S-1/A 1 d408045ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
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Index to Financial Statements

As filed with the Securities and Exchange Commission on December 3, 2012

Registration No. 333-184763

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Western Gas Equity Partners, LP

(Exact name of Registrant as Specified in Its Charter)

 

 

 

Delaware   4922   46-0967367
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

1201 Lake Robbins Drive

The Woodlands, Texas 77380-1046

(832) 636-6000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Philip H. Peacock

Western Gas Equity Partners, LP

1201 Lake Robbins Drive

The Woodlands, Texas 77380-1046

(832) 636-6000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

David P. Oelman

Alan Beck

Vinson & Elkins L.L.P.

1001 Fannin, Suite 2500

Houston, Texas 77002

(713) 758-2222

 

Michael E. Dillard

Sean T. Wheeler

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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. (Check one):

 

Large accelerated filer   ¨     Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)   Smaller reporting company   ¨

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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Index to Financial Statements

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated December 3, 2012

PROSPECTUS

 

 

LOGO

15,000,000 Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of the common units of Western Gas Equity Partners, LP. We are offering 15,000,000 common units. No public market currently exists for our common units. We have been approved for listing, subject to official notice of issuance, on the New York Stock Exchange under the symbol “WGP.” We currently estimate that the initial public offering price will be between $19.00 and $21.00 per common unit.

Investing in our common units involves risks. See “Risk Factors” beginning on page 22 of this prospectus. These risks include the following:

 

 

Our only cash-generating assets are our partnership interests in Western Gas Partners, LP (“WES”), and our cash flow is therefore completely dependent upon the ability of WES to make cash distributions to its partners.

 

 

WES’s general partner, with our consent but without the consent of our unitholders, may limit or modify the incentive distributions we are entitled to receive from WES, which may reduce cash distributions to you.

 

 

A reduction in WES’s distributions will disproportionately affect the amount of cash distributions to which we are currently entitled.

 

 

Our unitholders do not elect our general partner or vote on our general partner’s directors. In addition, upon completion of this offering, Anadarko will own a sufficient number of our common units to allow it to prevent the removal of our general partner.

 

 

WES’s general partner owes duties to WES’s unitholders that may conflict with our interests, including in connection with the terms of contractual agreements between us and WES; the determination of cash distributions to be made by WES; and the determination of whether WES should make acquisitions and on what terms. Additionally, our and WES’s partnership agreements contain modifications of state law fiduciary duty obligations which may limit an investor’s remedies.

 

 

Because WES is substantially dependent on Anadarko as its primary customer and ultimate owner of its general partner, any development that materially and adversely affects Anadarko’s operations, financial condition or market reputation could have a material and adverse impact on WES and us.

 

 

Because of the natural decline in production from existing wells, WES’s success depends on its ability to obtain new sources of natural gas, which is dependent on certain factors beyond its control. Any decrease in the volumes of natural gas that WES gathers, processes, treats and transports could adversely affect its business and operating results.

 

 

Our taxation as a flow-through entity depends on our status as a partnership for U.S. federal income tax purposes. Likewise, WES’s taxation as a flow-through entity depends on its status as a partnership for U.S. federal income tax purposes. If the IRS were to treat WES or us as a corporation for federal income tax purposes, then our cash available for distribution to you could be substantially reduced.

 

 

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

In addition, we qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933 and, as such, are allowed to provide in this prospectus more limited disclosures than an issuer that would not so qualify. Furthermore, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes Oxley Act of 2002 and the Investor Protection and Securities Reform Act of 2010. Please read “Prospectus Summary—Emerging Growth Company Status” and “Risk Factors.”

 

     Per Common Unit      Total  

Price to the public

   $                              $                    

Underwriting discounts and commissions (1)

   $         $     

Proceeds to Western Gas Equity Partners, LP (before expenses)

   $         $     

 

(1) Excludes a structuring fee of an aggregate of $1.0 million payable to Barclays Capital Inc. and Citigroup Global Markets Inc. Please read “Underwriting.”

We have granted the underwriters a 30-day option to purchase up to an additional 2,250,000 common units on the same terms and conditions as set forth above if the underwriters sell more than 15,000,000 common units in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Barclays, on behalf of the underwriters, expects to deliver the common units on or about                     , 2012.

 

 

 

Barclays    Citigroup
Deutsche Bank Securities    Morgan Stanley

 

 

 

Goldman, Sachs & Co.   RBC Capital Markets   UBS Investment Bank   Wells Fargo Securities

 

 

 

BMO Capital Markets       Global Hunter Securities       Janney Montgomery Scott       Ladenburg Thalmann & Co. Inc.         Tudor, Pickering, Holt & Co.

Prospectus dated                     , 2012


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Index to Financial Statements

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Index to Financial Statements

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

Western Gas Equity Partners, LP

     1   

Western Gas Partners, LP

     6   

Risk Factors

     11   

Our Structure

     13   

Our Management

     15   

Our Principal Executive Offices

     15   

Emerging Growth Company Status

     15   

The Offering

     18   

Summary Historical and Pro Forma Financial and Operating Data

     20   

RISK FACTORS

     22   

Risks Inherent in an Investment in Us

     22   

Risks Related to Conflicts of Interest

     31   

Risks Inherent in WES’s Business

     34   

Tax Risks to Our Common Unitholders

     48   

USE OF PROCEEDS

     53   

CAPITALIZATION

     54   

DILUTION

     55   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     56   

General

     56   

Our Initial Quarterly Distribution

     57   

Western Gas Equity Partners, LP Unaudited Pro Forma Available Cash for the Year Ended December  31, 2011 and the Twelve Months Ended September 30, 2012

     60   

Estimated Minimum Necessary WES Adjusted EBITDA to Enable Us to Pay the Aggregate Annualized Initial Quarterly Distribution for the Year Ending December 31, 2013

     63   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     70   

General

     70   

General Partner Interest

     70   

Adjustments to Capital Accounts

     70   

Distributions of Cash Upon Liquidation

     70   

Our Sources of Distributable Cash

     70   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

     72   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     75   

Introduction

     75   

Overview of WES

     79   

How WES Evaluates Its Operations

     80   

Items Affecting the Comparability of Financial Results—Western Gas Equity Partners, LP

     84   

Items Affecting the Comparability of Financial Results—Western Gas Partners, LP

     86   

General Trends and Outlook

     88   

Results of Operations—Combined Overview

     89   

Operating Results

     90   

Liquidity and Capital Resources

     100   

Total Contractual Cash Obligations

     108   

Quantitative and Qualitative Disclosures About Market Risk

     109   

Critical Accounting Policies and Estimates

     110   

 

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BUSINESS

     113   

Western Gas Equity Partners, LP—Overview

     113   

Western Gas Partners, LP—Overview

     114   

Industry Overview

     119   

Our and WES’s Assets

     122   

Safety and Maintenance

     132   

Regulation of Operations

     133   

Environmental Matters

     138   

Title to Properties and Rights-of-Way

     141   

Employees

     142   

Legal Proceedings

     142   

MANAGEMENT

     143   

Directors and Executive Officers

     143   

Board Committees

     146   

Election of Directors

     147   

Compensation of Directors

     147   

Executive Compensation Discussion and Analysis

     147   

Executive Compensation

     156   

Summary Compensation Table

     156   

Grants of Plan-Based Awards in 2011

     157   

Outstanding Equity Awards at Fiscal Year-End 2011

     158   

Option Exercises and Stock Vested in 2011

     161   

Pension Benefits for 2011

     161   

Nonqualified Deferred Compensation for 2011

     162   

Potential Payments Upon Termination or Change of Control

     162   

Compensation of WES GP Directors

     166   

Compensation Committee Interlocks and Insider Participation

     167   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     168   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     170   

Our Relationship with WES and WES GP

     170   

Indemnification of Directors and Officers

     170   

Agreements Entered Into or to be Entered Into in Connection with this Offering

     171   

Related Party Transactions of Western Gas Partners, LP

     172   

Conflicts of Interest

     176   

Material Provisions of Our General Partner’s Limited Liability Company Agreement

     177   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     178   

Conflicts of Interest

     178   

Fiduciary Duties

     180   

DESCRIPTION OF THE COMMON UNITS

     183   

The Common Units

     183   

Transfer Agent and Registrar

     183   

Transfer of Common Units

     183   

Comparison of Rights of Holders of WES’s Common Units and Our Common Units

     184   

THE PARTNERSHIP AGREEMENT OF WESTERN GAS EQUITY PARTNERS, LP

     187   

Organization and Duration

     187   

Purpose

     187   

Power of Attorney

     187   

Capital Contributions

     187   

 

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Limited Liability

     188   

Voting Rights

     188   

Issuance of Additional Securities

     190   

Amendments to Our Partnership Agreement

     190   

Merger, Sale or Other Disposition of Assets

     192   

Dissolution

     193   

Liquidation and Distribution of Proceeds

     193   

Withdrawal or Removal of the General Partner

     193   

Transfer of General Partner Interest

     194   

Transfer of Ownership Interests in Our General Partner

     194   

Change of Management Provisions

     194   

Limited Call Right

     195   

Meetings; Voting

     195   

Status as Limited Partner

     196   

Non-Citizen Assignees; Redemption

     196   

Indemnification

     196   

Reimbursement of Expenses

     196   

Books and Reports

     197   

Right to Inspect Our Books and Records

     197   

Registration Rights

     197   

THE PARTNERSHIP AGREEMENT OF WESTERN GAS PARTNERS, LP

     198   

Organization and Duration

     198   

Purpose

     198   

Power of Attorney

     198   

Cash Distributions

     198   

Capital Contributions

     198   

Voting Rights

     199   

Limited Liability

     200   

Issuance of Additional Securities

     201   

Amendment of WES’s Partnership Agreement

     201   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     203   

Termination and Dissolution

     204   

Liquidation and Distribution of Proceeds

     204   

Withdrawal or Removal of the General Partner

     205   

Transfer of General Partner Units

     206   

Transfer of Ownership Interests in the General Partner

     206   

Transfer of Incentive Distribution Rights

     206   

Change of Management Provisions

     206   

Limited Call Right

     207   

Non-U.S. and Non-Taxpaying Assignees; Redemption

     207   

Meetings; Voting

     208   

Status as Limited Partner

     208   

Non-Citizen Assignees; Redemption

     208   

Indemnification

     209   

Reimbursement of Expenses

     209   

Books and Reports

     209   

Right to Inspect Books and Records

     210   

Registration Rights

     210   

 

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UNITS ELIGIBLE FOR FUTURE SALE

     211   

Rule 144

     211   

Our Partnership Agreement and Registration Rights

     211   

Lock-Up Agreements

     211   

Registration Statement on Form S-8

     212   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     213   

Taxation of the Partnership

     214   

Tax Consequences of Unit Ownership

     215   

Tax Treatment of Operations

     222   

Disposition of Units

     222   

Uniformity of Units

     225   

Tax-Exempt Organizations and Other Investors

     226   

Administrative Matters

     227   

State, Local and Other Tax Considerations

     230   

INVESTMENT IN OUR COMMON UNITS BY EMPLOYEE BENEFIT PLANS

     231   

General Fiduciary Matters

     231   

Prohibited Transaction Issues

     231   

Plan Asset Issues

     232   

UNDERWRITING

     233   

LEGAL MATTERS

     240   

EXPERTS

     240   

WHERE YOU CAN FIND MORE INFORMATION

     240   

FORWARD-LOOKING STATEMENTS

     240   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A—FORM OF FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF WESTERN GAS EQUITY PARTNERS, LP

     A-1   

APPENDIX B—GLOSSARY OF TERMS

     B-1   

 

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Presentation of Assets, Operations and Financial Statements

Unless the context otherwise indicates, references in this prospectus to the assets and operations of Western Gas Partners, LP (together with its subsidiaries, “WES”) are to the assets owned by WES as of September 30, 2012. Because Anadarko Petroleum Corporation (together with its subsidiaries other than us, our general partner, WES’s general partner and WES, “Anadarko”) controls WES through its ownership of its general partner, each acquisition by WES of assets from Anadarko through September 30, 2012 was considered a transfer of net assets between entities under common control. As such, the assets WES acquired from Anadarko were initially recorded at Anadarko’s historic carrying value, which does not correlate to the total acquisition price paid by WES. Further, after an acquisition of assets from Anadarko, WES may be required to recast its financial statements to include the activities of such assets as of the date of common control. The consolidated financial statements included in this prospectus for periods prior to WES’s acquisition of assets under common control have been prepared from Anadarko’s historical cost-basis accounts and may not necessarily be indicative of the actual results of operations that would have occurred if WES had owned the assets during the periods reported. References in this prospectus to the historical and pro forma financial statements of Western Gas Equity Partners, LP are to the consolidated historical and condensed consolidated pro forma financial statements, respectively, included elsewhere in this prospectus.

Trademarks and Trade Names

We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and does not imply, a relationship with us or endorsement or sponsorship by or of us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and trade names.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before making an investment decision. You should read the entire prospectus, including the historical and pro forma financial statements and the notes to those financial statements, for a more complete understanding of this offering of common units. You should read “Risk Factors” for more information regarding risks you should consider before investing in our common units. Unless the context otherwise indicates, the information included in this prospectus assumes (i) that the underwriters do not exercise their over-allotment option, (ii) an initial public offering price of $20.00 per common unit (the midpoint of the range set forth on the cover page of the prospectus) and (iii) that we will use the net proceeds of this offering to purchase 5,997,174 WES (as defined below) common units and 122,391 WES general partner units, in each case, at an agreed purchase price of $46.00 per unit.

Throughout this prospectus, when we use the terms “WGP,” “we,” “us,” “our” and “Western Gas Equity Partners, LP,” we are referring to Western Gas Equity Partners, LP in its individual capacity or to Western Gas Equity Partners, LP and its consolidated subsidiaries collectively, as the context requires. As used in this prospectus, (i) “our general partner” refers to Western Gas Equity Holdings, LLC, the general partner of Western Gas Equity Partners, LP; (ii) “WES” refers to Western Gas Partners, LP in its individual capacity or to Western Gas Partners, LP and its subsidiaries collectively, as the context requires; (iii) “WES GP” refers to Western Gas Holdings, LLC, our wholly owned subsidiary and the general partner of Western Gas Partners, LP; (iv) “Anadarko” refers to Anadarko Petroleum Corporation and its subsidiaries and affiliates, other than us, our general partner, WES GP, WES, and its subsidiaries as of the closing date of this offering; and (v) “Anadarko Petroleum Corporation” refers to Anadarko Petroleum Corporation excluding its subsidiaries and affiliates. We include a glossary of some of the terms used in this prospectus as Appendix B.

Western Gas Equity Partners, LP

We are a Delaware limited partnership formed to own three types of partnership interests in Western Gas Partners, LP, a publicly traded limited partnership (NYSE: WES). WES is a growth-oriented Delaware master limited partnership organized by Anadarko Petroleum Corporation (NYSE: APC) to own, operate, acquire and develop midstream energy assets. Our only cash-generating assets consist of our partnership interests in WES, which upon the completion of this offering will consist of the following:

 

   

2,080,302 WES general partner units, representing a 2.0% general partner interest in WES;

 

   

all of the incentive distribution rights in WES, which entitle us to receive increasing percentages, up to the maximum level of 48.0%, of any incremental cash distributed by WES as certain target distribution levels are reached in any quarter; and

 

   

46,570,413 WES common units, representing a 44.8% limited partner interest in WES.

We were formed in September 2012 upon the conversion of our predecessor, WGR Holdings, LLC, into a Delaware limited partnership. As of September 30, 2012, we owned 40,573,239 WES common units and, indirectly through our 100% membership interest in WES GP, 1,957,845 WES general partner units and all of the incentive distribution rights.

Based on WES’s anticipated fourth quarter cash distribution and our expected ownership of WES following this offering, we expect our initial quarterly cash distribution to be $0.165 per common unit, or $0.660 per common unit on an annualized basis. Our primary objective is to increase distributions to our unitholders over time through growth in the distributions payable with respect to our partnership interests in WES. To achieve this objective, we intend to actively monitor and support WES in the successful execution of its business strategy. In the future, we may facilitate WES’s growth through the use of our capital resources, which could involve capital contributions, loans or other forms of financial support.

 

 

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WES is required by its partnership agreement to distribute, and it has historically distributed within 45 days of the end of each quarter, all of its cash on hand at the end of each quarter, less reserves established by its general partner to provide for the proper conduct of its business or to provide funds for future distributions. Like WES, we are structured as a limited partnership and will distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner.

Our cash flows will consist of the cash distributions we receive with respect to the WES partnership interests we own. While we, like WES, are structured as a limited partnership, our capital structure and cash distribution policy differ materially from those of WES. Most notably, (i) our general partner does not have an economic interest in us and is not entitled to receive any distributions from us and (ii) our capital structure does not include incentive distribution rights. Therefore, our distributions will be allocated exclusively to our common units.

Our ownership of WES’s incentive distribution rights entitles us to receive the following percentages of cash distributed by WES at the following target cash distribution levels:

 

   

13.0% of all incremental cash distributed in a quarter after $0.345 has been distributed in respect of each common unit and general partner unit of WES for that quarter;

 

   

23.0% of all incremental cash distributed in a quarter after $0.375 has been distributed in respect of each common unit and general partner unit of WES for that quarter; and

 

   

the maximum sharing level of 48.0% of all incremental cash distributed in a quarter after $0.450 has been distributed in respect of each common unit and general partner unit of WES for that quarter.

The cash distributions we receive from WES are tied to (i) WES’s per unit distribution level and (ii) the number of WES common units outstanding. An increase in either factor (assuming the other factor remains constant or increases) will generally result in an increase in the amount of cash distributions we receive from WES. Since its initial public offering, WES has engaged in transactions that have resulted in significant increases in both its per unit distribution level and outstanding equity capitalization, and we expect WES to engage in similar transactions in the future. WES has increased its quarterly cash distribution from $0.30 per common unit, or $1.20 on an annualized basis, for the quarter ended June 30, 2008, to $0.50 per common unit, or $2.00 on an annualized basis, for the quarter ended September 30, 2012. During the same period, WES issued a total of 42.9 million common units.

Our discussion of WES Adjusted EBITDA for the year ending December 31, 2013, included elsewhere in this prospectus, assumes a WES quarterly distribution of $0.52 per unit, because based on WES’s fourth quarter operating results to date, the management of WES GP has informed us that it plans to recommend that the WES GP board of directors approve an increase in WES’s distribution with respect to the fourth quarter of 2012 to $0.52 per WES common unit. This distribution increase for the fourth quarter of 2012 has not been submitted to, or approved by, the board of directors of WES GP and is therefore subject to change.

Based on WES’s ownership structure after giving effect to our acquisition of WES common units and general partner units in connection with the closing of this offering as described under “Use of Proceeds,” WES’s anticipated fourth quarter 2012 distribution of $0.52 per common unit will result in a quarterly distribution to us of $35.2 million, or approximately $140.6 million on an annualized basis, consisting of (i) $24.2 million from distributions on our WES common units, (ii) $1.3 million from distributions on our WES general partner units and (iii) $9.7 million from distributions on the incentive distribution rights. We are currently receiving distributions at the highest level on the incentive distribution rights and therefore will receive 48.0% of the cash that WES distributes in excess of $0.450 per common unit, if any. As a result, the cash distributions we receive from WES with respect to the incentive distribution rights will increase more rapidly than those with respect to our WES common and general partner units.

 

 

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The following two graphs illustrate (i) the historical growth in WES’s distributions on its common units and the corresponding historical growth in quarterly distributions to WES GP, including pursuant to the 2.0% general partner interest and the incentive distribution rights, and (ii) the historical growth in WES’s distributions on a per unit annualized basis, each beginning with WES’s quarterly distribution paid with respect to the second quarter of 2008 and continuing through the anticipated distribution with respect to the fourth quarter of 2012. As described above, the increases in WES’s aggregate cash distributions over time have resulted from increases in WES’s per unit quarterly distribution and equity capitalization over time.

Quarterly Cash Distributions by WES

 

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(1) Represents the prorated distribution for the period beginning with the closing of WES’s initial public offering on May 14, 2008 and ending on June 30, 2008.
(2) Represents the distribution that WES management expects to recommend to the WES GP board of directors with respect to the fourth quarter of 2012 and gives effect to the purchase of WES common units and general partner units with the net proceeds of this offering.
(3) Includes distributions on subordinated units prior to their conversion to common units in August 2011.

 

 

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Annualized Cash Distributions Per Common Unit by WES

 

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(1) Compound annual growth rate.
(2) Represents the distribution that WES management expects to recommend to the WES GP board of directors with respect to the fourth quarter of 2012.

The below graph illustrates the impact on us of WES raising or lowering its quarterly cash distribution from WES’s anticipated distribution with respect to the fourth quarter of 2012 of $0.52 per unit, or $2.08 on an annualized basis, based on our ownership of partnership interests in WES as of the closing of this offering and assuming that WES’s outstanding partnership interests remain constant. This information is presented for illustrative purposes only and is not intended to be a prediction of future performance.

 

 

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Hypothetical Annualized WES Distributions to Us (1)

 

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(1) Assumes WES GP does not exercise its right to limit or modify incentive distributions. Please read “Risk Factors—Risks Inherent in an Investment in Us—WES GP, with our consent but without the consent of our unitholders, may limit or modify the incentive distributions we are entitled to receive from WES, which may reduce cash distributions to you.”
(2) Represents the distribution that WES management expects to recommend to the WES GP board of directors with respect to the fourth quarter of 2012.

 

 

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The impact on us of changes in WES’s per unit cash distribution levels will vary depending on several factors, including the number of WES’s outstanding common units on the record date for cash distributions and the impact of the incentive distribution rights structure. In addition, the level of cash distributions we receive may be affected by risks associated with the underlying business of WES. Please read “Risk Factors.”

We expect to make an initial quarterly cash distribution of $0.165 per common unit, or $0.660 on an annualized basis, to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including reimbursements to our general partner. If WES is successful in implementing its business strategy and increasing distributions to its partners, we generally would expect to increase distributions to our unitholders, although the timing and amount of any such increase in our distributions will not necessarily correlate to any increase in WES’s distributions. However, we cannot assure you that any distributions will be declared or paid. The common units offered hereby are not entitled to arrearages in distributions. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

Western Gas Partners, LP

Western Gas Partners, LP (NYSE: WES) is a growth-oriented Delaware master limited partnership formed by Anadarko to own, operate, acquire and develop midstream energy assets. WES’s assets are located in East, West and South Texas, the Rocky Mountains (Colorado, Utah and Wyoming) and the Mid-Continent (Kansas and Oklahoma), and WES is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, natural gas liquids (“NGLs”) and crude oil for Anadarko, as well as third-party producers and customers. Approximately two-thirds of WES’s services are provided under long-term contracts with fee-based rates with the remainder provided under percent-of-proceeds and keep-whole contracts. A substantial majority of the commodity price risk associated with the percent-of-proceeds and keep-whole contracts is hedged under commodity price swap agreements with Anadarko. WES’s only commodity price risk that is not hedged is associated with the non-fee-based agreements that were acquired with the purchase of the Platte Valley system, which represented less than 5% of WES’s gross margin for the twelve months ended September 30, 2012. A substantial part of WES’s business is conducted under long-term contracts with Anadarko that typically have a minimum term of ten years from the date of execution. None of WES’s material gathering and processing contracts with Anadarko expires before December 30, 2017, and, as of September 30, 2012, the volume weighted-average remaining life of all of such contracts with Anadarko was 7.7 years. WES currently has over 700 third-party gathering and processing contracts with over 200 customers, with no third-party customer representing more than 10% of WES’s revenues. The largest third-party customer, which represents approximately 6% of WES’s revenues, has entered into a “life of lease” contract with WES, meaning that the contract remains in effect until the customer ceases production from the leases that are dedicated under this contract.

As of September 30, 2012, WES’s assets consisted of thirteen gathering systems, seven natural gas treating facilities, ten natural gas processing facilities, two NGL pipelines, one interstate natural gas pipeline that is regulated by the Federal Energy Regulatory Commission (“FERC”), one intrastate natural gas pipeline and interests in two natural gas gathering systems and a crude oil pipeline. For a detailed description of WES’s assets, please read “Business—Our and WES’s Assets.”

 

 

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The following table provides information regarding WES’s assets by geographic region, other than natural gas processing facilities currently under construction in South Texas and Colorado, as of and for the nine months ended September 30, 2012:

 

Area

  

Asset Type

  Miles of
Pipeline
    Approximate
Number of
Receipt Points
    Gas
Compression
(horsepower)
    Processing
or Treating
Capacity
(MMcf/d)
    Average
Gathering,
Processing and
Transportation
Throughput
(MMcf/d)
 

Rocky Mountains (1)

  

Gathering, Processing and Treating

    7,106        4,887        344,137        2,480        2,215   
  

Transportation

    982        32        26,828        —          83   

Mid-Continent

  

Gathering

    2,012        1,498        92,097        —          81   

East Texas

  

Gathering and Treating

    590        843        37,820        502        244   

West Texas

  

Gathering

    120        90        —          —          52   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

       10,810        7,350        500,882        2,982        2,675   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Throughput includes 100% of Chipeta system volumes; 50% of Newcastle gathering system volumes; 22% of Rendezvous volumes; and 14.81% of Fort Union volumes. For the nine months ended September 30, 2012, throughput does not include the following NGL or crude oil transportation volumes: 25 MBbls/d of average NGL pipeline volumes from the Chipeta assets and 6 MBbls/d of oil pipeline volumes representing WES’s 10% share of average White Cliffs volumes.

We believe that one of WES’s principal strengths is its relationship with Anadarko. Anadarko is among the largest independent oil and gas exploration and production companies in the world. Anadarko’s upstream oil and gas business explores for and produces natural gas, crude oil, condensate and NGLs. We believe Anadarko, through its indirect economic interest in WES and in us following this offering, will continue to be motivated to promote and support the successful execution of WES’s business plan and to pursue projects that help to enhance the value of WES’s business.

Approximately 75% and 76% of WES’s total natural gas gathering, transportation and treating throughput (excluding equity investment throughput) during the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, was comprised of natural gas production owned or controlled by Anadarko. Approximately 64% and 59% of WES’s total processing throughput (excluding equity investment throughput) during the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, was attributable to natural gas production owned or controlled by Anadarko. In addition, with respect to WES’s Wattenberg, Dew/Pinnacle, Haley, Helper, Clawson and Hugoton gathering systems, Anadarko has dedicated to WES pursuant to the terms of its applicable gathering agreements all of the natural gas production it owns or controls from (i) wells that are currently connected to such gathering systems, and (ii) additional wells that are drilled within one mile of wells connected to such gathering systems as those systems currently exist and as they are expanded to connect additional wells in the future. As a result, this dedication will continue to expand as long as additional wells are connected to these gathering systems. In executing its growth strategy, which includes acquiring and constructing additional midstream assets, WES utilizes the significant experience of Anadarko’s management team.

Although we believe WES’s relationship with Anadarko provides it with a significant advantage in the midstream natural gas sector, it is also a source of potential conflicts. For example, Anadarko is not restricted from competing with WES. Given Anadarko’s significant indirect economic interest in WES and in us, we believe it will be in Anadarko’s best interest for it to transfer additional assets to WES over time. However, Anadarko continually evaluates acquisitions and divestitures and may elect to acquire, construct or dispose of

 

 

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midstream assets in the future without offering WES the opportunity to acquire, construct or participate in the ownership of those assets. Anadarko is under no contractual obligation to offer any such opportunities to WES, nor is WES obligated to participate in any such opportunities. We cannot state with any certainty which, if any, opportunities to acquire additional assets from Anadarko may be made available to WES or if WES will elect, or will have the ability, to pursue any such opportunities.

WES’s Primary Growth Drivers

We believe WES’s continued growth will be primarily driven by future acquisitions, negotiated equity interests and organic growth projects.

Acquisitions. As reflected in the chart below, since 2008, WES has completed nine acquisitions for total consideration of approximately $2.2 billion, including over $300 million in third-party acquisitions. WES has consistently maintained investment grade leverage metrics, maintaining debt-to-Adjusted EBITDA levels of less than 4:1, while funding acquisitions through (i) two debt financings resulting in over $1.0 billion of total proceeds; (ii) six equity financings resulting in approximately $1.0 billion of total proceeds; and (iii) the issuance of approximately 8.3 million common units and 170,000 general partner units to Anadarko.

 

     Acquisition Date      Percentage Acquired     Acquisition Price
($MM) (1)
 

Powder River

     12/19/2008         100   $ 210.0   

Chipeta

     07/22/2009         51     107.0   

Granger

     01/29/2010         100     254.4   

Wattenberg

     08/02/2010         100     498.0   

White Cliffs (2)

     09/28/2010         10     38.0   

Platte Valley (2)

     02/28/2011         100     301.9   

Bison

     07/08/2011         100     130.0   

MGR

     01/13/2012         100     483.0   

Chipeta

     08/01/2012         24     135.0   

 

(1) Acquisition price includes the cash consideration for the acquisition together with, when applicable, the value of units (based on a trailing average closing price of the common units as of the acquisition date) issued to Anadarko as consideration and reflects the impact of post-closing purchase price adjustments.
(2) Third-party acquisition. The White Cliffs transaction involved the purchase by WES from Anadarko of an equity interest in White Cliffs Pipeline, L.L.C. (“White Cliffs”) and a related option to purchase an additional interest in White Cliffs from a third party for $20 million. Concurrently with that transaction, WES exercised its option to purchase the additional interest in White Cliffs from the third party for $18 million.

We expect that WES’s future growth will be driven in large part by additional acquisitions of midstream assets from Anadarko over time. Anadarko’s total domestic midstream asset portfolio (excluding assets which WES fully consolidates into its results) had aggregate average throughput of approximately 2.5 Bcf/d for the nine months ended September 30, 2012 and as of that date consisted of 17 gathering systems, approximately 4,300 miles of pipeline and eight processing and/or treating facilities. Anadarko also continues to make significant investments in midstream assets that may present potential acquisition opportunities for WES, with over $1.0 billion invested in 2011 (including approximately $576 million of acquisitions) and over $500 million (excluding acquisitions and equity investments) projected to be invested in 2012.

Negotiated equity interests. Due to its significant resource position in many developing basins, Anadarko has also been able to further increase its midstream asset base by acquiring equity interests in third-party projects in exchange for long-term volume commitments. These investments could provide incremental acquisition opportunities for WES if pursued by Anadarko or represent additional investment opportunities for WES if Anadarko chooses to offer WES the opportunity to pursue them directly.

 

 

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Organic growth projects. WES has successfully completed both large and small organic growth projects associated with its existing assets and expects to continue to do so in the future. As of September 30, 2012, these projects had involved growth capital expenditures of approximately $327 million since 2008, and WES has budgeted over $400 million for organic growth projects in 2012.

WES currently has a number of significant projects scheduled for completion in 2012, 2013 and 2014 that are supported by long-term, fee-based throughput commitments from Anadarko. These projects include:

 

   

Chipeta Train III in the Uinta Basin: WES recently completed the construction of a new cryogenic processing train at its Chipeta facility which has a designed capacity of approximately 300 MMcf/d and was placed into service in October 2012. In connection with the construction of Chipeta Train III, Anadarko has agreed to a fee-based contract with a ten-year throughput commitment of not less than 500 MMcf/d to the Chipeta facility, which will begin on the first day of the month following Chipeta Train III’s in-service date.

 

   

Brasada plant in the Maverick Basin: WES is currently constructing a new cryogenic facility which will process production from the Eagleford shale. The new plant has a designed capacity of approximately 200 MMcf/d and is expected to begin service in the second quarter of 2013. Anadarko has agreed to a fee-based contract with a ten-year throughput guarantee, which will begin on the plant’s in-service date and will increase to 180 MMcf/d (or 90% of the plant’s capacity) on January 1, 2014, and will include associated demand charges. Based on WES’s commercial contracts with Anadarko, WES’s management expects that the project’s cost will represent a multiple of 6.5x the Brasada plant’s anticipated 2014 EBITDA.

 

   

Lancaster plant in the DJ Basin: WES is currently constructing a new cryogenic facility which will process production from the Niobrara and Codell formations in the Wattenberg field. The new plant has a designed capacity of approximately 300 MMcf/d and is expected to begin service in the first quarter of 2014. Anadarko has agreed to a fee-based contract with a ten-year throughput guarantee of 270 MMcf/d (or 90% of the plant’s capacity) and associated demand charges, which will begin on the plant’s in-service date. Based on WES’s commercial contracts with Anadarko, WES’s management expects that the project’s cost will represent a multiple of 6.5x the Lancaster plant’s anticipated annual EBITDA.

 

   

Red Desert expansion in the Greater Green River Basin. In conjunction with upstream development in the Greater Green River Basin, WES is constructing approximately 30 miles of 16-inch pipeline to gather up to an additional 40,000 Mcf/d of expected gas production in the area. The pipeline will deliver gas to WES’s Patrick Draw plant, where existing compression and cryogenic capacity will be used for processing and delivery into downstream pipelines. The project is expected to be completed in early 2013 and is supported by volume commitments from a third-party producer with an active drilling program in the basin.

We believe that WES is well positioned to continue the successful execution of its growth strategy, and that its current inventory of growth projects, coupled with its historical record of strategic and accretive acquisitions, should result in continued growth in the cash distributions paid by WES to its partners, including us.

WES’s Strategy

WES’s primary business objective is to continue to increase its cash distributions per unit over time. To accomplish this objective, WES intends to execute the following strategy:

 

   

Pursuing accretive acquisitions. WES expects to continue to pursue accretive acquisition opportunities of midstream energy assets from Anadarko and third parties.

 

 

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Capitalizing on organic growth opportunities. As demonstrated by the organic growth projects described above, WES expects to grow certain of its systems organically over time by meeting Anadarko’s and other customers’ midstream service needs that result from their drilling activity in WES’s areas of operation. Additionally, WES continually evaluates economically attractive organic expansion opportunities in existing or new areas of operation that allow it to leverage its existing infrastructure, operating expertise and customer relationships by constructing and expanding systems to meet new or increased demand for its services.

 

   

Attracting third-party volumes to its systems. WES expects to continue to actively market its midstream services to, and pursue strategic relationships with, third-party producers with the intention of attracting additional volumes and/or expansion opportunities.

 

   

Managing commodity price exposure. WES intends to continue limiting its direct exposure to commodity price changes and promote cash flow stability by pursuing a contract structure designed to mitigate exposure to commodity price uncertainty through the use of fee-based contracts and fixed-price hedges.

 

   

Maintaining investment grade ratings. WES intends to operate at appropriate leverage and distribution coverage levels in order to maintain its investment grade status. By maintaining investment grade status, in part through maintaining leverage ratios appropriate for investment-grade partnerships, we believe that WES will have increased flexibility in its growth strategy and will be able to pursue strategic acquisitions and large growth projects at a lower capital cost, which could enhance their accretion.

For a discussion of the possible risks that could adversely affect WES’s strategy, please read “—Risk Factors” beginning on page 11 and “Risk Factors” beginning on page 22.

WES’s Competitive Strengths

We believe that WES is well positioned to successfully execute its strategy and achieve its primary business objective because of the following competitive strengths:

 

   

Affiliation with Anadarko. As a result of its significant retained interest in us, and therefore in WES, we believe that Anadarko is motivated to promote and support the successful execution of WES’s business plan and to use its relationships throughout the energy industry, including with producers in the United States, to help pursue projects that help to enhance the value of WES’s business.

 

   

Relatively stable and predictable cash flows. We believe that WES’s cash flows are largely protected from fluctuations caused by commodity price volatility due to (i) the approximately two-thirds of its services that are provided pursuant to long-term, fee-based agreements and (ii) the commodity price swap agreements that limit its exposure to commodity price changes with respect to its percent-of-proceeds and keep-whole contracts. For the twelve months ended September 30, 2012, approximately 97% of WES’s gross margin was derived from either long-term, fee-based contracts or percent-of-proceeds or keep-whole agreements that were hedged with commodity price swap agreements.

 

   

Financial flexibility to pursue expansion and acquisition opportunities. We believe that WES’s operating cash flows, borrowing capacity, and access to debt and equity capital markets provide it with financial flexibility to competitively pursue acquisition and expansion opportunities and to execute its strategy across capital market cycles. WES currently has investment grade ratings from two of the three major rating agencies and, as of September 30, 2012, WES had approximately $800 million of available borrowing capacity under its revolving credit facility (the “WES RCF”) to fund acquisitions, expansions and working capital.

 

   

Substantial presence in liquids-rich basins. WES’s asset portfolio includes gathering and processing systems, such as its Wattenberg, Platte Valley, Chipeta, Granger and Red Desert assets, which are in areas where the hydrocarbon production contains oil and condensate, as well as a significant amount of

 

 

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NGLs, for which pricing has historically been correlated to crude oil as opposed to natural gas. Due to the relatively high current price of crude oil as compared to natural gas, production in these areas offers WES’s customers higher margins and superior economics compared to basins in which the gas is predominantly dry. This pricing environment offers expansion opportunities for certain of WES’s systems as producers attempt to increase their wet gas and crude oil production.

 

   

Well-positioned, well-maintained and efficient assets. We believe that WES’s asset portfolio across geographically diverse areas of operation provides WES with opportunities to expand and attract additional volumes to its systems from multiple productive basins. Moreover, WES’s systems include an integrated package of high-quality, well-maintained assets for which WES has implemented modern processing, treating, measuring and operating technologies.

 

   

Consistent track record of accretive acquisitions. Since WES’s initial public offering in 2008, WES’s management team has successfully executed seven related-party and two third-party acquisitions of midstream energy assets totaling approximately $2.2 billion, which have contributed to a 16% compound annual growth rate in WES’s per unit distributions since the second quarter of 2009. WES’s management team has demonstrated its ability to identify, evaluate, negotiate, consummate and integrate strategic acquisitions and expansion projects, and it intends to use its experience and reputation to continue to grow WES through accretive acquisitions, focusing on opportunities to improve throughput volumes and cash flows.

For a discussion of the possible risks that could adversely affect WES’s competitive position, please read “—Risk Factors” below and “Risk Factors” beginning on page 22.

Recent Developments

WES Third Quarter Distribution

On November 13, 2012, WES paid a cash distribution of $0.50 per unit for the quarter ended September 30, 2012 to unitholders of record at the close of business on October 31, 2012. This distribution represents a 4% increase over the distribution of $0.48 per common unit paid for the quarter ended June 30, 2012, and a 19% increase over the distribution of $0.42 per common unit paid for the quarter ended September 30, 2011.

Risk Factors

An investment in our common units involves risks associated with our and WES’s business, regulatory and legal matters, limited partnership structure and the tax characteristics of our and WES’s common units. You should carefully consider the risks described in “Risk Factors” beginning on page 22 of this prospectus and the other information in this prospectus before deciding whether to invest in our common units.

Risks Inherent in an Investment in Us

 

   

Our only cash-generating assets are our ownership interests in WES, and our cash flow is therefore completely dependent upon the ability of WES to make cash distributions to its partners.

 

   

WES GP, with our consent but without the consent of our unitholders, may limit or modify the incentive distributions we are entitled to receive from WES, which may reduce cash distributions to you.

 

   

In the future, we may not have sufficient cash to pay our estimated initial quarterly distribution or to increase distributions.

 

   

Our rate of growth may be reduced to the extent we purchase additional WES common units, which will reduce the percentage of our cash flow that we receive from the incentive distribution rights.

 

 

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Our ability to meet our financial needs may be adversely affected by our cash distribution policy and our lack of operational assets.

 

   

A reduction in WES’s distributions will disproportionately affect the amount of cash distributions to which we are currently entitled.

 

   

If distributions on our common units are not paid with respect to any fiscal quarter, including our expected initial quarterly distribution, our unitholders will generally not be entitled to receive such payments in the future.

 

   

Our and WES’s cash distribution policies limit our respective abilities to grow.

 

   

The terms of any debt that we may incur may limit the distributions that we can pay to our unitholders.

 

   

Our unitholders do not elect our general partner or vote on our general partner’s directors. In addition, upon completion of this offering, Anadarko will own a sufficient number of our common units to allow it to prevent the removal of our general partner.

 

   

You will experience immediate and substantial dilution of $11.22 per common unit in the net tangible book value of your common units.

Risks Related to Conflicts of Interest

 

   

WES GP owes duties to WES’s unitholders that may conflict with our interests.

 

   

Potential conflicts of interest may arise among our general partner, its affiliates and us. Our general partner has limited its state law fiduciary duties to us and our unitholders, which may permit it to favor its own interests to the detriment of us and our unitholders.

 

   

The duties of our general partner’s officers and directors may conflict with their duties as officers and directors of WES GP.

 

   

Anadarko may compete with us or WES, which could adversely affect our or WES’s ability to grow and our or WES’s results of operations and cash available for distribution.

 

   

Our partnership agreement replaces our general partner’s fiduciary duties to our unitholders.

Risks Inherent in WES’s Business

 

   

WES is dependent on Anadarko for a substantial majority of the natural gas that it gathers, treats, processes and transports. A material reduction in Anadarko’s production that is gathered, treated, processed or transported by WES would result in a material decline in WES’s revenues and cash available for distribution.

 

   

Because WES is substantially dependent on Anadarko as its primary customer and the ultimate owner of its general partner, any development that materially and adversely affects Anadarko’s operations, financial condition or market reputation could have a material and adverse impact on WES and us. Material adverse changes at Anadarko could restrict WES’s or our access to capital, make it more expensive to access the capital markets or increase the costs of WES’s or our borrowings.

 

   

Because of the natural decline in production from existing wells, WES’s success depends on its ability to obtain new sources of natural gas, which is dependent on certain factors beyond WES’s control. Any decrease in the volumes of natural gas that WES gathers, processes, treats and transports could adversely affect its business and operating results.

 

 

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Lower natural gas, NGL or oil prices could adversely affect WES’s business.

 

   

WES’s strategies to reduce its exposure to changes in commodity prices may fail to protect WES and could negatively impact its financial condition, thereby reducing its cash flows and ability to make distributions to partners, including us.

 

   

If Anadarko were to limit transfers of midstream assets to WES or if WES were to be unable to make acquisitions on economically acceptable terms from Anadarko or third parties, WES’s future growth would be limited. In addition, any acquisitions WES makes may reduce, rather than increase, its cash generated from operations on a per-unit basis.

Tax Risks to Our Common Unitholders

 

   

Our taxation as a flow-through entity depends on our status as a partnership for U.S. federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. Likewise, WES’s taxation as a flow-through entity depends on its status as a partnership for U.S. federal income tax purposes, as well as WES’s not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat WES or us as a corporation for federal income tax purposes or either WES or we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to you could be substantially reduced.

 

   

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

 

   

You will be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.

Our Structure

The chart on page 17 depicts our organization and ownership structure after giving effect to this offering and the related transactions. Upon the consummation of this offering:

 

   

our general partner, Western Gas Equity Holdings, LLC, which is a wholly owned subsidiary of Anadarko, will own a non-economic general partner interest in us;

 

   

our public unitholders will own 15,000,000 common units, representing a 7.2% limited partner interest in us;

 

   

Anadarko will own 193,531,973 common units, representing a 92.8% limited partner interest in us;

 

   

we will own 46,570,413 WES common units, representing a 44.8% limited partner interest in WES;

 

   

we will own a 100% membership interest in WES GP, which serves as WES’s general partner and will own 2,080,302 WES general partner units, representing a 2.0% general partner interest in WES, and all of the incentive distribution rights in WES; and

 

   

we expect that our $30.0 million working capital facility with Anadarko as the lender that we entered into on November 1, 2012 will be undrawn at such time.

An increase in the public offering price per common unit above the assumed initial offering price of $20.00 (the midpoint of the price range set forth on the cover page of this prospectus) would increase the proceeds of the offering and therefore the number of common and general partner units we purchase from WES, increasing our equity ownership in WES and the distributions we will receive from WES. Because these additional WES units would increase our value, we would also increase the number of WGP common units issued to Anadarko in connection with this offering. Specifically, we would increase the number of WGP common units issued to Anadarko in an amount equal to the increase in the annualized WES distributions expected to be received on the additional WES units and the corresponding increase in incentive distributions, each based on the anticipated WES distribution for the fourth quarter of 2012, divided by our annualized initial quarterly

 

 

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distribution. For example, a $1.00 increase in our public offering price would result in incremental net proceeds to us of $14.3 million, which would allow us to purchase 303,587 and 6,196 additional common and general partner units in WES, respectively, and provide $0.8 million in additional expected annual cash distributions to us. Based on this increase, we would issue 1,154,247 additional WGP common units to Anadarko, and therefore our per unit available cash would not change.

Likewise, an increase in the number of common units sold in this offering would increase the proceeds of the offering and therefore the number of common and general partner units we purchase from WES, and as a result, the number of WGP common units issued to Anadarko in connection with this offering. Specifically, we would increase the number of WGP common units issued to Anadarko in an amount equal to the increase in the current WES distributions expected to be received on the additional WES units and the corresponding increase in incentive distributions, each based on the anticipated WES distribution for the fourth quarter of 2012, less the distributions payable by us on the additional WGP common units, divided by our annualized initial quarterly distribution. For example, an increase of 1,000,000 WGP common units issued to the public at our assumed midpoint public offering price of $20.00 per common unit would result in incremental net proceeds to us of $19.0 million, which would allow us to purchase 404,783 and 8,261 additional common and general partner units in WES, respectively, and provide $1.0 million in additional expected annual cash distributions to us. Based on this increase, we would issue 538,996 additional WGP common units to Anadarko, and therefore our per unit available cash would not change.

If we receive net proceeds from this offering of less than $281.5 million, we will be unable to purchase the aggregate number of WES common units and general partner units that we have assumed in the forecast of our estimated available cash for the year ending December 31, 2013, presented in “Our Cash Distribution Policy and Restrictions on Distributions.” In such instance, our estimated available cash for the year ending December 31, 2013 would decrease by an amount equal to the aggregate annualized distributions associated with the WES common and general partner units that we were unable to purchase.

In the event that (i) we purchase less than the aggregate number of WES common units and general partner units assumed in “Our Cash Distribution Policy and Restrictions on Distributions” and (ii) we do not have sufficient available cash to distribute our initial quarterly distribution to all of our common unitholders (including Anadarko) in any quarter during the forecast period, Anadarko will agree to forgo a portion of the distribution in such quarter on the common units that it receives in this offering in an amount equal to the lesser of (i) the amount sufficient to permit unitholders other than Anadarko to receive the full initial quarterly distribution in such quarter and (ii) the amount of incremental available cash of WES that our general partner determines would have been distributed to us for such quarter had we purchased (and had there been outstanding) the aggregate number of WES common units and general partner units that we have assumed in “Our Cash Distribution Policy and Restrictions on Distributions.” Anadarko will agree to forgo such distributions, as applicable, until the first completed quarter in which our available cash is sufficient to pay the full initial quarterly distribution on all of our outstanding common units. The agreement of Anadarko to forego such portions of its distributions does not guarantee that holders of common units will receive the initial quarterly distribution rate for any quarter in the forecast period. Furthermore, the holders of common units will not be entitled to arrearages with respect to distributions during the forecast period. If in any quarter subsequent to Anadarko foregoing a distribution we have available cash in excess of the amount required to pay our initial quarterly distribution on all of our common units (including those held by Anadarko), we will distribute to Anadarko the lesser of (i) the amount by which available cash exceeds the available cash required to pay our initial quarterly distribution on all of our common units (including those held by Anadarko) and (ii) the amount of distributions forgone by Anadarko that have not yet been repaid.

 

 

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Our Management

Western Gas Equity Holdings, LLC, our general partner, will manage our operations and activities, including, among other things, establishing the quarterly cash distribution levels for our common units and the reserves that it believes are prudent to maintain for the proper conduct of our business. Other than the administrative services fee described under “Certain Relationships and Related Party Transactions – Agreements Entered into or to be Entered Into in Connection with this Offering – Omnibus Agreement,” our general partner will not receive any management fee or other compensation in connection with its management of our business but will be reimbursed for all direct and indirect expenses incurred on our behalf.

We control and manage WES through our ownership of its general partner, WES GP. The officers of our general partner are also officers of WES GP, and our officers, as well as the employees that operate WES, are Anadarko employees. Five of our directors are affiliated with Anadarko and are also directors of WES GP. Our remaining three directors will be independent directors as defined by the New York Stock Exchange (the “NYSE”). At least one of our independent directors will be appointed prior to the date our common units are listed for trading on the NYSE, a second independent director will be appointed within 90 days of the completion of this offering and the third independent director will be appointed within one year of the completion of this offering. Anadarko is the sole member of our general partner and will have the right to appoint our entire board of directors. Furthermore, because we are the sole member of WES GP, Anadarko indirectly has the right to appoint the entire board of directors of WES GP. The board of directors of WES GP is responsible for overseeing WES GP’s role as the general partner of WES. Please read “Management.”

Our Principal Executive Offices

Our principal executive offices are located at 1201 Lake Robbins Drive, The Woodlands, Texas 77380-1046, and our telephone number is (832) 636-6000. Our website will be located at www.westerngas.com. The information on our website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as we are an emerging growth company, unlike other public companies, we will not be required to:

 

   

provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002;

 

   

comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

   

comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the Securities and Exchange Commission (the “SEC”) determines otherwise;

 

   

provide certain disclosure regarding executive compensation required of larger public companies; or

 

   

obtain shareholder approval of any golden parachute payments not previously approved.

 

 

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We will cease to be an “emerging growth company” upon the earliest of:

 

   

the last day of the fiscal year in which we have $1.0 billion or more in annual revenues;

 

   

the date on which we have at least $700 million in market value of our common units held by non-affiliates;

 

   

the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period; or

 

   

the last day of the fiscal year following the fifth anniversary of our initial public offering.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

 

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Western Gas Equity Partners, LP

Ownership and Organizational Chart After This Offering

 

LOGO

 

(1) WES’s joint venture interests consist of a 75% interest in Chipeta Processing LLC (“Chipeta”), a 22% interest in Rendezvous Gas Services, L.L.C. (“Rendezvous”), a 14.81% interest in Fort Union Gas Gathering, L.L.C. (“Fort Union”) and a 10% interest in White Cliffs.

 

 

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The Offering

 

Common units offered to the public

15,000,000 common units, or 17,250,000 common units if the underwriters exercise their over-allotment option in full.

 

Common units outstanding after this offering

208,531,973 common units, or 211,994,713 common units (including an additional 1,212,740 common units that would be issued to Anadarko, as described above under “—Our Structure”) if the underwriters exercise their over-allotment option in full.

 

Use of proceeds

We expect to receive net proceeds of approximately $281.5 million from the sale of our common units, after deducting underwriting discounts, the structuring fee and offering expenses. We will use the net proceeds from this offering as follows:

 

   

to purchase from WES 5,997,174 common units representing limited partner interests in WES for approximately $275.9 million; and

 

   

to make a capital contribution to WES on behalf of WES GP of approximately $5.6 million in exchange for 122,391 WES general partner units in order to maintain WES GP’s 2.0% general partner interest in WES.

 

  We will use any net proceeds from the exercise of the underwriters’ over-allotment option to purchase from WES additional common units and a corresponding number of general partner units.

 

  The foregoing assumes an initial public offering price for our common units of $20.00 per common unit (the midpoint of the price range set forth on the cover page of this prospectus). WES will use the proceeds from the issuance and sale to us of WES units for general partnership purposes. Please read “—Our Structure” for a discussion of the impact on our equity capitalization of a change in the public offering price of our common units or the number of common units sold in this offering.

 

Cash distributions

We expect to make an initial quarterly cash distribution of $0.165 per common unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

 

  We will pay our unitholders a prorated distribution for the first quarter that we are a publicly traded partnership. This distribution will be paid for the period beginning on the closing date of this offering and ending on the last day of that fiscal quarter. Therefore, assuming that we become a publicly traded partnership after September 30, 2012 and before December 31, 2012, we will pay you a prorated distribution based on the number of days in the period from the closing date of this offering to and including December 31, 2012. We expect to pay this cash distribution on or about February 25, 2013. However, we can provide no assurance that we will declare or pay distributions. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

 

 

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Issuance of additional securities

We can issue an unlimited number of additional limited partner interests and other equity securities without the consent of our unitholders. Please read “Units Eligible for Future Sale” and “The Partnership Agreement of Western Gas Equity Partners, LP—Issuance of Additional Securities.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or its directors on an annual or continuing basis. Our general partner may not be removed except by a vote of the holders of at least 80% of the outstanding common units voting together as a single class, including any limited partner units owned by our general partner and its affiliates, including Anadarko. Upon consummation of this offering, Anadarko will own an aggregate of 92.8% of our common units. This will give Anadarko the ability to prevent the involuntary removal of our general partner. Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 95% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price that is not less than the then-current market price of the common units.

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2014, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be 30% or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $0.660 per common unit, we estimate that your average allocable federal taxable income per year will be no more than $0.198 per unit. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions” and “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Limitations on Deductibility of Losses.”

 

Material tax consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material U.S. Federal Income Tax Consequences.”

 

Exchange listing

We have been approved to list our common units, subject to official notice of issuance, on the NYSE under the symbol “WGP.”

 

 

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Summary Historical and Pro Forma

Financial and Operating Data

The following table shows our summary historical and pro forma financial and operating data, in each case for the periods and as of the dates indicated. The summary historical consolidated statements of income and cash flow data for the years ended December 31, 2009, 2010 and 2011 and the balance sheet data as of December 31, 2010 and 2011 are derived from our audited historical consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated balance sheet data as of December 31, 2009 is derived from our unaudited historical consolidated financial statements not included in this prospectus. The summary historical consolidated statements of income and cash flow data for the nine months ended September 30, 2011 and 2012 and the balance sheet data as of September 30, 2012 are derived from our unaudited historical consolidated financial statements included elsewhere in this prospectus. Our financial statements consolidate WES and its general partner, WES GP, which is our wholly owned subsidiary. This financial information is an integral part of, and should be read in conjunction with, the consolidated financial statements and notes thereto included elsewhere in this prospectus, “Selected Historical and Pro Forma Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We have no separate operating activities apart from those conducted by WES, and our cash flows consist of distributions from WES on the partnership interests we own. Accordingly, the summary historical consolidated financial data set forth in the following table primarily reflect the operating activities and results of operations of WES. Since we own and control WES GP, we reflect our ownership interest in WES on a consolidated basis, which means that our financial results are combined with those of WES and WES GP.

The unaudited pro forma financial data below has been prepared as if certain transactions to be effected at the closing of this offering had taken place on September 30, 2012, in the case of the pro forma balance sheet, and on January 1, 2011, in the case of the pro forma statements of operations for the year ended December 31, 2011 and the nine months ended September 30, 2012. These transactions include:

 

   

the receipt of net proceeds of $281.5 million, after deducting underwriting discounts, the structuring fee and offering expenses, from the issuance and sale of 15,000,000 common units at an assumed initial offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover page of this prospectus);

 

   

the use of the net proceeds from this offering to purchase 5,997,174 WES common units and to make a capital contribution to WES on behalf of WES GP in exchange for 122,391 WES general partner units in order to maintain WES GP’s 2.0% general partner interest in WES, as described in “Use of Proceeds”; and

 

   

WES’s use of the funds received from us for general partnership purposes.

For a description of all of the assumptions used in preparing the unaudited summary pro forma financial data, you should read the notes to our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. The pro forma financial data should not be considered as indicative of the historical results we would have had or the future results that we will have after this offering.

 

 

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    Historical     Pro Forma  
      Year Ended
December 31,
2011
    Nine Months
Ended
September 30,
2012
 
    Year Ended December 31,     Nine Months Ended September 30,      
    2009     2010     2011             2011                     2012              
    (unaudited)                 (unaudited)     (unaudited)  
    (in thousands, except per unit and operating data)  

Statement of Income Data:

             

Total revenues

  $ 619,764      $ 663,274      $ 823,265      $ 608,068      $ 636,603      $ 823,265      $ 636,603   

Costs and expenses (1)

    392,808        394,276        502,168        366,556        400,991        502,168        400,991   

Depreciation, amortization and impairments

    90,692        91,010        111,904        78,413        81,270        111,904        81,270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    483,500        485,286        614,072        444,969        482,261        614,072        482,261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    136,264        177,988        209,193        163,099        154,342        209,193        154,342   

Interest income (expense), net

    10,762        1,449        (1,785     (2,746     (17,443     (1,785     (17,443

Other income (expense), net

    1,628        (538     (44     (895     (287     (44     (287

Income tax expense (2)

    39,667        51,464        45,664        36,000        29,902        19,018        699   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    108,987        127,435        161,700        123,458        106,710        188,346        135,913   

Net income attributable to WES public unitholders and other noncontrolling interests (3)

    36,772        63,495        86,057        64,016        71,258        86,057        71,258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Western Gas Equity Partners, LP

  $ 72,215      $ 63,940      $ 75,643      $ 59,442      $ 35,452      $ 102,289      $ 64,655   

Pro forma net income per WGP common unit

              $ 0.31   
             

 

 

 

Balance Sheet Data (at period end):

             

Net, property, plant and equipment

  $ 1,714,006      $ 1,753,762      $ 2,052,224        $ 2,342,923        $ 2,342,923   

Total assets

    2,246,321        2,263,094        2,837,626          2,953,944          3,235,444   

Total long-term liabilities

    785,952        1,021,737        1,258,450          1,537,447          1,081,544   

Total equity and partners’ capital

    1,408,882        1,182,658        1,466,954          1,141,610          1,971,296   

Cash Flow Data:

             

Net cash provided by (used in):

             

Operating activities

  $ 186,422      $ 221,331      $ 273,222      $ 201,484      $ 197,089       

Investing activities

    (223,128     (885,507     (472,951     (405,241     (864,263    

Financing activities

    70,616        621,266        399,214        428,140        488,109       

Capital expenditures

    121,295        138,000        142,946        78,573        258,916       

Operating Data (volumes in MMcf/d):

             

Gathering, treating and transportation throughput (4)

    1,229        1,181        1,321        1,327        1,255       

Processing throughput (5)

    808        815        962        940        1,182       

Equity investment throughput (6)

    225        228        198        191        236       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total throughput

    2,262        2,224        2,481        2,458        2,673       

Throughput attributable to noncontrolling interests

    180        197        242        237        254       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Throughput attributable to Western Gas Equity Partners, LP

    2,082        2,027        2,239        2,221        2,419       

 

(1) Pro forma costs and expenses do not give effect to estimated annual incremental general and administrative expenses of approximately $3.0 million that we expect we will incur as a result of being a publicly traded partnership.
(2) Prior to our conversion in September 2012 to a limited partnership, we were a single-member limited liability company, required to reflect our income tax expense and liability on a separate-return basis. Upon the completion of this offering, and similar to WES, we will be treated as a partnership for U.S. federal and state income tax purposes and therefore will not be subject to U.S. federal and state income taxes, except for the Texas margin tax.
(3) Represents the publicly held common units of WES and WES’s noncontrolling interests in Chipeta that were held by Anadarko and a third-party member. Effective August 1, 2012, WES acquired Anadarko’s remaining interest in Chipeta, accounted for on a prospective basis.
(4) Excludes average NGL pipeline volumes from the Chipeta assets of 11 MBbls/d, 14 MBbls/d, 24 MBbls/d, 23 MBbls/d, and 25 MBbls/d for the years ended December 31, 2009, 2010, 2011 and the nine months ended September 30, 2011 and 2012, respectively.
(5) Consists of 100% of Chipeta, Granger, Hilight and Red Desert complex volumes and 50% of Newcastle system volumes for all periods presented, as well as throughput beginning March 2011 attributable to the Platte Valley system.
(6) Represents WES’s 14.81% share of Fort Union and 22% share of Rendezvous gross volumes, and excludes WES’s 10% share of average White Cliffs pipeline volumes consisting of 3 MBbls/d, 4 MBbls/d, 3 MBbls/d and 6 MBbls/d for the years ended December 31, 2010 and 2011 and the nine months ended September 30, 2011 and 2012, respectively. WES’s 10% share of White Cliffs volumes for 2009 was not material.

 

 

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RISK FACTORS

Limited partner interests are inherently different from capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in similar businesses. We urge you to carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

If any of the following risks were to occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, we might not be able to pay the initial quarterly distribution on our common units, the trading price of our common units could decline and you could lose all or part of your investment in us.

Risks Inherent in an Investment in Us

Our only cash-generating assets are our ownership interests in WES, and our cash flow is therefore completely dependent upon the ability of WES to make cash distributions to its partners.

The amount of cash that WES can distribute each quarter to its partners, including us, principally depends upon the amount of cash it generates from its operations, which will fluctuate from quarter to quarter based on, among other things:

 

   

the prices of, level of production of, and demand for natural gas;

 

   

the volume of natural gas that WES gathers, compresses, processes, treats and transports;

 

   

the volumes and prices of NGLs and condensate that WES retains and sells;

 

   

demand charges and volumetric fees associated with WES’s transportation services;

 

   

the level of competition from other midstream energy companies;

 

   

regulatory action affecting the supply of or demand for natural gas, the rates WES can charge, how it contracts for services, its existing contracts, its operating costs or its operating flexibility;

 

   

prevailing economic conditions; and

 

   

our continued success in the guidance, supervision and support of the execution of WES’s business strategy.

In addition, the actual amount of cash WES will have available for distribution will depend on other factors, some of which are beyond its control, including:

 

   

the level of capital expenditures it makes;

 

   

the level of its operating and maintenance and general and administrative costs;

 

   

its debt service requirements and other liabilities;

 

   

fluctuations in its working capital needs;

 

   

its ability to borrow funds and access capital markets;

 

   

its treatment as a flow-through entity for U.S. federal income tax purposes;

 

   

restrictions contained in debt agreements to which it is a party; and

 

   

the amount of cash reserves established by WES GP.

Because of these factors, WES may not have sufficient available cash each quarter to pay quarterly distributions at its most recently paid amount of $0.50 per unit, its anticipated distribution amount of $0.52 per unit or any other amount. In particular, the anticipated $0.52 per unit distribution for the fourth quarter of 2012 has not been submitted to, or approved by, the board of directors of WES GP, and as such remains subject to change. The amount of cash that WES has available for distribution depends primarily upon its cash

 

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flow, including cash flow from operations and working capital borrowings, and is not solely a function of profitability, which will be affected by non-cash items. As a result, WES may be able to make cash distributions when it records losses for financial accounting purposes and may not be able to make cash distributions during periods when it records net income for financial accounting purposes. Please read “—Risks Inherent in WES’s Business” for a discussion of risks affecting WES’s ability to generate cash flow.

WES GP, with our consent but without the consent of our unitholders, may limit or modify the incentive distributions we are entitled to receive from WES, which may reduce cash distributions to you.

We own WES GP, which owns the incentive distribution rights in WES that entitle us to receive increasing percentages, up to a maximum of 48.0%, of any cash distributed by WES as certain target distribution levels in excess of $0.345 per WES unit are reached in any quarter. A growing portion of the cash flow we receive from WES is expected to be provided by these incentive distribution rights.

WES, like other publicly traded partnerships, will generally only undertake an acquisition or expansion capital projects if, after giving effect to related costs and expenses, the transaction would be expected to be accretive, meaning it would increase cash distributions per unit in future periods. Because WES GP currently participates in the incentive distribution rights at all levels, including the highest sharing level of 48.0%, it is more difficult for an acquisition or capital project to show accretion for the common unitholders of WES than if the incentive distribution rights received less incremental cash flow. As a result, WES GP may determine, in certain cases, to propose a reduction in the incentive distribution rights to facilitate a particular acquisition or expansion capital project. Such a reduction may relate to all of the cash flow on the incentive distribution rights or only to the expected cash flow from the transaction and may be either temporary or permanent in nature.

Our partnership agreement authorizes our general partner to approve any waiver, reduction, limitation or modification of or to WES’s incentive distribution rights without the consent of our unitholders. In determining whether or not to approve any such waiver or modification, our general partner’s board of directors or its special committee may consider whatever information it believes appropriate in making such determination. Our general partner’s board of directors or its special committee must also believe that any such modification is in the best interest of our partnership. Any determination with respect to such modification could include consideration of one or more financial cases based on a number of business, industry, economic, legal, regulatory and other assumptions applicable to the proposed transaction. Although we expect a reasonable basis will exist for those assumptions, the assumptions will generally involve current estimates of future conditions, which are difficult to predict. Realization of many of the assumptions will be beyond our general partner’s control. Moreover, the uncertainty and risk of inaccuracy associated with any financial projection will increase with the length of the forecasted period.

If distributions on the incentive distribution rights were reduced for the benefit of the WES common units, the total amount of cash distributions we would receive from WES, and therefore the amount of cash distributions we could pay to our unitholders, would be reduced.

In the future, we may not have sufficient cash to pay our estimated initial quarterly distribution or to increase distributions.

Because our only source of operating cash flow consists of cash distributions from WES, the amount of distributions we are able to make to our unitholders may fluctuate based on the level of distributions WES makes to its partners, including us. We cannot assure you that WES will continue to make quarterly distributions at its most recently paid level of $0.50 per unit, its anticipated level of $0.52 per unit or any other level, or increase its quarterly distributions in the future. In addition, while we would expect to increase or decrease distributions to our unitholders if WES were to increase or decrease distributions to us, the timing and amount of such changes in distributions, if any, would not necessarily be comparable to the timing and amount of any changes in distributions made by WES to us. Various factors such as reserves established by the board of directors of our general partner may affect the distributions we make to our unitholders. In addition, prior to

 

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making any distributions to our unitholders, we will reimburse our general partner and its affiliates for all direct and indirect expenses incurred by them on our behalf. Our general partner will determine the amount of these reimbursed expenses. The reimbursement of these expenses could adversely affect the amount of distributions we make to our unitholders. We cannot guarantee that in the future we will be able to pay distributions or that any distributions WES does pay to us will allow us to pay distributions at or above our estimated initial quarterly distribution of $0.165 per common unit. The actual amount of cash that is available for distribution to our unitholders will depend on numerous factors, many of which are beyond our control or the control of our general partner.

Our rate of growth may be reduced to the extent we purchase additional WES common units, which will reduce the percentage of our cash flow that we receive from the incentive distribution rights.

Our business strategy includes supporting the growth of WES through the use of our capital resources, including by purchasing WES common units or lending funds to WES to finance acquisitions or internal growth projects. To the extent we purchase common units, or securities not entitled to a current distribution from WES, the rate of our distribution growth may be reduced, at least in the short term, because a smaller percentage of our cash distributions will come from our ownership of the WES incentive distribution rights, the distributions on which increase at a faster rate than those of the other securities we hold. Our purchase of WES common units with the net proceeds of this offering will reduce the percentage of the cash flow we anticipate receiving from WES that is attributable to our ownership of incentive distribution rights from 29.0% with respect to the fourth quarter of 2012 (assuming a $0.52 per unit distribution) to 27.5% upon the completion of the offering (or 27.3% assuming the underwriters exercise their over-allotment option in full). If the aggregate size of this offering were to increase, we would use the incremental net proceeds to purchase additional WES common units and general partner units in the manner described under “Prospectus Summary—Our Structure.”

Our ability to meet our financial needs may be adversely affected by our cash distribution policy and our lack of operational assets.

Our cash distribution policy, which is consistent with our partnership agreement, requires us to distribute all of our available cash quarterly. Our only cash-generating assets are partnership interests in WES, and we currently have no independent operations separate from those of WES. Moreover, as discussed below, a reduction in WES’s distributions will disproportionately affect the amount of cash distributions we receive. Given that our cash distribution policy is to distribute available cash and not retain it and that our only cash-generating assets are partnership interests in WES, we may not have enough cash to meet our needs if any of the following events occur:

 

   

an increase in our operating expenses;

 

   

an increase in our general and administrative expenses;

 

   

an increase in our working capital requirements; or

 

   

an increase in the cash needs of WES or its subsidiaries that reduces WES’s distributions.

A reduction in WES’s distributions will disproportionately affect the amount of cash distributions to which we are currently entitled.

Our indirect ownership of all the incentive distribution rights in WES entitles us to receive specified percentages of total cash distributions made by WES with respect to any particular quarter only in the event that WES distributes more than $0.345 per unit for such quarter. As a result, the holders of WES’s common units have a priority over us to cash distributions by WES up to and including $0.345 per unit for any quarter.

Because we are currently participating at the 48.0% level on the incentive distribution rights, future growth in distributions paid by WES will not result in an increase in our share of incremental cash distributed by WES. Furthermore, a decrease in the amount of distributions by WES to less than $0.450 per unit per quarter would reduce our percentage of the incremental cash distributions above $0.375 per common unit per quarter from

 

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48.0% to 23.0%, and a decrease in the amount of distributions by WES to levels below the other established target distribution levels would similarly reduce our percentage of the incremental cash distributions from WES. As a result, any reduction in quarterly cash distributions from WES would have the effect of disproportionately reducing the amount of all distributions that we receive from WES based on our indirect ownership of the incentive distribution rights in WES as compared to cash distributions we receive from WES with respect to our indirect 2.0% general partner interest in WES and our WES common units.

If distributions on our common units are not paid with respect to any fiscal quarter, including our expected initial quarterly distribution, our unitholders will generally not be entitled to receive such payments in the future.

Our distributions to our unitholders will generally not be cumulative. Consequently, if distributions on our common units are not paid with respect to any fiscal quarter, including our expected initial quarterly distribution, our unitholders will generally not be entitled to receive such payments in the future. However, in the event we receive proceeds in this offering less than the assumed net proceeds of $281.5 million, and as a result we purchase fewer WES common and general partner units, Anadarko will agree to forgo certain distributions (subject to future reimbursement). Please read “Prospectus Summary—Our Structure.” The agreement of Anadarko to forego portions of its distributions during the forecast period as described in “Prospectus Summary—Our Structure” does not guarantee that holders of common units will receive the expected initial quarterly distribution for any quarter in the forecast period. Furthermore, the holders of common units will not be entitled to arrearages with respect to distributions during the forecast period.

Our and WES’s cash distribution policies limit our respective abilities to grow.

Because we distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. In fact, our growth will initially be completely dependent upon WES’s ability to increase its quarterly distribution per unit because currently our only cash-generating assets are partnership interests in WES. If we issue additional units or incur debt, including under our working capital facility, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to maintain or increase our per unit distribution level.

In addition, consistent with the terms of its partnership agreement, WES distributes to its partners all of its available cash each quarter. To the extent WES does not have sufficient cash reserves or is unable to finance growth externally, its cash distribution policy will significantly impair its ability to grow. Further, to the extent WES issues additional units in connection with any acquisitions or expansion capital projects, the payment of distributions on those additional units may increase the risk that WES will be unable to maintain or increase its per unit distribution level, which in turn may impact the available cash that we have to distribute to our unitholders. The incurrence of additional debt to finance its growth strategy would result in increased interest expense to WES, which in turn may reduce the available cash that we have to distribute to our unitholders.

The debt that we incur may limit the distributions that we can pay to our unitholders.

Our payment of principal and interest on any future indebtedness, including under our working capital facility, will reduce our cash available for distribution to our unitholders. We anticipate that any additional credit facility we enter into in the future would limit our ability to pay distributions to our unitholders during an event of default or if an event of default would result from the distributions.

In addition, any future indebtedness may adversely affect our ability to obtain additional financing for future operations or capital needs, limit our ability to pursue other business opportunities, or make our results of operations more susceptible to adverse economic or operating conditions.

Our unitholders do not elect our general partner or vote on our general partner’s directors. In addition, upon completion of this offering, Anadarko will own a sufficient number of our common units to allow it to prevent the removal of our general partner.

Unlike the holders of common stock in a corporation, our unitholders have only limited voting rights and, therefore, limited ability to influence management’s decisions regarding our business. Our unitholders do not

 

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have the ability to elect our general partner or the members of our general partner’s board of directors and will have no right to elect our general partner or the directors of our general partner on an annual or other continuing basis in the future. The members of our general partner’s board of directors, including the independent directors, are chosen by Anadarko, the sole member of our general partner. Furthermore, if our public unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Our general partner may not be removed except upon the vote of the holders of at least 80% of the outstanding common units. Because Anadarko will own more than 20% of our outstanding common units after this offering, our public unitholders will be unable to remove our general partner without Anadarko’s consent. Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Withdrawal or Removal of the General Partner.”

As a result of these provisions, the price at which our common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price. Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Meetings; Voting.”

You will experience immediate and substantial dilution of $11.22 per common unit in the net tangible book value of your common units.

The assumed initial public offering price of our common units is substantially higher than the pro forma net tangible book value per common unit of the common units to be outstanding immediately after the offering. If you purchase common units in this offering you will incur immediate and substantial dilution in the pro forma net tangible book value per common unit from the price you pay for the common units. Please read “Dilution.”

Our general partner may cause us to issue additional common units or other equity securities without your approval, which would dilute your ownership interests.

Our general partner may cause us to issue an unlimited number of additional common units or other equity securities, including securities that rank senior to the common units, without unitholder approval. The issuance of additional common units or other equity securities will have the following effects:

 

   

your proportionate ownership interest in us will decrease;

 

   

the amount of cash available for distribution on each common unit may decrease;

 

   

the relative voting strength of each previously outstanding common unit may be diminished;

 

   

the ratio of taxable income to distributions may increase; and

 

   

the market price of the common units may decline.

Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Issuance of Additional Securities.”

The general partner interest in us or the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, Anadarko, the owner of our general partner, may transfer its ownership interest in our general partner to a third party, also without unitholder consent. Our new general partner or the new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner and to control the decisions taken by the board of directors and officers.

 

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If WES’s unitholders remove WES GP, we would lose our general partner interest and incentive distribution rights in WES and the ability to manage WES.

We currently manage WES through WES GP, our wholly owned subsidiary. WES’s partnership agreement, however, gives unitholders of WES the right to remove the general partner of WES upon the affirmative vote of holders of 66 2/3% of WES’s outstanding units. If WES GP were to be removed as general partner of WES, it would receive cash or WES common units in exchange for its 2.0% general partner interest and the incentive distribution rights and would lose its ability to manage WES. While the WES common units or cash WES GP would receive are intended under the terms of WES’s partnership agreement to fully compensate it in the event such an exchange is required, the value of these WES common units or of the investments WES GP makes with the cash over time may not be equivalent to the value of the general partner interest and the incentive distribution rights had it retained them. Furthermore, the conversion of the incentive distribution rights into WES common units would disproportionately impact the amount of cash distributions to which we are entitled with respect to increases in WES distributions. Please read “The Partnership Agreement of Western Gas Partners, LP—Withdrawal or Removal of the General Partner.”

In addition, if WES GP is removed as general partner of WES, we would face an increased risk of being deemed an investment company under the Investment Company Act of 1940 (the “Investment Company Act”).

Our ability to sell our partnership interests in WES may be limited by securities law restrictions and liquidity constraints.

Upon completion of this offering and the application of the use of proceeds therefrom, we will own 46,570,413 common units of WES, all of which will be unregistered and restricted securities, within the meaning of Rule 144 under the Securities Act of 1933. Unless we exercise our registration rights with respect to these common units, we will be limited to selling into the market in any three-month period an amount of WES common units that does not exceed the greater of 1.0% of the total number of WES common units outstanding or the average weekly reported trading volume of the WES common units for the four calendar weeks prior to the sale. In addition, we face contractual limitations under WES’s partnership agreement on our ability to sell WES general partner units and the incentive distribution rights and the market for such interests is illiquid.

You may not have limited liability if a court finds that unitholder action constitutes control of our business.

Under Delaware law, you could be held liable for our obligations to the same extent as a general partner if a court were to determine that the right or the exercise of the right by our unitholders as a group to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other action under our partnership agreement constituted participation in the “control” of our business. Additionally, the limitations on the liability of holders of limited partner interests for the liabilities of a limited partnership have not been clearly established in many jurisdictions.

Furthermore, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act (the “Delaware Act”) provides that, under some circumstances, a unitholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution. Please read “The Partnership Agreement of Western Gas Equity Partners, LP—Limited Liability” for a discussion of the implications of the limitations on liability to a unitholder.

If in the future we cease to manage and control WES, we may be deemed to be an investment company under the Investment Company Act.

If we cease to manage and control WES and are deemed to be an investment company under the Investment Company Act, we will either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our organizational structure or our contractual rights to fall outside the definition of an investment company. Registering as an investment company could, among other

 

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things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage, require us to add additional directors who are independent of us and our affiliates, and adversely affect the price of our common units. In addition, if we were required to register under the Investment Company Act, we would be taxed as a corporation for U.S. federal income tax purposes.

Our partnership agreement restricts the rights of unitholders owning 20% or more of our units.

Our unitholders’ voting rights are restricted by a provision in our partnership agreement which provides that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of our unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting our unitholders’ ability to influence the manner or direction of our management. As a result, the price at which our common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price.

WES may issue additional limited partner interests or other equity securities, which may increase the risk that WES will not have sufficient available cash to maintain or increase its cash distribution level.

WES has wide latitude to issue additional limited partner interests on the terms and conditions established by its general partner. We receive cash distributions from WES on the general partner interests, incentive distribution rights and limited partner interests that we hold. Because we expect a growing portion of the cash we receive from WES to be attributable to our ownership of the incentive distribution rights, payment of distributions on additional WES limited partner interests may increase the risk that WES will be unable to maintain or increase its quarterly cash distribution per unit, which in turn may reduce the amount of incentive distributions we receive and the available cash that we have to distribute to our unitholders.

If WES GP is not fully reimbursed or indemnified for obligations and liabilities it incurs in managing the business and affairs of WES, its value and, therefore, the value of our common units could decline.

WES GP, as the general partner of WES, may make expenditures on behalf of WES for which it will seek reimbursement from WES. Under Delaware partnership law, WES GP, in its capacity as the general partner of WES, has unlimited liability for the obligations of WES, such as its debts and environmental liabilities, except for those contractual obligations of WES that are expressly made without recourse to the general partner. WES GP has expressly made certain WES indebtedness recourse to it. To the extent WES GP incurs obligations on behalf of WES, it is entitled to be reimbursed or indemnified by WES. If WES is unable or unwilling to reimburse or indemnify WES GP, WES GP may not be able to satisfy those liabilities or obligations, which would reduce its cash flows to us.

The amount of cash distributions that we will be able to distribute to our unitholders will be reduced by the incremental costs associated with our being a publicly traded partnership, other general and administrative expenses and any reserves that our general partner believes it is prudent to maintain for the proper conduct of our business and for future distributions.

Before we can pay distributions to our unitholders, we will first pay our expenses, including the costs of being a publicly traded partnership, which we expect to be approximately $3.0 million per year, and other operating expenses, and may establish reserves for debt service requirements, if any, for future distributions during periods of limited cash flows or for other purposes. In addition, we may reserve funds to allow our wholly owned subsidiary, WES GP, to make capital contributions to WES in order to maintain WES GP’s 2.0% general partner interest in WES when WES issues additional common units.

 

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The price of our common units may be volatile, and a trading market that will provide you with adequate liquidity may not develop.

Prior to this offering there has been no public market for our common units. An active market for our common units may not develop or may not be sustained after this offering. The initial public offering price of our common units will be determined by negotiations between us and the underwriters, based on several factors that we discuss in the “Underwriting” section of this prospectus. This price may not be indicative of the market price for our common units after this initial public offering. The market price of our common units could be subject to significant fluctuations after this offering, and may decline below the initial public offering price. You may be unable to resell your common units at or above the initial public offering price. The following factors could affect our common unit price:

 

   

WES’s operating and financial performance and prospects;

 

   

quarterly variations in the rate of growth of our financial indicators, such as EBITDA, distributable cash flow per unit, net income and revenues;

 

   

changes in revenue or earnings estimates or publication of research reports by analysts;

 

   

speculation by the press or investment community;

 

   

sales of our common units by our unitholders;

 

   

announcements by WES or its competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, securities offerings or capital commitments;

 

   

general market conditions; and

 

   

domestic and international economic, legal and regulatory factors related to WES’s performance.

The equity markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common units. In addition, potential investors may be deterred from investing in our common units for various reasons, including the very limited number of publicly traded entities whose assets consist almost exclusively of partnership interests in a publicly traded partnership. The lack of liquidity may also contribute to significant fluctuations in the market price of our common units and limit the number of investors who are able to buy our common units.

Our common units and WES’s common units may not trade in relation or proportion to one another.

Our common units and WES’s common units may not trade in simple relation or proportion to one another. Instead, while the trading prices of our common units and WES’s common units are likely to follow generally similar broad trends, the trading prices may diverge because, among other things:

 

   

WES’s cash distributions to its common unitholders have a priority over distributions on its incentive distribution rights;

 

   

we participate in the distributions on WES GP’s general partner interest and incentive distribution rights in WES while WES’s common unitholders do not; and

 

   

we may pursue business opportunities separate and apart from WES or any of its affiliates.

The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public or private markets, including sales by Anadarko or other large holders.

After this offering, we will have 208,531,973 common units outstanding, or 211,994,713 common units if the underwriters exercise their over-allotment option. All of the 193,531,973 common units that are issued to Anadarko, representing 92.8% of our outstanding common units (assuming no exercise by the underwriters of their over-allotment option), will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters.

 

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Each of the lock-up agreements with the underwriters may be waived in the discretion of Barclays Capital Inc. and Citigroup Global Markets Inc. Sales by Anadarko or other large holders of a substantial number of our common units in the public markets following this offering, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities. In addition, under our partnership agreement, our general partner and its affiliates, including Anadarko, have registration rights relating to the offer and sale of any units that they hold, subject to certain limitations. Please read “Units Eligible for Future Sale.”

Increases in interest rates may cause the market price of our common units, or WES’s common units, to decline.

Interest rates may increase in the future, whether because of inflation, increased yields on U.S. Treasury obligations or otherwise. As is true with other master limited partnerships (the common units of which are often viewed by investors as yield-oriented securities), the price of our and WES’s common units are impacted by our and WES’s levels of cash distributions and implied distribution yields. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our common units or WES’s common units, and a rising interest rate environment could have an adverse impact on our unit price, WES’s unit price, and our and WES’s ability to make cash distributions at intended levels.

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

In April 2012, President Obama signed into law the JOBS Act. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes Oxley Act of 2002, (2) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (3) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (4) provide certain disclosure regarding executive compensation required of larger public companies or (5) hold unitholder advisory votes on executive compensation.

If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes- Oxley Act of 2002, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a publicly traded partnership, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Though we will be required to disclose material changes made to our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a publicly traded partnership, we will need to implement additional internal controls, reporting systems and procedures and hire additional accounting, finance and legal staff. Furthermore, while we generally must comply with Section 404 of the Sarbanes Oxley Act of

 

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2002 for our fiscal year ended December 31, 2012, we are not required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our first annual report subsequent to our ceasing to be an “emerging growth company” within the meaning of Section 2(a)(19) of the Securities Act. Accordingly, we may not be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our annual report for the fiscal year ending December 31, 2017. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed.

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.

Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a publicly traded partnership. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results will be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes Oxley Act of 2002. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our units.

The NYSE does not require a publicly traded partnership like us to comply with certain of its corporate governance requirements.

We have been approved to list our common units, subject to official notice of issuance, on the NYSE under the symbol “WGP.” Because we will be a publicly traded partnership, the NYSE does not require our general partner to have a majority of independent directors on its board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements.

Risks Related to Conflicts of Interest

Conflicts of interest exist and may arise in the future among us, WES and our respective general partners and affiliates, including Anadarko, the owner of our general partner. For a further discussion of conflicts of interest that may arise, please read “Conflicts of Interest and Fiduciary Duties.”

WES GP owes duties to WES’s unitholders that may conflict with our interests, including in connection with the terms of contractual agreements, the determination of cash distributions to be made by WES, and the determination of whether WES should make acquisitions and on what terms.

Conflicts of interest exist and may arise in the future as a result of the relationships between us and our affiliates, including WES GP, on the one hand, and WES and its limited partners, on the other hand. The directors and officers of WES GP have duties to manage WES in a manner beneficial to us, as WES GP’s owner. At the same time, WES GP, as the general partner of WES, has a duty to manage WES in a manner beneficial to WES and its limited partners. The board of directors of WES GP or its special committee will resolve any such conflict and have broad latitude to consider the interests of all parties to the conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

For example, conflicts of interest may arise in connection with the following:

 

   

the terms and conditions of any contractual agreements between us and our affiliates, including Anadarko, on the one hand, and WES, on the other hand;

 

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the determination of the amount of cash to be distributed to WES’s partners, including us, and the amount of cash to be reserved for the future conduct of WES’s business;

 

   

the determination of whether WES should make acquisitions and on what terms;

 

   

the determination of whether WES should use cash on hand, borrow or issue equity to raise cash to finance acquisitions or expansion capital projects, repay indebtedness, meet working capital needs, pay distributions or otherwise;

 

   

any decision we make in the future to engage in business activities independent of WES; and

 

   

the allocation of shared overhead expenses to WES and us.

Potential conflicts of interest may arise among our general partner, its affiliates and us. Our general partner has limited its state law fiduciary duties to us and our unitholders, which may permit it to favor its own interests to the detriment of us and our unitholders.

Upon completion of this offering, Anadarko, the owner of our general partner, will own a 92.8% limited partner interest in us. Conflicts of interest may arise among our general partner and its affiliates (including Anadarko), on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:

 

   

our general partner is allowed to take into account the interests of parties other than us in resolving conflicts of interest, which has the effect of limiting its state law fiduciary duty to our unitholders;

 

   

our general partner determines whether or not we incur debt and that decision may affect our or WES’s credit ratings;

 

   

our general partner will have limited liability and fiduciary duties under our partnership agreement, which will restrict the remedies available to our unitholders for actions that, without these limitations, might constitute breaches of fiduciary duty. As a result of purchasing common units, our unitholders consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law;

 

   

our general partner controls the enforcement of obligations owed to us by it and its affiliates;

 

   

our general partner decides whether to retain separate counsel, accountants or others to perform services for us;

 

   

our partnership agreement gives our general partner broad discretion in establishing financial reserves for the proper conduct of our business. These reserves will affect the amount of cash available for distribution to our unitholders;

 

   

our general partner determines the amount and timing of capital expenditures, borrowings, issuances of additional partnership securities and reserves, each of which can affect the amount of cash that is available for distribution to our unitholders;

 

   

our general partner determines which costs incurred by it and its affiliates are reimbursable by us; and

 

   

our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered on terms that are fair and reasonable to us or entering into additional contractual arrangements with any of these entities on our behalf.

Please read “Certain Relationships and Related Party Transactions—Our Relationship with WES and WES GP” and “Conflicts of Interest and Fiduciary Duties—Conflicts of Interest.”

 

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The duties of our general partner’s officers and directors may conflict with their duties as officers and directors of WES GP.

Our general partner’s officers and directors have duties to manage our business in a manner beneficial to us, our unitholders and the owner of our general partner, Anadarko. However, a majority of our general partner’s directors and all of its officers are also officers and/or directors of WES GP, which has duties to manage the business of WES in a manner beneficial to WES and WES’s unitholders. Consequently, these directors and officers may encounter situations in which their obligations to WES on the one hand, and us, on the other hand, are in conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

In addition, our general partner’s officers, who are also the officers of WES GP and certain of whom are officers of Anadarko, will have responsibility for overseeing the allocation of their own time and time spent by administrative personnel on our behalf and on behalf of WES and/or Anadarko. These officers face conflicts regarding these time allocations that may adversely affect our or WES’s results of operations, cash flows, and financial condition.

Anadarko may compete with us or WES, which could adversely affect our or WES’s ability to grow and our or WES’s results of operations and cash available for distribution.

Anadarko is not restricted in its ability to compete with us or WES. If Anadarko competes with us or WES, our or WES’s results of operations and cash available for distribution may be adversely affected.

Our partnership agreement replaces our general partner’s fiduciary duties to our unitholders.

Our partnership agreement contains provisions that eliminate and replace the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement:

 

   

permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner. Examples of decisions that our general partner may make in its individual capacity include whether to exercise its limited call right, how to exercise its voting rights with respect to any common units it owns, whether to exercise its registration rights and whether to consent to any merger or consolidation of our partnership or amendment to our partnership agreement;

 

   

provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning it believed the decisions were in the best interests of our partnership;

 

   

generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the special committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships among the parties involved, including other transactions that may be particularly advantageous or beneficial to us;

 

   

provides that in resolving conflicts of interest, it will be presumed that in making its decision the general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or us, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption; and

 

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provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the general partner or those other persons acted in bad faith or, in the case of a criminal matter, acted with knowledge that such person’s conduct was criminal.

In order to become a limited partner of our partnership, our unitholders are required to agree to be bound by the provisions in our partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

Our general partner has a call right that may require you to sell your common units at an undesirable time or price.

If at any time more than 95% of our outstanding common units are owned by our general partner and its affiliates, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the remaining units held by unaffiliated persons at a price that is not less than the then-current market price of the common units. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your common units. At the completion of this offering and assuming no exercise of the underwriters’ over-allotment option, affiliates of our general partner will own 92.8% of our common units. For additional information about the call right, please read “The Partnership Agreement of Western Gas Equity Partners, LP—Limited Call Right.”

Our general partner may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets without prior approval of our unitholders.

Our general partner may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets without prior approval of our unitholders. If our general partner at any time were to decide to incur debt and secure its obligations or indebtedness by all or substantially all of our assets, and if our general partner were to be unable to satisfy such obligations or repay such indebtedness, the lenders could seek to foreclose on our assets. The lenders could also sell all or substantially all of our assets under such foreclosure or other realization upon those encumbrances without prior approval of our unitholders, which would adversely affect the price of our common units.

Risks Inherent in WES’s Business

WES is dependent on Anadarko for a substantial majority of the natural gas that it gathers, treats, processes and transports. A material reduction in Anadarko’s production that is gathered, treated, processed or transported by WES would result in a material decline in WES’s revenues and cash available for distribution.

WES relies on Anadarko for a substantial majority of the natural gas that it gathers, treats, processes and transports. Approximately 75% and 76% of WES’s total natural gas gathering, transportation and treating throughput (excluding equity investment throughput) during the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, was comprised of natural gas production owned or controlled by Anadarko. Approximately 64% and 59% of WES’s total processing throughput (excluding equity investment throughput) during the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, was attributable to natural gas production owned or controlled by Anadarko. Anadarko may suffer a decrease in production volumes in the areas serviced by WES and is under no contractual obligation to maintain its production volumes dedicated to WES pursuant to the terms of its applicable gathering agreements. The loss of a significant portion of production volumes supplied by Anadarko would result in a material decline in WES’s revenues and its cash available for distribution. In addition, Anadarko may reduce its drilling activity in WES’s areas of operation or determine that drilling activity in other areas of operation is strategically more attractive. A shift in Anadarko’s focus away from WES’s areas of operation could result in reduced throughput on its systems and a material decline in its revenues and cash available for distribution.

 

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Because WES is substantially dependent on Anadarko as its primary customer and the ultimate owner of its general partner, any development that materially and adversely affects Anadarko’s operations, financial condition or market reputation could have a material and adverse impact on WES and us. Material adverse changes at Anadarko could restrict WES’s or our access to capital, make it more expensive to access the capital markets or increase the costs of WES’s or our borrowings.

WES is substantially dependent on Anadarko as its primary customer and the ultimate owner of its general partner and expects to derive a substantial majority of its revenues from Anadarko for the foreseeable future. As a result, any event, whether in WES’s area of operations or otherwise, that adversely affects Anadarko’s production, financial condition, leverage, market reputation, liquidity, results of operations or cash flows may adversely affect WES’s and our revenues and cash available for distribution. Accordingly, we and WES are indirectly subject to the business risks of Anadarko, some of which are the following:

 

   

the volatility of natural gas and oil prices, which could have a negative effect on the value of Anadarko’s oil and natural gas properties, its drilling programs or its ability to finance its operations;

 

   

the availability of capital on an economic basis to fund Anadarko’s exploration and development activities;

 

   

a reduction in or reallocation of Anadarko’s capital budget, which could reduce the gathering, transportation and treating volumes available to WES as a midstream operator, limit WES’s midstream opportunities for organic growth or limit the inventory of midstream assets WES may acquire from Anadarko;

 

   

Anadarko’s ability to replace reserves;

 

   

Anadarko’s operations in foreign countries, which are subject to political, economic and other uncertainties;

 

   

Anadarko’s drilling and operating risks, including potential environmental liabilities;

 

   

transportation capacity constraints and interruptions;

 

   

adverse effects of governmental and environmental regulation; and

 

   

losses from pending or future litigation.

Further, WES is subject to the risk of non-payment or non-performance by Anadarko, including with respect to its gathering and transportation agreements, its $260.0 million note receivable from Anadarko and its commodity price swap agreements. We cannot predict the extent to which Anadarko’s business would be impacted if conditions in the energy industry were to deteriorate, nor can we estimate the impact such conditions would have on Anadarko’s ability to perform under its gathering and transportation agreements, note receivable or commodity price swap agreements. Further, unless and until WES receives full repayment of the $260.0 million note receivable from Anadarko, WES will be subject to the risk of non-payment or late payment of the interest payments and principal of the note. Accordingly, any material non-payment or non-performance by Anadarko could reduce WES’s ability to make distributions to its partners, including us. Also, due to our and WES’s relationship with Anadarko, our and WES’s ability to access the capital markets, or the pricing or other terms of any capital markets transactions, may be adversely affected by any impairments to Anadarko’s financial condition or adverse changes in its credit ratings.

Any material limitations on our or WES’s ability to access capital as a result of such adverse changes at Anadarko could limit our or WES’s ability to obtain future financing under favorable terms, or at all, or could result in increased financing costs in the future. Similarly, material adverse changes at Anadarko could negatively impact our or WES’s unit price, limiting our or WES’s ability to raise capital through equity issuances or debt financing, or could negatively affect our or WES’s ability to engage in, expand or pursue our or its business activities, and could also prevent us or WES from engaging in certain transactions that might otherwise be considered beneficial to us or WES.

 

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Because of the natural decline in production from existing wells, WES’s success depends on its ability to obtain new sources of natural gas, which is dependent on certain factors beyond WES’s control. Any decrease in the volumes of natural gas that WES gathers, processes, treats and transports could adversely affect its business and operating results.

The volumes that support WES’s business are dependent on, among other things, the level of production from natural gas wells connected to its gathering systems and processing and treatment facilities. This production will naturally decline over time. As a result, WES’s cash flows associated with these wells will also decline over time. In order to maintain or increase throughput levels on its systems, WES must obtain new sources of natural gas. The primary factors affecting WES’s ability to obtain sources of natural gas include (i) the level of successful drilling activity near its systems, (ii) its ability to compete for volumes from successful new wells, to the extent such wells are not dedicated to its systems, and (iii) its ability to capture volumes currently gathered or processed by Anadarko or third parties.

While Anadarko has dedicated production from certain of its properties to WES, WES has no control over the level of drilling activity in its areas of operation, the amount of reserves associated with wells connected to its systems or the rate at which production from a well declines. In addition, WES has no control over Anadarko or other producers or their drilling or production decisions, which are affected by, among other things, the availability and cost of capital, prevailing and projected commodity prices, demand for hydrocarbons, levels of reserves, geological considerations, governmental regulations, the availability of drilling rigs and other production and development costs. Fluctuations in commodity prices can also greatly affect investments by Anadarko and third parties in the development of new natural gas reserves. Declines in natural gas prices have had a negative impact on natural gas exploration, development and production activity and, if sustained, could lead to a material decrease in such activity. Sustained reductions in exploration or production activity in WES’s areas of operation would lead to reduced utilization of its gathering, processing and treating assets.

Because of these factors, even if new natural gas reserves are known to exist in areas served by WES’s assets, producers (including Anadarko) may choose not to develop those reserves. Moreover, Anadarko may not develop the acreage it has dedicated to WES. If competition or reductions in drilling activity result in WES’s inability to maintain the current levels of throughput on its systems, it could reduce WES’s revenue and impair its ability to make cash distributions to its partners, including us.

Lower natural gas, NGL or oil prices could adversely affect WES’s business.

Lower natural gas, NGL or oil prices could impact natural gas and oil exploration and production activity levels and result in a decline in the production of natural gas and condensate, resulting in reduced throughput on WES’s systems. Any such decline could also potentially affect WES’s vendors’, suppliers’ and customers’ ability to continue operations. In addition, such a decline would reduce the amount of NGLs and condensate WES retains and sells. As a result, lower natural gas prices could have an adverse effect on WES’s business, results of operations, financial condition and its ability to make cash distributions to its partners, including us.

In general terms, the prices of natural gas, oil, condensate, NGLs and other hydrocarbon products fluctuate in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond WES’s control. For example, in recent years, market prices for natural gas have declined substantially from the highs achieved in 2008, and the increased supply resulting from the rapid development of shale plays throughout North America has contributed significantly to this trend. Factors impacting commodity prices include the following:

 

   

domestic and worldwide economic conditions;

 

   

weather conditions and seasonal trends;

 

   

the ability to develop recently discovered fields or deploy new technologies to existing fields;

 

   

the levels of domestic production and consumer demand, as affected by, among other things, concerns over inflation, geopolitical issues and the availability and cost of credit;

 

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the availability of imported or a market for exported liquefied natural gas (“LNG”);

 

   

the availability of transportation systems with adequate capacity;

 

   

the volatility and uncertainty of regional pricing differentials such as in the Mid-Continent or Rocky Mountains;

 

   

the price and availability of alternative fuels;

 

   

the effect of energy conservation measures;

 

   

the nature and extent of governmental regulation and taxation; and

 

   

the anticipated future prices of natural gas, NGLs and other commodities.

WES’s strategies to reduce its exposure to changes in commodity prices may fail to protect WES and could negatively impact its financial condition, thereby reducing its cash flows and ability to make distributions to partners, including us.

For the nine months ended September 30, 2012, approximately 35% of WES’s processing gross margin was generated under percent-of-proceeds and keep-whole arrangements pursuant to which the associated revenues and expenses are directly correlated with the prices of natural gas, condensate and NGLs. This percentage may significantly increase as a result of future acquisitions, if any.

WES pursues various strategies to seek to reduce its exposure to adverse changes in the prices for natural gas, condensate and NGLs. These strategies will vary in scope based upon the level and volatility of natural gas, condensate and NGL prices and other changing market conditions. WES currently has in place commodity price swap agreements with Anadarko expiring at various times through September 2015 to manage the commodity price risk otherwise inherent in its percent-of-proceeds and keep-whole contracts. To the extent that WES engages in price risk management activities such as the commodity price swap agreements, it may be prevented from realizing the full benefits of price increases above the levels set by those activities. In addition, WES’s commodity price management may expose it to the risk of financial loss in certain circumstances, including if the counterparties to its hedging or other price risk management contracts fail to perform under those arrangements.

On December 31, 2013, and on various dates thereafter, a portion of the commodity price swap agreements that WES has entered into with Anadarko will expire. WES may be unable to renew such agreements with Anadarko on similar terms or at all. If such agreements are renewed with Anadarko, they may be renewed at lower prices than those established in the agreements currently in place. In the event that WES is unable to renew agreements with Anadarko, it may seek to enter into third-party commodity price swap agreements or similar hedging arrangements. Any such market based hedging arrangement may be less favorable from a commodity pricing perspective and would likely expose WES to volumetric risk that it is currently not exposed to, because WES’s current commodity price swap agreements with Anadarko are based on actual WES volumes.

If WES is unable to effectively manage the risk associated with its contracts that have commodity price exposure, it could have a material adverse effect on WES’s business, results of operations, financial condition and ability to make cash distributions to its partners, including us.

WES may not be able to obtain funding on acceptable terms or at all. This may hinder or prevent WES from meeting its future capital needs.

Global financial markets and economic conditions have been, and continue to be, volatile. While WES’s sector has rebounded from lows seen in 2008, the repricing of credit risk and the current relatively weak economic conditions have made, and will likely continue to make, it difficult for some entities to obtain funding. In addition, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets generally has increased as many

 

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lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity at all or on terms similar to the borrower’s current debt, and reduced, or in some cases, ceased to provide funding to borrowers. Further, WES may be unable to obtain adequate funding under the WES RCF if its lending counterparties become unwilling or unable to meet their funding obligations. Due to these factors, WES cannot be certain that funding will be available if needed and to the extent required on acceptable terms. If funding is not available when needed, or is available only on unfavorable terms, WES may be unable to execute its business plans, complete acquisitions or otherwise take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on WES’s financial condition, results of operations, cash flows and ability to make cash distributions to its partners, including us.

Restrictions in the indentures governing WES’s 5.375% Senior Notes due 2021 (the “2021 Notes”) and 4.000% Senior Notes due 2022 (the “2022 Notes” and, together with the 2021 Notes, the “WES Notes”) or the WES RCF may limit WES’s ability to capitalize on acquisition and other business opportunities.

The operating and financial restrictions and covenants in the indentures governing the WES Notes and in the WES RCF and any future financing agreements could restrict WES’s ability to finance future operations or capital needs or to expand or pursue business activities associated with WES’s subsidiaries and equity investments. The WES RCF contains covenants that restrict or limit WES’s ability to do the following:

 

   

incur additional indebtedness or guarantee other indebtedness;

 

   

grant liens to secure obligations other than its obligations under the WES Notes or the WES RCF or agree to restrictions on its ability to grant additional liens to secure its obligations under the WES Notes or the WES RCF;

 

   

engage in transactions with affiliates;

 

   

make any material change to the nature of its business from the midstream energy business; or

 

   

enter into a merger, consolidate, liquidate, wind up or dissolve.

The WES RCF also contains various customary covenants, customary events of default and a maximum consolidated leverage ratio as of the end of each quarter (which is defined as the ratio of consolidated indebtedness as of the last day of a fiscal quarter to Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“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.

Debt WES owes or incurs in the future may limit its flexibility to obtain financing and to pursue other business opportunities.

WES’s indebtedness could have important consequences to WES, including the following:

 

   

its ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;

 

   

its funds available for operations, future business opportunities and distributions to unitholders will be reduced by that portion of its cash flows required to make interest payments on its debt;

 

   

it may be more vulnerable to competitive pressures or a downturn in its business or the economy generally; and

 

   

its flexibility in responding to changing business and economic conditions may be limited.

 

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WES’s ability to service its debt will depend upon, among other things, its future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond WES’s control. If WES’s operating results are not sufficient to service any future indebtedness, it will be forced to take actions such as reducing distributions, reducing or delaying its business activities, acquisitions, investments or capital expenditures, selling assets or seeking additional equity capital. WES may not be able to effect any of these actions on satisfactory terms or at all.

If Anadarko were to limit transfers of midstream assets to WES or if WES were to be unable to make acquisitions on economically acceptable terms from Anadarko or third parties, WES’s future growth would be limited. In addition, any acquisitions WES makes may reduce, rather than increase, its cash generated from operations on a per-unit basis.

WES’s ability to grow depends, in part, on its ability to make acquisitions that increase its cash generated from operations on a per-unit basis. The acquisition component of WES’s strategy is based, in large part, on its expectation of ongoing divestitures of midstream energy assets by industry participants, including, most notably, Anadarko. A material decrease in such divestitures would limit WES’s opportunities for future acquisitions and could adversely affect its ability to grow its operations and increase its distributions to unitholders.

If WES is unable to make accretive acquisitions from Anadarko or third parties, either because it is (i) unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, (ii) unable to obtain financing for these acquisitions on economically acceptable terms or (iii) outbid by competitors, then its future growth and ability to increase distributions will be limited. Furthermore, even if WES makes acquisitions that it believes will be accretive, these acquisitions may nevertheless result in a decrease in the cash generated from operations on a per-unit basis.

Any acquisition involves potential risks, including the following, among other things:

 

   

mistaken assumptions about volumes or the timing of those volumes, revenues or costs, including synergies;

 

   

an inability to successfully integrate the acquired assets or businesses;

 

   

the assumption of unknown liabilities;

 

   

limitations on rights to indemnity from the seller;

 

   

mistaken assumptions about the overall costs of equity or debt;

 

   

the diversion of management’s and employees’ attention from other business concerns;

 

   

unforeseen difficulties operating in new geographic areas; and

 

   

customer or key employee losses at the acquired businesses.

If WES consummates any future acquisitions, its capitalization and results of operations may change significantly.

The amount of cash WES has available for distribution to its partners, including us, depends primarily on its cash flows rather than on its profitability. As a result, WES may be prevented from making distributions, even during periods in which it records net income.

The amount of cash WES has available for distribution depends primarily upon its cash flows and not solely on profitability, which will be affected by capital expenditures and non-cash items. As a result, WES may make cash distributions for periods in which it records losses for financial accounting purposes and may not make cash distributions for periods in which it records net earnings for financial accounting purposes.

 

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WES typically does not obtain independent evaluations of natural gas reserves connected to its systems. Therefore, in the future, volumes of natural gas on WES’s systems could be less than WES anticipates.

WES typically does not obtain independent evaluations of natural gas reserves connected to its systems. Accordingly, WES does not have independent estimates of total reserves connected to its systems or the anticipated life of such reserves. If the total reserves or estimated life of the reserves connected to WES’s systems are less than WES anticipates, or the timeline for the development of reserves is greater than WES anticipates, and WES is unable to secure additional sources of natural gas, there could be a material adverse effect on its business, results of operations, financial condition and ability to make cash distributions to its partners, including us.

WES’s industry is highly competitive, and increased competitive pressure could adversely affect its business and operating results.

WES competes with similar enterprises in its areas of operation. WES’s competitors may expand or construct midstream systems that would create additional competition for the services it provides to its customers. In addition, WES’s customers, including Anadarko, may develop their own midstream systems in lieu of using WES’s. WES’s ability to renew or replace existing contracts with its customers at rates sufficient to maintain current revenues and cash flows could be adversely affected by the activities of its competitors and customers. All of these competitive pressures could have a material adverse effect on WES’s business, results of operations, financial condition and ability to make cash distributions to its partners, including us.

WES’s results of operations could be adversely affected by asset impairments.

If natural gas and NGL prices decrease, WES may be required to write down the value of its midstream properties if the estimated future cash flows from these properties fall below their net book value. Because WES is an affiliate of Anadarko, the assets WES acquires from Anadarko are recorded at Anadarko’s carrying value prior to the transaction. Accordingly, WES may be at an increased risk for impairments because the initial book values of substantially all of its assets do not have a direct relationship with, and in some cases could be significantly higher than, the amounts WES paid to acquire such assets.

Further, at September 30, 2012, WES had approximately $87.9 million of goodwill on its balance sheet. Similar to the carrying value of the assets WES acquired from Anadarko, WES’s goodwill is an allocated portion of Anadarko’s goodwill, which WES recorded as a component of the carrying value of the assets it acquired from Anadarko. As a result, WES may be at increased risk for impairments relative to entities who acquire their assets from third parties or construct their own assets, as the carrying value of WES’s goodwill does not reflect, and in some cases is significantly higher than, the difference between the consideration WES paid for its acquisitions and the fair value of the net assets on the acquisition date.

Goodwill is not amortized, but instead must be tested at least annually for impairments, and more frequently when circumstances indicate likely impairments, by applying a fair-value-based test. Goodwill is deemed impaired to the extent that its carrying amount exceeds its implied fair value. Various factors could lead to goodwill impairments that could have a substantial negative effect on WES’s profitability, such as if WES is unable to maintain the throughput on its asset base or if other adverse events, such as sustained lower oil and natural gas prices, reduce the fair value of the associated reporting unit. Future non-cash asset impairments could negatively affect WES’s results of operations.

 

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If third-party pipelines or other facilities interconnected to WES’s gathering, transportation, treating or processing systems become partially or fully unavailable, or if the volumes WES gathers or transports do not meet the quality requirements of such pipelines or facilities, WES’s revenues and cash available for distribution could be adversely affected.

WES’s natural gas gathering, transportation, treating and processing systems are connected to other pipelines or facilities, the majority of which are owned by third parties. The continuing operation of such third-party pipelines or facilities is not within WES’s control. If any of these pipelines or facilities becomes unable to transport, treat or process natural gas or NGLs, or if the volumes WES gathers or transports do not meet the quality requirements of such pipelines or facilities, WES’s revenues and cash available for distribution could be adversely affected.

WES’s interstate natural gas transportation assets and operations are subject to regulation by FERC, which could have an adverse effect on WES’s revenues and WES’s ability to make distributions.

MIGC LLC (“MIGC”), an interstate natural gas transportation system owned by WES, is subject to regulation by FERC under the Natural Gas Act of 1938 (the “NGA”) and the EPAct 2005. Under the NGA, FERC has the authority to regulate natural gas companies that provide natural gas pipeline transportation services in interstate commerce. Federal regulation extends to such matters as:

 

   

rates, services and terms and conditions of service;

 

   

the certification and construction of new facilities;

 

   

the acquisition, extension, disposition or abandonment of facilities;

 

   

the maintenance of accounts and records;

 

   

relationships between affiliated companies involved in certain aspects of the natural gas business; and

 

   

market manipulation in connection with interstate sales, purchases or transportation of natural gas.

FERC allows natural gas companies to recover an allowance for income taxes in rates only to the extent the natural gas company or its owners, such as WES’s unitholders, are subject to U.S. income tax. This policy affects whom WES allows to own its units, and if WES is not successful in limiting ownership of its units to persons or entities subject to U.S. income tax, WES’s FERC-regulated rates and revenues could be adversely affected.

In addition, if WES fails to comply with all applicable FERC-administered statutes, rules, regulations and orders, WES could be subject to substantial penalties and fines. Under the EPAct 2005, FERC has civil penalty authority under the NGA to impose penalties for current violations of up to $1.0 million per day for each violation. FERC also has the power to order disgorgement of profits from transactions deemed to violate the NGA and EPAct 2005.

A change in the jurisdictional characterization of some of WES’s assets by federal, state or local regulatory agencies or a change in policy by those agencies could result in increased regulation of its assets, which could cause WES’s revenues to decline and operating expenses to increase.

WES believes that its natural gas pipelines, other than MIGC, meet the traditional tests FERC has used to determine if a pipeline is a gathering pipeline and is, therefore, not subject to FERC jurisdiction although FERC has not made any determinations with respect to the jurisdictional status of any of WES’s pipelines other than MIGC. The distinction between FERC-regulated transmission services and federally unregulated gathering services has been the subject of ongoing litigation and, over time, FERC policy concerning which activities it regulates and which activities are excluded from its regulation has changed. FERC makes jurisdictional determinations on a case-by-case basis. The classification and regulation of WES’s gathering facilities are subject to change based on future determinations by FERC, the courts or Congress. State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements and complaint-based rate regulation. In recent years, FERC has regulated the gathering activities of

 

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interstate pipeline transmission companies more lightly, which has resulted in a number of such companies transferring gathering facilities to unregulated affiliates. As a result of these activities, natural gas gathering may begin to receive greater regulatory scrutiny at both the state and federal levels.

Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs, operating restrictions or delays in the completion of oil and gas wells, which could decrease the need for WES’s midstream services.

Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations such as shales. The process involves the injection of water, sand and chemicals under pressure into the formation to fracture the surrounding rock and stimulate production. The process is typically regulated by state oil and natural gas commissions but the Environmental Protection Agency (the “EPA”) has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel under the Safe Drinking Water Act and recently released draft permitting guidance for hydraulic fracturing using diesel in fracturing fluids in those states where the EPA is the permitting authority. In addition, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, were proposed in recent sessions of Congress. Congress continues to consider legislation to amend the Safe Drinking Water Act.

Certain states in which WES operates, including Colorado, Texas and Wyoming, have adopted, and other states are considering adopting, regulations that could impose more stringent permitting, public disclosure, and well construction requirements on hydraulic fracturing operations or otherwise seek to ban fracturing activities altogether. In December 2011, the Colorado Oil and Gas Conservation Commission adopted rules requiring hydraulic fracturing operators to disclose information about wells and fracturing fluid to the public. The Texas Railroad Commission also adopted rules in December 2011 requiring that the well operator disclose, on an internet website, the list of chemical ingredients used in their hydraulic fracturing operations, subject to the requirements of federal Occupational Safety and Health Act (“OSHA”), and also file the list of chemicals with the Texas Railroad Commission with the well completion report. The total volume of water used to hydraulically fracture a well must also be disclosed to the public and filed with the Texas Railroad Commission. In Wyoming, operators are required to disclose information about chemical additives used in their hydraulic fracturing operations and well stimulations. In addition to state laws, local land use restrictions, such as city ordinances, may restrict or prohibit the performance of well drilling in general and/or hydraulic fracturing in particular. Other states are considering and may adopt more restrictive regulations of hydraulic fracturing beyond what has been discussed above for Texas, Wyoming and Colorado. In the event that federal, state, local or municipal legal restrictions are adopted in areas where WES’s oil and gas exploration and production customers operate, those operators may incur additional costs to comply with such requirements that may be significant in nature, experience delays or curtailment in the pursuit of exploration, development, or production activities, and perhaps even be precluded from the drilling of natural gas wells, which events could decrease the need for WES’s midstream services and could adversely affect its financial position, results of operations and cash flows, and ability to make distributions to its partners, including us. Increased regulation of the hydraulic fracturing process could also lead to greater opposition, including litigation, to oil and gas production activities using hydraulic fracturing techniques.

Furthermore, a number of federal agencies are analyzing, or have been requested to review, a variety of environmental issues associated with hydraulic fracturing. For example, the EPA has commenced a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater, with initial results expected to be available by late 2012 and final results by 2014. In addition, in May 2012, the U.S. Department of the Interior released a draft rule regarding hydraulic fracturing on federal lands that would require disclosure of chemicals used in the fracturing process and establish minimum criteria for well-bore integrity and disposal of flowback water generated during the fracturing process. Also in May 2012, the Bureau of Land Management

 

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issued a proposed rule that would require public disclosure of chemicals used in hydraulic fracturing operations, and impose other operational requirements for all hydraulic fracturing operations on federal lands, including Native American trust lands. These ongoing or proposed reviews, depending on the degree to which they are pursued and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the Safe Drinking Water Act or other regulatory mechanisms.

Climate change legislation or regulatory initiatives could increase WES’s operating and capital costs and could have the indirect effect of decreasing throughput available to WES’s systems or demand for the products it gathers, processes and transports.

Methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of oil, natural gas, and refined petroleum products, are greenhouse gases (“GHGs”). In December 2009, the EPA issued an Endangerment Finding which determined that emissions of GHGs present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. Based on its finding, the EPA has adopted regulations under existing provisions of the federal Clean Air Act that establish motor vehicle GHG emission standards and also require certain construction and operating permit reviews for GHG emissions from certain large stationary sources under the Prevention of Significant Deterioration (“PSD”) and Title V permit programs. These EPA rulemakings could adversely affect WES’s operations and restrict or delay its ability to obtain air permits for new or modified facilities. The EPA also published regulations that require onshore and offshore oil and natural gas production and onshore oil and natural gas processing, transmission, storage, and distribution activities, which include certain of WES’s operations, to monitor and report GHG emissions from covered facilities on an annual basis. In addition, Congress has from time to time considered legislation to reduce emissions of GHG, and numerous states have already taken legal measures to reduce emissions of GHG, primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. The increased costs of operations or delays in drilling that could be associated with climate change legislation may reduce drilling activity by Anadarko or third-party producers in WES’s areas of operation, with the effect of reducing the throughput available to its systems. Further, the adoption of any legislation or regulations that requires reporting of GHG or otherwise limits emissions of GHG from WES’s equipment and operations could require WES to incur costs to reduce emissions of GHG associated with its operations or could adversely affect demand for the natural gas and NGLs WES gathers and processes. Such developments could materially adversely affect WES’s revenues, results of operations and cash available for distribution to its partners, including us.

The recent adoption of derivatives legislation by the U.S. Congress could have an adverse effect on WES’s ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with its business.

The U.S. Congress recently adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act which, among other provisions, establishes federal oversight and regulation of the over-the-counter derivatives market and entities, such as WES or Anadarko, that participate in that market. In its rulemaking under the new legislation, the Commodities Futures Trading Commission (the “CFTC”) has proposed regulations to set position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalent. Certain bona fide hedging transactions or positions would be exempt from these position limits. It is not possible at this time to predict when the CFTC will finalize these regulations. The financial reform legislation may also require WES to comply with margin requirements and with certain clearing and trade-execution requirements in connection with its commodity price management activities, although the application of those provisions to WES is uncertain at this time. The financial reform legislation may also require some counterparties to spin off some of their derivatives activities to separate entities, which may not be as creditworthy. The new legislation and any new regulations could significantly increase the cost of derivative contracts (including through requirements to post collateral which could adversely affect WES’s available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks WES encounters, reduce WES’s ability to monetize or restructure its existing commodity price

 

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contracts, and increase WES’s exposure to less creditworthy counterparties. If WES reduces its use of commodity price contracts as a result of the legislation and regulations, WES’s results of operations may become more volatile and its cash flows may be less predictable, which could adversely affect WES’s ability to plan for and fund capital expenditures and make cash distributions to WES’s partners, including us.

WES may incur significant costs and liabilities resulting from pipeline integrity programs and related repairs.

Pursuant to the Pipeline Safety Improvement Act of 2002, as reauthorized and amended by the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006 and the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 (the “2011 Pipeline Safety Act”), the Department of Transportation (“DOT”) through the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) has adopted regulations requiring pipeline operators to develop integrity management programs for transmission pipelines located where a leak or rupture could do the most harm. The regulations require the operators of covered pipelines to:

 

   

perform ongoing assessments of pipeline integrity;

 

   

identify and characterize applicable threats to pipeline segments that could impact a high consequence area;

 

   

improve data collection, integration and analysis;

 

   

repair and remediate the pipeline as necessary; and

 

   

implement preventive and mitigating actions.

In addition, states have adopted regulations similar to existing DOT regulations for intrastate gathering and transmission lines. At this time, WES cannot predict the ultimate cost of compliance with this regulation, as the cost will vary significantly depending on the number and extent of any repairs found to be necessary as a result of the pipeline integrity testing. The results of these tests could cause WES to incur significant and unanticipated capital and operating expenditures or repairs or upgrades deemed necessary to ensure the continued safe and reliable operations of its gathering and transmission lines.

Pipeline safety laws and regulations expanding integrity management programs or requiring the use of certain safety technologies could require WES to use more comprehensive and stringent safety controls and subject WES to increased capital and operating costs.

On January 3, 2012, President Obama signed the 2011 Pipeline Safety Act, which, among other things, increases the maximum civil penalty for pipeline safety violations and directs the Secretary of Transportation to promulgate rules or standards relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation and testing to confirm the material strength of pipe operating above 30% of specified minimum yield strength in high consequence areas. On August 13, 2012, the PHMSA published a proposed rulemaking consistent with the signed act that, once finalized, will increase the maximum administrative civil penalties for violation of the pipeline safety laws and regulations after January 3, 2012 to $200,000 per violation per day of violation, with a maximum of $2,000,000 for a related series of violations. These civil penalty and safety enhancement requirements could impose increased civil penalties on WES for pipeline safety violations. In addition, the PHMSA published a final rule in May 2011 expanding pipeline safety requirements including added reporting obligations and integrity management standards to certain rural low-stress hazardous liquid pipelines that were not previously regulated in such manner. Also, in August 2011, the PHMSA published an advance notice of proposed rulemaking in which the agency is seeking public comment on a number of changes to regulations governing the safety of gas transmission pipelines, gathering lines and related facilities. The adoption of these and other laws or regulations that apply more comprehensive or stringent safety standards to gathering lines could require WES to install new or modified safety controls, pursue added capital projects, or conduct maintenance programs on an accelerated basis, all of which could require WES to incur increased operational costs that could be significant and have a material adverse effect on its financial position or results of operations and ability to make distributions to its partners, including us.

 

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WES is subject to stringent environmental laws and regulations that may expose it to significant costs and liabilities.

WES’s operations are subject to stringent and complex federal, state and local environmental laws and regulations that govern the discharge of materials into the environment or otherwise relate to environmental protection. Examples of these laws include the following:

 

   

the federal Clean Air Act and analogous state laws that impose obligations related to emissions of air pollutants;

 

   

the federal Comprehensive Environmental Response, Compensation and Liability Act and analogous state laws that require and regulate the cleanup of hazardous substances that have been released at properties currently or previously owned or operated by WES or at locations to which WES’s wastes are or have been transported for disposal;

 

   

the Federal Water Pollution Control Act, also known as the Clean Water Act, and analogous state laws that regulate discharges from WES’s facilities into state and federal waters, including wetlands;

 

   

the federal Resources Conservation and Recovery Act and analogous state laws that impose requirements for the storage, treatment and disposal of solid and hazardous waste from WES’s facilities; and

 

   

the Toxic Substances Control Act and analogous state laws that impose requirements on the use, storage and disposal of various chemicals and chemical substances at WES’s facilities.

These laws and regulations may impose numerous obligations that are applicable to WES’s operations, including the acquisition of permits to conduct regulated activities, the incurrence of capital expenditures to limit or prevent releases of materials from WES’s pipelines and facilities, and the imposition of substantial liabilities for pollution resulting from WES’s operations or existing at its owned or operated facilities. Numerous governmental authorities, such as the EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly corrective actions. Failure to comply with these laws, regulations and permits may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations and the issuance of injunctions limiting or preventing some or all of WES’s operations.

There is an inherent risk of incurring significant environmental costs and liabilities in connection with WES’s operations due to historical industry operations and waste disposal practices, WES’s handling of hydrocarbon wastes and potential emissions and discharges related to its operations. Joint and several strict liability may be incurred, without regard to fault, under certain of these environmental laws and regulations in connection with discharges or releases of substances or wastes on, under or from WES’s properties and facilities, many of which have been used for midstream activities for many years, often by third parties not under WES’s control. Private parties, including the owners of the properties through which WES’s gathering or transportation systems pass and facilities where WES’s wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. In addition, changes in environmental laws and regulations occur frequently, and any such changes that result in more stringent and costly waste handling, storage, transport, disposal or remediation requirements could have a material adverse effect on WES’s results of operations or financial condition. Finally, future federal and/or state restrictions, caps, or taxes on GHG emissions that may be passed in response to climate change or hydraulic fracturing concerns may impose additional capital investment requirements, increase WES’s operating costs and reduce the demand for its services.

 

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Recently finalized rules regulating air emissions from natural gas processing operations could cause WES to incur increased capital expenditures and operating costs, which may be significant.

On August 16, 2012, the EPA published final rules that establish new air emission controls for natural gas and NGL production, processing and transportation activities, including New Source Performance Standards to address emissions of sulfur dioxide and volatile organic compounds, and a separate set of emission standards to address hazardous air pollutants frequently associated with production and processing activities. Among other things, the rules establish specific requirements regarding emissions from compressors and controllers at natural gas gathering and boosting stations and processing plants together with dehydrators and storage tanks at natural gas processing plants, compressor stations and gathering and boosting stations. In addition, the rules establish new requirements for leak detection and repair of leaks at natural gas processing plants that exceed 500 parts per million in concentration. WES is currently reviewing this new rule and assessing its potential impacts on WES’s operations. Compliance with these requirements may require modifications to certain of WES’s operations, including the installation of new equipment to control emissions from WES’s compressors that could result in significant costs, including increased capital expenditures and operating costs, and could adversely impact WES’s business.

WES’s construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect its results of operations and financial condition.

One of the ways WES intends to grow its business is through the construction of new midstream assets. The construction of additions or modifications to WES’s existing systems and the construction of new midstream assets involve numerous regulatory, environmental, political and legal uncertainties that are beyond WES’s control. Construction activities could be subject to state, county and local ordinances that restrict the time, place or manner in which those activities may be conducted so as to reduce or mitigate nuisance-type conditions, including excessive levels of dust or noise or increased traffic congestion. Construction projects may also require the expenditure of significant amounts of capital, and financing may not be available on economically acceptable terms or at all. If WES undertakes these projects, they may not be completed on schedule, at the budgeted cost, or at all. Moreover, WES’s revenues may not increase immediately upon the expenditure of funds on a particular project. For instance, if WES expands a pipeline, the construction may occur over an extended period of time, yet WES will not receive any material increases in revenues until the project is completed. Moreover, WES could construct facilities to capture anticipated future growth in production in a region in which such growth does not materialize. Since WES is not engaged in the exploration for and development of natural gas and oil reserves, WES often does not have access to estimates of potential reserves in an area prior to constructing facilities in that area. To the extent WES relies on estimates of future production in its decision to construct additions to its systems, such estimates may prove to be inaccurate as a result of the numerous uncertainties inherent in estimating quantities of future production. As a result, new facilities may not be able to attract enough throughput to achieve WES’s expected investment return, which could adversely affect its results of operations and financial condition. In addition, the construction of additions to WES’s existing assets may require it to obtain new rights-of-way. WES may be unable to obtain such rights-of-way and may, therefore, be unable to connect new natural gas volumes to its systems or capitalize on other attractive expansion opportunities. Additionally, it may become more expensive for WES to obtain new rights-of-way or to renew existing rights-of-way. If the cost of renewing existing or obtaining new rights-of-way increases, WES’s cash flows could be adversely affected.

WES has partial ownership interests in joint venture legal entities, which affect its ability to operate and/or control these entities. In addition, WES may be unable to control the amount of cash it will receive or retain from the operation of these entities and WES could be required to contribute significant cash to fund its share of their operations, which could adversely affect WES’s ability to distribute cash to its partners, including us.

WES’s inability, or limited ability, to control the operations and/or management of joint venture legal entities in which it has a partial ownership interest may result in WES receiving or retaining less than the amount

 

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of cash it expects. WES also may be unable, or limited in its ability, to cause any such entity to effect significant transactions such as large expenditures or contractual commitments, the construction or acquisition of assets, or the borrowing of money.

In addition, for the Fort Union, White Cliffs and Rendezvous entities in which WES has a minority ownership interest, WES will be unable to control ongoing operational decisions, including the incurrence of capital expenditures or additional indebtedness that WES may be required to fund. Further, Fort Union, White Cliffs or Rendezvous may establish reserves for working capital, capital projects, environmental matters and legal proceedings, that would similarly reduce the amount of cash available for distribution. Any of the above could significantly and adversely impact WES’s ability to make cash distributions to its partners, including us.

Further, in connection with the acquisition of its membership interest in Chipeta, WES became party to Chipeta’s limited liability company agreement (as amended and restated). Among other things, the Chipeta LLC agreement provides that to the extent available, Chipeta will distribute available cash, as defined in the Chipeta LLC agreement, to its members quarterly in accordance with those members’ membership interests. Accordingly, WES may be required to distribute a portion of Chipeta’s cash balances, which are included in the cash balances in its consolidated balance sheets, to the other Chipeta members.

WES does not own all of the land on which its pipelines and facilities are located, which could result in disruptions to WES’s operations.

WES does not own all of the land on which its pipelines and facilities have been constructed, and WES is, therefore, subject to the possibility of more onerous terms and/or increased costs to retain necessary land use if WES does not have valid rights-of-way or if such rights-of-way lapse or terminate. WES obtains the rights to construct and operate its pipelines on land owned by third parties and governmental agencies for a specific period of time. WES’s loss of these rights, through its inability to renew right-of-way contracts or otherwise, could have a material adverse effect on WES’s business, results of operations, financial condition and ability to make cash distributions to WES’s partners, including us.

WES’s business involves many hazards and operational risks, some of which may not be fully covered by insurance. If a significant accident or event occurs for which WES is not fully insured, its operations and financial results could be adversely affected.

WES’s operations are subject to all of the risks and hazards inherent in gathering, processing, compressing, treating and transporting natural gas, condensate and NGLs, including the following:

 

   

damage to pipelines and plants, related equipment and surrounding properties caused by hurricanes, tornadoes, floods, fires and other natural disasters and acts of terrorism;

 

   

inadvertent damage from construction, farm and utility equipment;

 

   

leaks of natural gas and other hydrocarbons or losses of natural gas as a result of the malfunction of equipment or facilities;

 

   

leaks of natural gas containing hazardous quantities of hydrogen sulfide from WES’s Pinnacle gathering system or Bethel treating facility;

 

   

fires and explosions; and

 

   

other hazards that could also result in personal injury, loss of life, pollution and/or suspension of operations.

These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage. These risks may also result in curtailment or suspension of WES’s operations. A natural disaster or other hazard affecting the areas in which

 

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WES operates could have a material adverse effect on its operations. WES is not fully insured against all risks inherent in its business. For example, WES does not have any property insurance on its underground pipeline systems that would cover damage to the pipelines. In addition, although WES is insured for environmental pollution resulting from environmental accidents that occur on a sudden and accidental basis, WES may not be insured against all environmental accidents that might occur, some of which may result in toxic tort claims. If a significant accident or event occurs for which WES is not fully insured, it could adversely affect WES’s operations and financial condition. Furthermore, WES may not be able to maintain or obtain insurance of the type and amount it desires at reasonable rates. As a result of market conditions, premiums and deductibles for certain of WES’s insurance policies may substantially increase. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. Additionally, WES may be unable to recover from prior owners of its assets, pursuant to certain indemnification rights, for potential environmental liabilities.

WES is exposed to the credit risk of third-party customers, and any material non-payment or non-performance by these parties, including with respect to WES’s gathering, processing and transportation agreements, could reduce WES’s ability to make distributions to its unitholders.

On some of its systems, WES relies on a significant number of third-party customers for substantially all of its revenues related to those assets. The loss of all or even a portion of the contracted volumes of these customers, as a result of competition, creditworthiness, inability to negotiate extensions, or replacements of contracts or otherwise, could reduce WES’s ability to make cash distributions to its partners, including us.

The loss of, or difficulty in attracting and retaining, experienced personnel could reduce WES’s competitiveness and prospects for future success.

The successful execution of WES’s growth strategy and other activities integral to its operations will depend, in part, on WES’s ability to attract and retain experienced engineering, operating, commercial and other professionals. Competition for such professionals is intense. If WES cannot retain its technical personnel or attract additional experienced technical personnel, WES’s ability to compete could be adversely impacted.

WES is required to deduct estimated future maintenance capital expenditures from operating surplus, which may result in less cash available for distribution to unitholders than if actual maintenance capital expenditures were deducted.

WES’s partnership agreement requires it to deduct estimated, rather than actual, maintenance capital expenditures from operating surplus. The amount of estimated maintenance capital expenditures deducted from operating surplus will be subject to review and change by WES’s special committee at least once a year. In years when WES’s estimated maintenance capital expenditures are higher than actual maintenance capital expenditures, the amount of cash available for distribution will be lower than if actual maintenance capital expenditures were deducted from operating surplus. If WES underestimates the appropriate level of estimated maintenance capital expenditures, it may have less cash available for distribution in future periods when actual capital expenditures begin to exceed its previous estimates. Over time, if WES does not set aside sufficient cash reserves or have sufficient sources of financing available to make the expenditures required to maintain its asset base, WES may be unable to pay distributions at the anticipated level and could be required to reduce its distributions.

Tax Risks to Our Common Unitholders

In addition to reading the following risk factors, please read “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

 

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Our taxation as a flow-through entity depends on our status as a partnership for U.S. federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. Likewise, WES’s taxation as a flow-through entity depends on its status as a partnership for U.S. federal income tax purposes, as well as WES’s not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat WES or us as a corporation for federal income tax purposes or either WES or we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to you could be substantially reduced.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for U.S. federal income tax purposes. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service (the “IRS”) on this or any other tax matter affecting us. The value of our investment in WES depends largely on WES being treated as a partnership for U.S. federal income tax purposes.

Despite the fact that we are organized as a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. Although we do not believe, based upon our current operations, that we will be so treated, a change in our business (or a change in current law) could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state income tax at varying rates. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flows and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.

If WES were treated as a corporation for federal income tax purposes, it would pay federal income tax on its taxable income at the corporate tax rate. Distributions to us would generally be taxable again as corporate distributions, and, in general, no income, gains, losses, deductions, or credits would flow through to us. As a result, there would be a material reduction in our anticipated cash flow, likely causing a substantial reduction in the value of our common units.

In Texas, we will be subject to an entity-level tax on any portion of our income that is generated in Texas in the prior year. Imposition of any additional such taxes on us or an increase in the existing tax rates would reduce the cash available for distribution to our unitholders.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, from time to time members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Currently, one such legislative proposal would eliminate the qualifying income exception upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. We are unable to predict whether any of these changes or other proposals will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units. Any modifications to the U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible to meet the expectation for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes.

 

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You will be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.

Because our unitholders will be treated as partners to whom we will allocate taxable income that could be different in amount than the cash we distribute, you will be required to pay any federal income taxes and, in some cases, state and local income taxes on your share of our taxable income whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from that income.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the constructive termination of our partnership for federal income tax purposes.

We will be considered to have terminated as a partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Immediately following this offering, Anadarko will indirectly own more than 50% of the total interests in our capital and profits. Therefore, a transfer of all or a portion of Anadarko’s indirect interests in us could result in a constructive termination of us as a partnership for federal income tax purposes as well as a constructive termination of WES as a partnership for federal income tax purposes due to the deemed transfer of our interests in WES as a result of our termination. A constructive termination of us as a partnership for federal income tax purposes would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income, including our share of the taxable income of WES to the extent WES is also treated as having terminated as a partnership for federal income tax purposes. In the case of a unitholder reporting on a taxable year other than the calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. A constructive termination would not affect our classification as a partnership for federal income tax purposes, but instead, after our termination we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Constructive Termination” for a discussion of the consequences of a constructive termination for federal income tax purposes.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income result in a decrease in your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture of depreciation deductions and certain other items. In addition, because the amount realized includes a unitholder’s share of our liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may result in adverse tax consequences to them.

Investments in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (or “IRAs”), and non-U.S. persons raise issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S.

 

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persons will be reduced by withholding taxes, and non-U.S. persons will be required to file U.S. federal tax returns and pay tax on their shares of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.

If the IRS contests the federal income tax positions we or WES take, the market for our common units or WES’s common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to you.

The IRS may adopt positions that differ from the positions we or WES take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we or WES take. A court may not agree with some or all of the positions we or WES take. Any contest by the IRS may materially and adversely impact the market for our common units or WES’s common units and the price at which they trade. Our costs of any contest by the IRS will be borne indirectly by our unitholders because the costs will reduce our cash available for distribution.

We will treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we adopt.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We generally prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. Nonetheless, we allocate certain deductions for depreciation of capital additions based upon the date the underlying property is placed in service. The use of this proration method may not be permitted under existing Treasury Regulations, and although the U.S. Treasury Department issued proposed Treasury Regulations allowing a similar monthly simplifying convention, such regulations are not final and do not specifically authorize the use of the proration method we have adopted. Accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to successfully challenge our proration method, we may be required to change the allocation of items of income, gain, loss, and deduction among our unitholders.

A unitholder whose common units are loaned to a “short seller” to cover a short sale of common units may be considered as having disposed of those common units. If so, he would no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

Because there is no tax concept of loaning a partnership interest, a unitholder whose common units are loaned to a “short seller” to cover a short sale of common units may be considered as having disposed of the loaned units. In that case, he may no longer be treated for tax purposes as a partner with respect to those common

 

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units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller should modify any applicable brokerage account agreements to prohibit their brokers from borrowing their common units.

You will likely be subject to state and local taxes and return filing requirements in states where you do not live as a result of investing in our common units.

In addition to U.S. federal income taxes, you will likely be subject to other taxes, including foreign, state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if you do not live in any of those jurisdictions. You will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements. As we or WES make acquisitions or expand our business, we or WES may own assets or conduct business in additional states or foreign jurisdictions that impose a personal income tax. It is your responsibility to file all U.S. federal, foreign, state and local tax returns. Our counsel has not rendered an opinion on the foreign, state or local tax consequences of an investment in our common units.

 

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USE OF PROCEEDS

We expect to receive net proceeds of approximately $281.5 million from the sale of our common units assuming an initial public offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts, the structuring fee and offering expenses. We will use the net proceeds from this offering as follows:

 

   

to purchase from WES 5,997,174 common units representing limited partner interests in WES for approximately $275.9 million; and

 

   

to make a capital contribution to WES on behalf of WES GP of approximately $5.6 million in exchange for 122,391 WES general partner units in order to maintain WES GP’s 2.0% general partner interest in WES.

We will use any net proceeds from the exercise of the underwriters’ over-allotment option to purchase from WES additional common units and a corresponding number of general partner units.

Please read “Prospectus Summary—Our Structure” for a discussion of the impact on our equity capitalization of a change in the public offering price of our common units or the number of common units sold in this offering.

 

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CAPITALIZATION

The following table shows our cash and cash equivalents and our capitalization as of September 30, 2012:

 

   

on a consolidated historical basis; and

 

   

on a pro forma basis after giving effect to:

 

   

the sale of 15,000,000 common units in this offering and the application of the net proceeds to purchase WES common units and to make a capital contribution on behalf of WES GP to WES, as described in “Use of Proceeds;” and

 

   

the use of funds received from us by WES for general partnership purposes.

We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, the historical and pro forma financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of September 30, 2012  
     Historical      Pro forma (1)  
     (in millions)  

Cash and cash equivalents

   $ 47.5       $ 329.0   
  

 

 

    

 

 

 

WES revolving credit facility (2)

   $       $   

WES 5.375% senior notes due 2021 (3)

     494.5         494.5   

WES 4.000% senior notes due 2022 (3)(4)

     515.9         515.9   
  

 

 

    

 

 

 

Total debt(5)

   $ 1,010.4       $ 1,010.4   
  

 

 

    

 

 

 

Equity:

     

Net investment by Anadarko

     108.9           

Common unitholders – public

             281.5   

Common unitholders – Anadarko

             657.2   

Noncontrolling interests

     1,032.6         1,032.6   
  

 

 

    

 

 

 

Total equity

     1,141.5         1,971.3   
  

 

 

    

 

 

 

Total capitalization

   $ 2,151.9       $ 2,981.7   
  

 

 

    

 

 

 

 

(1) Please read “Prospectus Summary—Our Structure” for a discussion of the impact on our equity capitalization of a change in the public offering price of our common units or the number of common units sold in this offering.
(2) As of November 26, 2012, there were no outstanding borrowings under the WES RCF.
(3) Net of unamortized discount amount.
(4) On October 18, 2012, WES completed an offering of an additional $150.0 million in aggregate principal amount of the 2022 Notes. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and Credit Facilities.”
(5) On November 1, 2012, we entered into a $30.0 million working capital facility with Anadarko as lender that we expect to be undrawn at the closing of this offering.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of September 30, 2012, after giving effect to the offering of common units at an assumed initial public offering price of $20.00 (the midpoint of the price range set forth on the cover page of this prospectus) and the application of the net proceeds as described in “Use of Proceeds,” and assuming the underwriters’ over-allotment option is not exercised, the net tangible book value of our assets would have been $1,831.3 million, or $8.78 per common unit. Net tangible book value excludes $140.0 million of net intangible assets. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table:

 

Initial public offering price per common unit

      $ 20.00   

Net tangible book value per common unit before the offering (1)

   $ 5.18      

Increase in net tangible book value per common unit attributable to purchasers in this offering and the use of proceeds

     3.60      
  

 

 

    

 

 

 

Less: Pro forma net tangible book value per common unit after the offering

        8.78   
     

 

 

 

Immediate dilution in tangible net book value per common unit to purchasers in the offering (2)

      $ 11.22   
     

 

 

 

 

(1) Determined by dividing the net tangible book value by the number of common units to be issued to our general partner and its affiliates, including Anadarko.
(2) If the initial public offering price were to increase or decrease by $1.00 per common unit, immediate dilution in net tangible book value per common unit would increase by $0.98 or decrease by $0.93, respectively.

The following table sets forth the number of common units that we will issue and the total consideration contributed to us by affiliates of our general partner and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus:

 

     Units acquired     Total consideration  
     (in thousands, except percentages)  
   Number      Percent             Amount                      Percent          

General partner and affiliates (1)

     193,531,973         92.8   $ 1,001,622         77.0%   

Purchasers in the offering

     15,000,000         7.2   $ 300,000         23.0%   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     208,531,973         100.0   $ 1,301,622       $ 100.0%   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Upon consummation of this offering, our general partner and its affiliates, including Anadarko, will own an aggregate of 193,531,973 common units, representing a 92.8% limited partner interest in us.

 

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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy in conjunction with the factors and assumptions upon which our cash distribution policy is based. In addition, please read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our and WES’s business. For additional information regarding our historical and pro forma operating results, you should refer to our historical and pro forma financial statements, and the notes thereto, included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy

Our partnership agreement requires us to distribute all of our available cash quarterly. Our cash distribution policy reflects a basic judgment that our unitholders will be better served by our distributing rather than retaining our available cash. It is important that you understand that our only cash-generating assets are our partnership interests in WES, consisting of general partner units, common units and incentive distribution rights, on which we expect to receive quarterly distributions. We currently have no operations other than our ownership of these interests in WES. Generally, our available cash is our cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and cash on hand resulting from working capital borrowings made after the end of the quarter, which is consistent with our partnership agreement.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

There is no guarantee that our unitholders will receive quarterly distributions from us. We will not have an obligation to pay any distribution except as provided in our partnership agreement. Our cash distribution policy may be changed at any time and is subject to certain restrictions, including the following:

 

   

We do not have any debt currently outstanding and, therefore, are not subject to any debt covenants. However, we anticipate that any future debt agreements could contain certain financial tests and covenants that we would have to satisfy. If we are unable to satisfy the restrictions under any future debt agreements, we could be prohibited from making a distribution to you notwithstanding our stated distribution policy.

 

   

Our general partner and WES GP will have the authority to establish reserves for the prudent conduct of their respective businesses and for future cash distributions to our unitholders and WES unitholders, respectively. The establishment or increase of those reserves could result in a reduction in cash distributions to you from the levels we currently anticipate pursuant to our stated distribution policy, as well as the distributions we expect to receive from WES. Any determination to establish cash reserves made by our general partner in good faith will be binding on our unitholders. Our partnership agreement provides that in order for a determination by our general partner to be made in good faith, our general partner must believe that the determination is in our best interests.

 

   

If WES is unable to comply with future restrictions under its debt agreements, WES could be prohibited from making cash distributions to us, which in turn would prevent us from making cash distributions to you notwithstanding our stated distribution policy. While the current WES debt agreements do not contain any restrictions upon WES’s ability to distribute cash to its partners, WES may in the future enter into other debt arrangements containing restrictions on making cash distributions.

 

   

Our partnership agreement authorizes our general partner to approve any waiver, reduction, limitation or modification of or to WES’s incentive distribution rights without the consent of our unitholders. When determining whether or not to approve any such waiver or modification, our general partner’s board of directors or its special committee may consider whatever information it believes appropriate in making such determination. Our general partner’s board of directors or its special committee must

 

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also believe that any such modification is in the best interest of our partnership. Please read “Risk Factors—Risks Inherent in an Investment in Us—WES GP, with our consent but without the consent of our unitholders, may limit or modify the incentive distributions we are entitled to receive from WES, which may reduce cash distributions to you.”

 

   

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions contained therein, may be amended by a vote of holders of a majority of our common units. At the closing of this offering, Anadarko will own our general partner and approximately 92.8% of our outstanding common units.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to increases in our or WES’s operating or general and administrative expenses, principal and interest payments on debt, tax expenses, working capital requirements and anticipated cash needs of us or WES and its subsidiaries.

Our Cash Distribution Policy Limits Our Ability to Grow

As with most other publicly traded partnerships, because we distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. Since our only cash-generating assets are our partnership interests in WES, our growth will be dependent upon WES’s ability to increase its quarterly cash distributions. If we issue additional common units or incur debt, including under our working capital facility, the payment of distributions on those additional common units or interest on that debt could increase the risk that we will be unable to maintain or increase our per unit distribution level.

WES’s Ability to Grow is Dependent on its Access to Expansion Capital

Consistent with the terms of its partnership agreement, WES distributes to its partners all of its available cash each quarter. As a result, it relies primarily upon external financing sources, including borrowings under the WES RCF and the issuance of debt and equity securities, to fund its acquisitions and expansion capital expenditures. Accordingly, to the extent WES is unable to finance growth externally, its ability to grow will likely be impaired. To the extent WES issues additional common units and maintains or increases its distribution level per unit, the available cash that we have to distribute to our unitholders should generally increase. However, if WES issues additional common units and is unable to maintain its distribution level, the cash that we have to distribute to our unitholders should generally decrease. In addition, the incurrence of additional debt to finance WES’s growth strategy would result in increased interest expense to WES, which in turn may impact its distributions to us and the available cash that we have to distribute to our unitholders.

Our Initial Quarterly Distribution

Upon completion of this offering, we expect to pay an initial quarterly distribution of $0.165 per common unit, or $0.660 per common unit on an annualized basis. This equates to an aggregate cash distribution of approximately $34.4 million per quarter (approximately $137.6 million on an annualized basis) based on the number of common units expected to be outstanding immediately after the completion of this offering and assuming no exercise of the underwriters’ over-allotment option, or approximately $35.0 million per quarter (approximately $139.9 million on an annualized basis) if the underwriters exercise their over-allotment option in full.

Any distributions received by us from WES related to periods prior to the closing of this offering will be distributed entirely to Anadarko or its affiliates. We will pay a prorated cash distribution for the first quarter that we are a publicly traded partnership. This cash distribution will be based on the number of days in the period beginning on the closing date of this offering and ending on December 31, 2012. We expect to pay this cash distribution in February 2013. However, we can provide no assurance that any distributions will be declared or paid by us. See “Risk Factors—Risks Inherent in an Investment in Us—In the future, we may not have sufficient cash to pay our estimated initial quarterly distribution or to increase distributions.” We will pay our cash distributions within 55 days after the end of each fiscal quarter to holders of record on or about the first of the month in which the distribution is paid.

 

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The following table sets forth the number of common units expected to be outstanding upon the completion of this offering (assuming no exercise and full exercise of the underwriters’ over-allotment option) and the aggregate cash distributions payable on these common units during the first four full quarters following the completion of this offering at our initial quarterly distribution of $0.165 per common unit, or $0.660 per common unit on an annualized basis.

 

     No Exercise of the Underwriters’ Over-
Allotment Option
     Full Exercise of the Underwriters’ Over-
Allotment Option
 
            Distributions             Distributions  
     Number of
Units
     One
Quarter
     Four Quarters      Number of
Units
     One
Quarter
     Four Quarters  

Publicly held common units

     15,000,000       $ 2,475,000       $ 9,900,000         17,250,000       $ 2,846,250       $ 11,385,000   

Common units held by Anadarko

     193,531,973         31,932,776         127,731,102         194,744,713         32,132,878         128,531,511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     208,531,973       $ 34,407,776       $ 137,631,102         211,994,713       $ 34,979,128       $ 139,916,511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our cash distributions will generally not be cumulative. Consequently, if we do not pay the initial quarterly distribution on our common units with respect to any fiscal quarter, our unitholders generally will not be entitled to receive such payments in the future. However, in the event we receive proceeds in this offering less than the assumed net proceeds of $281.5 million, and as a result we purchase fewer WES common and general partner units, Anadarko will agree to forgo certain distributions (subject to future reimbursement) for the benefit of the other holders of common units. Please read “Prospectus Summary—Our Structure.”

Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly. Generally, our available cash is the sum of our (i) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) cash on hand resulting from working capital borrowings made after the end of a quarter. Our general partner may establish reserves to, among other things:

 

   

provide for the proper conduct of our business (including to satisfy general, administrative and other expenses and any debt service requirements);

 

   

permit WES GP to make capital contributions to WES to maintain its 2.0% general partner interest upon the issuance of partnership securities by WES;

 

   

comply with applicable law, any of our future debt instruments or other agreements, if any; or

 

   

provide funds for distributions to our unitholders for any one or more of the next four quarters.

Our partnership agreement provides that any determination made by our general partner in its capacity as our general partner, including a determination with respect to establishing cash reserves, must be made in good faith, and that any such determination will not be the subject of any other standard imposed by our partnership agreement, the Delaware Act or any other law, rule or regulation applicable to us or at equity. Our partnership agreement also provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must believe that the determination is in our best interests.

WES’s Cash Distribution Policy

Like us, WES has adopted a cash distribution policy that requires it to distribute all of its available cash to its partners on a quarterly basis. Under WES’s partnership agreement, available cash is generally defined to mean the sum of its (i) cash on hand at the end of a quarter after the payment of its expenses and the establishment of cash reserves and (ii) cash on hand resulting from working capital borrowings made after the end of a quarter. WES GP may establish cash reserves to, among other things:

 

 

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provide for the proper conduct of its business (including to satisfy general, administrative and other expenses and any debt service requirements);

 

   

comply with applicable law, any of its debt instruments or other agreements, if any; or

 

   

provide funds for distributions to its unitholders for any one or more of the next four quarters.

WES makes its quarterly distributions from cash generated from its operations, and those distributions have grown over time as its business has grown, primarily as a result of numerous acquisitions and organic expansion projects that have been funded through external financing sources and cash from operations.

WES has an established record of paying quarterly cash distributions to its partners. The following table sets forth, for the periods indicated, the per unit amount and payment date of the cash distributions paid by WES since the first quarter of 2009. WES’s cash distributions to its partners are generally paid within 45 days after the end of each quarter.

 

     Cash Distribution History
     Per Unit     

Payment Date

2009

     

1st Quarter

   $ 0.300       May 2009

2nd Quarter

   $ 0.310       August 2009

3rd Quarter

   $ 0.320       November 2009

4th Quarter

   $ 0.330       February 2010

2010

     

1st Quarter

   $ 0.340       May 2010

2nd Quarter

   $ 0.350       August 2010

3rd Quarter

   $ 0.370       November 2010

4th Quarter

   $ 0.380       February 2011

2011

     

1st Quarter

   $ 0.390       May 2011

2nd Quarter

   $ 0.405       August 2011

3rd Quarter

   $ 0.420       November 2011

4th Quarter

   $ 0.440       February 2012

2012

     

1st Quarter

   $ 0.460       May 2012

2nd Quarter

   $ 0.480       August 2012

3rd Quarter

   $ 0.50        

November 2012

4th Quarter

   $ 0.52        

(1)

 

(1) Represents the distribution that WES management expects to recommend to the WES GP board of directors with respect to the fourth quarter of 2012.

In the sections that follow, we present the basis for our belief that we will be able to pay our aggregate annualized initial quarterly distribution for the year ending December 31, 2013. In those sections, we present two tables, consisting of:

 

   

“Western Gas Equity Partners, LP Unaudited Pro Forma Available Cash,” in which we present the amount of available cash we would have had on a pro forma basis for the year ended December 31, 2011 and the twelve months ended September 30, 2012, giving pro forma effect to:

 

   

WES’s anticipated quarterly cash distribution of $0.52 per unit (which is the distribution that we expect WES will pay with respect to the fourth quarter of 2012);

 

   

interest expense based on WES’s debt balance as of September 30, 2012 as reflected in the pro forma cash interest expense in the table and notes below; and

 

   

the issuance of WES common units and general partner units in connection with this offering (resulting in WES having 101,934,761 common units and 2,080,302 general partner units outstanding).

 

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“Western Gas Equity Partners, LP Estimated Minimum Necessary WES Adjusted EBITDA,” in which we present our estimate of the minimum amount of WES Adjusted EBITDA necessary for WES to pay distributions to its partners, including us, which will enable us to have sufficient available cash to pay our aggregate annualized initial quarterly distribution for the year ending December 31, 2013 on all of the common units expected to be outstanding upon the completion of this offering.

Western Gas Equity Partners, LP Unaudited Pro Forma Available Cash for the Year Ended December 31, 2011 and the Twelve Months Ended September 30, 2012

Our pro forma available cash for each of the year ended December 31, 2011 and the twelve months ended September 30, 2012 would have been approximately $137.6 million. These amounts would have been sufficient for us to pay our aggregate annualized initial quarterly distribution of $137.6 million on all of our common units for such periods.

Our calculation of pro forma available cash includes estimated incremental general and administrative expenses that we expect we will incur as a result of being a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; and registrar and transfer agent fees. We expect that these items will increase our annual general and administrative expenses by approximately $3.0 million.

Western Gas Equity Partners, LP

Unaudited Pro Forma Available Cash

 

     Year Ended
December 31,
2011
    Twelve Months
Ended
September 30, 2012
 
     (in thousands, except ratios)  

Western Gas Partners, LP

    

Revenues

    

Gathering, processing and transportation of natural gas and NGLs

   $ 301,329      $ 314,747   

Natural gas, NGLs and condensate sales

     502,383        517,399   

Equity income and other, net

     19,553        19,653   
  

 

 

   

 

 

 

Total revenues

     823,265        851,799   

Less:

    

Cost of product

     327,371        341,325   
  

 

 

   

 

 

 

Gross margin

     495,894        510,474   

Less:

    

Operation and maintenance expense

     119,104        128,286   

General and administrative expense

     39,114        48,716   

Property and other taxes

     16,579        18,275   

Depreciation, amortization and impairments

     111,904        114,761   
  

 

 

   

 

 

 

Operating income

     209,193        200,436   

Plus:

    

Interest income, net—affiliates (1)

     28,560        22,243   

Interest expense (2)

     (53,255     (49,562

Other income (expense), net

     (44     564   
  

 

 

   

 

 

 

Income before income taxes

     184,454        173,681   

Less:

    

Income tax expense(3)

     19,018        4,155   
  

 

 

   

 

 

 

Net income

     165,436        169,528   

 

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     Year Ended
December 31,
2011
     Twelve Months
Ended
September 30, 2012
 
     (in thousands, except ratios)  

Less:

     

Net income attributable to WES public unitholders and other noncontrolling interests

     14,103         16,393   
  

 

 

    

 

 

 

Net income attributable to Western Gas Partners, LP

   $ 151,333       $ 153,135   

Add:

     

Distributions from equity investees

     15,999         19,614   

Non-cash equity-based compensation expense (4)

     13,754         23,926   

Interest expense (2)

     53,255         49,562   

Income tax expense (3)

     19,018         4,155   

Depreciation, amortization and impairments (5)

     109,151         112,383   

Other expense (5)

     3,683         1,665   

Less:

     

Equity income, net

     11,261         14,331   

Interest income—affiliates (1)

     28,560         22,243   

Other income (5)

     2,049         475   
  

 

 

    

 

 

 

Pro forma Adjusted EBITDA attributable to Western Gas Partners, LP (6)

   $ 324,323       $ 327,392   

Less:

     

Cash interest expense (2)

     53,675         53,675   

Cash income taxes (3)

     190         495   

Maintenance capital expenditures

     28,393         33,252   

Plus:

     

Cash interest income

     16,900         16,900   
  

 

 

    

 

 

 

Pro forma distributable cash of Western Gas Partners, LP (excluding investment and acquisition activity and related financings) (7)

   $ 258,965       $ 256,870   

Pro forma distributions to non-affiliated owners of WES (8)

     115,158         115,158   

Pro forma distributions to Western Gas Equity Partners, LP (8)

     

2% general partner interest

     5,116         5,116   

Incentive distribution rights

     38,649         38,649   

Common units

     96,866         96,866   
  

 

 

    

 

 

 

Total pro forma distributions to Western Gas Equity Partners, LP

     140,631         140,631   

Total pro forma distributions of Western Gas Partners, LP

     255,789         255,789   

Hypothetical pro forma cash reserves of Western Gas Partners,
LP (9)

   $ 3,176       $ 1,081   

Western Gas Equity Partners, LP

     

Pro forma distributions to Western Gas Equity Partners, LP

   $ 140,631       $ 140,631   

Less:

     

General and administrative expenses (10)

     3,000         3,000   
  

 

 

    

 

 

 

Pro forma available cash of Western Gas Equity Partners, LP

   $ 137,631       $ 137,631   

Pro forma aggregate annualized initial quarterly distribution of Western Gas Equity Partners, LP (8)

   $ 137,631       $ 137,631   

WES leverage ratio (11)

     3.61x         3.57x   

 

(1) Represents cash interest income WES receives annually from Anadarko with respect to the $260.0 million 30-year note bearing interest at a fixed annual rate of 6.50% together with earned interest income on intercompany balances related to assets acquired from Anadarko for periods prior to their acquisition. Beginning December 7, 2011, Anadarko discontinued charging interest on intercompany balances.

 

(2)

Assumes that the currently outstanding WES debt balance of $1.17 billion, consisting of $500 million of the 2021 Notes and $670 million of the 2022 Notes, was in place at the beginning of each period, less

 

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  adjustments made for capitalized interest. We have not deducted capitalized interest from the calculation of cash interest expense.

 

(3) Represents the amount paid by WES primarily for Texas margin taxes. There will likely be no incremental Texas margin tax attributable to WGP.

 

(4) Represents the amount of equity-based compensation expense incurred by WES that is not expected to be settled in cash. No pro forma adjustments have been made for the amounts incurred under the Amended and Restated Western Gas Holdings, LLC Equity Incentive Plan (the “Incentive Plan”) as a result of this offering that will be settled in cash because such amounts will be ultimately funded by Anadarko. For a description of the Incentive Plan, please read “Management—Executive Compensation Discussion and Analysis.”

 

(5) Includes WES’s share of depreciation, amortization and impairments; other expense; and other income attributable to Chipeta.

 

(6) WES defines Adjusted EBITDA as net income (loss) attributable to Western Gas Partners, LP, plus distributions from equity investees, non-cash equity-based compensation expense, expense in excess of the expense reimbursement cap provided in the WES omnibus agreement (if applicable), interest expense, income tax expense, depreciation, amortization and impairments, and other expense, less income from equity investments, interest income, income tax benefit, and other income.

 

(7) Amounts shown exclude all sources and uses of cash which do not affect available cash, including expansion capital expenditures, acquisitions and related financing activities during the periods shown. While the proceeds received by WES from equity offerings used in financing activities (including the proceeds from the sale of WES common units and general partner units to WGP in connection with this offering) would be considered available cash under the terms of WES’s partnership agreement, a distribution of such proceeds would be considered a return of capital and WES does not intend to pay distributions to its partners that would constitute a return of capital. Accordingly, we have excluded such equity proceeds as they would overstate the available cash that we believe would have been distributable to WES’s partners.

 

(8) Assumes no exercise of the underwriters’ over-allotment option. If the underwriters were to exercise their over-allotment option in full, the number of outstanding WES common units and general partner units would increase to 102,845,522 and 2,098,889, respectively, as a result of the assumed purchase of 910,761 WES common units and 18,587 WES general partner units by WGP with the net proceeds of the exercise of the over-allotment option. In such event, the pro forma distributions to Western Gas Equity Partners, LP for each of the year ended December 31, 2011 and the twelve months ended September 30, 2012 would increase to $142.9 million, and the pro forma aggregate annualized initial quarterly distribution of Western Gas Equity Partners, LP for each of the year ended December 31, 2011 and the twelve months ended September 30, 2012 would increase to $139.9 million.

 

(9) Amounts represent hypothetical cash reserves which would have been established by WES GP to provide for the proper conduct of WES’s business; comply with applicable law, any of its debt instruments or other agreements; or provide funds for distributions to WES’s unitholders for any one or more of the following four quarters. Such hypothetical cash reserves represent pro forma amounts of distributable cash generated by WES in excess of the aggregate minimum distributions by WES that would result in our receiving amounts sufficient to pay our annualized initial quarterly distribution of approximately $137.6 million.

 

(10) Reflects estimated cash expenses associated with being a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; and registrar and transfer agent fees.

 

(11) The WES RCF contains various customary covenants, including a covenant to maintain a maximum consolidated leverage ratio (which is defined in the credit facility as the ratio of consolidated indebtedness as of the last day of a fiscal quarter to consolidated earnings before interest, taxes, depreciation and amortization 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. The leverage ratio is calculated using the aforementioned assumptions and should not be interpreted as WES’s actual leverage ratio for the periods presented.

 

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Estimated Minimum Necessary WES Adjusted EBITDA to Enable Us to Pay the Aggregate Annualized Initial Quarterly Distribution for the Year Ending December 31, 2013

In order to have sufficient available cash to pay the aggregate annualized initial quarterly distribution on all of our outstanding common units for the year ending December 31, 2013, we estimate that we must receive cash distributions from WES of at least $140.6 million. In order for WES to pay us cash distributions that would permit us to pay the full initial quarterly distribution on all of our outstanding common units for the year ending December 31, 2013 (including the additional common units that we would issue if the offering price or size were increased to yield aggregate gross offering proceeds of approximately $435 million), we estimate that WES must generate Adjusted EBITDA of at least $340.0 million. WES defines Adjusted EBITDA as net income (loss) attributable to Western Gas Partners, LP, plus distributions from equity investees, non-cash equity–based compensation expense, expense in excess of the expense reimbursement cap provided in the WES omnibus agreement (if applicable), interest expense, income tax expense, depreciation, amortization and impairments, and other expense, less income from equity investments, interest income, income tax benefit, and other income. Adjusted EBITDA should not be considered an alternative to net income, net cash provided by operating activities, or any other measure of financial performance calculated in accordance with generally accepted accounting principles in the United States (“GAAP”).

The table below is intended to be an indicator or benchmark of the amount management considers to be the minimum amount of WES Adjusted EBITDA necessary for WES to pay distributions to its partners, including us, which will enable us to have sufficient available cash to pay the initial quarterly distribution of $0.165 per common unit per quarter (or $0.660 per common unit on an annualized basis) on our common units for the year ending December 31, 2013 (including the additional common units that we would issue if the offering price or size were increased to yield aggregate gross offering proceeds of approximately $435 million). The baseline estimate of WES Adjusted EBITDA should not be viewed as management’s full projection of WES’s expected operating results and financial performance for the year ending December 31, 2013. Similarly, such baseline estimate is not intended to modify or replace the guidance that WES provides on an annual basis. Our management believes that WES’s actual Adjusted EBITDA during the year ending December 31, 2013 will exceed the amount presented below.

We believe that our partnership interests in WES, including the incentive distribution rights, will generate sufficient cash flow to enable us to pay the aggregate annualized initial quarterly distribution on all of our common units for the year ending December 31, 2013. You should read the footnotes to the table below for a discussion of the material assumptions underlying this belief. Our belief is based on several assumptions and reflects our judgment of conditions we expect to exist and the course of action we expect WES to take. While we believe that these assumptions are reasonable in light of our current expectations regarding future events, the assumptions underlying our belief are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If WES’s expected results of operations are not realized, the amount of cash that WES distributes to us could be substantially less than that currently expected and could, therefore, be insufficient to permit us to pay the initial quarterly distribution, or any distribution, on our common units, which could cause the market price of our common units to decline materially. Consequently, our belief that we will have sufficient available cash to pay the initial quarterly distribution on all of our common units for the year ending December 31, 2013 should not be regarded as a representation by us, the underwriters or any other person that we will declare and pay such a distribution.

We have prepared the table below and related disclosure to substantiate our belief that we will have sufficient available cash to pay the aggregate annualized initial quarterly distribution on all of our common units for the year ending December 31, 2013. The statements made below are forward-looking statements and should be read together with the historical and pro forma financial statements and the accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The financial information below was not prepared with a view toward complying with the

 

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guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate sufficient available cash to pay the aggregate annualized initial quarterly distribution on all of our common units for the year ending December 31, 2013. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and we undertake no obligation to release publicly the results of any future revisions we may make to this financial information to reflect events or circumstances after the date of this prospectus. As a result, readers of this prospectus are cautioned not to place undue reliance on this financial information.

Neither our independent auditors nor any other independent accountants have compiled, examined or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and they assume no responsibility for, and disclaim any association with, the prospective financial information.

When reading this section, you should keep in mind the risk factors and other cautionary statements under the heading “Risk Factors” in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our financial condition and consolidated results of operations to vary significantly from those set forth in the table below.

 

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Western Gas Equity Partners, LP

Estimated Minimum Necessary WES Adjusted EBITDA

 

     Year Ending
December 31, 2013
 
     (in thousands,
except ratio)
 

Western Gas Partners, LP

  

Estimated Minimum Necessary Adjusted EBITDA attributable to
Western Gas Partners, LP (1)

   $ 339,977   

Less:

  

Cash interest expense (2)

     55,848   

Cash income taxes (3)

     249   

Maintenance capital expenditures (4)

     38,150   

Plus:

  

Cash interest income (5)

     16,900   
  

 

 

 

Estimated available cash of Western Gas Partners, LP

   $ 262,630   

Less:

  

Expansion capital expenditures (6)

     325,901   

Plus:

  

Borrowings to fund expansion capital expenditures (7)

     44,401   

Proceeds from sale of units to WGP to fund expansion capital expenditures (7)

     281,500   
  

 

 

 

Estimated available cash of Western Gas Partners, LP

   $ 262,630   

Distributions to non-affiliated owners of WES (8)

   $ 115,158   

Distributions to Western Gas Equity Partners, LP (8)

  

2% general partner interest

     5,116   

Incentive distribution rights

     38,649   

Common units

     96,866   
  

 

 

 

Total distributions to Western Gas Equity Partners, LP

   $ 140,631   
  

 

 

 

Total distributions of Western Gas Partners, LP

   $ 255,789   

Excess of estimated available cash of Western Gas Partners, LP over total distributions of Western Gas Partners, LP(8)

   $ 6,841   

Western Gas Equity Partners, LP

  

Distributions from Western Gas Partners, LP

   $ 140,631   

Less:

  

General and administrative expenses (9)

     3,000   
  

 

 

 

Estimated available cash of Western Gas Equity Partners, LP

   $ 137,631   

Aggregate annualized initial quarterly distribution of Western Gas Equity Partners, LP (8)

   $ 137,631   

WES leverage ratio (10)

     3.57x   

 

(1) In order to have sufficient available cash to pay the aggregate annualized initial quarterly distribution on all of our outstanding common units for the year ending December 31, 2013, we estimate that we must receive cash distributions from WES of at least $140.6 million. In order for WES to pay us cash distributions that would permit us to pay the full initial quarterly distribution on all of our outstanding common units for the year ending December 31, 2013 (including the additional common units that we would issue if the offering price or size were increased to yield aggregate gross offering proceeds of approximately $435 million), we estimate that WES must generate Adjusted EBITDA of at least $340.0 million for the year ending December 31, 2013, as compared to pro forma Adjusted EBITDA of $324.3 million and $327.4 million for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively.

 

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This table is intended to be an indicator or benchmark of the amount management considers to be the lowest amount of WES Adjusted EBITDA necessary for WES to pay distributions to its partners, including us, which will enable us to have sufficient available cash to pay the initial quarterly distribution of $0.165 per common unit per quarter (or $0.660 per common unit on an annualized basis) on our common units for the year ending December 31, 2013 (including the additional common units that we would issue if the offering price or size were increased to yield aggregate gross offering proceeds of approximately $435 million). The baseline estimate of WES Adjusted EBITDA should not be viewed as management’s full projection of WES’s expected operating results and financial performance for the year ending December 31, 2013. Similarly, such baseline estimate is not intended to modify or replace the guidance that WES provides on an annual basis. As discussed in more detail in footnote 8 below, our management believes that WES’s Adjusted EBITDA during the year ending December 31, 2013 will exceed the amount presented below.

Our calculation of estimated throughput presented below represents our estimate of the minimum throughput that we believe necessary for WES to generate sufficient Adjusted EBITDA to enable us to pay our annualized initial quarterly distribution on all of our common units if the aggregate offering size increases as described above. We calculated this estimated minimum throughput as follows:

 

   

We adjusted the estimated minimum Adjusted EBITDA attributable to WES of $340.0 million for certain items, including forecasted property and ad valorem taxes and general and administrative expenses, to derive an estimated minimum gross margin;

 

   

We divided the resulting estimated minimum gross margin into gross margin attributable to (i) gathering, treating and transportation, (ii) processing and (iii) equity investment, based on the percentage that each subset represents in the current 2013 forecast for WES; and

 

   

We divided each category of minimum gross margin by the applicable gross margin per Mcf included in the current 2013 forecast for WES, which yielded a minimum estimated throughput for each category.

The Estimated Minimum Necessary WES Adjusted EBITDA is based on a number of significant assumptions, including the following:

 

   

Total gathering, treating and transportation throughput of 1,196 MMcf/d for the year ending December 31, 2013, as compared to 1,321 MMcf/d and 1,268 MMcf/d for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively.

 

   

Total processing throughput of 1,106 MMcf/d for the year ending December 31, 2013, as compared to 962 MMcf/d and 1,143 MMcf/d for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively.

 

   

Total equity investment throughput of 157 MMcf/d for the year ending December 31, 2013, as compared to 198 MMcf/d and 231 MMcf/d for the year ended December 31, 2011 and twelve months ended September 30, 2012, respectively.

 

   

Reported throughput volumes will continue to exclude average NGL pipeline volumes and WES’s 10% share of White Cliffs pipeline volumes, both of which are measured in barrels. We assume throughput on WES’s NGL pipeline of 26 MBbls/d for the year ending December 31, 2013, as compared to 24 MBbls/d and 26 MBbls/d for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively. We assume throughput attributable to WES’s 10% share of White Cliffs of 6 MBbls/d for the year ending December 31, 2013, as compared to 4 MBbls/d and 6 MBbls/d for the year ended December 31, 2011 and twelve months ended September 30, 2012, respectively.

 

   

Equity income of $17.2 million for the year ending December 31, 2013, as compared to $11.3 million and $14.3 million for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively. The assumed increase is primarily attributable to additional anticipated transportation volumes for the White Cliffs pipeline.

 

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Distributions from equity investees of $22.1 million for the year ending December 31, 2013, as compared to $16.0 million and $19.6 million for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively. The assumed increase is primarily related to additional anticipated transportation volumes for the White Cliffs pipeline.

 

   

Equity-based compensation expense related to employees seconded to WES of $2.8 million for the year ending December 31, 2013, as compared to $13.8 million and $23.9 million for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively. The assumed decrease is primarily due to the settlement, in cash, of liabilities related to the Incentive Plan in conjunction with the closing of this offering. We will not have an equity compensation plan similar to the Incentive Plan, in which the value of the awards is tied to the value of the general partner of WES. Although we will have a typical long-term incentive plan, we expect that awards under this plan will be settled in our common units (as opposed to cash-settled liability-based awards granted under the Incentive Plan), and we therefore anticipate significantly lower equity-based compensation expense in the future relative to awards under the Incentive Plan. Please read “Management—Executive Compensation Discussion and Analysis” for more information.

 

   

WES does not consummate any material acquisitions from Anadarko or third parties during the year ending December 31, 2013.

 

   

WES does not issue any common units, general partner units or other partnership securities during the year ending December 31, 2013, other than common units and general partner units to be issued to us in connection with this offering.

 

   

Our general partner does not approve any waiver, reduction, limitation or modification of or to WES’s incentive distribution rights that would alter incentive distributions during the year ending December 31, 2013.

 

   

There will not be any new federal, state or local regulation of the portions of the energy industry in which we and WES operate, or any new interpretations of existing regulations, that will be materially adverse to our or WES’s business.

 

   

There will not be any major adverse change in the portions of the energy industry in which we and WES operate resulting from supply or production disruptions, reduced demand for our products or services, or significant changes in the market prices of natural gas or NGLs.

 

   

Market, insurance and overall economic conditions will not change substantially.

We cannot assure you that any of the assumptions summarized above, or any other assumptions upon which our Estimated Minimum Necessary WES Adjusted EBITDA is based, will prove to be correct. If the assumptions are incorrect or not achieved, we may not have sufficient available cash to make the contemplated distributions.

 

(2) We assume consolidated cash interest expense of approximately $55.8 million for the year ending December 31, 2013, as compared to $53.7 million for each of the year ended December 31, 2011 and the twelve months ended September 30, 2012 on a pro forma basis. Cash interest expense is assumed to be comprised of the following components:

(i) approximately $2.2 million of interest expense, net of capitalized interest, related to borrowings of $43.4 million under the WES RCF to fund expansion capital expenditures and the additional interest associated with the annual commitment fee of approximately 0.25% on the unused borrowing capacity under the WES RCF. We assume that WES will finance a substantial portion of its expansion capital expenditures through borrowings under the WES RCF. We have assumed that the weighted-average interest rate on the WES RCF during the year ending December 31, 2013 will not exceed 1.74%;

(ii) approximately $26.8 million of interest expense associated with the 2022 Notes; and

(iii) approximately $26.9 million of interest expense associated with the 2021 Notes.

 

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(3) Represents the amount paid by WES primarily for Texas margin taxes. There will likely be no incremental Texas margin tax attributable to WGP.

 

(4) We assume maintenance capital expenditures of $38.2 million for the year ending December 31, 2013, as compared to $28.4 million and $33.3 million for the year ended December 31, 2011 and twelve months ended September 30, 2012, respectively. The assumed increase in maintenance capital expenditures is primarily attributable to WES’s growing asset base and the resulting increased integrity expenditures.

 

(5) Represents cash interest income WES receives annually from Anadarko with respect to the $260.0 million 30-year note bearing interest at a fixed annual rate of 6.50% together with earned interest income on intercompany balances related to assets acquired from Anadarko for periods prior to their acquisition. Beginning December 7, 2011, Anadarko discontinued charging interest on intercompany balances.

 

(6) We assume expansion capital expenditures of $325.9 million for the year ending December 31, 2013, as compared to $87.5 million and $249.2 million for the year ended December 31, 2011 and the twelve months ended September 30, 2012, respectively. The expected increase in expansion capital expenditures is primarily attributable to amounts WES anticipates spending on the Lancaster Plant, the Brasada Plant, the expansion of the Red Desert system, and the continued expansion of its DJ Basin assets.

 

(7) Because WES has historically financed organic growth projects and acquisitions through the use of external financing sources, including borrowings under the WES RCF and the issuance of debt and equity securities, and we anticipate that it will continue to do so, we have shown estimated borrowings for these purposes as a source of cash in the table above. Specifically, we assume that WES will fund its $325.9 million of expected expansion capital for the year ending December 31, 2013 by borrowing $44.4 million and using the $281.5 million of net proceeds received by WES from the sale of common units and general partner units to us in connection with this offering. While such net proceeds received by WES are a non-recurring source of funds for WES, we believe that WES will be able to satisfy its liquidity needs subsequent to December 31, 2013, including for funding expansion capital expenditures, through cash and cash equivalents, cash flows generated from operations, including interest income on its $260.0 million note receivable from Anadarko, available borrowings under the WES RCF, and issuances of additional equity or debt securities. We anticipate that WES would have approximately $750 million of available borrowing capacity under the WES RCF as of December 31, 2013 (after giving effect to the projected $44.4 million of borrowings to fund expansion capital expenditures and approximately $6.6 million of letters of credit) as compared to approximately $800 million of available borrowing capacity as of September 30, 2012.

 

(8) Assumes the following:

 

   

WES will pay a quarterly cash distribution of $0.52 per WES common unit for each quarter, which per unit distribution amount is equal to the anticipated WES cash distribution for the fourth quarter of 2012;

 

   

101,934,761 and 2,080,302 outstanding WES common units and general partner units, including the assumed 5,997,174 WES common units and 122,391 WES general partner units to be purchased by WGP in connection with the closing of this offering; and

 

   

no exercise of the underwriters’ over-allotment option.

As noted above, our estimated minimum distributions from WES are based on an assumption that WES will pay a distribution of $0.52 per unit with respect to each quarter during the year ending December 31, 2013. We believe that this minimum distribution from WES is achievable because, in connection with its third quarter earnings announcement, WES:

 

   

reaffirmed its distribution growth guidance of 16-20% for the full year 2012. In order to achieve this distribution growth in 2012, it is anticipated that WES will raise its distribution with respect to the fourth quarter of 2012 to $0.52 per unit; and

 

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announced that it expects to raise its quarterly distribution by a minimum of 15% in 2013, which implies that it expects to raise its quarterly distribution by an average of $0.02 per quarter in 2013, consistent with WES’s $0.02 increases in its quarterly distribution in each of the last four quarters.

We further believe that it is reasonable to expect WES to achieve the financial performance necessary to generate the estimated minimum necessary Adjusted EBITDA and deliver the expected distribution growth due to the following:

 

   

WES’s largest asset position is in the DJ Basin in Colorado, where Anadarko has announced rates of return of over 100% on wells drilled and an increase in its rig count from seven to ten rigs in the second half of 2012;

 

   

WES’s third cryogenic train at Chipeta was completed in October 2012;

 

   

WES’s trailing twelve month Adjusted EBITDA reflects the impact of its recently acquired additional 24% interest in Chipeta only from August 1, 2012, whereas its 2013 operating results will include this additional interest for the full year;

 

   

WES has announced that it expects its Brasada plant will become operational in the second quarter of 2013;

 

   

throughput volumes for the White Cliffs pipeline are expected to increase due to (i) continued robust drilling activity in the Wattenberg Field, (ii) White Cliff’s recently announced binding open season to expand capacity on the White Cliffs Pipeline by approximately 80,000 barrels per day and (iii) White Cliffs’ status as the only pipeline delivering crude oil out of the basin and to the crude oil marketing hub in Cushing, Oklahoma;

 

   

the fixed prices established in WES’s commodity price swap agreements with Anadarko will be higher in 2013 than they were in 2012 with respect to substantially all of WES’s assets;

 

   

given its issuance of $150 million of additional senior notes due 2022 in October 2012, WES anticipates that it will have at least $790 million available for borrowing under its revolving credit facility at the beginning of 2013; and

 

   

since its initial public offering, WES has a consistent track record of executing accretive acquisitions either from Anadarko or third parties.

If the offering price or size is increased, we will use the resulting additional proceeds to purchase additional WES common and general partner units. We believe the excess of estimated available cash of Western Gas Partners, LP over total distributions of Western Gas Partners, LP presented in the table above would equal the amount needed to enable WES to distribute sufficient additional cash to us to permit us to pay the initial quarterly distribution on the common units we would issue in this offering if the offering price or size were increased to yield aggregate gross offering proceeds of approximately $435 million.

If we receive proceeds in this offering of less than the assumed net proceeds of $281.5 million, and as a result we purchase fewer WES common and general partner units, Anadarko will agree to forgo certain distributions (subject to future reimbursement) for the benefit of the other holders of our common units. Please read “Prospectus Summary—Our Structure.”

 

(9) We estimate that our incremental general and administrative expenses associated with being a publicly traded partnership will not exceed $3.0 million for the year ending December 31, 2013.

 

(10) The WES RCF contains various customary covenants, including a covenant to maintain a maximum consolidated leverage ratio (which is defined in the WES RCF as the ratio of consolidated indebtedness as of the last day of a fiscal quarter to consolidated earnings before interest, taxes, depreciation and amortization 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. The leverage ratio is calculated using the aforementioned assumptions and should not be interpreted as WES’s projected leverage ratio for the year ending December 31, 2013.

 

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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

General

Our partnership agreement requires that, within 55 days after the end of each quarter, beginning with the quarter ending December 31, 2012, we distribute all of our available cash to unitholders of record on the applicable record date. We will pro rate the initial quarterly distribution based on the number of days in the period from the closing of the offering through December 31, 2012.

Definition of Available Cash

Available cash, for any quarter, consists of all cash on hand at the end of that quarter:

 

   

less, the amount of cash reserves established by our general partner to:

 

   

provide for the proper conduct of our business (including to satisfy general, administrative and other expenses and any debt service requirements);

 

   

permit WES GP to make capital contributions to WES if we choose to maintain our 2.0% general partner interest upon the issuance of additional partnership securities by WES;

 

   

comply with applicable law, any of our future debt instruments or other agreements; or

 

   

provide funds for distributions to our unitholders for any one or more of the next four quarters;

 

   

plus, if our general partner so determines, all or a portion of cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter.

General Partner Interest

Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may own common units or other equity securities in us and is entitled to receive cash distributions on any such interests.

Adjustments to Capital Accounts

We will make adjustments to capital accounts upon the issuance of additional units. In doing so, we will allocate any unrealized and, for tax purposes, unrecognized gain or loss resulting from the adjustments to the unitholders and the general partner in the same manner as we allocate gain or loss upon liquidation.

Distributions of Cash Upon Liquidation

If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called a liquidation. We will first apply the proceeds of liquidation to the payment of our creditors in the order of priority provided in our partnership agreement and by law and, thereafter, we will distribute any remaining proceeds to the unitholders and our general partner in accordance with their respective capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

Our Sources of Distributable Cash

Our only cash-generating assets are our partnership interests in WES. Therefore, our cash flow and resulting ability to make cash distributions will be completely dependent upon the ability of WES to make cash distributions in respect of those partnership interests. The actual amount of cash that WES will have available for distribution will primarily depend on the amount of cash it generates from its operations. The actual amount of this cash will fluctuate from quarter to quarter based on certain factors, including:

 

   

the level of capital expenditures it makes;

 

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the level of its operating and maintenance and general and administrative costs;

 

   

its debt service requirements and other liabilities;

 

   

fluctuations in its working capital needs;

 

   

its ability to borrow funds and access capital markets;

 

   

its treatment as a flow-through entity for U.S. federal income tax purposes;

 

   

restrictions contained in debt agreements to which it is a party; and

 

   

the amount of cash reserves established by WES GP.

Anadarko Distribution Deferral

In the event we receive proceeds in this offering less than the assumed net proceeds of $281.5 million, and as a result we purchase fewer WES common and general partner units, Anadarko will agree to forgo certain distributions (subject to future reimbursement) for the benefit of the other holders of common units. Please read “Prospectus Summary—Our Structure.”

Our Partnership Interests in WES

All of our cash flows are generated from the cash distributions we receive with respect to our partnership interests in WES, which upon completion of this offering will consist of the following:

 

   

2,080,302 WES general partner units, representing a 2.0% general partner interest in WES;

 

   

all of the incentive distribution rights in WES, which entitle us to receive increasing percentages, up to the maximum level of 48.0%, of any incremental cash distributed by WES as certain target distribution levels are reached in any quarter; and

 

   

46,570,413 WES common units, representing a 44.8% limited partner interest in WES.

Distributions by WES of Available Cash from Operating Surplus

WES’s partnership agreement provides that distributions of available cash from operating surplus for any quarter will be made in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to WES’s general partner until WES distributes for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—WES Incentive Distribution Rights” below.

WES Incentive Distribution Rights

The right of WES GP, our wholly owned subsidiary and the general partner of WES, to receive incentive distributions is contained in WES’s partnership agreement. WES’s partnership agreement provides that if a quarterly cash distribution to WES’s common units exceeds a target of $0.345 per common unit and WES has distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution of $0.30 per common unit, then WES will distribute any additional available cash from operating surplus for that quarter among the unitholders and its general partner, WES GP, in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to WES’s general partner, until each unitholder receives a total of $0.345 per unit for that quarter (the “first target distribution”);

 

   

second, 85.0% to all unitholders, pro rata, and 15.0% to WES’s general partner, until each unitholder receives a total of $0.375 per unit for that quarter (the “second target distribution”);

 

   

third, 75.0% to all unitholders, pro rata, and 25.0% to WES’s general partner, until each unitholder receives a total of $0.450 per unit for that quarter (the “third target distribution”); and

 

   

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to WES’s general partner.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The following table shows our selected historical and pro forma financial and operating data, in each case for the periods and as of the dates indicated. The selected historical consolidated statements of income and cash flow data for the years ended December 31, 2009, 2010 and 2011 and the balance sheet data as of December 31, 2010 and 2011 are derived from our audited historical consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated statements of income and cash flow data for the years ended December 31, 2007 and 2008 and the balance sheet data as of December 31, 2007, 2008 and 2009 are derived from our unaudited historical consolidated financial statements not included in this prospectus. The selected historical consolidated statements of income and cash flow data for the nine months ended September 30, 2011 and 2012 and the balance sheet data as of September 30, 2012 are derived from our unaudited historical consolidated financial statements included elsewhere in this prospectus. Our financial statements consolidate WES and its general partner, WES GP, which is a wholly owned subsidiary of ours. This financial information is an integral part of, and should be read in conjunction with, the consolidated financial statements and notes thereto included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We have no separate operating activities apart from those conducted by WES, and our cash flows consist of distributions from WES on the partnership interests we own. Accordingly, the selected historical consolidated financial data set forth in the following table primarily reflect the operating activities and results of operations of WES. Since we own and control WES GP, we reflect our ownership interest in WES on a consolidated basis, which means that our financial results are combined with those of WES and WES GP.

The unaudited pro forma financial data below has been prepared as if certain transactions to be effected at the closing of this offering had taken place on September 30, 2012, in the case of the pro forma balance sheet, and on January 1, 2011, in the case of the pro forma statement of operations for the year ended December 31, 2011 and the nine months ended September 30, 2012. These transactions include the following:

 

   

the receipt of net proceeds of $281.5 million, after deducting underwriting discounts, the structuring fee and offering expenses, from the issuance and sale of 15,000,000 common units at an assumed initial offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover page of the prospectus);

 

   

the use of the net proceeds from this offering to purchase 5,997,174 WES common units and to make a capital contribution to WES on behalf of WES GP in exchange for 122,391 WES general partner units in order to maintain WES GP’s 2.0% general partner interest in WES, as described in “Use of Proceeds;” and

 

   

WES’s use of the funds received from us for general partnership purposes.

For a description of all of the assumptions used in preparing the unaudited selected pro forma financial data, you should read the notes to our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. The pro forma financial data should not be considered as indicative of the historical results we would have had or the future results that we will have after this offering.

 

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    Historical     Pro Forma  
    Year Ended December 31,     Nine Months Ended
September 30,
    Year Ended
December 31,
2011
    Nine Months
Ended
September 30,
2012
 
    2007     2008     2009     2010     2011     2011     2012      
   

(unaudited)

                (unaudited)     (unaudited)  
    (in thousands, except per unit and operating data)  

Statement of Income Data:

                 

Total revenues

  $ 731,297      $ 922,314      $ 619,764      $ 663,274      $ 823,265      $ 608,068      $ 636,603      $ 823,265      $ 636,603   

Costs and expenses (1)

    465,224        615,456        392,808        394,276        502,168        366,556        400,991        502,168        400,991   

Depreciation, amortization and impairments

    82,396        116,381        90,692        91,010        111,904        78,413        81,270        111,904        81,270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    547,620        731,837        483,500        485,286        614,072        444,969        482,261        614,072        482,261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    183,677        190,477        136,264        177,988        209,193        163,099        154,342        209,193        154,342   

Interest income (expense), net

    (4,965     13,110        10,762        1,449        (1,785     (2,746     (17,443     (1,785     (17,443

Other income (expense), net

    29        1,549        1,628        (538     (44     (895     (287     (44     (287

Income tax expense (2)

    62,926        65,343        39,667        51,464        45,664        36,000        29,902        19,018        699   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    115,815        139,793        108,987        127,435        161,700        123,458        106,710        188,346        135,913   

Net income (loss) attributable to WES public unitholders and other noncontrolling interests (3)

    (92     24,166        36,772        63,495        86,057        64,016        71,258        86,057        71,258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Western Gas Equity Partners, LP

  $ 115,907      $ 115,627      $ 72,215      $ 63,940      $ 75,643      $ 59,442      $ 35,452      $ 102,289      $ 64,655   

Pro forma net income per WGP common unit

                  $ 0.31   
                 

 

 

 

Balance Sheet Data (at period end):

                 

Net, property, plant and equipment

  $ 1,617,163      $ 1,693,735      $ 1,714,006      $ 1,753,762      $ 2,052,224        $ 2,342,923        $ 2,342,923   

Total assets

    1,832,397        2,202,023        2,246,321        2,263,094        2,837,626          2,953,944          3,235,444   

Total long-term liabilities

    530,611        680,319        785,952        1,021,737        1,258,450          1,537,447          1,081,544   

Total equity and partners’ capital

    1,243,763        1,442,894        1,408,882        1,182,658        1,466,954          1,141,610          1,971,296   

Cash Flow Data (for year end):

                 

Net cash provided by (used in):

                 

Operating activities

  $ 216,955      $ 266,287      $ 186,422      $ 221,331      $ 273,222      $ 201,484      $ 197,089       

Investing activities

    (199,922     (607,455     (223,128     (885,507     (472,951     (405,241     (864,263    

Financing activities

    (17,513     377,268        70,616        621,266        399,214        428,140        488,109       

Capital expenditures

    192,522        164,360        121,295        138,000        142,946        78,573        258,916       

Operating Data (volumes in MMcf/d):

                 

Gathering, treating and transportation throughput (4)

    1,442        1,339        1,229        1,181        1,321        1,327        1,255       

Processing throughput (5)

    458        557        808        815        962        940        1,182       

Equity investment throughput (6)

    289        304        225        228        198        191        236       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total throughput

    2,189        2,200        2,262        2,224        2,481        2,458        2,673       

Throughput attributable to noncontrolling interests

    —          124        180        197        242        237        254       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Throughput attributable to Western Gas Equity Partners, LP

    2,189        2,076        2,082        2,027        2,239        2,221        2,419       

 

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(1) Pro forma costs and expenses do not give effect to estimated annual incremental general and administrative expenses of approximately $3.0 million that we expect we will incur as a result of being a publicly traded partnership.
(2) Prior to our conversion in September 2012 to a limited partnership, we were a single-member limited liability company, required to reflect our income tax expense and liability on a separate-return basis. Upon the completion of this offering, and similar to WES, we will be treated as a partnership for U.S. federal and state income tax purposes and therefore will not be subject to U.S. federal and state income taxes, except for the Texas margin tax.
(3) Represents the publicly held common units of WES and WES’s noncontrolling interests in Chipeta that were held by Anadarko and a third-party member. Effective August 1, 2012, WES acquired Anadarko’s remaining interest in Chipeta, accounted for on a prospective basis.
(4) Excludes average NGL pipeline volumes from the Chipeta assets of 3 MBbls/d, 11 MBbls/d, 14 MBbls/d, 24 MBbls/d, 23 MBbls/d and 25 MBbls/d for and the years ended December 31, 2008, 2009, 2010, 2011 and the nine months ended September 30, 2011 and 2012, respectively.
(5) Consists of 100% of Chipeta, Granger, Hilight and Red Desert complex volumes and 50% of Newcastle system volumes for all periods presented, as well as throughput beginning March 2011 attributable to the Platte Valley system.
(6) Represents WES’s 14.81% share of Fort Union and 22% share of Rendezvous gross volumes, and excludes WES’s 10% share of average White Cliffs pipeline volumes consisting of 3 MBbls/d, 4 MBbls/d, 3 MBbls/d and 6 MBbls/d for and the years ended December 31, 2010 and 2011 the nine months ended September 30, 2011 and 2012, respectively. WES’s 10% share of White Cliffs volumes for 2009 was not material.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We were formed by converting WGR Holdings, LLC into a limited partnership and changing its name to Western Gas Equity Partners, LP. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to (i) “we,” “us,” “our,” “Western Gas Equity Partners, LP,” and “WGP” refer to Western Gas Equity Partners, LP and its consolidated subsidiaries collectively; (ii) “our general partner” refer to Western Gas Equity Holdings, LLC, the general partner of Western Gas Equity Partners, LP; (iii) “WES” refer to Western Gas Partners, LP and its subsidiaries collectively; (iv) “WES GP” refer to Western Gas Holdings, LLC, our wholly owned subsidiary and the general partner of Western Gas Partners, LP; (v) “Anadarko” refers to Anadarko Petroleum Corporation and its consolidated subsidiaries, other than us, our general partner, WES GP, WES, and its subsidiaries; and (vi) “Affiliates” refer to wholly owned and partially owned subsidiaries of Anadarko, excluding WGP, but including Fort Union Gas Gathering, LLC (“Fort Union”), White Cliffs Pipeline, LLC (“White Cliffs”), and Rendezvous Gas Services, LLC (“Rendezvous”).

You should read the following discussion and analysis of financial condition and results of operations in conjunction with the historical and pro forma financial statements, and the notes thereto, included elsewhere in this prospectus. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding certain risks inherent in our and WES’s businesses.

Introduction

We are a Delaware limited partnership formed to own three types of partnership interests in Western Gas Partners, LP, a publicly traded limited partnership (NYSE: WES). WES is a growth-oriented Delaware master limited partnership organized by Anadarko Petroleum Corporation (NYSE: APC) to own, operate, acquire and develop midstream energy assets. Our only cash-generating assets consist of our partnership interests in WES, which upon the completion of this offering will consist of the following:

 

   

2,080,302 WES general partner units, representing a 2.0% general partner interest in WES;

 

   

all of the incentive distribution rights in WES, which entitle us to receive increasing percentages, up to the maximum level of 48.0%, of any incremental cash distributed by WES as certain target distribution levels are reached in any quarter; and

 

   

46,570,413 WES common units, representing a 44.8% limited partner interest in WES.

We were formed in September 2012 upon the conversion of our predecessor, WGR Holdings, LLC, into a Delaware limited partnership. As of September 30, 2012, we owned 40,573,239 WES common units and, indirectly through our 100% membership interest in WES GP, 1,957,845 WES general partner units and all of the incentive distribution rights.

Based on WES’s anticipated fourth quarter cash distribution and our expected ownership of WES following this offering, we expect our initial quarterly cash distribution to be $0.165 per common unit, or $0.660 per common unit on an annualized basis. Our primary objective is to increase distributions to our unitholders over time through growth in the distributions payable with respect to our partnership interests in WES. To achieve this objective, we intend to actively monitor and support WES in the successful execution of its business strategy. In the future, we may facilitate WES’s growth through the use of our capital resources, which could involve capital contributions, loans or other forms of financial support.

WES is required by its partnership agreement to distribute, and it has historically distributed within 45 days of the end of each quarter, all of its cash on hand at the end of each quarter, less reserves established by its general partner to provide for the proper conduct of its business or to provide funds for future distributions. Like WES, we are structured as a limited partnership and will distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner.

Our cash flows will consist of the cash distributions we receive with respect to the WES partnership interests we own. While we, like WES, are structured as a limited partnership, our capital structure and cash

 

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distribution policy differ materially from those of WES. Most notably, (i) our general partner does not have an economic interest in us and is not entitled to receive any distributions from us and (ii) our capital structure does not include incentive distribution rights. Therefore, our distributions will be allocated exclusively to our common units.

Our ownership of WES’s incentive distribution rights entitles us to receive the following percentages of cash distributed by WES at the following target cash distribution levels:

 

   

13.0% of all incremental cash distributed in a quarter after $0.345 has been distributed in respect of each common unit and general partner unit of WES for that quarter;

 

   

23.0% of all incremental cash distributed in a quarter after $0.375 has been distributed in respect of each common unit and general partner unit of WES for that quarter; and

 

   

the maximum sharing level of 48.0% of all incremental cash distributed in a quarter after $0.450 has been distributed in respect of each common unit and general partner unit of WES for that quarter.

The cash distributions we receive from WES are tied to (i) WES’s per unit distribution level and (ii) the number of WES common units outstanding. An increase in either factor (assuming the other factor remains constant or increases) will generally result in an increase in the amount of cash distributions we receive from WES. Since its initial public offering, WES has engaged in transactions that have resulted in significant increases in both its per unit distribution level and outstanding equity capitalization, and we expect WES to engage in similar transactions in the future. WES has increased its quarterly cash distribution from $0.30 per common unit, or $1.20 on an annualized basis, for the quarter ended June 30, 2008, to $0.50 per common unit, or $2.00 on an annualized basis, for the quarter ended September 30, 2012. During the same period, WES issued a total of 42.9 million common units.

Our discussion of WES Adjusted EBITDA for the year ending December 31, 2013, included elsewhere in this prospectus, assumes a WES quarterly distribution of $0.52 per unit, because based on WES’s fourth quarter operating results to date, the management of WES GP has informed us that it plans to recommend that the WES GP board of directors approve an increase in WES’s distribution with respect to the fourth quarter of 2012 to $0.52 per WES common unit. This distribution increase for the fourth quarter of 2012 has not been submitted to, or approved by, the board of directors of WES GP and is therefore subject to change. Please read “Risk Factors – Risks Inherent in an Investment in Us – Our only cash-generating assets are our ownership interests in WES, and our cash flow is therefore completely dependent upon the ability of WES to make cash distributions to its partners.”

Based on WES’s ownership structure after giving effect to our acquisition of WES common units and general partner units in connection with the closing of this offering as described under “Use of Proceeds,” WES’s anticipated fourth quarter 2012 distribution of $0.52 per common unit will result in a quarterly distribution to us of $35.2 million, or approximately $140.6 million on an annualized basis, consisting of (i) $24.2 million from distributions on our WES common units, (ii) $1.3 million from distributions on our WES general partner units and (iii) $9.7 million from distributions on our incentive distribution rights. We are currently receiving distributions at the highest level on our incentive distribution rights and therefore will receive 48.0% of the cash that WES distributes in excess of $0.450 per common unit, if any. As a result, the cash distributions we receive from WES with respect to the incentive distribution rights will increase more rapidly than those with respect to our WES common and general partner units.

Financial Presentation

Because WGP controls WES GP, which in turn controls WES, we reflect our ownership interest in WES on a consolidated basis, which means that our financial results are combined with those of WES and WES GP. The publicly held limited partner interests in WES are reflected as noncontrolling interests in our results of operations. We have no separate operating activities apart from those conducted by WES, and our operating cash flows consist of distributions from WES on the partnership interests we own. Accordingly, our results of

 

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operations do not differ materially from the results of operations of WES, with the reconciling items between WGP’s consolidated financial statements and those of WES consisting primarily of: (i) the presentation of noncontrolling interests in WGP that are held by the limited partners of WES other than WGP, (ii) the elimination of WES GP’s investment in WES with WES GP’s underlying capital account and (iii) the recognition of the liabilities for awards issued pursuant to the Incentive Plan. These items, and certain tax issues specific to WGP insofar as they generate differences from WES’s historical financial statements, are described in “—Items Affecting the Comparability of Financial Results—Western Gas Equity Partners, LP” below, with the remainder of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” consisting solely of a discussion of the operating activities and results of operations of WES. WES’s historical results of operations do not reflect the incremental general and administrative expenses we expect to incur as a result of being a publicly traded partnership, which we expect to be approximately $3.0 million per year.

Unless the context otherwise indicates, references to the assets and operations of WES in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are to the assets owned by WES as of September 30, 2012. In May 2008, WES closed its initial public offering. Concurrently with the closing of the offering, Anadarko contributed to WES the assets and liabilities of Anadarko Gathering Company LLC (“AGC”), Pinnacle Gas Treating LLC (“PGT”) and MIGC, which are referred to as the “initial assets.” In December 2008, WES completed the acquisition of the Powder River assets from Anadarko, which included (i) the Hilight system, (ii) a 50% interest in the Newcastle system and (iii) a 14.81% membership interest in Fort Union.

The following table presents the acquisitions completed by WES during the years ended December 31, 2009, 2010 and 2011, and the nine months ended September 30, 2012, and identifies the funding sources for such acquisitions:

 

     Acquisition
Date
     Percentage
Acquired
    Borrowings      Cash On
Hand
     WES Common
Units Issued
     WES GP
Units
Issued
 
     (in thousands, except unit and percent amounts)  

Chipeta (1)

     07/01/09         51 %    $ 101,451       $ 4,638         351,424          7,172  

Granger (2)

     01/29/10         100     210,000         31,680         620,689         12,667  

Wattenberg (3)

     08/02/10         100     450,000         23,100         1,048,196         21,392  

White Cliffs (4)

     09/28/10         10             38,047                   

Platte Valley (5)

     02/28/11         100     303,000         602                   

Bison (6)

     07/08/11         100             25,000         2,950,284         60,210  

MGR (7)

     01/13/12         100     299,000         159,587         632,783         12,914  

Chipeta (8)

     08/01/12         24             128,250         151,235         3,086  

 

(1) The assets acquired from Anadarko included a 51% membership interest in Chipeta, together with an associated NGL pipeline. These assets provide processing and transportation services in the Greater Natural Buttes area in Uintah County, Utah. Chipeta owns a natural gas processing plant with one refrigeration unit and two cryogenic units. In November 2009, Chipeta acquired the Natural Buttes plant from a third party for $9.1 million, of which $4.5 million was contributed by the noncontrolling interest owners to fund their proportionate share of the acquisition cost. The 51% membership interest in Chipeta and associated NGL pipeline are referred to collectively as the “initial Chipeta assets,” and the acquisition is referred to as the “initial Chipeta acquisition.”
(2) The assets acquired from Anadarko included (i) the Granger gathering system with related compressors and other facilities, and (ii) the Granger complex, consisting of two cryogenic trains, one refrigeration train, an NGL fractionation facility and ancillary equipment. We refer to these assets, located in southwestern Wyoming, as the “Granger assets” and to the acquisition as the “Granger acquisition.”
(3) The assets acquired from Anadarko included the Wattenberg gathering system and related facilities, including the Fort Lupton processing plant. We refer to these assets, located in the Denver-Julesburg Basin, north and east of Denver, Colorado, as the “Wattenberg assets” and to the acquisition as the “Wattenberg acquisition.”

 

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(4) White Cliffs owns a crude oil pipeline that originates in Platteville, Colorado and terminates in Cushing, Oklahoma, and which became operational in June 2009. The acquisition of a 0.4% interest in White Cliffs and related purchase option from Anadarko, combined with the acquisition of an additional 9.6% interest in White Cliffs from a third party, are referred to collectively as the “White Cliffs acquisition.” The membership interest in White Cliffs is referred to as the “White Cliffs investment.”
(5) The assets acquired from a third party include (i) a natural gas gathering system and related compression and other ancillary equipment, and (ii) cryogenic gas processing facilities. We refer to these assets, located in the Denver-Julesburg Basin, as the “Platte Valley assets” and to the acquisition as the “Platte Valley acquisition.” An adjustment to intangible assets of $1.6 million was recorded in August 2011, representing the final allocation of the purchase price.
(6) The Bison gas treating facility acquired from Anadarko is located in the Powder River Basin in northeastern Wyoming, and includes three amine treating units, compressor units, and generators. We refer to these assets as the “Bison assets” and to the acquisition as the “Bison acquisition.” The Bison assets are the only treating and delivery point into the third-party-owned Bison pipeline.
(7) Mountain Gas Resources LLC (“MGR”), acquired from Anadarko, owns (i) the Red Desert complex, located in the greater Green River Basin in southwestern Wyoming, which includes the Patrick Draw processing plant, the Red Desert processing plant, gathering lines, and related facilities, (ii) a 22% interest in Rendezvous, which owns a gathering system serving the Jonah and Pinedale Anticline fields in southwestern Wyoming, and (iii) certain additional midstream assets and equipment. We refer to these assets as the “MGR assets” and to the acquisition as the “MGR acquisition.”
(8) On August 1, 2012, WES acquired Anadarko’s remaining 24% membership interest in Chipeta, with distributions related to the additional interest beginning July 1, 2012, bringing WES’s total membership interest in Chipeta to 75%. The 24% membership interest in Chipeta is referred to as the “additional Chipeta assets” and the acquisition is referred to as the “additional Chipeta acquisition.” The 25% membership interest held by a third party is reflected as a noncontrolling interest in WES’s consolidated financial statements for all periods.

Anadarko acquired MIGC, the Powder River assets, the Granger assets and the MGR assets in connection with its August 2006 acquisition of Western Gas Resources, Inc. (“Western”) and acquired its then 75% interest in Chipeta and the Wattenberg assets in connection with its August 2006 acquisition of Kerr-McGee Corporation (“Kerr-McGee”). Anadarko made its initial investment in White Cliffs on January 29, 2007.

Because Anadarko controls WES through its ownership of WES GP, WES’s acquisitions from Anadarko are considered transfers of net assets between entities under common control. As such, the assets WES acquired from Anadarko were initially recorded at Anadarko’s historic carrying value, which does not correlate to the total acquisition price paid by WES. Further, after an acquisition of assets from Anadarko, WES may be required to recast its financial statements to include the activities of such assets as of the date of common control. WES’s consolidated financial statements include (i) the combined financial results and operations of AGC and PGT from their inception through the closing date of WES’s initial public offering and (ii) the consolidated financial results and operations of WES and its subsidiaries from the closing date of its initial public offering combined with (a) the financial results and operations of MIGC, the Powder River assets, the Granger assets and the MGR assets from August 23, 2006, (b) the financial results and operations of the initial Chipeta assets and Wattenberg assets, from August 10, 2006, (c) the 0.4% interest in White Cliffs from January 29, 2007, (d) the financial results and operations of the Bison assets, which Anadarko began construction of in 2009 and placed in service in June 2010, and (e) the financial results and operations of the additional Chipeta assets from August 1, 2012.

As we consolidate our financial statements with those of WES, the consolidated financial statements included in this prospectus for periods prior to WES’s acquisition of assets under common control have been prepared from Anadarko’s historical cost-basis and may not necessarily be indicative of the actual results of operations that would have occurred if WES had owned the assets during the periods reported.

 

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Index to Financial Statements

Cash Distributions

The following table sets forth the distributions that WES has paid in respect of its general partner interest and incentive distribution rights for the periods indicated. We may not distribute all of the cash that we receive from WES to our unitholders, as our general partner may establish reserves for general, administrative and other expenses, future distributions and other purposes.

 

     Cash Distributions Made by WES (1)  
     Year Ended December 31,     Nine Months Ended
September 30,
 
     2009     2010     2011     2011     2012  
     (in thousands, except unit and per unit amounts)  

Cash distribution paid per common unit by WES (2)

   $ 1.260      $ 1.440      $ 1.655      $ 1.215      $ 1.440   

Average number of WES common units outstanding (2)

     57,795,971        69,593,387        86,682,967        85,319,362        94,163,750   

Total cash distributions made by WES to all partners

   $ 74,430      $ 103,364      $ 152,581      $ 109,554