UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission file number: 001-34046

WESTERN GAS PARTNERS, LP

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

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

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

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

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

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

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

There were 42,621,968 common units outstanding as of August 2, 2010.

 

 

TABLE OF CONTENTS

						Page
PART I				FINANCIAL INFORMATION
		Item 1.		Financial Statements
				Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009			4
				Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009			5
				Consolidated Statement of Equity and Partners’ Capital for the six months ended June 30, 2010			6
				Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009			7
				Notes to Unaudited Consolidated Financial Statements			8
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
				Cautionary Note Regarding Forward-Looking Statements			25
				Executive Summary			26
				Acquisitions			27
				May 2010 Equity Offering			28
				Items Affecting the Comparability of Our Financial Results			28
				Results of Operations			29
				Operating Results			29
				Liquidity and Capital Resources			41
				Contractual Obligations			46
				Off-Balance Sheet Arrangements			46
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			46
		Item 4.		Controls and Procedures			47
PART II				OTHER INFORMATION
		Item 1.		Legal Proceedings			48
		Item 1A.		Risk Factors			48
		Item 6.		Exhibits			49
EX-31.1
EX-31.2
EX-32.1

Definitions

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

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

Bcf/d: One billion cubic feet per day.

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

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

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

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

MMBtu: One million British thermal units.

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

MMcf/d: One million cubic feet per day.

Natural gas: Hydrocarbon gas found in the earth composed of methane, ethane, butane, propane and other gases.

Natural gas liquids or NGLs: The combination of ethane, propane, butane and natural gasoline that when removed from natural gas become liquid under various levels of higher pressure and lower temperature.

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

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Western Gas Partners, LP

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009(1)				2010				2009(1)
Revenues – affiliates
Gathering, processing and transportation of natural gas		$	36,965			$	36,815			$	74,079			$	72,889
Natural gas, natural gas liquids and condensate sales			40,782				45,470				85,941				87,630
Equity income and other			1,394				2,640				2,952				4,370
Total revenues – affiliates			79,141				84,925				162,972				164,889
Revenues – third parties
Gathering, processing and transportation of natural gas			5,185				6,714				11,430				13,974
Natural gas, natural gas liquids and condensate sales			2,626				1,932				6,319				3,404
Other, net			1,016				189				1,566				653
Total revenues – third parties			8,827				8,835				19,315				18,031
Total revenues			87,968				93,760				182,287				182,920
Operating expenses (2)
Cost of product			24,955				28,732				57,532				62,377
Operation and maintenance			13,735				15,689				28,903				29,775
General and administrative			4,358				5,367				9,433				11,653
Property and other taxes			2,800				2,808				5,568				5,629
Depreciation and amortization			13,555				12,839				27,238				24,855
Total operating expenses			59,403				65,435				128,674				134,289
Operating income			28,565				28,325				53,613				48,631
Interest income, net (3)			627				2,571				1,324				5,248
Other income (expense), net			(2,394	)			9				(2,374	)			16
Income before income taxes			26,798				30,905				52,563				53,895
Income tax expense			17				2,087				973				2,353
Net income			26,781				28,818				51,590				51,542
Net income attributable to noncontrolling interests			3,370				3,415				5,265				5,554
Net income attributable to Western Gas Partners, LP		$	23,411			$	25,403			$	46,325			$	45,988
Limited partner interest in net income:
Net income attributable to Western Gas Partners, LP (4)		$	23,411			$	25,403			$	46,325			$	45,988
Pre-acquisition (income) loss allocated to Parent			—				(7,279	)			1,218				(10,907	)
General partner interest in net income			(519	)			(362	)			(1,002	)			(701	)
Limited partner interest in net income		$	22,892			$	17,762			$	46,541			$	34,380
Net income per common unit – basic and diluted		$	0.35			$	0.32			$	0.72			$	0.62
Net income per subordinated unit – basic and diluted		$	0.35			$	0.32			$	0.72			$	0.62

See accompanying notes to unaudited consolidated financial statements.

Western Gas Partners, LP

(Unaudited, in thousands, except number of units)

		June 30,				December 31,
		2010				2009
ASSETS
Current assets
Cash and cash equivalents		$	64,402			$	69,984
Accounts receivable, net – third parties			2,456				4,076
Accounts receivable – affiliates			10,470				2,203
Natural gas imbalance receivables – third parties			551				266
Natural gas imbalance receivables – affiliates			41				448
Other current assets			2,766				3,287
Total current assets			80,686				80,264
Long-term assets
Note receivable – Anadarko			260,000				260,000
Property, plant and equipment
Cost			1,263,677				1,246,155
Less accumulated depreciation			280,257				252,778
Net property, plant and equipment			983,420				993,377
Goodwill			31,248				31,248
Equity investment			20,819				20,060
Other assets			2,198				2,974
Total assets		$	1,378,371			$	1,387,923
LIABILITIES, EQUITY AND PARTNERS’ CAPITAL
Current liabilities
Accounts payable – third parties		$	8,111			$	12,003
Natural gas imbalance payable – third parties			476				289
Natural gas imbalance payable – affiliates			1,339				1,319
Accrued ad valorem taxes			5,702				3,046
Income taxes payable			548				412
Accrued liabilities – third parties			11,780				8,717
Accrued liabilities – affiliates			242				470
Total current liabilities			28,198				26,256
Long-term liabilities
Long-term debt – third party			110,000				—
Note payable – Anadarko			175,000				175,000
Deferred income taxes			394				92,891
Asset retirement obligations and other			15,631				15,077
Total long-term liabilities			301,025				282,968
Total liabilities			329,223				309,224
Commitments and contingencies (Note 8)
Equity and partners’ capital
Common units (41,573,772 and 36,374,925 units issued and outstanding at June 30, 2010 and December 31, 2009, respectively)			662,262				497,230
Subordinated units (26,536,306 units issued and outstanding at June 30, 2010 and December 31, 2009)			277,953				276,571
General partner units (1,390,002 and 1,283,903 units issued and outstanding at June 30, 2010 and December 31, 2009, respectively)			17,372				13,726
Parent net investment			—				200,250
Total partners’ capital			957,587				987,777
Noncontrolling interests			91,561				90,922
Total equity and partners’ capital			1,049,148				1,078,699
Total liabilities, equity and partners’ capital		$	1,378,371			$	1,387,923

See accompanying notes to unaudited consolidated financial statements.

Western Gas Partners, LP

(Unaudited, in thousands)

						Partners’ Capital
		Parent Net				Limited Partners								General				Noncontrolling
		Investment				Common				Subordinated				Partner				Interests				Total
Balance at December 31, 2009		$	200,250			$	497,230			$	276,571			$	13,726			$	90,922			$	1,078,699
Net pre-acquisition contributions from Parent			7,914				—				—				—				—				7,914
Elimination of net deferred tax liabilities			92,203				—				—				—				—				92,203
Contribution of Granger assets			(300,367	)			57,513				—				1,174				—				(241,680	)
Contribution of assets from Parent			—				7,379				—				151				—				7,530
Contributions from noncontrolling interest owners			—				—				—				—				2,053				2,053
Non-cash equity-based compensation			—				146				—				—				—				146
May 2010 equity offering, net of offering and other expenses			—				97,128				—				2,183				—				99,311
Net income (loss)			(1,218	)			27,380				19,161				1,002				5,265				51,590
Distributions to unitholders			—				(24,787	)			(17,779	)			(869	)			—				(43,435	)
Distributions to noncontrolling interest owners			—				—				—				—				(6,383	)			(6,383	)
Other			1,218				273				—				5				(296	)			1,200
Balance at June 30, 2010		$	—			$	662,262			$	277,953			$	17,372			$	91,561			$	1,049,148

See accompanying notes to unaudited consolidated financial statements.

Western Gas Partners, LP

(Unaudited, in thousands)

		Six Months Ended June 30,
		2010				2009(1)
Cash flows from operating activities
Net income		$	51,590			$	51,542
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			27,238				24,855
Deferred income taxes			(607	)			(985	)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable			(6,844	)			1,849
Decrease in natural gas imbalance receivable			122				3,165
Increase (decrease) in accounts payable, accrued liabilities and natural gas imbalance payable			10,263				(10,255	)
Change in other items, net			1,172				(192	)
Net cash provided by operating activities			82,934				69,979
Cash flows from investing activities
Granger acquisition			(241,680	)			—
Capital expenditures			(9,591	)			(39,895	)
Investment in equity affiliate			(309	)			(263	)
Net cash used in investing activities			(251,580	)			(40,158	)
Cash flows from financing activities
Borrowings under revolving credit facility, net of repayments and issuance costs			109,987				—
May 2010 equity offering, net of $4.3 million in offering and other expenses			99,311				—
Contributions from noncontrolling interest owners and Parent			2,053				9,584
Distributions to unitholders			(43,435	)			(34,059	)
Distributions to noncontrolling interest owners			(6,383	)			(2,811	)
Net pre-acquisition contributions from Parent			1,531				3,556
Net cash provided by (used in) financing activities			163,064				(23,730	)
Net (decrease) increase in cash and cash equivalents			(5,582	)			6,091
Cash and cash equivalents at beginning of period			69,984				36,074
Cash and cash equivalents at end of period		$	64,402			$	42,165
Supplemental disclosures
Contribution of assets from Parent		$	7,530			$	—
Decrease in accrued capital expenditures		$	177			$	4,245
Interest paid		$	6,068			$	1,821
Interest received		$	8,450			$	8,450

See accompanying notes to unaudited consolidated financial statements.

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

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of business. Western Gas Partners, LP (the “Partnership”) is a Delaware limited partnership formed in August 2007. The Partnership is engaged in the business of gathering, compressing, processing, treating and transporting natural gas and natural gas liquids (“NGLs”) for Anadarko Petroleum Corporation and its consolidated subsidiaries as well as for third-party producers and customers. The Partnership’s assets consist of ten gathering systems, six natural gas treating facilities, six gas processing facilities, one interstate pipeline and one NGL pipeline. The Partnership’s assets are located in East and West Texas, the Rocky Mountains and the Mid-Continent.

For purposes of these financial statements, the “Partnership” refers to Western Gas Partners, LP and its subsidiaries; “Anadarko” or “Parent” refers to Anadarko Petroleum Corporation and its consolidated subsidiaries, excluding the Partnership; and “affiliates” refers to wholly owned and partially owned subsidiaries of Anadarko, excluding the Partnership. The “initial assets” collectively refer to Anadarko Gathering Company LLC, or “AGC,” Pinnacle Gas Treating LLC, or “PGT,” and MIGC LLC, or “MIGC,” all of which the Partnership acquired in connection with its May 2008 initial public offering. The “Powder River assets” collectively refer to the Partnership’s 100% ownership interest in the Hilight system, 50% interest in the Newcastle system and 14.81% limited liability company membership interest in Fort Union Gas Gathering, L.L.C., or “Fort Union,” all of which the Partnership acquired from Anadarko in December 2008, and the “Powder River acquisition” refers to the acquisition of the Powder River assets. The “Chipeta assets” collectively refer to the 51% membership interest in Chipeta Processing LLC, or “Chipeta,” and associated NGL pipeline, that the Partnership acquired from Anadarko in July 2009, and the “Chipeta acquisition” refers to the acquisition of the Chipeta assets. The “Granger assets” collectively refer to the Granger gathering system and Granger complex, which the Partnership acquired from Anadarko in January 2010, and the “Granger acquisition” refers to the acquisition of the Granger assets. The Wattenberg gathering system and associated assets that the Partnership acquired from Anadarko in August 2010 are referred to collectively as the “Wattenberg assets” and the acquisition is referred to as the “Wattenberg acquisition.” See Note 9—Subsequent Events—Wattenberg acquisition. The Partnership’s general partner is Western Gas Holdings, LLC, a wholly owned subsidiary of Anadarko.

Basis of presentation. The consolidated financial statements include the accounts of the Partnership and entities in which it holds a controlling financial interest. All significant intercompany transactions have been eliminated. Investments in non-controlled entities over which the Partnership exercises significant influence are accounted for under the equity method. The information furnished herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of financial position as of June 30, 2010 and December 31, 2009, results of operations for the three and six months ended June 30, 2010 and 2009, statement of equity and partners’ capital for the six months ended June 30, 2010 and statements of cash flows for the six months ended June 30, 2010 and 2009. The Partnership’s financial results for the three and six months ended June 30, 2010 are not necessarily indicative of the expected results for the full year ending December 31, 2010.

The accompanying consolidated financial statements of the Partnership have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). To conform to these accounting principles, management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements and the notes thereto. These estimates are evaluated on an ongoing basis, utilizing historical experience and other methods considered reasonable under the particular circumstances. Although these estimates are based on management’s knowledge and the best available information at the time, changes may result in revised estimates and actual results may differ from these estimates. Effects on the Partnership’s business, financial position and results of operations resulting from revisions to estimates are recognized when the facts that give rise to the revision become known.

The accompanying consolidated financial statements and notes should be read in conjunction with the Partnership’s annual report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2010, as revised by the Partnership’s current report on Form 8-K, filed with the SEC on May 4, 2010 (the “annual report on Form 10-K”) to recast the Partnership’s financial statements to reflect the results generated by the Granger assets, as discussed below, from the date on which those assets were acquired by Anadarko.

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

Acquisitions.

Chipeta acquisition. In July 2009, the Partnership acquired certain midstream assets from Anadarko that provide processing and transportation services in the Greater Natural Buttes area in Uintah County, Utah. The acquisition consisted of a 51% membership interest in Chipeta, together with an associated NGL pipeline. Chipeta owns a natural gas processing plant complex which includes two processing trains: a refrigeration unit completed in November 2007 and a cryogenic unit completed in April 2009. The Partnership financed the Chipeta acquisition (i) by borrowing $101.5 million from Anadarko pursuant to the terms of a 7.0% fixed-rate, three-year term loan agreement, and (ii) the issuance of 351,424 common units and 7,172 general partner units.

In November 2009, Chipeta closed its acquisition of a compressor station and processing plant (the “Natural Buttes plant”) from a third party for $9.1 million. The noncontrolling interest owners contributed $4.5 million to Chipeta during the year ended December 31, 2009 to fund their proportionate share of the Natural Buttes plant acquisition. The Natural Buttes plant is located in Uintah County, Utah.

As of June 30, 2010, Chipeta is owned 51% by the Partnership, 24% by Anadarko and 25% by a third-party member. The interests in Chipeta held by Anadarko and the third-party member are reflected as noncontrolling interests in the consolidated financial statements.

Granger acquisition. In January 2010, the Partnership acquired Anadarko’s entire 100% ownership interest in the following assets located in Southwestern Wyoming: (i) the Granger gathering system with related compressors and other facilities, and (ii) the Granger complex, consisting of two cryogenic trains, two refrigeration trains, an NGL fractionation facility and ancillary equipment. The Granger acquisition was financed primarily with $210.0 million in borrowings under the Partnership’s revolving credit facility plus $31.7 million of cash on hand, as well as through the issuance of 620,689 common units and 12,667 general partner units to Anadarko.

Wattenberg acquisition. The Partnership acquired certain assets located in the Denver-Julesburg Basin, north and east of Denver, Colorado, from Anadarko in August 2010. See Note 9—Subsequent Events—Wattenberg acquisition.

Presentation of Partnership acquisitions. The initial assets, Powder River assets, Chipeta assets and Granger assets are referred to collectively as the “Partnership Assets.” Unless otherwise noted, references to “periods prior to our acquisition of the Partnership Assets” and similar phrases refer to periods prior to July 2009 with respect to the Chipeta assets and periods prior to January 2010 with respect to the Granger assets. Unless otherwise noted, references to “periods subsequent to our acquisition of the Partnership Assets” and similar phrases refer to periods including and subsequent to July 2009 with respect to the Chipeta assets and periods including and subsequent to January 2010 with respect to the Granger assets.

Anadarko acquired the Granger assets in connection with its August 23, 2006 acquisition of Western Gas Resources, Inc. (“Western”) and Anadarko initially acquired the Chipeta assets in connection with its August 10, 2006 acquisition of Kerr-McGee Corporation (“Kerr-McGee”) and subsequently completed the construction of the Chipeta assets. The acquisitions by the Partnership of the Chipeta assets and Granger assets were considered transfers of net assets between entities under common control. Accordingly, the Partnership is required to revise its financial statements to include the activities of the Partnership Assets as of the date of common control. The Partnership’s historical financial statements for the three and six months ended June 30, 2009 as presented in the Partnership’s quarterly report on Form 10-Q for the quarter ended June 30, 2009, which included the results attributable to the initial assets and the Powder River assets, have been recast in this quarterly report on Form 10-Q to include the results attributable to the Chipeta assets and the Granger assets as if the Partnership owned such assets for all periods presented. Net income attributable to the Partnership Assets for periods prior to each acquisition is not allocated to the limited partners for purposes of calculating net income per limited partner unit.

The consolidated financial statements for periods prior to the Partnership’s acquisition of the Partnership Assets have been prepared from Anadarko’s historical cost-basis accounts and may not necessarily be indicative of the actual results of operations that would have occurred if the Partnership had owned the assets during the periods reported.

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

May 2010 equity offering. On May 18, 2010, the Partnership closed its equity offering of 4,000,000 common units to the public at a price of $22.25 per unit. On June 2, 2010, the Partnership issued an additional 558,700 common units to the public pursuant to the exercise of the underwriters’ over-allotment option granted in connection with the equity offering. In connection with the May 2010 equity offering, the Partnership issued 93,035 general partner units to Anadarko. The May 18 and June 2, 2010 issuances are referred to collectively as the “May 2010 equity offering.” Net proceeds from the offering of approximately $99.3 million, including the general partner’s proportionate capital contribution to maintain its 2.0% interest, and cash on hand were used to repay $100.0 million outstanding under the Partnership’s revolving credit facility.

Limited partner and general partner units

The Partnership’s common units are listed on the New York Stock Exchange under the symbol “WES.” The following table summarizes common, subordinated and general partner units issued during the six months ended June 30, 2010 (in thousands):

		Limited Partner Units								General
		Common				Subordinated				Partner Units				Total
Balance at December 31, 2009			36,375				26,536				1,284				64,195
Granger acquisition			621				—				12				633
May 2010 equity offering			4,559								93				4,652
Long-Term Incentive Plan awards			19				—				1				20
Balance at June 30, 2010			41,574				26,536				1,390				69,500

Anadarko holdings of Partnership Equity. As of June 30, 2010, Anadarko held 1,390,002 general partner units representing a 2.0% general partner interest in the Partnership, 100% of the Partnership’s incentive distribution rights (“IDRs”), 9,254,435 common units and 26,536,306 subordinated units. Anadarko owned an aggregate 51.5% limited partner interest in the Partnership based on its holdings of common and subordinated units. The public held 32,319,337 common units, representing a 46.5% limited partner interest in the Partnership.

2. PARTNERSHIP DISTRIBUTIONS

The partnership agreement requires that, within 45 days subsequent to the end of each quarter, beginning with the quarter ended June 30, 2008, the Partnership distribute all of its available cash (as defined in the partnership agreement) to unitholders of record on the applicable record date. During the three and six months ended June 30, 2010, the Partnership paid cash distributions to its unitholders of approximately $22.0 million and $43.4 million, respectively, representing the $0.33 per-unit distribution for the quarter ended December 31, 2009 and the $0.34 per-unit distribution for the quarter ended March 31, 2010. During the three and six months ended June 30, 2009, the Partnership paid cash distributions to its unitholders of approximately $17.0 million and $34.1 million, respectively, representing the $0.30 per-unit distributions for the quarters ended March 31, 2009 and December 31, 2008. See also Note 9—Subsequent Events concerning distributions approved in July 2010.

3. NET INCOME PER LIMITED PARTNER UNIT

The Partnership’s net income for periods including and subsequent to the Partnership’s acquisitions of the Partnership Assets is allocated to the general partner and the limited partners, including any subordinated unitholders, in accordance with their respective ownership percentages, and, when applicable, giving effect to unvested units granted under the Western Gas Partners, LP 2008 Long-Term Incentive Plan (the “LTIP”) and incentive distributions allocable to the general partner. The allocation of undistributed earnings, or net income in excess of distributions, to the incentive distribution rights is limited to available cash (as defined by the partnership agreement) for the period. Net income allocated to the general partner for the three months ended June 30, 2010 includes a nominal amount attributed to the incentive distributions. The Partnership’s net income allocable to the limited partners is allocated between the common and subordinated unitholders by applying the provisions of the partnership agreement that govern actual cash distributions as if all earnings for the period had been distributed. Accordingly, if current net income allocable to the limited partners is less than the minimum quarterly distribution, or if cumulative net income

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

allocable to the limited partners since May 14, 2008 is less than the cumulative minimum quarterly distributions, more income is allocated to the common units than the subordinated units for that quarterly period.

Basic and diluted net income per limited partner unit is calculated by dividing limited partners’ interest in net income by the weighted average number of limited partner units outstanding during the period. The common units and general partner units issued during the period are included on a weighted-average basis for the days in which they were outstanding.

The following table illustrates the Partnership’s calculation of net income per unit for common and subordinated limited partner units (in thousands, except per-unit information):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009(1)				2010				2009(1)
Net income attributable to Western Gas Partners, LP		$	23,411			$	25,403			$	46,325			$	45,988
Pre-acquisition (income) loss allocated to Parent			—				(7,279	)			1,218				(10,907	)
General partner interest in net income			(519	)			(362	)			(1,002	)			(701	)
Limited partner interest in net income		$	22,892			$	17,762			$	46,541			$	34,380
Net income allocable to common units		$	13,639			$	9,297			$	27,380			$	17,997
Net income allocable to subordinated units			9,253				8,465				19,161				16,383
Limited partner interest in net income		$	22,892			$	17,762			$	46,541			$	34,380
Net income per limited partner unit – basic and diluted
Common units		$	0.35			$	0.32			$	0.72			$	0.62
Subordinated units		$	0.35			$	0.32			$	0.72			$	0.62
Total		$	0.35			$	0.32			$	0.72			$	0.62
Weighted average limited partner units outstanding – basic and diluted
Common units			39,117				29,109				37,966				29,101
Subordinated units			26,536				26,536				26,536				26,536
Total			65,653				55,645				64,502				55,637

4. TRANSACTIONS WITH AFFILIATES

Affiliate transactions. The Partnership provides natural gas gathering, compression, processing, treating and transportation services to Anadarko and a portion of the Partnership’s expenditures are paid by or to Anadarko, which results in affiliate transactions. Except for volumes taken in-kind by certain producers, an affiliate of Anadarko sells the natural gas and extracted NGLs attributable to the Partnership’s processing activities, which also result in affiliate transactions. In addition, affiliate-based transactions also result from contributions to and distributions from Fort Union and Chipeta, which are paid or received by Anadarko.

Contribution of Partnership Assets to the Partnership. In January 2010, Anadarko contributed the Granger assets to the Partnership. In connection with the Granger acquisition, substantially all deferred tax liabilities attributable to the Granger assets were reversed and outstanding affiliate balances were entirely settled through an adjustment to parent net investment. See Note 1—Description of Business and Basis of Presentation. In August 2010, the Partnership acquired the Wattenberg assets from Anadarko. See Note 9—Subsequent Events—Wattenberg acquisition.

Cash management. Anadarko operates a cash management system whereby excess cash from most of its subsidiaries, held in separate bank accounts, is swept to centralized accounts. With respect to the Granger assets, sales and purchases related to third-party transactions prior to January 1, 2010 were received or paid in cash by Anadarko within its centralized cash

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

management system. Anadarko charged the Partnership interest at a variable rate on outstanding affiliate balances attributable to such assets for the periods these balances remained outstanding. The outstanding affiliate balances were entirely settled through an adjustment to parent net investment in connection with the Granger acquisition and, accordingly, affiliate-based interest expense on current intercompany balances is not charged for periods subsequent to January 1, 2010. Subsequent to the Partnership’s acquisition of the Partnership Assets, the Partnership cash-settles transactions directly with third parties and with Anadarko affiliates.

Note receivable from Anadarko. Concurrent with the closing of the Partnership’s May 2008 initial public offering, the Partnership loaned $260.0 million to Anadarko in exchange for a 30-year note bearing interest at a fixed annual rate of 6.50%. Interest on the note is payable quarterly. The fair value of the note receivable from Anadarko was approximately $209.0 million and $271.3 million at June 30, 2010 and December 31, 2009, respectively. The fair value of the note reflects consideration of credit risk and any premium or discount for the differential between the stated interest rate and quarter-end market rate, based on quoted market prices of similar debt instruments.

Note payable to Anadarko. Concurrent with the closing of the Powder River acquisition in December 2008, the Partnership entered into a five-year, $175.0 million term loan agreement with Anadarko under which the Partnership pays Anadarko interest at a fixed rate of 4.00% for the first two years and a floating rate of interest at three-month LIBOR plus 150 basis points beginning on December 1, 2010. See Note 7—Debt—Term loan for additional information.

Commodity price swap agreements. The Partnership entered into commodity price swap agreements with Anadarko to mitigate exposure to commodity price volatility that would otherwise be present as a result of the Partnership’s keep-whole and percentage-of-proceeds contracts applicable to natural gas processing activities at the Hilight, Newcastle and Granger systems. Such commodity price swap agreements were put in place effective January 1, 2009 to fix the margin the Partnership realizes on its share of revenues under keep-whole and percent-of-proceeds processing contracts at the Hilight and Newcastle systems. The commodity price swap arrangements for the Hilight and Newcastle systems expire in December 2011 and the Partnership can extend the agreements, at its option, annually through December 2013. Commodity price swap agreements were also put in place effective January 1, 2010 to fix the margin the Partnership realizes under both keep-whole and percentage-of-proceeds processing contracts at the Granger system. These commodity price swap arrangements for the Granger system extend through December 2014. In connection with the Wattenberg acquisition, the Partnership entered into five-year commodity price swap agreements with Anadarko effective July 2010. See Note 9—Subsequent Events—Wattenberg acquisition.

The Partnership’s notional volumes for each of the swap agreements are not specifically defined; instead, the commodity price swap agreements apply to volumes equal in amount to the Partnership’s share of actual volumes recovered from keep-whole and percentage-of-proceeds contracts at the Hilight, Newcastle and Granger systems. Because the notional volumes are not fixed, the commodity price swap agreements do not satisfy the definition of a derivative financial instrument and, therefore, are not required to be measured at fair value. The Partnership reports its realized gains and losses on the commodity price swap agreements in natural gas, NGLs and condensate sales – affiliates in its consolidated statements of income in the period in which the associated revenues are recognized. During the three and six months ended June 30, 2010, the Partnership recorded realized gains of $1.2 million and realized losses of $0.3 million, respectively, while during the three and six months ended June 30, 2009, the Partnership recorded realized gains of $2.3 million and $4.1 million, respectively, attributable to the commodity price swap agreements.

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

Chipeta LLC agreement. In connection with the Partnership’s acquisition of its 51% membership interest in Chipeta, the Partnership became party to Chipeta’s limited liability company agreement, as amended and restated as of July 23, 2009, together with Anadarko and the third-party member. Among other things, the Chipeta LLC Agreement prescribes the following:

	•		Chipeta’s members will be required from time to time to make capital contributions to Chipeta to the extent approved by the members in connection with Chipeta’s annual budget;
	•		Chipeta will distribute available cash, as defined in the Chipeta LLC Agreement, if any, to its members quarterly in accordance with each members’ membership interest; and
	•		Chipeta’s membership interests are subject to significant restrictions on transfer.

Chipeta gas processing agreement. Chipeta is party to a gas processing agreement dated September 6, 2008 with a subsidiary of Anadarko, pursuant to which Chipeta processes natural gas delivered by that subsidiary and the subsidiary takes allocated residue gas and NGLs in-kind. The Chipeta plant receives a large majority of its throughput pursuant to that agreement, which has a primary term that extends through 2023.

Omnibus agreement. Pursuant to the omnibus agreement, Anadarko performs centralized corporate functions for the Partnership, such as legal, accounting, treasury, cash management, investor relations, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, tax, marketing and midstream administration. The Partnership’s reimbursement to Anadarko for certain general and administrative expenses allocated to the Partnership is capped at $8.3 million for the year ended December 31, 2010, subject to adjustment to reflect expansions of the Partnership’s operations through the acquisition or construction of new assets or businesses and with the concurrence of the special committee of the Partnership’s general partner’s board of directors. Also see Note 9—Subsequent Events—Wattenberg acquisition for information on adjustments to the cap made as a result of the Wattenberg acquisition. The cap contained in the omnibus agreement does not apply to incremental general and administrative expenses allocated to or incurred by the Partnership as a result of being a publicly traded partnership.

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

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

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

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

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

Equity-based compensation. Grants made under equity-based compensation plans result in equity-based compensation expense which is determined by reference to the fair value of equity compensation as of the date of the relevant equity grant.

Long-term incentive plan. The general partner awarded phantom units primarily to the general partner’s independent directors under the LTIP in May 2008, May 2009 and May 2010. The phantom units awarded to the independent directors vest one year from the grant date. Compensation expense attributable to the phantom units granted under the LTIP is recognized entirely by the Partnership over the vesting period and was approximately $73,000 and $146,000 for the three and six months ended June 30, 2010, respectively, and $93,000 and $216,000 for the three and six months ended June 30, 2009, respectively.

The following table summarizes LTIP award activity for the six months ended June 30, 2010:

		Value per
		Unit				Units
Phantom units outstanding at beginning of period		$	15.02				21,970
Vested		$	15.02				(19,751	)
Granted		$	20.94				15,284
Phantom units outstanding at end of period		$	20.19				17,503

Equity incentive plan and Anadarko incentive plans. The Partnership’s general and administrative expenses include equity-based compensation costs allocated by Anadarko to the Partnership for grants made pursuant to the Western Gas Holdings, LLC Equity Incentive Plan (the “Incentive Plan”) as well as the Anadarko Petroleum Corporation 1999 Stock Incentive Plan and the Anadarko Petroleum Corporation 2008 Omnibus Incentive Compensation Plan (Anadarko’s plans are referred to collectively as the “Anadarko Incentive Plans”). The Partnership’s general and administrative expense for the three and six months ended June 30, 2010 included approximately $0.7 million and $1.6 million, respectively, of allocated equity-based compensation expense for grants made pursuant to the Incentive Plan and Anadarko Incentive Plans. The Partnership’s general and administrative expense for the three and six months ended June 30, 2009 included approximately $1.0 million and $1.9 million, respectively, of allocated equity-based compensation expense for grants made pursuant to the Incentive Plan and Anadarko Incentive Plans. A portion of these expenses are allocated to the Partnership by Anadarko as a component of compensation expense for the executive officers of the Partnership’s general partner and other employees pursuant to the omnibus agreement and employees who provide services to the Partnership pursuant to the services and secondment agreement. These amounts exclude compensation expense associated with the LTIP.

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

Summary of affiliate transactions. Revenues from affiliates include amounts earned by the Partnership from the gathering, treating, processing and transportation of natural gas and NGLs for Anadarko, as well as from the sale of natural gas and NGLs to Anadarko. Operating expenses include all amounts accrued or paid to affiliates for the operation of the Partnership’s systems, whether in providing services to affiliates or to third parties, including field labor, measurement and analysis, and other disbursements. Affiliate expenses do not bear a direct relationship to affiliate revenues and third-party expenses do not bear a direct relationship to third-party revenues. For example, the Partnership’s affiliate expenses are not necessarily those expenses attributable to generating affiliate revenues. The following table summarizes affiliate transactions.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
						(in thousands)
Revenues – affiliates		$	79,141			$	84,925			$	162,972			$	164,889
Operating expenses – affiliates			15,972				21,810				39,053				45,915
Interest income – affiliates			4,225				4,357				8,450				8,819
Interest expense, net – affiliates			1,786				1,786				3,571				3,571
Distributions to unitholders – affiliates			12,610				10,786				24,848				21,572
Contributions from noncontrolling interest owners – affiliate and Parent			33				352				2,019				19,256
Distributions to noncontrolling interest owners – affiliate and Parent			1,752				4,303				3,126				4,303

5. CONCENTRATION OF CREDIT RISK

Anadarko was the only customer from whom revenues exceeded 10% of the Partnership’s consolidated revenues for the three and six months ended June 30, 2010 and 2009. The percentage of revenues from Anadarko and the Partnership’s other customers are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Customer
Anadarko			89	%			88	%			88	%			88	%
Other			11	%			12	%			12	%			12	%
Total			100	%			100	%			100	%			100	%

6. PROPERTY, PLANT AND EQUIPMENT

A summary of the historical cost of the Partnership’s property, plant and equipment is as follows:

		Estimated
		useful life				June 30, 2010				December 31, 2009
						(dollars in thousands)
Land			n/a			$	354			$	354
Gathering systems			5 to 39 years				1,165,971				1,149,550
Pipeline and equipment			30 to 34.5 years				86,650				86,617
Assets under construction			n/a				8,620				7,552
Other			3 to 25 years				2,082				2,082
Total property, plant and equipment							1,263,677				1,246,155
Accumulated depreciation							280,257				252,778
Total net property, plant and equipment						$	983,420			$	993,377

The cost of property classified as “Assets under construction” is excluded from capitalized costs being depreciated. This amount represents property that is not yet suitable to be placed into productive service as of the balance sheet date.

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

7. DEBT

The Partnership’s outstanding debt as of June 30, 2010 consisted of $110.0 million outstanding under the revolving credit facility and the $175.0 million note payable to Anadarko in 2013 issued in connection with the Powder River acquisition. The Partnership’s outstanding debt as of December 31, 2009 consisted solely of the $175.0 million note payable to Anadarko. See Note 9—Subsequent Events—Wattenberg term loan for information on the term loan the Partnership entered into in August 2010 in connection with the Wattenberg acquisition.

Anadarko’s credit facility. In March 2008, Anadarko entered into a five-year $1.3 billion credit facility under which the Partnership may utilize up to $100.0 million to the extent that such amounts remain available to Anadarko under the credit facility. As of June 30, 2010, the full $100.0 million was available for borrowing by the Partnership. Interest on borrowings under the credit facility is calculated based on, at the election by the borrower, either (i) a floating rate equal to the federal funds effective rate plus 0.50% or (ii) a periodic fixed rate equal to LIBOR plus an applicable margin. The applicable margin, which was 0.44% at June 30, 2010, and the commitment fees on the facility are based on Anadarko’s senior unsecured long-term debt rating. Pursuant to the omnibus agreement, as a co-borrower under Anadarko’s credit facility, the Partnership is required to reimburse Anadarko for its allocable portion of commitment fees (as of June 30, 2010, 0.11% of the Partnership’s committed and available borrowing capacity, including the Partnership’s outstanding balances, if any) that Anadarko incurs under its credit facility, or up to $0.1 million annually. Under Anadarko’s credit agreements, the Partnership and Anadarko are required to comply with certain covenants, including a financial covenant that requires Anadarko to maintain a debt-to-capitalization ratio of 65% or less. As of June 30, 2010, Anadarko and the Partnership were in compliance with all covenants. Should the Partnership or Anadarko fail to comply with any covenant in Anadarko’s credit agreements, the Partnership may not be permitted to borrow under the credit facility. Anadarko is a guarantor of the Partnership’s borrowings, if any, under the credit facility. The Partnership is not a guarantor of Anadarko’s borrowings under the credit facility. See Note 9—Subsequent Events—Anadarko’s credit facility for information on the expected termination of Anadarko’s credit facility and the Partnership’s availability thereunder.

Working capital facility. In May 2010, the Partnership entered into a new two-year $30.0 million working capital facility with Anadarko as the lender. At June 30, 2010, no borrowings were outstanding under the working capital facility. The facility is available exclusively to fund working capital needs. Borrowings under the facility will bear interest at the same rate that would apply to borrowings under the Anadarko credit facility described above. Pursuant to the omnibus agreement, the Partnership pays a commitment fee of 0.11% annually to Anadarko on the unused portion of the working capital facility, or up to $33,000 annually. The Partnership is required to reduce all borrowings under the working capital facility to zero for a period of at least 15 consecutive days at least once during each of the twelve-month periods prior to the maturity date of the facility. See Note 9—Subsequent Events—Working capital facility for information on changes to the working capital facility.

Revolving credit facility. In October 2009, the Partnership entered into a three-year senior unsecured revolving credit facility with a group of banks (the “revolving credit facility”). The aggregate initial commitments of the lenders under the revolving credit facility are $350.0 million and are expandable to a maximum of $450.0 million. The revolving credit facility matures in October 2012 and bears interest at LIBOR, plus applicable margins ranging from 2.375% to 3.250%. The interest rate was 2.72% at June 30, 2010. The Partnership is required to pay a quarterly facility fee ranging from 0.375% to 0.750% of the commitment amount (whether used or unused), based upon the Partnership’s consolidated leverage ratio, as defined in the revolving credit facility. The facility fee rate was 0.375% at June 30, 2010. In January 2010, the Partnership borrowed $210.0 million under the revolving credit facility in connection with the Granger acquisition. The Partnership repaid $100.0 million of this amount plus accrued interest with proceeds from the May 2010 equity offering. As of June 30, 2010, $240.0 million was available for borrowing by the Partnership. See Note 9—Subsequent Events—Revolving credit facility for information on changes to the revolving credit facility and amounts outstanding under the facility.

The revolving credit facility contains covenants that limit, among other things, the Partnership’s, and certain of its subsidiaries’, ability to incur additional indebtedness, grant certain liens, merge, consolidate or allow any material change in the character of its business, sell all or substantially all of the Partnership’s assets, make certain transfers, enter into certain affiliate transactions, make distributions or other payments other than distributions of available cash under certain conditions and use proceeds other than for partnership purposes. The revolving credit facility also contains various customary covenants, customary events of default and certain financial tests as of the end of each quarter, including a maximum

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

consolidated leverage ratio, as defined in the revolving credit facility, of 4.5 to 1.0 and a minimum consolidated interest coverage ratio, as defined in the revolving credit facility, of 3.0 to 1.0. If the Partnership obtains two of the following three ratings: BBB- or better by Standard and Poor’s, Baa3 or better by Moody’s Investors Service or BBB- or better by Fitch Ratings Ltd., the Partnership will no longer be required to comply with the minimum consolidated interest coverage ratio as well as certain of the aforementioned covenants. As of June 30, 2010, the Partnership was in compliance with all covenants under the revolving credit facility.

Term loan agreement. In December 2008, the Partnership entered into a five-year $175.0 million term loan agreement with Anadarko in order to finance the cash portion of the consideration paid for the Powder River acquisition. The interest rate is fixed at 4.00% for the first two years and is a floating rate equal to three-month LIBOR plus 150 basis points for the final three years. The Partnership has the option to repay the outstanding principal amount in whole or in part commencing in December 2010.

The provisions of the five-year term loan agreement are non-recourse to the Partnership’s general partner and limited partners and contain customary events of default, including (i) nonpayment of principal when due or nonpayment of interest or other amounts within three business days of when due; (ii) certain events of bankruptcy or insolvency with respect to the Partnership; or (iii) a change of control. At June 30, 2010, the Partnership was in compliance with all covenants under the five-year term loan agreement.

The fair value of the Partnership’s debt under the revolving credit facility and the five-year term loan agreement approximate the carrying value of those instruments at June 30, 2010 and December 31, 2009. The fair value of debt reflects any premium or discount for the difference between the stated interest rate and quarter-end market rate.

Interest income and expense. The following table summarizes the amounts included in interest income, net.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
						(in thousands)
Interest expense on note payable to Anadarko		$	(1,750	)		$	(1,750	)		$	(3,500	)		$	(3,500	)
Interest expense on borrowings under revolving credit facility – third parties			(1,130	)			—				(2,107	)			—
Revolving credit facility fees and amortization – third parties			(682	)			—				(1,448	)			—
Credit facility commitment fees – affiliates			(36	)			(36	)			(71	)			(71	)
Interest expense		$	(3,598	)		$	(1,786	)		$	(7,126	)		$	(3,571	)
Interest income on note receivable from Anadarko		$	4,225			$	4,225			$	8,450			$	8,450
Interest income, net on affiliates balances			—				132				—				369
Interest income, net – affiliates		$	4,225			$	4,357			$	8,450			$	8,819
Interest income, net		$	627			$	2,571			$	1,324			$	5,248

8. COMMITMENTS AND CONTINGENCIES

Environmental. The Partnership is subject to federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. Management believes there are no such matters that could have a material adverse effect on the Partnership’s results of operations, cash flows or financial position.

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

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

Lease commitments. Anadarko, on behalf of the Partnership, has entered into lease agreements for corporate offices and shared field offices supporting the Partnership operations. The lease for the corporate offices expires in January 2012 and the leases for the shared offices extend through 2014. During May 2010, Anadarko purchased certain compression equipment previously leased on behalf of the Partnership and contributed the compression equipment to the Partnership, effectively terminating the lease and associated lease expense.

The amounts in the table below represent the remaining contractual lease obligations for the corporate offices and shared office leases as of June 30, 2010 that may be assigned or otherwise charged to the Partnership.

		Minimum
		rental
		payments
		(in thousands)
2010		$	208
2011			366
2012			209
2013			201
2014			201
Total		$	1,185

Rent expense associated with the above leases, including rent expense for periods prior to the purchase by Anadarko and its contribution of compression equipment to the Partnership in May 2010, was approximately $0.4 million and $0.8 million for the three and six months ended June 30, 2010, respectively, and $0.8 million and $1.3 million for the three and six months ended June 30, 2009, respectively.

Purchase commitment. In May 2010, the Partnership and Anadarko entered into a series of related agreements in which the Partnership intends to acquire a 10% member interest in White Cliffs Pipeline, L.L.C. (“White Cliffs”) for $38.2 million in cash. Specifically, the Partnership intends to acquire a 0.416% interest in White Cliffs from Anadarko and acquire a 9.584% interest in White Cliffs from a third party. White Cliffs owns a crude oil pipeline that originates in Platteville, Colorado and terminates in Cushing, Oklahoma and became operational in June 2009. Closing of the transactions is subject to certain conditions and is expected to occur during the next twelve months.

9. SUBSEQUENT EVENTS

Distributions to unitholders. On July 19, 2010, the board of directors of the Partnership’s general partner declared a cash distribution to the Partnership’s unitholders of $0.35 per unit, or $24.4 million in aggregate. The cash distribution is payable on August 13, 2010 to unitholders of record at the close of business on July 30, 2010.

Wattenberg acquisition. On August 2, 2010, the Partnership acquired Anadarko’s 100% ownership interest in Kerr-McGee Gathering LLC, which owns the Wattenberg gathering system with related compression and other facilities, including the Fort Lupton processing plant, located in the Denver-Julesburg Basin, north and east of Denver, Colorado. The Wattenberg acquisition was financed with a $250.0 million term loan described in more detail below, a $200.0 million draw on the Partnership’s revolving credit facility, plus $23.1 million of cash on hand, as well as through the issuance of 1,048,196 common units to Anadarko and 21,392 general partner units to the Partnership’s general partner. In connection with the Wattenberg acquisition, the Partnership increased the general and administrative expense cap under the omnibus agreement to $9.0 million for the year ended December 31, 2010.

Beginning with the Partnership’s quarterly report for the quarter ending September 30, 2010, its historic financial statements will be recast to reflect the results attributable to the Wattenberg assets for periods including and subsequent to August 10, 2006, the date Anadarko acquired the Wattenberg assets in conjunction with its acquisition of Kerr-McGee.

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

In connection with the Wattenberg acquisition, the Partnership entered into a 10-year, fee-based agreement with Anadarko on all of its affiliated throughput on the Wattenberg assets. The Partnership also entered into five-year commodity price swap agreements with Anadarko effective July 2010 to mitigate exposure to commodity price volatility that would otherwise be present as a result of the Partnership’s acquisition of the Wattenberg assets. Specifically, the commodity price swap agreements fix the margin the Partnership will realize under third-party keep-whole and percentage-of-proceeds contracts at the Wattenberg system. In this regard, the Partnership’s notional volumes for each of the swap agreements are not specifically defined; instead, the commodity price swap agreements apply to volumes equal in amount to the Partnership’s actual volumes recovered from keep-whole and percentage-of-proceeds contracts at the Wattenberg system. Below is a summary of the fixed prices on the Partnership’s commodity price swap agreements for the Wattenberg system.

		Year Ended December 31,
		2010(1)				2011				2012				2013				2014				2015(2)
										(per barrel)
Ethane		$	17.33			$	17.95			$	18.21			$	18.32			$	18.36			$	18.41
Propane		$	42.56			$	44.25			$	45.23			$	45.90			$	46.47			$	47.08
Iso butane		$	55.95			$	58.18			$	59.51			$	60.44			$	61.24			$	62.09
Normal butane		$	49.28			$	51.25			$	52.40			$	53.20			$	53.89			$	54.62
Natural gasoline		$	65.57			$	68.19			$	69.77			$	70.89			$	71.85			$	72.88
Condensate		$	68.18			$	70.97			$	72.73			$	74.04			$	75.22			$	76.47
										(per MMBtu)
Natural gas		$	4.18			$	4.89			$	5.21			$	5.37			$	5.57			$	5.96

(1)

Effective July 1, 2010.

(2)

Through June 30, 2015.

Wattenberg term loan. In connection with the Wattenberg acquisition, on August 2, 2010 the Partnership borrowed $250.0 million under a three-year term loan with a group of banks (“Wattenberg term loan”). The Wattenberg term loan bears interest at LIBOR plus a margin ranging from 2.50% to 3.50% depending on the Partnership’s consolidated leverage ratio as defined in the Wattenberg term loan agreement. The Wattenberg term loan contains various customary covenants which are substantially similar to those in the Partnership’s revolving credit facility.

Revolving credit facility. In connection with the Wattenberg acquisition, the Partnership exercised the accordion feature of its revolving credit facility and expanded the borrowing capacity of the revolving credit facility from $350.0 million to $450.0 million. On August 2, 2010, the Partnership borrowed $200.0 million under the revolving credit facility, bringing the borrowings outstanding under the revolving credit facility to $310.0 million with $140.0 million available.

Anadarko’s credit facility. In July 2010, Anadarko obtained commitments for a $5.0 billion five-year secured revolving credit facility. Upon the closing of Anadarko’s new credit facility, expected to occur in the third quarter of 2010, Anadarko’s existing $1.3 billion revolving credit agreement (“Anadarko RCA”) would be cancelled, thereby eliminating the Partnership’s $100.0 million of available borrowing capacity under the Anadarko RCA.

Working capital facility. In connection with the above-described financing transaction and its potential adverse impact on pricing and other terms of the Partnership’s $30.0 million working capital facility with Anadarko, the Partnership expects to terminate its working capital facility upon the closing of Anadarko’s new credit facility, which is expected to occur during the third quarter of 2010.

10. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

As of June 30, 2010, the Partnership may issue up to approximately $1.0 billion of limited partner common units and various debt securities under its effective shelf registration statement on file with the SEC. Debt securities issued under the shelf may be guaranteed by one or more existing or future subsidiaries of the Partnership (the “Guarantor Subsidiaries”), each of which is a wholly owned subsidiary of the Partnership. The guarantees, if issued, would be full, unconditional, joint and several. The following condensed consolidating financial information reflects the Partnership’s stand-alone accounts, the combined accounts of the Guarantor Subsidiaries, the accounts of the Non-Guarantor Subsidiary, consolidating adjustments and eliminations and the Partnership’s consolidated financial information. The condensed consolidating financial information

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

should be read in conjunction with the Partnership’s accompanying unaudited consolidated financial statements and related notes.

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

		Three Months Ended June 30, 2010
		Western Gas				Guarantor				Non-Guarantor
Statement of Income		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
		(in thousands)
Revenues		$	1,215			$	74,654			$	12,099			$	—			$	87,968
Operating expenses			3,997				50,183				5,223				—				59,403
Operating income (loss)			(2,782	)			24,471				6,876				—				28,565
Interest income, net			620				7				—				—				627
Other income (expense), net			(2,396	)			—				2				—				(2,394	)
Equity income from consolidated subsidiaries			27,969				3,508				—				(31,477	)			—
Income before income taxes			23,411				27,986				6,878				(31,477	)			26,798
Income tax expense			—				17				—				—				17
Net income			23,411				27,969				6,878				(31,477	)			26,781
Net income attributable to noncontrolling interests			—				3,370				—				—				3,370
Net income attributable to Western Gas Partners, LP		$	23,411			$	24,599			$	6,878			$	(31,477	)		$	23,411
		Three Months Ended June 30, 2009
		Western Gas				Guarantor				Non-Guarantor
Statement of Income		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
		(in thousands)
Revenues		$	2,292			$	79,808			$	11,660			$	—			$	93,760
Operating expenses			3,465				57,278				4,692				—				65,435
Operating income (loss)			(1,173	)			22,530				6,968				—				28,325
Interest income, net			2,435				136				—				—				2,571
Other income, net			8				—				1				—				9
Equity income from consolidated subsidiaries			16,853				—				—				(16,853	)			—
Income before income taxes			18,123				22,666				6,969				(16,853	)			30,905
Income tax benefit			—				2,087				—				—				2,087
Net income			18,123				20,579				6,969				(16,853	)			28,818
Net income attributable to noncontrolling interests			—				3,415				—				—				3,415
Net income attributable to Western Gas Partners, LP		$	18,123			$	17,164			$	6,969			$	(16,853	)		$	25,403

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

		Six Months Ended June 30, 2010
		Western Gas				Guarantor				Non-Guarantor
Statement of Income		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
		(in thousands)
Revenues		$	(251	)		$	160,352			$	22,186			$	—			$	182,287
Operating expenses			8,499				108,729				11,446				—				128,674
Operating income (loss)			(8,750	)			51,623				10,740				—				53,613
Interest income, net			1,310				14				—				—				1,324
Other income (expense), net			(2,378	)			—				4				—				(2,374	)
Equity income from consolidated subsidiaries			57,362				5,479				—				(62,841	)			—
Income before income taxes			47,544				57,116				10,744				(62,841	)			52,563
Income tax expense			—				973				—				—				973
Net income			47,544				56,143				10,744				(62,841	)			51,590
Net income attributable to noncontrolling interests			—				5,265				—				—				5,265
Net income attributable to Western Gas Partners, LP		$	47,544			$	50,878			$	10,744			$	(62,841	)		$	46,325
		Six Months Ended June 30, 2009
		Western Gas				Guarantor				Non-Guarantor
Statement of Income		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
		(in thousands)
Revenues		$	4,067			$	158,619			$	20,234			$	—			$	182,920
Operating expenses			7,866				117,520				8,903				—				134,289
Operating income (loss)			(3,799	)			41,099				11,331				—				48,631
Interest income, net			4,873				375				—				—				5,248
Other income, net			12				—				4				—				16
Equity income from consolidated subsidiaries			33,994				—				—				(33,994	)			—
Income before income taxes			35,080				41,474				11,335				(33,994	)			53,895
Income tax benefit			—				2,353				—				—				2,353
Net income			35,080				39,121				11,335				(33,994	)			51,542
Net income attributable to noncontrolling interests			—				5,554				—				—				5,554
Net income attributable to Western Gas Partners, LP		$	35,080			$	33,567			$	11,335			$	(33,994	)		$	45,988

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

		As of June 30, 2010
		Western Gas				Guarantor				Non-Guarantor
Balance Sheet		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
		(in thousands)
Current assets		$	60,226			$	140,316			$	12,442			$	(132,298	)		$	80,686
Note receivable — Anadarko			260,000				—				—				—				260,000
Investment in consolidated subsidiaries			863,426				98,161				—				(961,587	)			—
Net property, plant and equipment			191				799,870				183,359				—				983,420
Other long-term assets			2,198				52,067				—				—				54,265
Total assets		$	1,186,041			$	1,090,414			$	195,801			$	(1,093,885	)		$	1,378,371
Current liabilities		$	132,987			$	23,725			$	3,784			$	(132,298	)		$	28,198
Long-term debt			285,000				—				—				—				285,000
Other long-term liabilities			189				13,541				2,295				—				16,025
Total liabilities			418,176				37,266				6,079				(132,298	)			329,223
Partners’ capital			767,865				961,587				189,722				(961,587	)			957,587
Noncontrolling interests			—				91,561				—				—				91,561
Total liabilities, equity and partners’ capital		$	1,186,041			$	1,090,414			$	195,801			$	(1,093,885	)		$	1,378,371