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

(Exact name of registrant as specified in its charter)

Delaware		26-1075808
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
1201 Lake Robbins Drive
The Woodlands, Texas		77380
(Address of principal executive offices)		(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 November 1, 2010.

 

 

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements			4
Consolidated Statements of Income for the three and nine months ended September 30, 2010 and 2009			4
Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009			5
Consolidated Statement of Equity and Partners’ Capital for the nine months ended September 30, 2010			6
Consolidated Statements of Cash Flows for the nine months ended September 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			27
Cautionary Note Regarding Forward-Looking Statements			27
Executive Summary			28
Acquisitions			29
May 2010 Equity Offering			30
Items Affecting the Comparability of Our Financial Results			30
Results of Operations			32
Operating Results			32
Liquidity and Capital Resources			44
Contractual Obligations			50
Off-Balance Sheet Arrangements			50
Item 3. Quantitative and Qualitative Disclosures About Market Risk			50
Item 4. Controls and Procedures			51
PART II OTHER INFORMATION
Item 1. Legal Proceedings			51
Item 1A. Risk Factors			51
Item 6. Exhibits			52
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								Nine Months Ended
		September 30,								September 30,
		2010				2009(1)				2010				2009(1)
Revenues — affiliates
Gathering, processing and transportation of natural gas		$	48,843			$	44,084			$	139,601			$	132,426
Natural gas, natural gas liquids and condensate sales			56,932				62,220				176,187				168,807
Equity income and other			1,934				2,274				4,976				6,645
Total revenues — affiliates			107,709				108,578				320,764				307,878
Revenues — third parties
Gathering, processing and transportation of natural gas			10,762				12,497				32,409				36,617
Natural gas, natural gas liquids and condensate sales			2,954				4,512				20,605				22,926
Other, net			866				465				2,434				1,394
Total revenues — third parties			14,582				17,474				55,448				60,937
Total revenues			122,291				126,052				376,212				368,815
Operating expenses (2)
Cost of product			37,443				44,955				117,923				131,300
Operation and maintenance			19,414				21,911				64,011				66,351
General and administrative			5,811				7,800				17,332				21,655
Property and other taxes			3,610				3,454				10,879				10,720
Depreciation, amortization and impairments			19,126				16,965				54,458				49,518
Total operating expenses			85,404				95,085				264,603				279,544
Operating income			36,887				30,967				111,609				89,271
Interest income (expense), net (3)			(1,423	)			1,209				(87	)			6,536
Other income (expense), net			63				33				(2,311	)			50
Income before income taxes			35,527				32,209				109,211				95,857
Income tax expense			1,505				4,884				10,480				10,951
Net income			34,022				27,325				98,731				84,906
Net income attributable to noncontrolling interests			2,541				2,187				7,806				7,741
Net income attributable to Western Gas Partners, LP		$	31,481			$	25,138			$	90,925			$	77,165
Limited partner interest in net income:
Net income attributable to Western Gas Partners, LP (4)		$	31,481			$	25,138			$	90,925			$	77,165
Pre-acquisition net income allocated to Parent			(36	)			(8,090	)			(11,937	)			(25,036	)
General partner interest in net income			(888	)			(341	)			(1,890	)			(1,042	)
Limited partner interest in net income		$	30,557			$	16,707			$	77,098			$	51,087
Net income per common unit — basic and diluted		$	0.44			$	0.30			$	1.17			$	0.92
Net income per subordinated unit — basic and diluted		$	0.44			$	0.30			$	1.17			$	0.91

See accompanying notes to unaudited consolidated financial statements.

Western Gas Partners, LP

(Unaudited, in thousands, except number of units)

		September 30,				December 31,
		2010				2009(1)
ASSETS
Current assets
Cash and cash equivalents		$	36,400			$	69,984
Accounts receivable, net — third parties			7,819				9,200
Accounts receivable, net — affiliates			3,051				2,203
Natural gas imbalance receivables — third parties			1,276				266
Natural gas imbalance receivables — affiliates			4				448
Other current assets			5,146				4,163
Total current assets			53,696				86,264
Long-term assets
Note receivable — Anadarko			260,000				260,000
Plant, property and equipment
Cost			1,726,898				1,660,297
Less accumulated depreciation			351,165				299,309
Net property, plant and equipment			1,375,733				1,360,988
Goodwill			60,236				57,348
Equity investments			40,679				21,344
Other assets			2,894				2,974
Total assets		$	1,793,238			$	1,788,918
LIABILITIES, EQUITY AND PARTNERS’ CAPITAL
Current liabilities
Accounts and natural gas imbalance payables — third parties		$	11,262			$	15,627
Accounts and natural gas imbalance payables — affiliate			1,448				1,319
Accrued ad valorem taxes			11,012				6,319
Income taxes payable			342				412
Accrued liabilities — third party			17,664				11,010
Accrued liabilities — affiliates			—				470
Current notes payable — third parties			10,000				—
Total current liabilities			51,728				35,157
Long-term liabilities
Long-term debt — third parties			560,000				—
Note payable — Anadarko			175,000				175,000
Deferred income taxes			718				217,312
Asset retirement obligations and other			56,790				55,976
Total long-term liabilities			792,508				448,288
Total liabilities			844,236				483,445
Commitments and contingencies (Note 8)
Equity and partners’ capital
Common units (42,621,968 and 36,374,925 units issued and outstanding at September 30, 2010, and December 31, 2009, respectively)			562,400				497,230
Subordinated units (26,536,306 units issued and outstanding at September 30, 2010, and December 31, 2009)			280,453				276,571
General partner units (1,411,394 and 1,283,903 units issued and outstanding at September 30, 2010, and December 31, 2009, respectively)			15,977				13,726
Parent net investment			—				427,024
Total partners’ capital			858,830				1,214,551
Non-controlling interests			90,172				90,922
Total equity and partners’ capital			949,002				1,305,473
Total liabilities, equity and partners’ capital		$	1,793,238			$	1,788,918

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(1)		$	427,024			$	497,230			$	276,571			$	13,726			$	90,922			$	1,305,473
Net contributions from Parent			29,843				—				—				—				—				29,843
Contribution of Granger assets			(300,367	)			57,513				—				1,174				—				(241,680	)
Contribution of Wattenberg assets			(382,848	)			(88,447	)			—				(1,805	)			—				(473,100	)
White Cliffs acquisition from affiliate			(1,272	)			(18,728	)			—				—				—				(20,000	)
Contribution of assets from Parent			—				10,433				—				213				—				10,646
May 2010 equity offering, net of offering and other expenses			—				97,096				—				2,183				—				99,279
Non-cash equity-based compensation			—				224				—				—				—				224
Elimination of net deferred tax liabilities			214,464				—				—				—				—				214,464
Net income			11,937				46,150				30,948				1,890				7,806				98,731
Contributions from noncontrolling interest owners			—				—				—				—				2,053				2,053
Distributions to unitholders			—				(39,338	)			(27,066	)			(1,409	)			—				(67,813	)
Distributions to noncontrolling interest owners			—				—				—				—				(10,313	)			(10,313	)
Other			1,219				267				—				5				(296	)			1,195
Balance at September 30, 2010		$	—			$	562,400			$	280,453			$	15,977			$	90,172			$	949,002

See accompanying notes to unaudited consolidated financial statements.

Western Gas Partners, LP

(Unaudited, in thousands)

		Nine Months Ended
		September 30,
		2010				2009(1)
Cash flows from operating activities
Net income		$	98,731			$	84,906
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and impairments			54,458				49,518
Deferred income taxes			(1,666	)			(2,753	)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable			(459	)			3,963
(Increase) decrease in natural gas imbalance receivable			(566	)			2,953
Increase (decrease) in accounts payable, accrued liabilities and natural gas imbalance payable			11,609				(11,368	)
Change in other items, net			(3,291	)			(2,493	)
Net cash provided by operating activities			158,816				124,726
Cash flows from investing activities
Wattenberg acquisition from affiliate			(473,100	)			—
White Cliffs acquisition from affiliate			(20,000	)			—
White Cliffs acquisition from third party			(18,047	)			—
Granger acquisition from affiliate			(241,680	)			—
Chipeta acquisition from affiliate			—				(101,451	)
Capital expenditures			(62,976	)			(58,993	)
Investments in equity affiliates			(310	)			(264	)
Proceeds from sale of assets to affiliate			2,805				—
Proceeds from sale of assets to third party			2,425				—
Net cash used in investing activities			(810,883	)			(160,708	)
Cash flows from financing activities
Borrowings under revolving credit facility, net of issuance costs			419,987				—
Issuance of Wattenberg term loan			250,000
Repayments of borrowings under revolving credit facility			(100,000	)			—
Issuance of note payable to Anadarko			—				101,451
Proceeds from issuance of common units, net of $4.3 million in offering and other expenses			99,279				—
Distributions to unitholders			(67,813	)			(51,777	)
Contributions from noncontrolling interest owners and Parent			2,053				40,745
Distributions to noncontrolling interest owners			(10,313	)			(5,737	)
Net contributions from (distributions to) Parent			25,290				(28,751	)
Net cash provided by financing activities			618,483				55,931
Net (decrease) increase in cash and cash equivalents			(33,584	)			19,949
Cash and cash equivalents at beginning of period			69,984				36,074
Cash and cash equivalents at end of period		$	36,400			$	56,023
Supplemental disclosures
Non-cash contribution of assets from Parent		$	7,530			$	—
Increase (decrease) in accrued capital expenditures		$	2,066			$	(12,245	)
Interest paid		$	10,278			$	5,026
Interest received		$	12,675			$	12,675

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, 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 include ten gathering systems, six natural gas treating facilities, six gas processing facilities, one interstate pipeline, one NGL pipeline and noncontrolling interests in Fort Union Gas Gathering, L.L.C., or “Fort Union,” and White Cliffs Pipeline, L.L.C., or “White Cliffs.” 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, and also refers to Fort Union and White Cliffs. 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, 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, which 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 assets” collectively refer to the Wattenberg gathering system and associated assets, which the Partnership acquired from Anadarko in August 2010, and the “Wattenberg acquisition” refers to the acquisition of the Wattenberg assets. The “White Cliffs investment” refers to the interest in White Cliffs the Partnership acquired from Anadarko and a third party in September 2010. See Acquisitions discussed below. 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 which are, in the opinion of management, necessary for a fair statement of financial position as of September 30, 2010 and December 31, 2009, results of operations for the three and nine months ended September 30, 2010 and 2009, statement of equity and partners’ capital for the nine months ended September 30, 2010 and statements of cash flows for the nine months ended September 30, 2010 and 2009. The Partnership’s financial results for the three and nine months ended September 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 pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although management believes that the disclosures made are adequate to make the information not misleading. To conform to GAAP, 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 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. During 2009 and 2010, the Partnership completed several acquisitions from Anadarko and third parties.

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. At the time of the acquisition, Chipeta owned a natural gas processing plant complex that 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.

As of September 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.

Natural Buttes plant acquisition. 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.

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. In September 2010, the Partnership sold an idle refrigeration train at the Granger system to a third party for $2.4 million.

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 and 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, a $200.0 million draw on the Partnership’s revolving credit facility and $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.

White Cliffs acquisition. In September 2010, the Partnership and Anadarko closed a series of related transactions through which the Partnership acquired a 10% member interest in White Cliffs. Specifically, the Partnership acquired Anadarko’s 100% ownership interest in Anadarko Wattenberg Company, LLC (“AWC”) for $20.0 million in cash. AWC owned a 0.4% interest in White Cliffs and held an option to increase its interest in White Cliffs. Also, in a series of concurrent transactions AWC acquired an additional 9.6% interest in White Cliffs from a third party for $18.0 million in cash, subject to post-closing adjustments. White Cliffs owns a crude oil pipeline which originates in Platteville, Colorado and terminates in Cushing, Oklahoma and became operational in June 2009. Anadarko is a major shipper on the White Cliffs pipeline. The Partnership’s acquisition of the 0.4% interest in White Cliffs and related purchase option from Anadarko and the acquisition of an additional 9.6% interest in White Cliffs were funded with cash on hand and are referred to collectively as the “White Cliffs acquisition.” As of September 30, 2010, the Partnership holds a 10% interest in White Cliffs and the remaining 90% is held by three unaffiliated parties.

Presentation of Partnership acquisitions. The initial assets, Powder River assets, Chipeta assets, Granger assets, Wattenberg assets and White Cliffs investment 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, periods prior to January 2010 with respect to the Granger assets, periods prior to July 2010 with respect to the Wattenberg assets, and periods prior to September 2010 with respect to the White Cliffs investment. 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, periods including and subsequent to January 2010 with respect to the Granger assets, periods including and subsequent to July 2010 with respect to the Wattenberg assets, and periods including and subsequent to September 2010 with respect to the White Cliffs investment.

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

Anadarko acquired the Granger assets in connection with its August 23, 2006 acquisition of Western Gas Resources, Inc. (“Western”). Anadarko acquired the Wattenberg assets and 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. Anadarko made its initial investment in White Cliffs on January 27, 2007. Each acquisition of Partnership Assets, except the acquisitions of the Natural Buttes plant and the 9.6% interest in White Cliffs from third parties, was considered a transfer 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 nine months ended September 30, 2009, which included the results attributable to the initial assets, Powder River assets and Chipeta assets, as presented in the Partnership’s quarterly report on Form 10-Q for the quarter ended September 30, 2009, have been recast in this quarterly report on Form 10-Q to include the results attributable to the Granger assets, Wattenberg assets and AWC, including the 0.4% interest in White Cliffs, 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. In addition, certain amounts have been reclassified to conform to the current presentation. See Note 4—Transactions with Affiliates—Commodity price swap agreements.

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. The following tables present the impact to the historical consolidated statements of income attributable to the Granger assets, Wattenberg assets and 0.4% interest in White Cliffs as well as the reclassification of the impact of commodity price swap agreements related to purchases (in thousands):

		Three Months Ended September 30, 2009
		Partnership				Granger				Wattenberg				White
		Historical				Assets				Assets				Cliffs				Reclassification				Combined
Revenues		$	60,996			$	34,010			$	24,252			$	20			$	6,774			$	126,052
Net income			19,235				3,283				4,803				4				—				27,325

		Nine Months Ended September 30, 2009
		Partnership				Granger				Wattenberg				White
		Historical				Assets				Assets				Cliffs				Reclassification				Combined
Revenues		$	182,661			$	95,263			$	72,155			$	20			$	18,716			$	368,815
Net income			65,806				8,253				10,857				(10	)			—				84,906

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. The May 18 and June 2, 2010 issuances are referred to collectively as the “May 2010 equity offering.” In connection with the May 2010 equity offering, the Partnership issued 93,035 general partner units to Anadarko. Net proceeds from the May 2010 equity 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 of amounts outstanding under the Partnership’s revolving credit facility.

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

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 nine months ended September 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
Wattenberg acquisition			1,048				—				22				1,070
Balance at September 30, 2010			42,622				26,536				1,412				70,570

Anadarko holdings of Partnership Equity. As of September 30, 2010, Anadarko held 1,411,394 general partner units representing a 2% general partner interest in the Partnership, 100% of the Partnership’s incentive distribution rights (“IDRs”), 10,302,631 common units and 26,536,306 subordinated units. Anadarko owned an aggregate 52.2% 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 45.8% 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 nine months ended September 30, 2010, the Partnership paid cash distributions to its unitholders of approximately $24.4 million and $67.8 million, respectively, representing the $0.33 per-unit distribution for the quarter ended December 31, 2009, the $0.34 per-unit distribution for the quarter ended March 31, 2010 and the $0.35 per-unit distribution for the quarter ended June 30, 2010. During the three and nine months ended September 30, 2009, the Partnership paid cash distributions to its unitholders of approximately $17.7 million and $51.8 million, respectively, representing the $0.30 per-unit distributions for the quarters ended December 31, 2008 and March 31, 2009 and the $0.31 per-unit distribution for the quarter ended June 30, 2009. See also Note 9—Subsequent Events regarding distributions approved in October 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 incentive distributions allocable to the general partner and unvested units granted under the Western Gas Partners, LP 2008 Long-Term Incentive Plan (the “LTIP”). 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 and nine months ended September 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 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 each period are included on a weighted-average basis for the days in which they were outstanding.

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

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								Nine Months Ended
		September 30,								September 30,
		2010				2009(1)				2010				2009(1)
Net income attributable to Western Gas Partners, LP		$	31,481			$	25,138			$	90,925			$	77,165
Pre-acquisition net income allocated to Parent			(36	)			(8,090	)			(11,937	)			(25,036	)
General partner interest in net income			(888	)			(341	)			(1,890	)			(1,042	)
Limited partner interest in net income		$	30,557			$	16,707			$	77,098			$	51,087
Net income allocable to common units		$	18,770			$	8,818			$	46,150			$	26,838
Net income allocable to subordinated units			11,787				7,889				30,948				24,249
Limited partner interest in net income		$	30,557			$	16,707			$	77,098			$	51,087
Net income per limited partner unit — basic and diluted
Common units		$	0.44			$	0.30			$	1.17			$	0.92
Subordinated units		$	0.44			$	0.30			$	1.17			$	0.91
Total		$	0.44			$	0.30			$	1.17			$	0.92
Weighted average limited partner units outstanding — basic and diluted
Common units			42,257				29,395				39,412				29,200
Subordinated units			26,536				26,536				26,536				26,536
Total			68,793				55,931				65,948				55,736

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

4. TRANSACTIONS WITH AFFILIATES

Affiliate transactions. The Partnership provides natural gas gathering, processing, treating and transportation services to Anadarko and a portion of the Partnership’s expenditures is paid by or to Anadarko pursuant to the reimbursement provisions under the omnibus agreement discussed below, which result in affiliate transactions. An affiliate of Anadarko purchases residue gas, condensate and NGLs from the Partnership, which also results in affiliate transactions. In addition, affiliate-based transactions result from contributions to and distributions from Fort Union, Chipeta and White Cliffs, which were paid or received by Anadarko prior to the Partnership’s acquisition of such assets.

Contribution of Partnership Assets to the Partnership. Effective in January 2010, Anadarko contributed the Granger assets to the Partnership, in July 2010 Anadarko contributed the Wattenberg assets to the Partnership, and in September 2010 Anadarko sold AWC, including its 0.4% interest in White Cliffs, to the Partnership. See Note 1—Description of Business and Basis of Presentation. In connection with the Granger acquisition and Wattenberg acquisition, substantially all deferred tax liabilities attributable to the Granger assets and Wattenberg assets were eliminated.

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. Prior to January 1, 2010, with respect to the Granger assets, and prior to July 1, 2010, with respect to the Wattenberg assets, sales and purchases related to third-party transactions were received or paid in cash by Anadarko within its centralized cash management system. Prior to September 1, 2010, with respect to White Cliffs, investments in and distributions from White Cliffs were received or paid in cash by Anadarko, also resulting in affiliate balances. 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, Wattenberg acquisition and AWC acquisition and, accordingly, affiliate-based interest expense on current intercompany balances is not charged for periods subsequent to the Partnership’s acquisition of the Granger assets, Wattenberg assets and AWC, including the 0.4% interest in White Cliffs. 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 $259.2 million and $271.3 million at September 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 London Interbank Offered Rate (“LIBOR”) plus 150 basis points beginning on December 1, 2010. See Note 7—Debt—Note payable to Anadarko for additional information.

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

Commodity price swap agreements. The Partnership entered into commodity price swap agreements with Anadarko to mitigate exposure to commodity price volatility that would otherwise be present as a result of the purchase and sale of natural gas, condensate or NGLs at the Hilight, Newcastle, Granger and Wattenberg assets. The commodity price swap agreements for the Hilight and Newcastle assets were effective in January 2009 and expire in December 2011, with the Partnership able to extend the agreements, at its option, annually through December 2013. The commodity price swap agreements for the Granger assets were effective in January 2010 and extend through December 2014. The commodity price swap agreements for the Wattenberg assets were effective in July 2010 and extend through June 2015. Also see Note 9—Subsequent Events—Commodity price swap agreements regarding commodity price swap agreements entered into in October 2010 associated with condensate and natural gas sales and purchases at the Hugoton system. Below is a summary of the fixed price ranges on the Partnership’s commodity price swap agreements outstanding as of September 30, 2010.

		Year Ended December 31,
		2010		2011		2012		2013		2014		2015(1)
		(per barrel)
Ethane		$17.33 — 28.85		$17.95 — 29.31		$18.21 — 29.78		$18.32 — 30.10		$18.36 — 30.53		$	18.41
Propane		$40.63 — 48.76		$44.25 — 50.07		$45.23 — 50.93		$45.90 — 51.56		$46.47 — 52.37		$	47.08
Iso butane		$48.15 — 64.07		$58.18 — 66.03		$59.51 — 67.22		$60.44 — 68.11		$61.24 — 69.23		$	62.09
Normal butane		$48.15 — 60.03		$51.25 — 61.82		$52.40 — 62.92		$53.20 — 63.74		$53.89 — 64.78		$	54.62
Natural gasoline		$63.20 — 73.62		$68.19 — 75.99		$69.77 — 77.37		$70.89 — 78.42		$71.85 — 79.74		$	72.88
Condensate		$68.18 — 72.25		$68.87 — 75.33		$72.73 — 76.85		$74.04 — 78.07		$75.22 — 79.56		$	76.47
		(per MMBtu)
Natural gas		$4.18 — 5.61		$4.89 — 5.94		$5.21 — 5.97		$5.37 — 6.09		$5.57 — 6.20		$	5.96

The Partnership’s notional volumes for each of the swap agreements are not specifically defined; instead, the commodity price swap agreements apply to the actual volume of natural gas, condensate and NGLs purchased and sold at the Hilight, Newcastle, Granger and Wattenberg assets. Because the notional volumes are not fixed, the commodity price swap agreements do not satisfy the definition of a derivative financial instrument at inception and, therefore, are not required to be measured at fair value. The Partnership reports its realized gains and losses on the commodity price swap agreements related to sales in the natural gas, NGLs and condensate sales in its consolidated statements of income in the period in which the associated revenues are recognized. The Partnership reports its realized gains and losses on the commodity price swap agreements related to purchases in cost of product in its consolidated statements of income in the period in which the associated purchases are recorded. During the quarter ended September 30, 2010, the Partnership revised its presentation to report the effects of commodity price swap agreements attributable to purchases in cost of product in its consolidated statements of income. Net gains and losses on commodity price swap agreements related to purchases have been reclassified for all periods to conform to the current presentation. The following table summarizes gains and losses on commodity price swap agreements during the three and nine months ended September 30, 2010 and 2009.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
						(in thousands)
Gains (losses) on commodity price swap agreements:
Natural gas sales		$	7,336			$	7,270			$	12,803			$	19,254
Natural gas liquids sales			5,145				1,042				5,840				5,067
Gains on commodity price swap agreements related to sales			12,481				8,312				18,643				24,321
Losses on commodity price swap agreements related to purchases			(9,625	)			(6,774	)			(16,038	)			(18,716	)
Net gains on commodity price swap agreements		$	2,856			$	1,538			$	2,605			$	5,605

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 that:

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

Gas processing agreements. 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.

The Partnership entered into a 10-year, fee-based gathering agreement with Anadarko effective October 1, 2009 on substantially all of its affiliate throughput on the Granger assets. In connection with the Wattenberg acquisition, the Partnership entered into a 10-year, fee-based gathering agreement with Anadarko effective July 1, 2010 on all of its affiliate throughput on the Wattenberg assets. Under the new gathering agreements, the Granger assets and Wattenberg assets earn fixed fees based on the volume of the natural gas they gather and Anadarko retains any condensate and NGLs.

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 through December 31, 2010. In connection with the Granger acquisition and Wattenberg acquisition, the Partnership increased the general and administrative expense cap under the omnibus agreement to $8.3 million and then to $9.0 million for the year ended December 31, 2010. No adjustment to the cap was made in connection with the White Cliffs acquisition. The cap under the omnibus agreement is subject to future 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. 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.

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

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

The employees supporting the Partnership’s operations are employees of Anadarko. Anadarko charges the Partnership its allocated share of personnel costs, including costs associated with Anadarko’s equity-based compensation plans, non-contributory defined pension and postretirement plans and defined contribution savings plan, through the management services fee or pursuant to the omnibus agreement and services and secondment agreement described above. In general, the Partnership’s reimbursement to Anadarko under the omnibus agreement or services and secondment agreements is either (i) on an actual basis for direct expenses Anadarko 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, 2009 and 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 $0.1 million and $0.2 million for the three and nine months ended September 30, 2010, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2009, respectively.

The following table summarizes LTIP award activity for the nine months ended September 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 nine months ended September 30, 2010 included approximately $0.7 million and $2.3 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 nine months ended September 30, 2009 included approximately $1.2 million and $3.1 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 is 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 the services and secondment agreement. These amounts exclude compensation expense associated with the LTIP.

Compressor sale. In September 2010, the Partnership sold idle compressors with a net carrying value of $2.6 million to Anadarko for $2.8 million in cash. The gain on the sale was recorded as an adjustment to Partners’ capital.

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 residue gas, condensate and NGLs to Anadarko. A portion of the Partnership’s operating expenditures is paid by Anadarko, pursuant to the reimbursement provisions under the omnibus agreement discussed above, which also results in affiliate transactions. 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								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
						(in thousands)
Revenues — affiliates		$	107,709			$	108,578			$	320,764			$	307,878
Operating expenses — affiliates			29,250				33,269				91,438				102,167
Interest income — affiliates			4,225				4,336				12,688				13,234
Interest expense, net — affiliates			1,775				3,127				5,346				6,698
Distributions to unitholders — affiliates			13,066				11,257				37,915				32,829
Contributions from noncontrolling interest owners — affiliate and Parent			—				13,163				2,019				32,420
Distributions to noncontrolling interest owners — affiliate and Parent		$	1,925			$	—			$	5,051			$	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 nine months ended September 30, 2010 and 2009. The percentage of revenues from Anadarko and the Partnership’s other customers are as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Anadarko			87	%			85	%			84	%			82	%
Other customers			13	%			15	%			16	%			18	%
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				September 30, 2010				December 31, 2009
						(dollars in thousands)
Land			n/a			$	354			$	354
Gathering systems			5 to 39 years				1,621,976				1,562,273
Pipeline and equipment			30 to 34.5 years				86,650				86,617
Assets under construction			n/a				15,548				8,713
Other			3 to 25 years				2,370				2,340
Total property, plant and equipment							1,726,898				1,660,297
Accumulated depreciation							351,165				299,309
Total net property, plant and equipment						$	1,375,733			$	1,360,988

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

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.

7. DEBT

The Partnership’s outstanding debt as of September 30, 2010 consisted of $320.0 million outstanding under the revolving credit facility, the $250.0 million three-year term loan incurred in connection with the Wattenberg acquisition and the $175.0 million note payable to Anadarko due 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.

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 from 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 interest rate was 3.26% at September 30, 2010. The Wattenberg term loan contains various customary covenants, which are substantially similar to those in the Partnership’s revolving credit facility described below.

Note payable to Anadarko. In December 2008, the Partnership entered into a five-year $175.0 million term loan agreement with Anadarko in order to finance the cash portion of the consideration paid for the Powder River acquisition. The interest rate is fixed at 4.00% until December 2010, and is a floating rate equal to three-month LIBOR plus 150 basis points thereafter. 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 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 and (iii) a change of control. At September 30, 2010, the Partnership was in compliance with all covenants under the five-year term loan agreement.

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”). 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. In connection with the Wattenberg acquisition, the Partnership exercised the accordion feature of its revolving credit facility, expanding the borrowing capacity of the revolving credit facility from $350.0 million to $450.0 million, and borrowed $200.0 million under the facility. In September 2010, the Partnership borrowed $10.0 million under the Swingline Loan provision of its revolving credit facility for working capital purposes, and then repaid such amount in October 2010. As of September 30, 2010, $320.0 million was outstanding under the revolving credit facility and $130.0 million was available for borrowing.

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 2.63% at September 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 September 30, 2010.

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

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

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 September 30, 2010, the Partnership was in compliance with all covenants under the revolving credit facility.

Anadarko’s credit facility. In March 2008, Anadarko entered into a five-year $1.3 billion credit facility (the “Anadarko Credit Agreement”) under which the Partnership could utilize up to $100.0 million to the extent that such amounts remain available to Anadarko under the credit facility. Pursuant to the omnibus agreement, as a co-borrower under the Anadarko Credit Agreement, the Partnership was required to reimburse Anadarko for its allocable portion of commitment fees of up to $0.1 million annually. In September 2010, Anadarko entered into a new revolving credit facility, which resulted in the termination of the Anadarko Credit Agreement, eliminating the Partnership’s $100.0 million of available borrowing thereunder.

Working capital facility. In May 2010, the Partnership entered into a two-year $30.0 million working capital facility with Anadarko as the lender. Pursuant to the omnibus agreement, the Partnership paid a commitment fee of up to $33,000 annually to Anadarko on the unused portion of the working capital facility. In September 2010, in connection with Anadarko’s entry into a new revolving credit facility, the Partnership terminated its working capital facility with Anadarko.

Fair value of debt. The fair value of the Partnership’s debt under the revolving credit facility, the Wattenberg term loan and the five-year term loan agreement approximates the carrying value of those instruments at September 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 (expense), net.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
						(in thousands)
Interest expense on notes payable to Anadarko		$	(1,750	)		$	(3,091	)		$	(5,250	)		$	(6,591	)
Interest expense on borrowings under revolving credit facility — third parties			(3,012	)			—				(5,119	)			—
Revolving credit facility fees and amortization — third parties			(861	)			—				(2,310	)			—
Credit facility commitment fees — affiliates			(25	)			(36	)			(96	)			(107	)
Interest expense		$	(5,648	)		$	(3,127	)		$	(12,775	)		$	(6,698	)
Interest income on note receivable from Anadarko		$	4,225			$	4,225			$	12,675			$	12,675
Interest income, net on affiliates balances			—				111				13				559
Interest income, net — affiliates		$	4,225			$	4,336			$	12,688			$	13,234
Interest income (expense), net		$	(1,423	)		$	1,209			$	(87	)		$	6,536

8. COMMITMENTS AND CONTINGENCIES

Environmental obligations. The Partnership is subject to various environmental-remediation obligations arising from federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. As of September 30, 2010, the Partnership’s consolidated balance sheet included a $0.8 million current liability and a $0.2 million long-term liability for remediation and reclamation obligations, included in Accrued liabilities — third parties and Asset retirement obligations and other liabilities, respectively. As of December 31, 2009, the Partnership’s consolidated balance sheet included a $0.8 million current liability and a $0.7 million long-term liability for remediation and reclamation obligations. The obligations do not anticipate any insurance recoveries. Management regularly monitors the remediation and reclamation process and the liabilities recorded and believes the Partnership’s environmental obligations are adequate to fund remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not materially affect the Partnership’s overall

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

results of operations, cash flows or financial position. There can be no assurance, however, that current regulatory requirements will not change, or past non-compliance with environmental issues will not be discovered.

Litigation and legal proceedings. 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.

Lease commitments. Anadarko, on behalf of the Partnership, has entered into lease agreements for corporate offices, compression equipment and shared field offices supporting the Partnership’s operations. The lease for the corporate offices expires in January 2012 and the leases for the shared offices extend through 2014. During May and June 2010, Anadarko and Kerr-McGee Gathering LLC purchased an aggregate $44.5 million of previously leased compression equipment used at the Granger system and Wattenberg system, which terminated the leases and associated lease expense. The purchased compression equipment was subsequently contributed to the Partnership pursuant to provisions of the contribution agreements for the Granger acquisition and the Wattenberg acquisition.

The amounts in the table below represent the remaining contractual lease obligations for the corporate offices and shared office leases as of September 30, 2010, which may be assigned or otherwise charged to the Partnership pursuant to the reimbursement provisions of the omnibus agreement.

		Minimum
		rental payments
		(in thousands)
2010		$	95
2011			366
2012			209
2013			201
2014			201
Total		$	1,072

Rent expense associated with the above leases, including rent expense for periods prior to the purchase of compression equipment in May 2010 and June 2010, was approximately $0.4 million and $5.0 million for the three and nine months ended September 30, 2010, respectively, and $2.1 million and $7.2 million for the three and nine months ended September 30, 2009, respectively.

9. SUBSEQUENT EVENTS

Distributions to unitholders. On October 19, 2010, the board of directors of the Partnership’s general partner declared a cash distribution to the Partnership’s unitholders of $0.37 per unit, or $26.4 million in aggregate, including incentive distributions. The cash distribution is payable on November 12, 2010 to unitholders of record at the close of business on October 29, 2010.

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

Commodity price swap agreements. In October 2010, the Partnership entered into commodity price swap agreements with Anadarko to mitigate exposure to commodity price volatility associated with condensate and natural gas sales and purchases at the Hugoton system. The commodity price swap agreements are effective in October 2010 and expire in September 2015. The Partnership’s notional volumes for each of the swap agreements are not specifically defined; instead, the commodity price swap agreements apply to the actual volume of natural gas and condensate purchased and sold at the Hugoton system. Because the notional volumes are not fixed, the commodity price swap agreements do not satisfy the definition of a derivative financial instrument. The Partnership will recognize gains and losses on the commodity price swap agreements in the period in which the associated revenues and costs are recognized. Below is a summary of the fixed prices on the Partnership’s commodity price swap agreements associated with the Hugoton system.

		Year Ended December 31,
		2010(1)				2011				2012				2013				2014				2015(2)
		(per barrel)
Condensate		$	72.79			$	75.32			$	76.97			$	77.51			$	77.93			$	78.61
		(per MMbtu)
Natural gas		$	3.61			$	4.12			$	4.81			$	5.14			$	5.32			$	5.50

10. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

As of September 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 unaudited condensed consolidating financial information 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 are presented in accordance with the equity method of accounting in which the equity income from consolidated subsidiaries includes the results of operations of the Partnership Assets for periods including and subsequent to the Partnership’s acquisition of the Partnership Assets.

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

		Three Months Ended September 30, 2010
		Western								Non-
		Gas				Guarantor				Guarantor
Statement of Income		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
										(in thousands)
Revenues		$	12,481			$	99,568			$	10,242			$	—			$	122,291
Operating expenses			15,177				65,170				5,057				—				85,404
Operating income (loss)			(2,696	)			34,398				5,185				—				36,887
Interest income (expense), net			(1,431	)			8				—				—				(1,423	)
Other income, net			31				31				1				—				63
Equity income from consolidated subsidiaries			35,327				2,645				—				(37,972	)			—
Income before income taxes			31,231				37,082				5,186				(37,972	)			35,527
Income tax expense			—				1,505				—				—				1,505
Net income			31,231				35,577				5,186				(37,972	)			34,022
Net income attributable to noncontrolling interests			—				2,541				—				—				2,541
Net income attributable to Western Gas Partners, LP		$	31,231			$	33,036			$	5,186			$	(37,972	)		$	31,481

		Three Months Ended September 30, 2009
		Western								Non-
		Gas				Guarantor				Guarantor
Statement of Income		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
										(in thousands)
Revenues		$	8,312			$	107,114			$	10,626			$	—			$	126,052
Operating expenses			12,330				76,588				6,167				—				95,085
Operating income (loss)			(4,018	)			30,526				4,459				—				30,967
Interest income, net			1,093				116				—				—				1,209
Other income, net			10				20				3				—				33
Equity income from consolidated subsidiaries			19,963				2,276				—				(22,239	)			—
Income before income taxes			17,048				32,938				4,462				(22,239	)			32,209
Income tax expense			—				4,884				—				—				4,884
Net income			17,048				28,054				4,462				(22,239	)			27,325
Net income attributable to noncontrolling interests			—				2,187				—				—				2,187
Net income attributable to Western Gas Partners, LP		$	17,048			$	25,867			$	4,462			$	(22,239	)		$	25,138

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

		Nine Months Ended September 30, 2010
		Western								Non-
		Gas				Guarantor				Guarantor
Statement of Income		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
										(in thousands)
Revenues		$	18,643			$	325,141			$	32,428			$	—			$	376,212
Operating expenses			30,088				218,012				16,503				—				264,603
Operating income (loss)			(11,445	)			107,129				15,925				—				111,609
Interest income (expense), net			(121	)			34				—				—				(87	)
Other income (expense), net			(2,346	)			30				5				—				(2,311	)
Equity income from consolidated subsidiaries			92,688				8,125				—				(100,813	)			—
Income before income taxes			78,776				115,318				15,930				(100,813	)			109,211
Income tax expense			—				10,480				—				—				10,480
Net income			78,776				104,838				15,930				(100,813	)			98,731
Net income attributable to noncontrolling interests			—				7,806				—				—				7,806
Net income attributable to Western Gas Partners, LP		$	78,776			$	97,032			$	15,930			$	(100,813	)		$	90,925

		Nine Months Ended September 30, 2009
		Western								Non-
		Gas				Guarantor				Guarantor
Statement of Income		Partners, LP				Subsidiaries				Subsidiary				Eliminations				Consolidated
										(in thousands)
Revenues		$	24,321			$	313,634			$	30,860			$	—			$	368,815
Operating expenses			32,136				232,338				15,070				—				279,544
Operating income (loss)			(7,815	)			81,296				15,790				—				89,271
Interest income, net			5,965				571				—				—				6,536
Other income, net			23				20				7				—				50
Equity income from consolidated subsidiaries			53,957				2,276				—				(56,233	)			—
Income before income taxes			52,130				84,163				15,797				(56,233	)			95,857
Income tax expense			—				10,951				—				—				10,951
Net income			52,130				73,212				15,797				(56,233	)			84,906
Net income attributable to noncontrolling interests			—				7,741				—				—				7,741
Net income attributable to Western Gas Partners, LP		$	52,130			$	65,471			$	15,797			$	(56,233	)		$	77,165