurance, however, that current regulatory requirements will not change, or past non-compliance with environmental issues will not be discovered.

          Litigation and legal proceedings. On March 1, 2011, DCP Midstream LP (“DCP”) filed a lawsuit against Anadarko and others, including a Partnership subsidiary, Kerr-McGee Gathering LLC, in Weld County District Court in Colorado, alleging that Anadarko and its affiliates diverted gas from DCP’s gathering and processing facilities in breach of certain dedication agreements. In addition to various claims against Anadarko, DCP is claiming unjust enrichment and other damages against Kerr-McGee Gathering LLC, the entity which holds the Wattenberg assets. Management does not believe the outcome of this proceeding will have a material effect on the Partnership’s financial condition, results of operations or cash flows. The Partnership intends to vigorously defend this litigation. Furthermore, without regard to the merit of DCP’s claims, management believes that the Partnership has adequate contractual indemnities covering the claims against it in this lawsuit.

          In addition, from time to time, the Partnership is involved in legal, tax, regulatory and other proceedings in various forums regarding performance, contracts and other matters that arise in the ordinary course of business. Management is not aware of any such proceeding for which a final disposition could have a material adverse effect on the Partnership’s results of operations, cash flows or financial condition.

          Lease commitments. Anadarko, on behalf of the Partnership, has entered into lease agreements for corporate offices, shared field offices and a warehouse supporting the Partnership’s operations. The lease for the corporate offices expires in January 2012, with no purchase option at termination, and the leases for the shared offices extend through 2014. The lease for the warehouse extends through September 2011 and includes an early termination clause. In addition, during 2010, Anadarko and Kerr-McGee Gathering LLC purchased previously leased compression equipment used at the Granger and Wattenberg assets, which terminated the leases and associated lease expense. The purchased compression equipment was contributed to the Partnership pursuant to provisions of the contribution agreements for the Granger acquisition and the Wattenberg acquisition.

          As of March 31, 2011, there was no material change in the existing contractual lease obligations for the office and warehouse leases from December 31, 2010. Rent expense associated with these leases and the previously leased compression equipment was approximately $0.4 million and $2.1 million for the three months ended March 31, 2011 and 2010, respectively.

10. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

          As of March 31, 2011, the Partnership may issue up to approximately $635.8 million of additional limited partner common units and various debt securities under its effective shelf registration statement on file with the SEC. Debt securities issued under the shelf may be guaranteed by one or more existing or future subsidiaries of the Partnership (the “Guarantor Subsidiaries”), each of which is a wholly owned subsidiary of the Partnership. The guarantees, if issued, would be full, unconditional, joint and several. The following unaudited condensed consolidating financial information reflects the Partnership’s stand-alone accounts, the combined accounts of the Guarantor Subsidiaries, the accounts of the Non-Guarantor Subsidiary, consolidating adjustments and eliminations and the Partnership’s consolidated financial information. The unaudited condensed consolidating financial information should be read in conjunction with the Partnership’s accompanying consolidated financial statements and related notes.

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

          Western Gas Partners, LP’s and the Guarantor Subsidiaries’ investment in and equity income from their consolidated subsidiaries are presented in accordance with the equity method of accounting in which the equity income from consolidated subsidiaries includes the results of operations of the Partnership Assets for periods including and subsequent to the Partnership’s acquisition of the Partnership Assets.

		Three Months Ended March 31, 2011
		Western								Non-
		Gas				Guarantor				Guarantor
Statement of Income		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
		(in thousands)
Revenues		$	967			$	122,233			$	12,793			$	—			$	135,993
Operating expenses			12,613				78,517				6,767				—				97,897
Operating income (loss)			(11,646	)			43,716				6,026				—				38,096
Interest income – affiliates			4,215				10				—				—				4,225
Interest expense			(6,111	)			—				—				—				(6,111	)
Other income, net			1,749				9				2				—				1,760
Equity income from consolidated subsidiaries			46,777				3,074				—				(49,851	)			—
Income before income taxes			34,984				46,809				6,028				(49,851	)			37,970
Income tax expense			—				32				—				—				32
Net income			34,984				46,777				6,028				(49,851	)			37,938
Net income attributable to noncontrolling interests			—				2,954				—				—				2,954
Net income attributable to Western Gas Partners, LP		$	34,984			$	43,823			$	6,028			$	(49,851	)		$	34,984

 

		Three Months Ended March 31, 2010
		Western								Non-
		Gas				Guarantor				Guarantor
Statement of Income		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
		(in thousands)
Revenues		$	(1,926	)		$	120,775			$	10,087			$	—			$	128,936
Operating expenses			4,043				81,504				6,223				—				91,770
Operating income (loss)			(5,969	)			39,271				3,864				—				37,166
Interest income – affiliates			4,219				11				—				—				4,230
Interest expense			(3,528	)			—				—				—				(3,528	)
Other income, net			18				—				2				—				20
Equity income from consolidated subsidiaries			29,392				1,972				—				(31,364	)			—
Income before income taxes			24,132				41,254				3,866				(31,364	)			37,888
Income tax expense			—				5,556				—				—				5,556
Net income			24,132				35,698				3,866				(31,364	)			32,332
Net income attributable to noncontrolling interests			—				1,894				—				—				1,894
Net income attributable to Western Gas Partners, LP		$	24,132			$	33,804			$	3,866			$	(31,364	)		$	30,438

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

		March 31, 2011
		Western								Non-
		Gas				Guarantor				Guarantor
Balance Sheet		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
		(in thousands)
Current assets		$	82,412			$	18,478			$	13,414			$	(58,461	)		$	55,843
Note receivable – Anadarko			260,000				—				—				—				260,000
Investment in consolidated subsidiaries			1,097,335				99,441				—				(1,196,776	)			—
Net property, plant and equipment			151				1,435,695				182,544				—				1,618,390
Other long-term assets			5,119				155,655				—				—				160,774
Total assets		$	1,445,017			$	1,709,269			$	195,958			$	(1,255,237	)		$	2,095,007
Current liabilities		$	1,053			$	100,182			$	4,581			$	(58,461	)		$	47,355
Long-term debt			645,000				—				—				—				645,000
Other long-term liabilities			53				58,716				1,986				—				60,755
Total liabilities			646,106				158,898				6,567				(58,461	)			753,110
Partners’ capital			798,911				1,460,359				189,391				(1,196,776	)			1,251,885
Noncontrolling interests			—				90,012				—				—				90,012
Total liabilities, equity and partners’ capital		$	1,445,017			$	1,709,269			$	195,958			$	(1,255,237	)		$	2,095,007

 

		December 31, 2010
		Western								Non-
		Gas				Guarantor				Guarantor
Balance Sheet		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
		(in thousands)
Current assets		$	24,972			$	208,208			$	10,346			$	(200,342	)		$	43,184
Note receivable – Anadarko			260,000				—				—				—				260,000
Investment in consolidated subsidiaries			1,052,073				97,018				—				(1,149,091	)			—
Net property, plant and equipment			165				1,177,971				181,214				—				1,359,350
Other long-term assets			2,361				100,642				—				—				103,003
Total assets		$	1,339,571			$	1,583,839			$	191,560			$	(1,349,433	)		$	1,765,537
Current liabilities		$	201,989			$	38,420			$	2,127			$	(200,342	)		$	42,194
Long-term debt			474,000				—				—				—				474,000
Other long-term liabilities			38				42,283				1,954				—				44,275
Total liabilities			676,027				80,703				4,081				(200,342	)			560,469
Partners’ capital			663,544				1,412,674				187,479				(1,149,091	)			1,114,606
Noncontrolling interests			—				90,462				—				—				90,462
Total liabilities, equity and partners’ capital		$	1,339,571			$	1,583,839			$	191,560			$	(1,349,433	)		$	1,765,537

Notes to the unaudited consolidated financial statements of Western Gas Partners, LP

		Three Months Ended March 31, 2011
		Western								Non-
		Gas				Guarantor				Guarantor
Statement of Cash Flows		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
		(in thousands)
Cash flows from operating activities
Net income		$	34,984			$	46,777			$	6,028			$	(49,851	)		$	37,938
Adjustments to reconcile net income to net cash provided by operating activities:
Equity income from consolidated subsidiaries			(46,777	)			(3,074	)			—				49,851				—
Depreciation, amortization and impairments			14				18,106				1,438				—				19,558
Change in other items, net			(259,049	)			254,076				2,541				—				(2,432	)
Net cash provided by (used in) operating activities			(270,828	)			315,885				10,007				—				55,064
Net cash used in investing activities			—				(319,035	)			(470	)			2,040				(317,465	)
Net cash provided by (used in) financing activities			269,175				3,150				(4,117	)			(2,040	)			266,168
Net increase (decrease) in cash and cash equivalents			(1,653	)			—				5,420				—				3,767
Cash and cash equivalents at beginning of period			21,480				—				5,594				—				27,074
Cash and cash equivalents at end of period		$	19,827			$	—			$	11,014			$	—			$	30,841

 

		Three Months Ended March 31, 2010
		Western								Non-
		Gas				Guarantor				Guarantor
Statement of Cash Flows		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
		(in thousands)
Cash flows from operating activities
Net income		$	24,132			$	35,698			$	3,866			$	(31,364	)		$	32,332
Adjustments to reconcile net income to net cash provided by operating activities:
Equity income from consolidated subsidiaries			(29,392	)			(1,972	)			—				31,364				—
Depreciation, amortization and impairments			14				16,275				1,430				—				17,719
Change in other items, net			41,403				(40,512	)			1,517				—				2,408
Net cash provided by operating activities			36,157				9,489				6,813				—				52,459
Net cash used in investing activities			(241,680	)			(5,882	)			(1,049	)			—				(248,611	)
Net cash provided by (used in) financing activities			188,740				(3,607	)			(3,742	)			—				181,391
Net increase (decrease) in cash and cash equivalents			(16,783	)			—				2,022				—				(14,761	)
Cash and cash equivalents at beginning of period			61,632				—				8,352				—				69,984
Cash and cash equivalents at end of period		$	44,849			$	—			$	10,374			$	—			$	55,223