**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM10-Q/A**

**(Amendment No. 1)**

 

**(Mark One)**

 

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

 

**FOR THE QUARTERLY PERIOD ENDEDSEPTEMBER 30, 2004**

** **

**OR**

 

**o****          ****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 1-10389**

 

**WESTERNGAS RESOURCES, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                                         | ** ** | **84-1127613**                        |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                      |       | (I.R.S. Employer  Identification No.) |
|                                                                                 |       |                                  |
| **1099 18th Street, Suite 1200,  Denver, Colorado**                                  | ** ** | **80202**                             |
| (Address of principal executive offices)                                             |       | (Zip Code)                            |
|                                                                                 |       |                                  |
| **(303) 452-5603**                                                                   |
| Registrant’s telephone number, including  area code                             |
|                                                                                 |       |                                  |
| **No Changes**                                                                       |
| (Former name, former address and former  fiscal year, if changed since last report). |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes ý  No o

 

On November 1, 2004, there were 73,955,425 shares of the registrant’sCommon Stock outstanding.

 

----

 

**EXPLANATORY NOTE**

 

This Form 10-Q/A constitutes Amendment No.1 to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2004, filed on November 9, 2004(the “Original Report”).  We are herebyamending the Original Report to amend Part I, Item 4 as it appeared in theOriginal Report.

 

Other than as set forth above, this Amendment No.1 does not affect the consolidatedfinancial statements and footnotes or other disclosures filed in the OriginalReport.  Items not amended are presentedfor the convenience of the reader only. This Amendment No. 1 does not reflect events occuring after the originalfiling date of November 9, 2004. Therefore, this Amendment should be read together with other documentswe have filed with the Securities and Exchange Commission subsequent to theoriginal filing date.

 

2

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**Western Gas Resources, Inc.**

**Form 10-Q**

**Table of Contents**

 
| PART I - Financial Information |    |
|--------------------------------|---------|
|                           |    |   |   |
|                           | Item 1. | Financial Statements |   |
|                           |    |   |   |
|                           |    | Consolidated Balance Sheet - September 30, 2004 and December 31, 2003 |   |
|                           |    |   |   |
|                           |    | Consolidated Statement of Cash Flows -  Three Months Ended September 30, 2004 and 2003 |   |
|                           |    |   |   |
|                           |    | Consolidated Statement of Operations -  Three Months Ended September 30, 2004 and 2003 |   |
|                           |    |   |   |
|                           |    | Consolidated Statement of Changes in  Stockholders’ Equity - Three Months Ended September 30, 2004 |   |
|                           |    |   |   |
|                           |    | Notes to Consolidated Financial Statements |   |
|                           |    |   |   |
|                           | Item 2. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                           |    |   |   |
|                           | Item 3. | Quantitative and Qualitative Disclosures  about Market Risk |   |
|                           |    |   |   |
|                           | Item 4. | Controls and Procedures |   |
|                           |    |   |   |
| PART II - Other Information    |    |
|                           |    |   |   |
|                           | Item 1. | Legal Proceedings |   |
|                           |    |   |   |
|                           | Item 6. | Exhibits  and Reports on Form 8-K |   |
|                           |    |   |   |
| Signatures                     |    |

 

3

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**PARTI - FINANCIAL INFORMATION**

 

**ITEM 1.       FINANCIAL STATEMENTS**

 

WESTERNGAS RESOURCES, INC.

CONSOLIDATED BALANCE SHEET

(Dollars in thousands, except share data)

 
| ** **                                                                                                                                                            | ** ** | **September 30,********2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **(unaudited)**               | ** ** | ** **             | ** ** |
| ASSETS                                                                                                                                                                |       |                          |       |                   |       |
|                                                                                                                                                                  |       |                          |       |                   |       |
| Current assets:                                                                                                                                                       |       |                          |       |                   |       |
| Cash and cash equivalents                                                                                                                                             |       | $                             | 2,719      |                   | $          | 26,116 |   |
| Trade accounts receivable, net                                                                                                                                        |       | 240,235                       |       | 262,509                |       |
| Inventory                                                                                                                                                             |       | 109,260                       |       | 70,304                 |       |
| Assets from price risk management  activities                                                                                                                         |       | 35,760                        |       | 17,149                 |       |
| Other                                                                                                                                                                 |       | 9,210                         |       | 11,225                 |       |
| Total current assets                                                                                                                                                  |       | 397,184                       |       | 387,303                |       |
|                                                                                                                                                                  |       |                          |       |                   |       |
| Property and equipment:                                                                                                                                               |       |                          |       |                   |       |
| Gas gathering, processing and  transportation                                                                                                                         |       | 1,090,319                     |       | 1,028,176              |       |
| Oil and gas properties and equipment  (successful efforts method)                                                                                                     |       | 385,654                       |       | 329,555                |       |
| Construction in progress                                                                                                                                              |       | 158,705                       |       | 134,751                |       |
|                                                                                                                                                                  |       | 1,634,678                     |       | 1,492,482              |       |
| Less: Accumulated depreciation, depletion  and amortization                                                                                                           |       | (548,506                      | )          | (495,721               | )          |
|                                                                                                                                                                  |       |                          |       |                   |       |
| Total property and equipment, net                                                                                                                                     |       | 1,086,172                     |       | 996,761                |       |
|                                                                                                                                                                  |       |                          |       |                   |       |
| Other assets:                                                                                                                                                         |       |                          |       |                   |       |
| Gas purchase contracts (net of accumulated  amortization of $40,223 and $38,937, respectively)                                                                        |       | 27,932                        |       | 29,219                 |       |
| Assets from price risk management  activities                                                                                                                         |       | 546                           |       | 1,466                  |       |
| Equity investments                                                                                                                                                    |       | 38,021                        |       | 39,289                 |       |
| Other                                                                                                                                                                 |       | 4,071                         |       | 6,486                  |       |
|                                                                                                                                                                  |       |                          |       |                   |       |
| Total other assets                                                                                                                                                    |       | 70,570                        |       | 76,460                 |       |
|                                                                                                                                                                  |       |                          |       |                   |       |
| TOTAL ASSETS                                                                                                                                                          |       | $                             | 1,553,926  |                   | $          | 1,460,524 |   |
|                                                                                                                                                                  |       |                          |       |                   |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                             |       |                          |       |                   |       |
| Current liabilities:                                                                                                                                                  |       |                          |       |                   |       |
| Accounts payable                                                                                                                                                      |       | $                             | 284,734    |                   | $          | 303,186 |   |
| Accrued expenses                                                                                                                                                      |       | 38,455                        |       | 42,136                 |       |
| Liabilities from price risk management  activities                                                                                                                    |       | 34,617                        |       | 10,603                 |       |
| Dividends payable                                                                                                                                                     |       | 3,697                         |       | 3,056                  |       |
| Total current liabilities                                                                                                                                             |       | 361,503                       |       | 358,981                |       |
|                                                                                                                                                                  |       |                          |       |                   |       |
| Long-term debt                                                                                                                                                        |       | 317,500                       |       | 339,000                |       |
| Liabilities from price risk management  activities                                                                                                                    |       | 1,881                         |       | 1,304                  |       |
| Other long-term liabilities                                                                                                                                           |       | 24,373                        |       | 22,057                 |       |
| Deferred income taxes payable, net                                                                                                                                    |       | 217,376                       |       | 176,673                |       |
|                                                                                                                                                                  |       |                          |       |                   |       |
| Total liabilities                                                                                                                                                     |       | 922,633                       |       | 898,015                |       |
|                                                                                                                                                                  |       |                          |       |                   |       |
| Stockholders’ equity:                                                                                                                                            |       |                          |       |                   |       |
| Preferred Stock; 10,000,000 shares  authorized: $2.625 cumulative convertible preferred stock, par value $0.10; 0  and 2,060,000 issued and outstanding, respectively |       | —                        |       | 206                    |       |
| Common stock, par value $0.10; 100,000,000  shares authorized; 73,891,286 and 68,271,802 shares issued, respectively                                                  |       | 7,412                         |       | 6,876                  |       |
| Treasury stock, at cost; 50,032 common  shares in treasury                                                                                                            |       | (788                          | )          | (788                   | )          |
| Additional paid-in capital                                                                                                                                            |       | 388,469                       |       | 381,581                |       |
| Retained earnings                                                                                                                                                     |       | 241,354                       |       | 173,076                |       |
| Accumulated other comprehensive income                                                                                                                                |       | (5,154                        | )          | 1,558                  |       |
|                                                                                                                                                                  |       |                          |       |                   |       |
| Total stockholders’ equity                                                                                                                                       |       | 631,293                       |       | 562,509                |       |
|                                                                                                                                                                  |       |                          |       |                   |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                       |       | $                             | 1,553,926  |                   | $          | 1,460,524 |   |
|                                                                                                                                                                       |            |                               |            |                        |            |  |  |  |  |  |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

4

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WESTERN GAS RESOURCES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 
| ** **                                                                              | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                              | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                                                                                    |       |                                 |       |   |   |
| Reconciliation of net income to net cash  provided by operating activities:             |       |                                 |       |   |   |
| Net income                                                                              |       | $                                    | 78,181     |   | $ | 65,164 |   |
| Add income items that do not affect cash:                                               |       |                                 |       |   |   |
| Depreciation, depletion and amortization                                                |       | 67,013                               |       | 53,305 |   |
| Loss on the sale of property and equipment                                              |       | 1,409                                |       | 142 |   |
| Cumulative effect of a change in accounting  principle                                  |       | (4,714                               | )          | 6,724 |   |
| Deferred income taxes                                                                   |       | 42,533                               |       | 39,272 |   |
| Non-cash change in fair value of  derivatives                                           |       | (2,163                               | )          | (1,084 | ) |
| Other non-cash items, net                                                               |       | 2,468                                |       | 2,527 |   |
|                                                                                    |       |                                 |       |   |   |
| Adjustments to working capital to arrive at  net cash provided by operating activities: |       |                                 |       |   |   |
| Decrease in trade accounts receivable                                                   |       | 23,125                               |       | 38,717 |   |
| Increase in inventory                                                                   |       | (37,738                              | )          | (28,379 | ) |
| (Increase) decrease in other current assets                                             |       | (2,365                               | )          | 9,882 |   |
| (Increase) decrease in other assets and  liabilities, net                               |       | 205                                  |       | (478 | ) |
| Increase (decrease) in accounts payable                                                 |       | (18,452                              | )          | 20,375 |   |
| Increase (decrease) in accrued expenses                                                 |       | (200                                 | )          | 4,306 |   |
|                                                                                    |       |                                 |       |   |   |
| Net cash provided by operating activities                                               |       | 149,302                              |       | 210,473 |   |
|                                                                                    |       |                                 |       |   |   |
| Cash flows from investing activities:                                                   |       |                                 |       |   |   |
|                                                                                    |       |                                 |       |   |   |
| Purchases of property and equipment                                                     |       | (147,103                             | )          | (125,484 | ) |
| Proceeds from dispositions of property and  equipment                                   |       | 1,022                                |       | 3,831 |   |
| Contributions to equity investees                                                       |       | —                               |       | (10,450 | ) |
| Distributions from equity investees                                                     |       | 1,196                                |       | — |   |
|                                                                                    |       |                                 |       |   |   |
| Net cash used in investing activities                                                   |       | (144,885                             | )          | (132,103 | ) |
|                                                                                    |       |                                 |       |   |   |
| Cash flows from financing activities:                                                   |       |                                 |       |   |   |
|                                                                                    |       |                                 |       |   |   |
| Net proceeds from exercise of common stock  options                                     |       | 6,760                                |       | 3,062 |   |
| Payments for the redemption of preferred  stock                                         |       | (1,930                               | )          | — |   |
| Debt issue costs paid                                                                   |       | (1,850                               | )          | (1,851 | ) |
| Borrowings of long-term debt                                                            |       | 100,000                              |       | — |   |
| Payments on long-term debt                                                              |       | (165,000                             | )          | 15,000 |   |
| Borrowings under revolving credit facility                                              |       | 1,390,330                            |       | 747,200 |   |
| Payments on revolving credit facility                                                   |       | (1,346,830                           | )          | (780,800 | ) |
| Dividends paid                                                                          |       | (9,294                               | )          | (10,403 | ) |
|                                                                                    |       |                                 |       |   |   |
| Net cash (used in) financing activities                                                 |       | (27,814                              | )          | (27,792 | ) |
|                                                                                    |       |                                 |       |   |   |
| Net (decrease) increase in cash and cash  equivalents                                   |       | (23,397                              | )          | 50,578 |   |
|                                                                                    |       |                                 |       |   |   |
| Cash and cash equivalents at beginning of  period                                       |       | 26,116                               |       | 7,312 |   |
|                                                                                    |       |                                 |       |   |   |
| Cash and cash equivalents at end of period                                              |       | $                                    | 2,719      |   | $ | 57,890 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

5

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WESTERNGAS RESOURCES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share and pershare amounts)

 
| ** **                                                                                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Revenues:                                                                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Sale of gas                                                                                                                 |       | $                                     | 560,983    |                                 | $          | 557,105 |   | $ | 1,821,974 |   | $ | 1,909,297 |   |
| Sale of natural gas liquids                                                                                                 |       | 124,464                               |       | 86,009                               |       | 319,400 |   | 258,840 |   |
| Gathering, processing and transportation  revenue                                                                           |       | 25,080                                |       | 21,884                               |       | 66,319 |   | 63,119 |   |
| Price risk management activities                                                                                            |       | 7,158                                 |       | 1,065                                |       | 5,338 |   | (18,050 | ) |
| Other                                                                                                                       |       | 570                                   |       | 737                                  |       | 2,743 |   | 2,191 |   |
| Total revenues                                                                                                              |       | 718,255                               |       | 666,800                              |       | 2,215,774 |   | 2,215,397 |   |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Costs and expenses:                                                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Product purchases                                                                                                           |       | 585,774                               |       | 566,937                              |       | 1,845,282 |   | 1,898,375 |   |
| Plant and transportation operating expense                                                                                  |       | 23,976                                |       | 21,944                               |       | 68,165 |   | 66,478 |   |
| Oil and gas exploration and production  expense                                                                             |       | 18,510                                |       | 13,029                               |       | 55,432 |   | 38,830 |   |
| Depreciation, depletion and amortization                                                                                    |       | 22,039                                |       | 17,477                               |       | 67,013 |   | 53,305 |   |
| (Gain) loss on sale of assets                                                                                               |       | (230                                  | )          | 56                                   |       | 1,409 |   | 142 |   |
| Selling and administrative expense                                                                                          |       | 10,305                                |       | 8,972                                |       | 37,506 |   | 29,487 |   |
| Earnings from equity investments                                                                                            |       | (1,542                                | )          | (1,780                               | )          | (5,244 | ) | (5,209 | ) |
| Loss from early extinguishment of debt                                                                                      |       | —                                |       | —                               |       | 10,662 |   | — |   |
| Interest expense                                                                                                            |       | 3,912                                 |       | 6,449                                |       | 15,065 |   | 19,692 |   |
| Total costs and expenses                                                                                                    |       | 662,744                               |       | 633,084                              |       | 2,095,290 |   | 2,101,100 |   |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Income before income taxes                                                                                                  |       | 55,511                                |       | 33,716                               |       | 120,484 |   | 114,297 |   |
| Provision for income taxes:                                                                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Current                                                                                                                     |       | 1,949                                 |       | 544                                  |       | 4,484 |   | 3,137 |   |
| Deferred                                                                                                                    |       | 18,444                                |       | 12,283                               |       | 42,533 |   | 39,272 |   |
| Total provision for income taxes                                                                                            |       | 20,393                                |       | 12,827                               |       | 47,017 |   | 42,409 |   |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Income before cumulative effect of change  in accounting principle                                                          |       | 35,118                                |       | 20,889                               |       | 73,467 |   | 71,888 |   |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Cumulative effect of changes in accounting  principles net of tax of $2,710 and net of tax benefit of $3,967,  respectively |       | —                                |       | —                               |       | 4,714 |   | (6,724 | ) |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                                                                                                  |       | 35,118                                |       | 20,889                               |       | 78,181 |   | 65,164 |   |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Preferred stock requirements                                                                                                |       | —                                |       | (1,811                               | )          | (835 | ) | (5,434 | ) |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Income attributable to common stock                                                                                         |       | $                                     | 35,118     |                                 | $          | 19,078 |   | $ | 77,346 |   | $ | 59,730 |   |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Net income per share of common stock before  cumulative effect of change in accounting principle                            |       | $                                     | .48        |                                 | $          | .29 |   | $ | 1.01 |   | $ | 1.00 |   |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Cumulative effect of change in accounting  principle                                                                        |       | $                                     | —     |                                 | $          | — |   | $ | .07 |   | $ | (.10 | ) |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Earnings per share of common stock                                                                                          |       | $                                     | .48        |                                 | $          | .29 |   | $ | 1.08 |   | $ | .90 |   |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average shares of common stock  outstanding                                                                        |       | 73,778,729                            |       | 66,394,530                           |       | 71,887,962 |   | 66,288,592 |   |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Income attributable to common stock –  assuming dilution                                                               |       | $                                     | 35,118     |                                 | $          | 20,889 |   | $ | 77,346 |   | $ | 65,164 |   |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Earnings per share of common  stock – assuming dilution                                                                |       | $                                     | .47        |                                 | $          | .28 |   | $ | 1.06 |   | $ | .87 |   |
|                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average shares of common stock  outstanding - assuming dilution                                                    |       | 74,998,146                            |       | 74,690,296                           |       | 72,934,517 |   | 74,541,408 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

6

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WESTERN GAS RESOURCES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except share amounts)

 
|                                                                 |   | **$2.625  Cumulative  Convertible  Preferred  Stock** | ** ** | **Shares  of Common  Stock** | ** ** | **Shares  of Common  Stock  in Treasury** | ** ** | **$2.625  Cumulative  Convertible  Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Treasury  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income  Net of Tax** | ** ** | **Total  Stock-  holders’  Equity** |    |
|----------------------------------------------------------------------|--------|-------------------------------------------------------|------------|------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------------|------------|-------------------|------------|---------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------|---------|
|                                                                 |   |                                                  |       |                         |       |                                      |       |                                                  |       |              |       |                |       |                             |       |                   |       |                                                      |       |                                     |    |
| Balance at  December 31, 2003                                        |   | 2,060,000                                             |       | 68,271,802                   |       | 50,032                                    |       | $                                                     | 206        |              | $          | 3,438               |       | $                                | (788       | )                      | $          | 385,019                                                   |       | $                                        | 173,076 |   | $ | 1,558 |   | $ | 562,509 |   |
| Comprehensive  income:                                               |   |                                                  |       |                         |       |                                      |       |                                                  |       |              |       |                |       |                             |       |                   |       |                                                      |       |                                     |    |
| Net income, nine  months ended September 30, 2004                    |   |                                                  |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | —                           |       | 78,181                 |       | —                                                    |       | 78,181                                   |    |
| Translation  adjustments                                             |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | —                           |       | —                 |       | 144                                                       |       | 144                                      |    |
| Other  comprehensive income                                          |   |                                                  |       |                         |       |                                      |       |                                                  |       |              |       |                |       |                             |       |                   |       |                                                      |       |                                     |    |
| From equity  investees                                               |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | —                           |       | —                 |       | (814                                                      | )          | (814                                     | )       |
| Reclassification  adjustment for settled contracts                   |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | —                           |       | —                 |       | 1,695                                                     |       | 1,695                                    |    |
| Changes in fair  value of outstanding hedge positions                |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | —                           |       | —                 |       | (3,124                                                    | )          | (3,124                                   | )       |
| Hedge  ineffectiveness                                               |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | —                           |       | —                 |       | (35                                                       | )          | (35                                      | )       |
| Fair value of new  hedge positions                                   |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | —                           |       | —                 |       | (4,578                                                    | )          | (4,578                                   | )       |
| Change in  accumulated derivative comprehensive income               |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | —                           |       | —                 |       | (6,042                                                    | )          | (6,042                                   | )       |
| Total  comprehensive income, net of tax                              |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | —                           |       | —                 |       | —                                                    |       | 71,469                                   |    |
| Stock options  exercised                                             |   | —                                                |       | 494,256                      |       | —                                    |       | —                                                |       | 36                |       | —              |       | 6,724                            |       | —                 |       | —                                                    |       | 6,760                                    |    |
| Effect of  re-priced options                                         |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | 482                              |       | —                 |       | —                                                    |       | 482                                      |    |
| Tax benefit  related to stock options                                |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | 1,938                            |       | —                 |       | —                                                    |       | 1,938                                    |    |
| Dividends  declared on common stock                                  |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | —                           |       | (9,146                 | )          | —                                                    |       | (9,146                                   | )       |
| Two-for-one  common stock split                                      |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | 3,683             |       | —              |       | (3,683                           | )          | —                 |       | —                                                    |       | —                                   |    |
| Dividends  declared on $2.625 cumulative convertible preferred stock |   | —                                                |       | —                       |       | —                                    |       | —                                                |       | —            |       | —              |       | —                           |       | (789                   | )          | —                                                    |       | (789                                     | )       |
| Conversion of  $2.625 cumulative convertible preferred stock         |   | (2,024,404                                            | )          | 5,125,228                    |       | —                                    |       | (204                                                  | )          | 255               |       | —              |       | (93                              | )          | —                 |       | —                                                    |       | (42                                      | )       |
| Redemption of  $2.625 cumulative convertible preferred stock         |   | (35,596                                               | )          | —                       |       | —                                    |       | (2                                                    | )          | —            |       | —              |       | (1,918                           | )          | 32                     |       | —                                                    |       | (1,888                                   | )       |
|                                                                 |   |                                                  |       |                         |       |                                      |       |                                                  |       |              |       |                |       |                             |       |                   |       |                                                      |       |                                     |    |
| Balance at  September 30, 2004                                       |   | —                                                |       | 73,891,286                   |       | 50,032                                    |       | $                                                     | —     |              | $          | 7,412               |       | $                                | (788       | )                      | $          | 388,469                                                   |       | $                                        | 241,354 |   | $ | (5,154 | ) | $ | 631,293 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

7

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WESTERNGAS RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

***GENERAL***

 

We have prepared the accompanying unaudited interim consolidatedfinancial statements under the rules and regulations of the Securities andExchange Commission, or SEC.  As providedby such rules and regulations, we have condensed or omitted certain informationand notes normally included in annual financial statements prepared in conformitywith accounting principles generally accepted in the United States of America.

 

The interim consolidated financial statements presented herein shouldbe read in conjunction with the Consolidated Financial Statements and Notesthereto included in our Annual Report on Form 10-K for the year ended December31, 2003.  The interim consolidatedfinancial statements as of September 30, 2004 and for the three and nine-monthperiods ended September 30, 2004 and 2003 included herein are unaudited butreflect, in the opinion of management, all adjustments (which include onlynormal recurring adjustments) necessary to fairly present the results for suchperiods.  The results of operations forthe three and nine-months ended September 30, 2004 are not necessarilyindicative of the results of operations expected for the year ended December31, 2004.

 

Prior period amounts in the interim consolidated financial statementsand notes have been reclassified as appropriate to conform to the presentationused in 2004, including items associated with price risk management activitiesand the two-for-one common stock split completed on June 18, 2004.

 

##### ***EQUITY TRANSACTIONS***

##### *** ***

***Preferred StockConversion/Redemption.***  In December 2003, we issued a notice ofredemption for a total of 800,000 shares of our $2.625 cumulative convertiblepreferred stock.  The holders of theseshares had the right to convert them into shares of our common stock in lieu ofreceiving the redemption price in cash.  In January 2004, we issued an additional 1,979,244 shares of commonstock to holders who elected to convert their shares and paid $672,000 in cashproceeds to complete this redemption.  In March 2004, we issued an additional notice of redemption for theremaining 1,260,000 shares of our $2.625 cumulative convertible preferredstock.  In April 2004, we issued anadditional 3,113,582 shares of common stock to holders who elected to converttheir shares and paid $391,000 in cash proceeds to complete thisredemption.  After these redemptions, the$2.625 cumulative convertible preferred stock was delisted from trading on theNew York Stock Exchange and application was made to the SEC to deregister suchstock.

 

***Common StockSplit. ***OnJune 18, 2004, we completed a two-for-one split of our common stock, which wasdistributed in the form of a stock dividend. Shareholders of our common stock received one additional share for everyshare of common stock held on the record date of June 4, 2004.  After the stock split, each share of commonstock outstanding or thereafter issued includes or will include one-half of aSeries A Junior Participating Preferred Stock purchase right.  We have restated our financial information toreflect this split for all periods presented.

 

***EARNINGS PER SHARE OF COMMON STOCK***

 

Earningsper share of common stock are computed by dividing income attributable tocommon stock by the weighted average shares of common stock outstanding.  In addition, earnings per share of commonstock - assuming dilution is computed by dividing income attributable to commonstock by the weighted average shares of common stock outstanding as adjustedfor potential common shares.  Incomeattributable to common stock is net income less preferred stock dividends.   The following table presents the dividendsdeclared by us for each class of our outstanding equity securities (dollars inthousands, except per share amounts):

 
| ** **                    | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **2004**                        | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Common Stock                  |       | $                               | 3,697      |                                | $          | 1,661 |   | $ | 9,146 |   | $ | 4,977 |   |
| Preferred Stock               |       | —                          |       | 1,811                               |       | 789 |   | 5,434 |   |
| Total Dividends Declared      |       | $                               | 3,697      |                                | $          | 3,472 |   | $ | 9,935 |   | $ | 10,411 |   |
|                          |       |                            |       |                                |       |   |   |   |   |
| Dividends Declared Per Share: |       |                            |       |                                |       |   |   |   |   |
| Common Stock                  |       | $                               | 0.05       |                                | $          | 0.05 |   | $ | 0.15 |   | $ | 0.15 |   |
| Preferred Stock               |       | $                               | —     |                                | $          | 0.66 |   | $ | 0.66 |   | $ | 1.97 |   |

 

8

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Commonstock options and, until the final conversion or redemption in April 2004, our$2.625 cumulative convertible preferred stock are potential common shares.  The following isa reconciliation of the weighted average shares of common stock outstanding tothe weighted average common shares outstanding – assuming dilution.  The share information presented reflects thetwo-for-one common stock split.

 
| ** **                                                               | ** ** | **Quarter Ended September 30,** | ** ** | **Nine months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| ** **                                                               | ** ** | **2004**                        | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted average shares of common stock  outstanding                     |       | 73,778,729                      |       | 66,394,530                           |       | 71,887,962 |   | 66,288,592 |   |
| Potential common shares from:                                            |       |                            |       |                                 |       |   |   |   |   |
| Common stock options                                                     |       | 1,219,417                       |       | 1,352,370                            |       | 1,046,555 |   | 1,309,420 |   |
| $2.625 Cumulative Convertible Preferred  Stock                           |       | —                          |       | 6,943,396                            |       | — |   | 6,943,396 |   |
| Weighted average shares of common stock  outstanding - assuming dilution |       | 74,998,146                      |       | 74,690,296                           |       | 72,934,517 |   | 74,541,408 |   |

 

Thenumerators and the denominators for the prior periods were adjusted to reflectthese potential common shares and any related preferred dividends incalculating fully diluted earnings per share.

 

***ACCUMULATED OTHER COMPREHENSIVE INCOME***

 

Includedin Accumulated other comprehensive income at September 30, 2004 were unrealizedlosses of $8.3 million from the fair value of derivatives designated as cashflow hedges and unrealized gains of $3.1 million of cumulative foreign currencytranslation adjustments.  In the firstquarter of 2004, we discontinued cash flow hedge accounting treatment on ourhedges of equity butane production which utilized crude oil puts as asurrogate.  The value of these hedginginstruments will remain in Accumulated other comprehensive income and will bereclassified to our results of operations as the underlying transactionsoccur.  A loss of $107,000 was includedin Accumulated other comprehensive income at September 30, 2004 for theseitems.

 

Includedin Accumulated other comprehensive income at September 30, 2003 were unrealizedlosses of $2.8 million from the fair value of derivatives designated as cashflow hedges and unrealized gains of $1.2 million of cumulative foreign currencytranslation adjustments.

 

##### ***REVENUE RECOGNITION***

 

In the Gas Gathering, Processing and Treating segment, we recognize revenuefor our services at the time the service is performed. We record revenue fromour gas and NGL marketing activities, including sales of our equity production,upon transfer of title to the product. These revenues are recorded on a gross sales versus sales net ofpurchases basis as we obtain title to all the gas and NGLs that we buyincluding third-party purchases, and bear the risk of loss and credit exposureon these transactions.  Gas imbalances onour production are accounted for using the sales method.  For our marketing activities, we utilizemark-to-market accounting.  Undermark-to-market accounting, the expected margin to be realized over the term ofthe transaction is recorded in the month of origination.  To theextent that a transaction is not fully hedged or there is any hedgeineffectiveness, additional gains or losses associated with the transaction maybe reported in future periods.  Inthe Transportation segment, we realize revenue on a monthly basis from firmcapacity contracts under which the shipper pays for transport capacity whetheror not the capacity is used and from interruptible contracts where a fee ischarged based upon volumes received into the pipeline.

 

***CUMULATIVE EFFECT OF CHANGES IN ACCOUNTINGPRINCIPLES***

 

##### ***Depreciation, Depletionand Amortization for Oil and Gas Properties. ***We follow the successfulefforts method of accounting for oil and gas exploration and productionactivities.  Producing properties andrelated equipment are depreciated and depleted by the units-of-productionmethod based on estimated proved reserves. Effective January 1, 2004, we redefined the asset groupings for thecalculation of depreciation and depletion from a well-by-well basis to a fieldwide basis for each of the Jonah, Pinedale and Sand Wash fields and to agrouping of all wells drilled into related coal seams for the Powder RiverBasin.

 

9

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Thechange in the asset groupings for depreciation and depletion purposes istreated as a change in accounting principle. Accordingly, the Accumulated depreciation, depletion and amortizationfor these assets has been recalculated under the new asset groupings.  The cumulative effect of the change indepreciation and depletion method of $4.7 million, net of tax, or $0.07 pershare of common stock and $0.06 per share of common stock-assuming dilution, ispresented in the Consolidated Statement of Operations under the captionCumulative effect of changes in accounting principles, net of tax.  This change resulted in an increase inDepreciation, depletion and amortization expense of  $422,000, or $0.01 per share of common stockand per share of common stock-assuming dilution, in the third quarter of 2004and $2.0 million, or $0.03 per share of common stock and per share of commonstock-assuming dilution, in the nine months ended September 30, 2004.

 

Ifwe had adopted the change in asset groupings for depreciation and depletionpurposes on January 1, 2003, we estimate that Depreciation, depletion andamortization expense would have been $378,000 higher in the third quarter of2003 than reported on the Consolidated Statement of Operations and $612,000higher in the nine months ended September 30, 2003.  The estimated pro forma cumulative effect ofa January 1, 2003 change in our depreciation and depletion methodology wouldhave been an increase of $5.5 million in net income, or $0.08 in earnings pershare of common stock and $0.07 per share of common stock-assuming dilution.

 

Earningsper share of common stock in the third quarter ended September 30, 2003 was$0.29 per share of common stock and $0.28 per share of common stock-assumingdilution.  If we had adopted the changein asset groupings for depreciation and depletion purposes on January 1, 2003,earnings per share of common stock for the third quarter ended September 30,2003 would not have changed.  Earningsper share of common stock in the nine months ended September 30, 2003 was $0.90per share of common stock and $0.87 per share of common stock-assumingdilution.  If we had adopted the changein asset groupings for depreciation and depletion purposes on January 1, 2003,earnings per share of common stock in the nine months ended September 30, 2003would have been $0.97 per share of common stock and $0.93 per share of commonstock-assuming dilution.

 

***Accounting for Asset RetirementObligations.*** In June 2001, the FASB issued SFAS No.143 “Accounting for Asset Retirement Obligations.”  SFAS No. 143 waseffective for fiscal years beginning after June 15, 2002.  SFAS No. 143 established accounting standardsfor recognition and measurement of a liability for an asset retirementobligation and the associated asset retirement cost.  We adopted SFAS No. 143 on January 1, 2003and recorded an $11.5 million increase to Property and equipment, a $4.4million increase to Accumulated depreciation, depletion andamortization, a $17.8 million increase to Other long-term liabilities and a$6.7 million non-cash, net of tax, lossfrom the Cumulative effect of a change in accounting principle.

 

***POST RETIREMENT BENEFITS***

 

In July 2004, our board of directors authorized thedevelopment of an amendment to the board’s existing health care plan to providefor health care benefits for qualifying members, and their spouses, after theirretirement from our board of directors. The terms of the plan have not yet been finalized and, accordingly, noaccrual for the future cost of this benefit has been made in the financialstatements for the quarter and nine months ended September 30, 2004.

 

***DERIVATIVE INSTRUMENTS AND HEDGINGACTIVITIES***

 

The net loss recognized in earnings through Sale of gas and Sale ofnatural gas liquids during the first nine months of 2004 from hedgingactivities was $6.3 million, and we recognized a loss from hedgeineffectiveness of $56,000. In the first quarter of 2004, we determined in ourquarterly effectiveness testing that our hedges of equity butane productionwhich utilized crude oil puts as a surrogate were no longer effectivehedges.  Therefore, in the first quarterof 2004, we discontinued cash flow hedge accounting treatment on theseinstruments.  The value of these hedginginstruments will remain in Accumulated other comprehensive income and will bereclassified to our results of operations as the underlying transactionsoccur.  A loss of $107,000 was includedin Accumulated other comprehensive income at September 30, 2004 for theseitems.  Our remaining hedges for ourother products are expected to continue to be “highly effective” under SFAS No.133 in the future.

 

The gains and losses currently reflected in Accumulated othercomprehensive income will be reclassified to earnings based on the actual salesof the hedged gas or NGLs.  Based onprices as of September 30, 2004, approximately $3.9 million and $4.4 million oflosses in Accumulated other comprehensive income will be reclassified toearnings in 2004 and 2005, respectively.

 

10

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***SUPPLEMENTARYCASH FLOW INFORMATION***

 

Interest paid was $17.6 million and $16.9 million for the nine months ended September 30, 2004 and 2003,respectively. A total of $7.7 million and$6.0 million was paid in income taxes in the nine months ended September 30,2004 and 2003, respectively.

 

The Total provision for income taxes, as a percentage of Income beforeincome taxes was approximately 39.0% during the nine months ended September 30,2004 as compared to 37.1% in same period of 2003.  This increase is due to the civil penaltypaid to the CFTC, which was non-deductible for tax purposes.  The provision for income taxes as apercentage of Income before income taxes was approximately 36.7% during thequarter ended September 30, 2004.

 

***STOCK COMPENSATION***

 

Aspermitted under SFAS No. 123, “Accounting for Stock-Based Compensation”, wehave elected to continue to measure compensation costs for stock-based employeecompensation plans as prescribed by Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees.” We have complied with the pro forma disclosure requirements of SFAS No.123 as required under the pronouncement. We realize an income tax benefit from the exercise of non-qualifiedstock options related to the amount by which the market price at the date ofexercise exceeds the option price.  Thistax benefit is credited to additional paid-in capital.

 

Weare required to record compensation expense (if not previously accrued) equalto the number of unexercised re-priced options multiplied by the amount bywhich our stock price at the end of any quarter exceeds $10.50 per share.  We had options covering 27,000 and 49,438common shares outstanding at September 30, 2004 and 2003, respectively, whichwere treated as repriced options.  Basedon our stock price at September 30, 2004 of $28.59 per share and our stockprice at September 30, 2003 of $19.00 per share, compensation expense of$182,791 and $301,000, respectively, was recorded in the nine months endedSeptember 30, 2004 and 2003.

 

SFASNo. 123 requires pro forma disclosures for each quarter that a statement ofoperations is presented.  The following isa summary of the options to purchase our common stock granted during the ninemonths ended September 30, 2004 and 2003, respectively.

 
| ** **                | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| 1999 Plan                 |       | 140,876                             |       | — |   |
| 2002 Plan                 |       | 920,841                             |       | 1,089,900 |   |
| 2002 Directors’ Plan |       | 32,000                              |       | 32,000 |   |
| Total options granted     |       | 1,093,717                           |       | 1,121,900 |   |

 

Thefollowing is a summary of the weighted average fair value per share of theoptions granted during the nine monthsended September 30, 2004 and 2003, respectively.

 
| ** **                | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| 1999 Plan                 |       | $                                   | 13.12      |   | $ | — |   |
| 2002 Plan                 |       | $                                   | 13.09      |   | $ | 9.76 |   |
| 2002 Directors’ Plan |       | $                                   | 12.13      |   | $ | 10.70 |   |

 

Duringthe nine months ended September 30, 2004,thevalues for the options granted were estimated using the Black-Scholesoption-pricing model with the following assumptions:

 
| ** **                     | ** ** | **Nine Months Ended September 30, 2004** | ** ** |
|--------------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **1999 Plan**                            | ** ** | **2002 Plan** | ** ** | **2002 Directors’  Plan** | ** ** |
| Risk-free interest rate        |       | 3.74                                     | %          | 3.76 | % | 4.46 | % |
| Expected life (in years)       |       | 4                                        |       | 7 |   | 7 |   |
| Expected volatility            |       | 39                                       | %          | 39 | % | 40 | % |
| Expected dividends (quarterly) |       | $                                        | 0.05       |   | $ | 0.05 |   | $ | 0.05 |   |
|                                |            |                                          |            |  |  |  |  |  |  |  |

 

11

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UnderSFAS No. 123, the fair market value of the options at the grant date is amortizedover the appropriate vesting period for purposes of calculating compensationexpense.  If we had recorded compensationexpense for our grants under our stock-based compensation plans consistent withthe fair value method under this pronouncement, our net income, incomeattributable to common stock, earnings per share of common stock and earningsper share of common stock - assuming dilution would approximate the pro formaamounts below (dollars in thousands, except per share amounts):

 
| ** **                                                                                                                                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2004  As Reported**               | ** ** | **2004  Pro Forma** | ** ** | **2003  As Reported** | ** ** | **2003  Pro Forma** | ** ** |
| Net income                                                                                                                                     |       | $                                   | 78,181     |   | $ | 74,194 |   | $ | 65,164 |   | $ | 62,578 |   |
| Net income attributable to common stock                                                                                                        |       | 77,346                              |       | 73,359 |   | 59,730 |   | 57,144 |   |
| Earnings per share of common stock                                                                                                             |       | 1.08                                |       | 1.02 |   | 0.90 |   | 0.86 |   |
| Earnings per share of common stock - assuming  dilution                                                                                        |       | 1.06                                |       | 1.01 |   | 0.87 |   | 0.84 |   |
| Stock-based employee compensation cost, net  of related tax effects, included in net income                                                    |       | 305                                 |       | — |   | 367 |   | — |   |
| Stock-based employee compensation cost, net  of related tax effects, includable in net income if the fair value based  method had been applied |       | $                                   | —     |   | $ | 4,292 |   | $ | — |   | $ | 2,953 |   |

 

***SUBSEQUENT EVENTS***

 

***Acquisition of SanJuan Basin Properties.****  *In July 2004, wesigned a purchase and sale agreement to acquire oil and gas assets in the SanJuan Basin of New Mexico for approximately $82.2 million.  Closing occurred on October 1, 2004.  We funded this acquisition with amountsavailable under our revolving credit facility.  Inconjunction with signing the agreement, we paid a deposit of $4.1 million,which was applied against the purchase price at closing.

 

***SEGMENTREPORTING***

 

Weoperate in four principal business segments, as follows:  Gas Gathering, Processing and Treating;Exploration and Production; Marketing; and Transportation.  Management separately monitors these segmentsfor performance against our internal forecasts, and these segments areconsistent with our internal financial reporting package.  These segments have been identified basedupon the differing products and services, regulatory environment and theexpertise required for these operations.

 

***Gas Gathering,Processing and Treating.***  In the Gas Gathering, Processing and Treatingsegment, collectively with the Marketing and Transportation segments referredto as the midstream operations, we connect producers’ wells (including those ofour Exploration and Production segment) to our gathering systems for deliveryto our processing or treating plants, process the natural gas to extract NGLsand treat the natural gas in order to meet pipeline specifications.  In some areas, where no processing isrequired, we gather and compress producers’ gas and deliver it to pipelines forfurther delivery to market.  Except forvolumes taken in kind by our producers, the Marketing segment sells the gas andNGLs extracted at most of our facilities.

 

In this segment, we recognize revenue for our services at the time theservice is performed. Included in this segment is our Powder River coal bedmethane gathering operation, which gathers gas from producers, including ourExploration and Production segment.  In2003, this service for the Exploration and Production segment was performedunder a percentage-of-proceeds contract and in 2004, this service was performedunder a fee-based contract.  The changeof contract type has no effect on the Operating profit of either the GasGathering, Processing and Treating segment or the Exploration and Productionsegment.

 

Substantially all gas flowing through our gathering, processing andtreating facilities is supplied under three types of contracts providing forthe purchase, treating or processing of natural gas for periods ranging fromone month to twenty years or in some cases for the life of the oil and gas lease.  Approximately 56% of our plant facilities’gross margin, or revenues at the plant less product purchases, for the month ofSeptember 2004 was under percentage-of-proceeds agreements

 

12

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in which we are typically responsible for the marketing of the gas andNGLs.  Under these agreements, we payproducers a specified percentage of the net proceeds received from the sale ofthe gas and the NGLs.

 

Approximately 33% of our plant facilities’ gross margin for the monthof September 2004 was under contracts that are primarily fee-based from whichwe receive a set fee for each Mcf of gas gathered and/or processed. This typeof contract provides us with a steady revenue stream that is not dependent oncommodity prices, except to the extent that low prices may cause a producer todelay drilling.

 

Approximately 11% of our plant facilities’ gross margin for the monthof September 2004 was under contracts with “keepwhole” arrangements or wellheadpurchase contracts.  Under thesecontracts, we retain the NGLs recovered by the processing facility and keep theproducers whole by returning to the producers at the tailgate of the plant anamount of gas equal on a Btu basis to the natural gas received at the plantinlet.  The “keepwhole” component of thecontracts permits us to benefit when the value of the NGLs is greater as aliquid than as a portion of the residue gas stream.  However, we are adversely affected when thevalue of the NGLs is lower as a liquid than as a portion of the residue gasstream.

 

***Exploration and Production.***  The activities of the Exploration andProduction segment, also referred to as upstream operations, include theexploration and development of gas properties in the Rocky Mountain area,including those where our gathering and/or processing facilities arelocated.  The Marketing segment sells themajority of the production from these properties.

 

***Marketing.***  Our Marketing segment markets gas and NGLsextracted at our gathering, processing and treating facilities and producedfrom our exploration and production assets and buys and sells gas and NGLs inthe United States and Canada from and to a variety of customers.  In this segment, revenues for sales ofproduct are recognized at the time the gas or NGLs are delivered to thecustomer and are sensitive to changes in the market prices of the underlyingcommodities.  The marketing of productspurchased from third-parties typically results in low operating margins relativeto the sales price.  We sell our productsunder agreements with varying terms and conditions in order to match seasonaland other changes in demand.  Alsoincluded in this segment are our Canadian marketing operations, which areconducted through our wholly-owned subsidiary WGR Canada, Inc. and which areimmaterial for separate presentation.

 

***Transportation.***  The Transportation segment reflects theoperations of our MIGC, Inc. and MGTC, Inc. pipelines.   The revenue presentedin this segment is derived from transportation of gas for our Marketing segmentand other third parties.  In thissegment, we realize revenue on a monthly basis from firm capacity contractsunder which the shipper pays for transport capacity whether or not the capacityis used and from interruptible contracts where a fee is charged based uponvolumes received into the pipeline.  TheTransportation segment’s capacity contracts range in duration from one month tofourteen years.

 

***Segment Information.*** Thefollowing tables set forth our segment information as of and for the quarterand nine months ended September 30, 2004 and 2003 (dollars in thousands).  Due to our integrated operations, the use ofallocations in the determination of business segment information is necessary.  Inter-segment revenues are valued at pricescomparable to those of unaffiliated customers. Prior period amounts in the interim segment information have beenreclassified to conform to the presentation used in 2004.

 

13

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**QuarterEnded September 30, 2004:**

 
| ** **                                        | ** ** | **Gas  Gathering  and  Processing** | ** ** | **Exploration  and  Production** | ** ** | **Marketing** | ** ** | **Trans-  portation** | ** ** | **Corporate** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|---------------|------------|-----------------------|------------|---------------|------------|--------------------------|------------|-----------|------------|
| Revenues from unaffiliated customers:             |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Sale of gas                                       |       | $                                   | 878        |                             | $          | 2,375         |       | $                     | 557,141    |          | $          | 282                      |       | $         | —     |   | $ | — |   | $ | 560,676 |   |
| Sale of natural gas liquids                       |       | (559                                | )          | —                           |       | 130,057       |       | —                |       | —        |       | —                   |       | 129,498   |       |
| Equity hedges:                                    |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Gas                                               |       | (16                                 | )          | 324                              |       | —        |       | —                |       | —        |       | —                   |       | 308       |       |
| Liquids                                           |       | (5,035                              | )          | —                           |       | —        |       | —                |       | —        |       | —                   |       | (5,035    | )          |
| Gathering, processing and transportation  revenue |       | 23,469                              |       | —                           |       | —        |       | 1,611                 |       | —        |       | —                   |       | 25,080    |       |
| Total revenues from unaffiliated customers        |       | 18,737                              |       | 2,699                            |       | 687,198       |       | 1,893                 |       | —        |       | —                   |       | 710,527   |       |
| Inter-segment revenues                            |       | 257,310                             |       | 62,547                           |       | 12,601        |       | 3,560                 |       | —        |       | (336,018                 | )          | —    |       |
| Price risk management activities                  |       | (30                                 | )          | —                           |       | 7,188         |       | —                |       | —        |       | —                   |       | 7,158     |       |
| Interest income                                   |       | —                              |       | 1                                |       | —        |       | 1                     |       | 5,460         |       | (5,462                   | )          | —    |       |
| Other, net                                        |       | 112                                 |       | 9                                |       | (42           | )          | 2                     |       | 489           |       | —                   |       | 570       |       |
| Total revenues                                    |       | 276,129                             |       | 65,256                           |       | 706,945       |       | 5,456                 |       | 5,949         |       | (341,480                 | )          | 718,255   |       |
|                                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Product purchases                                 |       | 210,347                             |       | 636                              |       | 700,209       |       | 867                   |       | —        |       | (326,285                 | )          | 585,774   |       |
| Plant operating and transportation expense        |       | 22,976                              |       | 7                                |       | 4             |       | 1,848                 |       | —        |       | (859                     | )          | 23,976    |       |
| Oil and gas exploration and production  expense   |       | —                              |       | 27,468                           |       | —        |       | —                |       | —        |       | (8,958                   | )          | 18,510    |       |
| Earnings from equity investments                  |       | (1,542                              | )          | —                           |       | —        |       | —                |       | —        |       | —                   |       | (1,542    | )          |
| Operating profit                                  |       | 44,348                              |       | 37,145                           |       | 6,732         |       | 2,741                 |       | 5,949         |       | (5,378                   | )          | 91,537    |       |
|                                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Depreciation, depletion and amortization          |       | 9,769                               |       | 10,245                           |       | 35            |       | 415                   |       | 1,575         |       | —                   |       | 22,039    |       |
| Selling and administrative expense                |       | —                              |       | —                           |       | —        |       | —                |       | 10,315        |       | (10                      | )          | 10,305    |       |
| (Gain) loss from sale of assets                   |       | (20                                 | )          | (218                             | )          | —        |       | —                |       | 8             |       | —                   |       | (230      | )          |
| Interest expense                                  |       | —                              |       | (1                               | )          | 115           |       | (91                   | )          | 9,351         |       | (5,462                   | )          | 3,912     |       |
| Segment profit                                    |       | $                                   | 34,599     |                             | $          | 27,119        |       | $                     | 6,582      |          | $          | 2,417                    |       | $         | (15,300    | ) | $ | 94 |   | $ | 55,511 |   |
|                                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Identifiable assets:                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Other allocated assets                            |       | $                                   | 6,214      |                             | $          | 5,059         |       | $                     | 61,254     |          | $          | 24,598                   |       | $         | 385,054    |   | $ | (52,446 | ) | $ | 429,733 |   |
| Equity investment                                 |       | 38,021                              |       | —                           |       | —        |       | 3,822                 |       | 698,127       |       | (701,949                 | )          | 38,021    |       |
| Property and equipment                            |       | 641,898                             |       | 354,044                          |       | 18            |       | 37,226                |       | 52,986        |       | —                   |       | 1,086,172 |       |
| Total identifiable assets                         |       | $                                   | 686,133    |                             | $          | 359,103       |       | $                     | 61,272     |          | $          | 65,646                   |       | $         | 1,136,167  |   | $ | (754,395 | ) | $ | 1,553,926 |   |

 

**Quarter Ended September 30, 2003**:

 
| ** **                                        | ** ** | **Gas  Gathering  and  Processing** | ** ** | **Exploration  and  Production** | ** ** | **Marketing** | ** ** | **Trans-  portation** | ** ** | **Corporate** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|---------------|------------|-----------------------|------------|---------------|------------|--------------------------|------------|-----------|------------|
| Revenues from unaffiliated customers:             |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Sale of gas                                       |       | $                                   | 928        |                             | $          | 689           |       | $                     | 561,301    |          | $          | 219                      |       | $         | —     |   | $ | — |   | $ | 563,137 |   |
| Sale of natural gas liquids                       |       | 3                                   |       | —                           |       | 87,861        |       | —                |       | —        |       | —                   |       | 87,864    |       |
| Equity hedges:                                    |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Gas                                               |       | (540                                | )          | (5,492                           | )          | —        |       | —                |       | —        |       | —                   |       | (6,032    | )          |
| Liquids                                           |       | (1,854                              | )          | —                           |       | —        |       | —                |       | —        |       | —                   |       | (1,854    | )          |
| Gathering, processing and transportation  revenue |       | 20,128                              |       | —                           |       | —        |       | 1,756                 |       | —        |       | —                   |       | 21,884    |       |
| Total revenues from unaffiliated customers        |       | 18,665                              |       | (4,803                           | )          | 649,162       |       | 1,975                 |       | —        |       | —                   |       | 664,999   |       |
| Inter-segment revenues                            |       | 268,172                             |       | 54,825                           |       | 8,224         |       | 3,422                 |       | —        |       | (334,643                 | )          | —    |       |
| Price risk management activities                  |       | 186                                 |       | 572                              |       | 306           |       | —                |       | —        |       | —                   |       | 1,064     |       |
| Interest income                                   |       | (2                                  | )          | 16                               |       | —        |       | —                |       | 3,361         |       | (3,375                   | )          | —    |       |
| Other, net                                        |       | 500                                 |       | 8                                |       | (277          | )          | —                |       | 506           |       | —                   |       | 737       |       |
| Total revenues                                    |       | 287,521                             |       | 50,618                           |       | 657,415       |       | 5,397                 |       | 3,867         |       | (338,018                 | )          | 666,800   |       |
|                                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Product purchases                                 |       | 237,865                             |       | 685                              |       | 652,697       |       | 1,108                 |       | —        |       | (325,418                 | )          | 566,937   |       |
| Plant operating and transportation expense        |       | 20,359                              |       | 100                              |       | 79            |       | 2,058                 |       | —        |       | (652                     | )          | 21,944    |       |
| Oil and gas exploration and production  expense   |       | —                              |       | 21,595                           |       | —        |       | —                |       | —        |       | (8,566                   | )          | 13,029    |       |
| Earnings from equity investments                  |       | (1,780                              | )          | —                           |       | —        |       | —                |       | —        |       | —                   |       | (1,780    | )          |
| Operating profit                                  |       | 31,077                              |       | 28,238                           |       | 4,639         |       | 2,231                 |       | 3,867         |       | (3,382                   | )          | 66,670    |       |
|                                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Depreciation, depletion and amortization          |       | 7,485                               |       | 7,393                            |       | 35            |       | 413                   |       | 2,151         |       | —                   |       | 17,477    |       |
| Selling and administrative expense                |       | —                              |       | —                           |       | —        |       | —                |       | 8,986         |       | (13                      | )          | 8,973     |       |
| (Gain) loss from sale of assets                   |       | 56                                  |       | 2                                |       | —        |       | (5                    | )          | 3             |       | —                   |       | 56        |       |
| Interest expense                                  |       | —                              |       | 24                               |       | 93            |       | (47                   | )          | 9,754         |       | (3,375                   | )          | 6,449     |       |
| Segment profit                                    |       | $                                   | 23,536     |                             | $          | 20,819        |       | $                     | 4,511      |          | $          | 1,870                    |       | $         | (17,027    | ) | $ | 6 |   | $ | 33,715 |   |
| Identifiable assets:                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Other allocated assets                            |       | $                                   | 2,834      |                             | $          | 7,207         |       | $                     | 110,219    |          | $          | 34,310                   |       | $         | 337,285    |   | $ | (66,891 | ) | $ | 424,964 |   |
| Equity investment                                 |       | 34,822                              |       | —                           |       | —        |       | 3,751                 |       | 495,297       |       | (499,048                 | )          | 34,822    |       |
| Property and equipment                            |       | 592,405                             |       | 263,549                          |       | 1,566         |       | 39,558                |       | 57,735        |       | 7                        |       | 954,820   |       |
| Total identifiable assets                         |       | $                                   | 630,061    |                             | $          | 270,756       |       | $                     | 111,785    |          | $          | 77,619                   |       | $         | 890,317    |   | $ | (565,932 | ) | $ | 1,414,606 |   |

 

14

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**NineMonths Ended September 30, 2004:**

 
| ** **                                        | ** ** | **Gas  Gathering  and  Processing** | ** ** | **Exploration  and  Production** | ** ** | **Marketing** | ** ** | **Trans-  portation** | ** ** | **Corporate** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|---------------|------------|-----------------------|------------|---------------|------------|--------------------------|------------|-----------|------------|
| Revenues from unaffiliated customers:             |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Sale of gas                                       |       | $                                   | 2,767      |                             | $          | 6,158         |       | $                     | 1,808,212  |          | $          | 1,147                    |       | $         | —     |   | $ | — |   | $ | 1,818,284 |   |
| Sale of natural gas liquids                       |       | (556                                | )          | —                           |       | 329,968       |       | —                |       | —        |       | —                   |       | 329,412   |       |
| Equity hedges:                                    |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Gas                                               |       | 249                                 |       | 3,441                            |       | —        |       | —                |       | —        |       | —                   |       | 3,690     |       |
| Liquids                                           |       | (10,012                             | )          | —                           |       | —        |       | —                |       | —        |       | —                   |       | (10,012   | )          |
| Gathering, processing and transportation  revenue |       | 61,311                              |       | —                           |       | —        |       | 5,008                 |       | —        |       | —                   |       | 66,319    |       |
| Total revenues from unaffiliated customers        |       | 53,759                              |       | 9,599                            |       | 2,138,180     |       | 6,155                 |       | —        |       | —                   |       | 2,207,693 |       |
| Inter-segment revenues                            |       | 766,734                             |       | 178,903                          |       | 40,202        |       | 10,705                |       | —        |       | (996,544                 | )          | —    |       |
| Price risk management activities                  |       | (56                                 | )          | —                           |       | 5,394         |       | —                |       | —        |       | —                   |       | 5,338     |       |
| Interest income                                   |       | —                              |       | 4                                |       | —        |       | 1                     |       | 13,802        |       | (13,807                  | )          | —    |       |
| Other, net                                        |       | 924                                 |       | 10                               |       | (37           | )          | 49                    |       | 1,797         |       | —                   |       | 2,743     |       |
| Total revenues                                    |       | 821,361                             |       | 188,516                          |       | 2,183,739     |       | 16,910                |       | 15,599        |       | (1,010,351               | )          | 2,215,774 |       |
|                                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Product purchases                                 |       | 638,467                             |       | 1,568                            |       | 2,170,903     |       | 3,822                 |       | —        |       | (969,478                 | )          | 1,845,282 |       |
| Plant operating and transportation expense        |       | 65,264                              |       | 77                               |       | (168          | )          | 5,420                 |       | —        |       | (2,428                   | )          | 68,165    |       |
| Oil and gas exploration and production  expense   |       | —                              |       | 80,053                           |       | —        |       | —                |       | —        |       | (24,621                  | )          | 55,432    |       |
| Earnings from equity investments                  |       | (5,244                              | )          | —                           |       | —        |       | —                |       | —        |       | —                   |       | (5,244    | )          |
| Operating profit                                  |       | 122,874                             |       | 106,818                          |       | 13,004        |       | 7,668                 |       | 15,599        |       | (13,824                  | )          | 252,139   |       |
|                                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Depreciation, depletion and amortization          |       | 27,981                              |       | 32,111                           |       | 87            |       | 1,239                 |       | 5,595         |       | —                   |       | 67,013    |       |
| Selling and administrative expense                |       | —                              |       | —                           |       | —        |       | —                |       | 37,542        |       | (36                      | )          | 37,506    |       |
| (Gain) loss from sale of assets                   |       | 224                                 |       | (414                             | )          | —        |       | —                |       | 300           |       | 1,299                    |       | 1,409     |       |
| Loss from early extinguishment of debt            |       | —                              |       | —                           |       | —        |       | —                |       | 10,662        |       | —                   |       | 10,662    |       |
| Interest expense                                  |       | —                              |       | 41                               |       | 292           |       | (224                  | )          | 28,763        |       | (13,807                  | )          | 15,065    |       |
| Segment profit                                    |       | $                                   | 94,669     |                             | $          | 75,080        |       | $                     | 12,625     |          | $          | 6,653                    |       | $         | (67,263    | ) | $ | (1,280 | ) | $ | 120,484 |   |
|                                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Identifiable assets:                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Other allocated assets                            |       | $                                   | 6,214      |                             | $          | 5,059         |       | $                     | 61,254     |          | $          | 24,598                   |       | $         | 385,054    |   | $ | (52,446 | ) | $ | 429,733 |   |
| Equity investment                                 |       | 38,021                              |       | —                           |       | —        |       | 3,822                 |       | 698,127       |       | (701,949                 | )          | 38,021    |       |
| Property and equipment                            |       | 641,898                             |       | 354,044                          |       | 18            |       | 37,226                |       | 52,986        |       | —                   |       | 1,086,172 |       |
| Total identifiable assets                         |       | $                                   | 686,133    |                             | $          | 359,103       |       | $                     | 61,272     |          | $          | 65,646                   |       | $         | 1,136,167  |   | $ | (754,395 | ) | $ | 1,553,926 |   |

 

15

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**NineMonths Ended September 30, 2003:**

 
| ** **                                        | ** ** | **Gas  Gathering  and  Processing** | ** ** | **Exploration  and  Production** | ** ** | **Marketing** | ** ** | **Trans-  portation** | ** ** | **Corporate** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|---------------|------------|-----------------------|------------|---------------|------------|--------------------------|------------|-----------|------------|
| Revenues from unaffiliated customers:             |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Sale of gas                                       |       | $                                   | 2,799      |                             | $          | 2,830         |       | $                     | 1,922,100  |          | $          | 653                      |       | $         | —     |   | $ | — |   | $ | 1,928,382 |   |
| Sale of natural gas liquids                       |       | 9                                   |       | —                           |       | 267,387       |       | —                |       | —        |       | —                   |       | 267,396   |       |
| Equity hedges:                                    |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Gas                                               |       | (2,101                              | )          | (16,985                          | )          | —        |       | —                |       | —        |       | —                   |       | (19,086   | )          |
| Liquids                                           |       | (8,555                              | )          | —                           |       | —        |       | —                |       | —        |       | —                   |       | (8,555    | )          |
| Gathering, processing and transportation  revenue |       | 57,834                              |       | —                           |       | —        |       | 5,285                 |       | —        |       | —                   |       | 63,119    |       |
| Total revenues from unaffiliated customers        |       | 49,986                              |       | (14,155                          | )          | 2,189,487     |       | 5,938                 |       | —        |       | —                   |       | 2,231,256 |       |
| Inter-segment revenues                            |       | 832,328                             |       | 171,951                          |       | 26,849        |       | 10,651                |       | —        |       | (1,041,779               | )          | —    |       |
| Price risk management activities                  |       | (284                                | )          | (1,262                           | )          | (16,504       | )          | —                |       | —        |       | —                   |       | (18,050   | )          |
| Interest income                                   |       | 4                                   |       | 29                               |       | —        |       | 2                     |       | 8,678         |       | (8,713                   | )          | —    |       |
| Other, net                                        |       | 1,618                               |       | 21                               |       | 4             |       | 42                    |       | 506           |       | —                   |       | 2,191     |       |
| Total revenues                                    |       | 883,652                             |       | 156,584                          |       | 2,199,836     |       | 16,633                |       | 9,184         |       | (1,050,492               | )          | 2,215,397 |       |
|                                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Product purchases                                 |       | 737,442                             |       | 1,716                            |       | 2,171,367     |       | 1,709                 |       | —        |       | (1,013,859               | )          | 1,898,375 |       |
| Plant operating and transportation expense        |       | 62,472                              |       | 226                              |       | 239           |       | 5,686                 |       | —        |       | (2,145                   | )          | 66,478    |       |
| Oil and gas exploration and production  expense   |       | —                              |       | 64,488                           |       | —        |       | —                |       | —        |       | (25,658                  | )          | 38,830    |       |
| Earnings from equity investments                  |       | (5,209                              | )          | —                           |       | —        |       | —                |       | —        |       | —                   |       | (5,209    | )          |
| Operating profit                                  |       | 88,947                              |       | 90,154                           |       | 28,230        |       | 9,238                 |       | 9,184         |       | (8,830                   | )          | 216,923   |       |
|                                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Depreciation, depletion and amortization          |       | 22,603                              |       | 23,421                           |       | 106           |       | 1,275                 |       | 5,900         |       | —                   |       | 53,305    |       |
| Selling and administrative expense                |       | —                              |       | —                           |       | —        |       | —                |       | 29,527        |       | (41                      | )          | 29,486    |       |
| (Gain) loss from sale of assets                   |       | 210                                 |       | 2                                |       | —        |       | (123                  | )          | 53            |       | —                   |       | 142       |       |
| Interest  expense                                 |       |                                |       | 24                               |       | 134           |       | (103                  | )          | 28,350        |       | (8,713                   | )          | 19,692    |       |
| Segment profit                                    |       | $                                   | 66,134     |                             | $          | 66,707        |       | $                     | 27,990     |          | $          | 8,189                    |       | $         | (54,646    | ) | $ | (76 | ) | $ | 114,298 |   |
|                                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Identifiable assets:                              |       |                                |       |                             |       |          |       |                  |       |          |       |                     |       |      |       |
| Other allocated assets                            |       | $                                   | 2,834      |                             | $          | 7,207         |       | $                     | 110,219    |          | $          | 34,310                   |       | $         | 337,285    |   | $ | (66,891 | ) | $ | 424,964 |   |
| Equity investment                                 |       | 34,822                              |       | —                           |       | —        |       | 3,751                 |       | 495,297       |       | (499,048                 | )          | 34,822    |       |
| Property and equipment                            |       | 592,405                             |       | 263,549                          |       | 1,566         |       | 39,558                |       | 57,735        |       | 7                        |       | 954,820   |       |
| Total identifiable assets                         |       | $                                   | 630,061    |                             | $          | 270,756       |       | $                     | 111,785    |          | $          | 77,619                   |       | $         | 890,317    |   | $ | (565,932 | ) | $ | 1,414,606 |   |

 

***LEGAL PROCEEDINGS***

 

***Cornerstone PropanePartners, L.P. et al. v. Western Gas Resources, Inc. et al., United StatesDistrict Court, Southern District of New York, Civil Action No.04-CV-7415. ***OnSeptember 17, 2004, the plaintiffs, traders of natural gas futures contracts onthe New York Mercantile Exchange, or NYMEX, filed this action on behalf ofthemselves and a putative class of others similarly situated.  In the complaint, the plaintiffs claim thatwe manipulated the prices of natural gas futures on the NYMEX in violation ofthe Commodity Exchange Act, or CEA by reporting allegedly “inaccurate,misleading and false trading information” to trade publications that compileand publish indices of natural gas spot prices. In addition, the complaint asserts that we aided and abetted the allegedCEA violations of others.  The plaintiffsseek to recover actual damages on behalf of themselves and a class of naturalgas futures traders, and their costs of litigation including attorney’sfees.  We believe that the claims arewithout merit and intend to vigorously contest the allegations in this case.

 

***United States of America and ex rel. Jack J.Grynberg v. Western Gas Resources, Inc., et al., United States District Court,District of Colorado, Civil Action No. 97-D-1427. ***As reported inour Form 10-Q for the quarter ended March 31, 2004 and in previous periodicreports, we, along with over 300 natural gas companies, are defendantsin litigation filed on September 30, 1997, in 72 separate actions filed by Mr.Grynberg on behalf of the federal government. The allegations made by Mr. Grynberg are that established gasmeasurement and royalty calculation practices improperly deprived the federalgovernment of appropriate natural gas royalties and violate 31 U. S. C. 3729(a) (7) of the False Claims Act.  Thecases have been consolidated to the United States District Court for theDistrict of Wyoming.  Discovery on thejurisdictional issues is being completed to determine if this matter qualifiesas a qui tam (or class) action. We

 

16

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believe that Mr. Grynberg’s claims are baseless and without merit andintend to vigorously contest the allegations in this case.

 

***Price,et al. v. Gas Pipelines, Western Gas Resources, Inc., et al., District Court,Stevens County, Kansas, Case No. 99-C-30. ***As reported in our Form 10-Q for the quarter endedMarch 31, 2004 and in previous periodic reports, Western is a defendant inlitigation filed on September 23, 1999, along with numerous other natural gascompanies, in which Mr. Price is claiming an under measurement of gas and Btuvolumes throughout the country.  We alongwith other natural gas companies filed a motion to dismiss for failure to statea claim.  The court denied these motionsto dismiss.   The court denied plaintiff’smotion for certification as a class and, in the third quarter of 2003, theplaintiff amended and refiled for certification as a class.  On May 12, 2003, Mr. Price filed a furtherclaim, *Will Price et al v. Western GasResources, Inc. et al., District Court, Stevens County, Kansas, Case No. 03C23*,relating to certain matters previously removed from the foregoing action.  We believe that Mr. Price’s claims arewithout merit and intend to vigorously contest the allegations in this case.

 

***OtherLitigation.**** * We are involved in various other litigationand administrative proceedings arising in the normal course of business.  In the opinion of our management, anyliabilities that may result from these claims will not, individually or in theaggregate, have a material adverse effect on our financial position, results ofoperations or cash flow.

 

***Retirement Plan.***  As reported in our Form 10-Q for the quarterended March 31, 2004 and in previous periodic reports, we provide a RetirementPlan for our present and past employees, or participants.  The purpose of the Retirement Plan is toprovide a method for participants to save toward their retirement.  Beginning in January 1989, participants weregiven the option to invest their contributions in the Western Gas Fund.  The Western Gas Fund is comprised of sharesof our common stock, purchased in the open market by the trustee, FidelityManagement Trust Company, and short-term investments. A participant’s ownershipin the Western Gas Fund is measured in Units rather than in shares of commonstock.  To effectuate participantinvestment elections and therefore purchases and sales of Units, the trusteepurchases and sells the common stock in the open market at market prices.

 

We are required to register the shares of our common stock purchased bythe trustee of the Retirement Plan under the Securities Act.  Although all the purchases by the trusteewere made in the open market and in a manner consistent with the RetirementPlan and the investment elections of the participants, we have determined thatapproximately 934,000 shares of our common stock purchased by the trusteebeginning August 14, 2001 and ending August 14, 2002 (the “Rescission Period”)may not have been properly registered in accordance with the SecuritiesAct.  These shares were purchased at anaverage price of $15.96 per share for total value of $14.9 million.  As a result of this determination, we filed aregistration statement on Form S-3 with the SEC providing for a rescissionoffer to certain of the plan participants as described below.  This registration statement was filed inApril 2004 and has not been declared effective by the SEC.

 

Any participant who elected to allocate a percentage of his or herfunds in the Retirement Plan to purchase of Units in the Western Gas Fund atany time during the Rescission Period, and who still holds those Units duringthe period of the rescission offer, may direct a sale of those Units to us atthe price the participant paid for the Units, plus interest.  This election would be beneficial to anyparticipant who purchased Units at a price higher than our stock price at theend of the period of the rescission offer. If a participant has already directed and caused the sale of those Unitspurchased during the Rescission Period at a loss, then the trustee or theparticipant may receive from us, the price paid for those Units less the saleproceeds, plus interest.  This electionwould be beneficial to any participant who sold Units at a loss.

 

While we are unable to estimate the cost or results of the rescissionoffer, we do not expect the costs to have a material adverse effect on ourfinancial position, results of operations or cash flows.   We also believe that the amounts subject tothe rescission offer are immaterial for separate classification as temporaryequity on the Consolidated Balance Sheet at September 30, 2004 or at December31, 2003.

 

***RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS OR OTHER MATTERS.***

 

In October 2004, the “American Jobs Creation Act of 2004” was signedinto law.  Among other things, this billincluded modifications to tax deductions for manufacturing activities in theUnited States and is effective in 2005. Manufacturing activities includes oil and gas extraction and processingand, as a result, these tax deductions will apply to our operations.  We have not yet determined the impact of thisbill on our balance sheet, results of operations, or cash flows for 2004.

 

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**ITEM 2.****  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysis relates to factors that haveaffected our consolidated financial condition and results of operations for thethree and nine months ended September 30, 2004 and 2003.  Certain prior year amounts have beenreclassified to conform to the presentation used in 2004.  These reclassifications had no effect on netincome.  You should also refer to ourinterim consolidated financial statements and notes thereto included elsewherein this document.  This section, as wellas other sections in this Form 10-Q, contain “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995,which can be identified by the use of forward-looking terminology, such as “may,”“intend,” “will,” “expect,” “anticipate,” “estimate,” or “continue” or thenegative thereof or other variations thereon or comparable terminology.  In addition to the important factors referredto herein, numerous factors affecting the gas processing industry generally andin the specific markets for gas and natural gas liquids, NGLs, in which weoperate could cause actual results to differ materially from those in suchforward-looking statements.

 

***COMPANY OVERVIEW***

 

***Business Strategy. *** Maximizing the value of our existing coreassets is the focal point of our business strategy.   Our core assets are our fully integratedupstream and midstream assets in the Powder River and Green River Basins inWyoming, the San Juan Basin in New Mexico, the Sand Wash Basin in Colorado andour midstream operations in west Texas and Oklahoma.  Our long-term business plan is to increasestockholder value by: (i) doubling proven reserves and equity production ofnatural gas from the levels achieved in 2001 over a five year period; (ii)meeting or exceeding throughput projections in our midstream operations; and(iii) optimizing annual returns.

 

***Industry and CompanyOverview.  ***InNorth America, our industry has experienced several consecutive years ofdeclining natural gas production.  Mostof the major gas producing areas, such as the Gulf of Mexico, are mature andare in production decline.  We areconcentrating our efforts in the Rocky Mountain gas producing basins wherethere are estimated to be large quantities of undeveloped gas.  The U.S. government largely retains themineral rights to these undeveloped reserves; accordingly, the development andproduction of these reserves require permits from several governmental agenciesincluding the Bureau of Land Management, or BLM.  We are well positioned for future productiongrowth with a large inventory of undeveloped drilling locations in the PowderRiver and Greater Green River Basins to meet the growing demand for cleanburning natural gas.  In addition, ourexperience and technical expertise position us to acquire new opportunities todevelop natural gas in the Rocky Mountain region.  Our challenges will be to accomplish thesegoals with the difficulties encountered by the industry in obtaining thenecessary permits from the BLM, and state agencies such as the WyomingDepartment of Environmental Quality, or DEQ. We believe that our technical expertise in developing environmentallyresponsible solutions to the problems encountered in the development of gasreserves will be a competitive advantage in overcoming these challenges.

 

Our operations are conducted through the following four businesssegments:

 

***Exploration and Production. ***We explorefor, develop and produce natural gas reserves independently and to enhance andsupport our existing gathering and processing operations. Our producing propertiesare primarily located in the Powder River and Green River Basins of Wyoming,and the Sand Wash Basin in Colorado.  Inaddition, in October 2004, we acquired properties in the San Juan Basin of NewMexico.  These plays are low-risk,long-lived development projects.  Theseprovide us with the opportunity to steadily increase our production volume overtime at reasonable operating and low finding and development costs.  In the third quarter of 2004 our averageproduction sold was 155 MMcfe per day, which is a 4% increase over the averageproduction volume sold in the third quarter of 2003.

 

We continue to seek to add additional upstream core projects that arefocused on Rocky Mountain natural gas. We will utilize our expertise in exploration and low-risk development ofunconventional gas reservoirs including tight-gas sands, coal bed methane,biogenic, and shale gas plays to evaluate acquisitions of either additionalleaseholds, proven and undeveloped reserves or companies with operationsprimarily focused in the Rockies.  We mayalso evaluate unconventional gas reservoirs in areas outside the Rockies where wecan leverage our related exploration, production and gathering expertise.  Through September 30, 2004, we have acquiredthe drilling rights on approximately 502,000 net acres, in other Rocky Mountainbasins and continue to expand our leasehold positions.  In addition, in July 2004, we signed apurchase and sale agreement to acquire oil and gas assets in the San Juan Basinof New Mexico for approximately $82.2 million. This acquisition closed on October 1, 2004.

 

***Gathering, Processing and Treating. ***Our coreoperations are in well-established areas such as the Permian, Anadarko, PowderRiver, Greater Green River, and San Juan Basins.  We connect natural gas from gas and oil wellsto our gathering systems for delivery to our processing or treating plantsunder long-term contracts. At our plants we process natural gas to

 

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extract NGLs and treat natural gas in order to meet pipelinespecifications. We provide these services to major oil and gas companies, toindependent producers of various sizes and for our own production.  We believe that our low cost of operations, ourhigh on-line time, and our safety records are key elements in our ability tocompete effectively and provide service to our customers.  Our expertise in gathering, processing andtreating operations can enhance the economics of developing new upstream projects.

 

This segment of our operations has provided a stream of operatingprofit that is available for reinvestment into other projects or other segmentsof our business.  Overall throughput inour facilities during the third quarter of 2004 has remained relativelyconstant as compared to the third quarter of 2003 and averaged a total of 1.4Bcf per day.

 

***Transportation. *** In the Powder River Basin, we own oneinterstate pipeline, MIGC, Inc., and one intrastate pipeline, MGTC, Inc., whichtransport natural gas for producers and energy marketers under fee schedulesregulated by state or federal agencies.

 

***Marketing. ***Our gas marketing segment is an outgrowthof our gas processing and upstream activities. One of the primary goals of our gas marketing operations is thepreservation and enhancement of the value received for our equity volumes ofnatural gas.  This goal is achievedthrough the use of hedges on the production of our equity natural gas and NGLsand through the use of firm transportation capacity.  We also buy and sell natural gas and NGLs inthe wholesale market in the United States and in Canada.  These third-party sales, our firmtransportation capacity on interstate pipelines and our gas storage positions,combined with the stable supply of gas from our facilities and production, enableus to respond quickly to changing market conditions and to take advantage ofseasonal price variations and peak demand periods.

 

***RESULTS OF OPERATIONS***

 

**Three and nine months ended September 30, 2004 compared to the threeand nine months ended September 30, 2003**

**(Dollars in thousands, except per share amounts and operating data).**

 
| ** **                                           | ** ** | **Three Months Ended  September 30,** | ** **  | ** ** | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|-------------|------------|------------|--------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | ** **                            | **Percent** | ** ** | ** ** | **Percent**                          | ** ** |
| ** **                                           | ** ** | **2004**                              | ** **  | **2003**   | ** ** | **Change**                           | ** ** | **2004**   | ** ** | **2003** | ** ** | **Change** | ** ** |
|                                                 |       |                                  |        |       |       |                                 |       |       |       |   |   |   |   |
| **Financial results:**                               |       |                                  |        |       |       |                                 |       |       |       |   |   |   |   |
| Revenues                                             |       | $                                     | 718,255     |       | $          | 666,800                              |       | 8          |       | $ | 2,215,774 |   | $ | 2,215,397 |   | — |   |
| Net income                                           |       | 35,118                                |        | 20,889     |       | 68                                   |       | 78,181     |       | 65,164 |   | 20 |   |
| Earnings per share of common  stock                  |       | 0.48                                  |        | 0.29       |       | 66                                   |       | 1.08       |       | 0.90 |   | 20 |   |
| Earnings per share of common stock -  diluted        |       | 0.47                                  |        | 0.28       |       | 68                                   |       | 1.06       |       | 0.87 |   | 22 |   |
| Net cash (used in) provided by operating  activities |       | 34,332                                |        | 68,823     |       | (50                                  | )          | 149,736    |       | 210,473 |   | (29 | ) |
| Net cash (used in) provided by investing  activities |       | (66,561                               | )           | (56,116    | )          | (18                                  | )          | (145,319   | )          | (132,103 | ) | (10 | ) |
| Net cash (used in) provided by financing  activities |       | $                                     | 32,061      |       | $          | 4,952                                |       | 547        |       | $ | (27,814 | ) | $ | (27,792 | ) | — |   |
|                                                 |       |                                  |        |       |       |                                 |       |       |       |   |   |   |   |
| **Operating data:**                                  |       |                                  |        |       |       |                                 |       |       |       |   |   |   |   |
| Average gas sales (MMcf/D)                           |       | 1,130                                 |        | 1,285      |       | (12                                  | )          | 1,229      |       | 1,374 |   | (11 | ) |
| Average NGL sales (MGal/D)                           |       | 1,741                                 |        | 1,639      |       | 6                                    |       | 1,665      |       | 1,640 |   | (2 | ) |
| Average gas prices ($/Mcf)                           |       | $                                     | 5.38        |       | $          | 4.70                                 |       | 14         |       | $ | 5.39 |   | $ | 5.08 |   | 6 |   |
| Average NGL prices ($/Gal)                           |       | $                                     | 0.78        |       | $          | 0.57                                 |       | 37         |       | $ | 0.70 |   | $ | 0.58 |   | 21 |   |

 

Net income increased $14.2 million for thethree months ended September 30, 2004 compared to the same period in 2003.  The increase in net income was primarilyattributable to higher product prices and slightly higher equity production ofnatural gas.

 

Net income increased $13.0 million for thenine months ended September 30, 2004 compared to the same period in 2003.  This increase was primarily attributable tohigher product prices.  The priceincreases were somewhat offset by reduced operating profit from the marketingsegment and after-tax charges associated with a settlement with the CommodityFutures Trading Commission, or CFTC, of $7.0 million and the earlyextinguishment of long-term debt of $6.7 million.  Additionally, the nine months ended September30, 2004 included a change in accounting principle that resultedin a cumulative reduction of depreciation for periods prior to 2004 of $4.7million, net of tax, and the nine monthsended

 

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September 30, 2003 included a $6.7million after-tax loss from theCumulative effect of a change in accounting principle from the adoption of SFASNo. 143 “Accounting for Asset Retirement Obligations” on January 1, 2003.

 

Revenues from the sale of gas increased $3.9 million to $561.0 millionfor the three months ended September 30, 2004 compared to the same period in2003.  This increase was primarily due toan increase in product prices, which more than offset a decrease in salesvolume in the three months ended September 30, 2004.  Average gas prices realized by us increased$0.68 per Mcf to $5.38 per Mcf for the quarter ended September 30, 2004compared to the same period in 2003. Included in the realized gas price were approximately $308,000 of gainsrecognized in the three months ended September 30, 2004 related to futurespositions on equity gas volumes.  We haveentered into additional futures positions for a portion of our equity gas forthe remainder of 2004 and in 2005.  Seefurther discussion in “Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.”  Average gas sales volumesdecreased to 1,130 MMcf per day for the quarter ended September 30, 2004 from1,285 MMcf per day in the same period in 2003. This decrease was the result of our reduction in third party salesvolume due to the increase in product prices and related credit exposure.

 

Revenues from the sale of gas decreased $87.3 million to $1,822.0million for the nine months ended September 30, 2004 compared to the sameperiod in 2003.  This decrease wasprimarily due to a decrease in sales volume, which more than offset an increasein product prices in the nine months ended September 30, 2004.  Average gas prices realized by us increased$0.31 per Mcf to $5.39 per Mcf for the nine months ended September 30, 2004compared to the same period in 2003. Included in the realized gas price were approximately $3.7 million ofgains recognized in the nine months ended September 30, 2004 related to futurespositions on equity gas volumes.  Average gas sales volumes decreased to 1,229 MMcf per day for the ninemonths ended September 30, 2004 from 1,374 MMcf per day in the same period in2003.  This decrease was the result ofour reduction in third party sales volume due to the increase in product pricesand related credit exposure.

 

Revenues from the sale of NGLs increased $38.5 million to $124.5million for the three months ended September 30, 2004 compared to the sameperiod in 2003.  This is primarily due toa significant increase in product prices as sales volumes were relatively constant.  Average NGL prices realized by us increased$0.21 per gallon to $0.78 per gallon for the three months ended September 30,2004 compared to the same period in 2003. Included in the realized NGL price were approximately $5.0 million oflosses recognized in the three months ended September 30, 2004 related tofutures positions on equity NGL volumes. We have entered into additional futures positions for a portion of ourequity NGL production for the remainder of 2004 and in 2005.  See further discussion in “Item 3.Quantitative and Qualitative Disclosures About Market Risk.”  Average NGL sales volumes increased 102 MGalper day to 1,741 MGal per day for the three months ended September 30, 2004compared to the same period in 2003.

 

Revenues from the sale of NGLs increased approximately $60.6 million to$319.4 million for the nine months ended September 30, 2004 compared to thesame period in 2003.  This is primarilydue to a significant increase in product prices as sales volumes wererelatively constant.  Average NGL pricesrealized by us increased $0.12 per gallon to $0.70 per gallon for the ninemonths ended September 30, 2004 compared to the same period in 2003.  Included in the realized NGL price wereapproximately $10.0 million of losses recognized in the nine months endedSeptember 30, 2004 related to futures positions on equity NGL volumes.  Average NGL sales volumes increased 25 MGalper day to 1,665 MGal per day for the nine months ended September 30, 2004compared to the same period in 2003.

 

Product purchases increased by $18.8 million and decreased by $53.1million for the quarter and nine months ended September 30, 2004 compared tothe same periods in 2003.  The increasein product purchases in the third quarter of 2004 compared to the same periodin 2003 was the result of an increase in product prices.   The decrease in product purchases for thenine months ended September 30, 2004 compared to the same period in 2003 wasthe result of the reduction in third party sales volume which more than offsetan increase in product prices.  Overall,combined product purchases as a percentage of sales of all products decreasedto approximately 85% in the quarter and approximately 86% in the nine monthsended September 30, 2004 from 88% in both of the 2003 comparable periods.  The reduction in this percentage is primarilythe result of a decrease in the sale of third party product.

 

Oil and gas exploration and production expenses increased by $5.5million and $16.6 million, respectively, for the three and nine months endedSeptember 30, 2004 compared to the same periods in 2003.  These increases were substantially due toincreased lease operating expenses, or LOE, in the Powder River Basin coal beddevelopment. Overall, LOE averaged $0.61 per Mcf and $0.64 per Mcf for thequarter and nine months ended September 30, 2004 compared to $0.47 per Mcf and$0.43 per Mcf for the quarter and nine months ended September 30, 2003.  The increases in LOE are substantially due tohigher water handling charges, contract labor, and fuel and operating costs ofwellhead blowers in the Powder River Basin.

 

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Depreciation,depletion and amortization increased by $4.6 million and $13.7 million,respectively, for the three and nine months ended September 30, 2004 ascompared to the same periods in 2003. These increases are the result of additional capital expenditures anddepreciation and depletion on our oil and gas assets.   Effective January 1, 2004, we redefined theasset groupings for the calculation of depreciation and depletion on our oiland gas properties from a well-by-well basis to a field wide basis for each ofthe Jonah, Pinedale and Sand Wash fields and to a grouping of all wells drilledinto related coal seams for the Powder River Basin. This change resulted in anincrease in Depreciation, depletion and amortization expense of $422,000 and$2.0 million in the third quarter and nine months ended September 30, 2004,respectively.

 

The change in the depreciation and depletion methodology is treated asa change in accounting principle. Accordingly, the Accumulated depreciation, depletion and amortizationfor these assets has been recalculated under the new methodology.  The cumulative effect of the change indepreciation and depletion methodology is a benefit of $4.7 million, net oftax, and is presented in the Consolidated Statement of Operations under thecaption Cumulative effect of changes in accounting principles, net of tax.

 

Selling and administrative expenses increased by $1.3 million and $8.0million for the three and nine months ended September 30, 2004 as compared tothe same period in 2003.  The increase inselling and administrative expenses was the result of the July 2004 settlementwith the CFTC related to reporting of price information to industrypublications.

 

The Total provision for income taxes, as a percentage of Income beforeincome taxes was approximately 39.0% during the nine months ended September 30,2004 as compared to 37.1% in same period of 2003.  This increase is due to the civil penaltypaid to the CFTC, which was non-deductible for tax purposes.  The provision for income taxes as apercentage of Income before income taxes was approximately 36.7% during thequarter ended September 30, 2004.

 

***Cash Flow Information******.***

 

Cash flows from operatingactivities decreased by $61.2 million in the first nine months of 2004 comparedto the first nine months of 2003. This decrease was primarily due to the timingof cash receipts and payables and an increase in our inventory of products heldfor future resale.

 

Cash flows used in investingactivities increased by $12.8 million in the first nine months of 2004 comparedto the first nine months of 2003.  Thisincrease was due to an increase in capital expenditures in 2004.

 

Cash flows used in financingactivities remained relatively constant in the first nine months of 2004compared to the first nine months of 2003.

 

***Segment Information.***

 

***Gas Gathering, Processing and Treating.***  The Gas Gathering, Processing and Treatingsegment realized segment-operating profit of $122.9 million for the nine monthsended September 30, 2004 as compared to $88.9 million for the same period in2003.  The increase in operating profitin this segment in the 2004 period is primarily due to higher realized pricesand improved contractual terms on gas gathered in the Powder River Basin.

 

***Exploration and Production.***  The Exploration and Production segmentrealized segment-operating profit of $106.8 million for the nine months endedSeptember 30, 2004 compared to $90.2 million in the same period of 2003. Theincrease is due to an improvement in realized prices. The following table setsforth the average sales price received for our oil and gas products andproduction costs per Mcfe for the third quarter and nine months ended September30, 2004 and 2003.

 
| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Average sales price: (1)                                      |       |                                  |       |                                 |       |   |   |   |   |
| Oil ($/Bbl), excluding the effect of  hedging positions       |       | $                                     | 35.32      |                                 | $          | 28.73 |   | $ | 35.34 |   | $ | 29.48 |   |
| Oil ($/Bbl), including the effect of  hedging positions       |       | 35.32                                 |       | 28.73                                |       | 35.34 |   | 29.48 |   |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Gas ($/Mcf),  excluding the effect of  hedging positions |       | 4.53                                  |       | 4.03                                 |       | 4.50 |   | 4.31 |   |
| Gas ($/Mcf), including the effect of  hedging positions       |       | 4.55                                  |       | 3.63                                 |       | 4.59 |   | 3.86 |   |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Production and other costs:                                   |       |                                  |       |                                 |       |   |   |   |   |
| Lease operating expense ($/Mcfe)                              |       | 0.61                                  |       | 0.47                                 |       | 0.64 |   | 0.43 |   |
| Production tax expense ($/Mcfe)                               |       | 0.46                                  |       | 0.43                                 |       | 0.48 |   | 0.46 |   |
| Gathering and transportation expense  ($/Mcfe)                |       | 0.78                                  |       | 0.69                                 |       | 0.74 |   | 0.68 |   |
| Other expenses ($/Mcfe)                                       |       | 0.03                                  |       | 0.02                                 |       | 0.02 |   | 0.03 |   |
| Total costs ($/Mcfe)                                          |       | $                                     | 1.88       |                                 | $          | 1.61 |   | $ | 1.88 |   | $ | 1.60 |   |

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(1) The prices received forNGLs are included in the price received for gas.

 

 

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***Marketing.***  The Marketing segment realizedsegment-operating profit of $13.0 million for the nine months ended September30, 2004 compared to $28.2 million in the same period of 2003.  Thedecrease in the marketing profit is primarily due to lower profitability intransactions associated with our firm transportation capacity from the RockyMountain region to the Mid-Continent.

 

***Transportation.***  The Transportation segment realizedsegment-operating profit of $7.7 million for the nine months ended September30, 2004 compared to $9.2 million in the same period of 2003.  The transportation segment includes theresults from the MIGC and MGTC pipelines in the Powder River Basin.  The decrease in profit in this segment is dueto lower interruptible transportation volume in the 2004 periods as more gaswas transported out of the basin through other pipelines.

 

***Recently Issued Accounting Pronouncements.***  We continually monitor and revise ouraccounting policies as new rules are issued. See Notes to Consolidated Financial Statements (Unaudited) in Item 1 ofthis Form 10-Q for a detailed description of recently issued accountingpronouncements.

 

***LIQUIDITY AND CAPITALRESOURCES***

 

Oursources of liquidity and capital resources historically have been net cashprovided by operating activities, funds available under our financingfacilities and proceeds from offerings of debt and equity securities.  In the past, these sources have been sufficientto meet our needs and finance the growth of our business.  We can give no assurance that the historicalsources of liquidity and capital resources will be available for futuredevelopment and acquisition projects, and we may be required to seek additionalor alternative financing sources. Product prices, hedges of equity production, sales of inventory, thevolume of natural gas processed by our facilities, the volume of natural gasproduced from our producing properties, the margin on third-party productpurchased for resale, as well as the timely collection of our receivables areall expected to have significant influences on our future net cash provided byoperating activities.  Additionally, ourfuture growth will be dependent upon obtaining additions to dedicated plantreserves, acquisitions, new project development, marketing results, efficientoperation of our facilities and our ability to obtain financing at favorableterms.

 

Duringthe past several years, we have been successful in developing additionalreserves of natural gas and increasing our equity natural gas production.  However, the overall level of drilling andproduction associated with our producing properties will depend upon, amongother factors, the price for gas, availability of transportation capacity tomarket centers, the energy and environmental policy and regulation bygovernmental agencies, and the issuance of drilling and water disposal permits,none of which is entirely within our control. Any reduction in the levels of exploration, development and production byus or a significant reduction in natural gas prices could have a materialadverse effect on our financial condition, results of operations and cashflows.

 

Althoughsome of our plants have experienced natural declines in dedicated reserves,overall we have been successful in connecting additional reserves to more thanoffset these declines.  However, theoverall level of drilling associated with our plant facilities will dependupon, among other factors, the prices for oil and gas, the drilling budgets ofthird-party producers, availability of transportation capacity to marketcenters, the energy and environmental policy and regulation by governmentalagencies, the pace at which drilling permits are received, and the availabilityof foreign oil and gas, none of which is within our control. There is noassurance that we will continue to be suc­cessful in replacing the dedicatedreserves processed at our facilities. Any prolonged reduction in prices for natural gas and NGLs may depressthe levels of exploration, development and production by third-parties.  Lower levels of these activities could resultin a corresponding decline in the demand for our gathering, processing andtreating services.  A reduction in any ofthese activities could have a material adverse effect on our financialcondition, results of operations and cash flows.

 

Webelieve that the amounts available to be borrowed under our financingfacilities, together with net cash provided by operating activities, willprovide us with sufficient funds to connect new reserves, maintain our existingfacilities and complete our current capital expenditure program.  Depending on the timing and the amount of ourfuture projects, we may be required to seek additional sources of capital.  Our ability to secure such capital isrestricted by our financing facilities,

 

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althoughwe may request additional borrowing capacity from our lenders, seek waiversfrom our lenders to permit us to borrow funds from third-parties, seekreplacement financing facilities from other lenders, use stock as a currencyfor acquisitions, sell existing assets or use a combination ofalternatives.  While we believe that wewould be able to secure additional financing, if required, we can provide noassurance that we will be able to do so or as to the terms of any additionalfinancing.

 

Weutilized amounts available under the revolving credit facility together with anadditional $100.0 million borrowing under the master shelf agreement, to redeemour $155.0 million, 10% senior subordinated notes in June 2004, to pay a $7.8million prepayment penalty on this redemption, and to meet scheduled principalrepayments during the first ten months of 2004 of $35.0 million under themaster shelf agreement.

 

Wehave effective shelf registration statements filed with the SEC for anaggregate of $200 million of debt securities and preferred stock, along withthe shares of common stock, if any, into which those securities areconvertible, and $62 million of debt securities, preferred stock or commonstock.  These shelf registrations allowus to access the debt and equity markets.

 

***Common StockSplit. ***OnJune 18, 2004, we completed a two-for-one split of our common stock, which wasdistributed in the form of a stock dividend. Shareholders of our common stock received one additional share for everyshare of common stock held on the record date of June 4, 2004.  Upon completion of the stock split, we hadapproximately 73.6 million shares of common stock outstanding.  After the stock split, each share of commonstock outstanding or thereafter issued includes or will include one-half of aSeries A Junior Participating Preferred Stock purchase right.  We have restated our financial information toreflect this split for all periods presented.

 

***Post Retirement Benefits. ***In July 2004, the board of directors authorizedthe development of an amendment to the board’s existing health care plan toprovide for health care benefits for qualifying members, and their spouses,after their retirement from our board of directors.  The terms of the plan have not yet beenfinalized and, accordingly, no accrual for the future cost of this benefit hasyet been made.

 

***Capital InvestmentProgram.***  Wecurrently anticipate capital expenditures in 2004 of approximately $352.4million.  Due to drilling and regulatoryuncertainties that are beyond our control, we can make no assurance that ourcapital budget for 2004 will be fully expended. This budget may be further increased to provide for acquisitions ifapproved by our board of directors.

 

The 2004 capital budget and our capital expenditures during the ninemonths ended September 30, 2004 are presented in the following table (dollarsin thousands). 

 
| **Type of Capital Expenditure**                              | ** ** | **2004 Capital  Budget** | ** ** | **Capital Expenditures   During the  Nine months Ended  September 30, 2004** | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|------------------------------------------------------------------------------|------------|
| Gathering,  processing, treating and pipeline assets         |       | $                        | 112.8      | *                                                                            | $          | 50.6 | * |
| Exploration and production and lease  acquisition activities |       | 146.6                    |       | 84.8                                                                         |       |
| Acquisition of San Juan Basin oil and gas  properties        |       | 82.2                     |       | 4.1                                                                          |       |
| Information technology and other items                       |       | 3.0                      |       | 2.4                                                                          |       |
| Capitalized interest and overhead                            |       | 7.8                      |       | 4.5                                                                          |       |
| Total Capital Expenditures                                   |       | $                        | 352.4      |                                                                         | $          | 146.4 |   |

 

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* Includes $14.6 millionbudgeted in 2004 and $7.0 million expended in the first nine months of 2004 formaintaining existing facilities.

 

***ContractualCommitments and Obligations.***

 

##### ***ContractualCash Obligations. ***A summary of our contractual cash obligations as ofSeptember 30, 2004 is as follows (dollars in thousands):

 
| ** **                                | ** ** | ** **             | ** ** | **Payments by Period** | ** ** |
|-------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **Type of Obligation**                    | ** ** | **Total  Obligations** | ** ** | **Due in  2004**       | ** ** | **Due in  2005 – 2006** | ** ** | **Due in  2007 – 2008** | ** ** | **Due  Thereafter** | ** ** |
| Guarantee of Fort Union Project Financing |       | $                      | 4,949      |                   | $          | 206 |   | $ | 1,795 |   | $ | 2,081 |   | $ | 867 |   |
| Operating Leases                          |       | 75,758                 |       | 3,636                  |       | 29,005 |   | 25,502 |   | 17,615 |   |
| Firm Transportation Capacity Agreements   |       | 260,280                |       | 9,305                  |       | 75,224 |   | 68,259 |   | 107,492 |   |
| Firm Storage Capacity Agreements          |       | 31,487                 |       | 2,390                  |       | 12,181 |   | 5,903 |   | 11,013 |   |
| Long-term Debt                            |       | 317,500                |       | 25,000                 |       | 20,000 |   | 35,000 |   | 237,500 |   |
| Total Contractual Cash Obligations        |       | $                      | 689,974    |                   | $          | 40,537 |   | $ | 138,205 |   | $ | 136,745 |   | $ | 374,487 |   |
|                                           |            |                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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***Guarantee of FortUnion Project Financing.***   We own a 13% equity interest in Fort Union GasGathering, L.L.C., or Fort Union, and are the construction manager and fieldoperator.  Fort Union gathers and treatsnatural gas in the Powder River Basin in northeast Wyoming.  Initial construction and expansions of thegathering header and treating system have been project financed by FortUnion.  This debt is amortizing on anannual basis and is scheduled to be fully paid in 2009.  Our requirement to fund under this guaranteewould be reduced by the value of assets held by Fort Union.  This guarantee is not reflected on ourConsolidated Balance Sheet.

 

***OperatingLeases. ***Inthe ordinary course of our business operations, we enter into operating leasesfor office space, and for office, communication, transportation and compressionequipment.  Payments made on these leasesare a component of operating expenses and are reflected on the ConsolidatedStatement of Operations and, as operating leases, are not reflected on ourConsolidated Balance Sheet.  These leaseshave terms ranging from one month to ten years with return or fair marketpurchase options available at various times during the lease.   If we were to exercise the purchase optionson all the leased equipment, these purchase options would require the capitalexpenditure of approximately $44.4 million between 2007 and 2013.

 

***Firm Transportation Capacity and GatheringAgreements.***  Accessto firm transportation is also a significant element of our businessstrategy.  Firm transportation ensuresthat our equity production has access to downstream markets and allows us tocapture incremental profit in our marketing segment when pricing differentialsbetween physical locations occur.   These agreements are not reflected on our Consolidated Balance Sheet.

 

The fixed fees associated with our existing contracts for firmtransportation capacity during the remainder of 2004 will average approximately$0.14 per Mcf.  The associated contractperiods range from one month to thirteen years. Under firm transportation contracts, we are required to pay the fees associatedwith these contracts whether or not the transportation is used.

 

***Firm Storage Capacity Agreements*.**  Wecustomarily store gas in underground storage facilities to ensure an adequatesupply for long-term sales contracts and to capture seasonal pricedifferentials.

 

The feesassociated with these storage contracts in the remainder of 2004 will average $0.52 per Mcf of annualcapacity.  The associated contractperiods at September 30, 2004 have an average term of 34 months.  At September 30, 2004, we held gas in ourcontracted storage facilities and in pipeline imbalances of approximately 19.6Bcf at an average cost of $5.39 per Mcf compared to 14.5 Bcf at an average cost of $4.56per Mcf atSeptember 30, 2003.  Our currentpositions are for storage withdrawals within the next six months.  At the time we place product into storage, wecontract for the sale of that product, physically or financially, and do notspeculate on its future value.  Theseagreements for storage capacity are not reflected on our Consolidated BalanceSheet.

 

From time to time, we lease NGL storage space at major tradinglocations to facilitate the distribution of products. At September 30, 2004, weheld NGLs in storage at various third-party facilities of 2,877 MGal,consisting primarily of propane and ethane, at an average cost of $0.32 pergallon compared to 2,687 MGal at an average cost of $0.26 per gallon atSeptember 30, 2003.  These agreements forstorage capacity are not reflected on our Consolidated Balance Sheet.

 

#### ***Long-term Debt***

 

*** Revolving Credit Facility.***  Therevolving credit facility is a five-year, $400 million revolving creditfacility maturing in June 2009.   At September30, 2004, $137.5 million was outstanding under this facility.  On October 1, 2004, we drew on the creditfacility to fund the acquisition of the San Juan properties.   Loans made under this facility are securedby a pledge of the capital stock of our significant subsidiaries.  These subsidiaries also guarantee theborrowings under the facility.

 

The borrowings under thecredit facility bear interest at Eurodollar rates or a base rate, as requestedby us, plus an applicable percentage based on our debt to capitalizationratio.  The base rate is the agent’spublished prime rate.  We also pay aquarterly commitment fee ranging between 0.20% and 0.375%, depending on ourdebt to capitalization ratio.  This feeis paid on unused amounts of the commitment. At September 30, 2004, the interest rate payable on borrowings underthis facility was approximately 3.0%. Under the credit facility, we are subject to a number of covenants,including: maintaining a

 

24

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total debt to capitalization ratio of notmore than 55%; and maintaining a ratio of EBITDA, as defined in the creditfacility, to interest over the last four quarters in excess of 3.0 to 1.0.  The credit facility ranks equally withborrowings under our master shelf agreement with The Prudential InsuranceCompany.

 

***Master Shelf Agreement. ***Amountsoutstanding under the master shelf agreement at October 31, 2004 are asindicated in the following table (dollars in thousands):

 
| **Issue Date**   | ** ** | **Amount** | ** ** | **Interest Rate** | ** ** | **Final Maturity** | ** **     | **Principal Repayment Schedule** | ** **                                           |
|------------------|------------|------------|------------|-------------------|------------|--------------------|----------------|----------------------------------|------------------------------------------------------|
| July 28, 1995    |       | $          | 30,000     |              | 7.61       | %                  | July 28,  2007 |                             | $ 10,000 on  each of July 28, 2005 through 2007 |   |
| January 17, 2003 |       | 25,000     |       | 6.36              | %          | January 17,  2008  |           | Single  payment at maturity      |                                                 |
| June 30, 2004    |       | 100,000    |       | 5.92              | %          | June 30,  2011     |           | Single  payment at maturity      |                                                 |
| Total            |       | $          | 155,000    |              |       |               |           |                             |                                                 |   |

 

Our borrowings under themaster shelf agreement are secured by a pledge of the capital stock of oursignificant subsidiaries.  Thesesubsidiaries also guaranty the borrowings under the facility.  All of the borrowings under the master shelfagreement can be prepaid prior to their final maturity by paying ayield-maintenance fee.   Under our mastershelf agreement, we are subject to a number of covenants, including:maintaining a total debt to capitalization ratio of not more than 55%; and maintaininga quarterly test of EBITDA, as defined in the master shelf agreement, tointerest for the last four quarters in excess of 3.0 to 1.0.

 

#### ***EXPLORATION AND PRODUCTION***

#### ** **

Avital aspect of our long-term business plan is to double proven reserves andequity production of natural gas from the level at December 31, 2001 over afive year period.  In order to achievethis goal, we will continue to focus on the development of our leaseholdpositions in the Powder River CBM development and the Green River Basin.  Each of our existing upstream projects isfully integrated with our midstream operations. In other words, we provide the gathering, compression, processing,marketing or transportation services for both our own production and forthird-party operators.  Additionally, weare actively pursuing new exploration, development and producing propertyacquisition opportunities.

 

Our principal upstream operations are summarized inthe following table:  

 
| **Production Area**    | ** ** | **Gross Acres Under  Lease At  September 30, 2004** | ** ** | **Net Acres Under  Lease At  September 30, 2004** | ** ** | **Gross Productive  Gas Wells at  September 30, 2004** | ** ** | **Net Productive Gas  Wells at  September 30, 2004** | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| Powder River Basin CBM |       | 1,048,000                                           |       | 533,000                                           |       | 3,792                                                  |       | 1,796                                                |       |
| Pinedale/Jonah Basin   |       | 167,000                                             |       | 29,000                                            |       | 178                                                    |       | 19                                                   |       |
| Sand Wash Basin        |       | 162,000                                             |       | 137,000                                           |       | 19                                                     |       | 19                                                   |       |
| Northeast Colorado     |       | 394,000                                             |       | 340,000                                           |       | —                                                 |       | —                                               |       |
| Other                  |       | 186,000                                             |       | 168,000                                           |       | 10                                                     |       | 2                                                    |       |

 

***Production andDrilling Results.* **The following table sets forth the average net production volume ofnatural gas sold and the number of wells we drilled during each of the ninemonth periods ended September 30, 2004 and 2003 in each of our major producingareas.  This information should not beconsidered indicative of future performance, nor should it be assumed thatthere is necessarily any correlation between the number of productive wellsdrilled, quantities of reserves found or economic value.  Productive wells are defined as those thatproduce commercial quantities of hydrocarbons whether or not they produce areasonable rate of return.

 
| ** **                    | ** ** | **Nine Months Ended September 30,**   | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                    | ** ** | **Net Production Sold in MMcfe** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Net Production   Sold in MMcfe** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| Powder River Basin CBM        |       | 31,784                                |       |   |   |   |   | 33,973 |   |   |   |   |   |
| Productive wells drilled      |       |                                  |       | 512 |   | 246 |   |   |   | 467 |   | 224 |   |
| Dry development wells drilled |       |                                  |       | 0 |   | 0 |   |   |   | 0 |   | 0 |   |
|                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Pinedale/Jonah Basin          |       | 7,210                                 |       |   |   |   |   | 5,502 |   |   |   |   |   |
| Productive wells drilled      |       |                                  |       | 50 |   | 5 |   |   |   | 43 |   | 4 |   |
| Dry development wells drilled |       |                                  |       | 0 |   | 0 |   |   |   | 0 |   | 0 |   |
|                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Sand Wash Basin               |       | 1,806                                 |       |   |   |   |   | 986 |   |   |   |   |   |
| Productive wells drilled      |       |                                  |       | 5 |   | 5 |   |   |   | 2 |   | 2 |   |
| Dry development wells drilled |       |                                  |       | 0 |   | 0 |   |   |   | 0 |   | 0 |   |
| Dry exploratory wells drilled |       |                                  |       | 1 |   | 1 |   |   |   | 1 |   | 1 |   |

 

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***Powder River BasinCoal Bed Methane. ***Historically, the drilling operationsin the Powder River Basin were focused on developing reserves in the Wyodak andrelated coals, which are located on the east side of the coal beddevelopment.  Our net production soldfrom the Wyodak coal averaged 94 MMcfd in the third quarter ended September 30,2004.  Overall, we believe the Wyodakcoals have reached their peak production and will decline over the next severalyears.

 

The majority of future development will be concentrated on developingthe Big George and related coal seams in the western and northern parts of thePowder River Basin.  Our net productionfrom the Big George coal continues to increase and averaged 65 MMcfd in October2004 from the All Night Creek Unit, Pleasantville, SG Palo, Bullwhacker,Schoonover and Kingsbury Unit areas.  Inthese development areas and our areas of exploration, as of August 31, 2004, wehad 539 Big George wells dewatering and producing gas, 217 Big George wellsdewatering and 350 Big George wells drilled and in various stages of completion and hook-up inpreparation for dewatering and production.  There is, however, no assurance as to thetiming of the receipt of drilling and water discharge permits, the success ofour drilling program, and the dewatering time as our development progressesinto the western and northern parts of the Powder River Basin.

 

Drilling in the Powder River Basin is dependant on the receipt ofvarious regulatory permits, including BLM drilling permits and DEQ waterdischarge permits. Most of our undeveloped prospects from the Big Georgeformation are located in the Powder River drainage area.  The DEQ has not finalized their requiredwater management techniques to be used across the basin.  Techniques utilized by us, and approved bythe DEQ on a location-by-location basis, have included containment ortreating.  In order to facilitate theprocessing of our water discharge permit applications on the west side of thebasin, and in advance of the final requirements of the DEQ, we have installedand tested various types of water treatment facilities and are treating thewater produced in some areas of the basin and, with the approval of the DEQ,discharging into the Powder River.  Webelieve future developments in the Big George coal may require water treatmentfacilities.  These treating operationshave added and will add to the cost of development and operations in theseareas.  We continue to evaluate severaloptions for water treatment to identify alternative methodologies, which may bemore effective and cost efficient.

 

The pace of our development of this play has been delayed due to thetiming and receipt of drilling and water discharge permits, and we are unableto predict the timing and rate at which permits will be granted to accomplishour drilling and production targets and fully develop our leasehold in futureyears.  As of October 31, 2004, we havereceived a sufficient number of drilling permits to complete our 2004 drillingprogram of 760 wells, and prior to year-end, we anticipate receiving therequired water discharge permits for this program.

 

On August 10, 2004, the Tenth Circuit Court of Appeals in Denver,Colorado issued its decision in Pennaco Energy, Inc. v. United StatesDepartment of the Interior, 377 F.3d 1147 (10th Cir. 2004).  The court upheld a decision by the InteriorBoard of Land Appeals, or IBLA, that the Bureau of Land Management had notcomplied with the National Environmental Policy Act in issuing three federaloil and gas leases to Pennaco Energy, Inc. in the Powder River Basin of Wyomingfor coalbed methane development.  We arenot a party to the case, and the IBLA and Tenth Circuit decisions do notdirectly address any federal oil and gas leases held by us.  However, we hold approximately 70,000 netacres of federal oil and gas leases in the Powder River Basin, some of whichmay potentially be affected by the response to the Pennaco case.  The matter is presently before the Departmentof the Interior, which is evaluating this decision.  We cannot predict what action the Departmentof Interior or third parties might take in response to this matter, or how thedecision may affect the pace of federal leasing or permitting and developmentin the Powder River Basin.

 

***Jonah/Pinedale Fields.* **Our exploration and production assets inthe Green River Basin of southwest Wyoming are located in the Jonah Field andPinedale Anticline areas.  During 2004,we expect to participate in the drilling of 68 gross wells, or approximatelyseven net wells, on the Pinedale Anticline. Due to drilling and regulatory uncertainties, which are beyond ourcontrol, there can be no assurance that we will participate in the drilling ofthe total planned wells during 2004. Drilling to date on the Pinedale Anticline has been allowed on one wellper 40-acre tract.  In the third quarterof 2004, the State of Wyoming approved the drilling of two wells per 40-acretract on approximately half of the Pinedale Anticline.  If this spacing were approved along theexpanse of the Pinedale Anticline and proves successful, we would significantlyincrease our number of drilling locations. The timing of the drilling of these additional locations would besubject to the completion of any required regulatory and environmental reviews.

 

26

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***Acquisition of SanJuan Basin Properties.***  * *In July 2004, we signed a purchaseand sale agreement to acquire oil and gas assets in the San Juan Basin of NewMexico for approximately $82.2 million. Closing occurred on October 1, 2004. We funded this acquisition with amounts available under our revolving creditfacility.  The purchase includes32,000 gross acres, or 24,000 net acres, with approximately 100 wells producing15 MMcf per day gross, or 11 MMcf per day net, of coal bed methane.   Provedreserves as of December 31, 2003 were estimated to be approximately 60Bcfe.  The purchase also includesapproximately 130 miles of related gathering systems, which are currentlyconnected to our existing San Juan River plant. Approximately 30% of the properties are subject to a preferential rightto purchase by a third party.  This rightwill expire in February 2005 if not exercised.

 

#### ***MIDSTREAM OPERATIONS***

 

Ourmidstream operations consist of our gathering, processing, treating, marketingand transportation operations.  Animportant element of our long-term business plan is to meet or exceedthroughput projections in these areas and to optimize their profitability.  To achieve this goal, we must continue ourefforts to add to natural gas throughput levels through new well connectionsand through the expansion or acquisition of gathering or processingsystems.  We also seek to increase theefficiency of our operations by modernization of equipment and the consolidationof existing facilities.

 

***Gas Gathering, Processing and Treating.*** We operatea variety of gathering, processing and treating facilities, or plantoperations, as presented on the Principal Gathering and Processing FacilitiesTable set forth below.  Our operationsare located in some of the most actively drilled oil and gas producing basins in theUnited States.  Five of ourprocessing plants can further separate, or fractionate, the mixed NGL streaminto ethane, propane, normal butane and natural gasoline to obtain a highervalue for the NGLs, and three of our plants are capable of processing andtreating natural gas containing hydrogen sulfide or other impurities thatrequire removal prior to delivery to market pipelines.   Inaddition to our integrated upstream and midstream operations in the PowderRiver and Green River Basins in Wyoming, and in the San Juan Basin in NewMexico, ourcore assets include our plant operations located in west Texas andOklahoma.  We believe that our coreassets have stable production rates, provide a significant operating cash flowand continue to provide us with strategic growth opportunities.

 

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***Principal Gatheringand Processing Facilities Table.***  The following table provides informationconcerning our principal gathering, processing and treating facilities atSeptember 30, 2004.

 
| ** **                    | ** ** | **Year  Placed  in  Service** | ** ** | **Gas  Gathering  System  Miles** | ** **                        | **Gas  Throughput  Capacity  (MMcf/D) (2)** | ** **                        | **Average for the Nine Months Ended  September 30, 2004** | ** **                        |
|-------------------------------|------------|-------------------------------|------------|-----------------------------------|-----------------------------------|---------------------------------------------|-----------------------------------|-----------------------------------------------------------|-----------------------------------|
| **Facilities (1)**            | ** ** | ** **                    | ** ** | ** **                        | **Gas  Throughput  (MMcf/D) (3)** | ** **                                  | **Gas  Production  (MMcf/D) (4)** | ** **                                                | **NGL  Production  (MGal/D) (4)** | ** ** |
| ** **                    | ** ** | ** **                    | ** ** | ** **                        | ** **                        | ** **                                  | ** **                        | ** **                                                | ** **                        | ** ** | ** ** | ** ** | ** ** |
| Texas                         |       |                          |       |                              |                              |                                        |                              |                                                      |                              |   |   |   |   |
| Gomez Treating (5)            |       | 1971                          |       | 389                               |                              | 280                                         |                              | 97                                                        |                              | 88 |   | — |   |
| Midkiff/Benedum               |       | 1949                          |       | 2,326                             |                              | 165                                         |                              | 139                                                       |                              | 91 |   | 836 |   |
| Mitchell Puckett Treating (5) |       | 1972                          |       | 126                               |                              | 120                                         |                              | 48                                                        |                              | 31 |   | 1 |   |
| Wyoming                       |       |                          |       |                              |                              |                                        |                              |                                                      |                              |   |   |   |   |
| Coal Bed Methane Gathering    |       | 1990                          |       | 1,369                             |                              | 525                                         |                              | 396                                                       |                              | 374 |   | — |   |
| Desert Springs Gathering      |       | 1979                          |       | 65                                |                              | 10                                          |                              | 6                                                         |                              | 6 |   | 24 |   |
| Fort Union Gas Gathering      |       | 1999                          |       | 167                               |                              | 635                                         |                              | 454                                                       |                              | 454 |   | — |   |
| Granger Complex (6)(7)(8)     |       | 1987                          |       | 710                               |                              | 285                                         |                              | 260                                                       |                              | 207 |   | 332 |   |
| Hilight Complex (6)           |       | 1969                          |       | 657                               |                              | 124                                         |                              | 19                                                        |                              | 14 |   | 63 |   |
| Kitty/Amos Draw (6)           |       | 1969                          |       | 321                               |                              | 17                                          |                              | 6                                                         |                              | 4 |   | 26 |   |
| Newcastle (6)                 |       | 1981                          |       | 146                               |                              | 5                                           |                              | 3                                                         |                              | 2 |   | 22 |   |
| Red Desert (6)                |       | 1979                          |       | 122                               |                              | 42                                          |                              | 40                                                        |                              | 29 |   | 52 |   |
| Rendezvous (10)               |       | 2001                          |       | 238                               |                              | 275                                         |                              | 235                                                       |                              | 235 |   | — |   |
| Reno Junction (7)             |       | 1991                          |       | —                            |                              | —                                      |                              | —                                                    |                              | — |   | 129 |   |
| Table Rock Gathering          |       | 1979                          |       | 100                               |                              | 20                                          |                              | 14                                                        |                              | 14 |   | — |   |
| Wamsutter Gathering (11)      |       | 1979                          |       | 239                               |                              | 50                                          |                              | 44                                                        |                              | 40 |   | 21 |   |
| Wind River Gathering          |       | 1979                          |       | 111                               |                              | 80                                          |                              | 51                                                        |                              | 50 |   | — |   |
| Oklahoma                      |       |                          |       |                              |                              |                                        |                              |                                                      |                              |   |   |   |   |
| Chaney Dell/Westana           |       | 1966                          |       | 3,267                             |                              | 175                                         |                              | 182                                                       |                              | 158 |   | 305 |   |
| New Mexico                    |       |                          |       |                              |                              |                                        |                              |                                                      |                              |   |   |   |   |
| San Juan River (5)(9)         |       | 1955                          |       | 140                               |                              | 60                                          |                              | 27                                                        |                              | 22 |   | 41 |   |
| Utah                          |       |                          |       |                              |                              |                                        |                              |                                                      |                              |   |   |   |   |
| Four Corners Gathering        |       | 1988                          |       | 104                               |                              | 15                                          |                              | 2                                                         |                              | 2 |   | 11 |   |
| Total                         |       |                          |       | 10,597                            |                              | 2,883                                       |                              | 2,023                                                     |                              | 1,821 |   | 1,863 |   |

 

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(1)       Ourinterest in all facilities is 100% except for Midkiff/Benedum (73%); Newcastle(50%); Fort Union (13%) and Rendezvous (50%). We operate all facilities, and all data include our interests and theinterests of other joint interest owners and producers of gas volumes dedicatedto the facility.  Unless otherwiseindicated, all facilities shown in the table are gathering, processing ortreating facilities.

(2)       Gasthroughput capacity is as of September 30, 2004 and represents capacity inaccordance with design specifications unless other constraints exist, includingpermitting or field compression limits.

(3)       Aggregatenatural gas volumes delivered into our gathering systems.

(4)       Volumesof gas and NGLs are allocated to a facility when a well is connected to thatfacility; volumes exclude NGLs fractionated for third-parties.

(5)       Sourgas facility (capable of processing or treating gas containing hydrogen sulfideand/or carbon dioxide).

(6)       Processingfacility that includes fractionation (capable of fractionating raw NGLs intoend-use products).

(7)       NGLproduction includes conversion of third-party feedstock to iso-butane.

(8)       TheGranger Complex includes the Lincoln Road facility.  As of January 1, 2004, the volume informationfor this facility is reported with the volume information reported for Granger.

(9)       Excludesthe acquisition of gathering assets, which closed on October 1, 2004.

(10)     Themajority of the gas gathered by the Rendezvous gas gathering system isdelivered to our Granger facility and is included with the volume informationreported for Granger.

(11)     Aportion of the gas gathered by the Wamsutter gas gathering system is deliveredto our Red Desert facility and is included with the volume information reportedfor Red Desert.

 

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##### ***TransportationOperations. ***We own and operate MIGC, Inc., an interstatepipeline located in the Powder River Basin in Wyoming, and MGTC, Inc., anintrastate pipeline located in northeast Wyoming.  MIGC charges a Federal Energy RegulatoryCommission, or FERC, approved tariff and is connected to pipelines owned byColorado Interstate Gas Company, Williston Basin Interstate Pipeline Company,Kinder Morgan Interstate Pipeline Co., Wyoming Interstate Company, Ltd. andMGTC.  MIGC earns fees on a monthly basisfrom firm capacity contracts under which the shipper pays for transportcapacity whether or not the capacity is used and from interruptible contractswhere a fee is charged based upon volumes received into the pipeline.  Contracts with third parties for capacity onMIGC range in duration from one month to five years and the fees chargedaveraged $0.35 per Mcf in the first nine months of 2004.  MGTC provides transportation and gas sales tovarious cities in Wyoming at rates that are subject to the approval of theWyoming Public Service Commission.

 

The following table provides information concerning our principaltransportation assets at September 30, 2004.

 
| ** **                        | ** ** | **Year PlacedIn** | ** ** | **Transportation** | ** ** | **Average for the Nine Months Ended  September 30, 2004** | ** ** |
|-----------------------------------|------------|-------------------|------------|--------------------|------------|-----------------------------------------------------------|------------|
| **Transportation Facilities (1)** | ** ** | **Service**       | ** ** | **Miles**          | ** ** | **Pipeline Capacity  (MMcf/D) (2)**                       | ** ** | **Gas Throughput  (MMcf/D) (3)** | ** ** |
| ** **                        | ** ** | ** **        | ** ** | ** **         | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| MIGC (4)                          |       | 1970              |       | 263                |       | 130                                                       |       | 148 |   |
| MGTC (5)                          |       | 1963              |       | 251                |       | 18                                                        |       | 8 |   |
| Total                             |       |              |       | 514                |       | 148                                                       |       | 156 |   |

 

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(1)       Ourinterest in both facilities is 100%, and we operate both facilities.

(2)       Pipelinecapacity represents certificated capacity at the Powder River junction only anddoes not include interruptible capacity or capacity at other delivery points.

(3)       Aggregatevolumes transported by a pipeline.

(4)       MIGCis an interstate pipeline located in Wyoming and is regulated by the FERC.

(5)       MGTCis a public utility located in Wyoming and is regulated by the Wyoming PublicService Commission.

 

***Marketing Operations.***

 

***Gas*.*   ***We market gas produced atour wells and our plants and purchased from third-parties to end-users, localdistribution companies, or LDCs, pipelines and other marketing companiesthroughout the United States and Canada. In addition to our offices in Denver, we have marketing offices inHouston, Texas and Calgary, Alberta. Third-party sales, firm transportation capacity on interstate pipelinesand our gas storage positions, combined with the stable supply of gas from ourfacilities and production, enable us to respond quickly to changing marketconditions and to take advantage of seasonal price variations and peak demandperiods.  One of the primary goals of ourgas marketing operations continues to be the preservation and enhancement ofthe value received for our equity volumes of natural gas.  This goal is achieved through the use ofhedges on the production of our equity natural gas and through the use of firmtransportation capacity.

 

***NGLs*.*  ***We market NGLs, includingethane, propane, iso-butane, normal butane, natural gasoline and condensate,produced at our plants and purchased from third-parties, in the Rocky Mountain,Mid-Continent and Southwestern regions of the United States.  A majority of our production of NGLs moves tothe Gulf Coast area, which is the largest NGL market in the United States.  Through the development of end-use marketsand distribution capabilities, we seek to ensure that products from our plantsmove on a reliable basis, avoiding curtailment of production.  Consumers of NGLs are primarily thepetrochemical industry, the petroleum refining industry and the retail andindustrial fuel markets.  As an example,the petrochemical industry uses ethane, propane, normal butane and natural gasolineas feedstocks in the production of ethylene, which is used in the production ofvarious plastics products.  Further,consumers use propane for home heating, transportation and agriculturalapplications.  Price, seasonality and theeconomy primarily affect the demand for NGLs.

 

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**ITEM 3.**      **QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our commodity price risk management program has two primaryobjectives.  The first goal is topreserve and enhance the value of our equity volumes of gas and NGLs withregard to the impact of commodity price movements on cash flow and net incomein relation to those anticipated by our operating budget.  The second goal is to manage price riskrelated to our marketing activities to protect profit margins.  This risk relates to fixed price purchase andsale commitments, the value of storage inventories and exposure to physicalmarket price volatility.

 

We utilize a combination of fixed price forward contracts, exchange-tradedfutures and options, as well as fixed index swaps, basis swaps and optionstraded in the over-the-counter, or OTC, market to accomplish these goals.  These instruments allow us to preserve valueand protect margins because corresponding losses or gains in the value of thefinancial instruments offset gains or losses in the physical market.

 

We also use financial instruments to reduce basis risk.  Basis is the difference in price between thephysical commodity being hedged and the price of the futures contract used forhedging.  Basis risk is the risk that anadverse change in the futures market will not be completely offset by an equaland opposite change in the cash price of the commodity being hedged.  Basis risk exists in natural gas primarilydue to the geographic price differentials between cash market locations andfutures contract delivery locations.

 

We enter into futures transactions on the New York Mercantile Exchange,or NYMEX, and through OTC swaps and options with various counterparties,consisting primarily of investment banks, financial institutions and othernatural gas companies.  We conduct creditreviews of all of our OTC counterparties and have agreements with many of theseparties that contain collateral requirements. We generally use standardized swap agreements that allow for offset ofpositive and negative OTC exposures with the same counterparty.  OTC exposure is marked-to-market daily forthe credit review process.  Our exposureto OTC credit risk is reduced by our ability to require a margin deposit fromour counterparties based upon the mark-to-market value of their netexposure.  We are also subject to margindeposit requirements under these same agreements and under margin depositrequirements for our NYMEX transactions. At November 3, 2004, we had $36.7 million of margin depositsoutstanding.

 

We continually monitor and review the credit exposure to our marketingcounterparties.  In recent months theprices of natural gas and NGLs, and therefore our credit exposures, haveincreased significantly.  In order tominimize our credit exposures, we have utilized existing netting agreements toreduce our net credit exposure, established new netting agreements withadditional customers, terminated several long-term marketing obligations,negotiated accelerated payment terms with several customers, and increased theamount of credit which we make available to substantial companies which meetour credit requirements.  Althoughnetting agreements similar to those that we utilize have been upheld bybankruptcy courts in the past, if any of these customers with whom we havenetting agreements were to file for bankruptcy, we can provide no assurancethat our agreements will not be challenged or as to the outcome of anychallenge.

 

The use of financial instruments may expose us to the risk of financialloss in some circumstances, including instances when (i) our equity volumes areless than expected, (ii) our customers fail to purchase or deliver thecontracted quantities of natural gas or NGLs, or (iii) our OTC counterpartiesfail to perform.  To the extent that weengage in hedging activities, we may be prevented from realizing the benefitsof favorable price changes in the physical market.  However, we are similarly insulated againstdecreases in these prices.

 

***Risk Policy andControl.**** *We control the extent of riskmanagement and marketing activities through policies and procedures thatinvolve the senior level of management. On a daily basis, our marketing activities are audited and monitored byour independent risk oversight department, or IRO.  This department reports to the ChiefFinancial Officer, thereby providing a separation of duties from the marketingdepartment.  Additionally, the IROreports monthly to the Risk Management Committee, or RMC.  This committee is comprised of corporatemanagers and officers and is responsible for developing the policies andguidelines that control the management and measurement of risk. The RMC is alsoresponsible for setting risk limits including value-at-risk and dollar stoploss limits.  Our board of directorsapproves the risk limit parameters and risk management policy.

 

***Hedge Positions.* **As of September 30, 2004, we have hedgedapproximately 48% of our projected fourth quarter 2004 equity natural gasvolumes and approximately 46% of our projected fourth quarter 2004 equityproduction of crude oil, condensate, and NGLs. We have also entered into hedges for a portion of our projected 2005equity natural gas volumes and equity production of crude oil, condensate andNGLs.  All of these contracts aredesignated and accounted for as cash flow hedges.  As such, gains and losses related to theeffective portions of the changes in the fair value of the derivatives are

 

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recorded in Accumulated other comprehensive income, a component ofStockholders’ equity.  Realized gains orlosses on these cash flow hedges are recognized in the Consolidated Statementof Operations through Sale of gas or Sale of natural gas liquids when thehedged transactions occur.

 

To qualify as cash flow hedges, the hedge instruments must bedesignated as cash flow hedges and changes in their fair value must be highlycorrelated with changes in the price of the forecasted transaction being hedgedso that our exposure to the risk of commodity price changes is reduced.  To meet this requirement, we hedge the priceof the commodity and, if applicable, the basis between that derivative’scontract delivery location and the cash market location used for the actualsale of the product.  This structureattains a high level of effectiveness, insuring that a change in the price ofthe forecasted transaction will result in an equal and opposite change in thecash price of the hedged commodity.  Weutilize crude oil as a surrogate hedge for natural gasoline andcondensate.  Our hedges are tested foreffectiveness at inception and on a quarterly basis thereafter.  We use regression analysis based on afive-year period of time for this test.

 

In the first quarter of 2004, we determined in our quarterlyeffectiveness testing thatour hedges ofequity butane production which utilized crude oil puts as a surrogateare no longer effective hedges.  Therefore, in the first quarter,we discontinued cash flow hedge accountingtreatment onthese instruments.  The value of these financial instruments willremain in Accumulated other comprehensive income and will be reclassified toour results of operations as the underlying transactions occur.  A loss of $107,000 was included inAccumulated other comprehensive income at September 30, 2004 for theseitems.   Our remaining hedges for ourother products are expected to continue to be “highly effective” under SFAS No.133 in the future.  Gains or losses from theineffective portions of changes in the fair value of cash flow hedges arerecognized currently in earnings through Price risk management activities.  During the nine months ended September 30,2004, we recognized a loss of $56,000 from the ineffective portions of ourhedges.

 

### ***Outstanding Equity Hedge Positions and the Associated Basisfor 2004 and 2005****.* The following table details our hedge positions as of September 30,2004.  In order to determine the hedgedprice to the particular operating region, deduct the basis differential fromthe NYMEX price.  The prices for NGLs do not include the cost of the hedges of approximately$933,000 as of September 30, 2004.  There is no associated cost forthe natural gas hedges.

 
| **Product** | ** ** | **Year** | ** ** | **Quantity and Settle Price**                                                                                                                | ** ** | **Hedge of Basis Differential**                                                                                                                                                                                                                                             |
|-------------|------------|----------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Natural gas |       | 2004     |       | 70,000 MMBtu per day  with a minimum price of $4.00 and a maximum price ranging from $6.50 to $9.45  per MMBtu (average of $7.81 per MMBtu.) |       | Mid-Continent – 55,000  MMBtu per day with an average basis price of $0.27 per MMBtu.

Permian – 5,000 MMBtu  per day with an average basis price of $0.34 per MMBtu. Rocky Mountain –  10,000 MMBtu per day with an average basis price of $0.74 per MMBtu. |
|        |       |     |       |                                                                                                                                         |       |                                                                                                                                                                                                                                                                        |
|        |       | 2005     |       | 80,000 MMBtu per day  with an average minimum price of $4.75 and an average maximum price of $8.88  per MMBtu.                               |       | Mid-Continent – 60,000  MMBtu per day with an average basis price of $0.42 per MMBtu.  Permian – 5,000 MMBtu per day with an average basis price of $0.48 per MMBtu.  Rocky Mountain – 15,000 MMBtu per day with an average basis price of $0.72  per MMBtu. |

 

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| Crude,  Condensate,  Natural  Gasoline |   | 2004   |   | 50,000 Barrels per  month with a minimum price of $22.00 per barrel and a maximum price of $30.08  per barrel.                   |   | Not Applicable |
|----------------------------------------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|--------|----------------|
|                                   |   |   |   |                                                                                                                             |   |           |
|                                   |   | 2005   |   | 50,000 Barrels per  month with an average minimum price of $31.00 per barrel and an average  maximum price of $48.01 per barrel. |   | Not Applicable |
|                                   |   |   |   |                                                                                                                             |   |           |
| Propane                                |   | 2004   |   | 90,000 Barrels per  month with a minimum price of $0.42 per gallon and a maximum price of $0.56  per gallon.                     |   | Not Applicable |
|                                   |   |   |   |                                                                                                                             |   |           |
|                                   |   | 2005   |   | 75,000 Barrels per  month with an average minimum price of $0.52 per gallon and an average  maximum price of $0.88 per gallon.   |   | Not Applicable |
|                                   |   |   |   |                                                                                                                             |   |           |
| Ethane                                 |   | 2004   |   | 50,000 Barrels per  month. Floor at $0.31 per gallon.                                                                            |   | Not Applicable |
|                                   |   |   |   |                                                                                                                             |   |           |
|                                   |   | 2005   |   | 75,000 Barrels per  month. Floor at $0.38 per gallon.                                                                            |   | Not Applicable |

 

Account balances related to hedging transactions (designated as hedgesunder SFAS 133) at September 30, 2004 were $2.8 million in Current assets fromprice risk management activities, $14.7 million in Current Liabilities fromprice risk management activities,  $1.3million in long-term Liabilities from price risk management activities, ($4.8)million in Deferred income taxes payable, net, and a $8.3 million after-taxunrealized loss in Accumulated other comprehensive income, a component ofStockholders’ Equity.  Based on prices asof September 30, 2004, approximately $3.9 million of losses in Accumulatedother comprehensive income will be reclassified to earnings in the fourthquarter of 2004 and $4.4 million of losses in Accumulated other comprehensiveincome will be reclassified to earnings in 2005.

 

***Summary ofDerivative Positions.***  A summary of the change in our derivativeposition from December 31, 2003 to September 30, 2004 is as follows (dollars inthousands):

 
| Fair value of contracts outstanding at December 31, 2003              |   | $       | 6,707  |   |
|-----------------------------------------------------------------------|--------|---------|--------|--------|
| Decrease in value due  to change in price                             |   | (9,637) |   |
| Increase in value due to new contracts entered into during the period |   | 3,683   |   |
| Gains realized during the period from existing and new contracts      |   | (944)   |   |
| Changes in fair value attributable to changes in valuation techniques |   | —  |   |
| Fair value of contracts outstanding at September 30, 2004             |   | ($191)  |   |

 

A summary of our outstanding derivative positions at September 30, 2004is as follows (dollars in thousands):

 
| ** **                       | ** ** | **Fair Value of Contracts at September 30, 2004** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|
| **Source of Fair Value**         | ** ** | **Total  Fair Value**                             | ** ** | **Maturing  In 2004** | ** ** | **Maturing In  2005-2006** | ** ** | **Maturing In  2007-2008** | ** ** | **Maturing  Thereafter** | ** ** |
| Exchange published prices        |       | $                                                 | (9,450     | ) | $ | (2,872 | ) | $ | (6,578 | ) | — |   | — |   |
| Other actively quoted prices (1) |       | 22,285                                            |       | 8,606 |   | 13,679 |   | — |   | — |   |
| Other valuation methods (2)      |       | (13,026                                           | )          | (7,183 | ) | (5,843 | ) | — |   | — |   |
| Total fair value                 |       | $                                                 | (191       | ) | $ | (1,449 | ) | $ | 1,258 |   | — |   | — |   |
|                                  |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)   Otheractively quoted prices are derived from broker quotations, trade publications,and industry indices.

 

(2)   Othervaluation methods are the Black-Scholes option-pricing model utilizing pricesand volatility obtained from broker quotations, trade publications, andindustry indices.

 

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***Foreign Currency Derivative Market Risk***.  As a normal part of our business, we enterinto physical gas transactions which are payable in Canadian dollars.  We enter into forward purchases and sales ofCanadian dollars from time to time to fix the cost of our future Canadiandollar denominated natural gas purchase, sale, storage, and transportationobligations.  This is done to protectmarketing margins from adverse changes in the U.S. and Canadian dollar exchangerate between the time the commitment for the payment obligation is made and theactual payment date of such obligation. As of September 30, 2004, the net notional value of such contracts wasapproximately $44.3 million in Canadian dollars, and the fair market value ofthese contracts was $33.3 million in U.S. dollars.

 

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**ITEM 4.**      **CONTROLS AND PROCEDURES**

 

***Disclosure Controls and Procedures.***

 

Under the direction of the Chief Executive Officerand President, ("CEO"), and the Executive Vice President and ChiefFinancial Officer, ("CFO"), we reviewed and evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of theend of the period covered by this report. Based on such evaluation, our CEO andCFO concluded, as of the date of such evaluation, that our disclosure controlsand procedures are effective.

 

***Internal Controls over Financial Reporting.***

 

There have notbeen any changes in our internal control over financial reporting during thequarter ended September 30, 2004, that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PARTII - OTHER INFORMATION**

 

**ITEM 1.   LEGAL PROCEEDINGS**

 

Reference is made to “Notes to Consolidated Financial Statements(Unaudited)  – Legal Proceedings,” inItem 1 of this Form 10-Q and incorporated by reference in this Item 1.

 

**ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)       Exhibits:

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                 |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                            |
| 3.1                 |       | Certificate  of Incorporation of Western Gas Resources, Inc. (previously filed as Exhibit  3.1 to our Registration Statement on Form S-1, Registration No. 33-31604 and  incorporated herein by reference).                                     |
|                |       |                                                                                                                                                                                                                                            |
| 3.2                 |       | Certificate  of Amendment to the Certificate of Incorporation of Western Gas Resources, Inc.  (previously filed as Exhibit 3.2 to our Registration Statement on Form S-1,  Registration No. 33-31604 and incorporated herein by reference).     |
|                |       |                                                                                                                                                                                                                                            |
| 3.3                 |       | Certificate of  Designation, Preferences and Rights of Series A Junior Participating  Preferred Stock (previously filed as part of Exhibit 1 to our Form 8-A filed  on March 30, 2001 and incorporated herein by reference).                    |
|                |       |                                                                                                                                                                                                                                            |
| 3.4                 |       | Amended and Restated  Bylaws of Western Gas Resources, Inc. adopted by the Board of Directors on  May 7, 2004 (previously filed as Exhibit 99.1 to our Current Report on Form  8-K filed on May 11, 2004 and incorporated herein by reference). |
|                |       |                                                                                                                                                                                                                                            |
| 31.1                |       | Section 302  Certification of the Chief Executive Officer.                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                            |
| 31.2                |       | Section 302  Certification of the Chief Financial Officer.                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                            |
| 32.1                |       | Section 906  Certification of the Chief Executive Officer and Chief Financial Officer                                                                                                                                                      |

 

(b)    Reports on Form 8-K:

 

During the quarter endedSeptember 30, 2004, we filed or furnished the following Form 8-K reports:

 

•      CurrentReport on Form 8-K filed on July 1, 2004, announcing completion of an amendedcredit facility and master shelf agreement.

 

•      CurrentReport on Form 8-K filed on July 1, 2004, announcing settlement with theCommodity Futures Trading Commission.

 

•      CurrentReport on Form 8-K filed on July 22, 2004, announcing the purchase of San JuanBasin assets.

 

•      CurrentReport on Form 8-K furnished on August 5, 2004, announcing our financialresults for the quarter ended June 30, 2004.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                    |   | WESTERN GAS RESOURCES, INC. |                                               |
|-------------------------|--------|-----------------------------|----------------------------------------------------|
|                    |   | (Registrant)                |
|                    |   |                        |
|                    |   |                        |                                               |
| Date: November 22, 2004 |   | By:                         | /s/ PETER A. DEA                                   |   |
|                    |   |                        | Peter A. Dea                                       |
|                    |   |                        | Chief Executive Officer and President              |
|                    |   |                        |                                               |
|                    |   |                        |                                               |
| Date: November 22, 2004 |   | By:                         | /s/ WILLIAM J. KRYSIAK                             |   |
|                    |   |                        | William J. Krysiak                                 |
|                    |   |                        | Executive Vice President - Chief Financial Officer |
|                    |   |                        | (Principal Financial and Accounting Officer)       |
|                         |        |                             |                                                    |  |  |

 

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INDEX TO EXHIBITS

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                 |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                            |
| 3.1                 |       | Certificate  of Incorporation of Western Gas Resources, Inc. (previously filed as Exhibit  3.1 to our Registration Statement on Form S-1, Registration No. 33-31604 and  incorporated herein by reference).                                     |
|                |       |                                                                                                                                                                                                                                            |
| 3.2                 |       | Certificate  of Amendment to the Certificate of Incorporation of Western Gas Resources,  Inc. (previously filed as Exhibit 3.2 to our Registration Statement on Form  S-1, Registration No. 33-31604 and incorporated herein by reference).     |
|                |       |                                                                                                                                                                                                                                            |
| 3.5                 |       | Certificate of  Designation, Preferences and Rights of Series A Junior Participating  Preferred Stock (previously filed as part of Exhibit 1 to our Form 8-A filed  on March 30, 2001 and incorporated herein by reference).                    |
|                |       |                                                                                                                                                                                                                                            |
| 3.6                 |       | Amended and Restated  Bylaws of Western Gas Resources, Inc. adopted by the Board of Directors on  May 7, 2004 (previously filed as Exhibit 99.1 to our Current Report on Form  8-K filed on May 11, 2004 and incorporated herein by reference). |
|                |       |                                                                                                                                                                                                                                            |
| 31.1                |       | Section 302  Certification of the Chief Executive Officer.                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                            |
| 31.2                |       | Section 302  Certification of the Chief Financial Officer.                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                            |
| 32.1                |       | Section 906  Certification of the Chief Executive Officer and Chief Financial Officer                                                                                                                                                      |

 

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