e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-34046
WESTERN GAS PARTNERS, LP
(Exact name of registrant as specified in its charter)
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Delaware |
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26-1075808 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
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1201 Lake Robbins Drive
The Woodlands, Texas
(Address of principal executive offices)
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77380
(Zip Code) |
(832) 636-6000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
Common Units Representing Limited Partner Interests
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
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
The aggregate market value of the Partnerships common units representing limited partner
interests held by non-affiliates of the registrant was approximately $350.7 million on June 30,
2008 based on the closing price as reported on the New York Stock Exchange.
At February 27, 2009, there were 29,093,197 common units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
DESCRIPTION
1
DEFINITIONS
As generally used within the energy industry and in this Annual Report on Form 10-K, the identified
terms have the following meanings:
Backhaul: Pipeline transportation service in which the nominated gas flow from delivery point to
receipt point is in the opposite direction as the pipelines physical gas flow.
Barrel or Bbl: 42 U.S. gallons measured at 60 degrees Fahrenheit.
Bcf/d: One billion cubic feet per day.
Btu: British Thermal Unit.
Condensate: A natural gas liquid with a low vapor pressure mainly composed of propane, butane,
pentane and heavier hydrocarbon fractions.
Delivery point: The point where gas or natural gas liquids are delivered by a processor or
transporter to a producer, shipper or purchaser, typically the inlet at the interconnection between
the gathering or processing system and the facilities of a third-party processor or transporter.
Drip condensate: Heavier hydrocarbon liquids that fall out of the natural gas stream and are
recovered in the gathering system without processing.
Dry gas: A gas primarily composed of methane and ethane where heavy hydrocarbons and water
either do not exist or have been removed through processing.
End-use markets: The ultimate users/consumers of transported energy products.
Forward-haul: Pipeline transportation service in which the nominated gas flow from receipt point
to delivery point is in the same direction as the pipelines physical gas flow.
Long ton: A British unit of weight equivalent to 2,240 pounds.
LTD: One long ton per day.
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 gasolines
that when removed from natural gas become liquid under various levels of higher pressure and
lower temperature.
Plant condensate: Heavier hydrocarbon liquids that fall out of the natural gas stream and are
recovered at the plant.
Play: A proven geological formation that contains known or potential commercial amounts of
petroleum and/or natural gas.
Psia: Pounds per square inch, absolute; refers to the pressure resulting from a one pound-force
applied to an area of one square inch, including local atmospheric pressure.
Receipt point: The point where production is received by or into a gathering system or
transportation pipeline.
Residue gas: The natural gas remaining after being processed or treated.
Sour gas: Natural gas containing more than four parts per million of hydrogen sulfide.
Tailgate: The point at which processed natural gas and/or natural gas liquids leave a processing
facility for end-use markets.
Tcf: One trillion cubic feet of natural gas.
Wellhead: The equipment at the surface of a well used to control the wells pressure; the point at
which the hydrocarbons and water exit the ground.
2
WESTERN GAS PARTNERS, LP
PART I
Items 1 and 2. Business and Properties
Unless the context clearly indicates otherwise, references in this report to the Partnership,
we, our, us or like terms, when used in the historical context, refer to the combined
financial results and operations of Anadarko Gathering Company LLC and Pinnacle Gas Treating LLC
from their inception through the closing date of our initial public offering and to Western Gas
Partners, LP and its subsidiaries thereafter, combined with the financial results and operations of
MIGC LLC and the Powder River assets, as described in Powder River Acquisition below, from August
23, 2006 thereafter. When used in the present tense or prospectively, the Partnership, we,
our, us or like terms refer to Western Gas Partners, LP and its subsidiaries.
Anadarko refers to Anadarko Petroleum Corporation (NYSE: APC) and its subsidiaries and
affiliates, other than Western Gas Partners, LP and Western Gas Holdings, LLC, our general partner.
Anadarko Petroleum Corporation refers to Anadarko Petroleum Corporation excluding its
subsidiaries and affiliates. AGC refers to Anadarko Gathering Company LLC, PGT refers to Pinnacle
Gas Treating LLC and MIGC refers to MIGC LLC. Predecessor refers to AGC, PGT and MIGC. Each of
AGC, PGT, MIGC, our general partner and the Partnership is an indirect subsidiary of Anadarko.
Available Information
We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and other documents electronically with the U.S. Securities and Exchange Commission, or the SEC,
under the Securities Exchange Act of 1934. From time-to-time, we may also file registration and
related statements pertaining to equity or debt offerings. We provide access free of charge to all
of these SEC filings, as soon as reasonably practicable after filing or furnishing, on our Internet
site located at www.westerngas.com. You may also read and copy any materials that we file with the
SEC at the SECs Public Reference Room at 100 F Street, N.E., Room 1580, Washington, DC 20549. You
may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. You may also obtain such reports from the SECs Internet website at www.sec.gov.
Our Corporate Governance Guidelines, Code of Ethics for our Chief Executive Officer and Senior
Financial Officers, Code of Business Conduct and Ethics and the charters of the audit committee and
the special committee of our general partners board of directors are also available on our
Internet website. We will also provide, free of charge, a copy of any of our governance documents
listed above upon written request to our general partners corporate secretary at our principal
executive office.
Our principal executive offices are located at 1201 Lake Robbins Drive, The Woodlands, TX
77380-1046. Our telephone number is 832-636-6000.
GENERAL
We are a growth-oriented Delaware limited partnership organized by Anadarko to own, operate,
acquire and develop midstream energy assets. With midstream assets in East and West Texas, the
Rocky Mountains and the Mid-Continent, we are engaged in the business of gathering, compressing,
treating, processing and transporting natural gas for Anadarko and other producers and customers.
Approximately 74% of our services are provided under long-term contracts with fee-based rates and
approximately 22% of our services are provided under percent-of-proceeds contracts, based on
operating income for the year ended December 31, 2008. Effective January 1, 2009, we have entered
into fixed-price swap agreements with Anadarko to manage the future commodity price risk otherwise
inherent in our percent-of-proceeds contracts. A substantial part of our business is conducted with
Anadarko and governed by contracts which were entered into during 2008 with an initial term of 10
years. Certain contracts with third parties extend for primary terms of up to 20 years.
We believe that one of our principal strengths is our relationship with Anadarko. During each of
the past three years, over 80% of our total natural gas gathering, processing and transportation
volumes were comprised of natural gas production owned or controlled by Anadarko. In addition,
Anadarko has dedicated to us all of the natural gas production it owns or controls from (i) wells
that are currently connected to our gathering systems, and (ii) additional wells that are drilled
within one mile of wells connected to our gathering systems, as the systems currently exist and as
they are expanded to connect
additional wells in the future. As a result, this dedication will continue to expand as additional
wells are connected to our gathering systems.
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Our operations and activities are managed by our general partner, Western Gas Holdings, LLC, a
wholly owned subsidiary of Anadarko. We expect to utilize the significant experience of Anadarkos
management team to execute our growth strategy, which includes acquiring and constructing
additional midstream assets. As of December 31, 2008, Anadarkos total domestic midstream asset
portfolio, excluding assets we own, consists of 19 gathering systems with an aggregate throughput
of approximately 2.3 Bcf/d, 8,100 miles of pipeline, and 18 processing and/or
treating facilities.
SEGMENTS
Our operations are organized into a single business segment which engages in gathering,
compressing, processing, treating and transporting Anadarko and third-party natural gas production
in the United States. Information on our key measure of profit is included in Note 12Segment
Information of the notes to the consolidated financial statements included in Item 8Financial Statements and
Supplementary Data in this Form 10-K.
INITIAL PUBLIC OFFERING
On May 14, 2008, we closed our initial public offering of 18,750,000 common units at a price of
$16.50 per unit. On June 11, 2008, we issued an additional 2,060,875 common units to the public
pursuant to the partial exercise of the underwriters over-allotment option. We refer to the May 14
and June 11 transactions collectively as our initial public offering. Our common units are listed
on the New York Stock Exchange under the symbol WES.
In connection with our initial public offering, Anadarko contributed the assets and liabilities of
AGC, PGT and MIGC to us in exchange for 1,083,115 general partner units, representing a 2.0%
general partner interest in the Partnership, 100% of our partnership incentive distribution rights,
or IDRs, and 5,725,431 common units and 26,536,306 subordinated units. The common units held by
Anadarko include 751,625 common units issued to Anadarko following the expiration of the
underwriters over-allotment option and represent the portion of the common units for which the
underwriters did not exercise their over-allotment option. We refer to AGC, PGT and MIGC as our
initial assets.
POWDER RIVER ACQUISITION
On December 19, 2008, we acquired certain midstream assets from Anadarko for consideration
consisting of $175.0 million cash, which was financed by borrowing $175.0 million from Anadarko pursuant to the
terms of a five-year term loan agreement, 2,556,891 of our common units and 52,181 of our general partner
units. The acquired assets consisted of (i) a 100% ownership interest in the Hilight System, (ii) a
50% interest in the Newcastle System and (iii) a 14.81% limited liability company membership
interest in Fort Union Gas Gathering, L.L.C. We refer to these assets collectively as our Powder
River assets. These assets provide a combination of gathering, treating and processing services in
the Powder River Basin area of Wyoming.
Our initial public offering and Powder River acquisition are considered transfers of net assets
between entities under common control. Anadarko acquired MIGC and the Powder River assets in
connection with its August 23, 2006 acquisition of Western Gas
Resources, Inc., or Western. The
financial information included in this Annual Report on Form 10-K includes the combined financial
results and operations of AGC and PGT from their inception through May 14, 2008 and of the
Partnership thereafter, combined with the financial results and operations of MIGC and the Powder
River assets beginning on August 23, 2006.
Following the closing of the Powder River acquisition:
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Anadarko holds 1,135,296 general partner units, representing a 2.0% general partner
interest in the Partnership, and 100% of the IDRs; |
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Anadarko holds 8,282,322 common units and 26,536,306 subordinated units, representing an
aggregate 61.3% limited partner interest in the Partnership; and |
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the public holds 20,810,875 common units, representing a 36.7% limited partner interest
in the Partnership. |
4
OUR ASSETS AND AREAS OF OPERATION
Our assets consist of nine gathering systems, six natural gas treating facilities, two gas
processing facilities and one interstate pipeline that is regulated by the Federal Energy
Regulatory Commission or FERC. Our assets are located in East and West Texas, the Rocky Mountains
(Utah and Wyoming) and the Mid-Continent (Kansas and Oklahoma). The following table provides
information regarding our assets by geographic region as of or for the year ended December 31,
2008:
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Approximate |
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number of |
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Gas |
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Treating |
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Average |
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Length |
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receipt |
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compression |
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capacity |
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throughput |
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Area |
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Asset Type |
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(miles) |
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points |
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(horsepower) |
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(MMcf/d) |
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(MMcf/d) |
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East Texas |
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Gathering and Treating |
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587 |
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819 |
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44,432 |
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502 |
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460 |
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West Texas |
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Gathering |
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108 |
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77 |
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152 |
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Rocky Mountains |
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Gathering and Treating(1) |
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432 |
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179 |
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20,385 |
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386 |
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164 |
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Gathering and Processing(2) |
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1,130 |
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801 |
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29,781 |
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30 |
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Transportation |
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264 |
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19 |
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29,696 |
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171 |
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Mid-Continent |
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Gathering |
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2,073 |
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1,555 |
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102,257 |
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131 |
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Total |
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4,594 |
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3,450 |
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226,551 |
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888 |
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1,108 |
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(1) |
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Includes Fort Union Gas Gathering LLC, or Fort Union, in which we have a 14.81%
interest. Volumes represent our proportionate share of Fort Unions gross volumes. |
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Includes the Newcastle gathering system, in which we have a 50.00% interest. |
STRATEGY
Our primary business objective is to increase our cash distributions per unit over time. We intend
to accomplish this objective by executing the following strategy:
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Pursuing accretive acquisitions. We expect to continue to pursue accretive acquisition
opportunities within the midstream energy industry from Anadarko and third parties. |
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Capitalizing on organic growth opportunities. We expect to grow certain of our systems
organically over time by meeting Anadarkos and our other customers gathering needs that
result from their drilling activity in our areas of operation. |
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Attracting third-party volumes to our systems. We actively market our midstream
services to and pursue strategic relationships with third-party producers with the
intention of attracting additional volumes and/or expansion opportunities. |
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Minimizing commodity price exposure. The majority of our midstream services are
provided under fee-based arrangements. In addition, we entered into fixed-price swap
agreements with Anadarko to manage commodity price risk otherwise associated with our
percent-of-proceeds contracts. We intend to continue to limit our direct exposure to
commodity price changes. |
COMPETITIVE STRENGTHS
We believe that we are well positioned to successfully execute our strategy and achieve our primary
business objective because of the following competitive strengths:
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Affiliation with Anadarko. We believe Anadarko, as the indirect owner of our general
partner interest, all of the IDRs and a 61.3% limited partner interest in us, is motivated
to promote and support the successful execution of our business plan and to pursue projects
that enhance the value of our business. |
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Relatively stable and predictable cash flow. Our cash flow is largely protected from
fluctuations caused by commodity price volatility due to (i) the long-term nature of our
fee-based agreements and (ii) fixed-price swap agreements which limit our exposure to
commodity price changes with respect to our percent-of-proceeds contracts. |
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Well-positioned, well-maintained and efficient assets. We believe that our established
positions in our areas of operation provide us with opportunities to expand and attract
additional volumes to our systems. Moreover, our |
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systems include high-quality, well-maintained assets for which we have implemented modern processing, treating, measuring
and operating technologies. |
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Financial flexibility to pursue expansion and acquisition opportunities. We currently
have up to $100.0 million of borrowing capacity available to us under Anadarkos revolving
credit facility as well as a $30.0 million working capital facility. We believe our
operating cash flow, borrowing capacity, ability to finance acquisitions through Anadarko
and access to debt and equity capital markets provide us with the financial flexibility
necessary to execute or strategy across capital-market cycles. |
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Experienced management team. Members of our general partners management team have
extensive experience in building, acquiring, integrating, financing and managing midstream
assets. Our relationship with Anadarko provides us with the services of experienced
personnel who successfully managed our assets and operations while they were owned by
Anadarko. |
We believe that we will effectively leverage our competitive strengths to successfully implement
our strategy; however, our business involves numerous risks and uncertainties which may prevent us
from achieving our primary business objective. For a more complete description of the risks
associated with our business, please read Item 1ARisk Factors in this Form
10-K.
OUR RELATIONSHIP WITH ANADARKO PETROLEUM CORPORATION
One of our principal attributes is our relationship with Anadarko, which indirectly owns our
general partner and has a significant ownership interest in us. Anadarko is one of the largest independent
oil and gas exploration and production companies in the world. Anadarkos upstream oil and gas
business finds and produces natural gas, crude oil, condensate and natural gas liquids, or NGLs. As
of December 31, 2008, Anadarkos total domestic midstream asset portfolio, excluding assets we own,
consisted of 19 gathering systems with an aggregate throughput of approximately 2.3 Bcf/d, 8,100
miles of pipeline, and 18 processing and/or treating facilities.
Anadarko indirectly owns a 2.0% general partner interest in us, all of our IDRs and a 61.3% limited
partner interest in us. We entered into an omnibus agreement with Anadarko and our general partner
that governs our relationship with them regarding certain reimbursement and indemnification
matters. Although our relationship with Anadarko provides us with a significant advantage in the
midstream natural gas market, it is also a source of potential conflicts. For example, Anadarko is
not restricted from competing with us. Given Anadarkos significant ownership of limited and
general partner interests in us, we believe it will be in Anadarkos best interest for it to
transfer additional assets to us over time; however, Anadarko continually evaluates acquisitions
and divestitures and may elect to acquire, construct or dispose of midstream assets in the future
without offering us the opportunity to acquire or construct those assets. Anadarko is under no
contractual obligation to offer any such opportunities to us, nor are we obligated to participate
in any such opportunities. We cannot state with any certainty which, if any, opportunities to
acquire additional assets from Anadarko may be made available to us or if we will elect to pursue
any such opportunities. Please see Item 1ARisk Factors and Item 13Certain Relationships and
Related Transactions, and Director Independence of this Form 10-K for more information.
6
INDUSTRY OVERVIEW
The midstream natural gas industry is the link between the exploration and production of natural
gas and the delivery of its components to end-use markets. Operators within this industry create
value at various stages along the natural gas value chain by gathering raw natural gas from
producers at the wellhead, separating the hydrocarbons into dry gas (primarily methane) and NGLs,
and then routing the separated dry gas and NGL streams for delivery to end-use markets or to the
next intermediate stage of the value chain. The following diagram illustrates the groups of assets
found along the natural gas value chain:
Service Types. The services provided by us and other midstream natural gas companies are generally
classified into the categories described below. As indicated below, we do not currently provide all
of these services, although we may do so in the future.
Gathering. At the initial stages of the midstream value chain, a network of typically small
diameter pipelines known as gathering systems directly connect to wellheads in the production
area. These gathering systems transport raw, or untreated, natural gas to a central location for
treating and processing. A large gathering system may involve thousands of miles of gathering
lines connected to thousands of wells. Gathering systems are typically designed to be highly
flexible to allow gathering of natural gas at different pressures and scalable to allow
gathering of additional production without significant incremental capital expenditures. In
connection with our gathering services, we retain and sell drip condensate, which falls out of
the natural gas stream during gathering.
Compression. Natural gas compression is a mechanical process in which a volume of natural gas
at a given pressure is compressed to a desired higher pressure, which allows the natural gas to
be delivered into a higher pressure system. Field compression is typically used to allow a
gathering system to operate at a lower pressure or provide sufficient discharge pressure to
deliver natural gas into a higher pressure system. Since wells produce at progressively lower
field pressures as they deplete, field compression is needed to maintain throughput across the
gathering system.
Treating and Dehydration. To the extent that gathered natural gas contains contaminants, such
as water vapor, carbon dioxide and/or hydrogen sulfide, such natural gas is dehydrated to remove
the saturated water and treated to separate the carbon dioxide and hydrogen sulfide from the gas
stream.
Processing. Most decontaminated rich natural gas does not meet the quality standards for
long-haul pipeline transportation or commercial use and must be processed to remove the heavier
hydrocarbon components, which are extracted as NGLs.
Fractionation. Fractionation is the separation of the mixture of extracted NGLs into individual
components for end-use sale. It is accomplished by controlling the temperature and pressure of
the stream of mixed NGLs in order to take advantage of the different boiling points of separate
products.
Transportation and Storage. Once the raw natural gas has been treated or processed and the raw
NGL mix fractionated into individual NGL components, the natural gas and NGL components are
stored, transported and marketed to end-use markets. Each pipeline system typically has storage
capacity located both throughout the pipeline network and at major market centers to help temper
seasonal demand and daily supply-demand shifts. Our assets do not currently include storage
facilities.
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Typical Contractual Arrangements. Midstream natural gas services, other than transportation and
storage, are usually provided under contractual arrangements that vary in the amount of commodity
price risk they carry. Three typical contract types are described below:
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Fee-Based. Fee-based arrangements may be used for gathering, compression, treating and
processing services. Under these arrangements, the service provider typically receives a
fee for each unit of natural gas gathered and compressed at the wellhead and an additional
fee per unit of natural gas treated or processed at its facility. As a result, the price
per unit received by the service provider does not vary with commodity price changes,
minimizing that service providers direct commodity price risk exposure. |
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Percent-of-Proceeds, Percent-of-Value or Percent-of-Liquids. Percent-of-proceeds,
percent-of-value or percent-of-liquids arrangements may be used for gathering and
processing services. Under these arrangements, the service provider typically remits to the
producers either a percentage of the proceeds from the sale of residue gas and/or NGLs or a
percentage of the actual residue gas and/or NGLs at the tailgate. These types of
arrangements expose the processor to commodity price risk, as the revenues from the
contracts directly correlate with the fluctuating price of natural gas and NGLs. |
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Keep-Whole. Keep-whole arrangements may be used for processing services. Under these
arrangements, the service provider keeps 100% of the NGLs produced, and the processed
natural gas, or value of the gas, is returned to the producer. Since some of the gas is
used and removed during processing, the processor compensates the producer for the amount
of gas used and removed in processing by supplying additional gas or by paying an
agreed-upon value for the gas utilized. These arrangements have the highest commodity price
exposure for the processor because the costs are dependent on the price of natural gas and
the revenues are based on the price of NGLs. |
There are two forms of contracts utilized in the transportation and storage of natural gas, as
described below:
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Firm. Firm transportation service requires the reservation of pipeline capacity by a
customer between certain receipt and delivery points. Firm customers generally pay a
demand or capacity reservation fee based on the amount of capacity being reserved,
regardless of whether the capacity is used, plus a usage fee based on the amount of natural
gas transported. Firm storage contracts involve the reservation of a specific amount of
storage capacity, including injection and withdrawal rights, and generally include a
capacity reservation charge based on the amount of capacity being reserved plus an
injection and/or withdrawal fee. |
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Interruptible. Interruptible transportation and storage service is typically short-term
in nature and is generally used by customers that either do not need firm service or have
been unable to contract for firm service. These customers pay only for the volume of gas
actually transported or stored. The obligation to provide this service is limited to
available capacity not otherwise used by firm customers, and as such, customers receiving
services under interruptible contracts are not assured capacity on the pipeline or at the
storage facility. |
See Note 2Summary of Significant Accounting Policies of the notes to the consolidated financial
statements included in Item 8Financial Statements and Supplementary Data of this Form 10-K for
information regarding our contracts.
Natural Gas Demand and Production. Natural gas is a critical component of energy supply in the
U.S. According to the Energy Information Administration, or the EIA, total annual domestic
consumption of natural gas is expected to decrease from approximately 23.4 trillion cubic feet, or
Tcf, in 2008 to approximately 22.5 Tcf in 2011, but consumption is expected to increase to
approximately 24.5 Tcf by 2028. The industrial and electricity generation sectors are the largest
consumers of natural gas in the U.S. During the last three years, these sectors accounted for
approximately 58% of the total natural gas consumed in the U.S. In 2007, natural gas provided
approximately 24% of all end-user commercial and residential energy requirements. During the last
three years, the U.S. has, on average, consumed approximately 22.7 Tcf per year, with average
annual domestic production of approximately 19.4 Tcf during the same period. The EIA projects that
domestic natural gas production will increase from 20.5 Tcf per year to 23.5 Tcf per year between
2008 and 2028.
PROPERTIES
Our assets consist of nine gathering systems, six natural gas treating facilities, two gas
processing facilities and one interstate pipeline. Our assets are located in East and West Texas,
the Rocky Mountains (Utah and Wyoming), and the Mid-Continent (Kansas and Oklahoma).
In the areas in which we operate there historically has been a significant level of drilling
activity offsetting the natural decline in production from existing wells. The current commodity
price environment has resulted in significantly lower drilling
8
activity in recent months throughout
the areas in which we operate. We have no control over this activity. In addition, the recent or
further decline in commodity prices could affect production rates and the level of investment by
Anadarko and third parties in the exploration for and development of new natural gas reserves.
Further, Anadarko and our third-party customers plan to reduce, and may temporarily suspend,
drilling activities in certain areas during 2009, which would limit the number of new wells
connected to our systems. For example, Anadarko has announced that it expects to reduce its onshore rig fleet by approximately 50%
from peak levels reached in 2008 until further cost reductions are realized,
although the specific rig activity in our
areas of operations has not
been announced.
Anadarkos and our third-party customers 2009 capital programs and
drilling activity are subject to change based on their continued monitoring of industry economic
conditions and the commodity price environment. The current commodity price environment may impact
the comparability of our historical operating results to future operating results.
The following sections describe in more detail the services provided by our assets in our areas of
operation. All volumes stated below are based on a standard pressure base of 14.73 psia.
9
The
following map depicts the Partnerships and Anadarkos significant midstream assets as
of December 31, 2008.
10
East Texas
Dew gathering system
General. The 320-mile Dew gathering system is located in Anderson, Freestone, Leon and Robertson
Counties of East Texas. The Dew gathering system was placed into service in November 1998 to
provide gathering services for Anadarkos drilling program in the Bossier play. The system provides
gathering, dehydration and compression services and ultimately delivers into the Pinnacle gas
treating system for any required treating.
Average throughput on the Dew gathering system for the years ended December 31, 2008, 2007 and 2006
was 200 MMcf/d, 218 MMcf/d and 232 MMcf/d, respectively, from approximately 745, 730 and 700
receipt points, respectively. The Dew gathering system has pipeline diameters ranging from three to
twelve inches and has 11 compressor stations with a combined 43,167 horsepower of compression.
Customers. Anadarko is the largest shipper on the Dew gathering system. Anadarkos equity gas
accounted for 196 MMcf/d of throughput during the year ended December 31, 2008, which represented
approximately 98% of the total volume on the system.
Delivery Points. The Dew gathering system has delivery points with Pinnacle Gas Treating LLC, which
is the primary delivery point and is described in more detail below, and Kinder Morgans Tejas
pipeline.
Supply. Anadarko has approximately 879 producing wells in the Bossier play and controls
approximately 238,000 gross acres in the area. Anadarko historically has maintained an active
drilling program in the Bossier play, drilling approximately 20 to 30 gross wells per year.
Pinnacle Gas Treating LLC
General. Pinnacle Gas Treating LLC, or PGT, includes our Pinnacle gathering system and our Bethel
treating plant. PGT provides sour gas gathering and treating service in Anderson, Freestone, Leon,
Limestone and Robertson Counties of East Texas. The gathering system consists of 267 miles of
pipeline with diameters ranging from three to 24 inches and one compressor station with 1,265
horsepower. The Bethel treating plant, located in Anderson County, has total CO2
treating capacity of 500 MMcf/d and 20 LTD of sulfur treating capacity.
Average throughput on the Pinnacle gathering system for the years ended December 31, 2008, 2007 and
2006 was 260 MMcf/d, 296 MMcf/d and 306 MMcf/d, respectively, from approximately 74, 70 and 60
receipt points, respectively.
Customers. Anadarko is the largest shipper on the Pinnacle gathering system with 234 MMcf/d for the
year ended December 31, 2008, which represented approximately 90% of the total throughput on the
system during such period. The balance of throughput on the system during 2008 was primarily from
five third-party shippers.
Delivery Points. The Pinnacle gathering system is connected to Enterprise Texas Pipeline, LPs
pipeline, the Energy Transfer Fuels pipeline, the ETC Texas pipeline, Kinder Morgans Tejas
pipeline, the ATMOS Texas pipeline and the Enbridge Pipelines (East Texas) LP pipeline. These
pipelines provide transportation to the Carthage, Waha and Houston Ship Channel market hubs in
Texas.
Supply. The Pinnacle gathering system is well positioned to provide gathering and treating services
to the five-county area over which it extends. With the recent drilling activity in the Cotton
Valley Lime formations, which contain higher concentrations of H2S and CO2,
we obtained a commitment from a third-party producer that allowed us to expand the Bethel treating
facilities during 2008 by installing an additional 11 LTD of sulfur treating capacity to bring the
total installed sulfur treating capacity to 20 LTD. With this expansion, we believe that we are
well positioned to benefit from future sour gas production in the area.
Rocky Mountains
MIGC system
General. The MIGC system is a 264-mile interstate pipeline operating within the Powder River Basin
of Wyoming that is regulated by FERC. The MIGC system traverses the Powder River Basin from north
to south, extending approximately 150 miles to Glenrock, Wyoming. As a result, the MIGC system is well positioned to provide
transportation for the extensive
11
natural gas volumes received from various coal-bed methane
gathering systems and conventional gas processing plants throughout the Powder River Basin. MIGC
offers both forward-haul and backhaul transportation services, and additional capacity is available
from time to time on an interruptible basis.
During September 2007, MIGC completed the installation of, and placed into service, the Python
compression station, which increased capacity on the MIGC system by approximately 50 MMcf/d. MIGC
is currently certificated for 175 MMcf/d of firm transportation capacity, all of which is fully
subscribed.
Average throughput on the MIGC system for the years ended December 31, 2008, 2007 and 2006 was 171
MMcf/d, 148 MMcf/d and 126 MMcf/d, respectively, from approximately 20 receipt points.
Customers. Anadarko is the largest firm shipper on the MIGC system, with approximately 72% of
throughput for the year ended December 31, 2008. For the year ended December 31, 2008, two
third-party shippers accounted for approximately 27% of throughput on the system.
Revenues on the MIGC system are generated from contract demand charges and volumetric fees paid by
shippers under firm and interruptible gas transportation agreements. Our current firm
transportation agreements range in term from approximately one to 10 years. Of the current
certificated capacity of 175 MMcf/d, 85 MMcf/d is contracted through January 2011, 45 MMcf/d is
contracted through September 2012 and 40 MMcf/d is contracted through October 2018. Most of our
interruptible gas transportation agreements are month-to-month with the remainder generally having
terms of less than one year. Approximately 92% of our revenues from the MIGC system for the year
ended December 31, 2008 were associated with firm transportation demand charges.
Delivery Points. MIGC volumes can be redelivered to four interstate market pipelines and one
intrastate pipeline, including the Williston Basin Interstate pipeline at the northern end of the
Powder River Basin, the MGTC intrastate pipeline, a pipeline that supplies local markets in
Wyoming, the Wyoming Interstate Companys Medicine Bow lateral pipeline, the Colorado Interstate
Gas pipeline and the Kinder Morgan interstate pipeline at the southern end of the Powder River
Basin near Glenrock, Wyoming. The MGTC pipeline is owned by Anadarko.
Supply. Anadarko has a working interest in over 1.4 million gross acres within the prolific Powder
River Basin. It currently operates approximately 4,400 gross producing coal-bed methane wells and
has non-operating interests in more than 5,300 additional gross producing coal-bed methane wells.
Anadarkos gross acreage is approximately 50% developed with substantial undeveloped acreage
positions in the expanding Big George coal play and the multiple seam coal fairway to the north of
the Big George play.
Fort Union system
General. The Fort Union system is a gathering system operating within the Powder River Basin of
Wyoming, starting in west central Campbell County and terminating at the Medicine Bow treating
plant. The Fort Union gathering system has three parallel 24-inch pipes, each 106 miles in length, and
includes CO2 treating facilities at the Medicine Bow plant. The plant currently consists
of two amine trains and an additional train is expected to be placed into service during the first
quarter of 2009.
Fort Union Gas Gathering, L.L.C. is a partnership among Copano Pipelines/Rocky Mountains, LLC
(37.04%), Crestone Powder River L.L.C. (37.04%), Bargath, Inc. (11.11%) and the Partnership
(14.81%). Anadarko is the field and construction operator of the Fort Union gathering system. The
Fort Union gathering system has a capacity of approximately 1.3 Bcf/d.
Average throughput on the Fort Union system for the years ended December 31, 2008, 2007 and 2006
was 754 MMcf/d, 566 MMcf/d and 521 MMcf/d, respectively, from approximately 15 receipt points.
Customers. The four Fort Union owners named above are the only firm shippers on the Fort Union
system. To the extent capacity on the system is not used by the owners, it is available to third
parties under interruptible agreements.
Delivery Points. The Fort Union system delivers coal-bed methane gas to the Glenrock, Wyoming Hub
which accesses interstate pipelines, including Wyoming Interstate Gas Company, Kinder Morgan
Interstate Gas Transportation Company and Colorado Interstate Gas Company. These interstate
pipelines serve gas markets in the Rocky Mountains and Midwest regions of the United States.
Supply. Substantially all of Fort Unions gas supply is comprised of coal-bed methane volumes that
are either produced or gathered by the four Fort Union owners throughout the Powder River Basin.
Anadarko has a working interest in over 1.4
12
million gross acres within the Powder River Basin and
currently produces gas from approximately 9,800 coal-bed methane wells in the Wyodek coal, the
expanding Big George coal play and the multiple seam coal fairway to the north of the Big George
play. Another of the Fort Union owners has a comparable working interest in approximately 80% of
Anadarkos producing coal-bed methane wells. The two remaining Fort Union owners gather gas for
delivery to Fort Union under contracts with acreage dedications from multiple producers in the
heart of the Basin and from the coal-bed methane producing area near Sheridan, Wyoming.
Helper gathering system
General. The 67-mile Helper gathering system, located in Carbon County, Utah, was built to provide
gathering services for Anadarkos coal-bed methane development of the Ferron Coal. The Helper
gathering system provides gathering, dehydration, compression and treating services for coal-bed
methane gas.
Average throughput on the Helper gathering system for the years ended December 31, 2008, 2007 and
2006 was 36 MMcf/d, 35 MMcf/d and 38 MMcf/d, respectively, from approximately 120 receipt points.
The Helper gathering system has pipeline diameters ranging from four to 20 inches and includes two
compressor stations with a combined 14,075 horsepower and two CO2 treating facilities.
Customers. Anadarko is the largest shipper on the Helper gathering system. For the year ended
December 31, 2008, Anadarkos equity production represented approximately 99% of the Helper
gathering systems volume.
Delivery Points. The Helper gathering system delivers into the Questar Transportation Services
Companys pipeline. Questar provides transportation to regional markets in Wyoming, Colorado and
Utah and also delivers into the Kern River Pipeline, which provides transportation to markets in
the western U.S., primarily California.
Supply. The Helper Field is an Anadarko-operated field on the southwestern edge of the Uintah Basin
that produces from the Cretaceous Ferron sands and coals. The Helper Field consists of
approximately 19,000 gross acres and has 116 gross producing wells as of December 31, 2008.
Cardinal Draw, which lies immediately to the east of Helper Field, has 36 gross producing wells as
of December 31, 2008 and covers approximately 19,000 gross acres.
Clawson gathering system
General. The 47-mile Clawson gathering system, located in Carbon and Emery Counties of Utah, was
built in 2001 to provide gathering services for Anadarkos coal-bed methane development of the
Ferron Coal. The Clawson gathering system provides gathering, dehydration, compression and treating
services for coal-bed methane gas.
Average throughput on the Clawson gathering system for the years ended December 31, 2008, 2007 and
2006 was 17 MMcf/d, 18 MMcf/d and 22 MMcf/d, respectively, from approximately 45 receipt points.
The Clawson gathering system has pipeline diameters ranging from four to 18 inches and includes one
compressor station, with 6,310 horsepower, and a CO2 treating facility.
Customers. Anadarko is the largest shipper on the Clawson gathering system with approximately 97%
of the total throughput delivered into the system during the year ended December 31, 2008. The
remaining throughput on the system was comprised of production from third-party producers.
Delivery Points. The Clawson gathering system delivers into Questar Transportation Services
Companys pipeline.
Supply. Clawson Springs Field has 45 gross producing wells as of December 31, 2008 on approximately
7,000 gross acres. Production for Clawson Springs is primarily from the Cretaceous Ferron sands and
coals.
Hilight gathering system and processing plant
General. The 980-mile Hilight gathering system, located in Johnson, Campbell, Natrona and Converse
Counties of Wyoming, was built to provide low- and high-pressure gathering services for area
conventional gas production and delivers to the Hilight plant for processing. The Hilight gathering
system has pipeline diameters ranging from three to 16 inches and includes 10 compressor stations
with 16,366 horsepower. The Hilight system was built in 1969 and has a capacity of
approximately 30 MMcf/d. The Hilight plant utilizes a refrigeration process and provides for
fractionation of the recovered NGL product into propane, butanes and natural gasoline.
13
Average throughput on the Hilight system for the years ended December 31, 2008, 2007 and 2006 was
28 MMcf/d, 28 MMcf/d and 29 MMcf/d, respectively, from approximately 400 receipt points.
Customers. Gas processed at the Hilight system is purchased from 48 third-party customers, with the
ten largest producers providing approximately 80% of the system throughput.
Delivery Points. The Hilight gathering system delivers into MIGCs 16-inch transmission line, which
delivers to Glenrock, Wyoming.
Supply. The Hilight gathering system serves the gas gathering needs of several conventional
producing fields in Johnson, Campbell, Natrona and Converse counties. Our customers have
historically and may continue to maintain throughput with workover activity and by developing new
prospects. Based on publicly available information, these producers are planning drilling activity
over the next three to five years in the area serviced by the system.
Newcastle gathering system and processing plant
General. The 150-mile Newcastle gathering system, located in Weston and Niobrara Counties of
Wyoming, was built to provide gathering services for conventional gas production in the area. The
gathering system delivers into the Newcastle plant, which was built in 1981 and has a capacity of
approximately 3 MMcf/d. The plant utilizes a refrigeration process and provides for fractionation
of the recovered NGL product into propane and butane/gasoline mix products. The Newcastle facility
is a joint venture among Black Hills Exploration and Production, Inc. (44.7%), John Paulson (5.3%)
and the Partnership (50.0%). The Newcastle gathering system has pipeline diameters ranging from two
to six inches and includes one compressor station, with 560 horsepower. The Newcastle plant has an
additional 2,100 horsepower for refrigeration and residue compression.
Average throughput on the Newcastle system for the years ended December 31, 2008, 2007 and 2006 was
1 MMcf/d, 2 MMcf/d and 2 MMcf/d, respectively, from approximately 400 receipt points.
Customers. Gas processed at the Newcastle system is purchased from 15 third-party customers, with
the largest three producers providing approximately 85% of the system throughput. The largest
producer, Black Hills Exploration, provides approximately 70% of the throughput and is a part owner
of the Newcastle system.
Delivery Points. Propane products from the Newcastle plant are typically sold locally by truck and
the butane/gasoline mix products are transported to the Hilight plant for further fractionation.
Residue gas from the Newcastle system is delivered into MGTCs pipeline for transport, distribution
and sales.
Supply. The Newcastle gathering system and plant primarily service gas production from the Clareton
and Finn-Shurley fields in Weston County. Due to infill drilling and enhanced production
techniques, producers have continued to maintain and improve production. It is estimated that,
after 28 years of development, approximately 9% of the original reserves in place have been
produced.
Mid-Continent
Hugoton gathering system
General. The 2,073-mile Hugoton gathering system provides gathering service to the Hugoton field
and is primarily located in Seward, Stevens, Grant and Morton Counties of Southwest Kansas and
Texas County in Oklahoma.
Average throughput on the Hugoton gathering system for the years ended December 31, 2008, 2007 and
2006 was 131 MMcf/d, 123 MMcf/d and 114 MMcf/d, respectively, from approximately 1,550 receipt
points. The Hugoton gathering system has pipeline diameters ranging from two to 26 inches and 43
compressor stations with a combined 102,257 horsepower of compression.
Customers. Anadarko is the largest customer on the Hugoton gathering system with 105 MMcf/d of
average throughput during the year ended December 31, 2008, representing 83% of the total volume on
the system. Of these volumes, 65% represents Anadarkos equity production and 35% represents volumes purchased by Anadarko primarily
from two third parties. Approximately 17% of the remaining throughput on the Hugoton system for the
year ended December 31, 2008 was from four other third-party shippers.
14
Delivery Points. The Hugoton gathering system is connected to DCP Midstream, LPs National Helium
plant, which extracts NGLs and helium and redelivers residue gas into the Panhandle Eastern
pipeline. The system is also connected to Pioneer Natural Resources Corporations Satanta plant for
NGL processing and to the adjacent Mid-Continent Market Center, which provides access to the
Panhandle Eastern pipeline, the Northern Natural Gas pipeline, the Natural Gas pipeline, the
Southern Star pipeline, and the ANR pipeline. These pipelines provide transportation and market
access to Midwestern and Northeastern markets.
Supply. The Hugoton field is one of the largest natural gas fields in North America. The Hugoton
field continues to be a long-life, slow-decline asset for Anadarko, which operates over 1,200 gross
wells in the area and has an extensive acreage position with approximately 470,000 gross acres. We
believe that recent changes to the Hugoton and Panoma Council Grove Proration Orders will provide
opportunities for significant recompletion, redrilling and density-drilling activities.
By virtue of a farmout agreement between a third-party producer and Anadarko, the third-party
producer gained the right to explore below the primary formations in the Hugoton field. We believe
our existing asset is well-positioned to gather volumes that may be produced from new wells the
third-party producer may successfully drill.
West Texas
Haley gathering system
General. The 108-mile Haley gathering system is located in Loving County, Texas and gathers
Anadarkos production from the Delaware Basin. The Haley gathering system provides gathering and
dehydration services and has pipeline diameters ranging from four to 16 inches.
Average throughput on the Haley gathering system for the years ended December 31, 2008, 2007 and
2006 was 152 MMcf/d, 169 MMcf/d and 133 MMcf/d, respectively, from approximately 75, 60 and 35
receipt points, respectively. The Haley gathering system has historically experienced rapid growth
as a result of Anadarkos successful drilling activity in the area.
Customers. Anadarkos and its partners production represented 99% of the Haley gathering systems
throughput for the year ended December 31, 2008.
Delivery Points. The Haley gathering system has multiple delivery points. The primary delivery
points are to the El Paso Natural Gas pipeline or the Enterprise GC, L.P. pipeline for ultimate
delivery into Energy Transfers Oasis pipeline. We also have the ability to deliver into Southern
Union Energy Services pipeline for further delivery into the Oasis pipeline. The pipelines at
these delivery points provide transportation to both the Waha and Houston Ship Channel Markets.
Supply. In the greater Delaware basin, Anadarko had interests in 159 gross producing wells as of
December 31, 2008 and access to approximately 545,000 gross acres.
COMPETITION
We do not currently face significant competition on the majority of our systems due to the
substantial throughput volumes being owned or controlled by Anadarko and its dedication to us of
future production from acreage surrounding our gathering systems. We believe our assets that are
outside of the dedicated areas are geographically well positioned to retain and attract third-party
volumes.
Competition on gathering systems and at processing plants
The natural gas gathering, compression, processing, treating and transportation business is very
competitive. Our competitors include other midstream companies, producers, and intrastate and
interstate pipelines. Competition for natural gas volumes is primarily based on reputation,
commercial terms, reliability, service levels, location, available capacity, capital expenditures
and fuel efficiencies. We believe the primary competitive advantages of our Hilight and Newcastle
systems, which gather and process third-party volumes, are their proximity to established and new
production and our ability to provide flexible services to producers, including gathering,
compression and processing. We believe we can provide the services that producers and
other customers require to connect, gather and process their natural gas efficiently, at
competitive and flexible contract terms. Further, we believe that Fort Unions centralized amine
treating facility provides Fort Union a competitive advantage.
15
Our primary competitors for our gathering systems and processing plants include:
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Dew gathering system and Pinnacle gas treating: ETC Texas Pipeline, Ltd., Enbridge
Pipelines (East Texas) LP, XTO Energy and Kinder Morgan Tejas Pipeline, LP. |
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Fort Union: Thunder Creek Gas Services |
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Helper and Clawson gathering systems: Questar Transportation Services Company. |
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Hilight gathering and processing system: DCP Midstream and Merit Energy. |
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Hugoton gathering system: ONEOK Gas Gathering Company, DCP Midstream, LP and Pioneer
Resources. |
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Haley gathering system: Enterprise GC, LP and Southern Union Energy Services Company. |
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Newcastle gathering and processing system: DCP Midstream. |
Competition on transportation system
MIGC competes with other pipelines that service the regional market and transport gas volumes from
the Powder River Basin to Glenrock, Wyoming. MIGC competitors seek to attract and connect new gas
volumes throughout the Powder River Basin, including certain of the volumes currently being
transported on MIGC. An increase in competition could result from new pipeline installations or
expansions by existing pipelines. Competitive factors include commercial terms, available capacity,
fuel efficiencies, the interconnected pipelines and gas quality issues. MIGCs major competitor is
Thunder Creek Gas Services.
SAFETY AND MAINTENANCE
We are subject to regulation by the Pipeline and Hazardous Materials Safety Administration, or
PHMSA, of the Department of Transportation, or the DOT, pursuant to the Natural Gas Pipeline Safety
Act of 1968, or the NGPSA, and the Pipeline Safety Improvement Act of 2002, or the PSIA, which was
recently reauthorized and amended by the Pipeline Inspection, Protection, Enforcement and Safety
Act of 2006. The NGPSA regulates safety requirements in the design, construction, operation and
maintenance of gas pipeline facilities, while the PSIA establishes mandatory inspections for all
U.S. oil and natural gas transportation pipelines and some gathering lines in high-consequence
areas. The PHMSA has developed regulations implementing the PSIA that require transportation
pipeline operators to implement integrity management programs, including more frequent inspections
and other measures to ensure pipeline safety in high consequence areas, such as high population
areas, areas unusually sensitive to environmental damage and commercially navigable waterways. Our
transportation pipeline system, MIGC, includes no high consequence areas and thus these particular
integrity management programs are not applicable.
We, or the entity in which we own an interest, inspect our pipelines regularly using equipment
rented from third-party suppliers. Third parties also assist us in interpreting the results of the
inspections.
States are largely preempted by federal law from regulating pipeline safety for interstate lines
but most are certified by the DOT to assume responsibility for enforcing federal intrastate
pipeline regulations and inspection of intrastate pipelines. In practice, because states can adopt
stricter standards for intrastate pipelines than those imposed by the federal government for
interstate lines, states vary considerably in their authority and capacity to address pipeline
safety. We do not anticipate any significant difficulty in complying with applicable state laws and
regulations. Our natural gas pipelines have continuous inspection and compliance programs designed
to keep the facilities in compliance with pipeline safety and pollution control requirements.
In addition, we are subject to a number of federal and state laws and regulations, including the
federal Occupational Safety and Health Act, or OSHA, and comparable state statutes, the purposes of
which are to protect the health and safety of workers, both generally and within the pipeline
industry. In addition, the OSHA hazard communication standard, the Environmental Protection Agency,
or EPA, community right-to-know regulations under Title III of the federal Superfund Amendment and
Reauthorization Act and comparable state statutes require that information be maintained concerning
hazardous materials used or produced in our operations and that such information be provided to
employees, state and local government authorities and citizens. We and the entities in which we own
an interest are also subject to OSHA Process Safety Management regulations, which are designed to
prevent or minimize the consequences of catastrophic releases of toxic, reactive, flammable or
explosive chemicals. These regulations apply to any process which involves a chemical at or above
the specified thresholds or any process which involves flammable liquid or gas, pressurized tanks,
caverns and wells in
16
excess of 10,000 pounds at various locations. Flammable liquids stored in atmospheric tanks below
their normal boiling points without the benefit of chilling or refrigeration are exempt. We have an
internal program of inspection designed to monitor and enforce compliance with worker safety
requirements. We believe that we are in material compliance with all applicable laws and
regulations relating to worker health and safety.
REGULATION OF OPERATIONS
Regulation of pipeline gathering and transportation services, natural gas sales and transportation
of NGLs may affect certain aspects of our business and the market for our products and services.
Interstate transportation pipeline regulation
MIGC, our interstate natural gas transportation system, is subject to regulation by FERC under the
Natural Gas Act of 1938, or the NGA.
Under the NGA, FERC has authority to regulate natural gas companies that provide natural gas
pipeline transportation services in interstate commerce. Federal regulation extends to such matters
as:
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rates, services, and terms and conditions of service; |
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the types of services MIGC may offer to its customers; |
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the certification and construction of new facilities; |
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the acquisition, extension, disposition or abandonment of facilities; |
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the maintenance of accounts and records; |
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relationships between affiliated companies involved in certain aspects of the natural
gas business; |
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the initiation and discontinuation of services; |
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market manipulation in connection with interstate sales, purchases or transportation of
natural gas; and |
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participation by interstate pipelines in cash management arrangements. |
Natural gas companies are prohibited from charging rates that have been determined not to be just
and reasonable by FERC. In addition, FERC prohibits natural gas companies from unduly preferring or
unreasonably discriminating against any person with respect to pipeline rates or terms and
conditions of service.
The rates and terms and conditions for our interstate pipeline services are set forth in
FERC-approved tariffs. Pursuant to FERCs jurisdiction over rates, existing rates may be challenged
by complaint and proposed rate increases may be challenged by protest. Any successful complaint or
protest against our rates could have an adverse impact on our revenues associated with providing
transportation service.
Commencing in 2003, FERC issued a series of orders adopting rules for new Standards of Conduct for
Transmission Providers (Order No. 2004), which apply to interstate natural gas pipelines and
certain natural gas storage companies that provide storage services in interstate commerce. Order
No. 2004 became effective in 2004. Among other matters, Order No. 2004 required interstate pipeline
and storage companies to operate independently from their energy affiliates, prohibited interstate
pipeline and storage companies from providing non-public transportation or shipper information to
their energy affiliates, prohibited interstate pipeline and storage companies from favoring their
energy affiliates in providing service, and obligated interstate pipeline and storage companies to
post on their websites a number of items of information concerning the company, including its
organizational structure, facilities shared with energy affiliates, discounts given for services and
instances in which the company has agreed to waive discretionary terms of its tariff. On July 7,
2004, FERC issued an order providing MIGC with a partial waiver of the independent functioning and
information access provisions of the standards of conduct.
Late in 2006, the D.C. Circuit vacated and remanded Order No. 2004 as it relates to natural gas
transportation providers, including MIGC. The D.C. Circuit found that FERC had not adequately
justified its expansion of the prior standards of conduct to include energy affiliates, and vacated
the entire rule as it relates to natural gas transportation providers. On January 9, 2007, as
clarified on March 21, 2007, FERC issued an interim rule (Order No. 690) re-promulgating on an
interim basis the standards of conduct that were not challenged before the court, while FERC
decided how to respond to the courts
17
decision on a permanent basis through FERCs rulemaking process. On October 16, 2008, FERC issued
Order No. 717, a final rule that amends the regulations adopted on an interim basis in Order No.
690. Order No. 717 implements revised standards of conduct that include three primary rules: (1)
the independent functioning rule, which requires transmission function and marketing function
employees to operate independently of each other; (2) the no-conduit rule, which prohibits
passing transmission function information to marketing function employees; and (3) the
transparency rule, which imposes posting requirements to help detect any instances of undue
preference. FERC also clarified in Order No. 717 that existing waivers to the standards of conduct
(such as those held by MIGC) shall continue in full force and effect. A number of parties have
requested clarification or rehearing of Order No. 717, and FERC action on rehearing is currently
pending. We have no way to predict what revisions to the standards of conduct may be made by FERC
on rehearing. However, we do not expect the impact on MIGC to
materially differ from the impact on other similarly situated natural gas service providers.
In May 2005, FERC issued a policy statement permitting the inclusion of an income tax allowance in
the cost of service-based rates of a pipeline organized as a tax pass-through partnership entity,
if the pipeline proves that the ultimate owner of its equity interests has an actual or potential
income tax liability on public utility income. The policy statement also provides that whether a
pipelines owners have such actual or potential income tax liability will be reviewed by FERC on a
case-by-case basis. In August 2005, FERC dismissed requests for rehearing of its new policy
statement. On December 16, 2005, FERC issued its first significant case-specific review of the
income tax allowance issue in a pipeline partnerships rate case. FERC reaffirmed its new income
tax allowance policy and directed the subject pipeline to provide certain evidence necessary for
the pipeline to determine its income tax allowance. The new tax allowance policy and the December
16, 2005 order were appealed to the D.C. Circuit. The D.C. Circuit issued an order on May 29, 2007
in which it denied these appeals and upheld FERCs new tax allowance policy and the application of
that policy in the December 16, 2005 order on all points subject to appeal. The D.C. Circuit denied
rehearing of the May 29, 2007 decision on August 20, 2007, and the D.C. Circuits decision is
final.
On December 8, 2006, FERC issued another order addressing the income tax allowance in rates. In the
December 8, 2006 order, FERC refined and reaffirmed prior statements regarding its income tax
allowance policy, and notably raised a new issue regarding the implication of the policy statement
for publicly traded partnerships. It noted that the tax deferral features of a publicly traded
partnership may cause some investors to receive, for some indeterminate duration, cash
distributions in excess of their taxable income, which FERC characterized as a tax savings. FERC
stated that it is concerned that this created an opportunity for those investors to earn an
additional return, funded by ratepayers. Responding to this concern, FERC chose to adjust the
pipelines equity rate of return downward based on the percentage by which the publicly traded
partnerships cash flow exceeded taxable income. On February 7, 2007, the pipeline filed a request
for rehearing on this issue. FERC issued an order on rehearing of the December 8, 2006 order on May
2, 2008, establishing a paper hearing on certain issues and determining that the remaining issues
not addressed in the paper hearing would be addressed in an order following the completion of the
paper hearing. Rehearing of the May 2, 2008 order has been granted and is currently pending. A
partial offer of settlement of the issues subject to the paper hearing has been filed, and FERC
action on the partial settlement is currently pending. The ultimate outcome of this proceeding
cannot be predicted with certainty.
On April 17, 2008, FERC issued a proposed policy statement regarding the composition of proxy
groups for determining the appropriate return on equity for natural gas and oil pipelines using
FERCs Discounted Cash Flow, or DCF, model. In the policy statement, which modified a proposed
policy statement issued in July 2007, FERC concluded: (1) master limited partnerships, or MLPs,
should be included in the proxy group used to determine return on equity for both oil and natural
gas pipelines; (2) there should be no cap on the level of distributions included in FERCs current
DCF methodology; (3) Institutional Brokers Estimate System, or IBES, forecasts should remain the
basis for the short-term growth forecast used in the DCF calculation; (4) the long-term growth
component of the DCF model should be limited to fifty percent of long-term gross domestic product;
and (5) there should be no modification to the current two-thirds and one-third weighting of the
short-term and long-term growth components, respectively. FERC also concluded that the policy
statement should govern all gas and oil rate proceedings involving the establishment of return on
equity that are pending before FERC. FERCs policy determinations applicable to MLPs are subject to
further modification, and it is possible that these policy determinations may have a negative
impact on MIGCs rates in the future.
On August 8, 2005, Congress enacted the Energy Policy Act of 2005, or the EPAct 2005. Among other
matters, EPAct 2005 amends the NGA to add an anti-manipulation provision which makes it unlawful
for any entity to engage in prohibited behavior in contravention of rules and regulations to be
prescribed by FERC and, furthermore, provides FERC with additional civil penalty authority. On
January 19, 2006, FERC issued Order No. 670, a rule implementing the anti-manipulation provision of
EPAct 2005, and subsequently denied rehearing. The rules make it unlawful for any entity, directly
or indirectly in connection with the purchase or sale of natural gas subject to the jurisdiction of
FERC or the purchase or sale of transportation services subject to the jurisdiction of FERC: (1) to
use or employ any device, scheme or artifice to defraud;
(2) to make any untrue statement of material fact or omit to make any such statement necessary to
make the statements made
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not misleading; or (3) to engage in any act or practice that operates as a
fraud or deceit upon any person. The new anti-manipulation rules apply to interstate gas pipelines
and storage companies and intrastate gas pipelines and storage companies that provide interstate
services, such as Section 311 service, as well as otherwise non-jurisdictional entities to the
extent the activities are conducted in connection with gas sales, purchases or transportation
subject to FERC jurisdiction. The new anti-manipulation rules do not apply to activities that
relate only to intrastate or other non-jurisdictional sales or gathering, but only to the extent
such transactions do not have a nexus to jurisdictional transactions. EPAct 2005 also amends the
NGA and the Natural Gas Policy Act of 1978, or NGPA, to give FERC authority to impose civil penalties for violations of these statutes,
up to $1,000,000 per day per violation for violations occurring after August 8, 2005. In connection
with this enhanced civil penalty authority, FERC issued a policy statement on enforcement to
provide guidance regarding the enforcement of the statutes, orders, rules and regulations it
administers, including factors to be considered in determining the appropriate enforcement action
to be taken. Should we fail to comply with all applicable FERC-administered statutes, rules,
regulations and orders, we could be subject to substantial penalties and fines.
In 2008, FERC took steps to enhance its market oversight and monitoring of the natural gas industry
by issuing several rulemaking orders designed to promote gas price transparency and to prevent
market manipulation. Order No. 704, as clarified on rehearing in 2008, requires buyers and sellers
of natural gas above a de minimis level, including entities not otherwise subject to FERC
jurisdiction, to submit an annual report to FERC describing their wholesale physical natural gas
transactions. The first such report is due on May 1, 2009 for calendar year 2008 activities. Order
No. 720, issued on November 20, 2008, increases the Internet posting obligations of interstate
pipelines, and also requires major non-interstate pipelines (defined as pipelines with annual
deliveries of more than 50 million MMBtu) to post on the Internet the daily volumes scheduled for
each receipt and delivery point on their systems with a design capacity of 15,000 MMBtu per day or
greater. Numerous parties have requested modification or reconsideration of this rule, and it
remains to be seen whether the requirements will be modified on rehearing, which is currently
pending. In November 2008, FERC also issued a Notice of Inquiry to the industry soliciting comments
regarding whether Hinshaw pipelines and intrastate pipelines that transport natural gas in
interstate commerce pursuant to Section 311 of the NGPA should be required to post on the Internet
certain details of their transactions with individual shippers in a manner comparable to the
reporting requirements applicable to interstate pipelines. Once FERC evaluates the comments filed
in response to the Notice of Inquiry, it may choose to engage in the formal rulemaking process to
propose additional reporting requirements on such pipelines.
In 2008, FERC also took action to ease restrictions on the capacity release market, in which
shippers on interstate pipelines can transfer to one another their rights to pipeline and/or
storage capacity. Among other things, Order No. 712, as modified on rehearing, removes the price
ceiling on short-term capacity releases of one year or less, allows a shipper releasing gas storage
capacity to tie the release to the purchase of the gas inventory and the obligation to deliver the
same volume at the expiration of the release, and facilitates Asset Management Agreements, or AMAs,
by exempting releases under qualified AMAs from: the competitive bidding requirements for released
capacity; FERCs prohibition against tying releases to extraneous conditions; and the prohibition
on capacity brokering.
Gathering pipeline regulation
Section 1(b) of the NGA exempts natural gas gathering facilities from the jurisdiction of FERC. We
believe that our natural gas pipelines meet the traditional tests that FERC has used to determine
that a pipeline is a gathering pipeline and is, therefore, not subject to FERC jurisdiction. The
distinction between FERC-regulated transmission services and federally unregulated gathering
services, however, is the subject of substantial, on-going litigation, so the classification and
regulation of our gathering facilities are subject to change based on future determinations by
FERC, the courts or Congress. State regulation of gathering facilities generally includes various
safety, environmental and, in some circumstances, nondiscriminatory take requirements and
complaint-based rate regulation. In recent years, FERC has taken a more light-handed approach to
regulation of the gathering activities of interstate pipeline transmission companies, which has
resulted in a number of such companies transferring gathering facilities to unregulated affiliates.
As a result of these activities, natural gas gathering may begin to receive greater regulatory
scrutiny at both the state and federal levels. Our natural gas gathering operations could be
adversely affected should they be subject to more stringent application of state or federal
regulation of rates and services. Our natural gas gathering operations also may be or become
subject to additional safety and operational regulations relating to the design, installation,
testing, construction, operation, replacement and management of gathering facilities. Additional
rules and legislation pertaining to these matters are considered or adopted from time to time. We
cannot predict what effect, if any, such changes might have on our operations, but the industry
could be required to incur additional capital expenditures and increased costs depending on future
legislative and regulatory changes.
Our natural gas gathering operations are subject to ratable take and common purchaser statutes in
most of the states in which we operate. These statutes generally require our gathering pipelines to
take natural gas without undue discrimination as to source of supply or producer. These statutes
are designed to prohibit discrimination in favor of one producer over another
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producer or one source of supply over another source of supply. The regulations under these statutes can have the
effect of imposing some restrictions on our ability as an owner of gathering facilities to decide
with whom we contract to gather natural gas. The states in which we operate have adopted a
complaint-based regulation of natural gas gathering activities, which allows natural gas producers
and shippers to file complaints with state regulators in an effort to resolve grievances relating
to gathering access and rate discrimination. We cannot predict whether such a complaint will be
filed against us in the future. Failure to comply with state regulations can result in the
imposition of administrative, civil and criminal remedies. To date, there has been no adverse
effect to our systems due to these regulations.
During the 2007 legislative session, the Texas State Legislature passed H.B. 3273, or the
Competition Bill, and H.B. 1920, or the LUG Bill. The Texas Competition Bill and LUG Bill contain
provisions applicable to gathering facilities. The Competition Bill allows the Railroad Commission
of Texas, or the TRRC, the ability to use either a cost-of-service method or a market-based method
for setting rates for natural gas gathering in formal rate proceedings. It also gives the TRRC
specific authority to enforce its statutory duty to prevent discrimination in natural gas
gathering, to enforce the requirement that parties participate in an informal complaint process and
to punish purchasers, transporters and gatherers for taking discriminatory actions against shippers
and sellers. The LUG Bill modifies the informal complaint process at the TRRC with procedures
unique to lost and unaccounted for gas issues. It extends the types of information that can be
requested and gives the TRRC the authority to make determinations and issue orders in specific
situations. Both the Competition Bill and the LUG Bill became effective September 1, 2007. We
cannot predict what effect, if any, either the Competition Bill or the LUG Bill might have on our
gathering operations.
ENVIRONMENTAL MATTERS
General
Our
operation of pipelines, plants and other facilities for the gathering, processing, compression,
treating and transporting of natural gas and other products is subject to stringent and complex
federal, state and local laws and regulations relating to the protection of the environment. As an
owner or operator of these facilities, we must comply with these laws and regulations at the
federal, state and local levels. These laws and regulations can restrict or impact our business
activities in many ways, such as:
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requiring the installation of pollution-control equipment or otherwise restricting
the way we can handle or dispose of our wastes; |
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limiting or prohibiting construction activities in sensitive areas, such as
wetlands, coastal regions or areas inhabited by endangered or threatened species; |
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requiring investigatory and remedial actions to mitigate or eliminate pollution
conditions caused by our operations or attributable to former operations; and |
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enjoining the operations of facilities deemed to be in non-compliance with such
environmental laws and regulations and permits issued pursuant thereto. |
Failure to comply with these laws and regulations may trigger a variety of administrative, civil
and criminal enforcement measures, including the assessment of monetary penalties, the imposition
of investigatory and remedial obligations and the issuance of orders enjoining future operations or
imposing additional compliance requirements. Certain environmental statutes impose strict and joint
and several liability for costs required to clean up and restore sites where hazardous substances,
hydrocarbons or wastes have been disposed or otherwise released, thus, we may be subject to
environmental liability at our currently owned or operated facilities for conditions caused prior
to our involvement. Moreover, it is not uncommon for neighboring landowners and other third parties
to file claims for personal injury and property damage allegedly caused by the release of hazardous
substances, hydrocarbons or other waste products into the environment.
The trend in environmental regulation is to place more restrictions and limitations on activities
that may affect the environment, and thus, there can be no assurance as to the amount or timing of
future expenditures for environmental compliance or remediation and actual future expenditures may
be different from the amounts we currently anticipate. We try to anticipate future regulatory
requirements that might be imposed and plan accordingly to remain in compliance with changing
environmental laws and regulations and to minimize the costs of such compliance. We also actively
participate in industry groups that help formulate recommendations for addressing existing or
future regulations.
We do not believe that compliance with federal, state or local environmental laws and regulations
will have a material adverse effect on our business, financial position or results of operations or
cash flows. In addition, we believe that the
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various environmental activities in which we are
presently engaged are not expected to materially interrupt or diminish our operational ability to
gather, process, compress, treat and transport natural gas. We cannot assure you, however, that future
events, such as changes in existing laws or enforcement policies, the promulgation of new laws or
regulations or the development or discovery of new facts or conditions will not cause us to incur
significant costs. Below is a discussion of several of the material environmental laws and
regulations that relate to our business. We believe that we are in material compliance with
applicable environmental laws and regulations.
Hazardous substances and waste
Our operations are subject to environmental laws and regulations relating to the management and
release of hazardous substances, solid and hazardous wastes and petroleum hydrocarbons. These laws
generally regulate the generation, storage, treatment, transportation and disposal of solid and
hazardous waste and may impose strict and joint and several liability for the investigation and
remediation of affected areas where hazardous substances may have been released or disposed. For
instance, the Comprehensive Environmental Response, Compensation, and Liability Act, referred to as
CERCLA or the Superfund law, and comparable state laws impose liability, without regard to fault or
the legality of the original conduct, on certain classes of persons. These persons include current
owners or operators of the site where a release of hazardous substances occurred, prior owners or
operators that owned or operated the site at the time of the release, and companies that disposed
or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these
persons may be subject to joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment, for damages to natural resources and for
the costs of certain health studies. CERCLA also authorizes the EPA and, in some instances, third
parties to act in response to threats to the public health or the environment and to seek to
recover the costs they incur from the responsible classes of persons. It is not uncommon for
neighboring landowners and other third parties to file claims for personal injury and property
damage allegedly caused by hazardous substances or other pollutants released into the environment.
Despite the petroleum exclusion of CERCLA Section 101(14), which currently encompasses natural
gas, we may nonetheless handle hazardous substances within the meaning of CERCLA, or similar state
statutes, in the course of our ordinary operations and, as a result, may be jointly and severally
liable under CERCLA for all or part of the costs required to clean up sites at which these
hazardous substances have been released into the environment.
We also generate solid wastes, including hazardous wastes, which are subject to the requirements of
the Resource Conservation and Recovery Act, referred to as RCRA, and comparable state statutes.
While RCRA regulates both solid and hazardous wastes, it imposes strict requirements on the
generation, storage, treatment, transportation and disposal of hazardous wastes. Certain petroleum
production wastes are excluded from RCRAs hazardous waste regulations. However, it is possible
that these wastes, which could include wastes currently generated during our operations, will in
the future be designated as hazardous wastes and, therefore, be subject to more rigorous and
costly disposal requirements. Any such changes in the laws and regulations could have a material
adverse effect on our maintenance capital expenditures and operating expenses.
We currently own or lease, and our Predecessor has in the past owned or leased, properties where
hydrocarbons are being or have been handled for many years. Although we have generally utilized
operating and disposal practices that were standard in the industry at the time, hydrocarbons or
other wastes may have been disposed of or released on or under the properties owned or leased by
us, or on or under the other locations where these hydrocarbons and wastes have been transported
for treatment or disposal. In addition, certain of these properties have been operated by third
parties whose treatment and disposal or release of hydrocarbons and other wastes was not under our
control. These properties and the wastes disposed thereon may be subject to CERCLA, RCRA and
analogous state laws. Under these laws, we could be required to remove or remediate previously
disposed wastes (including wastes disposed of or released by prior owners or operators), to clean
up contaminated property (including contaminated groundwater) or to perform remedial operations to
prevent future contamination. We are not currently aware of any facts, events or conditions
relating to such requirements that could materially impact our financial condition, results of
operations or cash flows.
Air emissions
Our operations are subject to the Federal Clean Air Act and comparable state laws and regulations.
These laws and regulations regulate emissions of air pollutants from various industrial sources,
including our compressor stations, and also impose various monitoring and reporting requirements.
Such laws and regulations may require that we obtain pre-approval for the construction or
modification of certain projects or facilities, obtain and strictly comply with air permits
containing various emissions and operational limitations and utilize specific emission control technologies to
limit emissions. Our failure to comply with these requirements could subject us to monetary
penalties, injunctions, conditions or restrictions on operations and, potentially, criminal
enforcement actions. We believe that we are in material compliance with these requirements. We may
be required to incur certain capital expenditures in the future for air pollution control equipment in
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connection with obtaining and maintaining permits and approvals for air emissions. We believe,
however, that our operations will not be materially adversely affected by such requirements, and
the requirements are not expected to be any more burdensome to us than to any other similarly
situated companies.
Water discharges
The Federal Water Pollution Control Act, or the Clean Water Act, and analogous state laws impose
restrictions and strict controls regarding the discharge of pollutants or fill into state waters as
well as waters of the U.S. and adjacent wetlands. The discharge of pollutants into regulated waters
is prohibited, except in accordance with the terms of permits issued by the EPA, the Army Corps of
Engineers or an analogous state agency. Spill prevention, control and countermeasure requirements
of federal laws require appropriate containment berms and similar structures to help prevent the
contamination of regulated waters in the event of a hydrocarbon spill, rupture or leak. In
addition, the Clean Water Act and analogous state laws require individual permits or coverage under
general permits for discharges of storm water runoff from certain types of facilities. These
permits may require us to monitor and sample the storm water runoff from certain of our facilities.
Some states also maintain groundwater protection programs that require permits for discharges or
operations that may impact groundwater conditions. We believe that we are in material compliance
with these requirements. However, federal and state regulatory agencies can impose administrative,
civil and criminal penalties for non-compliance with discharge permits or other requirements of the
Clean Water Act and analogous state laws and regulations. We believe that compliance with existing
permits and compliance with foreseeable new permit requirements will not have a material adverse
effect on our financial condition, results of operations or cash flows.
Endangered species
The Endangered Species Act, or ESA, restricts activities that may affect endangered or threatened
species or their habitats. While some of our pipelines may be located in areas that are designated
as habitats for endangered or threatened species, we believe that we are in material compliance
with the ESA. However, the designation of previously unidentified endangered or threatened species
could cause us to incur additional costs or become subject to operating restrictions or bans in the
affected states.
Climate change
Recent scientific studies have suggested that emissions of certain gases, commonly referred to as
greenhouse gases and including carbon dioxide and methane, may be contributing to warming of the
Earths atmosphere. In response to such studies, the U.S. Congress is actively considering
legislation to reduce emissions of greenhouse gases. In addition, numerous states have already
taken legal measures to reduce emissions of greenhouse gases, primarily through the planned
development of greenhouse gas emission inventories and/or regional greenhouse gas initiatives.
Also, as a result of the U.S. Supreme Courts decision on April 2, 2007 in Massachusetts, et al. v.
EPA, 549 U.S. 497 (2007), the EPA may be required or encouraged to regulate greenhouse gas
emissions from mobile sources (e.g., cars and trucks) even if Congress does not adopt new
legislation specifically addressing emissions of greenhouse gases. The Courts holding in
Massachusetts that greenhouse gases fall under the federal Clean Air Acts definition of air
pollutant may also result in future regulation of greenhouse gas emissions from stationary sources
under certain Clean Air Act programs. New legislation or regulatory programs that restrict
emissions of greenhouse gases in areas where we conduct business could adversely affect our
operations and demand for our services.
Anti-terrorism measures
The Department of Homeland Security Appropriation Act of 2007 requires the Department of Homeland
Security, or DHS, to issue regulations establishing risk-based performance standards for the
security of chemical and industrial facilities, including oil and gas facilities that are deemed to
present high levels of security risk. The DHS issued an interim final rule in April 2007
regarding risk-based performance standards to be attained pursuant to this act and, on November 20,
2007, further issued an Appendix A to the interim rules that establish chemicals of interest and
their respective threshold quantities that will trigger compliance with these interim rules. We
have determined the extent to which our facilities are subject to the rule, made the necessary
notifications and determined that the requirements will not have a material
impact on our financial condition, results of operations or cash flows.
TITLE TO PROPERTIES AND RIGHTS-OF-WAY
Our real property is classified into two categories: (1) parcels that we own in fee and (2) parcels
in which our interest derives from leases, easements, rights-of-way, permits or licenses from
landowners or governmental authorities, permitting the use of
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such land for our operations. Portions of the land on which our plants and other major facilities are located are owned by us in
fee title, and we believe that we have satisfactory title to these lands. The remainder of the land
on which our plant sites and major facilities are located are held by us pursuant to surface leases
between us, as lessee, and the fee owner of the lands, as lessors. We have or our Predecessor has
leased or owned these lands for many years without any material challenge known to us relating to
the title to the land upon which the assets are located, and we believe that we have satisfactory
leasehold estates or fee ownership of such lands. We have no knowledge of any challenge to the
underlying fee title of any material lease, easement, right-of-way, permit or license held by us or
to our title to any material lease, easement, right-of-way, permit or lease, and we believe that we
have satisfactory title to all of our material leases, easements, rights-of-way, permits and
licenses.
Some of the leases, easements, rights-of-way, permits and licenses transferred to us at the time of
our initial public offering required the consent of the grantor of such rights, which in certain
instances is a governmental entity. Our general partner has obtained sufficient third-party
consents, permits and authorizations for the transfer of the assets necessary to enable us to
operate our business in all material respects. With respect to any remaining consents, permits or
authorizations that have not been obtained, we have determined these will not have material adverse
effect on the operation of our business should we fail to obtain such consents, permits or
authorization in a reasonable time frame.
Anadarko holds record title to portions of certain assets as we make the appropriate filings in the
jurisdictions in which such assets are located and obtain any consents and approvals as needed.
Such consents and approvals would include those required by federal and state agencies or other
political subdivisions. In some cases, Anadarko temporarily holds record title to property as
nominee for our benefit and in other cases may, on the basis of expense and difficulty associated
with the conveyance of title, may cause its affiliates to retain title, as nominee for our benefit,
until a future date. We anticipate that there will be no material change in the tax treatment of
our common units resulting from Anadarko holding the title to any part of such assets subject to
future conveyance or as our nominee.
EMPLOYEES
We do not have any employees. The officers of our general partner manage our operations and
activities. As of December 31, 2008, Anadarko employed approximately 167 people who provided
direct, full-time support to our operations. All of the employees required to conduct and support
our operations are employed by Anadarko and all of our direct, full-time personnel are subject to a
service and secondment agreement between our general partner and Anadarko. None of these employees
are covered by collective bargaining agreements, and Anadarko considers its employee relations to
be good.
Item 1A. Risk Factors
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
We have made in this report, and may from time to time otherwise make in other public filings,
press releases and discussions, forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning our
operations, economic performance and financial condition. These statements can be identified by the
use of forward-looking terminology such as may, could, believe, expect, anticipate,
estimate, project, continue, potential, plan, forecast or other similar words. These
statements discuss future expectations, contain projections of results of operations or financial
condition or include other forward-looking information. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct.
These forward-looking statements involve risk and uncertainties. Important factors that could cause
actual results to differ materially from our expectations include, but are not limited to, the
following risks and uncertainties:
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our assumptions about the energy market; |
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future treating and processing volumes and pipeline throughput, including Anadarkos
production, which is gathered or transported through our assets; |
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operating results; |
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competitive conditions; |
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technology; |
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the availability of capital resources, capital expenditures and other contractual
obligations; |
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the supply of and demand for, and the price of oil, natural gas, NGLs and other products
or services; |
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the weather; |
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inflation; |
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the availability of goods and services; |
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general economic conditions, either internationally or nationally or in the
jurisdictions in which we are doing business; |
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legislative or regulatory changes, including changes in environmental regulation,
environmental risks, regulations by FERC and liability under federal and state
environmental laws and regulations; |
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the securities or capital markets, and our ability to access credit, including under
Anadarkos $1.3 billion credit facility; |
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our ability to maintain and/or obtain rights to operate our assets on land owned by
third parties; |
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our ability to acquire assets on acceptable terms; |
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non-payment or non-performance of Anadarko or other significant customers, including
under our gathering, processing and transportation agreements and our $260.0 million note receivable
from Anadarko; and |
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other factors discussed below and elsewhere in Item 1ARisk Factors and in Item
7Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates included in this Form 10-K and in our other
public filings and press releases. |
The risk factors and other factors noted throughout or incorporated by reference in this
report could cause our actual results to differ materially from those contained in any
forward-looking statement. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or
otherwise.
Limited partner units are inherently different from capital stock of a corporation, although many
of the business risks to which we are subject are similar to those that would be faced by a
corporation engaged in similar businesses. We urge you to carefully consider the following risk
factors together with all of the other information included in this annual report in evaluating an
investment in our common units.
If any of the following risks were to occur, our business, financial condition or results of
operation could be materially adversely affected. In that case, we might not be able to pay the
minimum quarterly distribution on our common units, the trading price of our common units could
decline and you could lose all or part of your investment in us.
RISKS RELATED TO OUR BUSINESS
We are dependent on Anadarko for a majority of the natural gas that we gather, treat and transport.
A material reduction in Anadarkos production gathered or transported by our assets would result in
a material decline in our revenues and cash available for distribution.
We rely on Anadarko for a majority of the natural gas that we gather, treat and transport. For the
year ended December 31, 2008, Anadarko accounted for approximately 83% of our natural gas
gathering, processing and transportation volumes. Anadarko may suffer a decrease in production
volumes in the areas serviced by us and is under no contractual obligation to maintain its
production volumes dedicated to us. The loss of a significant portion of the natural gas volumes
supplied by Anadarko would result in a material decline in our revenues and our cash available for
distribution. In addition, Anadarko may reduce its drilling activity in our areas of operation or
determine that drilling activity in other areas of operation is strategically more attractive. A
shift in Anadarkos focus away from our areas of operation could result in reduced throughput on
our system and a material decline in our revenues and cash available for distribution.
Because of the natural decline in production from existing wells, our success depends on our
ability to obtain new sources of natural gas, which is dependent on certain factors beyond our
control. Any decrease in the volumes of natural gas that we gather, process, compress, treat and
transport could adversely affect our business and operating results.
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The volumes that support our business are dependent on the level of production from natural gas
wells connected to our gathering systems and processing and treatment facilities. This production
will naturally decline over time. As a result, our cash flows associated with these wells will also
decline over time. In order to maintain or increase throughput levels on our gathering systems, we
must obtain new sources of natural gas. The primary factors affecting our ability to obtain sources
of natural gas include (i) the level of successful drilling activity near our systems, (ii) our
ability to compete for volumes from successful new wells, to the extent such wells are not
dedicated to our systems, and (iii) our ability to capture volumes currently gathered or processed
by third parties.
While Anadarko has dedicated production from certain of its properties to us, we have no control
over the level of drilling activity in our areas of operation, the amount of reserves associated
with wells connected to our gathering systems or the rate at which production from a well declines.
In addition, we have no control over Anadarko or other producers or their drilling or production
decisions, which are affected by, among other things, the availability and cost of capital,
prevailing and projected commodity prices, demand for hydrocarbons, levels of reserves, geological
considerations, governmental regulations, the availability of drilling rigs and other production
and development costs. Fluctuations in commodity prices can also greatly affect investments by
Anadarko and third parties in the development of new natural gas reserves. Declines in natural gas
prices could have a negative impact on exploration, development and production activity and, if
sustained, could lead to a material decrease in such activity. Sustained reductions in exploration
or production activity in our areas of operation would lead to reduced utilization of our gathering
and treating assets.
Because of these factors, even if new natural gas reserves are known to exist in areas served by
our assets, producers (including Anadarko) may choose not to develop those reserves. Moreover,
Anadarko may not develop the acreage it has dedicated to us. If competition or reductions in
drilling activity result in our inability to maintain the current levels of throughput on our
systems, it could reduce our revenue and impair our ability to make cash distributions to our
unitholders.
We may not have sufficient cash from operations following the establishment of cash reserves and
payment of fees and expenses, including cost reimbursements to our general partner, to enable us to
pay the minimum quarterly distribution to holders of our common and subordinated units.
In order to pay the minimum quarterly distribution of $0.30 per unit per quarter, or $1.20 per unit
per year, we will require available cash of approximately $17.0 million per quarter, or $68.1
million per year, based on the number of general partner units and common and subordinated units
outstanding at December 31, 2008. We may not have sufficient available cash from operating surplus
each quarter to enable us to pay the minimum quarterly distribution. The amount of cash we can
distribute on our units principally depends upon the amount of cash we generate from our
operations, which will fluctuate from quarter to quarter based on, among other things:
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the prices of, level of production of, and demand for natural gas; |
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the volume of natural gas we gather, compress, treat, process and transport; |
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the volumes and prices of condensate that we retain and sell; |
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demand charges and volumetric fees associated with our transportation services; |
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the level of competition from other midstream energy companies; |
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the level of our operating and maintenance and general and administrative costs; |
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regulatory action affecting the supply of or demand for natural gas, the rates we can
charge, how we contract for services, our existing contracts, our operating costs or our
operating flexibility; and |
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prevailing economic conditions. |
In addition, the actual amount of cash we will have available for distribution will depend on other
factors, including the following, some of which are beyond our control:
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the level of capital expenditures we make; |
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our debt service requirements and other liabilities; |
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fluctuations in our working capital needs; |
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our ability to borrow funds and access capital markets; |
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restrictions contained in debt agreements to which we are a party; and |
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the amount of cash reserves established by our general partner. |
25
Declining general economic, business or industry conditions may have a material adverse effect on
our results of operations, liquidity and financial condition.
Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of
credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to
increased economic uncertainty and diminished expectations for the global economy.
These factors, combined with volatile oil, natural gas and NGLs prices, declining business and
consumer confidence and increased unemployment, have precipitated an economic slowdown and a
recession. Concerns about global economic growth have had a significant adverse impact on global
financial markets and commodity prices. If the economic climate in the United States or abroad
continues to deteriorate, demand for petroleum products could continue to diminish and prices for
oil, natural gas and NGLs could continue to decrease, which could reduce the throughput on our
systems, affect our vendors, suppliers and customers ability to continue operations, and
adversely impact our results of operations, liquidity and financial condition.
Lower natural gas and oil prices could adversely affect our business.
Lower natural gas and oil prices could impact natural gas and oil exploration and production
activity levels and result in a decline in the production of natural gas and condensate, resulting
in reduced throughput on our systems. Any such decline may cause our current or potential customers
to delay drilling or shut in production. In addition, such a decline would reduce the amount of
NGLs and condensate we retain and sell. As a result, lower natural gas prices could have an adverse
effect on our business, results of operations, financial condition and our ability to make cash
distributions to our unitholders.
In general terms, the prices of natural gas, oil, condensate, NGLs and other hydrocarbon products
fluctuate in response to changes in supply and demand, market uncertainty and a variety of
additional factors that are beyond our control. These factors include:
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worldwide economic conditions; |
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weather conditions and seasonal trends; |
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the levels of domestic production and consumer demand; |
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the availability of imported liquefied natural gas, or LNG; |
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the availability of transportation systems with adequate capacity; |
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the volatility and uncertainty of regional pricing differentials such as in the
Mid-Continent or Rocky Mountains; |
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the price and availability of alternative fuels; |
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the effect of energy conservation measures; |
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the nature and extent of governmental regulation and taxation; and |
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the anticipated future prices of natural gas, NGLs and other commodities. |
We may not be able to obtain funding, obtain funding on acceptable terms or obtain funding under
Anadarkos $1.3 billion credit facility because of the deterioration of the credit and capital
markets. This may hinder or prevent us from meeting our future capital needs.
Global financial markets and economic conditions have been, and continue to be volatile. The debt
and equity capital markets have been exceedingly distressed. These issues, along with significant
write-offs in the financial services sector, the repricing of credit risk and the current weak
economic conditions have made, and will likely continue to make, it difficult for some entities to
obtain funding. In addition, as a result of concerns about the stability of financial markets
generally and the solvency of counterparties specifically, the cost of obtaining money from the
credit markets generally has increased as many lenders and institutional investors have increased
interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity
at all or on terms similar to the borrowers current debt and reduced, or in some cases, ceased to
provide funding to borrowers. In addition, we may be unable to obtain adequate funding under
Anadarkos $1.3 billion credit facility if (i) Anadarkos lending counterparties become unwilling
or unable to meet their funding obligations, (ii) Anadarko has to draw down on its entire $1.3
billion credit facility in order to meet its own capital needs or (iii) the amount we may
borrow under Anadarkos $1.3 billion credit facility is reduced for other reasons. Due to these
factors, we cannot be
certain
26
that funding will be available if needed and to the extent required,
on acceptable terms. If funding is not available when needed, or is available only on unfavorable
terms, we may be unable to execute our business plans, complete acquisitions or otherwise take
advantage of business opportunities or respond to competitive pressures, any of which could have a
material adverse effect on our financial condition, results of operations or cash flows.
Limitations on our access to capital may impair our ability to execute our growth strategy.
Our ability to raise capital for acquisitions and other capital expenditures depends upon periodic
ready access to the capital markets. In the future, we intend to finance our acquisitions and, to a
much lesser extent, expansions of our gathering systems, through access to public and private debt
and equity offerings. If we are unable to access the capital markets, we may be unable to execute
our strategy of growth through acquisitions and expansions.
The amount of cash we have available for distribution to holders of our common and subordinated
units depends primarily on our cash flow rather than on our profitability; accordingly, we may be
prevented from making distributions, even during periods in which we record net income.
The amount of cash we have available for distribution depends primarily upon our cash flow and not
solely on profitability, which will be affected by non-cash items. As a result, we may make cash
distributions during periods when we record losses for financial accounting purposes and may not
make cash distributions during periods when we record net earnings for financial accounting
purposes.
The amount of available cash we need to pay the minimum quarterly distribution on all of our units
and the corresponding distribution on our general partners 2.0% interest for four quarters is
approximately $68.1 million.
We typically do not obtain independent evaluations of natural gas reserves connected to our
gathering, processing and transportation systems; therefore, in the future, volumes of natural gas on our
systems could be less than we anticipate.
We typically do not obtain independent evaluations of natural gas reserves connected to our
systems. Accordingly, we do not have independent estimates of total reserves dedicated to our
systems or the anticipated life of such reserves. If the total reserves or estimated life of the
reserves connected to our systems are less than we anticipate and we are unable to secure
additional sources of natural gas, it could have a material adverse effect on our business, results
of operations, financial condition and our ability to make cash distributions to our unitholders.
Our industry is highly competitive, and increased competitive pressure could adversely affect our
business and operating results.
We compete with similar enterprises in
our areas of operation. Our competitors may expand or
construct gathering, processing, compression, treating or transportation systems that would create additional
competition for the services we provide to our customers. In addition, our customers, including
Anadarko, may develop their own gathering, compression, treating, processing or transportation
systems in lieu of using ours. Our ability to renew or replace existing contracts with our
customers at rates sufficient to maintain current revenues and cash flow could be adversely
affected by the activities of our competitors and our customers. All of these competitive pressures
could have a material adverse effect on our business, results of operations, financial condition
and ability to make cash distributions to our unitholders.
Our operating income could be affected by changes in commodity prices.
Under our gathering agreements, we retain and sell condensate, which falls out of the natural gas
stream during the gathering process, and compensate shippers with a thermally equivalent volume of
natural gas. Condensate sales comprised a nominal amount of our total revenues for the year ended
December 31, 2008. The price we receive for our drip condensate correlates to the market price of oil.
The relationship between natural gas prices and oil prices therefore affects the margin on our
drip condensate sales. When natural gas prices are high relative to oil prices, the profit margin we
realize on our drip condensate sales is low due to the higher value of natural gas. Correspondingly,
when natural gas prices are low relative to oil prices, the profit margin is high.
27
Our strategies to reduce our exposure to changes in commodity prices may fail to protect us and
could reduce our gross margin and cash flows.
We pursue various strategies to seek to reduce our exposure to adverse changes in the prices for
natural gas and NGLs. These strategies will vary in scope based upon the level and volatility of
natural gas and NGLs prices and other changing market conditions. Based on operating income for the
year ended December 31, 2008, approximately 74% of our services are provided under long-term
contracts with fee-based rates, which are not directly impacted by changes in commodity prices, and
approximately 22% of our processing services are provided under percent-of-proceeds arrangements pursuant to
which our revenues are directly correlated with the prices of natural gas and NGLs. We have entered
into fixed-price swap agreements with Anadarko to manage the commodity price risk otherwise
inherent in our percent-of-proceeds contracts. If we do not (or are unable to) effectively manage
the commodity price risk associated with these contracts or are unable to replace the existing swap
arrangements when they expire, our revenue will decline in periods marked by lower natural gas and
NGLs prices. In addition, it is possible that the percentage of our services subject to
percent-of-proceeds contracts may significantly increase as a result of future acquisitions, if
any. Finally, future acquisitions may also result in our acquiring other commodity-price
susceptible contracts, e.g., keep-whole arrangements, which could result in incremental commodity
price exposure.
If third-party pipelines or other facilities interconnected to our gathering or transportation
systems become partially or fully unavailable, or if the volumes we gather or transport do not meet
the natural gas quality requirements of such pipelines or facilities, our revenues and cash
available for distribution could be adversely affected.
Our natural gas gathering and transportation systems connect to other pipelines or facilities, the
majority of which are owned by third parties. The continuing operation of such third-party
pipelines or facilities is not within our control. If any of these pipelines or facilities becomes
unable to transport natural gas, or if the volumes we gather or transport do not meet the natural
gas quality requirements of such pipelines or facilities, our revenues and cash available for
distribution could be adversely affected.
Our interstate natural gas transportation operations are subject to regulation by FERC, which could
have an adverse impact on our ability to establish transportation rates that would allow us to earn
a reasonable return on our investment, or even recover the full cost of operating our pipeline,
thereby adversely impacting our ability to make distributions.
MIGC, our interstate natural gas transportation system, is subject to regulation by FERC under the
Natural Gas Act of 1938, or the NGA, and the Energy Policy Act of 2005, or the EPAct 2005.
Under the NGA, FERC has the authority to regulate natural gas companies that provide natural gas
pipeline transportation services in interstate commerce. Federal regulation extends to such matters
as:
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rates, services and terms and conditions of service; |
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the types of services MIGC may offer to its customers; |
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the certification and construction of new facilities; |
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the acquisition, extension, disposition or abandonment of facilities; |
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the maintenance of accounts and records; |
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relationships between affiliated companies involved in certain aspects of the natural
gas business; |
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the initiation and discontinuation of services; |
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market manipulation in connection with interstate sales, purchases or transportation of
natural gas; and |
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participation by interstate pipelines in cash management arrangements. |
Natural gas companies are prohibited from charging rates that have been determined to be not just
and reasonable by FERC. In addition, FERC prohibits natural gas companies from unduly preferring or
unreasonably discriminating against any person with respect to pipeline rates or terms and
conditions of service.
The rates and terms and conditions for our interstate pipeline services are set forth in a
FERC-approved tariff. Pursuant to FERCs jurisdiction over rates, existing rates may be challenged
by complaint and proposed rate increases may be challenged by protest. Any successful complaint or
protest against our rates could have an adverse impact on our revenues associated with providing
transportation service.
28
Should we fail to comply with all applicable FERC-administered statutes, rules, regulations and
orders, we could be subject to substantial penalties and fines. Under the EPAct 2005, FERC has
civil penalty authority under the NGA to impose penalties for current violations of up to
$1,000,000 per day for each violation. FERC also has the power to order disgorgement of profits
from transactions deemed to violate the NGA and EPAct 2005.
A change in the jurisdictional characterization of some of our assets by federal, state or local
regulatory agencies or a change in policy by those agencies could result in increased regulation of
our assets, which could cause our revenues to decline and operating expenses to increase.
Section 1(b) of the NGA exempts natural gas gathering facilities from the jurisdiction of FERC. We
believe that our natural gas pipelines, other than MIGC, meet the traditional tests FERC has used
to determine if a pipeline is a gathering pipeline and is, therefore, not subject to FERC
jurisdiction. The distinction between FERC-regulated transmission services and federally
unregulated gathering services is the subject of substantial ongoing litigation and, over time,
FERC policy concerning where to draw the line between activities it regulates and activities
excluded from its regulation has changed. The classification and regulation of our gathering
facilities are subject to change based on future determinations by FERC, the courts or Congress.
State regulation of gathering facilities generally includes various safety, environmental and, in
some circumstances, nondiscriminatory take requirements and complaint-based rate regulation. In
recent years, FERC has taken a more light-handed approach to regulation of the gathering activities
of interstate pipeline transmission companies, which has resulted in a number of such companies
transferring gathering facilities to unregulated affiliates. As a result of these activities,
natural gas gathering may begin to receive greater regulatory scrutiny at both the state and
federal levels.
FERC regulation of MIGC, including the outcome of certain FERC proceedings on the appropriate
treatment of tax allowances included in regulated rates and the appropriate return on equity, may
reduce our transportation revenues, affect our ability to include certain costs in regulated rates
and increase our costs of operations, and thus adversely affect our cash available for
distribution.
FERC has certain proceedings pending,
which concern the appropriate
allowance for income taxes that may
be included in cost-based rates for FERC-regulated pipelines owned by publicly traded partnerships
that do not directly pay federal income tax. FERC issued a policy permitting such tax allowances in
2005. FERCs policy and its initial application in a specific case were upheld on appeal by the
D.C. Circuit in May of 2007 and the D.C. Circuits decision is final. In December 2006, FERC issued
another order addressing the income tax allowance in rates, in which it reaffirmed prior statements
regarding its income tax allowance policy, but raised a new issue regarding the implication of the
policy statement for publicly traded partnerships. FERC noted that the tax deferral features of a
publicly traded partnership may cause some investors to receive, for some indeterminate duration,
cash distributions in excess of their taxable income, creating an opportunity for those investors
to earn an additional return, funded by ratepayers. Responding to this concern, FERC adjusted the
equity rate of return of the pipeline at issue downward based on the percentage by which the
publicly traded partnerships cash flow exceeded taxable income. Further procedures have been
ordered in this proceeding and the proceeding is still pending before FERC.
FERC issued a policy statement on April 17, 2008, regarding the composition of proxy groups for
purposes of determining natural gas and oil pipeline equity returns to be included in
cost-of-service based rates. In the policy statement, FERC determined that MLPs should be included
in the proxy group used to determine return on equity, and made various determinations on how the
Discounted Cash Flow, or DCF, methodology should be applied for MLPs. FERC also concluded that the
policy statement should govern all gas and oil rate proceedings involving the establishment of
return on equity that are pending before FERC. FERCs application of the policy statement in
individual pipeline proceedings is subject to challenge in those proceedings.
The ultimate outcome of these proceedings is not certain and may result in new policies being
established at FERC applicable to MLPs. Any such policy developments may adversely affect the
ability of MIGC to achieve a reasonable level of return or impose limits on its ability to include
a full income tax allowance in cost of service, and therefore could adversely affect our cash
available for distribution.
29
We are subject to stringent environmental laws and regulations that may expose us to significant
costs and liabilities.
Our natural gas gathering, compression, treating, processing and transportation operations are
subject to stringent and complex federal, state and local environmental laws and regulations that
govern the discharge of materials into the environment or otherwise relate to environmental
protection. Examples of these laws include:
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the federal Clean Air Act and analogous state laws that impose obligations related to
air emissions; |
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the federal Comprehensive Environmental Response, Compensation and Liability Act, also
known as CERCLA or the Superfund law, and analogous state laws that require and regulate
the cleanup of hazardous substances that have been released at properties currently or
previously owned or operated by us or at locations to which our wastes are or have been
transported for disposal; |
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the federal Water Pollution Control Act, also known as the Clean Water Act, and
analogous state laws that regulate discharges from our facilities into state and federal
waters, including wetlands; |
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the federal Resource Conservation and Recovery Act, also known as RCRA, and analogous
state laws that impose requirements for the storage, treatment and disposal of solid and
hazardous waste from our facilities; and |
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the Toxic Substances Control Act, also known as TSCA, and analogous state laws that
impose requirements on the use, storage and disposal of various chemicals and chemical
substances at our facilities. |
These laws and regulations may impose numerous obligations that are applicable to our operations,
including the acquisition of permits to conduct regulated activities, the incurrence of capital
expenditures to limit or prevent releases of materials from our pipelines and facilities, and the
imposition of substantial liabilities for pollution resulting from our operations or existing at
our owned or operated facilities. Numerous governmental authorities, such as the U.S. Environmental
Protection Agency, or the EPA, and analogous state agencies, have the power to enforce compliance
with these laws and regulations and the permits issued under them, oftentimes requiring difficult
and costly corrective actions. Failure to comply with these laws, regulations and permits may
result in the assessment of administrative, civil and criminal penalties, the imposition of
remedial obligations and the issuance of injunctions limiting or preventing some or all of our
operations.
There is an inherent risk of incurring significant environmental costs and liabilities in
connection with our operations due to historical industry operations and waste disposal practices,
our handling of hydrocarbon wastes and potential emissions and discharges related to our
operations. Joint and several strict liability may be incurred, without regard to fault, under
certain of these environmental laws and regulations in connection with discharges or releases of
substances or wastes on, under or from our properties and facilities, many of which have been used
for midstream activities for many years, often by third parties not under our control. Private
parties, including the owners of the properties through which our gathering or transportation
systems pass and facilities where our wastes are taken for reclamation or disposal, may also have
the right to pursue legal actions to enforce compliance as well as to seek damages for
non-compliance with environmental laws and regulations or for personal injury or property damage.
In addition, changes in environmental laws and regulations occur frequently, and any such changes
that result in more stringent and costly waste handling, storage, transport, disposal or
remediation requirements could have a material adverse effect on our operations or financial
position. Finally, future federal and/or state restrictions, caps, or taxes on greenhouse gas
emissions that may be passed in response to climate-change concerns may impose additional capital
investment requirements, increase our operating costs and reduce the demand for our services.
Our construction of new assets may not result in revenue increases and will be subject to
regulatory, environmental, political, legal and economic risks, which could adversely affect our
results of operations and financial condition.
One of the ways we intend to grow our business is through the construction of new midstream assets.
The construction of additions or modifications to our existing systems and the construction of new
midstream assets involve numerous regulatory, environmental, political and legal uncertainties that
are beyond our control. Such expansion projects may also require the expenditure of significant
amounts of capital, and financing may not be available on economically acceptable terms or at all.
If we undertake these projects, they may not be completed on schedule, at the budgeted cost, or at
all. Moreover, our revenues may not increase immediately upon the expenditure of funds on a
particular project. For instance, if we expand a pipeline, the construction may occur over an
extended period of time, yet we will not receive any material increases in revenues until the
project is completed. Moreover, we could construct facilities to capture anticipated future growth
in production in a region in which such growth does not materialize. Since we are not engaged in
the exploration for and development of natural gas and oil reserves, we often do not have access to
third-party estimates of potential reserves in an area prior to constructing facilities in that
area. To the extent we rely on estimates of future production in our decision to construct
additions to our systems, such estimates may prove to be inaccurate as a result of the numerous
uncertainties
inherent in estimating quantities of future production. As a result, new facilities may not be able
to attract enough throughput
30
to achieve our expected investment return, which could adversely
affect our results of operations and financial condition. In addition, the construction of
additions to our existing assets may require us to obtain new
rights-of-way. We may be unable to obtain such rights-of-way and may, therefore, be unable to
connect new natural gas volumes to our systems or capitalize on other attractive expansion
opportunities. Additionally, it may become more expensive for us to obtain new rights-of-way or to
renew existing rights-of-way. If the cost of renewing existing or obtaining new rights-of-way
increases, our cash flows could be adversely affected.
If Anadarko were to limit divestitures of midstream assets to us or if we were to be unable to make
acquisitions on economically acceptable terms from Anadarko or third parties, our future growth
would be limited, and the acquisitions we do make may reduce, rather than increase, our cash
generated from operations on a per-unit basis.
Our ability to grow depends, in part, on our ability to make acquisitions that increase our cash
generated from operations on a per-unit basis. The acquisition component of our strategy is based,
in large part, on our expectation of ongoing divestitures of midstream energy assets by industry
participants, including, most notably, Anadarko. A material decrease in such divestitures would
limit our opportunities for future acquisitions and could adversely affect our ability to grow our
operations and increase our distributions to our unitholders.
If we are unable to make accretive acquisitions from Anadarko or third parties, either because we
are (i) unable to identify attractive acquisition candidates or negotiate acceptable purchase
contracts, (ii) unable to obtain financing for these acquisitions on economically acceptable terms
or (iii) outbid by competitors, then our future growth and ability to increase distributions will
be limited. Furthermore, even if we do make acquisitions that we believe will be accretive, these
acquisitions may nevertheless result in a decrease in the cash
generated from operations on a per-unit basis.
Any acquisition involves potential risks, including, among other things:
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mistaken assumptions about volumes, revenues and costs, including synergies; |
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an inability to successfully integrate the assets or businesses we acquire; |
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the assumption of unknown liabilities; |
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limitations on rights to indemnity from the seller; |
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mistaken assumptions about the overall costs of equity or debt; |
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the diversion of managements and employees attention from other business concerns; |
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unforeseen difficulties operating in new geographic areas; and |
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customer or key employee losses at the acquired businesses. |
If we consummate any future acquisitions, our capitalization and results of operations may change
significantly, and our unitholders will not have the opportunity to evaluate the economic, financial and other
relevant information that we will consider in determining the application of these funds and other
resources.
We have a partial ownership interest in Fort Union, which limits our ability to operate and control
this entity. In addition, we may be unable to control the amount of operating cash flow we will
receive from this entity and we may be required to contribute a significant amount of cash to fund
our share of its operations, which could adversely affect our ability
to make cash distributions to
our unitholders.
We own a 14.81% non-managing membership interest in Fort Union. Thus, our inability or limited
ability to control the operations and management of Fort Union could cause us not to receive the
amount of cash we expect to be distributed to us. Specifically, the following items may reduce cash
available for distribution to us from Fort Union:
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we are unable to control the ongoing operational decisions of Fort Union, including the
incurrence of capital expenditures; |
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we have limited ability to control decisions with respect to
the operations of Fort
Union, including decisions with respect to distributions to us; |
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Fort Union may establish reserves for working capital, capital projects, environmental
matters and legal proceedings, which reserves would reduce the amount of cash available for
distribution by Fort Union; and |
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Fort Union may incur additional indebtedness, whereby required principal and interest
payments may reduce the amount of cash available for distribution by Fort Union. |
Any of the above could significantly and adversely impact our ability to make cash distributions to
our unitholders.
We do not own all of the land on which our pipelines and facilities are located, which could result
in disruptions to our operations.
We do not own all of the land on which our pipelines and facilities have been constructed, and we
are, therefore, subject to the possibility of more onerous terms and/or increased costs to retain
necessary land use if we do not have valid rights-of-way or if such rights-of-way lapse or
terminate. We obtain the rights to construct and operate our pipelines on land owned by third
parties and governmental agencies for a specific period of time. Our loss of these rights, through
our inability to renew right-of-way contracts or otherwise, could have a material adverse effect on
our business, results of operations, financial condition and ability to make cash distributions to
our unitholders.
Our business involves many hazards and operational risks, some of which may not be fully covered by
insurance. If a significant accident or event occurs for which we are not fully insured, our
operations and financial results could be adversely affected.
Our operations are subject to all of the risks and hazards inherent in the gathering, compressing,
processing, treating and transportation of natural gas, including:
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damage to pipelines and plants, related equipment and surrounding properties caused by
hurricanes, tornadoes, floods, fires and other natural disasters and acts of terrorism; |
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inadvertent damage from construction, farm and utility equipment; |
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leaks of natural gas and other hydrocarbons or losses of natural gas as a result of the
malfunction of equipment or facilities; |
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leaks of natural gas containing hazardous quantities of hydrogen sulfide from our
Pinnacle gathering system or Bethel treating facility; |
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fires and explosions; and |
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other hazards that could also result in personal injury and loss of life, pollution and
suspension of operations. |
These risks could result in substantial losses due to personal injury and/or loss of life, severe
damage to and destruction of property and equipment and pollution or other environmental damage.
These risks may also result in curtailment or suspension of our operations. A natural disaster or
other hazard affecting the areas in which we operate could have a material adverse effect on our
operations. We are not fully insured against all risks inherent in our business. For example, we do
not have any property insurance on our underground pipeline systems that would cover damage
to the pipelines. In addition, although we are insured for environmental pollution resulting from
environmental accidents that occur on a sudden and accidental basis, we may not be insured against
all environmental accidents that might incur, some of which may result in toxic tort claims. If a
significant accident or event occurs for which we are not fully insured, it could adversely affect
our operations and financial condition. Furthermore, we may not be able to maintain or obtain
insurance of the type and amount we desire at reasonable rates. As a result of market conditions,
premiums and deductibles for certain of our insurance policies may substantially increase. In some
instances, certain insurance could become unavailable or available only for reduced amounts of
coverage. Additionally, we may be unable to recover from prior owners of our assets, pursuant to
certain indemnification rights, for potential environmental liabilities.
We are exposed to the credit risk of Anadarko and third-party customers, and any material
non-payment or non-performance by these parties, including with respect to our gathering,
processing and transportation agreements, our $260.0 million note receivable from Anadarko and our
commodity price swap agreements with Anadarko, could reduce our ability to make distributions to
our unitholders.
We are dependent on Anadarko for the majority of our revenues. Consequently, we are subject to the
risk of non-payment or non-performance by Anadarko, including with respect to our gathering and
transportation agreements, our $260.0 million
note receivable and our commodity price swap agreements. Any such non-payment or non-performance
could reduce our ability to make distributions to our unitholders. Furthermore, Anadarko is subject
to its own financial, operating and regulatory risks, which could increase the risk of default on
its obligations to us. We cannot predict the extent to which
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Anadarkos business would be impacted
if conditions in the energy industry were to continue to deteriorate, nor can we estimate the impact
such conditions would have on Anadarkos ability to perform under our gathering and transportation
agreements, note receivable or our commodity price swap agreements. Further, unless and until we receive full repayment of the $260.0
million note receivable from Anadarko, we will be subject to the risk of non-payment or late payment of the
interest payments and principal of the note. Accordingly, any material non-payment or
non-performance by Anadarko could reduce our ability to make distributions to our unitholders.
With respect to our Hilight and Newcastle systems, we rely on a significant number of third-party
customers for substantially all of our revenues related to those assets. The loss of all or even a
portion of the contracted volumes of these customers, as a result of competition, creditworthiness,
inability to negotiate extensions, or replacements of contracts or otherwise, could reduce our
ability to make cash distributions to our unitholders.
Anadarkos credit facility and other debt instruments contain financial and operating restrictions
that may limit our access to credit. In addition, our ability to obtain credit in the future may be
affected by Anadarkos credit rating.
We have the ability to incur up to $100.0 million of indebtedness under Anadarkos $1.3 billion
credit facility. However, this $100.0 million of borrowing capacity will be available to us only to
the extent that sufficient amounts remain unborrowed by Anadarko. As a result, borrowings by
Anadarko could restrict our access to credit. In addition, if we or Anadarko were to fail to comply
with the terms of this credit facility, we could be unable to make any borrowings under Anadarkos
credit facility, even if capacity were otherwise available. As a result, the restrictions in
Anadarkos credit facility could adversely affect our ability to finance our future operations or
capital needs or to engage in, expand or pursue our business activities, and could also prevent us
from engaging in certain transactions that might otherwise be considered beneficial to us.
Anadarkos and our ability to comply with the terms of its and our respective debt instruments may
be affected by events beyond its and our control, including prevailing economic, financial and
industry conditions. We and Anadarko are subject to covenants, and Anadarko is subject to a
debt-to-capitalization ratio, under Anadarkos credit facility. Should we or Anadarko fail to
comply with any covenants under Anadarkos credit facility, we could be unable to make any
borrowings under that credit facility. Additionally, a default by Anadarko under one of its debt
instruments may cause a cross-default under Anadarkos other debt instruments, including the credit
facility under which we are a co-borrower. Accordingly, a breach by Anadarko of certain of the
covenants or ratios in another debt instrument could cause the acceleration of any indebtedness we
have outstanding under the credit facility. In the event of an acceleration, we might not have, or
be able to obtain, sufficient funds to make the required repayments of debt, finance our operations
and pay distributions to unitholders. For more information regarding our debt agreements, please
read Item 7Managements discussion and analysis of financial condition and results of
operationsLiquidity and capital resources.
Due to our relationship with Anadarko, our ability to obtain credit will be affected by Anadarkos
credit rating. Even if we obtain our own credit rating or separate financing arrangement, any
future change in Anadarkos credit rating would likely also result in a change in our credit
rating. Regardless of whether we have our own credit rating, a downgrading of Anadarkos credit
rating could limit our ability to obtain financing in the future upon favorable terms or at all.
Debt we owe or incur in the future may limit our flexibility to obtain financing and to pursue
other business opportunities.
Future levels of indebtedness, including that we owe through our $175.0 million term loan with
Anadarko, could have important consequences to us, including the following:
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our ability to obtain additional financing, if necessary, for working capital, capital
expenditures, acquisitions or other purposes may be impaired or such financing may not be
available on favorable terms; |
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our funds available for operations, future business opportunities and distributions to
unitholders will be reduced by that portion of our cash flow required to make interest
payments on our debt; |
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we may be more vulnerable to competitive pressures or a downturn in our business or the
economy generally; and |
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our flexibility in responding to changing business and economic conditions may be
limited. |
Our ability to service our debt will depend upon, among other things, our future financial and
operating performance, which will be affected by prevailing economic conditions and financial,
business, regulatory and other factors, some of which are beyond our control. If our operating
results are not sufficient to service any future indebtedness, we will be forced to take
actions such as reducing distributions, reducing or delaying our business activities, acquisitions,
investments or capital expenditures, selling assets or seeking additional equity capital. We may
not be able to effect any of these actions on satisfactory terms or at all.
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Increases in interest rates could adversely impact our unit price, our ability to issue equity or
incur debt for acquisitions or other purposes and our ability to make cash distributions at our
intended levels.
Interest rates may increase in the future, whether because of inflation, increased yields on U.S.
Treasury obligations or otherwise. In such cases, the interest rate on our five-year $175.0 million
term loan with Anadarko, which after December 2010 will be calculated at a floating rate equal to
three-month LIBOR plus 150 basis points, would increase. If interest rates rise, our future financing
costs could increase accordingly. In addition, as is true with other MLPs (the common units of
which are often viewed by investors as yield-oriented securities), our unit price is impacted by
our level of cash distributions and implied distribution yield. The distribution yield is often
used by investors to compare and rank yield-oriented securities for investment decision-making
purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield
requirements of investors who invest in our units, and a rising interest rate environment could
have an adverse impact on our unit price, our ability to issue equity or incur debt for
acquisitions or other purposes and our ability to make cash distributions at our intended levels.
RISKS INHERENT IN AN INVESTMENT IN US
Anadarko owns and controls our general partner, which has sole responsibility for conducting our
business and managing our operations. Anadarko and our general partner have conflicts of interest
with, and may favor Anadarkos interests to the detriment of our unitholders.
Anadarko owns and controls our general partner and has the power to appoint all of the officers and
directors of our general partner, some of whom are also officers of Anadarko. Although our general
partner has a fiduciary duty to manage us in a manner that is beneficial to us and our unitholders,
the directors and officers of our general partner have a fiduciary duty to manage our general
partner in a manner that is beneficial to its owner, Anadarko. Conflicts of interest may arise
between Anadarko and our general partner, on the one hand, and us and our unitholders, on the other
hand. In resolving these conflicts of interest, our general partner may favor its own interests and
the interests of Anadarko over our interests and the interests of our unitholders. These conflicts
include the following situations, among others:
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Neither our partnership agreement nor any other agreement requires Anadarko to pursue a
business strategy that favors us. |
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Anadarko is not limited in its ability to compete with us and may offer business
opportunities or sell midstream assets to parties other than us. |
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Our general partner is allowed to take into account the interests of parties other than
us, such as Anadarko, in resolving conflicts of interest. |
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The officers of our general partner will also devote significant time to the business of
Anadarko and will be compensated by Anadarko accordingly. |
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Our partnership agreement limits the liability of and reduces the fiduciary duties owed
by our general partner, and also restricts the remedies available to our unitholders for
actions that, without the limitations, might constitute breaches of fiduciary duty. |
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Except in limited circumstances, our general partner has the power and authority to
conduct our business without unitholder approval. |
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Our general partner determines the amount and timing of asset purchases and sales,
borrowings, issuance of additional partnership securities and the creation, reduction or
increase of reserves, each of which can affect the amount of cash that is distributed to
our unitholders. |
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Our general partner determines the amount and timing of any capital expenditures and
whether a capital expenditure is classified as a maintenance capital expenditure, which
reduces operating surplus, or an expansion capital expenditure, which does not reduce
operating surplus. This determination can affect the amount of cash that is distributed to
our unitholders and to our general partner and the ability of the subordinated units to
convert to common units. |
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Our general partner determines which costs incurred by it are reimbursable by us. |
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Our general partner may cause us to borrow funds in order to permit the payment of cash
distributions, even if the purpose or effect of the borrowing is to make a distribution on
the subordinated units, to make incentive distributions or to accelerate the expiration of
the subordination period. |
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Our partnership agreement permits us to classify up to $31.8 million as operating
surplus, even if it is generated from asset sales, non-working capital borrowings or other
sources that would otherwise constitute capital surplus. This cash may be used to fund
distributions on our subordinated units or to our general partner in respect of the general
partner interest or the incentive distribution rights. |
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Our partnership agreement does not restrict our general partner from causing us to pay
it or its affiliates for any services rendered to us or entering into additional
contractual arrangements with any of these entities on our behalf. |
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Our general partner intends to limit its liability regarding our contractual and other
obligations. |
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Our general partner may exercise its right to call and purchase all of the common units
not owned by it and its affiliates if they own more than 80% of the common units. |
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Our general partner controls the enforcement of the obligations that it and its
affiliates owe to us. |
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Our general partner decides whether to retain separate counsel, accountants or others to
perform services for us. |
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Our general partner may elect to cause us to issue Class B units to it in connection
with a resetting of the target distribution levels related to our general partners
incentive distribution rights without the approval of the special committee of the board of
directors of our general partner or our unitholders. This election may result in lower
distributions to our common unitholders in certain situations. |
Please read Item 13Certain Relationships and Related Transactions, and Director Independence.
Anadarko is not limited in its ability to compete with us and is not obligated to offer us the
opportunity to acquire additional assets or businesses, which could limit our ability to grow and
could adversely affect our results of operations and cash available for distribution to our
unitholders.
Anadarko is not prohibited from owning assets or engaging in businesses that compete directly or
indirectly with us. In addition, in the future, Anadarko may acquire, construct or dispose of
additional midstream or other assets and may be presented with new business opportunities, without
any obligation to offer us the opportunity to purchase or construct such assets or to engage in
such business opportunities. Moreover, while Anadarko may offer us the opportunity to buy
additional assets from it, it is under no contractual obligation to do so and we are unable to
predict whether or when such acquisitions might be completed.
Cost reimbursements due to Anadarko and our general partner for services provided to us or on our
behalf will be substantial and will reduce our cash available for
distribution to our unitholders. The amount
and timing of such reimbursements will be determined by our general partner.
Prior to making distributions on our common units, we will reimburse our general partner and its
affiliates for all expenses they incur on our behalf. These expenses will include all costs
incurred by Anadarko and our general partner in managing and operating us. While our reimbursement
of allocated general and administrative expenses is capped until December 31, 2009 under the
omnibus agreement, we are required to reimburse Anadarko and our general partner for all direct
operating expenses incurred on our behalf. These direct operating expense reimbursements and the
reimbursement of incremental general and administrative expenses we will incur as a result of being
a publicly traded partnership are not capped. Our partnership agreement provides that our general
partner will determine in good faith the expenses that are allocable to us. The reimbursements to
Anadarko and our general partner will reduce the amount of cash otherwise available for
distribution to our unitholders.
If you are not an Eligible Holder, you may not receive distributions or allocations of income or
loss on your common units and your common units will be subject to redemption.
We have adopted certain requirements regarding those investors who may own our common and
subordinated units. Eligible Holders are U.S. individuals or entities subject to U.S. federal
income taxation on the income generated by us or entities not subject to U.S. federal income
taxation on the income generated by us, so long as all of the entitys owners are U.S. individuals
or entities subject to such taxation. If you are not an Eligible Holder, our general partner may
elect not to make distributions or allocate income or loss on your units and you run the risk of
having your units redeemed by us at the lower of
your purchase price cost and the then-current market price. The redemption price will be paid in
cash or by delivery of a promissory note, as determined by our general partner.
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Our general partners liability regarding our obligations is limited.
Our general partner included provisions in its and our contractual arrangements that limit its
liability under contractual arrangements so that the counterparties to such arrangements have
recourse only against our assets, and not against our general partner or its assets. Our general
partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to
our general partner. Our partnership agreement provides that any action taken by our general
partner to limit its liability is not a breach of our general partners fiduciary duties, even if
we could have obtained more favorable terms without the limitation on liability. In addition, we
are obligated to reimburse or indemnify our general partner to the extent that it incurs
obligations on our behalf. Any such reimbursement or indemnification payments would reduce the
amount of cash otherwise available for distribution to our unitholders.
Our partnership agreement requires that we distribute all of our available cash, which could limit
our ability to grow and make acquisitions.
We expect that we will distribute all of our available cash to our unitholders and will rely
primarily upon external financing sources, including commercial bank borrowings and the issuance of
debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a
result, to the extent we are unable to finance growth externally, our cash distribution policy will
significantly impair our ability to grow. Furthermore, we used substantially all of the net
proceeds from our initial public offering to make a loan to Anadarko, and therefore, the net
proceeds from our initial public offering was not used to grow our business.
In addition, because we distribute all of our available cash, our growth may not be as fast as that
of businesses that reinvest their available cash to expand ongoing operations. To the extent we
issue additional units in connection with any acquisitions or expansion capital expenditures, the
payment of distributions on those additional units may increase the risk that we will be unable to
maintain or increase our per-unit distribution level. There are no limitations in our partnership
agreement or in Anadarkos credit facility, under which we are a co-borrower, on our ability to
issue additional units, including units ranking senior to the common units. The incurrence of
additional commercial borrowings or other debt to finance our growth strategy would result in
increased interest expense, which, in turn, may impact the available cash that we have to
distribute to our unitholders.
Our partnership agreement limits our general partners fiduciary duties to holders of our common
and subordinated units.
Our partnership agreement contains provisions that modify and reduce the fiduciary standards to
which our general partner would otherwise be held by state fiduciary duty law. For example, our
partnership agreement permits our general partner to make a number of decisions in its individual
capacity, as opposed to in its capacity as our general partner, or otherwise free of fiduciary
duties to us and our unitholders. This entitles our general partner to consider only the interests
and factors that it desires and relieves it of any duty or obligation to give any consideration to
any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of
decisions that our general partner may make in its individual capacity include:
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how to allocate corporate opportunities among us and its affiliates; |
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whether to exercise its limited call right; |
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how to exercise its voting rights with respect to the units it owns; |
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whether to exercise its registration rights; |
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whether to elect to reset target distribution levels; and |
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whether or not to consent to any merger or consolidation of
the Partnership or amendment
to the partnership agreement. |
By purchasing a common unit, a common unitholder agrees to become bound by the provisions in the
partnership agreement, including the provisions discussed above.
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Our partnership agreement restricts the remedies available to holders of our common and
subordinated units for actions taken by our general partner that might otherwise constitute
breaches of fiduciary duty.
Our partnership agreement contains provisions that restrict the remedies available to unitholders
for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty
under state fiduciary duty law. For example, our partnership agreement:
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provides that whenever our general partner makes a determination or takes, or declines
to take, any other action in its capacity as our general partner, our general partner is
required to make such determination, or take or decline to take such other action, in good
faith, and will not be subject to any other or different standard imposed by our
partnership agreement, Delaware law, or any other law, rule or regulation, or at equity; |
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provides that our general partner will not have any liability to us or our unitholders
for decisions made in its capacity as a general partner so long as such decisions are made
in good faith, meaning that it believed that the decision was in the best interest of our
partnership; |
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provides that our general partner and its officers and directors will not be liable for
monetary damages to us, our limited partners or their assignees resulting from any act or
omission unless there has been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that our general partner or its officers and directors,
as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the
case of a criminal matter, acted with knowledge that the conduct was criminal; and |
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provides that our general partner will not be in breach of its obligations under the
partnership agreement or its fiduciary duties to us or our unitholders if a transaction
with an affiliate or the resolution of a conflict of interest is: |
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approved by the special committee of the board of directors of our
general partner, although our general partner is not obligated to seek such
approval; |
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approved by the vote of a majority of the outstanding common units,
excluding any common units owned by our general partner and its affiliates; |
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on terms no less favorable to us than those generally being provided to
or available from unrelated third parties; or |
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fair and reasonable to us, taking into account the totality of the
relationships among the parties involved, including other transactions that may be
particularly favorable or advantageous to us. |
In connection with a situation involving a transaction with an affiliate or a conflict of interest,
any determination by our general partner must be made in good faith. If an affiliate transaction or
the resolution of a conflict of interest is not approved by our common unitholders or the special
committee and the board of directors of our general partner determines that the resolution or
course of action taken with respect to the affiliate transaction or conflict of interest satisfies
either of the standards set forth in subclauses (c) and (d) above, then it will be presumed that,
in making its decision, the board of directors acted in good faith, and in any proceeding brought
by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such
proceeding will have the burden of overcoming such presumption.
Our general partner may elect to cause us to issue Class B and general partner units to it in
connection with a resetting of the target distribution levels related to its incentive distribution
rights, without the approval of the special committee of its board of directors or the holders of
our common units. This could result in lower distributions to holders of our common units.
Our general partner has the right, at any time when there are no subordinated units outstanding and
it has received incentive distributions at the highest level to which it is entitled (48%) for each
of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at
higher levels based on our distributions at the time of the exercise of the reset election.
Following a reset election by our general partner, the minimum quarterly distribution will be
adjusted to equal the reset minimum quarterly distribution and the target distribution levels will
be reset to correspondingly higher levels based on percentage increases above the reset minimum
quarterly distribution.
If our general partner elects to reset the target distribution levels, it will be entitled to
receive a number of Class B units and general partner units. The Class B units will be entitled to
the same cash distributions per unit as our common units and will be convertible into an equal
number of common units. The number of Class B units to be issued to our general partner will be
equal to that number of common units which would have entitled their holder to an average aggregate
quarterly cash distribution in the prior two quarters equal to the average of the distributions to
our general partner on the incentive
distribution rights in the prior two quarters. Our general partner will be issued the number of
general partner units necessary
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to maintain our general partners interest in us that existed
immediately prior to the reset election. We anticipate that our general partner would exercise this
reset right in order to facilitate acquisitions or internal growth projects that would not be
sufficiently accretive to cash distributions per common unit without such conversion. It is
possible, however, that our general partner could exercise this reset election at a time when it is
experiencing, or expects to experience, declines in the cash distributions it receives related to
its incentive distribution rights and may, therefore, desire to be issued Class B units, which are
entitled to distributions on the same priority as our common units, rather than retain the right to
receive incentive distributions based on the initial target distribution levels. As a result, a
reset election may cause our common unitholders to experience a reduction in the amount of cash
distributions that our common unitholders would have otherwise received had we not issued new Class
B units and general partner units to our general partner in connection with resetting the target
distribution levels.
Holders of our common units have limited voting rights and are not entitled to elect our general
partner or its directors.
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on
matters affecting our business and, therefore, limited ability to influence managements decisions
regarding our business. Unitholders will have no right on an annual or ongoing basis to elect our
general partner or its board of directors. The board of directors of our general partner will be
chosen by Anadarko. Furthermore, if the unitholders are dissatisfied with the performance of our
general partner, they will have little ability to remove our general partner. As a result of these
limitations, the price at which the common units will trade could be diminished because of the
absence or reduction of a takeover premium in the trading price. Our partnership agreement also
contains provisions limiting the ability of unitholders to call meetings or to acquire information
about our operations, as well as other provisions limiting the unitholders ability to influence
the manner or direction of management.
Even if holders of our common units are dissatisfied, they cannot initially remove our general
partner without its consent.
The unitholders initially will be unable to remove our general partner without its consent because
our general partner and its affiliates currently own sufficient units to be able to prevent its
removal. The vote of the holders of at least 66 ⅔% of all outstanding limited partner units voting
together as a single class is required to remove our general partner. As of February 27, 2009,
Anadarko owns 62.6% of our outstanding common and subordinated units. Also, if our general partner
is removed without cause during the subordination period and units held by our general partner and
its affiliates are not voted in favor of that removal, all remaining subordinated units will
automatically convert into common units and any existing arrearages on our common units will be
extinguished. A removal of our general partner under these circumstances would adversely affect our
common units by prematurely eliminating their distribution and liquidation preference over our
subordinated units, which would otherwise have continued until we had met certain distribution and
performance tests. Cause is narrowly defined to mean that a court of competent jurisdiction has
entered a final, non-appealable judgment finding our general partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as our general partner. Cause does not
include most cases of charges of poor management of the business, so the removal of our general
partner because of the unitholders dissatisfaction with our general partners performance in
managing our partnership will most likely result in the termination of the subordination period and
conversion of all subordinated units to common units.
Our partnership agreement restricts the voting rights of certain unitholders owning 20% or more of
our common units.
Unitholders voting rights are further restricted by a provision of our partnership agreement
providing that any units held by a person that owns 20% or more of any class of units then
outstanding, other than our general partner, its affiliates, their transferees and persons who
acquired such units with the prior approval of the board of directors of our general partner,
cannot vote on any matter.
Our general partner interest or the control of our general partner may be transferred to a third
party without unitholder consent.
Our general partner may transfer its general partner interest to a third party in a merger or in a
sale of all or substantially all of its assets without the consent of the unitholders. Furthermore,
our partnership agreement does not restrict the ability of Anadarko to transfer all or a portion of
its ownership interest in our general partner to a third party. The new owner of our general
partner would then be in a position to replace the board of directors and officers of our general
partner with its own designees and thereby exert significant control over the decisions made by the
board of directors and officers.
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We may issue additional units without unitholder approval, which would dilute existing ownership
interests.
Our partnership agreement does not limit the number of additional limited partner interests that we
may issue at any time without the approval of our unitholders. The issuance by us of additional
common units or other equity securities of equal or senior rank will have the following effects:
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our existing unitholders proportionate ownership interest in us will decrease; |
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the amount of cash available for distribution on each unit may decrease; |
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because a lower percentage of total outstanding units will be subordinated units, the
risk that a shortfall in the payment of the minimum quarterly distribution will be borne by
our common unitholders will increase; |
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the ratio of taxable income to distributions may increase; |
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the relative voting strength of each previously outstanding unit may be diminished; and |
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the market price of the common units may decline. |
Anadarko may sell units in the public or private markets, and such sales could have an adverse
impact on the trading price of the common units.
As of February 27, 2009, Anadarko holds an aggregate of 8,282,322 common units and 26,536,306
subordinated units. All of the subordinated units will convert into common units at the end of the
subordination period and may convert earlier under certain circumstances. The sale of any or all of
these units in the public or private markets could have an adverse impact on the price of the
common units or on any trading market on which common units are traded.
Our general partner has a limited call right that may require existing unitholders to sell their units at an
undesirable time or price.
If at any time our general partner and its affiliates own more than 80% of the common units, our
general partner will have the right, which it may assign to any of its affiliates or to us, but not
the obligation, to acquire all, but not less than all, of the common units held by unaffiliated
persons at a price that is not less than their then-current market price. As a result, existing unitholders may be
required to sell their common units at an undesirable time or price and may not receive any return
on their investment. Existing unitholders may also incur a tax liability upon a sale of their units. As of February
27, 2009, Anadarko owns approximately 28.5% of our outstanding common units. At the end of the
subordination period, assuming no additional issuances of common units (other than upon the
conversion of the subordinated units), Anadarko will own approximately 62.6% of our outstanding
common units.
Unitholders liability may not be limited if a court finds that unitholder action constitutes control of
our business.
A general partner of a partnership generally has unlimited liability for the obligations of the
partnership, except for those contractual obligations of the partnership that are expressly made
without recourse to the general partner. Our partnership is organized under Delaware law, and we
conduct business in a number of other states. The limitations on the liability of holders of
limited partner interests for the obligations of a limited partnership have not been clearly
established in some of the other states in which we do business. A unitholder could be liable for any and
all of our obligations as if that unitholder were a general partner if a court or government agency were to
determine that:
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we were conducting business in a state but had not complied with that particular states
partnership statute; or |
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that unitholders right to act with other unitholders to remove or replace our general partner, to
approve some amendments to our partnership agreement or to take other actions under our
partnership agreement constitute control of our business. |
Unitholders may have liability to repay distributions that were wrongfully distributed to them.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or
distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act,
we may not make a distribution to unitholders if the distribution would cause our liabilities to exceed the
fair value of our assets. Delaware law provides that for a period of three years from the date of
an impermissible distribution, limited partners who received the distribution and who knew at the
time of the distribution that it violated Delaware law will be liable to the limited partnership
for the distribution amount. Substituted limited partners are liable both for the obligations of
the assignor to make contributions to the partnership that were known to the substituted limited
partner at the time it became a limited partner and for those obligations that were
39
unknown if the liabilities could have been determined from the partnership agreement. Neither
liabilities to partners on account of their partnership interest nor liabilities that are
non-recourse to the partnership are counted for purposes of determining whether a distribution is
permitted.
We incur increased costs as a result of being a publicly traded partnership.
We have no history operating as a publicly traded partnership prior to our initial public offering.
As a publicly traded partnership, we incur significant legal, accounting and other expenses. In
addition, the Sarbanes-Oxley Act of 2002 and related rules subsequently implemented by the SEC and
the New York Stock Exchange, or the NYSE, have required changes in the corporate governance
practices of publicly traded companies. We expect these rules and regulations to increase our legal
and financial compliance costs compared to our historical costs and to make activities more
time-consuming and costly.
If we are deemed to be an investment company under the Investment Company Act of 1940, it would
adversely affect the price of our common units and could have a material adverse effect on our
business.
Our assets include, among other items, a $260.0 million note receivable from Anadarko. If this note
receivable together with a sufficient amount of our other assets are deemed to be investment
securities, within the meaning of the Investment Company Act of 1940, or the Investment Company
Act, we would either have to register as an investment company under the Investment Company Act,
obtain exemptive relief from the SEC or modify our organizational structure or contract rights so
as to fall outside of the definition of investment company. Registering as an investment company
could, among other things, materially limit our ability to engage in transactions with affiliates,
including the purchase and sale of certain securities or other property from or to our affiliates,
restrict our ability to borrow funds or engage in other transactions involving leverage and require
us to add additional directors who are independent of us or our affiliates. The occurrence of some
or all of these events would adversely affect the price of our common units and could have a
material adverse effect on our business.
Moreover, treatment of us as an investment company would prevent our qualification as a partnership
for federal income tax purposes, in which case we would be treated as a corporation for federal
income tax purposes. As a result, we would pay federal income tax on our taxable income at the
corporate tax rate, distributions to our unitholders would generally be taxed again as corporate distributions
and none of our income, gains, losses or deductions would flow through to our unitholders. If we were taxed as
a corporation, our cash available for distribution to our unitholders would be substantially reduced.
Therefore, treatment of us as an investment company would result in a material reduction in the
anticipated cash flow and after-tax return to the unitholders, likely causing a substantial
reduction in the value of our common units.
We
expect to amend our partnership agreement to provide that any net termination losses treated as
arising during the subordination period as a result of an adjustment to the carrying value of our
assets in connection with an issuance by us of additional units will be allocated among the holders
of subordinated units and common units in proportion to their percentage interests. As a result of
this amendment, if we liquidate during the subordination period, it is possible there would be less
net termination gain to be allocated to unitholders holding common units, resulting in those
unitholders receiving less liquidation proceeds than under our current partnership agreement. In
order to mitigate the possibility of adverse consequences to our common units of this revised
allocation, we also intend to amend our partnership agreement to provide that, in the event we
liquidate during the subordination period, we will allocate items of income, gain, loss and
deduction that would otherwise be included in the computation of net termination gain or net
termination loss and, if necessary, items included in our net income or net losses, in each case to
the extent possible, so that the capital account of each common unit will equal the amount it would
have been had we not amended our partnership agreement. In the unlikely event that we liquidate
during the subordination period and we do not have sufficient items included in net termination
gain, net termination loss, or other items of income, gain, loss and deduction, as the case may be,
to cause the capital account in respect of each common unit to equal this amount, unitholders
holding common units could receive less liquidation proceeds than under our current partnership
agreement.
Our partnership agreement currently provides that any net termination loss, as defined in the
partnership agreement, deemed recognized during the subordination period as the result of an
adjustment to the carrying value of our assets in connection with an issuance of additional units
will first be allocated to the general partner and unitholders holding subordinated units until the
capital account with respect to each subordinated unit has been reduced to zero. Under our current
partnership agreement, an issuance of additional units at a time when our common units are trading
at a price lower than the capital account balance of our then outstanding common units may require
us to adjust the carrying value of our property to an amount that causes the capital account with
respect to each of our (i) subordinated units to equal zero and (ii) existing common units to equal
the then-current trading price of common units.
40
While the existing allocation provisions are intended to preserve the senior economic position of
our common units during the subordination period, they may also have the effect of causing the
holders of our common units to suffer adverse tax consequences. A book down of our assets that
results in the capital account in respect of each subordinated unit equaling zero would require a
substantial reduction in the carrying value of our property. As a result of such a book down and
because we have adopted the remedial allocation method with respect to the depreciation and
amortization of our assets, the amount of tax depreciation and amortization allocated to holders of
our common units could be substantially reduced. There would be a corresponding reduction in the
amount of taxable income allocated to the holders of subordinated units.
In order to mitigate the possibility of this adverse tax effect to the common units and
corresponding benefit to the subordinated units, we expect to amend our partnership agreement to
provide that any net termination loss, as defined in the partnership agreement, deemed to be
recognized by us during the subordination period as a result of a book down in the carrying value
of our assets will be allocated pro rata to the holders of common units and subordinated units.
This amendment will not affect the amount of the reduction in the capital account with respect to a
common unit resulting from a book down. Under both the current partnership agreement and the
amended partnership agreement, the capital account with respect to each existing common unit will
be decreased to the trading price of common units existing at the time of the contribution to us
that requires us to book down the carrying value of our assets. The amendment will reduce (perhaps
substantially) the amount of the book down in the carrying value of our assets, as well as the
amount of the resulting reduction in tax depreciation allocable to holders of common units that
would otherwise occur pursuant to the book down provisions contained in the current partnership
agreement.
While the amount of the decrease in the capital account of an existing holder of common units will
not be affected by the amendment to our partnership agreement, the potential amount of net
termination gain recognized by us if we liquidate during the subordination period may be
substantially reduced as a result of the amendment. Therefore, our amended partnership agreement
will provide that upon a liquidation during the subordination period, we will specially allocate
items included in net termination gain or net termination loss and, if necessary, items of income,
gain, loss and deduction that would otherwise be included in our net income or net losses, in each
case to the maximum extent possible, to cause the capital account of each common unit to equal the
amount the capital account would have been had we not amended our partnership agreement. In the
unlikely event that we liquidate during the subordination period and we do not have sufficient
items included in net termination gain, net termination loss, or other items of income, gain, loss
and deduction, as the case may be, to cause the capital account in respect of each common unit to
equal this amount, unitholders holding common units could receive less liquidation proceeds than
under our current partnership agreement.
TAX RISKS TO COMMON UNITHOLDERS
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well
as our not being subject to a material amount of entity-level taxation by individual states. If the
IRS were to treat us as a corporation for federal income tax purposes or we were to become subject
to additional amounts of entity-level taxation for state tax purposes, then our cash available for
distribution to our unitholders could be substantially reduced.
The anticipated after-tax economic benefit of an investment in our common units depends largely on
our being treated as a partnership for federal income tax purposes. We have not requested, and do
not plan to request, a ruling from the Internal Revenue Service, or the IRS, on this or any other
tax matter affecting us.
Despite the fact that we are classified as a limited partnership under Delaware law, it is possible
in certain circumstances for a partnership such as ours to be treated as a corporation for federal
income tax purposes. Although we do not believe, based upon our current operations, that we will be
so treated, a change in our business (or a change in current law) could cause us to be treated as a
corporation for federal income tax purposes or otherwise subject us to taxation as an entity.
If we were treated as a corporation for federal income tax purposes, we would pay federal income
tax on our taxable income at the corporate tax rate, which is currently a maximum of 35% and would
likely pay state income tax at varying rates. Distributions to our
unitholders would generally be taxed again
as corporate distributions, and no income, gains, losses, deductions or credits would flow through
to our unitholders. Because a tax would be imposed upon us as a corporation, our cash available for
distribution to our unitholders would be substantially reduced. Therefore, treatment of us as a
corporation would result in a material reduction in the anticipated cash flow and after-tax return
to the unitholders, likely causing a substantial reduction in the value of our common units.
Current law may change so as to cause us to be treated as a corporation for federal income tax
purposes or otherwise subject us to a material amount of entity-level taxation at the state or
federal level. In addition, if we are deemed to be an investment company, as described above, we
would be subject to such taxation.
41
At the state level, were we to be subject to federal income tax, we would also be subject to the
income tax provisions of many states. Moreover, because of widespread state budget deficits and
other reasons, several states are evaluating ways to independently subject partnerships to
entity-level taxation through the imposition of state income, franchise and other forms of
taxation. For example, we are required to pay Texas margin tax at a maximum effective rate of 0.7%
of our gross income apportioned to Texas. Imposition of such a tax on us by Texas and, if
applicable, by any other state will reduce the cash available for distribution to our unitholders.
Our partnership agreement provides that if a law is enacted or existing law is modified or
interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to
entity-level taxation for federal, state or local income tax purposes, the minimum quarterly
distribution amount and the target distribution amounts may be adjusted to reflect the impact of
that law on us.
The tax treatment of publicly traded partnerships or an investment in our common units could be
subject to potential legislative, judicial or administrative changes and differing interpretations,
possibly on a retroactive basis.
The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an
investment in our common units, may be modified by administrative, legislative or judicial
interpretation at any time. Any modification to the U.S. federal income tax laws or interpretations
thereof could make it more difficult or impossible to meet the requirements for us to be treated as
a partnership for U.S. federal income tax purposes, affect or cause us to change our business
activities, affect the tax considerations of an investment in us, change the character or treatment
of portions of our income and adversely affect an investment in our common units. Modifications to
the U.S. federal income tax laws and interpretations thereof may or may not be applied
retroactively. We are unable to predict any particular change. Any potential change in law or
interpretation thereof could negatively impact the value of an investment in our common units.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our
units each month based upon the ownership of our units on the first day of each month, instead of
on the basis of the date a particular unit is transferred. The IRS may challenge this treatment,
which could change the allocation of items of income, gain, loss and deduction among our
unitholders.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our
units each month based upon the ownership of our units on the first day of each month, instead of
on the basis of the date a particular unit is transferred. The use of this proration method may not
be permitted under existing Treasury regulations, and, accordingly, our counsel is unable to opine
as to the validity of this method. If the IRS were to challenge this method or new Treasury
regulations were issued, we may be required to change the allocation of items of income, gain, loss
and deduction among our unitholders.
If the IRS contests the federal income tax positions we take or the pricing of our related party
agreements with Anadarko, the market for our common units may be adversely impacted and the cost of
any IRS contest will reduce our cash available for distribution to our unitholders.
We have not requested a ruling from the IRS with respect to our treatment as a partnership for
federal income tax purposes or any other matter affecting us, including the pricing of our related
party agreements with Anadarko. The IRS may adopt positions that differ from the positions we take. It may be necessary to resort
to administrative or court proceedings to sustain some or all of or the
positions we take. A court may not agree with some or all of the positions
we take. For example, the IRS may reallocate items of income, deductions, credits or allowances
between related parties if the IRS determines that such reallocation is necessary to prevent
evasion of taxes or clearly to reflect the income of any such related parties. Any contest with the
IRS may materially and adversely impact the market for our common units and the price at which they
trade. If the IRS were successful in any such challenge, we may be required to change the
allocation of items of income, gain, loss and deduction among our unitholders and our general
partner. Such a reallocation may require us and our unitholders to file amended tax returns. In
addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our
general partner because the costs will reduce our cash available for distribution.
Our unitholders will be required to pay taxes on their share of our income even if they do not
receive any cash distributions from us.
Because our unitholders will be treated as partners to whom we will allocate taxable income which
could be different in amount than the cash we distribute, our unitholders will be required to pay
any federal income taxes and, in some cases, state and local income
taxes on their share of our
taxable income whether or not our unitholders receive cash distributions from us.
42
Our unitholders
may not receive cash distributions from us equal to their share of our taxable income or even equal
to the actual tax liability that results from that income.
Tax gain or loss on the disposition of our common units could be more or less than expected.
If a
unitholder disposes of common units, the unitholder will recognize a gain or loss
equal to the difference
between the amount realized and that unitholders tax basis in those common units.
Because distributions in
excess of a unitholders allocable share of our net taxable income decrease that
unitholders tax
basis in its common units, the amount, if any, of such prior excess distributions with respect to
the units sold will, in effect, become taxable income to her, if she sells such units at a price
greater than her tax basis in those units, even if the price received is less than the original
cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain,
may be taxed as ordinary income due to potential recapture items, including depreciation recapture.
In addition, because the amount realized includes a unitholders share of our nonrecourse
liabilities, if a unitholder sells her units, she may incur a tax liability in excess of the amount
of cash received from the sale.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may
result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as employee benefit plans and individual
retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For
example, virtually all of our income allocated to organizations that are exempt from federal income
tax, including IRAs and other retirement plans, will be unrelated business taxable income and will
be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the
highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal
tax returns and pay tax on their share of our taxable income. Any tax-exempt entity or a non-U.S.
person should consult its tax advisor before investing in our common units.
We treat each purchaser of our common units as having the same tax benefits without regard to the
actual common units purchased. The IRS may challenge this treatment, which could adversely affect
the value of the common units.
Because we cannot match transferors and transferees of common units, we adopted depreciation and
amortization positions that may not conform to all aspects of existing Treasury Regulations. Our
counsel is unable to opine on the validity of such filing positions. A successful IRS challenge to
those positions could adversely affect the amount of tax benefits
available to our unitholders. It also could
affect the timing of these tax benefits or the amount of gain from any sale of common units and
could have a negative impact on the value of our common units or result in audit adjustments to a
unitholders tax returns.
We adopted certain valuation methodologies that may result in a shift of income, gain, loss and
deduction between our general partner and the unitholders. The IRS may challenge this treatment,
which could adversely affect the value of the common units.
When we issue additional units or engage in certain other transactions, we will determine the fair
market value of our assets and allocate any unrealized gain or loss attributable to our assets to
the capital accounts of our unitholders and our general partner. Our methodology may be viewed as
understating the value of our assets. In that case, there may be a shift of income, gain, loss and
deduction between certain unitholders and our general partner, which may be unfavorable to such
unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have
a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our
tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our
valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible
and intangible assets, and allocations of income, gain, loss and deduction between our general
partner and certain of our unitholders.
A successful IRS challenge to these methods or allocations could adversely affect the amount of
taxable income or loss being allocated to our unitholders. It also could affect the amount of gain
from our unitholders sale of common units and could have a negative impact on the value of the
common units or result in audit adjustments to our unitholders tax returns without the benefit of
additional deductions.
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month
period will result in the termination of our partnership for federal income tax purposes.
We will be considered to have terminated our partnership for federal income tax purposes if there
is a sale or exchange of 50% or more of the total interests in our capital and profits within a
twelve-month period. Our termination would, among other things, result in the closing of our
taxable year for all unitholders and could result in a deferral of depreciation
43
deductions
allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year
other than a fiscal year ending December 31, the closing of our taxable year may also result in
more than twelve months of our taxable income or loss being
includable in the unitholders taxable income for
the year of termination. Our termination currently would not affect our classification as a
partnership for federal income tax purposes, but instead, we would be treated as a new partnership
for tax purposes. If treated as a new partnership, we must make new tax elections and could be
subject to penalties, if we are unable to determine that a termination occurred.
Our unitholders are subject to state and local taxes and return filing requirements in states where
they do not live as a result of investing in our common units.
In addition to federal income taxes, our unitholders are subject to other taxes, including foreign,
state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes
that are imposed by the various jurisdictions in which we conduct business or own property, even if
they do not live in any of those jurisdictions. Our unitholders will likely be required to file
foreign, state and local income tax returns and pay state and local income taxes in some or all of
these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with
those requirements. We currently own assets and conduct business in the states of Kansas, Oklahoma,
Texas, Utah and Wyoming. Each of these states, other than Texas and Wyoming, currently imposes a
personal income tax, and all of these states impose income taxes on corporations and other
entities. As we make acquisitions or expand our business, we may own assets or conduct business in
additional states that impose a personal income tax. It is the responsibility of each unitholder to
file all required U.S. federal, foreign, state and local tax returns. Our counsel has not rendered
an opinion on the foreign, state or local tax consequences of an investment in our common units.
Item 1B. Unresolved Staff Comments
None
Item 3. Legal Proceedings
We are not a party to any legal proceeding other than legal proceedings arising in the ordinary
course of our business. We are a party to various administrative and regulatory proceedings that
have arisen in the ordinary course of our business. Please see Items 1 and 2Business and
Properties, in this Form 10-K for more information.
Item 4. Submission of Matters to a Vote of Security Holders
None
44
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
MARKET INFORMATION
Our common units are listed on the New York Stock Exchange under the symbol WES. Common
units began trading on May 9, 2008, at an initial offering price of $16.50 per unit. Prior
to May 9, 2008, our equity securities were not listed on any exchange or traded in any
public market. The following table sets forth the high and low closing prices of the common
units as well as the amount of cash distributions declared and paid for each quarter since
our initial public offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
Quarter Ended |
|
Quarter Ended |
|
|
December 31, |
|
September 30, |
|
June 30, |
|
|
2008 |
|
2008 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High Price |
|
$ |
15.17 |
|
|
$ |
16.96 |
|
|
$ |
17.25 |
|
Low Price |
|
$ |
10.58 |
|
|
$ |
13.02 |
|
|
$ |
16.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
per common unit |
|
$ |
0.30 |
|
|
$ |
0.1582 |
|
|
|
|
|
Distribution
per subordinated unit |
|
$ |
0.30 |
|
|
$ |
0.1582 |
|
|
|
|
|
As of February 27, 2009, there were approximately 12 unitholders of record of the
Partnerships common units. This number does not include unitholders whose units are held
in trust by other entities. The actual number of unitholders is greater than the number of
holders of record.
We have also issued 26,536,306 subordinated units and 1,135,296 general partner units, for
which there is no established public trading market. All of the subordinated units and
general partner units are held by affiliates of our general partner. Our general partner
and its affiliates receive quarterly distributions on these units only after
sufficient funds have been paid to the common units.
USE OF PROCEEDS FROM SALE OF SECURITIES
We completed our initial public offering of 20,810,875 common units, including 2,060,875
common units sold pursuant to the partial exercise by the underwriters of their option to
purchase additional common units, representing limited partnership interests in us at a
price of $16.50 per unit. In connection with the offering, we issued to our general partner
1,083,115 general partner units and 100% of our IDRs, which entitle our general partner to
increasing percentages up to a maximum of 50.0% of cash distributions based on the amount
of the quarterly cash distribution. We also issued 5,725,431 common units and 26,536,306
subordinated units to a subsidiary of Anadarko. Subsidiaries of Anadarko contributed our
initial assets to us in connection with the offering.
Net proceeds of $321.1 million (net of $22.3 million of underwriting discount and
structuring fees) from our initial public offering were used (i) to pay approximately $5.9
million in expenses associated with the offering and the transactions related thereto, (ii)
to make a loan of $260.0 million to Anadarko in exchange for a 30-year note bearing
interest at a fixed annual rate of 6.5%, (iii) to reimburse
Anadarko $45.2 million from offering proceeds and (iv) retained
$10.0 million for general partnership purposes.
45
SELECTED INFORMATION FROM OUR PARTNERSHIP AGREEMENT
Set forth below is a summary of the significant provisions of our partnership agreement that relate
to cash distributions, minimum quarterly distributions and IDRs.
Available cash
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 our partnership agreement) to unitholders of record on the applicable record
date. The amount of available cash generally is all cash on hand at the end of the quarter less the
amount of cash reserves established by our general partner to provide for the proper conduct of our
business, including reserves to fund future capital expenditures, to comply with applicable laws,
or our debt instruments and other agreements, or to provide funds for distributions to our
unitholders and to our general partner for any one or more of the next four quarters. Working
capital borrowings generally include borrowings made under a credit facility or similar financing
arrangement.
Minimum quarterly distributions
The partnership agreement provides that, during a period of time referred to as the subordination
period, the common units are entitled to distributions of available cash each quarter in an amount
equal to the minimum quarterly distribution, which is $0.30 per common unit, plus any arrearages
in the payment of the minimum quarterly distribution on the common units from prior quarters,
before any distributions of available cash are permitted on the subordinated units. Furthermore,
arrearages do not apply to and therefore will not be paid on the subordinated units. The effect of
the subordinated units is to increase the likelihood that, during the subordination period,
available cash is sufficient to fully fund cash distributions on the common units in an amount
equal to the minimum quarterly distribution.
The subordination period will lapse at such time when the Partnership has paid at least $0.30 per
quarter on each common unit, subordinated unit and general partner unit for any three consecutive,
non-overlapping four-quarter periods ending on or after June 30, 2011. Also, if the Partnership has
paid at least $0.45 per quarter (150% of the minimum quarterly distribution) on each outstanding
common unit, subordinated unit and general partner unit for each calendar quarter in a four-quarter
period, the subordination period will terminate automatically. The subordination period will also
terminate automatically if the general partner is removed without cause and the units held by the
general partner and its affiliates are not voted in favor of such removal. When the subordination
period lapses or otherwise terminates, all remaining subordinated units will convert into common
units on a one-for-one basis and the common units will no longer be entitled to preferred
distributions on prior-quarter distribution arrearages. All subordinated units are held indirectly
by Anadarko.
General partner interest and incentive distribution rights
The general partner is currently entitled to 2.0% of all quarterly distributions that the
Partnership makes prior to its liquidation. After distributing amounts equal to the minimum
quarterly distribution to common and subordinated unitholders and distributing amounts to eliminate
any arrearages to common unitholders, our general partner is entitled to incentive distributions
pursuant to its ownership of our IDRs if the amount we distribute with respect to any quarter
exceeds specified target levels shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marginal Percentage |
|
|
Total Quarterly Distribution |
|
Interest in Distributions |
|
|
Target Amount |
|
Unitholders |
|
General Partner |
|
|
|
|
|
|
|
|
|
|
|
Minimum Quarterly Distribution |
|
$0.300 |
|
|
98 |
% |
|
|
2 |
% |
First Target Distribution |
|
up to $0.345 |
|
|
98 |
% |
|
|
2 |
% |
Second Target Distribution |
|
above $0.345 up to $0.375 |
|
|
85 |
% |
|
|
15 |
% |
Third Target distribution |
|
above $0.375 up to $0.450 |
|
|
75 |
% |
|
|
25 |
% |
Thereafter |
|
above $0.45 |
|
|
50 |
% |
|
|
50 |
% |
The table above assumes that our general partner maintains its 2% general partner interest, that
there are no arrearages on common units and our general partner continues to own the IDRs. The
maximum distribution sharing percentage of 50.0% includes distributions paid to the general partner
on its 2.0%
general partner interest and does not include any distributions that the general partner may
receive on limited partner units that it may own or acquire.
46
OTHER SECURITY MATTERS
Sales of Unregistered Units
On December 19, 2008,
we acquired certain midstream assets from Anadarko for consideration
consisting of $175.0 million cash, 2,556,891 of our common units
and 52,181 of our general partner
units. The common units and general partner units issued in connection with the acquisition were
issued to subsidiaries of Anadarko Petroleum Corporation in a private placement and the issuance
was not registered with the SEC.
Securities Authorized for Issuance Under Equity Compensation Plans
In connection with the closing of our initial public offering, our general partner adopted the
Western Gas Partners, LP 2008 Long-Term Incentive Plan, or LTIP, which permits the issuance of up
to 2,250,000 units. Phantom unit grants have been made to each of the independent directors of our
general partner under the LTIP. Please read the information under Item 12Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters of this report, which is
incorporated by reference into this Item 5.
Repurchase of Equity
None
Item 6. Selected Financial and Operating Data
The following table shows our selected financial and operating data for the periods and as of the
dates indicated, which is derived from our consolidated financial statements. On May 14, 2008, we
closed our initial public offering of 18,750,000 common units. Concurrent with the closing of the
offering, Anadarko contributed to us the assets and liabilities of the Predecessor, which were
comprised of AGC, PGT and MIGC, which we refer to as our initial assets. On June 11, 2008, we
issued an additional 2,060,875 common units to the public and 751,625 common units to Anadarko in
connection with the partial exercise of the underwriters over-allotment option. On December 19,
2008, we closed the Powder River acquisition with Anadarko. Anadarko acquired MIGC and the Powder
River assets in connection with its August 23, 2006 acquisition of Western.
Our acquisition of the initial assets and the Powder River acquisition are considered
transfers of net assets between entities under common control. Accordingly, our consolidated financial
statements include the combined financial results and operations of AGC and PGT from their
inception through the closing date of our initial public offering and to the Partnerships
consolidated financial statements thereafter, combined with the financial results and operations of
MIGC and the Powder River acquisition from August 23, 2006 thereafter.
47
The information in the following table should be read together with Item 7Managements Discussion
and Analysis of Financial Condition and Results of Operations in this Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Financial Information |
|
|
2008 |
|
2007(1) |
|
2006(1) |
|
2005 |
|
2004 |
|
|
(in thousands, except per unit data) |
Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
311,648 |
|
|
$ |
261,493 |
|
|
$ |
128,610 |
|
|
$ |
71,650 |
|
|
$ |
68,049 |
|
Costs and expenses |
|
|
199,566 |
|
|
|
166,994 |
|
|
|
80,752 |
|
|
|
35,720 |
|
|
|
31,301 |
|
Depreciation and impairment |
|
|
42,365 |
|
|
|
30,481 |
|
|
|
20,230 |
|
|
|
15,447 |
|
|
|
14,841 |
|
|
|
|
Total operating expenses |
|
|
241,931 |
|
|
|
197,475 |
|
|
|
100,982 |
|
|
|
51,167 |
|
|
|
46,142 |
|
|
|
|
Operating income |
|
|
69,717 |
|
|
|
64,018 |
|
|
|
27,628 |
|
|
|
20,483 |
|
|
|
21,907 |
|
Interest income (expense), net |
|
|
9,191 |
|
|
|
(7,805 |
) |
|
|
(9,574 |
) |
|
|
(8,650 |
) |
|
|
(7,146 |
) |
Other income (expense), net |
|
|
145 |
|
|
|
(15 |
) |
|
|
(26 |
) |
|
|
66 |
|
|
|
|
|
Income tax expense (2) |
|
|
13,777 |
|
|
|
19,540 |
|
|
|
5,327 |
|
|
|
4,789 |
|
|
|
5,504 |
|
|
|
|
Net income |
|
$ |
65,276 |
|
|
$ |
36,658 |
|
|
$ |
12,701 |
|
|
$ |
7,110 |
|
|
$ |
9,257 |
|
|
|
|
Gross margin (3) |
|
$ |
159,716 |
|
|
$ |
140,666 |
|
|
$ |
83,235 |
|
|
$ |
64,841 |
|
|
$ |
63,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner interest in net income (4) |
|
$ |
842 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Common unitholders interest in net income (4) |
|
$ |
20,841 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Subordinated unitholders interest in net income (4) |
|
$ |
20,420 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common unit (basic and diluted) |
|
$ |
0.78 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Net income per subordinated unit (basic and diluted) |
|
$ |
0.77 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Distributions per unit |
|
$ |
0.46 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
517,815 |
|
|
$ |
511,775 |
|
|
$ |
464,919 |
|
|
$ |
200,451 |
|
|
$ |
196,065 |
|
Total assets |
|
|
856,441 |
|
|
|
544,318 |
|
|
|
504,383 |
|
|
|
206,373 |
|
|
|
199,110 |
|
Total long-term liabilities |
|
|
185,146 |
|
|
|
139,801 |
|
|
|
140,071 |
|
|
|
37,664 |
|
|
|
30,573 |
|
Total partners capital and parent net equity |
|
$ |
654,954 |
|
|
$ |
392,140 |
|
|
$ |
352,578 |
|
|
$ |
160,585 |
|
|
$ |
162,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
109,796 |
|
|
$ |
72,908 |
|
|
$ |
33,304 |
|
|
$ |
30,131 |
|
|
$ |
31,160 |
|
Investing activities |
|
|
(479,959 |
) |
|
|
(54,328 |
) |
|
|
(42,963 |
) |
|
|
(21,076 |
) |
|
|
(16,548 |
) |
Financing activities |
|
|
403,469 |
|
|
|
(19,038 |
) |
|
|
10,113 |
|
|
|
(9,067 |
) |
|
|
(14,596 |
) |
Adjusted EBITDA(5) |
|
|
112,474 |
|
|
|
91,830 |
|
|
|
47,239 |
|
|
|
35,930 |
|
|
|
36,748 |
|
Capital expenditures, net |
|
$ |
36,864 |
|
|
$ |
54,328 |
|
|
$ |
42,963 |
|
|
$ |
20,841 |
|
|
$ |
16,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering throughput (MMcf/d) |
|
|
831 |
|
|
|
917 |
|
|
|
891 |
|
|
|
757 |
|
|
|
715 |
|
Third Party |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering throughput (MMcf/d) |
|
|
135 |
|
|
|
90 |
|
|
|
80 |
|
|
|
41 |
|
|
|
31 |
|
Processing throughput (MMcf/d) |
|
|
30 |
|
|
|
30 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering throughput (MMcf/d) |
|
|
966 |
|
|
|
1,007 |
|
|
|
971 |
|
|
|
798 |
|
|
|
746 |
|
Processing throughput (MMcf/d) |
|
|
30 |
|
|
|
30 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
Average gross margin per Mcf |
|
$ |
0.44 |
|
|
$ |
0.37 |
|
|
$ |
0.23 |
|
|
$ |
0.22 |
|
|
$ |
0.23 |
|
|
|
|
(1) |
|
Financial information for 2007 and 2006 has been revised to include
results attributable to the Powder River assets from August 23, 2006. See Note
3Powder River Acquisition of the notes to the consolidated financial statements in Item
8Financial Statements and Supplementary Data. |
|
(2) |
|
Includes federal and state income tax expense for all of our assets through May 13,
2008. For the period beginning May 14, 2008 and ending December 19, 2008 includes Texas margin
tax expense for our initial assets and federal and state income tax expense for the Powder
River assets and for the
period beginning December 20, 2008 and ending December 31, 2008, includes Texas margin tax
expense for all of our assets. See Note 6Transactions with
Affiliates of the notes to the
consolidated financial statements in Item 8Financial Statements and Supplementary Data. |
48
|
|
|
(3) |
|
We define gross margin as gathering, processing and
transportation revenues, plus natural gas, natural gas liquids and
condensate sales, less cost of product. |
|
(4) |
|
Net income is allocated among the general partner, common unitholders and
subordinated unitholders and is attributable to the initial assets for periods including and
subsequent to May 14, 2008 and the Powder River assets for periods including and subsequent to
December 19, 2008. Prior to May 14, 2008 in the case of the initial assets and December 19,
2008 in the case of the Powder River acquisition, all income is attributed to the Predecessor.
See Note 5Net Income per Limited Partner Unit of the
notes to the consolidated financial
statements in Item 8Financial Statements and Supplementary Data. |
|
(5) |
|
Adjusted EBITDA is not defined in GAAP. Adjusted EBITDA is presented because it is
helpful to management, industry analysts, investors, lenders and rating agencies in assessing
the financial performance and operating results of our fundamental business activities. For a
reconciliation of Adjusted EBITDA to its most directly comparable financial measures
calculated and presented in accordance with GAAP, please see
Non-GAAP Financial Measures in this Item. |
NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss), plus distributions from equity investee, interest
expense, income tax expense and depreciation, less income from equity investments, interest income,
income tax benefit and other income (expense). We believe that the presentation of Adjusted EBITDA
provides information useful to investors in assessing our financial condition and results of
operations and that Adjusted EBITDA is a widely accepted financial indicator of a companys ability
to incur and service debt, fund capital expenditures and make distributions. Adjusted EBITDA is a
supplemental financial measure that management and external users of our consolidated financial
statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:
|
|
|
our operating performance as compared to other publicly traded partnerships in the
midstream energy industry, without regard to financing methods, capital structure or
historical cost basis; |
|
|
|
|
the ability of our assets to generate cash flow to make distributions; and |
|
|
|
|
the viability of acquisitions and capital expenditure projects and the returns on
investment of various investment opportunities. |
Reconciliation to GAAP measures
The GAAP measures most directly comparable to Adjusted EBITDA are net income and net cash provided
by operating activities. Our non-GAAP financial measure of Adjusted EBITDA should not be considered
as an alternative to the GAAP measures of net income or net cash provided by operating activities.
Adjusted EBITDA has important limitations as an analytical tool because it excludes some but not
all items that affect net income and net cash provided by operating activities. You should not
consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported
under GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry,
our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other
companies, thereby diminishing its utility.
Management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing
the comparable GAAP measures, understanding the differences between Adjusted EBITDA compared to net
income and net cash provided by operating activities, and incorporating this knowledge into its
decision-making processes. We believe that investors benefit from having access to the same
financial measures that our management uses in evaluating our operating results.
49
The following tables present a reconciliation of the non-GAAP financial measure of Adjusted EBITDA
to the GAAP financial measures of net income and net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Financial Information |
|
|
2008 |
|
2007(1) |
|
2006(1) |
|
2005 |
|
2004 |
|
|
(in thousands) |
Reconciliation of Adjusted EBITDA to net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
112,474 |
|
|
$ |
91,830 |
|
|
$ |
47,239 |
|
|
$ |
35,930 |
|
|
$ |
36,748 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from equity investee |
|
|
5,128 |
|
|
|
1,348 |
|
|
|
741 |
|
|
|
|
|
|
|
|
|
Interest expense, net affiliates |
|
|
1,259 |
|
|
|
7,805 |
|
|
|
9,574 |
|
|
|
8,650 |
|
|
|
7,146 |
|
Interest expense from note affiliate |
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
13,777 |
|
|
|
19,540 |
|
|
|
5,327 |
|
|
|
4,789 |
|
|
|
5,504 |
|
Depreciation and impairment |
|
|
42,365 |
|
|
|
30,481 |
|
|
|
20,230 |
|
|
|
15,447 |
|
|
|
14,841 |
|
Other expense, net |
|
|
|
|
|
|
15 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income, net |
|
|
4,736 |
|
|
|
4,017 |
|
|
|
1,360 |
|
|
|
|
|
|
|
|
|
Interest income from note affiliate |
|
|
10,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
66 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
65,276 |
|
|
$ |
36,658 |
|
|
$ |
12,701 |
|
|
$ |
7,110 |
|
|
$ |
9,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Adjusted EBITDA to Net Cash Provided by
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
112,474 |
|
|
$ |
91,830 |
|
|
$ |
47,239 |
|
|
$ |
35,930 |
|
|
$ |
36,748 |
|
Interest income (expense), net affiliates |
|
|
9,191 |
|
|
|
(7,805 |
) |
|
|
(9,574 |
) |
|
|
(8,650 |
) |
|
|
(7,146 |
) |
Current income tax expense |
|
|
(12,153 |
) |
|
|
(8,724 |
) |
|
|
(2,101 |
) |
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
145 |
|
|
|
(15 |
) |
|
|
(26 |
) |
|
|
66 |
|
|
|
|
|
Distributions from equity investee in excess of equity income, net |
|
|
(392 |
) |
|
|
2,669 |
|
|
|
619 |
|
|
|
|
|
|
|
|
|
Changes in operating working capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and natural gas imbalances |
|
|
(4,959 |
) |
|
|
(3,692 |
) |
|
|
2,037 |
|
|
|
(662 |
) |
|
|
933 |
|
Accounts payable and accrued expenses |
|
|
4,840 |
|
|
|
142 |
|
|
|
(4,312 |
) |
|
|
3,373 |
|
|
|
(551 |
) |
Other, including changes in non-current assets and liabilities |
|
|
650 |
|
|
|
(1,497 |
) |
|
|
(578 |
) |
|
|
74 |
|
|
|
1,176 |
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
109,796 |
|
|
$ |
72,908 |
|
|
$ |
33,304 |
|
|
$ |
30,131 |
|
|
$ |
31,160 |
|
|
|
|
|
|
|
(1) |
|
Financial information for 2007 and 2006 has been revised to include results
attributable to the Powder River assets from August 23, 2006. See Note 3Powder River
Acquisition of the notes to the consolidated financial statements in Item 8Financial Statements
and Supplementary Data. |
50
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
We are a growth-oriented Delaware limited partnership organized by Anadarko to own, operate,
acquire and develop midstream energy assets. We currently operate in East and West Texas, the Rocky
Mountains (Utah and Wyoming) and the Mid-Continent (Kansas and Oklahoma) and are engaged in the
business of gathering, compressing, treating, processing and transporting natural gas for Anadarko
and third-party producers and customers.
OPERATING AND FINANCIAL HIGHLIGHTS
We achieved significant milestones during 2008. Significant operational and financial highlights
include:
|
|
|
closed our initial public offering in May 2008; |
|
|
|
|
completed our first acquisition of midstream assets from Anadarko in December 2008 in a
challenging market environment; |
|
|
|
|
completed several system expansions, including modifying horsepower on our Dew gathering
system; expanding our Bethel treating facility; connecting new wells,
including 26 wells on our Hugoton gathering system and 13 wells on our Haley gathering system,
and completed train two of the Fort Union gathering system; and |
|
|
|
|
leveraged our fee-based structure and managed capital and operating costs to generate cash
flows, funding distributions to unitholders. |
INITIAL PUBLIC OFFERING
On May 14, 2008, we closed our initial public offering of 18,750,000 common units at a price of
$16.50 per unit. On June 11, 2008, we issued an additional 2,060,875 common units to the public
pursuant to the partial exercise of the underwriters over-allotment option granted in connection
with our initial public offering. Concurrent with the initial closing of the offering, Anadarko
contributed the assets and liabilities of AGC, PGT and MIGC to us in exchange for 1,083,115 general
partner units, representing a 2.0% general partner interest in the Partnership, 100% of the IDRs,
and 5,725,431 common units and 26,536,306 subordinated units. The common units held by Anadarko
include 751,625 common units issued to Anadarko following the expiration of the underwriters
over-allotment option and represent the portion of the common units for which the underwriters did
not exercise their over-allotment option. We refer to AGC, PGT and MIGC as our initial assets.
POWDER RIVER ACQUISITION
On December 19, 2008, we acquired certain midstream assets from Anadarko for consideration
consisting of $175.0 million cash, which was financed by
borrowing $175.0 million from Anadarko pursuant to the terms of a
five-year term loan agreement, 2,556,891 of our common units and 52,181 of our general partner
units. The acquired assets consisted of (i) a 100% ownership interest in the Hilight System, (ii) a
50% interest in the Newcastle System and (iii) a 14.81% limited liability company membership
interest in Fort Union Gas Gathering, L.L.C. We refer to these assets collectively as the Powder
River assets. The Powder River assets provide a combination of gathering, treating and processing
services in the Powder River Basin of Wyoming.
51
The
following tables present the impact to the consolidated statements of
income attributable to the Powder
River assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership |
|
|
Powder River |
|
|
|
|
|
|
|
|
|
Historical |
|
|
Acquisition |
|
|
Eliminations |
|
|
Combined |
|
|
|
|
Year Ended December 31, 2008 |
|
Revenues |
|
$ |
151,841 |
|
|
$ |
159,967 |
|
|
$ |
(160 |
) |
|
$ |
311,648 |
|
Operating expenses |
|
|
93,986 |
|
|
|
148,105 |
|
|
|
(160 |
) |
|
|
241,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
57,855 |
|
|
|
11,862 |
|
|
|
|
|
|
|
69,717 |
|
Interest and other income (expense), net affiliates |
|
|
7,817 |
|
|
|
1,519 |
|
|
|
|
|
|
|
9,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
65,672 |
|
|
|
13,381 |
|
|
|
|
|
|
|
79,053 |
|
Income tax expense |
|
|
8,772 |
|
|
|
5,005 |
|
|
|
|
|
|
|
13,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
56,900 |
|
|
$ |
8,376 |
|
|
|
|
|
|
$ |
65,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
Revenues |
|
$ |
117,993 |
|
|
$ |
143,660 |
|
|
$ |
(160 |
) |
|
$ |
261,493 |
|
Operating expenses |
|
|
72,748 |
|
|
|
124,887 |
|
|
|
(160 |
) |
|
|
197,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
45,245 |
|
|
|
18,773 |
|
|
|
|
|
|
|
64,018 |
|
Interest and other income (expense), net affiliates |
|
|
(8,521 |
) |
|
|
701 |
|
|
|
|
|
|
|
(7,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
36,724 |
|
|
|
19,474 |
|
|
|
|
|
|
|
56,198 |
|
Income tax expense |
|
|
12,724 |
|
|
|
6,816 |
|
|
|
|
|
|
|
19,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,000 |
|
|
$ |
12,658 |
|
|
|
|
|
|
$ |
36,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
Revenues |
|
$ |
81,562 |
|
|
$ |
47,105 |
|
|
$ |
(57 |
) |
|
$ |
128,610 |
|
Operating expenses |
|
|
58,379 |
|
|
|
42,660 |
|
|
|
(57 |
) |
|
|
100,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
23,183 |
|
|
|
4,445 |
|
|
|
|
|
|
|
27,628 |
|
Interest and other income (expense), net affiliates |
|
|
(9,657 |
) |
|
|
57 |
|
|
|
|
|
|
|
(9,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
13,526 |
|
|
|
4,502 |
|
|
|
|
|
|
|
18,028 |
|
Income tax expense |
|
|
3,814 |
|
|
|
1,513 |
|
|
|
|
|
|
|
5,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,712 |
|
|
$ |
2,989 |
|
|
|
|
|
|
$ |
12,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion analyzes our financial condition and results of operations and should be
read in conjunction with our historical consolidated financial statements, and the notes thereto,
included in Item 8Financial Statements and Supplementary Data and Item 1ARisk Factors of this
report on Form 10-K. For ease of reference, we refer to the historical financial results of AGC and
PGT prior to our initial public offering, combined with the historical financial results of MIGC
and the Powder River assets from August 23, 2006 thereafter, as being our historical financial
results. Unless the context otherwise requires, references to we, us, our, the Partnership
or Western Gas Partners are intended to refer to the business and operations of Western Gas
Partners, LP and its consolidated subsidiaries since May 14, 2008, the business and operations of
AGC and PGT since their inception and the business and operations of MIGC and the Powder River
assets since August 23, 2006. For purposes of the following discussion, Anadarko refers to
Anadarko Petroleum Corporation and its consolidated subsidiaries, excluding the Partnership.
52
OUR OPERATIONS
Our results are driven primarily by the volumes of natural gas we gather, compress, process, treat
or transport through our systems. For the year ended December 31, 2008, our revenues were derived
approximately as follows:
|
|
|
50% from natural gas and natural gas liquids sales; |
|
|
|
|
40% from gathering, processing, compression and transportation activities; |
|
|
|
|
5% from condensate sales; and |
|
|
|
|
5% from equity income from our interest in Fort Union, changes in our imbalance
positions and other revenues. |
For the
year ended December 31, 2008, approximately 86% of our total
revenues and 83% of our gathering, processing and transportation
throughput volumes were attributable to
transactions entered into with Anadarko.
In our gathering operations, we contract with producers and customers to gather natural gas from
individual wells located near our gathering systems. We connect wells to gathering lines through
which natural gas may be compressed and delivered to a processing plant, treating facility or
downstream pipeline, and ultimately to end users. We also treat a significant portion of the
natural gas that we gather so that it will satisfy required specifications for pipeline
transportation.
Effective January 1, 2008, we received a significant dedication from our largest customer,
Anadarko, in order to maintain or increase our existing throughput levels and to offset the natural
production declines of the wells currently connected to our gathering systems. Specifically,
Anadarko has dedicated to us all of the natural gas production it owns or controls from (i) wells
that are currently connected to our gathering systems, and (ii) additional wells that are drilled
within one mile of wells connected to our gathering systems, as the systems currently exist and as
they are expanded to connect additional wells in the future. As a result, this dedication will
continue to expand as additional wells are connected to our gathering systems. Volumes associated
with this dedication averaged approximately 646,000 MMBtu/d for the year ended December 31, 2008
and 734,000 MMBtu/d for the year ended December 31, 2007, based on throughput from the wells
ultimately subject to the dedication.
Based on operating income for the year ended December 31, 2008, approximately 74% of our services
are provided pursuant to fee-based contracts under which we are paid a fixed fee based on the
volume and thermal content of the natural gas we gather, compress, treat or transport. This type of
contract provides us with a relatively stable revenue stream that is not subject to direct
commodity-price risk, except to the extent that we retain and sell
drip condensate that is recovered
during the gathering of natural gas from the wellhead.
Based on operating income for the year ended December 31, 2008, approximately 22% of our services
are provided pursuant to percent-of-proceeds contracts pursuant to which Anadarko is typically
responsible for the marketing of the natural gas and NGLs and we are entitled to a specified
percentage of the net proceeds from the sale of natural gas and NGLs. Revenue is recognized when
the natural gas or NGLs are sold and the related product purchases are recorded as a percent of the
product sale. We have entered into fixed-price swap agreements with Anadarko to manage the
commodity price risk inherent in our percent-of-proceeds contracts. See Note 6Transactions with
Affiliates of the notes to the consolidated financial statements included in Item 8Financial Statements and
Supplementary Data in this Form 10-K.
We also have indirect exposure to commodity price risk in that persistent low commodity prices may
cause our current or potential customers to delay drilling or shut in production, which would
reduce the volumes of natural gas available for gathering, compressing, treating, processing and
transporting by our systems. We also bear a limited degree of commodity price risk through our
condensate recovery and sale operations and through settlement of natural gas imbalances. Please
read Item 7AQuantitative and Qualitative Disclosures about Market Risk below.
We provide a significant portion of our transportation services on our MIGC system through firm
contracts that obligate our customers to pay a monthly reservation or demand charge, which is a
fixed charge applied to firm contract capacity and owed by a customer regardless of the actual
pipeline capacity used by that customer. When a customer uses the capacity it has reserved under
these contracts, we are entitled to collect an additional commodity usage charge based on the
actual volume of natural gas transported. These usage charges are typically a small percentage of
the total revenues received from our firm capacity contracts. We also provide transportation
services through interruptible contracts, pursuant to which a fee is charged to our customers based
upon actual volumes transported through the pipeline.
53
As a result of our initial public offering and the Powder River acquisition, the results of
operations, financial condition and cash flows vary significantly for 2008 as compared to periods
ending prior to our initial public offering. Please see Items Affecting the Comparability of Our
Financial Results, set forth below in this Item.
HOW WE EVALUATE OUR OPERATIONS
Our management relies on certain financial and operational metrics to analyze our performance.
These metrics are significant factors in assessing our operating results and profitability and
include (1) throughput volumes, (2) operating expenses, (3) Adjusted EBITDA and (4) gross margin.
Throughput volumes
In order to maintain or increase throughput volumes on our gathering and processing systems, we
must connect additional wells to our systems. Our success in maintaining or increasing throughput
is impacted by successful drilling of new wells by producers which will be dedicated to our
systems, our ability to secure volumes from new wells drilled on non-dedicated acreage and our
ability to attract natural gas volumes currently gathered, processed or treated by our competitors.
To maintain and increase throughput volumes on our MIGC system, we must continue to contract
capacity to shippers, including producers and marketers, for transportation of their natural gas.
Although firm capacity on the MIGC system is fully subscribed, we nevertheless monitor producer and
marketing activities in the area served by our transportation system to maintain a full
subscription of MIGCs firm capacity and to identify new opportunities.
Operating expenses
We analyze operating expenses to evaluate our performance. Operating expenses include all amounts
accrued for or paid to affiliates or third parties for the operation of our systems, including
product purchases, utilities, field labor, measurement and analysis and other disbursements. The
primary components of our operating expenses that we evaluate include operation and maintenance
expenses, cost of product expenses and general and administrative expenses. Certain of our
operating expenses are paid to affiliates; however, 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. Accordingly, our affiliate expenses are not those expenses necessary for
generating our affiliate revenues and our third-party expenses are not those expenses necessary for
generating our third-party revenues.
Operation and maintenance expenses include, among other things, direct labor, insurance, repair and
maintenance, contract services, utility costs and services provided to us or on our behalf. For
periods commencing on and subsequent to May 14, 2008 with respect to our initial assets and for
periods commencing on and subsequent to December 1, 2008 with respect to the Powder River assets,
these expenses are incurred under and governed by our services and secondment agreement with
Anadarko.
Cost of product expenses include (i) costs associated with the purchase of natural gas and NGLs
pursuant to our percent-of-proceeds processing contracts, (ii) costs associated with the purchase
of natural gas pursuant to the gas imbalance provisions contained in our contracts, (iii) costs
associated with our obligations under certain contracts to redeliver a volume of natural gas to
shippers which is thermally equivalent to condensate retained by us and sold to third parties and
(iv) costs associated with our fuel tracking mechanism, which tracks the difference between actual
fuel usage and loss and amounts recovered for estimated fuel usage and loss under our contracts.
These expenses are subject to variability, although our exposure to commodity price risk
attributable to our percent-of-proceeds contracts is mitigated through our commodity price swap
agreements with Anadarko. For the years ended December 31, 2008, 2007 and 2006, cost of product
expenses comprised 56%, 57% and 41% of total operating expenses, respectively.
General and administrative expenses for periods prior to May 14, 2008 with respect to our initial
assets and for periods prior to December 1, 2008 with respect to the Powder River assets, include
reimbursements attributable to costs incurred by Anadarko on our behalf and allocations of
Anadarkos general and administrative costs by Anadarko to us. For these periods, Anadarko received
compensation or reimbursement through a management services fee. Subsequent to May 14, 2008 with
respect to our initial assets and subsequent to December 1, 2008 with respect to the Powder River
assets, Anadarko is no longer compensated for corporate services through a management services fee.
Instead, we reimburse Anadarko for general and administrative expenses it incurs on our behalf
pursuant to the terms of our omnibus agreement with Anadarko. Amounts
required to be reimbursed to Anadarko under the omnibus agreement include those expenses
attributable to our status as a publicly traded partnership, such as:
54
|
|
|
expenses associated with annual and quarterly reporting; |
|
|
|
|
tax return and Schedule K-1 preparation and distribution expenses; |
|
|
|
|
expenses associated with listing on the New York Stock Exchange; and |
|
|
|
|
independent auditor fees, legal fees, investor relations expenses, and registrar and
transfer agent fees. |
In addition to the above, we are required pursuant to the terms of the omnibus agreement with
Anadarko, to reimburse Anadarko for allocable general and administrative expenses. The amount
required to be reimbursed by us to Anadarko for allocated general and administrative expenses was
originally capped at $6.0 million annually; however, this amount was increased to $6.65 million
annually in connection with the Powder River acquisition. The annual expense cap stipulated in the
omnibus agreement is effective through December 31, 2009, subject to adjustment to reflect changes
in the Consumer Price Index and, with the concurrence of the special committee of our general
partners board of directors, to reflect expansions of our operations through the acquisition or
construction of new assets or businesses. After December 31, 2009, our general partner will
determine the general and administrative expenses to be reimbursed by us in accordance with our
partnership agreement. The cap contained in the omnibus agreement does not apply to incremental
general and administrative expenses incurred by or allocated to us as a result of being a separate
publicly traded entity. We currently expect those expenses to be approximately $5.6 million per
year, excluding equity-based compensation.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss), plus distributions from equity investee, interest
expense, income tax expense and depreciation, less income from equity investments, interest income,
income tax benefit and other income (expense). We believe that the presentation of Adjusted EBITDA
provides information useful to investors in assessing our financial condition and results of
operations and that Adjusted EBITDA is a widely accepted financial indicator of a companys ability
to incur and service debt, fund capital expenditures and make distributions. Adjusted EBITDA is a
supplemental financial measure that management and external users of our consolidated financial
statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:
|
|
|
our operating performance as compared to other publicly traded partnerships in the
midstream energy industry, without regard to financing methods, capital structure or
historical cost basis; |
|
|
|
|
the ability of our assets to generate cash flow to make distributions; and |
|
|
|
|
the viability of acquisitions and capital expenditure projects and the returns on
investment of various investment opportunities. |
Adjusted EBITDA is not defined in GAAP. For a reconciliation of Adjusted EBITDA to its most
directly comparable financial measures calculated and presented in accordance with GAAP, please see
Non-GAAP Financial Measures in Item 6Selected Financial and Operating Data of this Form 10-K.
Gross margin
We define
gross margin as gathering, processing and transportation revenues,
plus natural gas, natural gas liquids and condensate sales, less cost of product. We consider gross margin to provide
information useful in assessing our results of operations, our ability to internally fund capital expenditures and to service
or incur additional debt.
55
ITEMS AFFECTING THE COMPARABILITY OF OUR FINANCIAL RESULTS
Our historical results of operations for the periods presented may not be comparable to future or
historic results of operations for the reasons described below:
|
|
|
We anticipate incurring approximately $5.6 million of general and administrative
expenses annually, excluding equity-based compensation expense, attributable to operating as a publicly traded entity, including expenses
associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and
distribution expenses; expenses associated with listing on the New York Stock Exchange;
independent auditor fees; legal fees; investor relations expenses; registrar and transfer
agent fees; insurance premiums; and expenses associated with maintaining a limited
accounting staff and facilities. General and administrative expenses such as these are
reflected in our historical consolidated financial statements for periods including and
subsequent to our initial public offering in May 2008. |
|
|
|
|
Additionally, we anticipate incurring up to $6.65 million in general and administrative
expenses annually to be charged by Anadarko to us pursuant to the omnibus agreement, which
became effective in connection with our initial public offering. This amount is expected to
be greater than amounts allocated to us by Anadarko for the management services fee
reflected in our historical consolidated financial statements for periods prior to May 14,
2008. |
|
|
|
|
Prior to May 14, 2008 with respect to our initial assets and prior to December 19, 2008
with respect to the Powder River assets, all affiliate transactions were net settled within
our consolidated financial statements because these transactions related to Anadarko and
were funded by Anadarkos working capital. Effective on May 14, 2008 with respect to our initial assets and December
19, 2008 with respect to the Powder River assets, all affiliate and third-party
transactions are funded by our working capital. This impacts the comparability of our cash
flow statements, working capital analysis and liquidity discussion. |
|
|
|
|
Prior to May 14, 2008 with respect to our initial assets and prior to December 19, 2008
with respect to the Powder River assets, we incurred interest expense or earned interest
income on intercompany balances with Anadarko. These intercompany balances were
extinguished through non-cash transactions in connection with the closing of our initial
public offering and the Powder River acquisition; therefore, interest expense and interest
income attributable to these balances is reflected in our historical consolidated financial
statements for the periods ending prior to and including May 14, 2008 with respect to our
initial assets and prior to and including December 19, 2008 with respect to the Powder
River assets. |
|
|
|
|
In connection with the Powder River acquisition, we entered
into a five-year, $175.0
million term loan agreement with Anadarko, under which we will pay interest at a fixed rate
of 4.0% for the first two years and a floating rate of interest at
three-month LIBOR plus 150
basis points for the final three years. For periods including and subsequent to the Powder
River acquisition, interest expense on the $175.0 million note payable to Anadarko will be
incurred so long as the loan agreement remains in place. |
|
|
|
|
Concurrent with the closing of our initial public offering, we loaned $260.0 million to
Anadarko in exchange for a 30-year note bearing interest at a fixed annual rate of 6.50%.
Interest income attributable to the note is reflected in our consolidated financial
statements for the period beginning on May 14, 2008 and ending December 31, 2008 and will
be included in future periods so long as the note remains outstanding. |
|
|
|
|
Pursuant to the omnibus agreement, as a co-borrower under Anadarkos credit facility, we
are required to reimburse Anadarko for our allocable portion of commitment fees (0.11% of
our committed and available borrowing capacity, including our outstanding balances) that
Anadarko incurs under its credit facility, or up to $110,000 per year. See Note
6Transactions with Affiliates in the notes to the consolidated financial statements
included in Item 8Financial Statements and Schedules of this Form 10-K. In addition,
Anadarko entered into a working capital facility with us, under which we incur an annual
commitment fee of 0.11% of the unused portion of our committed borrowing capacity of $30.0
million, or up to $33,000 per year. These commitment fees are included in interest income
(expense), net in our consolidated financial statements for the period beginning on May 14,
2008 and ending December 31, 2008 and will be included in future periods so long as the
credit facilities are in place. |
|
|
|
|
For periods ending prior to January 1, 2008, our consolidated financial statements
reflect the gathering fees we historically charged Anadarko under our affiliate
cost-of-service-based arrangements. Under these arrangements, we recovered, on an annual
basis, our operation and maintenance, general and administrative and depreciation expenses
in addition to earning a return on our invested capital. Effective January 1, 2008, we
entered into new 10-year gas gathering agreements with Anadarko. Pursuant to the terms of
the new agreements, our fees for gathering and treating services rendered to Anadarko
increased. This increase was due, in part, to compensate us for additional operation and maintenance expense that we incur as a result of us bearing all of the cost of
employee benefits |
56
specifically identified and related to operational personnel working on
our assets, as compared to bearing only those employee benefit costs reasonably allocated by
Anadarko to us for the periods ending prior to January 1, 2008. Because our new gas
gathering agreements are designed to fully recover these incremental costs, our revenues
increased by an amount approximately equal to the incremental operation and maintenance
expense. Although this change in methodology for computing affiliate gathering rates does
not impact our net cash flows or net income, this methodology change impacts the components
thereof as compared to periods ending prior to January 1, 2008. If we applied the
methodology employed under our new gas gathering agreements with Anadarko to the year ended
December 31, 2007, we estimate our historic gathering revenues and operation and maintenance
expense would have increased by $3.1 million and our cash flow from operations would have
remained unchanged.
|
|
|
The 10-year gas gathering agreements entered into with Anadarko included new fees for
gathering and treating. The new fees are based on capital improvements and changes in our
cost-of-service analysis and are higher than those fees reflected in our historical
financial results for the periods ended prior to January 1, 2008. |
|
|
|
|
Our financial results for historical periods reflect commodity prices changes, which, in
turn, impacts the financial results derived from our percent-of-proceeds processing
contracts. Effective January 1, 2009, we have mitigated the commodity price risk associated
with our percent-of-proceeds processing contracts by entering into fixed-price commodity
price swap agreements with Anadarko that extend through at least December 31, 2010. See
Note 6Transactions with Affiliates of the notes to the consolidated financial statements
included in Item 8Financial Statements and Supplementary Data in this Form 10-K. |
|
|
|
|
We are generally not subject to federal or state income tax. Federal and state income
tax expense was recorded for periods ending prior to and including May 14, 2008 with
respect to income generated by our initial assets and prior to and
including December 19, 2008 with
respect to income generated by the Powder River assets. In periods subsequent to May 14,
2008 with respect to income generated by our initial assets and subsequent to December 19,
2008 with respect to income generated by the Powder River assets, we are only subject to
Texas margin tax; therefore, income tax expense attributable to Texas margin tax will
continue to be recognized in our consolidated financial statements. We are required to make
payments to Anadarko pursuant to a tax sharing arrangement for our share of Texas margin
tax included in any combined or consolidated returns of Anadarko. The consolidated
financial statements for periods ending prior to May 14, 2008 with respect to income
generated by our initial assets and prior to December 19, 2008 with respect to income
generated by the Powder River assets include deferred federal and state income taxes which
were provided on temporary differences between the financial statement carrying amounts of
recognized assets and liabilities and their respective tax bases as if we filed tax returns
as a stand-alone entity. Immediately prior to closing of the dates of our initial public
offering and the Powder River acquisition, we recorded an adjustment to equity of $76.5
million and $50.4 million, respectively, for the elimination of net deferred tax
liabilities. |
|
|
|
|
We currently make cash distributions to our unitholders and our general partner at an
initial distribution rate of $0.30 per unit per full quarter ($1.20 per unit on an
annualized basis). We paid cash distributions to our unitholders of $0.4582 per unit during
the year ended December 31, 2008. This amount represents a $0.30 per unit quarterly
distribution prorated for the 48-day period beginning on the date of our initial public
offering and ending on June 30, 2008, or $0.1582 per unit, and a $0.30 per unit
distribution for the quarter ended on September 30, 2008. |
|
|
|
|
We expect that we will rely upon external financing sources, including commercial bank
borrowings and debt and equity issuances, to fund our acquisition and expansion capital
expenditures. Historically, we largely relied on internally generated cash flows and
capital contributions from Anadarko to satisfy our capital expenditure requirements. |
|
|
|
|
In connection with the closing of our initial public offering, our general partner
adopted two new compensation plans; the Western Gas Partners, LP 2008 Long-Term Incentive
Plan, or LTIP, and the Amended and Restated Western Gas Holdings, LLC Equity Incentive
Plan, or the Incentive Plan. Phantom unit grants have been made to each of the independent
directors of our general partner under the LTIP, and incentive unit grants have been made
to each of our general partners executive officers under the Incentive Plan. Pursuant to
Financial Accounting Standards Board Statement No. 123 (revised 2004), Shared-Based
Payment, or SFAS 123(R), grants made under equity-based compensation plans result in
equity-based compensation expense which is determined, in part, by reference to the fair
value of equity compensation as of the date of grant. For periods
ending prior to May 14, 2008, equity-based compensation expense
attributable to the LTIP
and Incentive Plan is not reflected in our historical consolidated financial statements as
there were no outstanding equity grants under either plan. Effective
as of May 14, 2008, equity-based compensation expense for grants made under the LTIP
and Incentive Plan is reflected in our statements of operations. Share-based compensation
expense attributable to grants made under the LTIP will impact our cash flows from
operating activities only to the extent our general partners board of directors, at its discretion, elects to make a cash payment to a
participant in lieu of actual |
57
receipt of common units by the participant upon the lapse of
the relevant vesting period. Equity-based compensation expense attributable to grants made
under the Incentive Plan will impact our cash flow from operating activities only to the
extent cash payments are made to Incentive Plan participants and such cash payments do not
cause total annual reimbursements made by us to Anadarko pursuant to the omnibus agreement
to exceed the general and administrative expense limit set forth therein for the periods to
which such expense limit applies. See equity-based compensation discussion included in Note
2 Summary of Significant Accounting Policies and Note
6Transactions with Affiliates of
the notes to the consolidated financial statements included in Item 8Financial Statements
and Supplementary Data in this Form 10-K.
GENERAL TRENDS AND OUTLOOK
We expect our business to continue to be affected by the following key trends. Our expectations are
based on assumptions made by us and information currently available to us. To the extent our
underlying assumptions about, or interpretations of, available information prove to be incorrect,
our actual results may vary materially from our expectations.
Capital markets
We require periodic access to capital in order to fund acquisitions and expansion projects. Under
the terms of our partnership agreement, we are required to distribute all of our available cash to
our unitholders, which makes us dependent upon raising capital to fund growth projects.
Historically, master limited partnerships have accessed the public debt and equity capital markets
to raise money for new growth projects. Recent market turbulence has either raised the cost of
those public funds or, in some cases, eliminated the availability of these funds to prospective
issuers. If we are unable either to access the public capital markets or find alternative sources
of capital, our growth strategy may be more challenging to execute.
Impact of interest rates
Interest rates have been volatile in recent periods. If interest rates rise, our future financing
costs could increase accordingly. In addition, because our common units are yield-based securities,
rising market interest rates could impact the relative attractiveness of our common units to
investors, which could limit our ability to raise funds, or increase the cost of raising funds, in
the capital markets. Though our competitors may face similar circumstances, such an environment
could adversely impact our efforts to expand our operations or make future acquisitions.
Natural gas supply and demand
Natural gas continues to be a critical component of energy supply in the U.S. According to the
Energy Information Administration, or EIA, total annual domestic consumption of natural gas is
expected to decrease from approximately 23.4 Tcf in 2008 to approximately 22.5 Tcf in 2011, but
consumption is expected to increase to approximately 24.5 Tcf by 2028. During the last three years,
the U.S. has, on average, consumed approximately 22.7 Tcf per year, while total domestic production
averaged approximately 19.4 Tcf per year during the same period. Overall, natural gas reserves in
the U.S. have increased in recent years, based on data obtained from the EIA.
There is a natural decline in production from existing wells. Although in the areas in which we
operate there has been a significant level of drilling activity offsetting this decline in recent
years, the current natural gas price environment has resulted in significantly lower drilling
activity throughout areas in which we operate and drilling activity in certain areas could be
temporarily suspended. We have no control over this activity. In addition, the recent or further
decline in commodity prices could affect production rates and the level of investment by Anadarko and
third parties in the exploration for and development of new natural gas reserves.
Rising operating costs and inflation
The high level of natural gas exploration, development and production activities across the U.S. in
recent years, and the associated construction of required midstream infrastructure, resulted in
increased competition for personnel and equipment. Although the activities have slowed in recent
months, we have not yet realized a material decline in the prices we pay for labor, supplies and
property, plant and equipment. An increase in the general level of prices in the economy could have
a similar effect. We have the ability to recover increased costs from our customers through
escalation provisions provided for in our contracts. However, there may be a delay in recovering
these costs or we may be unable to recover all these costs. To the extent we are unable to recover
higher costs our operating results will be negatively impacted.
58
Benefits from system expansions
We expect that expansion projects, including the following, will position us to capitalize on
future drilling activity by Anadarko and third-party producers and shippers:
|
|
|
We modified and relocated horsepower on our Dew system during the third quarter of 2008,
which resulted in lower gathering line pressures and an increase in throughput of
approximately 2 MMcf/d. |
|
|
|
|
Further modifications of compression on our Dew system are planned for 2009 which are
expected to result in lower gathering line pressures servicing the Holly Branch producing
area and may further increase throughput by up to approximately 2 MMcf/d. |
|
|
|
|
We expanded our Bethel treating facility by installing an additional 11 LTD of sulfur
treating capacity in order to provide additional sour gas treating capacity for drilling in
the area, which we completed in July 2008. |
|
|
|
|
We are expanding our Hugoton gathering system to connect wells drilled by third parties
and Anadarko. During 2008, we connected 12 third-party wells with an average initial
production rate of 2.8 MMcf/d. We also connected 8 new Anadarko wells and reconnected 6
others that were previously connected to third-party gathering systems. These 14 wells
collectively produced at a rate of 1.9 MMcf/d during the month of December 2008. |
|
|
|
|
In November 2007, Anadarko completed Phase II of the Fort Union expansion project by
installing 42 miles of 24 pipe, bringing the total header system to two parallel 24 lines
stretching 106 miles in length. During 2008, Anadarko completed Phase III of the Fort Union
expansion project by installing a third parallel 106-mile 24 line, increasing the total
Fort Union handling capacity to 1,300 MMcf/d. |
|
|
|
|
Anadarko expanded train one of the Medicine Bow Plant at the terminus of the Fort Union
gathering system in March 2007, increasing the total amine circulation capacity to 300
gal/min and increasing the systems gas treating capability to 70 MMcf/d of gas containing
3.2% CO2. During the fourth quarter of 2008, we completed train two, which has
600 gal/min of amine circulation and a gas treating capacity of 112 MMcf/d of gas
containing 4.5% CO2. Train three, which is identical to train two, is currently
under construction and is expected to begin operations in the first quarter of 2009. Upon
the completion of train three, we expect to have sufficient treating capacity to meet the
CO2 specifications of downstream pipelines in the future. |
Acquisition opportunities
A key component of our growth strategy is to acquire midstream assets from Anadarko over time. In
December 2008, we acquired the Powder River assets from Anadarko. As of December 31, 2008,
Anadarkos total domestic midstream asset portfolio, excluding assets we own, consisted of 19
gathering systems with an aggregate throughput of approximately 2.3 Bcf/d, 8,100 miles of pipeline
and 18 processing and/or treating facilities. Anadarko owns a 2.0% general partner interest in us,
all of our IDRs and a 61.3% limited partner interest in us. Given Anadarkos significant interests
in us, we believe Anadarko will benefit from selling additional assets to us over time; however,
Anadarko continually evaluates acquisitions and divestitures and may elect to acquire, construct or
dispose of midstream assets in the future without offering us the opportunity to acquire or
construct those assets. Should Anadarko choose to pursue additional midstream asset sales, it is
under no contractual obligation to offer assets or business opportunities to us. We may also pursue
selected asset acquisitions from third parties to the extent such acquisitions complement our or
Anadarkos existing asset base or allow us to capture operational efficiencies from Anadarkos or
third-party production. However, if we do not make additional acquisitions from Anadarko or third
parties on economically acceptable terms, our future growth will be limited, and the acquisitions
we make could reduce, rather than increase, our cash generated from operations on a per-unit basis.
59
RESULTS OF OPERATIONS OVERVIEW
OPERATING RESULTS
The following table and discussion presents a summary of our results of operations for the years
ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007(1) |
|
|
2006(1) |
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
Gathering, processing and transportation of natural gas |
|
$ |
107,582 |
|
|
$ |
93,007 |
|
|
$ |
66,296 |
|
Natural gas, natural gas liquids and condensate sales |
|
|
154,772 |
|
|
|
146,151 |
|
|
|
52,959 |
|
Equity income and other |
|
|
9,289 |
|
|
|
6,144 |
|
|
|
2,380 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues affiliates |
|
|
271,643 |
|
|
|
245,302 |
|
|
|
121,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues third parties |
|
|
|
|
|
|
|
|
|
|
|
|
Gathering, processing and transportation of natural gas |
|
|
15,958 |
|
|
|
11,019 |
|
|
|
5,783 |
|
Natural gas, natural gas liquids and condensate sales |
|
|
16,119 |
|
|
|
2,772 |
|
|
|
3 |
|
Other |
|
|
7,928 |
|
|
|
2,400 |
|
|
|
1,189 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues third parties |
|
|
40,005 |
|
|
|
16,191 |
|
|
|
6,975 |
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
311,648 |
|
|
|
261,493 |
|
|
|
128,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product |
|
|
134,715 |
|
|
|
112,283 |
|
|
|
41,806 |
|
Operation and maintenance |
|
|
44,765 |
|
|
|
40,756 |
|
|
|
29,907 |
|
General and administrative |
|
|
14,385 |
|
|
|
8,364 |
|
|
|
4,320 |
|
Property and other taxes |
|
|
5,701 |
|
|
|
5,591 |
|
|
|
4,719 |
|
Depreciation and impairment |
|
|
42,365 |
|
|
|
30,481 |
|
|
|
20,230 |
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
241,931 |
|
|
|
197,475 |
|
|
|
100,982 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
69,717 |
|
|
|
64,018 |
|
|
|
27,628 |
|
Interest income (expense), net affiliates |
|
|
9,191 |
|
|
|
(7,805 |
) |
|
|
(9,574 |
) |
Other income (expense), net |
|
|
145 |
|
|
|
(15 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
|
79,053 |
|
|
|
56,198 |
|
|
|
18,028 |
|
Income Tax Expense |
|
|
13,777 |
|
|
|
19,540 |
|
|
|
5,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
65,276 |
|
|
$ |
36,658 |
|
|
$ |
12,701 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(3) |
|
$ |
112,474 |
|
|
$ |
91,830 |
|
|
$ |
47,239 |
|
Gross margin(3) |
|
|
159,716 |
|
|
|
140,666 |
|
|
|
83,235 |
|
|
|
|
(1) |
|
Financial information for 2007 and 2006 has been revised to include results
attributable to the Powder River assets from August 23, 2006. See Note 3Powder River
Acquisition of the notes to the consolidated financial statements in Item 8Financial
Statements and Supplementary Data. |
|
(2) |
|
Operating expenses include amounts charged by affiliates to the Partnership for
services as well as reimbursement of amounts paid by affiliates to third parties on behalf
of the Partnership. See Note 6Transactions with Affiliates of the notes to the consolidated
financial statements in Item 8Financial Statements and Supplementary Data. |
|
(3) |
|
Adjusted EBITDA and gross margin are defined above within this Item 7 under the
caption How We Evaluate Our Operations. Item 6Selected Financial and Operating Data,
includes a reconciliation of Adjusted EBITDA to its most directly comparable measures
calculated and presented in accordance with GAAP. |
For purposes of the following discussion, any increases or decreases for the year ended December
31, 2008 refer to the comparison of the year ended December 31, 2008 to the year ended December
31, 2007. Similarly, any increases or decreases for the year ended December 31, 2007 refer to the
comparison of the year ended December 31, 2007 to the year ended December 31, 2006.
Executive Summary
Total revenues increased by $50.2 million and $132.9 million for the year ended December 31, 2008
and for the year ended December 31, 2007, respectively. Gathering, processing and transportation
revenues increased $19.5 million; natural gas, NGLs and condensate revenues increased $22.0 million
and equity income and other revenues increased $8.7 million for the year ended December 31, 2008.
Gathering, processing and transportation revenues increased $31.9 million; natural gas,
60
NGLs and condensate revenues increased $96.0 million and equity income and other revenues increased
$5.0 million for the year ended December 31, 2007. Revenues attributable to MIGC and the Powder
River assets contributed to $110.0 million of the increase in total revenues for the year ended
December 31, 2007. This distinction bears significance for all comparisons for the year ended
December 31, 2007 in that results attributable to these assets for 2006 include only the results
from August 23, 2006, the date Anadarko acquired Western.
Net income increased by $28.6 million and $24.0 million for the year ended December 31, 2008 and
for the year ended December 31, 2007, respectively. The increase in net income for the year ended
December 31, 2008 is primarily due to a $50.2 million increase in total revenues driven by
gathering rate increases, increased condensate margins, an increase in other revenues from changes
in gas imbalance positions and gas prices, a $17.0 million increase in net affiliate interest
income and a $5.8 million decrease in income tax expense. These items are partially offset by
higher operating expenses of $44.5 million for the year ended December 31, 2008.
For the year ended December 31, 2007, the increase in net income of $24.0 million is primarily due
to a $132.9 million increase in total revenues attributable to acquisitions, gathering rate
increases, increased condensate margins and an increase in equity income and other revenues from
changes in gas imbalance positions and gas prices, and a $1.8 million decrease in net affiliate
interest expense. These items are partially offset by higher operating expenses of $96.5 million
and increased income tax expense of $14.2 million. MIGC and the Powder River assets contributed to
$16.5 million of the increase in net income for the year ended December 31, 2007. The changes in
revenues, operating expenses, interest expense and income taxes are discussed in more detail below.
Revenues and Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 vs. 2007 |
|
|
2006 |
|
|
2007 vs. 2006 |
|
|
|
|
(in thousands, except per-unit data and percents) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates |
|
$ |
271,643 |
|
|
$ |
245,302 |
|
|
|
11 |
% |
|
$ |
121,635 |
|
|
|
102 |
% |
Third parties |
|
|
40,005 |
|
|
|
16,191 |
|
|
|
147 |
% |
|
|
6,975 |
|
|
|
132 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
311,648 |
|
|
$ |
261,493 |
|
|
|
19 |
% |
|
$ |
128,610 |
|
|
|
103 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering and transportation
throughput (MMcf/d)(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates |
|
|
831 |
|
|
|
917 |
|
|
|
(9 |
%) |
|
|
891 |
|
|
|
3 |
% |
Third parties |
|
|
135 |
|
|
|
90 |
|
|
|
50 |
% |
|
|
80 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total throughput |
|
|
966 |
|
|
|
1,007 |
|
|
|
(4 |
%) |
|
|
971 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing throughput (MMcf/d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties |
|
|
30 |
|
|
|
30 |
|
|
|
0 |
% |
|
|
30 |
|
|
|
(0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total throughput |
|
|
30 |
|
|
|
30 |
|
|
|
0 |
% |
|
|
30 |
|
|
|
(0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin per MMcf (b) |
|
$ |
0.44 |
|
|
$ |
0.37 |
|
|
|
19 |
% |
|
$ |
0.23 |
|
|
|
61 |
% |
|
|
|
(a) |
|
Throughput volumes exclude Fort Union volumes. |
|
(b) |
|
Calculated using gathering, processing and transportation of natural gas revenues
and natural gas, natural gas liquids and condensate sales, less cost of product. Processing
volumes originate from third parties while the related residue natural gas and natural gas
liquids are sold to an affiliate, therefore the gross margin per MMcf calculated separately
for affiliates and third parties is not meaningful. |
Throughput volumes, which consist of affiliate and third-party volumes, decreased by 41,000 Mcf/d
for the year ended December 31, 2008 and increased by 36,000 Mcf/d for the year ended December 31,
2007.
Affiliate gathering and transportation volumes decreased by 86,000 Mcf/d for the year ended
December 31, 2008, primarily attributable to throughput decreases at the Haley, Pinnacle, Hugoton
and Dew systems, partially offset by increases at the MIGC system. Haley field production and
related Haley system throughput peaked in the first quarter of 2007. Since the first quarter of
2007, production and associated volumes from the Haley field have gradually declined due to the
natural production decline and a shift in rig activity from the dedicated gathering area to other
exploration areas within the Delaware Basin, resulting in fewer well connections. Recent activity
has partially offset volume declines at the Haley system, with 13 wells connected during the year
ended December 31, 2008, in addition to the third-party volumes described below. The
decline in affiliate volumes at the Hugoton, Dew and Pinnacle systems for the year ended December
31, 2008 is primarily
61
due to natural production declines and reduced or delayed activity in the Dew and Pinnacle areas. These volume decreases are partially offset by increases in the MIGC system due
to a new affiliate contract that became effective in September 2007 in connection with
expansion of the
systems capacity.
Affiliate gathering and transportation volumes increased by 26,000 Mcf/d for the year ended
December 31, 2007, primarily attributable to increases in
volumes at the Haley and MIGC systems, partially offset by decreases
at the Dew system.
Third-party gathering and transportation volumes increased by 45,000 Mcf/d for the year ended
December 31, 2008, primarily attributable to the throughput increases at the Haley and Hugoton
systems, partially offset by throughput declines at the Pinnacle system resulting primarily from a
decrease in volumes at two central receipt points from a large third-party shipper. The increase in
third-party volumes at the Haley gathering system is primarily due to a third partys activity in
the area. Increased volumes at the Hugoton system are due to a third-party customers successful
drilling program, which resulted in 12 additional wells being connected to the Hugoton gathering
system during the year ended December 31, 2008.
Third-party gathering and transportation volumes increased by 10,000 Mcf/d for the year ended
December 31, 2007, primarily attributable to throughput increases at the Hugoton system.
Processing volumes remained flat for the year ended December 31, 2008 and for the year ended
December 31, 2007.
Gathering, Processing and Transportation of Natural Gas Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 vs. 2007 |
|
|
2006 |
|
|
2007 vs. 2006 |
|
|
|
|
|
|
|
|
(in thousands, except percents) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering,
processing and
transportation of
natural gas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates |
|
$ |
107,582 |
|
|
$ |
93,007 |
|
|
|
16 |
% |
|
$ |
66,296 |
|
|
|
40 |
% |
Third parties |
|
|
15,958 |
|
|
|
11,019 |
|
|
|
45 |
% |
|
|
5,783 |
|
|
|
91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
123,540 |
|
|
$ |
104,026 |
|
|
|
19 |
% |
|
$ |
72,079 |
|
|
|
44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gathering, processing and transportation of natural gas revenues increased by $19.5 million
and $31.9 million for the year ended December 31, 2008 and for the year ended December 31, 2007,
respectively. Revenues from affiliates increased $14.6 million for the year ended December 31, 2008
primarily due to an increase in affiliate gathering rates under new contracts that became effective
January 1, 2008, partially offset by lower volumes. Revenues from third parties for the year ended
December 31, 2008 increased $4.9 million primarily due to an increase in volumes on the Haley and
Hugoton systems.
Gathering, processing and transportation revenues from affiliates for the year ended December 31,
2007 increased $26.7 million as a result of the acquisition of the MIGC system in August 2006,
increasing rates in all the gathering systems and increased volumes, primarily in the Haley and
Pinnacle systems. Third-party gathering, processing and transportation revenues for the year ended
December 31, 2007 increased $5.2 million primarily as a result of the acquisition of the MIGC
system in August 2006 and receipt of a $1.1 million payment for a volume commitment.
62
Natural Gas, Natural Gas Liquids and Condensate Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 vs. 2007 |
|
|
2006 |
|
|
2007 vs. 2006 |
|
|
|
|
(in thousands, except percents) |
|
Natural gas
sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates |
|
$ |
56,887 |
|
|
$ |
42,302 |
|
|
|
34 |
% |
|
$ |
16,963 |
|
|
|
149 |
% |
Third parties |
|
|
23 |
|
|
|
|
|
|
nm |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
56,910 |
|
|
$ |
42,302 |
|
|
|
35 |
% |
|
$ |
16,963 |
|
|
|
149 |
% |
|
Natural gas liquids sales affiliates: |
|
$ |
97,885 |
|
|
$ |
96,795 |
|
|
|
1 |
% |
|
$ |
28,556 |
|
|
|
239 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drip condensate sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates |
|
$ |
|
|
|
$ |
7,054 |
|
|
(100 |
%) |
|
$ |
7,440 |
|
|
|
(5 |
%) |
Third parties |
|
|
16,096 |
|
|
|
2,772 |
|
|
|
481 |
% |
|
|
3 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,096 |
|
|
$ |
9,826 |
|
|
|
64 |
% |
|
$ |
7,443 |
|
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total natural gas, natural gas liquids
and condensate sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates |
|
$ |
154,772 |
|
|
$ |
146,151 |
|
|
|
6 |
% |
|
$ |
52,959 |
|
|
|
176 |
% |
Third parties |
|
|
16,119 |
|
|
|
2,772 |
|
|
|
481 |
% |
|
|
3 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
170,891 |
|
|
$ |
148,923 |
|
|
|
15 |
% |
|
$ |
52,962 |
|
|
|
181 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
natural gas, natural gas liquids and condensate sales increased by $22.0 million and $96.0
million for the year ended December 31, 2008 and for the year ended December 31, 2007,
respectively.
The increase in natural gas sales for the year ended December 31, 2008 was primarily due to an
increase in the average price for residue sold from $5.24 per Mcf to $7.62 per Mcf. The volume of
natural gas sold was relatively flat for the year ended December 31, 2008. The increase for year
ended December 31, 2007 is primarily due to including revenues attributable to the Hilight and
Newcastle systems for the full year of 2007 compared to only a partial year for 2006, partially
offset by a decrease in prices from $5.62 per Mcf to $5.24 per Mcf for the year ended December 31,
2007.
The increase in NGLs sales for the year ended December 31, 2008 was primarily due to an increase in
the average price from $57.43 per Bbl to $73.75 per Bbl of liquids sold. The volume of NGLs
decreased approximately 712 Bbls/d for the year ended December 31, 2008. The increase for year
ended December 31, 2007 is primarily due to including revenues attributable to the Hilight and
Newcastle systems for the full year of 2007 compared to only a partial year for 2006. In addition,
prices increased from $50.24 per Bbl to $57.43 per Bbl of liquids for the year ended December 31,
2007. Sales of plant condensate are included in NGLs sales.
The
increase in drip condensate sales was primarily due to increased average condensate prices,
which were $89.34 per Bbl for the year ended December 31, 2008,
$64.43 per Bbl for the year ended December 31, 2007 and
$58.84 per Bbl
for the year ended December 31, 2006. Drip condensate volumes increased approximately 77 Bbls/d and 66
Bbls/d for the years ended December 31, 2008 and December 31, 2007, respectively. The volume
increases for the years is primarily attributable to an increase in condensate recoveries due to
the higher Btu composition of the gas stream from third-party drilling activity that has offset
production declines. The change from affiliate revenues to third-party revenues is attributable to
a November 2007 contract modification which effectively converted all of our condensate sales for
2008 to third-party sales.
63
Equity Income and Other Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 vs. 2007 |
|
2006 |
|
|
2007 vs. 2006 |
|
|
|
(in thousands, except percents) |
|
Equity income affiliate |
|
$ |
4,736 |
|
|
$ |
4,017 |
|
|
|
18 |
% |
|
$ |
1,360 |
|
|
|
195 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates |
|
$ |
4,553 |
|
|
$ |
2,127 |
|
|
|
114 |
% |
|
$ |
1,020 |
|
|
|
109 |
% |
Third parties |
|
|
7,928 |
|
|
|
2,400 |
|
|
|
230 |
% |
|
|
1,189 |
|
|
|
102 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity and other revenues |
|
$ |
17,217 |
|
|
$ |
8,544 |
|
|
|
102 |
% |
|
$ |
3,569 |
|
|
|
139 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity income and other revenues increased by $8.7 million and $5.0 million for the year
ended December 31, 2008 and for the year ended December 31, 2007, respectively. The increase for
the year ended December 31, 2008 is primarily due to changes in our natural gas imbalance positions
primarily due to higher gas prices, which accounted for $6.7 million of the increase,
and a $0.7 million increase in equity income from our investment in Fort Union. The increase for the year
ended December 31, 2007 is primarily due to income from Fort Union, which is included for the full
year for 2007 compared to only four and half months for 2006, and changes in our gas imbalance
positions primarily due to higher gas prices.
Cost of Product and Operation and Maintenance Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 vs. 2007 |
|
2006 |
|
|
2007 vs. 2006 |
|
|
|
(in thousands, except percents) |
|
Cost of product |
|
$ |
134,715 |
|
|
$ |
112,283 |
|
|
|
20 |
% |
|
$ |
41,806 |
|
|
|
169 |
% |
Operation and maintenance |
|
|
44,765 |
|
|
|
40,756 |
|
|
|
10 |
% |
|
|
29,907 |
|
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product
and operation and maintenance expenses |
|
$ |
179,480 |
|
|
$ |
153,039 |
|
|
|
17 |
% |
|
$ |
71,713 |
|
|
|
113 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product for the year ended December 31, 2008 and for the year ended December 31, 2007
increased by $22.4 million and $70.5 million, respectively. Cost of product is impacted by natural
gas and NGLs we purchase from producers and also for the cost of natural gas that we redeliver to
shippers to compensate them on a thermally equivalent basis for condensate retained by us and sold
to third parties. Gas purchases from producers for natural gas averaged $6.23 per Mcf, $4.29 per
Mcf and $4.16 per Mcf for the years ended December 31, 2008, 2007 and 2006, respectively. Gas
purchases from producers for NGLs averaged $50.81 per Bbl, $42.65 per Bbl and $37.14 per Bbl for
the years ended December 31, 2008, 2007 and 2006, respectively. Gas purchases for plant condensate
averaged $6.94 per Mcf, $6.09 per Mcf and $6.19 per Mcf for the years ended December 31, 2008, 2007
and 2006, respectively. The increase in cost of product for 2008 was primarily attributable to the
increase cost of natural gas and NGLs and the cost to settle gas imbalances associated with MIGC.
The increase in cost of product for 2007 was primarily attributable to having a full year of cost
for MIGC and the Powder River assets compared to a partial year for 2006, partially offset by an
increase in average price per unit purchased. Cost of product expense includes natural gas
purchases from affiliates of $23.6 million, $18.8 million and $8.7 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
Operation and maintenance expense for the year ended December 31, 2008 and for the year ended
December 31, 2007 increased by $4.0 million and $10.8 million, respectively. For the year ended
December 31, 2008, labor and employee-related expenses increased by approximately $6.5 million
primarily attributable to being charged by Anadarko for the full cost of these expenses.
Specifically, contract modifications, beginning in 2008, entitled Anadarko to charge us additional
labor and employee-related expenses in order for us to bear the full cost of operational personnel
working on our assets instead of bearing only those employee benefit costs reasonably allocated by
Anadarko to us. These additional costs were taken into account when setting the gathering rates in
our affiliate-based contracts that became effective in January 2008; thus, our revenues increased
by approximately the same amount. In addition, other increases in labor and employee-related
expenses for the year ended December 31, 2008 were due to increases in benefits and incentive
programs. These increases are partially offset by decreases in compressor expenses of $2.6 million.
For the year ended
64
December 31, 2007, the increase in operations and maintenance expense is primarily attributable to the acquisition of MIGC and the Powder River acquisition. Operation
and maintenance expenses include charges from affiliates of $19.2 million, $11.7 million and $1.7
million for the years ended December 31, 2008, 2007 and 2006, respectively, for services provided
to the Partnership pursuant to the services and secondment agreement for periods subsequent to the
initial public offering and for personnel costs allocated by Anadarko to us for periods prior to
May 14, 2008 with respect to the initial assets and prior to December 1, 2008 with respect to the
Powder River assets.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 vs. 2007 |
|
2006 |
|
|
2007 vs. 2006 |
|
|
|
(in thousands, except percents) |
|
Gross margin |
|
$ |
159,716 |
|
|
$ |
140,666 |
|
|
|
14 |
% |
|
$ |
83,235 |
|
|
|
69 |
% |
Gross margin increased $19.1 million for the year ended December 31, 2008 and increased $57.4
million for the year ended December 31, 2007 due to the increases in total revenues partially
offset by the increases in cost of product expense, which are described above.
General and Administrative, Depreciation, Impairment and Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 vs. 2007 |
|
2006 |
|
|
2007 vs. 2006 |
|
|
|
(in thousands, except percents)
|
|
General and administrative |
|
$ |
14,385 |
|
|
$ |
8,364 |
|
|
|
72 |
% |
|
$ |
4,320 |
|
|
|
94 |
% |
Property and other taxes |
|
|
5,701 |
|
|
|
5,591 |
|
|
|
2 |
% |
|
|
4,719 |
|
|
|
19 |
% |
Depreciation and impairment |
|
|
42,365 |
|
|
|
30,481 |
|
|
|
39 |
% |
|
|
20,230 |
|
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and
administrative,
depreciation and other
expenses |
|
$ |
62,451 |
|
|
$ |
44,436 |
|
|
|
41 |
% |
|
$ |
29,269 |
|
|
|
52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative, depreciation, impairment and other expenses increased by $18.0 million
and $15.2 million for the year ended December 31, 2008 and for the year ended December 31, 2007,
respectively. The increases are partially attributable to an increase in general and administrative
expenses of $6.0 million and $4.0 million for the year ended December 31, 2008 and for the year
ended December 31, 2007, respectively. The general and administrative expense increase in 2008 is
primarily due to increased expenses of $3.0 million attributable to being a publicly traded entity,
$2.2 million attributable to equity-based compensation expense and $1.5 million of direct costs
attributable to the Powder River transaction, partially offset by a decrease in expenses charged pursuant
to the management services fee prior to May 14, 2008. Expenses attributable
to being a publicly traded entity are comprised of consulting and auditing
fees, expenses attributable to
accounting personnel dedicated to the operations of the Partnership, legal
expenses and director fees. For 2007, the
increase in general and administrative expenses is primarily attributed to MIGC
and the Powder River assets, which are included for the full year for 2007 compared to only four
and a half months for 2006.
Subsequent to May 14, 2008 general and administrative expenses were charged to us by Anadarko
pursuant to the omnibus agreement, which became effective on May 14, 2008. For periods prior to May
14, 2008 with respect to the initial assets and December 1, 2008 with respect to the Powder River
assets, general and administrative expenses included costs allocated by Anadarko to the
Partnership in the form of a management services fee. General and administrative expenses include
charges from affiliates of $11.0 million, $8.4 million and $4.3 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
Property and other taxes increased by $110,000 and $872,000 for the year ended December 31, 2008
and for the year ended December 31, 2007, respectively, primarily due to higher ad valorem taxes.
Depreciation and impairment expense increased by $11.9 million and $10.3 million for the year ended
December 31, 2008 and for the year ended December 31, 2007, respectively. The increased
depreciation and impairment expense for the year ended December 31, 2008 is primarily attributable
to a $9.4 million impairment expense recognized in connection with the shut-in of a plant in the
Hilight System prior to our Powder River acquisition and depreciation on additional assets placed
into service during 2008, including an 11-ton Lo-cat project at the Pinnacle system. The increased
depreciation and impairment expense for the year ended December 31, 2007 is primarily attributable
to depreciation expense on the MIGC pipeline and the Powder River assets, which is included for the
full year for 2007 compared to a partial year for 2006 and for other assets placed in service
during the second half of 2006 and 2007 at the Haley and Hugoton systems.
65
Interest Income (Expense), Net Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 vs. 2007 |
|
2006 |
|
|
2007 vs. 2006 |
|
|
|
(in thousands, percents)
|
|
Interest income on note receivable from Anadarko |
|
$ |
10,703 |
|
|
$ |
|
|
|
|
100 |
% |
|
$ |
|
|
|
|
|
|
Interest (expense) on note payable to Anadarko |
|
|
(253 |
) |
|
|
|
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
Interest (expense), net affiliates |
|
|
(1,259 |
) |
|
|
(7,805 |
) |
|
|
(84 |
%) |
|
|
(9,574 |
) |
|
|
(18 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income (expense),
net affiliates |
|
$ |
9,191 |
|
|
$ |
(7,805 |
) |
|
|
218 |
% |
|
$ |
(9,574 |
) |
|
|
(18 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We earned net interest income for the year ended December 31, 2008 as compared to incurring net
interest expense for the years ended December 31, 2007 and 2006. Interest income (expense), net
consists of interest income on our $260.0 million note receivable from Anadarko for periods
subsequent to May 14, 2008, offset by interest expense charged on affiliate balances for periods
prior to May 14, 2008 with respect to the initial assets and prior to December 19, 2008 with the
respect to the Powder River assets, as well as interest expense attributable to our $175.0 million
term loan agreement entered into with Anadarko in connection with our the Powder River acquisition
and commitment fees on our portion of Anadarkos $1.3 billion credit facility and our $30.0 million
working capital facility for periods subsequent to May 14, 2008. The net changes in interest income
(expense) are $17.0 million and $1.8 million for the year ended December 31, 2008 and for the year
ended December 31, 2007, respectively. These changes are primarily due to the items described
above.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 vs. 2007 |
|
2006 |
|
|
2007 vs. 2006 |
|
|
|
(in thousands, except percents)
|
|
Income before income taxes |
|
$ |
79,053 |
|
|
$ |
56,198 |
|
|
|
41 |
% |
|
$ |
18,028 |
|
|
|
212 |
% |
Income tax expense |
|
|
13,777 |
|
|
|
19,540 |
|
|
|
(30 |
%) |
|
|
5,327 |
|
|
|
267 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
17 |
% |
|
|
35 |
% |
|
|
|
|
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008 and for the year ended December 31, 2007, income tax expense
decreased by approximately $5.8 million and increased approximately $14.2 million, respectively.
The decrease in income tax expense for the year ended December 31, 2008 is primarily due to the
Partnerships U.S. federal income tax status as a non-taxable entity for the period beginning on
May 14, 2008 and ending on December 31, 2008, partially offset by an increase in income before
income tax earned prior to May 14, 2008, which is subject to federal and state income tax. Income
earned by the Partnership attributable to the initial assets after May 14, 2008 is subject only to
Texas margin tax. The increase in income tax expense for the year ended December 31, 2007 is
primarily due to inclusion of income taxes attributable to MIGC and the Powder River assets for the
full year for 2007 compared to only four and a half months for 2006.
For 2008, the variance from the 35% federal statutory rate is primarily attributable to the
Partnerships income attributable to the initial assets being subject only to Texas margin tax for
the period beginning on May 14, 2008 and ending on December 31, 2008. For 2006, the variance from
the 35% federal statutory rate is primarily attributable to state income tax. The effective tax
rates for 2007 and 2006 include an increase to the 35% statutory rate attributable to state income
tax expense, offset by a reduction in state income tax expense resulting from enacted Texas
legislation. Texas House Bill 3, signed into law in May 2006, eliminated the taxable capital and
earned surplus components of the existing franchise tax and replaced these components with a
taxable margin tax calculated on a combined group-reporting basis. We were required to include the
impact of the new law in income for the period which included the date of the laws enactment. The
adjustment, a reduction in deferred state income taxes in the amount of approximately $0.4 million
and $1.1 million (net of federal tax benefit), was included in 2007 and 2006 income tax expense,
respectively.
66
LIQUIDITY AND CAPITAL RESOURCES
Our
ability to finance operations, fund maintenance capital expenditures and pay distributions
will largely depend on our ability to generate sufficient cash flow to cover these requirements.
Our ability to generate cash flow is subject to a number of factors, some of which are beyond our
control. Please read Item 1ARisk Factors of this Form 10-K.
Prior to our initial public offering, our sources of liquidity included cash generated from
operations and funding from Anadarko. Furthermore, we had participated in Anadarkos cash
management program, whereby Anadarko, on a periodic basis, swept cash balances residing in our bank
accounts. Thus, our historical consolidated financial statements for periods ending prior to our
initial public offering reflect no significant cash balances. Unlike our transactions with third parties, which
ultimately are settled in cash, our affiliate transactions were settled on a net basis through an
adjustment to parent net equity. Subsequent to our initial public offering, we maintain our own
bank accounts and sources of liquidity. Although we continue to utilize Anadarkos cash management
system, our cash accounts are not subject to cash sweeps with Anadarkos cash accounts.
Our current sources of liquidity include:
|
|
|
approximately $29.0 million of working capital as of December 31, 2008, which we define
as the amount by which current assets exceed current liabilities; |
|
|
|
|
cash generated from operations; |
|
|
|
|
available borrowings of up to $100.0 million under Anadarkos credit facility; |
|
|
|
|
available borrowings under our $30.0 million working capital facility with Anadarko; |
|
|
|
|
interest income from our $260.0 million note receivable from Anadarko; |
|
|
|
|
issuances of additional partnership units; and |
|
|
|
|
debt offerings. |
We believe that cash generated from these sources will be sufficient to satisfy our short-term
working capital requirements and long-term capital expenditure requirements. The amount of future
distributions to unitholders will depend on earnings, financial conditions, capital requirements
and other factors, and will be determined by the board of directors of our general partner on a
quarterly basis.
Working capital
Working capital, defined as the amount by which current assets exceed current liabilities, is an
indication of our liquidity and potential need for short-term funding. Our working capital
requirements are driven by changes in accounts receivable and accounts payable. These changes are
primarily impacted by factors such as credit extended to, and the timing of collections from, our
customers and our level of spending for maintenance and expansion activity.
67
Historical cash flow
The following table and discussion presents a summary of our net cash provided by operating
activities, net cash used in investing activities, net cash used in financing activities and
Adjusted EBITDA for the years ended December 31, 2008, 2007 and 2006.
For the period January 1, 2008 to May 13, 2008, our net cash from operating activities and capital
contributions from our parent were used to service our cash requirements, which included the
funding of operating expenses and capital expenditures. Subsequent to May 14, 2008 with respect to
our initial assets and December 19, 2008 with respect to the Powder River assets, transactions with
Anadarko are cash-settled.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 vs. 2007 |
|
2006 |
|
|
2007 vs. 2006 |
|
|
|
(in thousands, except percents) |
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
109,796 |
|
|
$ |
72,908 |
|
|
|
51 |
% |
|
$ |
33,304 |
|
|
|
119 |
% |
Investing activities |
|
|
(479,959 |
) |
|
|
(54,328 |
) |
|
|
783 |
% |
|
|
(42,963 |
) |
|
|
26 |
% |
Financing activities |
|
|
403,469 |
|
|
|
(19,038 |
) |
|
nm |
(1) |
|
|
10,113 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in
cash and cash equivalents |
|
$ |
33,306 |
|
|
$ |
(458 |
) |
|
nm |
|
|
$ |
454 |
|
|
nm |
|
Adjusted EBITDA |
|
$ |
112,474 |
|
|
$ |
91,830 |
|
|
|
22 |
% |
|
$ |
47,239 |
|
|
|
94 |
% |
For a
reconciliation of Adjusted EBITDA to its most directly comparable financial measures
calculated and presented in accordance with GAAP, please read Non-GAAP Financial Measures in Item
6Selected Financial and Operating Data of this Form 10-K.
Operating Activities. Net cash provided by operating activities increased by $36.9 million and
$39.6 million for the year ended December 31, 2008 and for the year ended December 31, 2007,
respectively. The increase in net cash provided by operating activities for the year ended December
31, 2008 is primarily attributable to gathering rate increases, increased condensate margins,
revenues attributable to changes in gas imbalance positions and gas prices as well as increased net
interest income. These items are partially offset by higher cash operating expenses. Additionally,
changes in working capital decreased cash flows from operating activities. The increase in net cash
provided by operating activities for the year ended December 31, 2007 is primarily attributable to
the cash flows from MIGC and the Powder River assets, which are
included for the full year for 2007 compared to a partial year for
2006.
Investing Activities. Net cash used in investing activities increased by $425.6 million and $11.4
million for the year ended December 31, 2008 and for the year ended December 31, 2007,
respectively. The increase for the year ended December 31, 2008 is primarily attributable to our
$260.0 million loan made to Anadarko in connection with the initial public offering, the $175.0
million of cash paid for the Powder River acquisition and $8.1 million for additional investment in
Fort Union, partially offset by a $17.5 million decrease in capital expenditures. The increase for
the year ended December 31, 2007 is attributable to higher capital expenditures.
Financing Activities. Net cash provided by financing activities increased by $422.5 million and
decreased by $29.2 million for the year ended December 31, 2008 and for the year ended December 31,
2007, respectively. This increase for the year ended December 31, 2008 is primarily attributable to
the receipt of $315.2 million of net proceeds from the initial public offering, $175.0 million of
loan proceeds attributable to our term loan agreement with Anadarko which was entered in connection
with the Powder River acquisition, and a $2.3 million decrease
in net distributions to Anadarko.
These amounts were partially offset by $45.2 million of reimbursements to our Parent
from offering proceeds and $24.8 million of cash distributions to unitholders. The
decrease for the year ended December 31, 2007 is attributable to an increase in net distributions to
Anadarko.
Adjusted EBITDA. Adjusted EBITDA for the year ended December 31, 2008 and for the year ended
December 31, 2007 increased by $20.6 million and $44.6 million, respectively. The increase for the
year ended December 31, 2008 is primarily due to a $50.2 million increase in total revenues and a
$3.8 million increase in distributions from Fort Union, partially offset by a $22.4 million
increase in cost of product, a $4.0 million increase in operation and maintenance expenses and a
$6.0 million increase in general and administrative expenses, all of which are discussed above. The
increase for the year ended December 31, 2007 is primarily due to a $132.9 million increase in
total revenues and a $607,000 increase in distributions
68
from Fort Union, partially offset by a $70.5 million increase in cost of product, a $10.8 million
increase in operation and maintenance expenses, a $4.0 million increase in general and
administrative expenses and a $0.9 million increase in property and other taxes, all of which are
discussed above.
Capital requirements
Our business can be capital intensive, requiring significant investment to maintain and improve
existing facilities. We categorize capital expenditures as either:
|
|
|
maintenance capital expenditures, which include those expenditures required to maintain
the existing operating capacity and service capability of our assets, including the
replacement of system components and equipment that have suffered significant wear and
tear, become obsolete or approached the end of their useful lives, those expenditures
necessary to remain in compliance with regulatory or legal requirements or those
expenditures necessary to complete additional well connections to maintain existing system
volumes and related cash flows; or |
|
|
|
|
expansion capital expenditures, which include those expenditures incurred in order to
extend the useful lives of our assets, increase gathering,
processing, treating and transmission
throughput from current levels, reduce costs or increase revenues. |
Total capital expenditures for the years ended December 31, 2008, 2007 and 2006 were $36.9 million,
$54.3 million and $43.0 million, respectively. For 2007 and 2006, we did not differentiate between
maintenance and expansion capital expenditures. For the year ended December 31, 2008, expansion
capital expenditures represented approximately 53% of total capital expenditures. We estimate our
total capital expenditures, excluding acquisitions (if any), to be $27.0 million to $31.0 million
and our maintenance capital expenditures to be approximately half of
total capital expenditures for the twelve months
ending December 31, 2009. Our future expansion capital expenditures may vary significantly from
period to period based on the investment opportunities available to us, which are dependent, in
part, on the drilling activities of Anadarko and third-party producers. From time to time, for
projects with significant risk or capital exposure, we may secure indemnity provisions or
throughput agreements. We expect to fund future capital expenditures from cash flows generated from
our operations, interest income from our note receivable from Anadarko, borrowings under Anadarkos
credit facility, the issuance of additional partnership units or debt offerings.
Distributions
We expect to pay a minimum quarterly distribution of $0.30 per unit per full quarter, which equates
to approximately $17.0 million per full quarter, or approximately $68.1 million per full year,
based on the number of common, subordinated and general partner units outstanding as of December
31, 2008. We do not have a contractual obligation to pay distributions. On January 28, 2009, the
board of directors of our general partner declared a cash distribution to our unitholders of $0.30
per unit, which was paid on February 13, 2009 to unitholders of record at the close of business on
January 30, 2009. In addition, we paid cash distributions to our unitholders of $0.4582 per unit
during the year ended December 31, 2008. This amount represents a $0.30 per unit quarterly
distribution prorated for the 48-day period beginning on May 14, 2008 and ending on June 30, 2008,
or $0.1582 per unit, and a $0.30 per unit distribution for the quarter ended on September 30, 2008.
See Note 4Partnership Equity and Distributions of the notes to the consolidated financials statements included in Item
8Financial Statements and Supplementary Data in this Form 10-K.
Our borrowing capacity under Anadarkos credit facility
On March 4, 2008, Anadarko entered into a $1.3 billion credit facility under which we are a
co-borrower. This credit facility is available for borrowings and letters of credit and permits us
to borrow up to $100.0 million under the facility for general partnership purposes, including
acquisitions, but only to the extent that sufficient amounts remain unborrowed by Anadarko and its
other subsidiaries. At December 31, 2008, the full $100.0 million was available for borrowing by
us. The $1.3 billion credit facility expires in March 2013.
Interest on borrowings under the credit facility is calculated based on the election by the
borrower of 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 December 31, 2008, and the commitment fees on the facility are based on Anadarkos senior
unsecured long-term debt rating. Pursuant to the omnibus agreement, as a co-borrower under
Anadarkos credit facility, we are required to reimburse Anadarko for our allocable portion of
commitment fees (0.11% of our committed and available borrowing capacity, including our outstanding
balances) that Anadarko incurs under its credit facility, or up to $110,000
annually. Under the credit facility, we and Anadarko are required to comply with certain covenants,
including a financial
69
covenant that requires Anadarko to maintain a debt-to-capitalization ratio of
65% or less. As of December 31, 2008, we and Anadarko were in compliance with all covenants. Should
we or Anadarko fail to comply with any covenant in Anadarkos credit facility, we may not be
permitted to borrow thereunder. Anadarko is a guarantor of all borrowings under the credit
facility, including our borrowings. We are not a guarantor of Anadarkos borrowings under the
credit facility.
Our working capital facility
Concurrent with the closing of our initial public offering, we entered into a two-year, $30.0
million working capital facility with Anadarko as the lender. At December 31, 2008, no borrowings
were outstanding under the working capital facility. The facility is available exclusively to fund
working capital borrowings. Borrowings under the facility will bear interest at the same rate as
would apply to borrowings under the Anadarko credit facility described above. We pay a commitment
fee of 0.11% annually to Anadarko on the unused portion of the working capital facility, or up to
$33,000 annually.
We are required to reduce all borrowings under our 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.
Credit risk
We bear credit risk represented by our exposure to non-payment or non-performance by our customers,
including Anadarko. Generally, non-payment or non-performance results from a customers inability
to satisfy receivables for services rendered or volumes owed pursuant to gas imbalance agreements.
We examine the creditworthiness of third-party customers and may establish credit limits for
significant third-party customers.
We are dependent upon a single producer, Anadarko, for the majority of our natural gas volumes and
we do not maintain a credit limit with respect to Anadarko. Consequently, we are subject to the
risk of non-payment or late payment by Anadarko for gathering, treating and transmission fees and
for proceeds from the sale of natural gas, natural gas liquids and condensate to Anadarko.
We expect our exposure to concentrated risk of non-payment or non-performance to continue for as
long as we remain substantially dependent on Anadarko for our revenues. Additionally, we are
exposed to credit risk on the note receivable from Anadarko that was issued concurrent with the
closing of our initial public offering. We are also party to an omnibus agreement with Anadarko
under which Anadarko is required to indemnify us for certain environmental claims, losses arising
from rights-of-way claims, failures to obtain required consents or governmental permits and income
taxes. Finally, we entered into commodity price swap agreements with Anadarko in order to
substantially reduce our exposure to commodity price risk attributable to our percent-of-proceeds
contracts for the Hilight system and the Newcastle system and are subject to performance risk
thereunder.
If Anadarko becomes unable to perform under the terms of our gathering, processing and
transportation agreements, natural gas and NGL purchase agreements, its note payable to us, the
omnibus agreement, the services and secondment agreement or the commodity price swap agreements,
our ability to make distributions to our unitholders may be adversely impacted.
CONTRACTUAL OBLIGATIONS
Following is a summary of our obligations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
Note Payable |
|
|
|
|
|
|
Office |
|
|
Retirement |
|
|
to Anadarko |
|
|
|
|
|
|
Lease |
|
|
Obligations |
|
|
Principal |
|
|
Interest |
|
|
Total |
|
|
|
(in thousands) |
|
2009 |
|
$ |
149 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,000 |
|
|
$ |
7,149 |
|
2010 |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
7,000 |
|
|
|
7,009 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,119 |
|
|
|
5,119 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,119 |
|
|
|
5,119 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
175,000 |
|
|
|
5,119 |
|
|
|
180,119 |
|
Thereafter |
|
|
|
|
|
|
9,093 |
|
|
|
|
|
|
|
|
|
|
|
9,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
158 |
|
|
$ |
9,093 |
|
|
$ |
175,000 |
|
|
$ |
29,357 |
|
|
$ |
213,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office leases: Anadarko leases office space used exclusively by us and charges rental payments to
us. The amounts above represent the future minimum rent payments due under the office lease.
70
Asset retirement obligations: When assets are acquired or constructed, the initial estimated asset
retirement obligation is recognized in an amount equal to the net present value of the settlement
obligation, with an associated increase in properties and equipment. Revisions to estimated asset
retirement obligations can result from revisions to estimated inflation rates and discount rates,
escalating retirement costs and changes in the estimated timing of settlement. For additional
information see Note 10Asset Retirement Obligations of
the notes to the consolidated financial
statements under Item 8Financial Statements and
Supplementary Data of this Form 10-K.
Note payable to Anadarko: In connection with the Powder River acquisition, we entered into a
five-year, $175.0 million term loan agreement with Anadarko
which calls for interest at a fixed rate of 4.0% for the first two
years and a floating rate of interest at three-month LIBOR plus 150
basis points for the final three years.
Also see Items Affecting the Comparability of Our Financial Results for a discussion of contractual
obligations effective with the initial public offering or Powder
River acquisition, including the omnibus agreement, expenses
related to operating as a publicly traded partnership, the services and secondment agreement and
equity-based compensation plans.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of combined financial statements in accordance with accounting principles generally
accepted in the U.S. requires our management to make estimates and assumptions that affect the
amounts reported in the combined financial statements and the accompanying notes. Although these
estimates are based on managements best available knowledge of current and expected future events,
actual results may vary significantly from those estimates. Management considers an understanding
of our critical accounting policies and estimates to be essential to gaining a full understanding
of our combined financial results. For additional information concerning our accounting policies
not discussed below, see the notes to the consolidated financial statements included elsewhere in
this annual report on Form 10-K.
Depreciation
Depreciation expense is generally computed using the straight-line method over the estimated useful
life of the assets. Determination of depreciation expense requires judgment regarding the estimated
useful lives and salvage values of property, plant and equipment. As circumstances warrant,
depreciation estimates are reviewed to determine if any changes in the underlying assumptions are
necessary. The weighted average life of our long-lived assets is approximately 21 years. If the
depreciable lives of our assets were reduced by 10%, we estimate that annual depreciation expense
would increase by approximately $3.5 million, which would result in a corresponding reduction in
our operating income.
Impairment of Assets
Each reporting period, management assesses whether facts and circumstances indicate that the
carrying amounts of property, plant and equipment may not be recoverable from expected undiscounted
cash flows from the use and eventual disposition of an asset. If the carrying amount of the asset
is not expected to be recoverable from future undiscounted cash flows, an impairment may be
recognized. Any impairment is measured as the excess of the carrying amount of the asset over its
estimated fair value.
In assessing long-lived assets for impairment, management evaluates changes in our business and
economic conditions and their implications for recoverability of the assets carrying amounts.
Since a significant portion of our revenues arises from gathering and transporting natural gas
production from Anadarko-operated properties, significant downward revisions in reserve estimates
or changes in future development plans by Anadarko, to the extent they affect our operations, may
necessitate assessment of the carrying amount of our affected assets for recoverability. Such
assessment requires application of judgment regarding the use and ultimate disposition of the
asset, long-range revenue and expense estimates, global and regional economic conditions, including
commodity prices and drilling activity by our customers, as well as other factors affecting
estimated future net cash flows. The measure of impairment to be recognized, if any, depends upon
managements estimate of the assets fair value, which may be determined based on the estimates of
future net cash flows or values at which similar assets were transferred in the market in recent
transactions, if such data is available. For the periods presented, we believe that no facts were
present that indicate the carrying amount of assets may not be recoverable. However, given the
degree of judgment about highly uncertain matters involved in assessing our key assets for
impairment, it is reasonably possible that such assessments in future periods would have material
effects on our financial conditions and results of operations.
71
Fair Value
Management estimates fair value in performing impairment tests for long-lived assets and goodwill
as well as for the initial measurement of asset retirement obligations. When management is required to
measure fair value, and there is not a market observable price for the asset or liability, or a
market observable price for a similar asset or liability, management generally utilizes an income
or multiples valuation approach. The income approach utilizes managements best assumptions
regarding expectations of projected cash flows, and discounts the expected cash flows using a
commensurate risk adjusted discount rate. Such evaluations involve a significant amount of
judgment, since the results are based on expected future events or conditions, such as sales
prices; estimates of future throughput; capital and operating costs and the timing thereof;
economic and regulatory climates and other factors. A multiples approach utilizes managements best
assumptions regarding expectations of projected EBITDA and multiple of that EBITDA that a buyer
would pay to acquire an asset. Managements estimates of future net cash flows and EBITDA are
inherently imprecise because they reflect managements expectation of future conditions that are
often outside of managements control. However, assumptions used reflect a market participants
view of long-term prices, costs and other factors, and are consistent with assumptions used in the
Partnerships business plans and investment decisions.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have off-balance sheet arrangements other than operating leases. The information
pertaining to operating leases required for this item is provided in Note 13Commitments and
Contingencies included in the notes to the consolidated financial
statements under Item 8Financial
Statements and Supplementary Data of this Form 10-K, which information is incorporated by
reference.
RECENT ACCOUNTING DEVELOPMENTS
The information required for this item is provided in Note 2Summary of Significant Accounting
Policies Recently issued accounting standards not yet adopted
included in the notes to the
consolidated financial statements under Item 8 Financial
Statements and Supplementary Data of this Form 10-K, which information is incorporated
by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
We bear a limited degree of commodity price risk with respect to certain of our gathering
contracts. Specifically, pursuant to certain of our contracts, we retain and sell condensate that
is recovered during the gathering of natural gas. As part of this arrangement, we are required to
provide a thermally equivalent volume of natural gas or the cash equivalent thereof to the shipper.
Thus, our revenues for this portion of our contractual arrangement are based on the price received
for the condensate and our costs for this portion of our contractual arrangement depend on the
price of natural gas. Condensate historically sells at a price representing a slight discount to
the price of NYMEX West Texas Intermediate crude oil.
In addition, certain of our processing services are provided under percent-of-proceeds agreements
in which Anadarko is typically responsible for the marketing of the natural gas and NGLs. Under
these agreements, we receive a specified percent of the net proceeds from the sale of natural gas
and NGLs. To mitigate our exposure to changes in commodity prices on these processing agreements,
we entered into commodity price swap agreements with Anadarko with fixed commodity prices that
extend through December 31, 2010. For additional information on the commodity price swap
agreements, see Note 6Transactions with Affiliates
included in the notes to the consolidated
financial statements under Item 8 Financial
Statements and Supplementary Data of this Form 10-K.
We consider our exposure to commodity price risk associated with the above-described arrangements
to be minimal given the relatively small amount of our operating income generated by drip
condensate sales and the existence of the commodity price swap agreements with Anadarko. For the
twelve months ended December 31, 2008, a 10% change in the trading margin between drip condensate
and natural gas would have resulted in an approximate $1.1 million, or 2%, change in operating
income for the period. A 10% decrease in natural gas and NGLs prices for the twelve months ended
December 31, 2008 would have resulted in an approximate $3.0 million, or 4%, decrease in operating
income as a result of our percent-of-proceeds contracts; however, this variability attributable to
commodity prices has been substantially mitigated through our commodity price swap agreements with
Anadarko. For additional information on the commodity price swap agreements, see
Note 6Transactions with Affiliates included in the notes
to the consolidated financial statements
under Item 8 Financial Statements and Supplementary
Data of this Form 10-K.
72
We also bear a limited degree of commodity price risk with respect to settlement of our natural gas
imbalances that arise from differences in gas volumes received into our systems and gas volumes
delivered by us to customers. Natural gas volumes owed to or by us that are subject to monthly cash
settlement are valued according to the terms of the contract as of the balance sheet dates, and
generally reflect market index prices. Other natural gas volumes owed to or by us are valued at our
weighted average cost of natural gas as of the balance sheet dates and are settled in-kind. Our
exposure to the impact of changes in commodity prices on outstanding imbalances depends on the
timing of settlement of the imbalances.
Interest Rate Risk
Interest rates during the periods discussed above were low compared to rates over the last 50
years. If interest rates rise, our future financing costs will increase. As of December 31, 2008,
we owed $175.0 million to Anadarko under our five-year term loan we entered into in
connection with the Powder River acquisition and had $100.0 million of credit available for
borrowing under Anadarkos five-year credit facility in addition to $30.0 million available under
our two-year working capital facility with Anadarko. Our $175.0 million term loan agreement with
Anadarko calls for interest at a fixed rate of 4.0% for the first two years and a floating rate of
interest at 3-month LIBOR plus 150 basis points for the final three years. Interest on borrowings
under Anadarkos credit facility is calculated based on the election by the borrower of 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 December 31,
2008, is based on Anadarkos senior unsecured long-term debt rating. Borrowings under our working
capital facility bear interest at the same rate that would apply to borrowings under the Anadarko
credit facility. We may incur additional debt in the future, either through accessing our working
capital facility with Anadarko, our $100.0 million borrowing capacity under Anadarkos existing
credit facility or other financing sources, including commercial bank borrowings or debt issuances.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, together with the report of our independent
registered public accounting firm, begin on page F-1 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
Item 9A(T). Disclosure Controls and Procedures
This annual report does not include managements assessment regarding internal control over
financial reporting or an attestation report of our independent registered public
accounting firm due to a transition period established by rules of the Securities and
Exchange Commission for newly public companies.
Item 9B. Other Information
Not applicable
73
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Management of Western Gas Partners, LP
As a limited partnership, we have no directors or officers. Instead, Western Gas Holdings, LLC, our
general partner, manages our operations and activities. Our general partner is not elected by our
unitholders and is not subject to re-election in the future. The directors of our general partner
oversee our operations. Unitholders are not entitled to elect the directors of our general partner
or directly or indirectly participate in our management or operations. However, our general partner
owes a fiduciary duty to our unitholders, which duty is defined and described in our partnership
agreement. Our general partner will be liable, as general partner, for all of our debts (to the
extent not paid from our assets), except for indebtedness or other obligations that are made
specifically nonrecourse to it. Our general partner, therefore, may cause us to incur indebtedness
or other obligations that are nonrecourse to it.
Our general partners board of directors has nine directors, four of whom are independent as
defined under the independence standards established by the New York Stock Exchange, or NYSE, and
the Securities Exchange Act of 1934, or the Exchange Act. Our general partners board of directors
has affirmatively determined that Messrs. Milton Carroll, Anthony R. Chase, James R. Crane and
David J. Tudor are independent as described in the rules of the NYSE and the Exchange Act. The NYSE
does not require a listed publicly traded partnership, such as ours, to have a majority of
independent directors on the board of directors of our general partner or to establish a
compensation committee or a nominating committee.
The executive officers of our general partner manage and conduct our day-to-day operations. The
executive officers of our general partner allocate their time between managing our business and
affairs and the business and affairs of Anadarko. The executive officers of our general partner may
face a conflict regarding the allocation of their time between our business and the other business
interests of Anadarko. The officers of our general partner generally do not devote all of their
time to our business, although we expect the amount of time that they devote may increase or
decrease in future periods as our business continues to develop. The officers of our general
partner and other Anadarko employees operate our business and provide us with general and
administrative services pursuant to the omnibus agreement and the services and secondment agreement
described in Item 13Certain Relationships and Related Party Transactions, and Director
Independence. We reimburse Anadarko for allocated expenses of operational personnel who perform
services for our benefit, and for certain direct expenses.
Directors and Executive Officers
The following table sets forth information with respect to the directors and executive officers of
our general partner as of March 3, 2009. Directors are appointed for a term of one year.
|
|
|
|
|
Name |
|
Age |
|
Position with Western Gas Holdings, LLC |
|
|
|
|
|
Robert G. Gwin |
|
45 |
|
President, Chief Executive Officer and Director |
Michael C. Pearl |
|
37 |
|
Senior Vice President and Chief Financial Officer |
Danny J. Rea |
|
50 |
|
Senior Vice President, Chief Operating Officer and Director |
Amanda M. McMillian |
|
36 |
|
Vice President, General Counsel and Corporate Secretary |
Jeremy M. Smith |
|
36 |
|
Vice President and Treasurer |
R.A. Walker |
|
52 |
|
Chairman of the Board and Director |
Milton Carroll |
|
58 |
|
Director |
Anthony R. Chase |
|
53 |
|
Director |
James R. Crane |
|
55 |
|
Director |
Charles A. Meloy* |
|
49 |
|
Director |
Robert K. Reeves |
|
51 |
|
Director |
David J. Tudor |
|
49 |
|
Director |
|
|
|
* |
|
Replaced Karl F. Kurz as a director effective February 25, 2009. |
Our directors hold office until their successors shall have been duly elected and qualified or
until the earlier of their death, resignation, removal or disqualification. Officers serve at the
discretion of the board of directors. There are no family relationships among any of our directors
or executive officers.
74
Robert G. Gwin has served as President and Chief Executive Officer and as a director of our general
partner since August 2007. He has served as Senior Vice President, Finance and Chief Financial
Officer of Anadarko since March 2009, and prior to that position had served as Senior Vice
President of Anadarko since March 2008. He previously served as Vice President, Finance and
Treasurer of Anadarko since January 2006. Prior to joining Anadarko, he served as Chief Executive
Officer of Community Broadband Ventures, LP from November 2004 to January 2006. Prior to this
position, he was with Prosoft Learning Corporation, serving as Chairman and Chief Executive Officer
from November 2002 to November 2004 and Chief Financial Officer from 2000 to November 2002. In
April 2006, to facilitate its acquisition by another company, Prosoft filed a prepackaged voluntary
plan of reorganization. Previously, Mr. Gwin spent 10 years at Prudential Capital Group in merchant
banking roles of increasing responsibility, including serving as Managing Director with
responsibility for the firms energy investments worldwide. Mr. Gwin holds a Bachelor of Science
degree from the University of Southern California and a Master of Business Administration degree
from the Fuqua School of Business at Duke University, and he is a Chartered Financial Analyst.
Michael C. Pearl has served as Senior Vice President and Chief Financial Officer of our general
partner since August 2007 and as Director, Accounting of Anadarko since December 2008. Prior to
this position, he served as Director, Corporate Tax of Anadarko from August 2006 to December 2008
and corporate tax manager from September 2004 to August 2006. Prior to his tenure at Anadarko, Mr.
Pearl joined Ernst & Young LLP in 1995, where he held positions of increasing responsibility,
including senior manager, and advised multinational energy companies on structured acquisitions,
divestitures, and financings, including advising on partnership taxation and accounting matters. He
holds a Bachelor of Business Administration degree and a Master of Science degree in Accounting
from Texas A&M University and is a Certified Public Accountant.
Danny J. Rea has served as Senior Vice President and Chief Operating Officer and as a director of
our general partner since August 2007 and as Vice President, Midstream of Anadarko since May 2007.
Previously, Mr. Rea served as Manager, Midstream Services from May 2004 to May 2007 and Manager,
Gas Field Services from August 2000 to May 2007. Mr. Rea joined Anadarko as an engineer in 1981 and
has held positions of increasing responsibility over his 27 years with the Company. He holds a
Bachelor of Science degree in Petroleum Engineering from Louisiana Tech University, and a Master of
Business Administration degree from the University of Houston. He currently serves on the board of
directors for the Wyoming Pipeline Authority and is a member of the Gas Processors Association and
the Society of Petroleum Engineers.
Amanda M. McMillian has served as Vice President, General Counsel and Corporate Secretary of our
general partner since January 2008 and as Senior Counsel of Anadarko since January 2008. She joined
Anadarko as Counsel in December 2004. Prior to joining Anadarko, she practiced corporate and
securities law at the law firm of Akin Gump Strauss Hauer & Feld LLP. She holds a Bachelor of Arts
degree from Southwestern University and Master of Arts and Juris Doctor degrees from Duke
University.
Jeremy M. Smith has served as Vice President and Treasurer of our general partner since August 2007
and as Assistant Treasurer, Corporate Finance of Anadarko since July 2006. Prior to joining
Anadarko, he served as Assistant Treasurer to Plains Exploration & Production Company from June
2003 to June 2006 and as Assistant Treasurer of 3TEC Energy Corporation from May 2000 until its
sale to Plains Exploration & Production Company in June 2003. Mr. Smith holds a Bachelor of Arts
degree in Economics from Rice University, a Master of Science degree in Accounting from Texas A&M
University and a Master of Business Administration degree from Rice University, and he is a
Chartered Financial Analyst.
R.A. Walker has served as non-executive Chairman of the Board and as a director of our general
partner since August 2007. He has served as Chief Operating Officer of Anadarko since March 2009,
and prior to that position had served as Senior Vice President, Finance and Chief Financial Officer
of Anadarko since 2005. Prior to joining Anadarko, he was a Managing Director for the Global Energy
Group of UBS Investment Bank from 2003 to 2005 and was President, Chief Financial Officer and a
director of 3TEC Energy Corporation from 2000, until its sale to Plains Exploration &
Production Company in June 2003. From 1987 to 2000, he worked for Prudential Capital Group in a
variety of merchant banking positions, including Senior Managing Director and co-head of Prudential
Capital Group at the time of his departure. Mr. Walker has served as a director of Temple-Inland,
Inc. since November 2008, and has served on the boards of directors of
numerous publicly traded companies, including TEPPCO Partners, L.P. (a NYSE-listed publicly traded
partnership) where he served as chairman of the audit committee. Mr. Walker holds Bachelor of
Science and Master of Business Administration degrees from the University of Tulsa.
Milton Carroll has served as a director of our general partner and as Chairman of the special
committee of the board of directors since April 2008. Mr. Carroll currently serves as Chairman of
Houston-based CenterPoint Energy, Inc., where he
75
has been a director since 1992. Mr. Carroll
is
Chairman and founder of Instrument Products, Inc., an oil-tool manufacturing
company in Houston, Texas. He also serves as Chairman of Health Care Services Corporation (a
Chicago-based company operating through its Blue Cross and Blue Shield divisions in Illinois,
Texas, Oklahoma and New Mexico) and is a director of Halliburton Company. Mr. Carroll holds a
Bachelor of Science degree in Industrial Technology from Texas Southern University.
Anthony R. Chase has served as a director of our general partner and as a member of the special and
audit committees of the board of directors since April 2008. Since January 2009, Mr. Chase has
served as Executive Vice President of Crest Investment Company, a Houston-based private equity firm
that develops business opportunities worldwide. Prior to that position, he had most recently served
as the Chairman and Chief Executive Officer of ChaseCom, a global customer relationship management
and staffing services company until its sale in 2007 to AT&T. Mr. Chase has also been a Professor
of Law at the University of Houston since 1991. Mr. Chase currently serves on the board of
directors of Cornell Companies. From July 2004 to July 2008, he served as a director of the
Federal Reserve Bank of Dallas, and also served as its Deputy Chairman from 2006 until his departure in
July 2008. Mr.
Chase holds a Bachelor of Arts, Masters of Business Administration and Juris Doctor degrees from
Harvard University.
James R. Crane has served as a director of our general partner and as a member of the special and
audit committees of the board of directors since April 2008. Mr. Crane is currently Chairman and
Chief Executive Officer of Crane Capital Group. He has also served as Chairman of the Board
of Crane Worldwide Logistics, a Houston-based single-source provider of global
transportation and logistics services, since August 2008.
Prior to that time, he served as Founder, Chairman and Chief Executive
Officer of EGL, Inc., a NASDAQ-listed global transportation, supply chain management and
information services company based in Houston, Texas, from 1984 until its sale in August 2007. Mr.
Crane holds a Bachelor of Science degree in Industrial Safety from the University of Central
Missouri.
Charles A. Meloy has served as a director of our general partner since February 2009, and as
Senior Vice President, Worldwide Operations of Anadarko since December 2006. Before joining
Anadarko, he served as Vice President of Exploration and Production at Kerr-McGee Corporation,
prior to its acquisition by Anadarko. At Kerr-McGee, Mr. Meloy was Vice President of Gulf of Mexico
exploration, production and development from 2004 to 2005, Vice President and Managing Director of
North Sea operations from 2002 to 2004, and held several other deepwater Gulf of Mexico management
positions beginning in 1999. Earlier in his career, Mr. Meloy held various planning, operations,
deepwater and reservoir engineering positions with Oryx Energy Company and its predecessor, Sun Oil
Company. He earned a bachelors degree in chemical engineering from Texas A&M University and is a
member of the Society of Petroleum Engineers and Texas Professional Engineers.
Robert K. Reeves has served as a director of our general partner since August 2007 and as Senior
Vice President, General Counsel and Chief Administrative Officer of Anadarko since February 2007.
He previously served as Senior Vice President, Corporate Affairs & Law and Chief Governance Officer
beginning in 2004. He has also served as a director of Key Energy Services, Inc., a publicly traded
oil field services company, since October 2007. Prior to joining Anadarko, he served as Executive
Vice President, Administration and General Counsel of North Sea New Ventures from 2003 to 2004 and
as Executive Vice President, General Counsel and Secretary of Ocean Energy, Inc. and its
predecessor companies from 1997 to 2003. Mr. Reeves holds a Bachelor of Science degree in Business
Administration and a Juris Doctor degree from Louisiana State University.
David J. Tudor has served as a director of our general partner and as Chairman of the audit
committee and a member of the special committee of the board of directors since April 2008. Since
1999, Mr. Tudor has been the President and Chief Executive Officer of ACES Power Marketing, an
Indianapolis-based commodity risk management company owned by 16 Generation and Transmission
Cooperatives throughout the United States. Prior to joining ACES Power Marketing, Mr. Tudor was the
Executive Vice President & Chief Operating Officer of PG&E Energy Trading, where he managed
commercial operations in the United States and Canada. He also currently serves as a director of
Wabash Valley Power Associations Board Risk Oversight Committee. Mr. Tudor holds a Bachelor of
Science degree in Accounting from David Lipscomb University.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our general partners board of directors and executive
officers, and persons who own more than 10 percent of a registered class of our equity securities,
to file with the Securities Exchange Commission, or the SEC, and any exchange or other system on
which such securities are traded or quoted, initial reports of ownership and reports of changes in
ownership of our common units and other equity securities. Officers, directors and greater than 10
percent unitholders are required by the SECs regulations to furnish to us and any exchange or
other system on which such securities are traded or quoted with copies of all Section 16(a) forms
they filed with the SEC.
76
To our knowledge, based solely on a review of the copies of such reports furnished to us and
written representations that no other reports were required, we believe that all reporting
obligations our general partners officers, directors and greater than 10 percent unitholders under
Section 16(a) were satisfied during the year ended December 31, 2008.
Reimbursement of Expenses of Our General Partner and its Affiliates
Our general partner does not receive any management fee or other compensation for its management of
our partnership under the omnibus agreement, as amended, the services and secondment agreement or
otherwise. Under the omnibus agreement, our reimbursement to Anadarko for certain general and
administrative expenses it allocates to us is capped at $6.65 million annually through December 31,
2009, subject to adjustments to reflect changes in the Consumer Price Index and, with the
concurrence of the special committee of our general partners board of directors, to reflect
expansions of our operations through the acquisition or construction of new assets or businesses.
Thereafter, our general partner will determine the general and administrative expenses to be
reimbursed by us in accordance with our partnership agreement. The cap contained in the omnibus
agreement does not apply to incremental general and administrative expenses we expect to incur or
be allocated to us as a result of being a publicly traded partnership. Please read Item 13Certain
Relationships and Related Party Transactions, and Director Independence.
Board Committees
The board of directors of our general partner has two standing committees: the audit committee and
the special committee.
Audit Committee
The audit committee is comprised of three independent directors, Messrs. Tudor (chairperson), Chase
and Crane, each of whom is able to understand fundamental financial statements and at least one of
whom has past experience in accounting or related financial management experience. The board has
determined that each member of the audit committee is independent under the NYSE listing standards
and the Exchange Act. In making the independence determination, the board considered the
requirements of the NYSE and our Code of Business Conduct and Ethics. The audit committee held
three meetings in 2008.
Mr. Tudor has been designated by the board of directors of our general partner as the audit
committee financial expert meeting the requirements promulgated by the SEC based upon his
education and employment experience as more fully detailed in Mr. Tudors biography set forth
above.
The audit committee assists the board of directors in its oversight of the integrity of our
combined financial statements and our compliance with legal and regulatory requirements and
partnership policies and controls. The audit committee has the sole authority to, among other
things, (1) retain and terminate our independent registered public accounting firm, (2) approve all
auditing services and related fees and the terms thereof performed by our independent registered
public accounting firm, and (3) establish policies and procedures for the pre-approval of all
audit, audit-related, non-audit services and tax services to be rendered by our independent
registered public accounting firm. The audit committee is also responsible for confirming the
independence and objectivity of our independent registered public accounting firm. Our independent
registered public accounting firm has been given unrestricted access to the audit committee and to
our management, as necessary.
Special Committee
The special committee is comprised of four independent directors, Messrs. Carroll (Chairperson),
Chase, Crane and Tudor. The special committee reviews specific matters that the board believes may
involve conflicts of interest (including certain transactions with Anadarko). The special committee
will determine, as set forth in the partnership agreement, if the resolution of the conflict of
interest is fair and reasonable to us. The members of the special committee are not officers or
employees of our general partner or directors, officers, or employees of its affiliates, including
Anadarko. Our partnership agreement provides that any matters approved by the special committee
will be conclusively deemed to be fair and reasonable to us, approved by all of our partners and
not a breach by our general partner of any duties it may owe us or our unitholders. The special
committee held five meetings in 2008.
Meeting of Non-Management Directors and Communications with Directors
At each quarterly meeting of our general partners board of directors, all of our independent
directors meet in an executive session without management participation or participation by
non-independent directors. Mr. Carroll, the chairperson of the special committee, presides over
these executive sessions.
77
The general partners board of directors welcomes questions or comments about the Partnership
and its operations. Unitholders or interested parties may contact the board of directors, including
any individual director, at boardofdirectors@westerngas.com or at the following address and fax
number; Name of the Director(s), c/o Corporate Secretary, Western Gas Partners, LP, 1201 Lake
Robbins Drive, The Woodlands, Texas 77380, (832) 636-6001.
Code of Ethics, Corporate Governance Guidelines and Board Committee Charters
Our general partner has adopted a Code of Ethics For Chief Executive Officer and Senior Financial
Officers, or the Code of Ethics, which applies to our general partners Chief Executive Officer,
Chief Financial Officer, Chief Accounting Officer, Controller and all other senior financial and
accounting officers of our general partner. We will disclose any amendment to, or waiver from, any
provision of the Code of Ethics in a current report on Form 8-K. Our general partner has also
adopted Corporate Governance Guidelines that outline the important policies and practices regarding
our governance and a Code of Business Conduct and Ethics applicable to all employees of Anadarko or
affiliates of Anadarko who perform services for us and our general partner.
We make available free of charge, within the Investor Relations section of our website at
www.westerngas.com/page/ir-governance/, and in print to any unitholder who so requests, the Code of
Ethics, the Corporate Governance Guidelines, the Code of Business Conduct and Ethics, our audit
committee charter and our special committee charter. Requests for print copies may be directed to
investors@westerngas.com or to: Investor Relations, Western Gas Partners LP, 1201 Lake Robbins
Drive, The Woodlands, Texas 77380, or telephone (832) 636-6000. We will post on our Internet
website all waivers to or amendments of the Code of Ethics, which are required to be disclosed by
applicable law and the NYSEs Corporate Governance Listing Standards. The information contained on,
or connected to, our Internet website is not incorporated by reference into this Annual Report on
Form 10-K and should not be considered part of this or any other report that we file with or
furnish to the SEC.
Item 11. Executive Compensation
Compensation Discussion and Analysis
Overview
We do not directly employ any of the persons responsible for managing our business, and we do not
have a compensation committee of the board of directors. Western Gas Holdings, LLC, our general
partner, manages our operations and activities, and its board of directors and officers make
compensation decisions on our behalf.
Some of the officers of our general partner also serve as officers of Anadarko. The compensation
(other than the long-term incentive plan benefits described below) of Anadarkos employees that
perform services on our behalf, including our executive officers, is approved by Anadarkos
management. Awards under our long-term incentive plan are recommended by Anadarkos management and
approved by the board of directors of our general partner. Our reimbursement of Anadarko for the
compensation of executive officers is governed by, and subject to the limitations contained in, the
omnibus agreement and is based on Anadarkos methodology used for allocating general and
administrative expenses to us. Under the omnibus agreement, as amended, our reimbursement of
certain general and administrative expenses is capped at $6.65 million annually through December
31, 2009, subject to adjustment to reflect changes in the Consumer Price Index and, with the
concurrence of the special committee of our general partners board of directors, to reflect
expansions of our operations through the acquisition or construction of new assets or businesses.
Thereafter, our general partner will determine the general and administrative expenses to be
reimbursed by us in accordance with our partnership agreement. The cap contained in the omnibus
agreement does not apply to incremental general and administrative expenses we incur or are
allocated to us as a result of being a publicly traded partnership. Please read Item 13Certain
relationships and related party transactionsOmnibus agreement.
The most highly compensated executive officers of our general partner for 2008 were Robert G. Gwin
(the principal executive officer), Michael C. Pearl (the principal financial officer and principal
accounting officer), Danny J. Rea (the principal operating officer), Amanda M. McMillian and Jeremy
M. Smith (collectively, the named executive officers). Compensation paid or awarded by us in 2008
with respect to the named executive officers reflects only the portion of compensation expense that
is allocated to us pursuant to Anadarkos allocation methodology and subject to the terms of the
omnibus agreement. Anadarko has the ultimate decision-making authority with respect to the total
compensation of the
named executive officers and, subject to the terms of the omnibus agreement, the portion of such
compensation that is
78
allocated to us pursuant to Anadarkos allocation methodology. The following
discussion relating to compensation paid by Anadarko is based on information provided to us by
Anadarko and does not purport to be a complete discussion and analysis of Anadarkos executive
compensation philosophy and practices. With the exception of the independent director grants under
our long-term incentive plan and awards made under the Western Gas Holdings, LLC Equity Incentive
Plan, the elements of compensation discussed below (and Anadarkos decisions with respect to the
levels of such compensation), are not subject to approvals by the board of directors of our general
partner, including the audit or special committee thereof. Awards under our long-term incentive
plan will be made by the board of directors of our general partner.
Anadarkos executive compensation program design, principles and process
Anadarkos executive compensation program is designed to adhere to the following philosophy and
design principles:
Anadarkos Compensation Committee believes that:
|
|
|
executive interests should be aligned with stockholder interests; |
|
|
|
|
executive compensation should be structured to provide appropriate incentive and
reasonable reward for the contributions made and performance achieved; and |
|
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|
|
a competitive compensation package must be provided to attract and retain experienced,
talented executives to ensure Anadarkos success. |
In support of this philosophy, Anadarkos executive compensation programs are designed to adhere to
the following principles:
|
|
|
a majority of total executive compensation should be in the form of equity-based
compensation; |
|
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|
|
a meaningful portion of total executive compensation should be tied directly to the
achievement of goals and objectives related to Anadarkos targeted financial and operating
performance; |
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|
a significant component of performance-based compensation should be tied to long-term
relative performance measures that emphasize an increase in stockholder value over time; |
|
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|
performance-based compensation opportunities should not encourage excessive risk taking
that may compromise Anadarkos value or its stockholders; |
|
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|
executives should maintain significant levels of equity ownership; |
|
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|
|
to encourage retention, a substantial portion of compensation should be forfeitable by
the executive upon voluntary termination; |
|
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|
|
total compensation opportunities should be reflective of each executive officers role,
skills, experience level and individual contribution to the organization; and |
|
|
|
|
our executives should be motivated to contribute as team members to Anadarkos overall
success, as opposed to merely achieving specific individual objectives. |
Anadarko establishes compensation levels for each executive officer, which are generally targeted
between the 50th and 75th percentiles of Anadarkos industry peer group. In setting compensation
levels of each executive officer, Anadarko considers individual experience, individual performance,
internal equity, development and/or succession status, and other individual or organizational
circumstances. In the case of our named executive officers, Anadarko takes into account the
additional duties, as applicable, our executive officers assume in connection with their roles as
officers of our general partner.
With respect to compensation objectives and decisions regarding the named executive officers for
2008, Anadarkos management reviewed market data for determining relevant compensation levels and
compensation program elements. In addition, Anadarkos management reviewed and, in certain cases,
participated in, various relevant compensation surveys and consulted with compensation consultants
with respect to determining 2008 compensation for our named executive officers. All compensation
determinations are discretionary and, as noted above, subject to Anadarkos decision-making
authority.
79
Elements of compensation
The primary elements of Anadarkos compensation program are a combination of annual cash and
long-term equity-based compensation. For 2008, the principal elements of compensation for the named
executive officers are as follows:
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base salary; |
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annual cash incentives; |
|
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|
equity-based compensation, which includes equity-based
compensation under Anadarkos 1999
Stock Incentive Plan, Anadarkos 2008 Omnibus Incentive Compensation Plan, or the Omnibus
Plan, the Western Gas Partners, LP 2008 Long-Term Incentive Plan, and the Western Gas
Holdings, LLC Equity Incentive Plan; and |
|
|
|
|
Anadarkos other benefits, including welfare and retirement benefits, severance benefits
and change of control benefits, plus other benefits on the same basis as other eligible
Anadarko employees. |
Base Salary. Anadarkos management establishes base salaries to provide a fixed level of income
for our named executive officers for their level of responsibility (which may or may not be related
to our business), their relative expertise and experience, and in some cases their potential for
advancement. As discussed above, a portion of the base salaries of
our named executive officers is to
be allocated to us based on Anadarkos methodology used for allocating general and administrative
expenses, subject to the limitations in the omnibus agreement.
Annual Cash Incentives (Bonuses). Anadarkos management awarded annual cash awards to our named
executive officers in 2009 under the 2008 Anadarkos annual incentive program, or AIP, which is
part of Anadarkos Omnibus Plan. Annual cash incentive awards are used by Anadarko to motivate and
reward executives for the achievement of Anadarko objectives aligned with value creation and/or
recognize individual contributions to Anadarkos performance. The annual incentive program puts a
portion of an executives compensation at risk by linking potential annual compensation to
Anadarkos achievement of specific performance metrics during the year related to operational,
financial and safety measures internal to Anadarko. The overall funding for Anadarkos annual
incentive program is capped at 200% of target. Executives may receive up to 200% of their
individual bonus target if Anadarko significantly exceeds the specified performance metrics and,
conversely, no bonus is paid if Anadarko does not achieve a minimum threshold level of performance.
For those named executive officers who are also officers of Anadarko, actual bonus awards were
determined by the compensation and benefits committee, or compensation committee, of Anadarkos
board of directors according to Anadarkos, and each officers contribution toward, achievement
against the established performance metrics. The bonus targets are intended to provide a designated
level of compensation opportunity when Anadarko and the officers achieve the specified performance
metrics as approved by Anadarkos compensation committee.
The portion of any annual cash awards allocable to us is based on Anadarkos methodology used for
allocating general and administrative expenses, subject to the limitations established in the
omnibus agreement. Anadarkos general policy is to pay these awards during the first quarter of
each calendar year for the prior years performance.
Long-Term Incentive Awards Under Anadarkos 2008 Omnibus Incentive Compensation Plan. Anadarko
periodically makes equity-based awards under its Omnibus Plan, to align the interests of its
executive officers with those of Anadarko shareholders by emphasizing the long-term growth in
Anadarkos value. For 2008, the annual equity awards consisted of a combination of (1) stock
options, (2) time-based restricted stock and restricted stock units, and/or (3) performance unit
awards. This award structure is intended to provide a combination of equity-based vehicles that is
performance-based in absolute and relative terms, while also encouraging retention.
Our Long-Term Incentive Plan. Our general partner has adopted the Western Gas Partners, LP 2008
Long-Term Incentive Plan for the employees and directors of our general partner and the employees
of its affiliates, including Anadarko, who perform services for us. The long-term incentive plan
provides for the grant of unit awards, restricted units, phantom units, unit options, unit
appreciation rights, distribution equivalent rights and substitute awards. For a more detailed
description of this plan, please read Long-term incentive plan. Any equity-based awards to our
executive officers and the directors of our general partner are intended to align their long-term
interests with those of our unitholders. Currently, only the non-management directors of our
general partner hold grants awarded under this plan.
Our General Partners Amended and Restated Equity Incentive Plan. Our general partner has adopted
the Western Gas Holdings, LLC Amended and Restated Equity Incentive Plan for the executive officers
of our general partner. The awards of unit appreciation rights, unit value rights and distribution
equivalent rights made under this plan are designed to provide
80
incentive compensation to encourage superior performance. For a description of this plan, please
read, Amended and Restated Western Gas Holdings, LLC Equity Incentive Plan.
Other Benefits. In addition to the compensation discussed above, Anadarko also provides other
benefits to the named executive officers who are also executive officers of Anadarko, including:
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retirement benefits to match competitive practices in Anadarkos industry, including the
Anadarko Employee Savings Plan, Anadarkos Savings Restoration Plan, and the Anadarko
Retirement Plan and Retirement Restoration Plan; |
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severance benefits under the Anadarko Severance Plan or the Anadarko Officer Severance
Plan, as applicable; |
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certain change of control benefits under key employee change of control contracts; |
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director and officer indemnification agreements; |
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a limited number of perquisites, including financial counseling, tax preparation and
estate planning, an executive physical program, management disability insurance, and
personal excess liability insurance; and |
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|
benefits including medical, dental, vision, flexible spending accounts, paid time off,
life insurance and disability coverage, which are also provided to all other eligible
U.S.-based Anadarko employees. |
For a more detailed summary of Anadarkos executive compensation program and the benefits provided
thereunder, please read Compensation Discussion and Analysis in Anadarkos proxy statement for
its annual meeting of stockholders, which is expected to be filed with the SEC no later than April
9, 2009.
Role of executive officers in executive compensation
Anadarkos compensation committee determines the compensation (other than the long-term incentive
plan benefits described above) payable to our named executive
officers who are also senior
executive officers of Anadarko and Anadarkos management determines the compensation for each of our
other named executive officers. The board of directors of our general partner determines
compensation for the independent, non-management directors of our general partners board of
directors, as well as any grants made under our long-term incentive plan and its equity incentive
plan.
Compensation mix
We believe that the mix of base salary, cash awards, awards under Anadarkos stock incentive plan,
our long-term incentive plan and our general partners equity incentive plan, and other
compensation fit Anadarkos and our overall compensation objectives. We believe this mix of
compensation provides competitive compensation opportunities to align and drive employee
performance in support of Anadarkos business strategies, as well as our own, and to attract,
motivate and retain high-quality talent with the skills and competencies required by Anadarko and
us.
WESTERN GAS PARTNERS, LP 2008 LONG-TERM INCENTIVE PLAN
General
In April 2008, our general partner adopted the Western Gas Partners, LP 2008 Long-Term Incentive
Plan, which we refer to as the LTIP, for employees and directors of our general partner and its
affiliates, including Anadarko, who perform services for us. The summary of the LTIP contained
herein does not purport to be complete and is qualified in its entirety by reference to the LTIP.
The LTIP provides for the grant of unit awards, restricted units, phantom units, unit options, unit
appreciation rights, distribution equivalent rights and substitute awards. Subject to adjustment
for certain events, an aggregate of 2,250,000 common units may be delivered pursuant to awards
under the LTIP. Units that are cancelled, forfeited or are withheld to satisfy our general
partners tax withholding obligations or payment of an awards exercise price are available for
delivery pursuant to other awards. The LTIP is administered by our general partners board of
directors. The LTIP has been designed to promote the interests of the partnership and its
unitholders by strengthening its ability to attract, retain and motivate qualified individuals to
serve as directors and employees.
81
Unit awards
Our general partners board of directors may grant unit awards to eligible individuals under the
LTIP. A unit award is an award of common units that are fully vested upon grant and are not subject
to forfeiture. No unit awards were granted during 2008.
Restricted units and phantom units
A restricted unit is a common unit that is subject to forfeiture. Upon vesting, the forfeiture
restrictions lapse and the recipient holds a common unit that is not subject to forfeiture. A
phantom unit is a notional unit that entitles the grantee to receive a common unit upon the vesting
of the phantom unit or, in the discretion of our general partners board of directors, cash equal
to the fair market value of a common unit. Our general partners board of directors may make grants
of restricted and phantom units under the LTIP that contain such terms, consistent with the LTIP,
as the board may determine are appropriate, including the period over which restricted or phantom
units will vest. The board may, in its discretion, base vesting on the grantees completion of a
period of service or upon the achievement of specified financial objectives or other criteria. In
addition, the restricted and phantom units will vest automatically upon a change of control of our
general partner (as defined in the LTIP) or as otherwise described in the award agreement. Our
general partners board of directors approved phantom unit grants to each of Messrs. Carroll,
Chase, Crane and Tudor in connection with their election to the board. The phantom units granted to
each of these directors in 2008 have a value of $125,000. These phantom units vest on
the first anniversary of the date of grant and have tandem distribution equivalent rights.
If a grantees employment or membership on the board of directors terminates for any reason, the
grantees restricted and phantom units will be automatically forfeited unless and to the extent
that the award agreement or the board provides otherwise.
Distributions made by us with respect to awards of restricted units may, in the boards discretion,
be subject to the same vesting requirements as the restricted units. The board, in its discretion,
may also grant tandem distribution equivalent rights with respect to phantom units.
Unit options and unit appreciation rights
The LTIP also permits the grant of options covering common units and unit appreciation rights.
Unit options represent the right to purchase a number of common units at a specified exercise
price. Unit appreciation rights represent the right to receive the appreciation in the value of a
number of common units over a specified exercise price, either in cash or in common units as
determined by the board. Unit options and unit appreciation rights may be granted to such eligible
individuals and with such terms as the board may determine, consistent with the LTIP; however, a
unit option or unit appreciation right must have an exercise price greater than or equal to the
fair market value of a common unit on the date of grant. No unit options or unit appreciation
rights were granted during 2008.
Distribution equivalent rights
Distribution equivalent rights are rights to receive all or a portion of the distributions
otherwise payable on units during a specified time. Distribution equivalent rights may be granted
alone or in combination with another award.
Source of common units; cost
Common units to be delivered with respect to awards may be newly-issued units, common units
acquired by our general partner in the open market, common units already owned by our general
partner or us, common units acquired by our general partner directly from us or any other person or
any combination of the foregoing. Our general partner is entitled to reimbursement by us for the
cost incurred in acquiring such common units. With respect to unit options, our general partner is
entitled to reimbursement from us for the difference between the cost it incurs in acquiring these
common units and the proceeds it receives from an optionee at the time of exercise. Thus, we bear
the cost of the unit options. If we issue new common units with respect to these awards, the total
number of common units outstanding will increase, and our general partner will remit the proceeds
it receives from a participant, if any, upon exercise of an award to us. With respect to any awards
settled in cash, our general partner is entitled to reimbursement by us for the amount of the cash
settlement.
82
Amendment or termination of long-term incentive plan
Our general partners board of directors, in its discretion, may terminate the LTIP at any time
with respect to the common units for which a grant has not previously been made. The LTIP will
automatically terminate on the earlier of the 10th anniversary of the date it was initially adopted
by our general partner or when common units are no longer available for delivery pursuant to awards
under the LTIP. Our general partners board of directors will also have the right to alter or amend
the LTIP or any part of it from time to time or to amend any outstanding award made under the LTIP;
provided, however, that no change in any outstanding award may be made that would materially impair
the rights of the participant without the consent of the affected participant, and/or result in
taxation to the participant under Section 409A of the Internal Revenue Code of 1986, as
amended, unless otherwise determined by the
general partners board of directors.
WESTERN GAS HOLDINGS, LLC AMENDED AND RESTATED EQUITY INCENTIVE PLAN
General
Our general partner has adopted the Western Gas Holdings, LLC Amended and Restated Equity Incentive
Plan, which we refer to as the Incentive Plan, for the executive officers of our general partner.
The summary of the Incentive Plan and related award grants contained herein does not purport to be
complete and is qualified in its entirety by reference to the Incentive Plan. The Incentive Plan
provides for the grant of unit appreciation rights, unit value rights and distribution equivalent
rights. Subject to adjustment for certain events, an aggregate of 100,000 unit appreciation rights,
100,000 unit value rights and 100,000 distribution equivalent rights may be delivered pursuant to
awards under the Incentive Plan. Unit appreciation rights, unit value rights and distribution
equivalent rights that are forfeited, cancelled, or otherwise terminated or expired without payment
are available for grant pursuant to other awards made under the Incentive Plan. The Incentive Plan
is administered by our general partners board of directors. The LTIP has been designed to provide
to key executives of the general partner incentive compensation to encourage superior performance
of the partnership and the general partner. The costs of these awards are allocated within and
subject to the reimbursement provisions of the omnibus agreement.
Unit appreciation rights
Our general partners board of directors may grant unit appreciation rights to eligible individuals
under the Incentive Plan. A unit appreciation right is the economic equivalent of a stock
appreciation right so it does not include a participants pro rata share of the value of our
general partner as of the grant date. Our general partners board of directors has the authority to
determine the executives to whom unit appreciation rights may be granted, the number of unit
appreciation rights to be granted to each participant, the period over and the conditions, if any,
under which the unit appreciation rights may become vested or forfeited, and such other terms and
conditions as the board may establish with respect to such awards.
The number of unit appreciation rights outstanding will be adjusted by our general partners board
of directors upon certain changes in capitalization to prevent the valuation dilution or
enlargement of potential benefits intended to be provided with respect to awards granted under the
Incentive Plan; provided, however, that no change in any outstanding award made as a result of a
change in capitalization may materially impair the rights of the participant without the consent of
the affected participant.
Unless otherwise provided in the award agreement, termination of a participants employment with
Anadarko shall cause all of such participants unvested awards under the Incentive Plan to be
forfeited upon termination. However, the general partners board of directors may, in its
discretion, waive in whole or in part such forfeiture.
Vesting of unit appreciation rights
Our general partners board of directors has the authority to determine the restrictions and
vesting provisions for any unit appreciation rights. The initial grants of unit appreciation rights
under the Incentive Plan provide for vesting (x) in one-third increments over a three-year period
commencing on the first anniversary of the grant date or (y) immediately upon the occurrence of any
of the following events, if they occur earlier, including: (1) a change of control of our general
partner or Anadarko; (2) the closing of an initial public offering of our general partner; (3)
termination of employment with our general partner and its affiliates (including Anadarko) due to
involuntary termination (with or without cause); (4) death; (5) disability as defined under Section
409A of the Internal Revenue Code of 1986, as amended; or (6) an unforeseeable emergency as defined
in the Incentive Plan. Upon the occurrence of a vesting event, each participant will receive a
lump-sum cash payment (less any applicable withholding taxes) for each unit appreciation right that
is exercised prior to the earlier of the 90th day
83
after a participants voluntary termination and the 10th anniversary of the grant date.
The unit appreciation rights may not be sold or transferred except to the general partner, Anadarko
or any of their affiliates.
Unit value rights
Our general partners board of directors may grant unit value rights to eligible individuals under
the Incentive Plan. A unit value right imparts to a participant his or her pro rata share of the
value of the general partner at the time of grant. Our general partners board of directors has the
authority to determine the executives to whom unit value rights may be granted, the number of unit
value rights to be granted to each participant, the period over and the conditions, if any, under
which the unit value rights may become vested or forfeited, and such other terms and conditions as
the board may establish with respect to such awards.
The number of unit value rights outstanding will be adjusted by our general partners board of
directors upon certain changes in capitalization to prevent the valuation dilution or enlargement
of potential benefits intended to be provided with respect to awards granted under the Incentive
Plan; provided, however, that no change in any outstanding award made as a result of a change in
capitalization may materially impair the rights of the participant without the consent of the
affected participant.
Unless otherwise provided in the award agreement, termination of a participants employment with
Anadarko shall cause all of such participants unvested awards under the Incentive Plan to be
forfeited upon termination. However, the general partners board of directors may, in its
discretion, waive in whole or in part such forfeiture.
Vesting of unit value rights
Our general partners board of directors has the authority to determine the restrictions and
vesting provisions for any unit value rights. The initial grants of unit value rights provide for
vesting (x) in one-third increments over a three-year period commencing on the first anniversary of
the grant date or (y) immediately upon the occurrence of any of the following events, if they occur
earlier, including: (1) a change of control of our general partner or Anadarko; (2) the closing of
an initial public offering of our general partner; (3) termination of employment with our general
partner and its affiliates (including Anadarko) due to involuntary termination (with or without
cause); (4) death; (5) disability as defined under Section 409A of the Internal Revenue Code of
1986, as amended; or (6) an unforeseeable emergency as defined in the Incentive Plan. Upon the
occurrence of a vesting event, each participant will receive a lump-sum cash payment (less any
applicable withholding taxes) for each unit value right. The unit value rights may not be sold or
transferred except to the general partner, Anadarko or any of their affiliates.
Distribution equivalent rights
Grants of unit appreciation rights and unit value rights also include an equal number of
distribution equivalent rights, which entitle the holder to receive with respect to each unit
appreciation right and unit value right awarded an amount in cash or incentive units equal in value
to the distributions made by our general partner to its members during the period an award is
outstanding. These distribution equivalent rights are subject to the same vesting requirements as
the incentive units with which such distribution equivalent rights are associated.
Vesting of distribution equivalent rights
Our general partners board of directors has the authority to determine the restrictions and
vesting provisions for any distribution equivalent rights. The initial grants of distribution
equivalent rights provide for vesting immediately upon the occurrence of any of the following
events, including: (1) a change of control of our general partner or Anadarko; (2) the closing of
an initial public offering of our general partner; (3) termination of employment with our general
partner and its affiliates (including Anadarko) due to involuntary termination (with or without
cause); (4) death; (5) disability as defined under Section 409A of the Internal Revenue Code of
1986, as amended; (6) the date three days in advance of the 10th anniversary of the
grant date; or (7) an unforeseeable emergency as defined in the Incentive Plan. Upon the occurrence
of a vesting event, each participant will receive a lump-sum cash payment (less any applicable
withholding taxes) for each distribution equivalent right. The distribution equivalent rights may
not be sold or transferred except to our general partner, Anadarko or any of their affiliates.
Amendment or termination of Incentive Plan
Our general partners board of directors, in its discretion, may amend or terminate the Incentive
Plan at any time with respect to the unit appreciation rights, unit value rights and distribution
equivalent rights, including increasing the number of unit
84
appreciation rights, unit value rights
and distribution equivalent rights available for awards under the Incentive Plan, without the
consent of the participants. The board may also waive any conditions, rights or terms under any
award under this plan, provided that no change in any award under the plan will materially reduce
the benefit to a participant in the plan without such participants consent. The Incentive Plan
will terminate on the date termination is approved by our general partners board of directors or
when all unit appreciation rights, unit value rights and distribution equivalent rights available
under the Incentive Plan have been paid to participants.
EXECUTIVE COMPENSATION
We do not directly employ any of the persons responsible for managing or operating our business and
we have no compensation committee. Instead, we are managed by our general partner, Western Gas
Holdings, LLC, the executive officers of which are employees of Anadarko. Our reimbursement for the
compensation of executive officers is governed by the omnibus agreement and the services and
secondment agreement described in Item 13Certain Relationships and Related Party Transactions,
and Director IndependenceAgreements with AnadarkoServices and secondment
agreement.
Summary Compensation Table For 2008
The following table summarizes the compensation amounts expensed by us for our general partners
Chief Executive Officer, Chief Financial Officer and our three highest paid executive officers
other than our CEO and CFO for the period of May 14, 2008 through December 31, 2008, which
represents the time period following our initial public offering.
Summary Compensation Table
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Non-Equity |
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Stock |
|
Option |
|
Incentive Plan |
|
All Other |
|
|
Name and Principal |
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|
|
Salary |
|
Bonus |
|
Awards |
|
Awards |
|
Compensation |
|
Compensation |
|
Total |
Position |
|
Year |
|
($)(1) |
|
($) |
|
($)(2) |
|
($)(3) |
|
($)(4) |
|
($)(5) |
|
($) |
Robert G. Gwin |
|
|
2008 |
|
|
|
107,392 |
|
|
|
0 |
|
|
|
371,769 |
|
|
|
208,411 |
|
|
|
163,977 |
|
|
|
28,137 |
|
|
|
879,686 |
|
President and
Chief Executive
Officer |
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|
Michael C. Pearl |
|
|
2008 |
|
|
|
55,286 |
|
|
|
0 |
|
|
|
109,486 |
|
|
|
24,272 |
|
|
|
53,787 |
|
|
|
14,485 |
|
|
|
257,316 |
|
Senior Vice
President and
Chief Financial
Officer |
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Danny J. Rea |
|
|
2008 |
|
|
|
65,699 |
|
|
|
0 |
|
|
|
158,583 |
|
|
|
37,952 |
|
|
|
72,459 |
|
|
|
17,213 |
|
|
|
351,906 |
|
Senior Vice
President and
Chief Operating
Officer |
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Amanda M. McMillian |
|
|
2008 |
|
|
|
48,011 |
|
|
|
0 |
|
|
|
76,874 |
|
|
|
0 |
|
|
|
32,049 |
|
|
|
12,579 |
|
|
|
169,513 |
|
Vice President,
General Counsel
and Corporate
Secretary |
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Jeremy M. Smith |
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2008 |
|
|
|
46,083 |
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0 |
|
|
|
88,537 |
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|
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0 |
|
|
|
26,754 |
|
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|
12,074 |
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|
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173,448 |
|
Vice President and
Treasurer |
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(1) |
|
The amounts in this column reflect the base salary compensation
allocated to us by Anadarko for the period of May 14, 2008 through
December 31, 2008. |
|
(2) |
|
The amounts in this column reflect the compensation cost allocated to
us by Anadarko for the period of May 14, 2008 through December 31,
2008, in accordance with SFAS No. 123(R) for non-option stock awards
granted pursuant to the Western Gas Holdings, LLC Equity Incentive
Plan, 2008 Omnibus Incentive Compensation Plan and the 1999 Stock
Incentive Plan and includes amounts from awards granted in and prior
to 2008. The awards |
85
|
|
|
|
|
granted by Western Gas Holdings, LLC were valued
under SFAS No. 123(R) by multiplying the number of units awarded by
the current per unit valuation on the date of grant of $50.00,
assuming no forfeitures. The value per unit was based on the estimated
fair value of the general partner using a hybrid discounted cash flow
and multiples valuation approach. For a discussion of valuation
assumptions for the awards under the 2008 Omnibus Incentive Plan and
the 1999 Stock Incentive Plan, see Note 12 Stock-Based Compensation
of the Notes to Consolidated Financial Statements included in
Anadarkos annual report under Item 8 of the Form 10-K for the year
ended December 31, 2008. For information regarding the non-option
stock awards granted to the named executives in 2008, please see the
Grants of Plan-Based Awards Table. |
|
(3) |
|
The amounts in this column reflect the compensation cost allocated to
us by Anadarko for the period of May 14, 2008 through December 31,
2008, in accordance with SFAS No. 123(R) for option awards granted
pursuant to the Western Gas Holdings, LLC Equity Incentive Plan, 2008
Omnibus Incentive Compensation Plan and the 1999 Stock Incentive Plan
and may include amounts from option awards granted in and prior to
2008. See note (2) above for valuation assumptions. |
|
(4) |
|
The amounts in this column reflect the annual incentive compensation
allocated to us for the period of May 14, 2008 through December 31,
2008. These amounts represent payments under the Anadarko annual
incentive program, which were earned in 2008 and paid in early 2009. |
|
(5) |
|
The amounts in this column reflect the compensation expenses related
to Anadarkos retirement and savings plans that were allocated to us
for the period of May 14, 2008 through December 31, 2008. These
allocated expenses are detailed in the table below: |
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|
|
|
|
|
|
Retirement Plan |
|
Savings Plan |
Name |
|
Expense |
|
Expense |
Robert G. Gwin |
|
$ |
19,760 |
|
|
$ |
8,377 |
|
Michael C. Pearl |
|
$ |
10,173 |
|
|
$ |
4,312 |
|
Danny J. Rea |
|
$ |
12,089 |
|
|
$ |
5,124 |
|
Amanda M. McMillian |
|
$ |
8,834 |
|
|
$ |
3,745 |
|
Jeremy M. Smith |
|
$ |
8,479 |
|
|
$ |
3,595 |
|
86
Grants of Plan-Based Awards in 2008
The following table sets forth information concerning annual incentive awards, stock options, unit
appreciation rights, unit value rights, restricted stock shares, restricted stock units and
performance units granted during 2008 to each of the named executive officers:
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All Other |
|
All Other |
|
|
|
|
|
Grant |
|
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Stock |
|
Option |
|
|
|
|
|
Date |
|
|
Estimated Future Payouts |
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards: |
|
Awards: |
|
Exercise |
|
Fair Value |
|
|
|
|
|
|
Under Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Number of |
|
or |
|
of Stock |
|
|
Equity Incentive Plan |
|
Estimated Future Payouts Under |
|
Shares of |
|
Securities |
|
Base Price |
|
and |
Name |
|
|
|
|
|
Awards(1) |
|
|
|
|
|
Equity Incentive Plan Awards(2) |
|
Stock or |
|
Underlying |
|
of Option |
|
Option |
and |
|
Threshold |
|
Target |
|
Maximum |
|
Threshold |
|
Target |
|
Maximum |
|
Units |
|
Options |
|
Awards |
|
Awards |
Grant Date |
|
($) |
|
($) |
|
($) |
|
(#) |
|
(#) |
|
(#) |
|
(#)(3) |
|
(#)(4) |
|
($/Sh) |
|
($)(5) |
Robert G. Gwin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,240 |
|
|
|
188,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
3/12/2008 |
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,300 |
|
|
|
64.69 |
|
|
|
196,881 |
|
4/2/2008(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
483,333 |
|
12/20/2008(7) |
|
|
|
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|
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|
|
|
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|
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20,000 |
|
|
|
50.00 |
|
|
|
|
|
12/20/2008(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
11/4/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,600 |
|
|
|
35.18 |
|
|
|
489,132 |
|
11/4/2008(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,800 |
|
|
|
|
|
|
|
|
|
|
|
225,152 |
|
11/4/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,211 |
|
|
|
19,300 |
|
|
|
38,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
432,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael C.
Pearl |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,959 |
|
|
|
53,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/13/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
65.99 |
|
|
|
44,508 |
|
3/13/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
90,857 |
|
4/2/2008(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
241,667 |
|
12/20/2008(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
50.00 |
|
|
|
|
|
12/20/2008(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Danny J. Rea |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,604 |
|
|
|
87,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/2/2008(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
241,667 |
|
12/20/2008(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
50.00 |
|
|
|
|
|
12/20/2008(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
11/4/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,100 |
|
|
|
35.18 |
|
|
|
118,861 |
|
11/4/2008(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,800 |
|
|
|
|
|
|
|
|
|
|
|
137,202 |
|
11/4/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,080 |
|
|
|
4,000 |
|
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amanda M.
McMillian |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,723 |
|
|
|
31,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/13/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,927 |
|
|
|
|
|
|
|
|
|
|
|
149,217 |
|
4/2/2008(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
120,833 |
|
12/20/2008(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
50.00 |
|
|
|
|
|
12/20/2008(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeremy M. Smith |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,957 |
|
|
|
29,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/13/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,227 |
|
|
|
|
|
|
|
|
|
|
|
158,303 |
|
4/2/2008(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
120,833 |
|
12/20/2008(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
50.00 |
|
|
|
|
|
12/20/2008(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the estimated future cash payouts allocable to us under
Anadarkos annual incentive program. The estimated amounts are
calculated based on the applicable annual bonus target and base salary
earnings for each named executive officer in effect for the 2008
measurement period. If threshold levels of performance are not met,
then the payout can be zero. The expense allocated to us for the
actual bonus payouts under the annual incentive program for 2008 are
reflected in the Non-Equity Incentive Plan Compensation column of the
Summary Compensation Table. For additional discussion of Anadarkos
annual incentive program please see section Compensation Discussion
and AnalysisElements of Total CompensationAnnual Cash Incentives
(Bonuses) of Anadarkos proxy statement for its annual meeting of
stockholders which is expected to be filed no later than April 9,
2009. |
87
|
|
|
(2) |
|
Reflects the estimated future payout under Anadarkos performance unit
awards. Executives may earn from 0% to 200% of the targeted award
based on Anadarkos relative TSR performance over a specified
performance period. Fifty percent of this award is tied to a two-year
performance period and the remaining fifty percent is tied to a
three-year performance period. If earned, the awards are to be paid in
cash. The threshold value represents the minimum payment (other than
zero) that may be earned. For additional discussion of Anadarkos
performance unit awards please see section Compensation Discussion and
AnalysisElements of Total CompensationAnnual Cash Incentives
(Bonuses) of Anadarkos proxy statement for its annual meeting of
stockholders which is expected to be filed no later than April 9,
2009. |
|
(3) |
|
Reflects the number of unit value rights, restricted stock shares and
restricted stock units awarded in 2008. These awards vest equally over
three years, beginning with the first anniversary of the grant date.
Executive officers receive distribution equivalent rights on the unit
value rights, dividends on the restricted stock shares and dividends
equivalents on the restricted stock units. |
|
(4) |
|
Reflects the number of stock options and unit appreciation rights each
named executive officer was awarded in 2008. These awards vest equally
over three years, beginning with the first anniversary of the date of
grant. The stock options have a term of seven years and the unit
appreciation rights have a term of ten years. |
|
(5) |
|
The amounts included in the Grant Date Fair Value of Stock and Option
Awards column represent the expected allocation to us of the grant
date fair value of the awards made to named executives in 2008
computed in accordance with SFAS No. 123(R). The value ultimately
realized by the executive upon the actual vesting of the award(s) or
the exercise of the unit appreciation right(s) and stock option(s) may
or may not be equal to the SFAS No. 123(R) determined value. The
awards granted by Western Gas Holdings, LLC were valued under SFAS No.
123(R) by multiplying the number of units awarded by the current per
unit valuation on the date of grant of $50.00, assuming no
forfeitures. The value per unit was based on the estimated fair value
of the general partner using a hybrid discounted cash flow and
multiples valuation approach. For a discussion of valuation
assumptions for the awards under the 2008 Omnibus Incentive Plan and
the 1999 Stock Incentive Plan, see Note 12Stock-Based Compensation
of the Notes to Consolidated Financial Statements included in
Anadarkos annual report under Item 8 of the Form 10-K for the year
ended December 31, 2008. |
|
(6) |
|
The April 2, 2008 equity incentive unit awards were granted under the
Western Gas Holdings, LLC Equity Incentive Plan. These awards were
modified on December 20, 2008 in order to comply with the requirements
of Section 409A of the Internal Revenue Code of 1986, as amended. The
restructured awards as a result of the modification are described
below in footnote 7. |
|
(7) |
|
The awards shown for December 20, 2008 reflect a modification to the
April 2, 2008 awards. This modification was made in order for the
original awards to comply with the requirements of Section 409A of the
Internal Revenue Code of 1986, as amended. The modification
effectively split the April 2nd incentive unit awards
granted into an equal number of unit appreciation rights and unit
value rights. The unit appreciation rights vest equally over three
years, beginning with the original award grant date and have a term of
ten years. The unit value rights vest equally over three years,
beginning with the original award grant date and have a maximum per
unit value of $50.00. In addition to these units, participants are
eligible to receive an equal number of distribution equivalent rights
which become payable upon certain events. Pursuant to the SEC rules,
the incremental value (if any) of the modification must be shown in
the grant date fair value column. The incremental fair value computed
as of the modification date in accordance with SFAS 123(R) was zero.
These awards are discussed further on beginning on page 83 of the
Compensation Discussion and Analysis. |
|
(8) |
|
For accounting purposes, these awards have a November 4, 2008 grant
date which is based on the date Anadarkos Compensation and Benefits
Committee approved the awards and the date the terms of the awards
were communicated to participants. The effective date for participants
is December 1, 2008. The awards vest equally over three years,
beginning with the first anniversary of the participant grant date. |
88
Outstanding Equity Awards at Fiscal Year-End 2008
The following table reflects all outstanding equity awards as of December 31, 2008 for each of the
named executives, including both Anadarko and Western Gas Holdings, LLC awards and does not take
into account that under our omnibus agreement with Anadarko we are only allocated a portion of the
SFAS No. 123(R) expense related to these awards. The market values shown are based on Anadarkos
closing stock price on December 31, 2008 of $38.55, unless otherwise noted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Units(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payout |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock |
|
Number of |
|
Value of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares/Units and Unit Value Rights(2) |
|
Unearned |
|
Unearned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market |
|
Shares, |
|
Shares, |
|
|
Option Awards(1) |
|
Number of |
|
Value of |
|
Units or |
|
Units or |
|
|
Number of Securities |
|
Option |
|
|
|
|
|
Shares or |
|
Shares or |
|
Other |
|
Other |
|
|
Underlying Unexercised Options |
|
Exercise |
|
Option |
|
Units of Stock That |
|
Units of Stock That |
|
Rights That Have |
|
Rights That Have |
Name |
|
Exercisable
(#) |
|
Unexercisable (#) |
|
Price ($) |
|
Expiration Date |
|
Have Not Vested (#) |
|
Have Not Vested ($) |
|
Not Vested (#) |
|
Not Vested ($) |
Robert G. Gwin |
|
|
13,500 |
|
|
|
13,500 |
|
|
|
50.6900 |
|
|
|
1/16/2013 |
|
|
|
8,500 |
|
|
|
327,675 |
|
|
|
2,325 |
|
|
|
89,629 |
|
|
|
|
12,734 |
|
|
|
6,366 |
|
|
|
48.6900 |
|
|
|
12/4/2013 |
|
|
|
1,966 |
|
|
|
75,789 |
|
|
|
7,600 |
|
|
|
292,980 |
|
|
|
|
13,667 |
|
|
|
27,333 |
|
|
|
40.5100 |
|
|
|
1/10/2014 |
|
|
|
4,800 |
|
|
|
185,040 |
|
|
|
19,300 |
|
|
|
744,015 |
|
|
|
|
7,234 |
|
|
|
14,466 |
|
|
|
59.8700 |
|
|
|
11/6/2014 |
|
|
|
12,800 |
|
|
|
493,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,300 |
|
|
|
64.6900 |
|
|
|
3/12/2015 |
|
|
|
20,000 |
(5) |
|
|
1,000,000 |
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,600 |
|
|
|
35.1800 |
|
|
|
11/4/2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
(4) |
|
|
50.0000 |
|
|
|
4/2/2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael C. Pearl |
|
|
958 |
|
|
|
958 |
|
|
|
48.9000 |
|
|
|
12/1/2013 |
|
|
|
541 |
|
|
|
20,856 |
|
|
|
|
|
|
|
|
|
|
|
|
2,500 |
|
|
|
5,000 |
|
|
|
51.8900 |
|
|
|
7/2/2014 |
|
|
|
3,333 |
|
|
|
128,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
65.9900 |
|
|
|
3/13/2015 |
|
|
|
3,000 |
|
|
|
115,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
(4) |
|
|
50.0000 |
|
|
|
4/2/2018 |
|
|
|
10,000 |
(5) |
|
|
500,000 |
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Danny J. Rea |
|
|
5,000 |
|
|
|
|
|
|
|
21.4525 |
|
|
|
10/30/2010 |
|
|
|
1,083 |
|
|
|
41,750 |
|
|
|
7,400 |
|
|
|
285,270 |
|
|
|
|
5,000 |
|
|
|
|
|
|
|
33.4000 |
|
|
|
12/2/2011 |
|
|
|
2,333 |
|
|
|
89,937 |
|
|
|
4,000 |
|
|
|
154,200 |
|
|
|
|
5,000 |
|
|
|
|
|
|
|
43.5550 |
|
|
|
11/15/2012 |
|
|
|
7,800 |
|
|
|
300,690 |
|
|
|
|
|
|
|
|
|
|
|
|
3,834 |
|
|
|
1,916 |
|
|
|
48.9000 |
|
|
|
12/1/2013 |
|
|
|
10,000 |
(5) |
|
|
500,000 |
(6) |
|
|
|
|
|
|
|
|
|
|
|
3,534 |
|
|
|
7,066 |
|
|
|
59.8700 |
|
|
|
11/6/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,100 |
|
|
|
35.1800 |
|
|
|
11/4/2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
(4) |
|
|
50.0000 |
|
|
|
4/2/2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amanda M. McMillian |
|
|
|
|
|
|
5,000 |
(4) |
|
|
50.0000 |
|
|
|
4/2/2018 |
|
|
|
470 |
|
|
|
18,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200 |
|
|
|
46,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,927 |
|
|
|
189,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
(5) |
|
|
250,000 |
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeremy M. Smith |
|
|
|
|
|
|
5,000 |
(4) |
|
|
50.0000 |
|
|
|
4/2/2018 |
|
|
|
833 |
|
|
|
32,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
833 |
|
|
|
32,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
38,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,227 |
|
|
|
201,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
(5) |
|
|
250,000 |
(6) |
|
|
|
|
|
|
|
|
89
|
|
|
(1) |
|
The table below shows the vesting dates for the respective unexercisable stock options and
unit appreciation rights listed in the above Outstanding Equity Awards Table: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting Date |
|
Robert G. Gwin |
|
Michael C. Pearl |
|
Danny J. Rea |
|
Amanda M. McMillian |
|
Jeremy M. Smith |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/10/2009 |
|
|
13,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/12/2009 |
|
|
7,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/13/2009 |
|
|
|
|
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4/2/2009 |
|
|
6,667 |
|
|
|
3,334 |
|
|
|
3,334 |
|
|
|
1,667 |
|
|
|
1,667 |
|
7/2/2009 |
|
|
|
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
11/4/2009 |
|
|
26,200 |
|
|
|
|
|
|
|
6,367 |
|
|
|
|
|
|
|
|
|
11/6/2009 |
|
|
7,233 |
|
|
|
|
|
|
|
3,533 |
|
|
|
|
|
|
|
|
|
12/1/2009 |
|
|
|
|
|
|
958 |
|
|
|
1,916 |
|
|
|
|
|
|
|
|
|
12/4/2009 |
|
|
6,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/10/2010 |
|
|
13,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/16/2010 |
|
|
13,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/12/2010 |
|
|
7,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/13/2010 |
|
|
|
|
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4/2/2010 |
|
|
6,667 |
|
|
|
3,333 |
|
|
|
3,333 |
|
|
|
1,667 |
|
|
|
1,667 |
|
7/2/2010 |
|
|
|
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
11/4/2010 |
|
|
26,200 |
|
|
|
|
|
|
|
6,367 |
|
|
|
|
|
|
|
|
|
11/6/2010 |
|
|
7,233 |
|
|
|
|
|
|
|
3,533 |
|
|
|
|
|
|
|
|
|
3/12/2011 |
|
|
7,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/13/2011 |
|
|
|
|
|
|
1,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4/2/2011 |
|
|
6,666 |
|
|
|
3,333 |
|
|
|
3,333 |
|
|
|
1,666 |
|
|
|
1,666 |
|
11/4/2011 |
|
|
26,200 |
|
|
|
|
|
|
|
6,366 |
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
The table below shows the vesting dates for the respective restricted stock shares,
restricted stock units and unit value rights listed in the above Outstanding Equity Awards
Table: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting Date |
|
Robert G. Gwin |
|
Michael C. Pearl |
|
Danny J. Rea |
|
Amanda M. McMillian |
|
Jeremy M. Smith |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/16/2009 |
|
|
4,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/13/2009 |
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
1,643 |
|
|
|
1,743 |
|
4/2/2009 |
|
|
6,667 |
|
|
|
3,334 |
|
|
|
3,334 |
|
|
|
1,667 |
|
|
|
1,667 |
|
7/2/2009 |
|
|
|
|
|
|
1,667 |
|
|
|
|
|
|
|
600 |
|
|
|
500 |
|
8/1/2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
833 |
|
12/1/2009 |
|
|
4,267 |
|
|
|
541 |
|
|
|
3,683 |
|
|
|
470 |
|
|
|
833 |
|
12/3/2009 |
|
|
2,400 |
|
|
|
|
|
|
|
1,167 |
|
|
|
|
|
|
|
|
|
12/4/2009 |
|
|
1,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/16/2010 |
|
|
4,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/13/2010 |
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
1,642 |
|
|
|
1,742 |
|
4/2/2010 |
|
|
6,667 |
|
|
|
3,333 |
|
|
|
3,333 |
|
|
|
1,667 |
|
|
|
1,667 |
|
7/2/2010 |
|
|
|
|
|
|
1,666 |
|
|
|
|
|
|
|
600 |
|
|
|
500 |
|
12/1/2010 |
|
|
4,267 |
|
|
|
|
|
|
|
2,600 |
|
|
|
|
|
|
|
|
|
12/3/2010 |
|
|
2,400 |
|
|
|
|
|
|
|
1,166 |
|
|
|
|
|
|
|
|
|
3/13/2011 |
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
1,642 |
|
|
|
1,742 |
|
4/2/2011 |
|
|
6,666 |
|
|
|
3,333 |
|
|
|
3,333 |
|
|
|
1,666 |
|
|
|
1,666 |
|
12/1/2011 |
|
|
4,266 |
|
|
|
|
|
|
|
2,600 |
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
The table below shows the performance periods for the respective performance units
listed in the above Outstanding Equity Awards Table: |
|
|
|
|
|
|
|
|
|
Performance Period |
|
Robert G. Gwin |
|
Danny J. Rea |
1/1/2008 to 12/31/2009 |
|
|
6,125 |
|
|
|
3,700 |
|
1/1/2008 to 12/31/2010 |
|
|
3,800 |
|
|
|
3,700 |
|
1/1/2009 to 12/31/2010 |
|
|
9,650 |
|
|
|
2,000 |
|
1/1/2009 to 12/31/2011 |
|
|
9,650 |
|
|
|
2,000 |
|
90
|
|
|
(4) |
|
This award represents a grant of unit appreciation rights under the Western Gas
Holdings, LLC Amended and Restated Equity Incentive Plan. |
|
(5) |
|
This award represents a grant of unit value rights under the Western Gas Holdings, LLC
Amended and Restated Equity Incentive Plan. |
|
(6) |
|
The market value for this award is calculated based on the per unit value effective on
December 31, 2008 of $50.00. |
Option Exercises and Stock Vested in 2008
The following table reflects all Anadarko option awards exercised in 2008 and Anadarko stock awards
that vested in 2008 and does not take into account that under our omnibus agreement with Anadarko
we were only allocated a portion of the SFAS No. 123(R) expense related to these awards. Please
refer to the Summary Compensation Table on page 85 for a summary of the total expense allocated to
us in 2008 for both option and stock awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards |
|
Stock Awards |
|
|
Number of Shares |
|
|
|
|
|
Number of Shares |
|
|
|
|
Acquired on |
|
Value Realized on |
|
Acquired on |
|
Value Realized on |
Name |
|
Exercise (#) |
|
Exercise ($)(1) |
|
Vesting (#)(2) |
|
Vesting ($)(1) |
Robert G. Gwin |
|
|
|
|
|
|
|
|
|
|
8,617 |
|
|
|
404,709 |
|
Michael C. Pearl |
|
|
959 |
|
|
|
27,138 |
|
|
|
3,041 |
|
|
|
175,574 |
|
Danny J. Rea |
|
|
6,000 |
|
|
|
309,432 |
|
|
|
4,216 |
|
|
|
196,984 |
|
Amanda M. McMillian |
|
|
|
|
|
|
|
|
|
|
1,802 |
|
|
|
94,310 |
|
Jeremy M. Smith |
|
|
|
|
|
|
|
|
|
|
2,166 |
|
|
|
115,266 |
|
|
|
|
(1) |
|
The Value Realized reflects the taxable value to the named executive officer as of the date of the option
exercise or vesting of restricted stock. The actual value ultimately realized by the named executive
officer may be more or less than the Value Realized calculated in the above table depending on the timing
in which the named executive officer held or sold the stock associated with the exercise or vesting
occurrence. |
|
(2) |
|
Shares acquired on vesting include restricted stock shares or units whose restrictions lapsed during 2008. |
Pension Benefits for 2008
Anadarko maintains both funded tax-qualified defined benefit pension plans and unfunded
nonqualified pension benefit plans. The nonqualified pension benefit plans are designed to provide
for supplementary pension benefits due to limitations imposed by the Internal Revenue Code that
restrict the amount of benefits payable under tax-qualified plans. Our named executive officers are
eligible to participate in these plans. As part of the omnibus agreement a portion of the expense
related to these plans is allocated to us by Anadarko. The allocated expense for each named
executive officer is included in the All Other Compensation column of the Summary Compensation
Table on page 85. For additional discussion on Anadarkos pension benefits, please see section
Compensation Discussion and AnalysisElements of Total CompensationRetirement Benefits of
Anadarkos proxy statement for its annual meeting of stockholders which is expected to be filed no
later than April 9, 2009.
Nonqualified Deferred Compensation for 2008
Anadarko maintains a Deferred Compensation Plan and a Savings Restoration Plan for certain
employees, including our named executive officers. The Deferred Compensation Plan allows certain
employees to voluntarily defer receipt of up to 75% of their salary and/or up to 100% of their
annual incentive bonus payments. The Savings Restoration Plan accrues a benefit substantially equal
to the amount that, in the absence of certain Internal Revenue Code limitations, would have been
allocated to their account as matching contributions under the Anadarkos 401(k) Plan. Pursuant to
the terms of the omnibus agreement, a portion of the expense related to these plans is allocated to
us by Anadarko. The allocated expense for each named executive officer is included in the All Other
Compensation column of the Summary Compensation Table on page 85. For additional discussion on
Anadarkos pension benefits please see section Compensation Discussion and Analysis
Elements of Total CompensationRetirement Benefits of
Anadarkos proxy statement for its annual meeting of
stockholders which is expected to be filed no later than April 9, 2009.
91
Potential Payments Upon Termination or Change of Control
In the event of termination of employment with Western Gas Holdings, LLC by reason of: (A) a Change
of Control of either Western Gas Holdings, LLC or Anadarko; (B) the closing of an initial public
offering of Western Gas Holdings, LLC; (C) the involuntary termination of employment with Western
Gas Holdings, LLC or its affiliates (with or without cause); (D) death; (E) disability, as defined
under Section 409A of the Internal Revenue Code of 1986, as amended; or (F) an unforeseeable
emergency, and assuming that the employee remains employed by Anadarko, the only payment triggered
is the acceleration of awards under the Western Gas Holdings, LLC Equity Incentive Plan. The award
values under this Plan as of December 31, 2008 are as follows:
|
|
|
|
|
|
|
Accelerated |
|
|
Incentive Plan |
Name |
|
Awards(1) |
Robert G. Gwin |
|
$ |
1,000,000 |
|
Michael C. Pearl |
|
$ |
500,000 |
|
Danny J. Rea |
|
$ |
500,000 |
|
Amanda M. McMillian |
|
$ |
250,000 |
|
Jeremy M. Smith |
|
$ |
250,000 |
|
|
|
|
(1) |
|
Values are based on the December 31, 2008 per unit value of $50.00. |
We have not entered into any employment agreements with our named executive officers, nor do we
manage any severance plans. However, our named executive officers are eligible for certain benefits
provided by Anadarko. Currently, we are not allocated any expense for these agreements or plans,
but for disclosure purposes we are presenting the full value of the potential payments provided by
Anadarko in the event of termination or change of control of Anadarko. Values exclude those
benefits generally provided to all salaried employees. For additional discussion related to these
termination scenarios, please see section Compensation Discussion and AnalysisElements of Total
Executive CompensationSeverance Benefits of Anadarkos proxy statement for its annual meeting of
stockholders which is expected to be filed no later than April 9, 2009.
The following tables reflect potential payments to our named executive officers under existing
contracts, agreements, plans or arrangements, whether written or unwritten, with Anadarko, for
various scenarios involving a change of control of Anadarko or termination of employment from
Anadarko for each named executive officer, assuming a December 31, 2008 termination date, and,
where applicable, using the closing price of Anadarkos common stock of $38.55 (as reported on the
NYSE as of December 31, 2008). As of December 31, 2008, none of our executive officers were
eligible for retirement; accordingly, no table is included for this event.
Involuntary For Cause or Voluntary Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ms. |
|
|
|
|
Mr. Gwin |
|
Mr. Pearl |
|
Mr. Rea |
|
McMillian |
|
Mr. Smith |
Supplemental Pension Benefits(1) |
|
$ |
81,533 |
|
|
$ |
17,258 |
|
|
$ |
465,196 |
|
|
$ |
3,501 |
|
|
$ |
3,404 |
|
Nonqualified Deferred Compensation(2) |
|
$ |
35,355 |
|
|
$ |
8,829 |
|
|
$ |
102,923 |
|
|
$ |
2,513 |
|
|
$ |
2,783 |
|
Total |
|
$ |
116,888 |
|
|
$ |
26,087 |
|
|
$ |
568,119 |
|
|
$ |
6,014 |
|
|
$ |
6,187 |
|
|
|
|
(1) |
|
Reflects the lump-sum present value of vested benefits related to Anadarkos supplemental pension benefits. |
|
(2) |
|
Reflects the combined vested balances in Anadarkos nonqualified Savings Restoration Plan and Deferred
Compensation Plan. |
92
Involuntary Not For Cause Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ms. |
|
|
|
|
Mr. Gwin |
|
Mr. Pearl |
|
Mr. Rea |
|
McMillian |
|
Mr. Smith |
Cash Severance(1) |
|
$ |
1,377,500 |
|
|
$ |
|
|
|
$ |
689,000 |
|
|
$ |
|
|
|
$ |
|
|
Pro-rata Bonus for 2008(2) |
|
$ |
338,154 |
|
|
$ |
|
|
|
$ |
156,462 |
|
|
$ |
|
|
|
$ |
|
|
Accelerated Anadarko Equity Compensation(3) |
|
$ |
2,473,450 |
|
|
$ |
264,993 |
|
|
$ |
936,214 |
|
|
$ |
254,314 |
|
|
$ |
304,275 |
|
Accelerated Western Equity Compensation(4) |
|
$ |
1,000,000 |
|
|
$ |
500,000 |
|
|
$ |
500,000 |
|
|
$ |
250,000 |
|
|
$ |
250,000 |
|
Supplemental Pension Benefits(5) |
|
$ |
169,032 |
|
|
$ |
17,258 |
|
|
$ |
1,162,329 |
|
|
$ |
3,501 |
|
|
$ |
3,404 |
|
Nonqualified Deferred Compensation(6) |
|
$ |
35,355 |
|
|
$ |
8,829 |
|
|
$ |
102,923 |
|
|
$ |
2,513 |
|
|
$ |
2,783 |
|
Health and Welfare Benefits(7) |
|
$ |
41,737 |
|
|
$ |
|
|
|
$ |
156,723 |
|
|
$ |
|
|
|
$ |
|
|
Financial Counseling(8) |
|
$ |
24,898 |
|
|
$ |
|
|
|
$ |
24,898 |
|
|
$ |
|
|
|
$ |
|
|
Total |
|
$ |
5,460,126 |
|
|
$ |
791,080 |
|
|
$ |
3,728,549 |
|
|
$ |
510,328 |
|
|
$ |
560,462 |
|
|
|
|
(1) |
|
Messrs. Gwins and Reas values assume two times base salary plus one
times target bonus. No values have been disclosed for the other named
executive officers as they receive the same benefits as generally
provided to all salaried employees. |
|
(2) |
|
Messrs. Gwins and Reas values assume a pro-rata bonus based on
target bonus percentages effective for the 2008 AIP and eligible
earnings as of December 31, 2008. No values have been disclosed for
the other named executive officers as they receive the same benefits
as generally provided to all salaried employees. |
|
(3) |
|
Reflects the in-the-money value of unvested stock options, the target
value of unvested performance units, and the value of unvested
restricted stock shares and restricted stock units, granted under
Anadarko equity plans, all as of December 31, 2008. |
|
(4) |
|
Reflects the in-the-money value of unvested unit appreciation rights
and the value of unvested unit value rights, granted under the Western
Gas Holdings, LLC Equity Incentive Plan. Values are based on the
December 31, 2008 per unit value of $50.00. |
|
(5) |
|
Messrs. Gwins and Reas values include a special retirement benefit
enhancement that is equivalent to the additional supplemental pension
benefits that would have accrued assuming they were eligible for
subsidized early retirement benefits. All other named executive
officers values reflect their vested balance in Anadarkos Retirement
Restoration Plan. Values exclude vested amounts payable under the
qualified plans available to all employees. |
|
(6) |
|
Reflects the combined vested balances in Anadarkos nonqualified
Savings Restoration Plan and Deferred Compensation Plan. |
|
(7) |
|
Messrs. Gwins and Reas values represent 24 months of health and
welfare benefit coverage. These amounts are present values determined
in accordance with SFAS No. 106, Employers Accounting for
Postretirement Benefits other than Pensions. Mr. Reas value also
includes the present value of a retiree death benefit in Anadarkos
Management Life Insurance Plan, or MLIP. The MLIP provides for a
retiree death benefit equal to one times final base salary. This
retiree death benefit is only applicable to participants who were
employed by Anadarko on June 30, 2003. Therefore, this benefit is only
applicable to Mr. Rea. No values have been disclosed for the other
named executive officers as they receive the same benefits as
generally provided to all salaried employees. |
|
(8) |
|
Messrs. Gwins and Reas values assume financial counseling services
continue for two years after termination. No values have been
disclosed for the other named executive officers as they are not
eligible for this benefit. |
93
Change of Control: Involuntary Termination or Voluntary For Good Reason
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ms. |
|
|
|
|
Mr. Gwin |
|
Mr. Pearl |
|
Mr. Rea |
|
McMillian |
|
Mr. Smith |
Cash Severance(1) |
|
$ |
2,250,243 |
|
|
$ |
|
|
|
$ |
1,440,157 |
|
|
$ |
|
|
|
$ |
|
|
Pro-rata Bonus for 2008(2) |
|
$ |
300,946 |
|
|
$ |
|
|
|
$ |
231,606 |
|
|
$ |
|
|
|
$ |
|
|
Accelerated Anadarko Equity Compensation(3) |
|
$ |
2,473,450 |
|
|
$ |
264,993 |
|
|
$ |
936,214 |
|
|
$ |
254,314 |
|
|
$ |
304,275 |
|
Accelerated Western Equity Compensation(4) |
|
$ |
1,000,000 |
|
|
$ |
500,000 |
|
|
$ |
500,000 |
|
|
$ |
250,000 |
|
|
$ |
250,000 |
|
Supplemental Pension Benefits(5) |
|
$ |
629,294 |
|
|
$ |
17,258 |
|
|
$ |
1,438,627 |
|
|
$ |
3,501 |
|
|
$ |
3,404 |
|
Nonqualified Deferred Compensation(6) |
|
$ |
175,026 |
|
|
$ |
8,829 |
|
|
$ |
192,312 |
|
|
$ |
2,513 |
|
|
$ |
2,783 |
|
Health and Welfare Benefits(7) |
|
$ |
62,977 |
|
|
$ |
|
|
|
$ |
183,636 |
|
|
$ |
|
|
|
$ |
|
|
Outplacement Assistance(8) |
|
$ |
30,000 |
|
|
$ |
|
|
|
$ |
30,000 |
|
|
$ |
|
|
|
$ |
|
|
Financial Counseling(9) |
|
$ |
38,099 |
|
|
$ |
|
|
|
$ |
38,099 |
|
|
$ |
|
|
|
$ |
|
|
Excise Tax and Gross-up(10) |
|
$ |
1,956,051 |
|
|
$ |
|
|
|
$ |
1,494,610 |
|
|
$ |
|
|
|
$ |
|
|
Total |
|
$ |
8,916,086 |
|
|
$ |
791,080 |
|
|
$ |
6,485,261 |
|
|
$ |
510,328 |
|
|
$ |
560,462 |
|
|
|
|
(1) |
|
Messrs. Gwins and Reas values assume 2.9 times the sum of base
salary plus the highest bonus paid in the past three years. No values
have been disclosed for the other named executive officers as they
receive the same benefits as generally provided to all salaried
employees. |
|
(2) |
|
Messrs. Gwins and Reas values assume the full-year equivalent of
the highest annual bonus the officer received over the past three
years. No values have been disclosed for the other named executive
officers as they receive the same benefits as generally provided to
all salaried employees. |
|
(3) |
|
Reflects the in-the-money value of unvested stock options, the target
value of unvested performance units, and the value of unvested
restricted stock shares and restricted stock units, granted under
Anadarko equity plans, all as of December 31, 2008. |
|
(4) |
|
Reflects the in-the-money value of unvested unit appreciation rights
and the value of unvested unit value rights, granted under the
Western Gas Holdings, LLC Equity Incentive Plan. Values are based on
the December 31, 2008 per unit value of $50.00. |
|
(5) |
|
Messrs. Gwins and Reas values include a special retirement benefit
enhancement that is equivalent to the additional supplemental pension
benefits that would have accrued assuming the named executive
officers were eligible for subsidized early retirement benefits and
include special pension credits provided through change of control
agreements. All other named executive officers values reflect their
vested balance in Anadarkos Retirement Restoration Plan. Values
exclude vested amounts payable under the qualified plans available to
all employees. |
|
(6) |
|
Messrs. Gwins and Reas values include their combined balances in
Anadarkos nonqualified Savings Restoration Plan and Deferred
Compensation Plan plus an additional three years of employer
contributions into the Savings Restoration Plan based on their
current contribution rate to the LTIP. All other named executive
officers values reflect their combined balances in Anadarkos
nonqualified Savings Restoration Plan and Deferred Compensation Plan. |
|
(7) |
|
Messrs. Gwins and Reas values represent 36 months of health and
welfare benefit coverage. All amounts are present values determined
in accordance with SFAS No. 106, Employers Accounting for
Postretirement Benefits other than Pensions. Mr. Reas value also
includes the present value of a retiree death benefit in the MLIP.
The MLIP provides for a retiree death benefit equal to one times
final base salary. This retiree death benefit is only applicable to
participants who were employed by Anadarko on June 30, 2003.
Therefore, this benefit is only applicable to Mr. Rea. No values have
been disclosed for the other named executive officers as they receive
the same benefits as generally provided to all salaried employees. |
|
(8) |
|
Messrs. Gwins and Reas values represent the outplacement assistance
benefits provided under their change of control agreements. No values
have been disclosed for the other named executive officers as they
receive the same benefits as generally provided to all salaried
employees. |
|
(9) |
|
Messrs. Gwins and Reas values assume financial counseling services
continue for three years after termination. No values have been
disclosed for the other named executive officers as they are not
eligible for this benefit. |
94
|
|
|
(10) |
|
Values estimate the total payment required to make each executive
whole for the 20% excise tax imposed by Section 280G of the Internal Revenue Code. No
values have been disclosed for the other named executive officers as
they receive the same benefits as generally provided to all salaried
employees. |
Disability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ms. |
|
|
|
|
Mr. Gwin |
|
Mr. Pearl |
|
Mr. Rea |
|
McMillian |
|
Mr. Smith |
Cash Severance |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Pro-rata Bonus for 2008(1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Accelerated Anadarko Equity Compensation(2) |
|
$ |
2,473,450 |
|
|
$ |
264,993 |
|
|
$ |
936,214 |
|
|
$ |
254,314 |
|
|
$ |
304,275 |
|
Accelerated Western Equity Compensation(3) |
|
$ |
1,000,000 |
|
|
$ |
500,000 |
|
|
$ |
500,000 |
|
|
$ |
250,000 |
|
|
$ |
250,000 |
|
Supplemental Pension Benefits(4) |
|
$ |
81,533 |
|
|
$ |
17,258 |
|
|
$ |
465,196 |
|
|
$ |
3,501 |
|
|
$ |
3,404 |
|
Nonqualified Deferred Compensation(5) |
|
$ |
35,355 |
|
|
$ |
8,829 |
|
|
$ |
102,923 |
|
|
$ |
2,513 |
|
|
$ |
2,783 |
|
Health and Welfare Benefits(6) |
|
$ |
283,017 |
|
|
$ |
|
|
|
$ |
155,505 |
|
|
$ |
|
|
|
$ |
|
|
Total |
|
$ |
3,873,355 |
|
|
$ |
791,080 |
|
|
$ |
2,159,838 |
|
|
$ |
510,328 |
|
|
$ |
560,462 |
|
|
|
|
(1) |
|
There are no special arrangements related to the payment of a pro-rata bonus in the event
of disability. Payments are paid pursuant to the
standards established under Anadarkos annual incentive program for all salaried employees. |
|
(2) |
|
Reflects the in-the-money value of unvested stock options, the target value of unvested performance units, and the value of unvested
restricted stock shares and restricted stock units, granted under Anadarko equity plans, all as of December 31, 2008. |
|
(3) |
|
Reflects the in-the-money value of unvested unit appreciation rights and the value of unvested unit value rights, granted under the Western
Gas Holdings, LLC Equity Incentive Plan. Values are based on the December 31, 2008 per unit value of $50.00. |
|
(4) |
|
Reflects the lump sum present value of vested benefits related to Anadarkos supplemental pension benefits. |
|
(5) |
|
Reflects the combined vested balances in Anadarkos nonqualified Savings Restoration Plan and Deferred Compensation Plan. |
|
(6) |
|
Messrs. Gwins and Reas values reflect the continuation of additional death benefit coverage provided to officers of Anadarko until age 65.
All amounts are present values determined in accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits other than
Pensions. No values have been disclosed for the other named executive officers as they are not eligible for this benefit. |
Death
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ms. |
|
|
|
|
Mr. Gwin |
|
Mr. Pearl |
|
Mr. Rea |
|
McMillian |
|
Mr. Smith |
Cash Severance |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Pro-rata Bonus for 2008(1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Accelerated Anadarko Equity Compensation(2) |
|
$ |
2,473,450 |
|
|
$ |
264,993 |
|
|
$ |
936,214 |
|
|
$ |
254,314 |
|
|
$ |
304,275 |
|
Accelerated Western Equity Compensation(3) |
|
$ |
1,000,000 |
|
|
$ |
500,000 |
|
|
$ |
500,000 |
|
|
$ |
250,000 |
|
|
$ |
250,000 |
|
Supplemental Pension Benefits(4) |
|
$ |
81,533 |
|
|
$ |
17,258 |
|
|
$ |
465,196 |
|
|
$ |
3,501 |
|
|
$ |
3,404 |
|
Nonqualified Deferred Compensation(5) |
|
$ |
35,355 |
|
|
$ |
8,829 |
|
|
$ |
102,923 |
|
|
$ |
2,513 |
|
|
$ |
2,783 |
|
Life Insurance Proceeds(6) |
|
$ |
1,494,886 |
|
|
$ |
|
|
|
$ |
833,989 |
|
|
$ |
|
|
|
$ |
|
|
Total |
|
$ |
5,085,224 |
|
|
$ |
791,080 |
|
|
$ |
2,838,322 |
|
|
$ |
510,328 |
|
|
$ |
560,462 |
|
|
|
|
(1) |
|
There are no special arrangements related to the payment of a pro-rata bonus in the event of death. Payments are paid pursuant to the
standards established under Anadarkos annual incentive program for all salaried employees. |
|
(2) |
|
Reflects the in-the-money value of unvested stock options, the target value of unvested performance units, and the value of unvested
restricted stock shares and restricted stock units, granted under Anadarko equity plans, all as of December 31, 2008. |
95
|
|
|
(3) |
|
Reflects the in-the-money value of unvested unit appreciation rights and the value of unvested unit value rights, granted under the Western
Gas Holdings, LLC Equity Incentive Plan. Values are based on the December 31, 2008 per unit value of $50.00. |
|
(4) |
|
Includes the lump sum present value of vested benefits related to Anadarkos supplemental pension benefits. |
|
(5) |
|
Includes the combined vested balances in Anadarkos nonqualified Savings Restoration Plan and Deferred Compensation Plan. |
|
(6) |
|
Messrs. Gwins and Reas values include amounts payable under additional death benefits provided to officers and other key employees of
Anadarko. These liabilities are not insured, but are self-funded by Anadarko. Proceeds are not exempt from federal taxes; values shown
include an additional tax gross-up amount to equate benefits with nontaxable life insurance proceeds. Values exclude death benefit proceeds
from programs available to all employees. No values have been disclosed for the other named executive officers as they receive the same
benefits as generally provided to all salaried employees. |
Director Compensation
Officers or employees of Anadarko who also serve as directors of our general partner do not receive
additional compensation for their service as a director of our general partner. Non-employee
directors of Anadarko receive compensation for their board service and for attending meetings of
the board of directors of our general partner and committees of the board pursuant to the director
compensation plan approved by the board of directors in April 2008. Such compensation consists of:
|
|
|
an annual retainer of $40,000 for each board member; |
|
|
|
|
an annual retainer of $2,000 for each member of the audit committee ($15,000 for the
committee chair); |
|
|
|
|
an annual retainer of $2,000 for each member of the special committee ($15,000 for the
committee chair); |
|
|
|
|
a fee of $2,000 for each board meeting attended; |
|
|
|
|
a fee of $2,000 for each committee meeting attended; and |
|
|
|
|
annual grants of phantom units with a value of $70,000, all of which vest 100% on the
first anniversary of the date of grant (with vesting to be accelerated upon a change of
control of our general partner or Anadarko). |
In addition, each non-employee director is reimbursed for out-of-pocket expenses in connection with
attending meetings of the board of directors or committees. Each director is fully indemnified by
us, pursuant to individual indemnification agreements and our partnership agreement, for actions
associated with being a director to the fullest extent permitted under Delaware law. On May 14,
2008, the non-employee directors received an initial grant of phantom units with a value of
$125,000.
The following table sets forth information concerning total director compensation earned during the
2008 fiscal year by each non-employee director:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
Nonqualified |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive |
|
Deferred |
|
All Other |
|
|
|
|
Fees Earned or |
|
Stock |
|
Option |
|
Plan |
|
Compensation |
|
Compensa- |
|
|
|
|
Paid in Cash |
|
Awards |
|
Awards |
|
Compensation |
|
Earnings |
|
tion |
|
Total |
Name |
|
($) |
|
($)(1) |
|
($) |
|
($) |
|
($) |
|
($) |
|
($) |
Milton Carroll |
|
|
79,000 |
|
|
|
80,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,825 |
|
Anthony R. Chase |
|
|
72,000 |
|
|
|
80,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,825 |
|
James R. Crane |
|
|
70,000 |
|
|
|
80,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,825 |
|
David J. Tudor |
|
|
87,000 |
|
|
|
80,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,825 |
|
|
|
|
(1) |
|
The amounts included in the Stock Awards column represent the
compensation cost recognized by the Partnership in 2008 related to
non-option awards to directors, computed in accordance with SFAS No.
123(R). For a discussion of valuation assumptions, see Note 6
Transactions with AffiliatesEquity- based compensationLong-term
incentive plan of the Notes to Consolidated Financial Statements
included in our annual report under Item 8 of the Form 10-K for the
year ended December 31, 2008. As of December 31, 2008, each of the
non-employee directors had 7,576 outstanding phantom units. |
96
The following table contains the grant date fair value of phantom unit awards made to each
non-employee director during 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
|
|
Value of |
|
|
|
|
|
|
|
|
Stock |
|
|
|
|
|
|
|
|
and Option |
|
|
Grant |
|
Phantom |
|
Awards |
Directors |
|
Date |
|
Units (#) |
|
($)(1) |
Milton Carroll
|
|
May 14
|
|
|
7,576 |
|
|
|
125,004 |
|
Anthony R. Chase
|
|
May 14
|
|
|
7,576 |
|
|
|
125,004 |
|
James R. Crane
|
|
May 14
|
|
|
7,576 |
|
|
|
125,004 |
|
David J. Tudor
|
|
May 14
|
|
|
7,576 |
|
|
|
125,004 |
|
|
|
|
(1) |
|
The amounts included in the Grant Date Fair Value of Stock and Option
Awards column represent the grant date fair value of the awards made
to non-employee directors in 2008 computed in accordance with SFAS No.
123(R). The value ultimately realized by a director upon the actual
vesting of the award(s) may or may not be equal to the SFAS No. 123(R)
determined value. The awards granted by Western Gas Holdings, LLC were valued under SFAS No. 123(R) by multiplying
the number of units awarded by the current per unit valuation on the date of grant of $50.00,
assuming no forfeitures. The value per unit was based on the estimated fair value of the general
partner using a hybrid discounted cash flow and multiples valuation approach.
|
Compensation Committee Interlocks
and Insider Participation
As previously discussed, our general partners board of directors is not required to maintain, and
does not maintain, a compensation committee. Messrs. Walker, Gwin, Meloy, Rea and Reeves,
who are directors of our general partner, are also executive officers of Anadarko. However, all
compensation decisions with respect to each of these persons are made by Anadarko and none of these
individuals receive any compensation directly from us or our general partner. Please read Certain
Relationships and Related Transactions, and Director Independence below for information about
relationships among us, our general partner and Anadarko.
Compensation Committee Report
Neither we nor our general partner has a compensation committee. The board of directors of our
general partner has reviewed and discussed the Compensation Discussion and Analysis set forth above
and based on this review and discussion has approved it for inclusion in this Form 10-K.
The board of directors of Western Gas Holdings, LLC:
Robert G. Gwin
Charles A. Meloy
Danny J. Rea
Robert K. Reeves
R.A. Walker
Milton Carroll
Anthony R. Chase
James R. Crane
David J. Tudor
97
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following tables set forth the
beneficial ownership of our units as of February 27, 2009 held by:
|
|
|
each member of the board of directors of our general partner; |
|
|
|
|
each named executive officer of our general partner; |
|
|
|
|
all directors and officers of our general partner as a group; and |
|
|
|
|
each person or group of persons known by us to be a beneficial owner of 5% or more of
the then outstanding units. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
total common |
|
|
|
|
|
|
|
Percentage of |
|
|
Subordinated |
|
|
subordinated |
|
|
and subordinated |
|
|
|
|
|
|
|
common units |
|
|
units |
|
|
units |
|
|
units |
|
Name and address of |
|
Common units |
|
|
beneficially |
|
|
beneficially |
|
|
beneficially |
|
|
beneficially |
|
beneficial owner(1) |
|
beneficially owned(2) |
|
|
owned |
|
|
owned |
|
|
owned |
|
|
owned |
|
Anadarko Petroleum
Corporation(2) |
|
|
8,282,322 |
|
|
|
28.5 |
% |
|
|
26,536,306 |
|
|
|
100.0 |
% |
|
|
62.6 |
% |
Western Gas Resources,
Inc.(2) |
|
|
8,282,322 |
|
|
|
28.5 |
% |
|
|
26,536,306 |
|
|
|
100.0 |
% |
|
|
62.6 |
% |
WGR Holdings, LLC(2) |
|
|
8,282,322 |
|
|
|
28.5 |
% |
|
|
26,536,306 |
|
|
|
100.0 |
% |
|
|
62.6 |
% |
Robert G. Gwin |
|
|
10,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Michael C. Pearl |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Danny J. Rea |
|
|
7,500 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amanda M. McMillian |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeremy M. Smith |
|
|
3,800 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
* |
|
R.A. Walker |
|
|
6,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Milton Carroll(3) |
|
|
4,800 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Anthony R. Chase(3) |
|
|
15,200 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
* |
|
James R. Crane(3) |
|
|
350,582 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Charles A. Meloy |
|
|
3,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Robert K. Reeves |
|
|
9,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
* |
|
David J. Tudor(3) |
|
|
1,500 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
* |
|
All directors and executive
officers as a group (12
persons)(3) |
|
|
411,382 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
|
* |
|
Less than 1% |
|
(1) |
|
Unless otherwise indicated, the address for all beneficial owners in this table is 1201 Lake Robbins Drive, The Woodlands, Texas 77380. |
|
(2) |
|
Anadarko Petroleum Corporation is the ultimate parent company of WGR
Holdings, LLC and Western Gas Resources, Inc. and may, therefore, be
deemed to beneficially own the units held by WGR Holdings, LLC and
Western Gas Resources, Inc. |
|
(3) |
|
Does not include 7,576 phantom units that were granted to each of
Messrs. Carroll, Chase, Crane and Tudor under the Western Gas
Partners, LP 2008 Long-Term Incentive Plan. These phantom units vest
100% on the first anniversary of the date of the grant. Each vested
phantom unit entitles the holder to receive a common unit or, in the
discretion of our general partners board of directors, cash equal to
the fair market value of a common unit. Holders of phantom units are
entitled to distribution equivalents on a current basis. Holders of
phantom units have no voting rights until such time as the phantom
units become vested and common units are issued to such holders. |
98
The following table sets forth, as of March 3, 2009, the number of shares of common stock of
Anadarko owned by each of the named executive officers and directors of our general partner and all
directors and executive officers of our general partner as a group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Percentage of |
|
|
|
Shares of |
|
|
underlying |
|
|
Total shares of |
|
|
total shares of |
|
|
|
common stock |
|
|
options |
|
|
common stock |
|
|
common stock |
|
Name and address of |
|
owned directly |
|
|
exercisable |
|
|
beneficially |
|
|
beneficially |
|
beneficial owner(1) |
|
or indirectly(2) |
|
|
within 60 days(2) |
|
|
owned(2) |
|
|
owned(2) |
|
Robert G. Gwin(3)(4) |
|
|
21,305 |
|
|
|
68,236 |
|
|
|
89,541 |
|
|
|
* |
|
Michael C. Pearl(4) |
|
|
8,533 |
|
|
|
5,125 |
|
|
|
13,658 |
|
|
|
* |
|
Danny J. Rea(3)(4) |
|
|
8,901 |
|
|
|
22,368 |
|
|
|
31,269 |
|
|
|
* |
|
Amanda M. McMillian(4) |
|
|
8,524 |
|
|
|
0 |
|
|
|
8,524 |
|
|
|
* |
|
Jeremy M. Smith(4) |
|
|
11,438 |
|
|
|
0 |
|
|
|
11,438 |
|
|
|
* |
|
R.A. Walker(3)(4) |
|
|
61,340 |
|
|
|
126,802 |
|
|
|
188,142 |
|
|
|
* |
|
Milton Carroll |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
* |
|
Anthony R. Chase |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
* |
|
James R. Crane |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
* |
|
Charles A. Meloy(3)(4) |
|
|
27,259 |
|
|
|
37,001 |
|
|
|
64,260 |
|
|
|
* |
|
Robert K. Reeves(3)(4) |
|
|
44,150 |
|
|
|
269,368 |
|
|
|
313,518 |
|
|
|
* |
|
David J. Tudor |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
* |
|
All directors and executive
officers as a group (12
persons)(3)(4) |
|
|
191,450 |
|
|
|
528,900 |
|
|
|
720,350 |
|
|
|
* |
|
|
|
|
* |
|
Less than 1% |
|
(1) |
|
Unless otherwise indicated, the address for all beneficial owners in this table is 1201 Lake Robbins Drive, The Woodlands, Texas 77380. |
|
(2) |
|
As of December 31, 2008, there were 459.9 million shares of Anadarko Petroleum Corporation common stock issued and outstanding. |
|
(3) |
|
Does not include unvested restricted stock units of Anadarko Petroleum
Corporation held by the following directors and executive officers in
the amounts indicated: Robert G. Gwin47,500, Danny J. Rea10,133;
R.A. Walker43,533; Charles A. Meloy20,666; Robert K. Reeves30,000;
and a total of 151,832 unvested restricted stock units are held by the
directors and executive officers as a group. Restricted stock units
typically vest equally over three years beginning on the first
anniversary of the date of grant, and upon vesting are payable in
Anadarko common stock, subject to applicable tax withholding. Holders
of restricted stock units receive dividend equivalents on the units,
but do not have voting rights. Generally, a holder will forfeit any
unvested restricted units if he or she terminates voluntarily or is
terminated for cause prior to the vesting date. Holders of restricted
stock units have the ability to defer such awards. |
|
(4) |
|
Includes unvested shares of restricted common stock of Anadarko
Petroleum Corporation held by the following directors and executive
officers in the amounts indicated: Robert G. Gwin6,216; Michael C.
Pearl6,874; Danny J. Rea1,083; Amanda M. McMillian6,597; Jeremy
M. Smith7,893; R.A. Walker16,266; Charles A. Meloy 3,933;
Robert K. Reeves3,633; and a total of 52,495 unvested shares of
restricted common stock are held by the directors and executive
officers as a group. Restricted stock awards typically vest equally
over three years beginning on the first anniversary of the date of
grant. Holders of restricted stock receive dividends on the shares and
also have voting rights. Generally, a holder of restricted stock will
forfeit any unvested restricted shares if he or she terminates
voluntarily or is terminated for cause prior to the vesting date. |
The following table sets forth owners of 5% or greater of our units.
|
|
|
|
|
|
|
|
|
|
|
Amount and |
|
|
|
|
|
|
Nature |
|
|
|
|
|
|
of Beneficial |
|
|
Title of Class |
|
Name and Address of Beneficial Owner |
|
Ownership |
|
Percent of Class |
Common Units |
|
Kayne Anderson Capital Advisors, L.P. |
|
2,225,203 (1) |
|
8.39% |
|
|
1800 Avenue of the Stars |
|
|
|
|
|
|
Second Floor |
|
|
|
|
|
|
Los Angeles, CA 90067 |
|
|
|
|
Common Units |
|
Neuberger Berman Inc. |
|
1,965,244 (2) |
|
7.406% |
|
|
605 Third Avenue |
|
|
|
|
|
|
New York, NY 10158 |
|
|
|
|
|
|
|
(1) |
|
Based upon its Schedule 13G filed February 12, 2009 with the SEC with respect to Company
securities held as of December 31, 2008, Kayne Anderson Capital Advisors, L.P. has shared
voting power as to 2,225,203 shares of
common units and shared dispositive power as to 2,225,203 shares of common units, and Richard
A. Kayne has shared |
99
|
|
|
|
|
voting power as to 2,225,203 shares of common units and shared dispositive
power as to 2,225,203 shares of common units. |
|
(2) |
|
Based upon its Schedule 13G filed February 13, 2009 with the SEC with respect to Company
securities held as of December 31, 2008, Neuberger Berman Inc. has sole voting power as to
1,756,934 shares of common units, and shared dispositive power as to 1,965,244 shares of common
units, and Neuberger Berman, LLC has sole voting power as to
1,756,934 shares of common units and shared dispositive power as to
1,965,244 shares of common units. |
Securities Authorized for Issuance Under Equity Compensation Plan
The following table sets forth information with respect to the securities that may be issued under
the Western Gas Partners, LP 2008 Long-Term Incentive Plan, or LTIP, as of December 31,
2008. For
more information regarding the LTIP, which did not require approval by our unitholders, please read
Note 6Transactions with Affiliates included in the notes
to the consolidated financial statements
under Item 8 Financial Statements and Supplementary
Data of this Form 10-K and Item 11Executive CompensationLong-Term Incentive Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
(a) |
|
(b) |
|
remaining available |
|
|
Number of securities |
|
Weighted-average |
|
for future issuance |
|
|
to be issued upon |
|
exercise price of |
|
under equity |
|
|
exercise of |
|
outstanding |
|
compensation plans |
|
|
outstanding options, |
|
options, warrants |
|
(excluding securities |
Plan category |
|
warrants and rights |
|
and rights |
|
reflected in column(a)) |
Equity compensation plans approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security
holders(1) |
|
|
30,304 |
|
|
|
|
(2) |
|
|
2,219,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
30,304 |
|
|
|
|
|
|
|
2,219,696 |
|
|
|
|
(1) |
|
The board of directors of our general partner adopted the LTIP in connection with the
initial public offering of our common units. |
|
(2) |
|
Phantom units constitute the only rights outstanding under the LTIP. Each phantom unit
that may be settled in common units entitles the holder to receive, upon vesting, one
common unit with respect to each phantom unit, without payment of any cash. Accordingly,
there is no reportable weighted-average exercise price. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
As of February 27, 2009, our general partner and its affiliates owned 8,282,322 common units and
26,536,306 subordinated units representing an aggregate 61.3% limited partner interest in us. In
addition, as of February 27, 2009, our general partner owned 1,135,296 general partner units,
representing a 2% general partner interest in us, as well as incentive distribution rights.
Distributions and Payments to Our General Partner and its Affiliates
The following table summarizes the distributions and payments made by us to our general partner and
its affiliates in connection with our formation and to be made to us by our general partner and its
affiliates in connection with our ongoing operation and liquidation. These distributions and
payments were determined, before our initial public offering, by and among affiliated entities and,
consequently, are not the result of arms-length negotiations.
|
|
|
Formation stage |
|
|
|
|
|
The consideration
received by Anadarko
and
|
|
5,725,431 common units; |
its subsidiaries
for the contribution
of the
|
|
26,536,306 subordinated units; |
assets and
liabilities to us |
|
1,083,115 general partner units, and |
|
|
our incentive distribution rights. |
100
|
|
|
|
|
|
Operational stage |
|
|
|
|
|
Distributions of available cash to
our general partner and its
affiliates
|
|
We will generally make cash
distributions of 98.0% to our
unitholders pro rata, including
Anadarko as the indirect holder of
an aggregate 8,282,322 common units
and 26,536,306 subordinated units,
and 2.0% to our general partner,
assuming it makes any capital
contributions necessary to maintain
its 2.0% interest in us. In
addition, if distributions exceed
the minimum quarterly distribution
and other higher target distribution
levels, our general partner will be
entitled to increasing percentages
of the distributions, up to 50.0% of
the distributions above the highest
target distribution level. |
|
|
|
|
|
Assuming we have sufficient
available cash to pay the full
minimum quarterly distribution on
all of our outstanding units for
four quarters, our general partner
and its affiliates would receive an
annual distribution of approximately
$1.4 million on their general
partner units and $41.8 million on
their common and subordinated units. |
|
|
|
Payments to our general partner and
its affiliates
|
|
Our general partner and its
affiliates are entitled to
reimbursement for all expenses
incurred on our behalf, including
salaries and employee benefit costs
for employees who provide services
to us, and all other necessary or
appropriate expenses allocable to us
or reasonably incurred by our
general partner and its affiliates
in connection with operating our
business. The partnership agreement
provides that our general partner
determines in good faith the amount
of such expenses that are allocable
to us. |
|
|
|
Withdrawal or removal of our general
partner
|
|
If our general partner withdraws or
is removed, its general partner
interest and its incentive
distribution rights will either be
sold to the new general partner for
cash or converted into common units,
in each case for an amount equal to
the fair market value of those
interests. |
|
|
|
Liquidation stage |
|
|
|
|
|
Liquidation
|
|
Upon our liquidation, our partners,
including our general partner, will
be entitled to receive liquidating
distributions according to their
respective capital account balances. |
Agreements with Anadarko
We and other parties entered into various agreements with Anadarko in connection with our initial
public offering in May 2008 and our asset acquisition in December 2008. These agreements address
the acquisition of assets and the assumption of liabilities by us and our subsidiaries. These
agreements were not the result of arms-length negotiations and, as such, they or underlying
transactions may not be based on terms as favorable as those that could have been obtained from
unaffiliated third parties.
Omnibus agreement
In connection with our initial public offering, we entered into an omnibus agreement with Anadarko
and our general partner that addresses the following matters:
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Anadarkos obligation to indemnify us for certain liabilities and our obligation to
indemnify Anadarko for certain liabilities; |
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our obligation to reimburse Anadarko for all expenses incurred or payments made on
our behalf in conjunction with Anadarkos provision of general and administrative
services to us, including salary and benefits of Anadarko personnel, our public
company expenses, general and administrative expenses and salaries and benefits of our
executive management who are employees of Anadarko; |
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our obligation to reimburse Anadarko for all insurance coverage expenses it incurs
or payments it makes with respect to our assets; and our obligation to reimburse
Anadarko for our allocable portion of commitment fees |
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(0.11% of our committed and
available borrowing capacity) that Anadarko incurs under its $1.3 billion credit
facility. |
The table below reflects the categories of expenses for which the Partnership was obligated to
reimburse Anadarko pursuant to the omnibus agreement for the year ended December 31, 2008:
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Period from May 14, 2008 |
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to December 31, 2008 |
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(in millions) |
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Reimbursement of general and administrative expenses |
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$ |
3.4 |
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Reimbursement of public company expenses |
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$ |
3.1 |
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Reimbursement of expenses related to Powder River acquisition |
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$ |
1.5 |
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Reimbursement of commitment fees |
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$ |
0.1 |
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Our general partner and its affiliates also received payments from us pursuant to the contractual
arrangements described below under the caption Contracts with affiliates.
Any or all of the provisions of the omnibus agreement are terminable by Anadarko at its option if
our general partner is removed without cause and units held by our general partner and its
affiliates are not voted in favor of that removal. The omnibus agreement will also generally
terminate in the event of a change of control of us or our general partner.
Administrative services and reimbursement
Under the omnibus agreement, we reimburse Anadarko for the payment of certain operating expenses
and for the provision of various general and administrative services for our benefit with respect
to our initial assets and for subsequent acquisitions. The omnibus agreement further provides that
we reimburse Anadarko for all expenses it incurs or payments it makes with respect to our assets.
Pursuant to these arrangements, Anadarko performs centralized corporate functions for us, such as
legal, accounting, treasury, cash management, insurance administration and claims processing, risk
management, health, safety and environmental, information technology, human resources, credit,
payroll, internal audit, tax, marketing and midstream administration. We reimburse Anadarko for all
of the expenses it incurs or payments it makes on our behalf, including salaries and benefits of
Anadarko personnel, our public company expenses, our general and administrative expenses and
salaries and benefits of our executive management who are also employees of Anadarko.
Under the omnibus agreement, our reimbursement to Anadarko for certain general and administrative
expenses it allocates to us was capped at $6.0 million annually. This cap was subsequently modified
on December 19, 2008 due to the Powder River acquisition from Anadarko and is currently $6.65
million annually through December 31, 2009. The cap is subject to adjustment to reflect changes in
the Consumer Price Index and, with the concurrence of the special committee of our general
partners board of directors, to reflect expansions of our operations through the acquisition or
construction of new assets or businesses. Thereafter, our general partner will determine the
general and administrative expenses to be allocated to us in accordance with our partnership
agreement. The cap contained in the omnibus agreement does not apply to incremental general and
administrative expenses that we incur or are allocated to us as a result of being a publicly traded
entity.
Indemnification
Under the omnibus agreement, Anadarko has indemnified us until May 14, 2011 against certain
potential environmental claims, losses and expenses associated with the operation of our initial
assets, which occurred prior to May 14, 2008 or relate to any investigation, claim or proceeding
under environmental laws relating to such assets and pending as of May 14, 2008. Anadarko will have
no indemnification obligation with respect to environmental claims on our initial assets made as a
result of additions to or modifications of environmental laws that are promulgated after May 14,
2008.
Additionally, Anadarko will indemnify us for losses attributable to the following with respect to
our initial assets:
(1) |
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our failure, as of May 14, 2008, to have valid easements, fee title or leasehold interests in
and to the lands on which our assets are located, to the extent such failure renders us unable
to use or operate our assets in substantially the same manner in which they were used and
operated immediately prior to the closing of our initial public offering; |
102
(2) |
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our failure, as of May 14, 2008, to have any consent or governmental permit necessary to
allow (i) the transfer of assets from Anadarko to us at May 14, 2008 or (ii) us to use or
operate our assets in substantially the same manner in which they were used and operated
immediately prior to May 14, 2008; |
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(3) |
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all income tax liabilities |
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(i) |
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attributable to the pre-closing operations of our assets, |
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(ii) |
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arising from or relating to the formation transactions, or |
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(iii) |
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arising under Treasury Regulation Section 1.1502-6 and any similar provision from
state, local or foreign applicable law, by contract, as successor or transferee or
otherwise, provided that such income tax is attributable to having been a member of any
consolidated, combined or unitary group prior to the closing of our initial public
offering; |
(4) |
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all liabilities, other than covered environmental laws and other than liabilities incurred in
the ordinary course of business conducted in compliance with the applicable laws, that arise
prior to May 14, 2008; and |
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(5) |
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all liabilities attributable to any assets or entities retained by Anadarko. |
Anadarkos liability for indemnification is unlimited in amount. Anadarko will not have any
obligation to indemnify us, unless a claim for indemnification specifying in reasonable detail the
basis for such claim is furnished to us in good faith (a) with respect to a claim under clause (1)
or (2) above, prior to the third anniversary date of the closing of our initial public offering or
(b) with respect to a claim under clause (3) or (5) above, prior to the first day after expiration
of the statute of limitations period applicable to such claim. In no event shall Anadarko be
obligated to indemnify us for any losses or income taxes to the extent we have made reservations
for any such losses or income taxes in our combined financial statements as of December 31, 2007,
or to the extent we recover any such losses or income taxes under available insurance coverage or
from contractual rights against any third party.
Under the omnibus agreement, we have agreed to indemnify Anadarko for all claims, losses and
expenses attributable to operations of our initial assets on or after May 14, 2008,
to the extent
that such losses are not subject to Anadarkos indemnification obligations.
Indemnification Agreements
In connection with our initial public offering, our general partner entered into indemnification
agreements with each of its officers and directors (each, an Indemnitee). Each indemnification
agreement provides that our general partner will indemnify and hold harmless each Indemnitee
against all expense, liability and loss (including attorneys fees, judgments, fines or penalties
and amounts to be paid in settlement) actually and reasonably incurred or suffered by the
Indemnitee in connection with serving in their capacity as officers and directors of our general
partner (or of any subsidiary of our general partner) or in any capacity at the request of our
general partner or its board of directors to the fullest extent permitted by applicable law,
including Section 18-108 of the Delaware Limited Liability Company Act in effect on the date of the
agreement or as such laws may be amended to provide more advantageous rights to the Indemnitee. The
indemnification agreements also provide that our general partner must advance payment of certain
expenses to the Indemnitee, including fees of counsel, in advance of final disposition of any
proceeding subject to receipt of an undertaking from the Indemnitee to return such advance if it is
ultimately determined that the Indemnitee is not entitled to indemnification.
Through December 31, 2008, there have been no payments or claims to Anadarko related to
indemnifications and no payments or claims have been received from Anadarko related to
indemnifications.
Services and Secondment Agreement
In connection with our initial public offering, Anadarko and our general partner entered into a
services and secondment agreement pursuant to which specified employees of Anadarko are seconded to
our general partner to provide operating, routine maintenance and other services with respect to
our business under the direction, supervision and control of our general partner. Pursuant to the
services and secondment agreement, our general partner reimburses Anadarko for the services
provided by the seconded employees. The initial term of the services and secondment agreement is 10
years. The term will extend for additional 12-month periods unless either party provides 180 days
written notice otherwise prior to the
expiration of the applicable 12-month period. Either party may terminate the agreement at any time
upon 180 days written notice.
103
Tax sharing agreement
In connection with our initial public offering, we entered into a tax sharing agreement pursuant to
which we reimburse Anadarko for our share of Texas margin tax borne by
Anadarko as a result of our results being included in a combined or consolidated tax return filed
by Anadarko with respect to periods after May 14, 2008, the closing date of our initial public
offering with respect to our initial assets and December 19, 2008 with respect to our
Powder River assets. Anadarko may use its tax attributes to cause its combined or consolidated group, of which
we may be a member for this purpose, to owe no tax. However, we would nevertheless reimburse
Anadarko for the tax we would have owed had the attributes not been available or used for our
benefit, even though Anadarko had no cash expense for that period.
Note from Anadarko
In connection with our initial public offering, we loaned $260.0 million to Anadarko. The note is a
30-year note bearing interest at a fixed annual rate of 6.5%, payable quarterly, with principal and
all accrued and unpaid interest due in full at maturity.
Our working capital facility
In connection with our initial public offering, we entered into a $30.0 million two-year revolving
credit facility with Anadarko as the lender. The facility is available exclusively to fund our
working capital borrowings. Borrowings under the facility bear interest at the same rate as applies
to borrowings under Anadarkos revolving credit facility. We pay a commitment fee of 0.11%
annually to Anadarko on the unused portion of the working capital facility.
We are required to reduce all borrowings under our 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.