**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

### **FORM 10-Q**

### ** **

**(MarkOne)**

 

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

 

**FORTHE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003**

 

**OR**

 

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

 

**FORTHE TRANSITION PERIOD FROM                                TO                                 **

 

**Commission file number 1-10389**

 

### **WESTERN GAS RESOURCES, INC.**

(Exact name of registrant as specified in itscharter)

 

| **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 allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing 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 under the Exchange Act). Yes ý  No o

 

On November 1, 2003, there were 33,238,670 shares of theregistrant’s common stock outstanding.

 

 

----

 

**WesternGas Resources, Inc.Form 10-QTable of Contents**

 
| PART I - Financial Information |
|--------------------------------|
|                           |   |
| Item 1.                        | Financial Statements |
|                           |   |
|                           | Consolidated Balance Sheet - September 30, 2003 and  December 31, 2002 |
|                           |   |
|                           | Consolidated Statement of Cash Flows - Nine  months Ended September 30, 2003 and 2002 |
|                           |   |
|                           | Consolidated Statement of Operations -  Three and Nine months Ended September 30, 2003 and 2002 |
|                           |   |
|                           | Consolidated Statement of Changes in  Stockholders’ Equity - Nine months Ended September 30, 2003 |
|                           |   |
|                           | Condensed 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 4.                        | Submission of Matters to a Vote of Security  Holders |
|                           |   |
| Item 6.                        | Exhibits and Reports on Form 8-K |
|                           |   |
| Signatures                     |

 

2

----

 

**PARTI - FINANCIAL INFORMATION**

**ITEM 1.       FINANCIALSTATEMENTS**

** **

WESTERN GAS RESOURCES, INC.CONSOLIDATED BALANCE SHEET(Dollars in thousands, except share data)

 
|                                                                                                                                                                               |   | **September 30,  2003** |      | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|-----------------------------|--------|
|                                                                                                                                                                               |   | **(unaudited)**              |      |                        |   |
| ASSETS                                                                                                                                                                             |   |                         |      |                        |   |
|                                                                                                                                                                               |   |                         |      |                        |   |
| Current assets:                                                                                                                                                                    |   |                         |      |                        |   |
| Cash and cash equivalents                                                                                                                                                          |   | $                            | 57,890    |                        | $      | 7,312 |   |
| Trade accounts receivable, net                                                                                                                                                     |   | 215,331                      |      | 253,587                     |   |
| Inventory                                                                                                                                                                          |   | 71,904                       |      | 43,482                      |   |
| Assets held for sale                                                                                                                                                               |   | 445                          |      | 3,250                       |   |
| Assets from price risk management  activities                                                                                                                                      |   | 22,312                       |      | 34,873                      |   |
| Other                                                                                                                                                                              |   | 16,419                       |      | 27,744                      |   |
| Total current assets                                                                                                                                                               |   | 384,301                      |      | 370,248                     |   |
|                                                                                                                                                                               |   |                         |      |                        |   |
| Property and equipment:                                                                                                                                                            |   |                         |      |                        |   |
| Gas gathering, processing, and  transportation                                                                                                                                     |   | 996,401                      |      | 942,147                     |   |
| Oil and gas properties and equipment  (successful efforts method)                                                                                                                  |   | 307,277                      |      | 252,747                     |   |
| Construction in progress                                                                                                                                                           |   | 129,495                      |      | 104,033                     |   |
|                                                                                                                                                                               |   | 1,433,173                    |      | 1,298,927                   |   |
| Less:   Accumulated depreciation, depletion and amortization                                                                                                                  |   | (478,353                     | )         | (432,281                    | )      |
|                                                                                                                                                                               |   |                         |      |                        |   |
| Total property and equipment, net                                                                                                                                                  |   | 954,820                      |      | 866,646                     |   |
|                                                                                                                                                                               |   |                         |      |                        |   |
| Other  assets:                                                                                                                                                                     |   |                         |      |                        |   |
| Gas purchase contracts (net of accumulated  amortization of $38,508 and  $37,232, respectively)                                                                                    |   | 29,648                       |      | 30,924                      |   |
| Assets from price risk management  activities                                                                                                                                      |   | 2,199                        |      | 406                         |   |
| Other                                                                                                                                                                              |   | 43,638                       |      | 33,920                      |   |
|                                                                                                                                                                               |   |                         |      |                        |   |
| Total other assets                                                                                                                                                                 |   | 75,485                       |      | 65,250                      |   |
|                                                                                                                                                                               |   |                         |      |                        |   |
| TOTAL ASSETS                                                                                                                                                                       |   | $                            | 1,414,606 |                        | $      | 1,302,144 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                          |   |                         |      |                        |   |
| Current liabilities:                                                                                                                                                               |   |                         |      |                        |   |
| Accounts payable                                                                                                                                                                   |   | $                            | 263,362   |                        | $      | 242,987 |   |
| Accrued expenses                                                                                                                                                                   |   | 56,926                       |      | 51,509                      |   |
| Liabilities from price risk management  activities                                                                                                                                 |   | 15,979                       |      | 34,811                      |   |
| Dividends payable                                                                                                                                                                  |   | 3,472                        |      | 3,464                       |   |
| Total current liabilities                                                                                                                                                          |   | 339,739                      |      | 332,771                     |   |
|                                                                                                                                                                               |   |                         |      |                        |   |
| Long-term debt                                                                                                                                                                     |   | 341,333                      |      | 359,933                     |   |
| Liabilities from price risk management  activities                                                                                                                                 |   | 1,247                        |      | 406                         |   |
| Other long-term liabilities                                                                                                                                                        |   | 21,428                       |      | 1,713                       |   |
| Deferred income taxes payable, net                                                                                                                                                 |   | 166,522                      |      | 124,253                     |   |
|                                                                                                                                                                               |   |                         |      |                        |   |
| Total liabilities                                                                                                                                                                  |   | 870,269                      |      | 819,076                     |   |
|                                                                                                                                                                               |   |                         |      |                        |   |
| Stockholders’ equity:                                                                                                                                                         |   |                         |      |                        |   |
| Preferred Stock; 10,000,000 shares  authorized:  $ 2.625 cumulative convertible preferred stock, par value $.10; 2,760,000  issued ($138,000,000 aggregate liquidation preference) |   | 276                          |      | 276                         |   |
| Common stock, par value $.10; 100,000,000  shares authorized; 33,222,188 and  33,077,611 shares issued, respectively                                                               |   | 3,347                        |      | 3,329                       |   |
| Treasury stock, at cost; 25,016 common  shares in treasury                                                                                                                         |   | (788                         | )         | (788                        | )      |
| Additional paid-in capital                                                                                                                                                         |   | 383,810                      |      | 381,066                     |   |
| Retained earnings                                                                                                                                                                  |   | 157,045                      |      | 102,292                     |   |
| Accumulated other comprehensive income                                                                                                                                             |   | 647                          |      | (2,812                      | )      |
| Notes receivable from key employees secured  by common stock                                                                                                                       |   | —                       |      | (295                        | )      |
|                                                                                                                                                                               |   |                         |      |                        |   |
| Total stockholders’ equity                                                                                                                                                    |   | 544,337                      |      | 483,068                     |   |
|                                                                                                                                                                               |   |                         |      |                        |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                    |   | $                            | 1,414,606 |                        | $      | 1,302,144 |   |

 

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

 

3

----

 

WESTERN GASRESOURCES, INC.CONSOLIDATED STATEMENT OF CASH FLOWS(Unaudited)(Dollars in thousands)

 
|                                                                                    |   | **Nine  months Ended  September 30,** |    |
|-----------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                                    |   | **2003**                                   |    | **2002** |   |
|                                                                                    |   |                                       |    |   |   |
| Reconciliation of net income to net cash  provided by operating activities:             |   |                                       |    |   |   |
| Net income                                                                              |   | $                                          | 65,164  |   | $ | 35,153 |   |
| Add income items that do not affect cash:                                               |   |                                       |    |   |   |
| Depreciation, depletion and amortization                                                |   | 53,305                                     |    | 54,002 |   |
| Loss on the sale of property and equipment                                              |   | 142                                        |    | 644 |   |
| Cumulative effect of change in accounting principle                                     |   | 6,724                                      |    | — |   |
| Deferred income taxes                                                                   |   | 39,272                                     |    | 14,602 |   |
| Non-cash change in fair value of derivatives                                            |   | (1,084                                     | )       | 2,733 |   |
| Other non-cash items, net                                                               |   | 2,527                                      |    | 694 |   |
|                                                                                    |   |                                       |    |   |   |
| Adjustments to working capital to arrive at  net cash provided by operating activities: |   |                                       |    |   |   |
| (Increase) decrease in trade accounts  receivable                                       |   | 38,717                                     |    | (23,276 | ) |
| (Increase) decrease in product inventory                                                |   | (28,379                                    | )       | 6,238 |   |
| (Increase) decrease in other current assets                                             |   | 9,882                                      |    | (15,892 | ) |
| (Increase) decrease in other assets and liabilities,  net                               |   | (478                                       | )       | 373 |   |
| Increase (decrease) in accounts payable                                                 |   | 20,375                                     |    | (26,399 | ) |
| Increase in accrued expenses                                                            |   | 4,306                                      |    | 23,993 |   |
|                                                                                    |   |                                       |    |   |   |
| Net cash provided by operating activities                                               |   | 210,473                                    |    | 72,865 |   |
|                                                                                    |   |                                       |    |   |   |
| Cash flows from investing activities:                                                   |   |                                       |    |   |   |
|                                                                                    |   |                                       |    |   |   |
| Purchases of property and equipment                                                     |   | (125,484                                   | )  | (87,784 | ) |
| Proceeds from the dispositions of property  and equipment                               |   | 3,831                                      |    | 33,404 |   |
| Contributions to equity investees                                                       |   | (10,450                                    | )       | (7,637 | ) |
|                                                                                    |   |                                       |    |   |   |
| Net cash used in investing activities                                                   |   | (132,103                                   | )       | (62,017 | ) |
|                                                                                    |   |                                       |    |   |   |
| Cash flows from financing activities:                                                   |   |                                       |    |   |   |
|                                                                                    |   |                                       |    |   |   |
| Net proceeds from exercise of common stock  options                                     |   | 3,062                                      |    | 6,434 |   |
| Debt issue costs paid                                                                   |   | (1,851                                     | )       | (123 | ) |
| Payments of long-term debt                                                              |   | 15,000                                     |    | — |   |
| Payments on revolving credit facility                                                   |   | (780,800                                   | )       | (732,780 | ) |
| Borrowings under revolving credit facility                                              |   | 747,200                                    |    | 723,280 |   |
| Dividends paid                                                                          |   | (10,403                                    | )       | (11,326 | ) |
|                                                                                    |   |                                       |    |   |   |
| Net cash provided by (used in) financing  activities                                    |   | (27,792                                    | )       | (14,515 | ) |
|                                                                                    |   |                                       |    |   |   |
| Net increase in cash and cash equivalents                                               |   | 50,578                                     |    | (3,667 | ) |
|                                                                                    |   |                                       |    |   |   |
| Cash and cash equivalents at beginning of  period                                       |   | 7,312                                      |    | 10,032 |   |
|                                                                                    |   |                                       |    |   |   |
| Cash and cash equivalents at end of period                                              |   | $                                          | 57,890  |   | $ | 6,365 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

4

----

 

WESTERN GAS RESOURCES, INC.CONSOLIDATED STATEMENT OF OPERATIONS(Unaudited)(Dollars in thousands, except share and per share amounts)

 
|                                                                                             |   | **Three  Months Ended  September 30,** |    | **Nine months  Ended  September 30,** |   |
|--------------------------------------------------------------------------------------------------|--------|---------------------------------------------|---------|--------------------------------------------|--------|
|                                                                                             |   | **2003**                                    |    | **2002**                                   |   | **2003** |   | **2002** |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Revenues:                                                                                        |   |                                        |    |                                       |   |   |   |   |   |
| Sale of gas                                                                                      |   | $                                           | 556,606 |                                       | $      | 510,764 |   | $ | 1,890,435 |   | $ | 1,566,551 |   |
| Sale of natural gas liquids                                                                      |   | 86,009                                      |    | 85,214                                     |   | 258,568 |   | 229,888 |   |
| Gathering, processing and transportation  revenue                                                |   | 21,884                                      |    | 17,007                                     |   | 63,119 |   | 47,466 |   |
| Non-cash change in fair value of  derivatives                                                    |   | 1,564                                       |    | 396                                        |   | 1,084 |   | (2,733 | ) |
| Other                                                                                            |   | 737                                         |    | 701                                        |   | 2,191 |   | 2,954 |   |
| Total revenues                                                                                   |   | 666,800                                     |    | 614,082                                    |   | 2,215,397 |   | 1,844,126 |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Costs and expenses:                                                                              |   |                                        |    |                                       |   |   |   |   |   |
| Product purchases                                                                                |   | 566,937                                     |    | 529,911                                    |   | 1,898,375 |   | 1,602,806 |   |
| Plant and transportation operating expense                                                       |   | 21,944                                      |    | 20,824                                     |   | 66,478 |   | 59,485 |   |
| Oil and gas exploration and production  expense                                                  |   | 13,029                                      |    | 7,553                                      |   | 38,830 |   | 24,084 |   |
| Depreciation, depletion and amortization                                                         |   | 17,477                                      |    | 18,813                                     |   | 53,305 |   | 54,002 |   |
| Loss on sale of assets                                                                           |   | 56                                          |    | 562                                        |   | 142 |   | 644 |   |
| Selling and administrative expense                                                               |   | 8,972                                       |    | 8,061                                      |   | 29,487 |   | 28,639 |   |
| Earnings from equity investments                                                                 |   | (1,780                                      | )       | (1,141                                     | )      | (5,209 | ) | (2,793 | ) |
| Interest expense                                                                                 |   | 6,449                                       |    | 6,858                                      |   | 19,692 |   | 20,288 |   |
| Total costs and expenses                                                                         |   | 633,084                                     |    | 591,441                                    |   | 2,101,100 |   | 1,787,155 |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Income before income taxes                                                                       |   | 33,716                                      |    | 22,641                                     |   | 114,297 |   | 56,971 |   |
| Provision for income taxes:                                                                      |   |                                        |    |                                       |   |   |   |   |   |
| Current                                                                                          |   | 544                                         |    | 2,507                                      |   | 3,137 |   | 7,216 |   |
| Deferred                                                                                         |   | 12,283                                      |    | 6,747                                      |   | 39,272 |   | 14,602 |   |
| Total provision for income taxes                                                                 |   | 12,827                                      |    | 9,254                                      |   | 42,409 |   | 21,818 |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Income before cumulative effect of change  in accounting principle                               |   | 20,889                                      |    | 13,387                                     |   | 71,888 |   | 35,153 |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Cumulative effect of change in accounting  principle,  net of tax benefit of $3,967              |   | —                                      |    | —                                     |   | (6,724 | ) | — |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Net income                                                                                       |   | 20,889                                      |    | 13,387                                     |   | 65,164 |   | 35,153 |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Preferred stock requirements                                                                     |   | (1,811                                      | )       | (2,130                                     | )      | (5,434 | ) | (6,390 | ) |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Income attributable to common stock                                                              |   | $                                           | 19,078  |                                       | $      | 11,257 |   | $ | 59,730 |   | $ | 28,763 |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Net income per share of common stock before  cumulative effect of change in accounting principle |   | $                                           | .57     |                                       | $      | .34 |   | $ | 2.00 |   | $ | .87 |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Cumulative effect of change in accounting  principle                                             |   | $                                           | —  |                                       | $      | — |   | $ | .20 |   | $ | — |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Earnings per share of common stock                                                               |   | $                                           | .57     |                                       | $      | .34 |   | $ | 1.80 |   | $ | .87 |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Weighted average shares of common stock  outstanding                                             |   | 33,197,265                                  |    | 33,010,914                                 |   | 33,144,296 |   | 32,921,846 |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Income attributable to common stock – assuming  dilution                                    |   | $                                           | 20,889  |                                       | $      | 11,257 |   | $ | 65,164 |   | $ | 28,763 |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Earnings per share of common  stock – assuming dilution                                     |   | $                                           | .56     |                                       | $      | .34 |   | $ | 1.75 |   | $ | .86 |   |
|                                                                                             |   |                                        |    |                                       |   |   |   |   |   |
| Weighted average shares of common stock  outstanding - assuming dilution                         |   | 37,345,148                                  |    | 33,589,743                                 |   | 37,270,704 |   | 33,580,658 |   |

 

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

 

5

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WESTERN GASRESOURCES, INC.CONSOLIDATED STATEMENT OF CHANGESIN STOCKHOLDERS’ EQUITY(Unaudited)(Dollars in thousands, except share amounts)

 

 
|                                                                |   | **Shares of  $ 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** |   | **Notes  Receivable  from Key  Employees** |    | **Total  Stock-  holders’  Equity** |   |
|---------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|------------------------------|--------|-------------------------------------------|--------|--------------------------------------------------------|--------|-------------------|--------|---------------------|--------|----------------------------------|--------|------------------------|--------|-----------------------------------------------------------|--------|--------------------------------------------|---------|------------------------------------------|--------|
|                                                                |   |                                                              |   |                         |   |                                      |   |                                                   |   |              |   |                |   |                             |   |                   |   |                                                      |   |                                       |    |                                     |   |
| Balance at December 31, 2002                                        |   | 2,760,000                                                         |   | 33,077,611                   |   | 25,016                                    |   | $                                                      | 276    |              | $      | 3,329               |   | $                                | (788   | )                      | $      | 381,066                                                   |   | $                                          | 102,292 |                                     | $      | (2,812 | ) | $ | (295 | ) | $ | 483,068 |   |
| Comprehensive income:                                               |   |                                                              |   |                         |   |                                      |   |                                                   |   |              |   |                |   |                             |   |                   |   |                                                      |   |                                       |    |                                     |   |
| Net income, nine months ended September 30, 2003                    |   | —                                                            |   | —                       |   | —                                    |   | —                                                 |   | —            |   | —              |   | —                           |   | 65,164                 |   | —                                                    |   | —                                     |    | 65,164                                   |   |
| Translation adjustments                                             |   | —                                                            |   | —                       |   | —                                    |   | —                                                 |   | —            |   | —              |   | —                           |   | —                 |   | 857                                                       |   | —                                     |    | 857                                      |   |
| Reclassification adjustment for settled contracts                   |   | —                                                            |   | —                       |   | —                                    |   | —                                                 |   | —            |   | —              |   | —                           |   | —                 |   | 3,060                                                     |   | —                                     |    | 3,060                                    |   |
| Changes in fair value of outstanding hedging positions              |   | —                                                            |   | —                       |   | —                                    |   | —                                                 |   | —            |   | —              |   | —                           |   | —                 |   | (1,354                                                    | )      | —                                     |    | (1,354                                   | )      |
| Reduction due to estimated ineffectiveness                          |   | —                                                            |   | —                       |   | —                                    |   | —                                                 |   | —            |   | —              |   | —                           |   | —                 |   | (29                                                       | )      | —                                     |    | (29                                      | )      |
| Fair value of new hedge positions                                   |   | —                                                            |   | —                       |   | —                                    |   | —                                                 |   | —            |   | —              |   | —                           |   | —                 |   | 925                                                       |   | —                                     |    | 925                                      |   |
| Change in accumulated derivative comprehensive income               |   | —                                                            |   | —                       |   | —                                    |   | —                                                 |   | —            |   | —              |   | —                           |   | —                 |   | 2,602                                                     |   | —                                     |    | 2,602                                    |   |
|                                                                |   |                                                              |   |                         |   |                                      |   |                                                   |   |              |   |                |   |                             |   |                   |   |                                                      |   |                                       |    |                                     |   |
| Total comprehensive income, net of tax                              |   |                                                              |   |                         |   |                                      |   |                                                   |   |              |   |                |   |                             |   |                   |   |                                                      |   |                                       |    | 68,623                                   |   |
| Stock options exercised                                             |   | —                                                            |   | 144,577                      |   | —                                    |   | —                                                 |   | 18                |   | —              |   | 2,162                            |   | —                 |   | —                                                    |   | —                                     |    | 2,180                                    |   |
| Effect of re-priced stock options                                   |   | —                                                            |   | —                       |   | —                                    |   | —                                                 |   | —            |   | —              |   | 582                              |   | —                 |   | —                                                    |   | —                                     |    | 582                                      |   |
| Loans forgiven                                                      |   | —                                                            |   | —                       |   | —                                    |   | —                                                 |   | —            |   | —              |   | —                           |   | —                 |   | —                                                    |   | 295                                        |    | 295                                      |   |
| Dividends declared on common stock ($.10 per common share)          |   | —                                                            |   | —                       |   | —                                    |   | —                                                 |   | —            |   | —              |   | —                           |   | (4,977                 | )      | —                                                    |   | —                                     |    | (4,977                                   | )      |
| Dividends declared on $2.625 cumulative convertible preferred stock |   | —                                                            |   | —                       |   | —                                    |   | —                                                 |   | —            |   | —              |   | —                           |   | (5,434                 | )      | —                                                    |   | —                                     |    | (5,434                                   | )      |
|                                                                |   |                                                              |   |                         |   |                                      |   |                                                   |   |              |   |                |   |                             |   |                   |   |                                                      |   |                                       |    |                                     |   |
| Balance at September 30, 2003                                       |   | 2,760,000                                                         |   | 33,222,188                   |   | 25,016                                    |   | $                                                      | 276    |              | $      | 3,347               |   | $                                | (788   | )                      | $      | 383,810                                                   |   | $                                          | 157,045 |                                     | $      | 647 |   | $ | — |   | $ | 544,337 |   |

 

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

 

6

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WESTERN GASRESOURCES, INC.CONDENSED NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited)

 

***GENERAL***

 

We have prepared the accompanying unaudited interim consolidatedfinancial statements under the rules and regulations of the Securities andExchange Commission.  As provided bysuch rules and regulations, we have condensed or omitted certain informationand notes normally included in annual financial statements prepared inconformity with accounting principles generally accepted in the United Statesof 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 endedDecember 31, 2002.  The interimconsolidated financial statements as of September 30, 2003 and for thethree and nine-month periods ended September 30, 2003 and 2002 included hereinare unaudited but reflect, in the opinion of management, all adjustments (whichinclude only normal recurring adjustments) necessary to fairly present theresults for such periods.  The resultsof operations for the three and nine months ended September 30, 2003 arenot necessarily indicative of the results of operations expected for the yearended December 31, 2003.

 

Prior period amounts in the interim consolidated financial statementsand notes have been reclassified as appropriate to conform to the presentationused in 2003.

 

***EARNINGS PER SHAREOF COMMON STOCK***

 

Earnings per shareof common stock are computed by dividing income attributable to common stock bythe 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 income less preferred stock dividends.  We declared preferred stock dividends of$1.8 million and $2.1 million for the three months ended September 30,2003 and 2002, respectively, and $5.4 million and $6.4 million, respectively,for the nine month periods ended September 30, 2003 and 2002. Common stockoptions and our $2.625 cumulative convertible preferred stock are potentialcommon shares.   The following is a reconciliation of the weighted averageshares of common stock outstanding to the weighted average common sharesoutstanding – assuming dilution.

 
|                                                                      |   | **Quarter Ended  September 30,** |   | **Nine months Ended  September 30,** |   |
|---------------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
|                                                                      |   | **2003**                              |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Weighted average shares of common stock  outstanding                      |   | 33,197,265                            |   | 33,010,914                                |   | 33,144,296 |   | 32,921,846 |   |
| Potential common shares from:                                             |   |                                  |   |                                      |   |   |   |   |   |
| Common stock options                                                      |   | 676,185                               |   | 578,829                                   |   | 654,710 |   | 658,812 |   |
| $ 2.625 Cumulative Convertible Preferred Stock                            |   | 3,471,698                             |   | —                                    |   | 3,471,698 |   | — |   |
| Weighted average shares of common stock  outstanding  - assuming dilution |   | 37,345,148                            |   | 33,589,743                                |   | 37,270,704 |   | 33,580,658 |   |

 

The numerators and the denominatorsfor these periods were adjusted to reflect these potential shares and anyrelated preferred dividends in calculating fully diluted earnings per share.

 

***ACCUMULATEDOTHER COMPREHENSIVE INCOME***

 

Included in Accumulated othercomprehensive income at September 30, 2003 were unrealized losses of $2.8million from the fair value of derivatives designated as cash flow hedges andunrealized gains of $1.2 million of cumulative foreign currency translationadjustments.

 

Included in Accumulated othercomprehensive income at September 30, 2002 were unrealized losses of$200,000 from the fair value of derivatives designated as cash flow hedges and$1.9 million of cumulative foreign currency translation adjustments.

 

7

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***CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE***

 

In June 2001,the FASB issued SFAS No. 143 “Accounting for Asset RetirementObligations.”  SFAS No. 143 was effective for fiscal yearsbeginning after June 15, 2002. SFAS No. 143 establishes accounting standards for recognition andmeasurement of a liability for an asset retirement obligation and theassociated asset retirement cost.  Weadopted SFAS No. 143 on January 1, 2003 and recorded a $11.5 millionincrease to Property and equipment, a $4.4 million increase to Accumulateddepreciation, depletion and amortization, a $17.8 million increase to Otherlong-term liabilities and a $6.7 million non-cash, after-tax loss from the Cumulative effect of a change inaccounting principle.

 

The following is a reconciliation of the asset retirement obligation forthe nine months ended September 30, 2003 (dollars in thousands):

 

| Asset retirement obligation  as of January 1, 2003    |   | $     | 17,801 |   |
|------------------------------------------------------------|--------|-------|--------|--------|
| Liability accrued upon  capital expenditures               |   | 1,758 |   |
| Liability settled                                          |   | (290  | )      |
| Accretion of discount  expense                             |   | 874   |   |
| Asset retirement obligation  as of September 30, 2003 |   | $     | 20,143 |   |

 

Exclusive ofassets disposed of during 2002, if we had adopted SFAS No. 143 as ofJanuary 1, 2002, we estimate that the asset retirement obligation at thatdate would have been $15.7 million, based on the same assumptions used in ourcalculation of the obligation at January 1, 2003.  The estimated 2002 pro forma effect of ahypothetical January 1, 2002 adoption of SFAS No. 143 on net income andearnings per share, for annual and interim periods, is not material.

 

##### ***In connection with the adoption of SFAS No. 143, wecompleted a review of our operating assets and reevaluated the operating lifeand salvage values of the associated equipment. ***As a result of this evaluation, weextended the useful life of many of our operating assets and adjusted theestimated salvage value of our operating equipment.  These adjustments resulted in an approximate $3.4 million and$9.3 million, respectively, or $0.06 and $0.16 per share of common stock - assumingdilution, respectively, decrease in depreciation, depletion and amortization in thethree and nine months ended September 30, 2003, from the expensecalculated using the previous useful lives. The adjustments to the salvage value and depreciable lives of our assetsare treated as a revision of an estimate and are accounted for on a prospectivebasis.

##### *** ***

***OTHER INFORMATION***

 

***Acquisition ofGathering Systems.***  Effective February 1, 2003, we acquired 18 gathering systemsin Wyoming, primarily located in the Green River Basin with smaller operationsin the Powder River and Wind River Basins, for a total of $37.1 million.  Several of the systems located in the PowderRiver do not integrate directly into our existing systems, and accordingly weare negotiating for the sale of these systems. We completed the sale of several of these systems during the thirdquarter of 2003, and the remaining systems are classified as Assets held forsale on the Consolidated Balance Sheet at September 30, 2003.  During the three and nine months endedSeptember 30, 2003, the income, if any, generated by the assets includedin Assets held for sale are immaterial for separate presentation as a discontinuedoperation.

 

***Acquisition of SandWash Properties. ***EffectiveAugust 15, 2003, we acquired all the capital stock of a privatecorporation for $12.9 million.  Theassets of this entity primarily consisted of non-operating interests in variousSand Wash properties operated by us.

 

***Price Reporting to Gas Trade Publications. *** In the third quarter of 2003, we learned thatcertain employees in our marketing department furnished inaccurate informationregarding natural gas transactions to energy publications, which compile andreport energy index prices.  Wediscovered the inaccuracies during a review of certain marketing activities,which is being conducted in response to a subpoena issued by the CommodityFutures Trading Commission, or CFTC. Certain of our employees have identified inaccuracies associated withreporting of natural gas transactions primarily related to points inTexas.  Our review of this and otherregions is continuing as we respond to the CFTC subpoena.  We are unable to predict whether we will besubject to any fines or penalties by CFTC, and what the amount of such fineswould be if imposed.

 

***SUBSEQUENT EVENT***

 

On November 7, 2003, we issued a notice of redemption for approximately700,000 shares of our $2.625 cumulative convertible preferred stock at itsliquidation preference plus 0.525% premium. The holders of this preferred stock have the right to convert in wholeor in part their preferred stock into shares of our common stock in lieu ofreceiving the redemption price in cash. The holders may make their election at any time prior to the redemptiondate.  The redemption date is scheduledfor December 11, 2003 and to the extent required, will be funded with amountsavailable under our revolving credit facility. If all holders elect to receive shares of our common stock, we will issuean additional 882,000 shares of common stock, and if all holders elect toreceive cash, the redemption price will total approximately $35.6 millionincluding accrued and unpaid dividends. Also if all holders elect to receive cash, the pro rata capitalizedoffering costs associated with the redeemed preferred stock of $1.3 millionwill be reflected as a special dividend to preferred shareholders in 2003 andwill reduce earnings per share of common stock by approximately $0.04 percommon share in the fourth quarter of 2003.

 

8

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***DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES***

 

The net lossrecognized in earnings through Sale of residue gas and Sale of natural gasliquids during the first nine months of 2003 from hedging activities was $27.9million, and we recognized a loss from hedge ineffectiveness of $46,000.  Overall, our hedges are expected to continueto be “highly effective” under SFAS No. 133 in the future.  An additional $1.3 million of losses were reclassifiedinto earnings as a result of the discontinuance of cash flow hedges.  These cash flow hedges were discontinued dueto the reduction of forecasted production volumes.

 

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, 2003, approximately $4.3 million of losses inAccumulated other comprehensive income will be reclassified to earnings in 2003and approximately $1.5 million of gains in Accumulated other comprehensiveincome will be reclassified to earnings in 2004.

 

***SUPPLEMENTARY CASH FLOWINFORMATION***

*** ***

Interest paid was $16.9 million and $17.2 million for the nine monthsended September 30, 2003 and 2002, respectively. A total of $6.0 million and $600,000 were paid in income taxes in thenine months ended September 30, 2003 and 2002, respectively.

 

***STOCK COMPENSATION***

 

As permitted underSFAS No. 123, “Accounting for Stock-Based Compensation”, we have elected tocontinue to measure compensation costs for stock-based employee compensationplans as prescribed by Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees.”  We havecomplied with the pro forma disclosure requirements of SFAS No. 123 as requiredunder the pronouncement.  We realize anincome tax benefit from the exercise of non-qualified stock options related tothe amount by which the market price at the date of exercise exceeds the optionprice.  This tax benefit is credited toadditional paid-in capital.

 

We are required torecord compensation expense (if not previously accrued) equal to the number ofunexercised re-priced options multiplied by the amount by which our stock priceat the end of any quarter exceeds $21.00 per share.  We had re-priced options covering 24,719 common sharesoutstanding at September 30, 2003 and 58,167 common shares outstanding atSeptember 30, 2002.  Based on ourstock price at September 30, 2003 of $38.00 per share and our stock priceat September 30, 2002 of $31.25 per share, a recovery of compensationexpense of $40,000 and $358,000, respectively, was recorded in the three monthsended September 30, 2003 and 2002 and compensation expense of $301,000 anda recovery of compensation expense of $35,000, respectively, was recorded inthe nine months ended September 30, 2003 and 2002.

 

SFAS No. 123requires pro forma disclosures for each quarter that a statement of operationsis presented.  The following is a summary of the options to purchase ourcommon stock granted during the quarters and nine months endedSeptember 30, 2003 and 2002, respectively.

 
|                      |   | **Quarter  Ended September 30,** |   | **Nine  months Ended  September 30,** |   |
|---------------------------|--------|---------------------------------------|--------|--------------------------------------------|--------|
|                      |   | **2003**                              |   | **2002**                                   |   | **2003** |   | **2002** |   |
| 2002 Plan                 |   | 499,950                               |   | —                                     |   | 544,950 |   | — |   |
| 2002 Directors’ Plan |   | —                                |   | —                                     |   | 16,000 |   | 18,000 |   |
| Total options granted     |   | 499,950                               |   | —                                     |   | 560,950 |   | 18,000 |   |

 

The following is asummary of the weighted average fair value per share of the options grantedduring the quarters andnine months ended September 30, 2003 and 2002, respectively.

 
|                      |   | **Quarter  Ended September 30,** |   | **Nine  months Ended  September 30,** |   |
|---------------------------|--------|---------------------------------------|--------|--------------------------------------------|--------|
|                      |   | **2003**                              |   | **2002**                                   |   | **2003** |   | **2002** |   |
| 2002 Plan                 |   | $                                     | 19.51  |                                       | — |   | $ | 19.52 |   | — |   |
| 2002 Directors’ Plan |   | —                                |   | —                                     |   | $ | 21.39 |   | $ | 22.50 |   |
|                           |        |                                       |        |                                            |        |  |  |  |  |  |  |  |

 

9

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These values wereestimated using the Black-Scholes option-pricing model with the followingassumptions:

 
|                           |   | **2002 Plan** |   | **2002 Directors’ Plan** |   |
|--------------------------------|--------|---------------|--------|-------------------------------|--------|
| Risk-free interest rate        |   | 3.47          | %      | 2.59                          | %      |
| Expected life (in years)       |   | 5             |   | 5                             |   |
| Expected volatility            |   | 53            | %      | 54                            | %      |
| Expected dividends (quarterly) |   | $             | 0.05   |                          | $      | 0.05 |   |
|                                |        |               |        |                               |        |  |  |

 

Under SFAS No.123, the fair market value of the options at the grant date is amortized overthe appropriate vesting period for purposes of calculating compensationexpense.  If we had recordedcompensation expense for our grants under our stock-based compensation plansconsistent with the fair value method under this pronouncement, our net income,income attributable to common stock, earnings per share of common stock andearnings per share of common stock - assuming dilution would approximate thepro forma amounts below (dollars in thousands, except per share amounts):

 
|                                                                                                                                           |   | **Quarter  Ended September 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                                           |   | **2003  As Reported**                 |   | **2003  Pro Forma** |   | **2002  As Reported** |   | **2002  Pro Forma** |   |
| Net income                                                                                                                                     |   | $                                     | 20,889 |   | $ | 19,823 |   | $ | 13,387 |   | $ | 12,104 |   |
| Net income attributable to common stock                                                                                                        |   | 19,078                                |   | 18,012 |   | 11,257 |   | 9,974 |   |
| Earnings per share of common stock                                                                                                             |   | 0.57                                  |   | 0.54 |   | 0.34 |   | 0.30 |   |
| Earnings per share of common stock -  assuming dilution                                                                                        |   | 0.56                                  |   | 0.53 |   | 0.34 |   | 0.30 |   |
| Stock-based employee compensation cost, net  of related tax effects, included in net income                                                    |   | $                                     | 34     |   | $ | — |   | $ | (156 | ) | $ | — |   |
| Stock-based employee compensation cost, net  of related tax effects, includable in net income if the fair value based  method had been applied |   | $                                     | — |   | $ | 1,100 |   | $ | — |   | $ | 1,127 |   |

 
|                                                                                                                                           |   | **Nine  months Ended September 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                                                           |   | **2003  As Reported**                     |   | **2003  Pro Forma** |   | **2002  As Reported** |   | **2002  Pro Forma** |   |
| Net income                                                                                                                                     |   | $                                         | 65,164 |   | $ | 62,578 |   | $ | 35,153 |   | $ | 32,646 |   |
| Net income attributable to common stock                                                                                                        |   | 59,730                                    |   | 57,144 |   | 28,763 |   | 26,256 |   |
| Earnings per share of common stock                                                                                                             |   | 1.80                                      |   | 1.72 |   | 0.87 |   | 0.80 |   |
| Earnings per share of common stock -  assuming dilution                                                                                        |   | 1.75                                      |   | 1.68 |   | 0.86 |   | 0.78 |   |
| Stock-based employee compensation cost, net  of related tax effects, included in net income                                                    |   | $                                         | 367    |   | $ | — |   | $ | 152 |   | $ | — |   |
| Stock-based employee compensation cost, net  of related tax effects, includable in net income if the fair value based  method had been applied |   | $                                         | — |   | $ | 2,953 |   | $ | — |   | $ | 2,659 |   |

 

***SEGMENT REPORTING***

*** ***

We operate in fourprincipal business segments, as follows: Gas Gathering, Processing and Treating; Exploration and Production;Marketing; and Transportation. Management separately monitors these segments for performance againstour internal forecast, and these segments are consistent with our internalfinancial reporting package.  Thesesegments have been identified based upon the differing products and services,regulatory environment and the expertise required for these operations.

 

***Gas Gathering,Processing and Treating.***  In this segment, we connect producers’ wells (including those ofour Exploration and Production segment) to our gathering systems for deliveryto our processing or treating plants, process the

 

10

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natural gas to extract NGLs andtreat 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 residuegas and NGLs extracted at most of our facilities.  In this segment, we recognize revenue for our services at thetime the service is performed.

 

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 83% of our plant facilities’gross margin, or revenue at the plant less product purchases, for the month ofSeptember 2003 was under percentage-of-proceeds agreements in which we aretypically responsible for the marketing of the gas and NGLs.  Under these agreements, we pay producers aspecified percentage of the net proceeds received from the sale of the gas andthe NGLs.

 

Approximately 11% of our plant facilities’ gross margin for the monthof September 2003 was under contracts that are primarily fee-based fromwhich we receive a set fee for each Mcf of gas gathered and/or processed. Thistype of contract provides us with a steady revenue stream that is not dependenton commodity prices, except to the extent that low prices may cause a producerto delay drilling.

 

Approximately 6% of our plant facilities’ gross margin for the month ofSeptember 2003 was under contracts with ‘‘keepwhole’’ arrangements orwellhead purchase contracts.  We retainthe NGLs recovered by the processing facility and keep the producers whole byreturning to the producers at the tailgate of the plant an amount of residuegas equal on a Btu basis to the natural gas received at the plant inlet.  The ‘‘keepwhole’’ component of the contractspermits us to benefit when the value of the NGLs is greater as a liquid than asa portion of the residue gas stream. However, we are adversely affected when the value of the NGLs is loweras a liquid than as a portion of the residue gas stream.

 

***Exploration and Production.***  The activities of the Exploration andProduction segment include the exploration and development of gas properties inthe Rocky Mountain area, including those where our gathering and/or processingfacilities are located.  The Marketingsegment sells the majority of the production from these properties.

 

***Marketing.***  Our Marketing segment buys and sells gas and NGLs in the UnitedStates and Canada from and to a variety of customers.  In this segment, revenues for sales of product are recognized atthe time the gas or NGLs are delivered to the customer and are sensitive tochanges in the market prices of the underlying commodities.  The marketing of products purchased fromthird-parties typically results in low operating margins relative to the salesprice.  We sell our products underagreements with varying terms and conditions in order to match seasonal andother changes in demand.  This segmentalso markets gas and NGLs produced by our gathering, processing, treating andproduction assets.  Also included inthis segment are our Canadian marketing operations, which are conducted throughour wholly-owned subsidiary WGR – Canada, Inc. and are immaterial for separatepresentation.

 

***Transportation.***  The Transportation segment reflects theoperations of Western’s MIGC and MGTC pipelines.  The revenue generated in this segment is primarily fromtransportation of residue gas for our Marketing segment and otherthird-parties.  In this segment, we realizerevenue on a monthly basis from firm capacity contracts under which the shipperpays for transport capacity whether or not the capacity is used and frominterruptible contracts where a fee is charged based upon volumes received intothe pipeline.  The Transportationsegments’ firm capacity contracts range in duration from one month to sixyears.

 

***Segment Information.*** The followingtables set forth our segment information as of and for the three and ninemonths ended September 30, 2003 and 2002 (dollars in thousands).  Due to our integrated operations, the use ofallocations in the determination of business segment information isnecessary.  Inter-segment revenues arevalued at prices comparable to those of unaffiliated customers.  Prior period amounts in the interim segmentinformation have been reclassified to conform to the presentation used in 2003.

 

11

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|                                              |   | **Gas  Gathering  and  Processing** |        | **Exploration  and  Production** |       | **Marketing** |       | **Trans-  portation** |        | **Corporate** |       | **Elim-  inating  Entries** |       | **Total**   |        |
|---------------------------------------------------|--------|-------------------------------------|-------------|----------------------------------|------------|---------------|------------|-----------------------|-------------|---------------|------------|-----------------------------|------------|-------------|-------------|
|                                              |   |                                |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| **Quarter Ended September 30, 2003**         |   |                                | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| Revenues from unaffiliated customers              |   |                                |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| Sale of gas                                       |   | $                                   | 928         |                             | $          | 689           |       | $                     | 560,803     |          | $          | 219                         |       | $           | —      |   | $ | — |   | $ | 562,639 |   |
| Sale of natural gas liquids                       |   | 3                                   |        | —                           |       | 87,861        |       | —                |        |          |       |                        |       | 87,864      |        |
| Equity hedges:                                    |   |                                |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| Residue                                           |   | (540                                | )           | (5,492                           | )          | —        |       | —                |        | —        |       | —                      |       | (6,033      | )           |
| Liquids                                           |   | (1,854                              | )           | —                           |       | —        |       | —                |        | —        |       | —                      |       | (1,854      | )           |
| Gathering, processing and transportation  revenue |   | 20,033                              |        | —                           |       | —        |       | 1,756                 |        | 95            |       | —                      |       | 21,884      |        |
| Total revenues from unaffiliated customers        |   | 18,569                              |        | (4,803                           | )          | 648,663       |       | 1,975                 |        | 95            |       | —                      |       | 664,499     |        |
| Inter-segment revenues                            |   | 268,158                             |        | 54,825                           |       | 8,224         |       | 3,422                 |        | 14            |       | (334,643                    | )          | —      |        |
| Non-cash change in fair value of  derivatives     |   | 186                                 |        | 572                              |       | 805           |       | —                |        | —        |       | —                      |       | 1,564       |        |
| Interest income                                   |   | (2                                  | )           | 16                               |       | —        |       | —                |        | 3,361         |       | (3,375                      | )          | —      |        |
| Other, net                                        |   | 500                                 |        | 8                                |       | (277          | )          | —                |        | 506           |       | —                      |       | 737         |        |
| Total revenues                                    |   | 287,411                             |        | 50,619                           |       | 657,415       |       | 5,397                 |        | 3,976         |       | (338,018                    | )          | 666,800     |        |
| Product purchases                                 |   | 237,865                             |        | 685                              |       | 652,697       |       | 1,108                 |        | —        |       | (325,418                    | )          | 566,937     |        |
| Plant operating and transportation expense        |   | 20,609                              |        | 100                              |       | 79            |       | 2,058                 |        | (250          | )          | (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                                  |   | 30,717                              |        | 28,239                           |       | 4,639         |       | 2,231                 |        | 4,226         |       | (3,382                      | )          | 66,670      |        |
|                                              |   |                                |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| Depreciation, depletion and amortization          |   | 7,485                               |        | 7,393                            |       | 35            |       | 413                   |        | 2,151         |       | —                      |       | 17,477      |        |
| Selling and administrative expense                |   | 4,016                               |        | 2,749                            |       | 1,734         |       | 485                   |        | —        |       | (13                         | )          | 8,972       |        |
| (Gain) loss from sale of assets                   |   | 56                                  |        | 2                                |       | —        |       | (5                    | )           | 3             |       | —                      |       | 56          |        |
| Interest expense                                  |   | —                              |        | 24                               |       | 93            |       | (47                   | )           | 9,754         |       | (3,375                      | )          | 6,449       |        |
| Segment profit                                    |   | $                                   | 19,160      |                             | $          | 18,071        |       | $                     | 2,777       |          | $          | 1,385                       |       | $           | (7,682      | ) | $ | 6 |   | $ | 33,716 |   |
|                                              |   |                                | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| **Identifiable  assets**                          |   |                                | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| **Other  allocated assets**                       |   | **$**                               | **2,834**   | ** **                       | **$**      | **7,207**     | ** ** | **$**                 | **110,219** | ** **    | **$**      | **34,310**                  | ** ** | **$**       | **337,285** | ** ** | **$** | **(66,891** | **)** | **$** | **424,964** | ** ** |
| **Investment  in others**                         |   | **3,164**                           | ** **  | **—**                       | ** ** | **—**    | ** ** | **3,751**             | ** **  | **264,230**   | ** ** | **(236,323**                | **)**      | **34,822**  | ** **  |
| **Capital  assets**                               |   | **592,405**                         | ** **  | **263,549**                      | ** ** | **1,566**     | ** ** | **39,558**            | ** **  | **57,735**    | ** ** | **7**                       | ** ** | **954,820** | ** **  |
| **Total  identifiable assets**                    |   | **$**                               | **598,403** | ** **                       | **$**      | **270,756**   | ** ** | **$**                 | **111,785** | ** **    | **$**      | **77,619**                  | ** ** | **$**       | **659,250** | ** ** | **$** | **(303,207** | **)** | **$** | **1,414,606** | ** ** |

 
|                                              |   | **Gas  Gathering  and  Processing** |        | **Exploration  and  Production** |       | **Marketing** |       | **Trans-  portation** |        | **Corporate** |       | **Elim-  inating  Entries** |       | **Total**   |        |
|---------------------------------------------------|--------|-------------------------------------|-------------|----------------------------------|------------|---------------|------------|-----------------------|-------------|---------------|------------|-----------------------------|------------|-------------|-------------|
|                                              |   |                                | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| **Quarter Ended September 30, 2002**         |   |                                | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| Revenues from unaffiliated customers              |   |                                |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| Sale of gas                                       |   | $                                   | 573         |                             | $          | 364           |       | $                     | 500,926     |          | $          | 187                         |       | $           | 179         |   | $ | — |   | $ | 502,229 |   |
| Sale of natural gas liquids                       |   | 3                                   |        | —                           |       | 87,354        |       | —                |        | —        |       | —                      |       | 87,357      |        |
| Equity hedges:                                    |   |                                |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| Residue                                           |   | 534                                 |        | 8,000                            |       | —        |       | —                |        | —        |       | —                      |       | 8,534       |        |
| Liquids                                           |   | (2,143                              | )           | —                           |       | —        |       | —                |        | —        |       | —                      |       | (2,143      | )           |
| Gathering, processing and transportation  revenue |   | 14,969                              |        | —                           |       | —        |       | 2,042                 |        | (3            | )          | —                      |       | 17,008      |        |
| Total revenues from unaffiliated customers        |   | 13,936                              |        | 8,364                            |       | 588,280       |       | 2,229                 |        | 176           |       | —                      |       | 612,985     |        |
| Inter-segment revenues                            |   | 154,126                             |        | 26,735                           |       | 7,644         |       | 3,719                 |        | 14            |       | (192,238                    | )          | —      |        |
| Non-cash change in fair value of  derivatives     |   | 470                                 |        | (464                             | )          | 390           |       | —                |        | —        |       | —                      |       | 396         |        |
| Interest income                                   |   | —                              |        | 8                                |       | (2            | )          | —                |        | 2,274         |       | (2,280                      | )          | —      |        |
| Other, net                                        |   | 490                                 |        | 2                                |       | 11            |       | 14                    |        | 184           |       | —                      |       | 701         |        |
| Total revenues                                    |   | 169,022                             |        | 34,645                           |       | 596,323       |       | 5,962                 |        | 2,648         |       | (194,518                    | )          | 614,082     |        |
| Product purchases                                 |   | 126,335                             |        | 746                              |       | 587,106       |       | (347                  | )           | —        |       | (183,929                    | )          | 529,911     |        |
| Plant operating and transportation expense        |   | 18,246                              |        | 40                               |       | 79            |       | 2,107                 |        | 683           |       | (331                        | )          | 20,824      |        |
| Oil and gas exploration and production  expense   |   | —                              |        | 15,494                           |       | —        |       | —                |        | —        |       | (7,941                      | )          | 7,553       |        |
| Earnings from equity investments                  |   | (1,141                              | )           | —                           |       | —        |       | —                |        | —        |       | —                      |       | (1,141      | )           |
| Operating profit                                  |   | 25,582                              |        | 18,365                           |       | 9,138         |       | 4,202                 |        | 1,965         |       | (2,317                      | )          | 56,935      |        |
| Depreciation, depletion and amortization          |   | 10,353                              |        | 6,356                            |       | 40            |       | 412                   |        | 1,652         |       | —                      |       | 18,813      |        |
| Selling and administrative expense                |   | 3,496                               |        | 2,390                            |       | 1,510         |       | 678                   |        | —        |       | (14                         | )          | 8,060       |        |
| (Gain) loss from sale of assets                   |   | 720                                 |        | (191                             | )          | —        |       | 473                   |        | 136           |       | (576                        | )          | 562         |        |
| Interest expense                                  |   | —                              |        | —                           |       | 40            |       | (6                    | )           | 9,104         |       | (2,280                      | )          | 6,858       |        |
| Segment profit                                    |   | $                                   | 11,013      |                             | $          | 9,810         |       | $                     | 7,548       |          | $          | 2,645                       |       | $           | (8,927      | ) | $ | 553 |   | $ | 22,642 |   |
|                                              |   |                                | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| **Identifiable  assets**                          |   |                                | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| **Other  allocated assets**                       |   | **$**                               | **3,709**   | ** **                       | **$**      | **2,547**     | ** ** | **$**                 | **114,647** | ** **    | **$**      | **20,836**                  | ** ** | **$**       | **285,326** | ** ** | **$** | **(18,799** | **)** | **$** | **408,266** | ** ** |
| **Investment  in others**                         |   | **1,764**                           | ** **  | **—**                       | ** ** | **—**    | ** ** | **3,811**             | ** **  | **235,391**   | ** ** | **(224,886**                | **)**      | **16,080**  | ** **  |
| **Capital  assets**                               |   | **531,020**                         | ** **  | **219,808**                      | ** ** | **1,709**     | ** ** | **42,357**            | ** **  | **51,032**    | ** ** | **576**                     | ** ** | **846,503** | ** **  |
| **Total  identifiable assets**                    |   | **$**                               | **536,493** | ** **                       | **$**      | **222,355**   | ** ** | **$**                 | **116,356** | ** **    | **$**      | **67,005**                  | ** ** | **$**       | **571,749** | ** ** | **$** | **(243,109** | **)** | **$** | **1,270,849** | ** ** |

** **

12

----

 
|                                              |   | **Gas  Gathering  and  Processing** |        | **Exploration  and  Production** |       | **Marketing** |       | **Trans-  portation** |        | **Corporate** |       | **Elim-  inating  Entries** |       | **Total**   |        |
|---------------------------------------------------|--------|-------------------------------------|-------------|----------------------------------|------------|---------------|------------|-----------------------|-------------|---------------|------------|-----------------------------|------------|-------------|-------------|
| **Nine months Ended September 30, 2003**     |   |                                | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| Revenues from unaffiliated customers              |   |                                |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| Sale of gas                                       |   | $                                   | 2,799       |                             | $          | 2,830         |       | $                     | 1,903,240   |          | $          | 653                         |       | $           | —      |   | $ | — |   | $ | 1,909,522 |   |
| Sale of natural gas liquids                       |   | 9                                   |        | —                           |       | 267,114       |       | —                |        |          |       |                        |       | 267,123     |        |
| Equity hedges:                                    |   |                                |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| Residue                                           |   | (2,101                              | )           | (16,985                          | )          | —        |       | —                |        | —        |       | —                      |       | (19,087     | )           |
| Liquids                                           |   | (8,555                              | )           | —                           |       | —        |       | —                |        | —        |       | —                      |       | (8,555      | )           |
| Gathering, processing and transportation  revenue |   | 57,848                              |        | —                           |       | —        |       | 5,285                 |        | (14           | )          | —                      |       | 63,119      |        |
| Total revenues from unaffiliated customers        |   | 50,000                              |        | (14,155                          | )          | 2,170,353     |       | 5,938                 |        | (14           | )          | —                      |       | 2,212,122   |        |
| Inter-segment revenues                            |   | 832,287                             |        | 171,951                          |       | 26,849        |       | 10,651                |        | 41            |       | (1,041,779                  | )          | —      |        |
| Non-cash change in fair value of  derivatives     |   | (284                                | )           | (1,262                           | )          | 2,630         |       | —                |        | —        |       | —                      |       | 1,084       |        |
| Interest income                                   |   | 4                                   |        | 29                               |       | —        |       | 2                     |        | 8,678         |       | (8,713                      | )          | —      |        |
| Other, net                                        |   | 1,618                               |        | 21                               |       | 4             |       | 42                    |        | 506           |       | —                      |       | 2,191       |        |
| Total revenues                                    |   | 883,625                             |        | 156,584                          |       | 2,199,837     |       | 16,633                |        | 9,211         |       | (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                                  |   | 88,920                              |        | 90,154                           |       | 28,231        |       | 9,238                 |        | 9,211         |       | (8,830                      | )          | 216,923     |        |
|                                              |   |                                |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| Depreciation, depletion and amortization          |   | 22,603                              |        | 23,421                           |       | 106           |       | 1,275                 |        | 5,900         |       | —                      |       | 53,305      |        |
| Selling and administrative expense                |   | 13,060                              |        | 8,936                            |       | 5,650         |       | 1,882                 |        | —        |       | (41                         | )          | 29,487      |        |
| (Gain) loss from sale of assets                   |   | 210                                 |        | 2                                |       | —        |       | (123                  | )           | 53            |       | —                      |       | 142         |        |
| Interest expense                                  |   | —                              |        | 24                               |       | 134           |       | (103                  | )           | 28,350        |       | (8,713                      | )          | 19,692      |        |
| Segment profit                                    |   | $                                   | 53,047      |                             | $          | 57,770        |       | $                     | 22,341      |          | $          | 6,307                       |       | $           | (25,092     | ) | $ | (76 | ) | $ | 114,297 |   |
|                                              |   |                                | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| **Identifiable  assets**                          |   |                                | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| **Other  allocated assets**                       |   | **$**                               | **2,834**   | ** **                       | **$**      | **7,207**     | ** ** | **$**                 | **110,219** | ** **    | **$**      | **34,310**                  | ** ** | **$**       | **337,285** | ** ** | **$** | **(66,891** | **)** | **$** | **424,964** | ** ** |
| **Investment  in others**                         |   | **3,164**                           | ** **  | **—**                       | ** ** | **—**    | ** ** | **3,751**             | ** **  | **264,230**   | ** ** | **(236,323**                | **)**      | **34,822**  | ** **  |
| **Capital  assets**                               |   | **592,405**                         | ** **  | **263,549**                      | ** ** | **1,566**     | ** ** | **39,558**            | ** **  | **57,735**    | ** ** | **7**                       | ** ** | **954,820** | ** **  |
| **Total  identifiable assets**                    |   | **$**                               | **598,403** | ** **                       | **$**      | **270,756**   | ** ** | **$**                 | **111,785** | ** **    | **$**      | **77,619**                  | ** ** | **$**       | **659,250** | ** ** | **$** | **(303,207** | **)** | **$** | **1,414,606** | ** ** |

** **

13

----

 
|                                              |   | **Gathering  and  Processing** |        | **Exploration  and  Production** |       | **Marketing** |       | **Trans-  portation** |        | **Corporate** |       | **Elim-  inating  Entries** |       | **Total**   |        |
|---------------------------------------------------|--------|--------------------------------|-------------|----------------------------------|------------|---------------|------------|-----------------------|-------------|---------------|------------|-----------------------------|------------|-------------|-------------|
| **Nine months Ended September 30, 2002**     |   |                           | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| Revenues from unaffiliated customers              |   |                           |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| Sale of gas                                       |   | $                              | 1,429       |                             | $          | 989           |       | $                     | 1,538,668   |          | $          | 967                         |       | $           | —      |   | $ | — |   | $ | 1,542,053 |   |
| Sale of natural gas liquids                       |   | 9                              |        | —                           |       | 236,010       |       | —                |        | —        |       | —                      |       | 236,019     |        |
| Equity hedges:                                    |   |                           |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| Residue                                           |   | 2,882                          |        | 21,616                           |       | —        |       | —                |        | —        |       | —                      |       | 24,498      |        |
| Liquids                                           |   | (6,131                         | )           | —                           |       | —        |       | —                |        | —        |       | —                      |       | (6,131      | )           |
| Gathering, processing and transportation  revenue |   | 41,073                         |        | —                           |       | —        |       | 6,346                 |        | 47            |       | —                      |       | 47,466      |        |
| Total revenues from unaffiliated customers        |   | 39,262                         |        | 22,605                           |       | 1,774,678     |       | 7,313                 |        | 47            |       | —                      |       | 1,843,905   |        |
| Inter-segment revenues                            |   | 438,065                        |        | 72,305                           |       | 17,070        |       | 11,574                |        | 41            |       | (539,055                    | )          | —      |        |
| Non-cash change in fair value of  derivatives     |   | 406                            |        | 431                              |       | (3,570        | )          | —                |        | —        |       | —                      |       | (2,733      | )           |
| Interest income                                   |   | —                         |        | 32                               |       | 10            |       | —                |        | 6,064         |       | (6,106                      | )          | —      |        |
| Other, net                                        |   | 2,780                          |        | 4                                |       | 11            |       | 28                    |        | 131           |       | —                      |       | 2,954       |        |
| Total revenues                                    |   | 480,513                        |        | 95,377                           |       | 1,788,199     |       | 18,915                |        | 6,283         |       | (545,161                    | )          | 1,844,126   |        |
| Product purchases                                 |   | 360,452                        |        | 1,946                            |       | 1,757,264     |       | 932                   |        | —        |       | (517,788                    | )          | 1,602,806   |        |
| Plant operating and transportation expense        |   | 53,043                         |        | 129                              |       | 211           |       | 6,277                 |        | 776           |       | (951                        | )          | 59,485      |        |
| Oil and gas exploration and production  expense   |   | —                         |        | 44,395                           |       | —        |       | —                |        | —        |       | (20,311                     | )          | 24,084      |        |
| Earnings from equity investments                  |   | (2,793                         | )           | —                           |       | —        |       | —                |        | —        |       | —                      |       | (2,793      | )           |
| Operating profit                                  |   | 69,811                         |        | 48,907                           |       | 30,724        |       | 11,706                |        | 5,507         |       | (6,111                      | )          | 160,544     |        |
|                                              |   |                           |        |                             |       |          |       |                  |        |          |       |                        |       |        |        |
| Depreciation, depletion and amortization          |   | 31,303                         |        | 16,470                           |       | 120           |       | 1,272                 |        | 4,837         |       | —                      |       | 54,002      |        |
| Selling and administrative expense                |   | 12,603                         |        | 7,995                            |       | 5,714         |       | 2,368                 |        | —        |       | (41                         | )          | 28,639      |        |
| (Gain) loss from sale of assets                   |   | 720                            |        | (250                             | )          | —        |       | 479                   |        | 271           |       | (576                        | )          | 644         |        |
| Interest expense                                  |   | —                         |        | —                           |       | 92            |       | (6                    | )           | 26,308        |       | (6,106                      | )          | 20,288      |        |
| Segment profit                                    |   | $                              | 25,185      |                             | $          | 24,692        |       | $                     | 24,798      |          | $          | 7,593                       |       | $           | (25,909     | ) | $ | 612 |   | $ | 56,971 |   |
|                                              |   |                           | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| **Identifiable  assets**                          |   |                           | ** **  |                             | ** ** |          | ** ** |                  | ** **  |          | ** ** |                        | ** ** |        | ** **  |
| **Other  allocated assets**                       |   | **$**                          | **3,709**   | ** **                       | **$**      | **2,547**     | ** ** | **$**                 | **114,647** | ** **    | **$**      | **20,836**                  | ** ** | **$**       | **285,326** | ** ** | **$** | **(18,799** | **)** | **$** | **408,266** | ** ** |
| **Investment  in others**                         |   | **1,764**                      | ** **  | **—**                       | ** ** | **—**    | ** ** | **3,811**             | ** **  | **235,391**   | ** ** | **(224,886**                | **)**      | **16,080**  | ** **  |
| **Capital  assets**                               |   | **531,020**                    | ** **  | **219,808**                      | ** ** | **1,709**     | ** ** | **42,357**            | ** **  | **51,032**    | ** ** | **576**                     | ** ** | **846,503** | ** **  |
| **Total  identifiable assets**                    |   | **$**                          | **536,493** | ** **                       | **$**      | **222,355**   | ** ** | **$**                 | **116,356** | ** **    | **$**      | **67,005**                  | ** ** | **$**       | **571,749** | ** ** | **$** | **(243,109** | **)** | **$** | **1,270,849** | ** ** |

** **

##### ***GUARANTOR AND NON-GUARANTORSUBSIDIARIES***

##### *** ***

Our payment obligations under the revolvingcredit facility, the master shelf agreement and the senior subordinated notes,or collectively the financing facilities, are fully and unconditionallyguaranteed by our significant subsidiaries to the extent allowed by applicablelaw. These guarantees are joint and several and, in the case of the seniorsubordinated notes, are subordinated in right of payment to senior debt of theguarantors.

 

During the three and nine month periods endedSeptember 30, 2003 and 2002, the guarantors of our payment obligationsunder the financing facilities were Lance Oil & Gas Company, Inc., WesternGas Resources-Texas, Inc., Mountain Gas Resources, Inc., MIGC, Inc., MGTC, Inc.and Western Gas Wyoming, L.L.C., or collectively, the guarantor subsidiaries.

 

Our subsidiaries that did not guarantee ourpayment obligations under the financing facilities during the three and ninemonth periods ended September 30, 2003 and 2002 included Western PowerServices, Inc., Western Gas Resources-Westana, Inc. and WGR Canada, Inc., orcollectively, the non-guarantor subsidiaries.

 

Presented below is condensed consolidatingfinancial information for Western Gas Resources, Inc., or the Parent Company,the guarantor subsidiaries and the non-guarantor subsidiaries.  Balance sheet data are presented as ofSeptember 30, 2003 and 2002.  TheStatement of Operations and Statement of Cash Flows data are presented for thethree and nine-month periods ended September 30, 2003 and 2002.

 

For purposes of the following tables, theParent Company’s investments in its subsidiaries are accounted for using theequity method of accounting.  Net incomeof guarantor and non-guarantor subsidiaries is, therefore, reflected in theParent Company column under Earnings from equity investments.  Selling and administrative expense andProvision for income

 

14

----

 

taxes are primarily reflected in the ParentCompany column.  The ConsolidatingEntries eliminate the investments in the subsidiaries and other inter-companytransactions for consolidated reporting purposes.

 

15

----

 

**SupplementalCondensed Consolidating Balance SheetAs of September 30, 2003**

 
|                                               |   | **Parent  Company** |      | **Guarantor  Subsidiaries** |   | **Non-  Guarantor  Subsidiaries** |   | **Consolidating  Entries** |    | **Total** |   |
|----------------------------------------------------|--------|---------------------|-----------|-----------------------------|--------|-----------------------------------|--------|----------------------------|---------|-----------|--------|
| ASSETS                                             |   |                |      |                        |   |                              |   |                       |    |      |   |
| Current  assets:                                   |   |                |      |                        |   |                              |   |                       |    |      |   |
| Cash and  cash equivalents                         |   | $                   | 51,993    |                        | $      | 5,330                             |   | $                          | 567     |      | $      | — |   | $ | 57,890 |   |
| Trade  accounts receivable, net                    |   | 255,869             |      | 18,073                      |   | 8,624                             |   | (67,235                    | )       | 215,331   |   |
| Inventory                                          |   | 48,244              |      | 43                          |   | 23,617                            |   | —                     |    | 71,904    |   |
| Assets held  for sale                              |   | 445                 |      | —                      |   | —                            |   | —                     |    | 445       |   |
| Assets from  price risk management activities      |   | 22,312              |      | —                      |   | —                            |   | —                     |    | 22,312    |   |
| Other                                              |   | 14,909              |      | (106                        | )      | 1,616                             |   | —                     |    | 16,419    |   |
| Total  current assets                              |   | 393,772             |      | 23,340                      |   | 34,424                            |   | (67,235                    | )       | 384,301   |   |
| Total  property and equipment, net                 |   | 398,657             |      | 480,838                     |   | 74,701                            |   | 624                        |    | 954,820   |   |
|                                               |   |                |      |                        |   |                              |   |                       |    |      |   |
| Other  assets:                                     |   |                |      |                        |   |                              |   |                       |    |      |   |
| Gas  purchase contracts, net                       |   | 7,470               |      | 22,178                      |   | —                            |   | —                     |    | 29,648    |   |
| Assets from  price risk management activities      |   | 2,199               |      | —                      |   | —                            |   | —                     |    | 2,199     |   |
| Other  assets                                      |   | 71,883              |      | 1,261                       |   | 93                                |   | (64,421                    | )       | 8,816     |   |
| Investments  in subsidiaries                       |   | 558,703             |      | 31,658                      |   | 3,164                             |   | (558,703                   | )       | 34,822    |   |
| Total other  assets                                |   | 640,255             |      | 55,097                      |   | 3,257                             |   | (623,124                   | )       | 75,485    |   |
|                                               |   |                |      |                        |   |                              |   |                       |    |      |   |
| Total  assets                                      |   | $                   | 1,432,684 |                        | $      | 559,275                           |   | $                          | 112,382 |      | $      | (689,735 | ) | $ | 1,414,606 |   |
|                                               |   |                |      |                        |   |                              |   |                       |    |      |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY         |   |                |      |                        |   |                              |   |                       |    |      |   |
| Current  liabilities:                              |   |                |      |                        |   |                              |   |                       |    |      |   |
| Accounts  payable                                  |   | $                   | 347,547   |                        | $      | 30,435                            |   | $                          | 21,849  |      | $      | (136,469 | ) | $ | 263,362 |   |
| Accrued  expenses                                  |   | 31,160              |      | 24,385                      |   | 1,381                             |   | —                     |    | 56,926    |   |
| Liabilities  from price risk management activities |   | 15,979              |      | —                      |   | —                            |   | —                     |    | 15,979    |   |
| Dividends  payable                                 |   | 3,472               |      | —                      |   | —                            |   | —                     |    | 3,472     |   |
| Total  current liabilities                         |   | 398,158             |      | 54,820                      |   | 23,230                            |   | (136,469                   | )       | 339,739   |   |
|                                               |   |                |      |                        |   |                              |   |                       |    |      |   |
| Long-term  debt                                    |   | 341,333             |      | 44,967                      |   | 19,454                            |   | (64,421                    | )       | 341,333   |   |
| Other  long-term liabilities                       |   | 11,170              |      | 9,495                       |   | 763                               |   | —                     |    | 21,428    |   |
| Liabilities  from price risk management activities |   | 1,247               |      | —                      |   | —                            |   | —                     |    | 1,247     |   |
| Deferred  income taxes payable                     |   | 136,439             |      | 29,805                      |   | 5,989                             |   | (5,711                     | )       | 166,522   |   |
|                                               |   |                |      |                        |   |                              |   |                       |    |      |   |
| Total  liabilities                                 |   | 888,347             |      | 139,087                     |   | 49,436                            |   | (206,601                   | )       | 870,269   |   |
| Total stockholders’ equity                    |   | 544,337             |      | 420,188                     |   | 62,946                            |   | (483,134                   | )       | 544,337   |   |
|                                               |   |                |      |                        |   |                              |   |                       |    |      |   |
| Total liabilities and  stockholders’ equity   |   | $                   | 1,432,684 |                        | $      | 559,275                           |   | $                          | 112,382 |      | $      | (689,735 | ) | $ | 1,414,606 |   |

 

**SupplementalCondensed Consolidating Statement of OperationsFor the Quarter ended September 30, 2003**

 
|                                          |   | **Parent  Company** |    | **Guarantor  Subsidiaries** |   | **Non-  Guarantor  Subsidiaries** |   | **Consolidating  Entries** |   | **Total** |   |
|-----------------------------------------------|--------|---------------------|---------|-----------------------------|--------|-----------------------------------|--------|----------------------------|--------|-----------|--------|
| Total  revenues                               |   | $                   | 872,005 |                        | $      | 91,186                            |   | $                          | 41,626 |      | $      | (338,017 | ) | $ | 666,800 |   |
| Costs and  expenses:                          |   |                |    |                        |   |                              |   |                       |   |      |   |
| Product  purchases                            |   | 832,090             |    | 21,100                      |   | 39,010                            |   | (325,263                   | )      | 566,937   |   |
| Plant  operating expense                      |   | 15,340              |    | 6,715                       |   | 697                               |   | (808                       | )      | 21,944    |   |
| Oil and gas  exploration and production costs |   | 546                 |    | 21,004                      |   | 45                                |   | (8,566                     | )      | 13,029    |   |
| Depreciation,  depletion and amortization     |   | 6,645               |    | 10,045                      |   | 10,045                            |   | —                     |   | 17,477    |   |
| Selling and  administrative expense           |   | 8,556               |    | 379                         |   | 50                                |   | (13                        | )      | 8,972     |   |
| (Gain) loss  on sale of assets                |   | 59                  |    | (3                          | )      | —                            |   | —                     |   | 56        |   |
| Earnings  from equity investments             |   | (31,365             | )       | (1,164                      | )      | (616                              | )      | 31,365                     |   | (1,780    | )      |
| Interest  expense                             |   | 6,425               |    | 3,307                       |   | 91                                |   | (3,374                     | )      | 6,449     |   |
| Total costs  and expenses                     |   | 838,296             |    | 61,383                      |   | 40,064                            |   | (306,659                   | )      | 633,084   |   |
| Income  before income taxes                   |   | 33,709              |    | 29,803                      |   | 1,562                             |   | (31,358                    | )      | 33,716    |   |
| Total  provision for income taxes             |   | 12,827              |    | —                      |   | —                            |   | —                     |   | 12,827    |   |
| Net income                                    |   | $                   | 20,882  |                        | $      | 29,803                            |   | $                          | 1,562  |      | $      | (31,358 | ) | $ | 20,889 |   |

 

16

----

**Supplemental Condensed ConsolidatingStatement of Operations**

**Forthe Nine Months ended September 30, 2003**

 
|                                                                   |   | **Parent  Company** |      | **Guarantor  Subsidiaries** |   | **Non-  Guarantor  Subsidiaries** |   | **Consolidating  Entries** |    | **Total** |   |
|------------------------------------------------------------------------|--------|---------------------|-----------|-----------------------------|--------|-----------------------------------|--------|----------------------------|---------|-----------|--------|
| Total  revenues                                                        |   | $                   | 2,851,316 |                        | $      | 275,537                           |   | $                          | 139,036 |      | $      | (1,050,492 | ) | $ | 2,215,397 |   |
| Costs and  expenses:                                                   |   |                |      |                        |   |                              |   |                       |    |      |   |
| Product  purchases                                                     |   | 2,724,468           |      | 53,607                      |   | 133,537                           |   | (1,013,237                 | )       | 1,898,375 |   |
| Plant  operating expense                                               |   | 45,679              |      | 21,340                      |   | 2,225                             |   | (2,766                     | )       | 66,478    |   |
| Oil and gas  exploration and production costs                          |   | 1,069               |      | 63,374                      |   | 45                                |   | (25,658                    | )       | 38,830    |   |
| Depreciation,  depletion and amortization                              |   | 19,632              |      | 31,797                      |   | 1,876                             |   | —                     |    | 53,305    |   |
| Selling and  administrative expense                                    |   | 28,187              |      | 1,167                       |   | 174                               |   | (41                        | )       | 29,487    |   |
| (Gain) loss  on sale of assets                                         |   | 21                  |      | 121                         |   | —                            |   | —                     |    | 142       |   |
| Earnings  from equity investments                                      |   | (96,555             | )         | (3,431                      | )      | (1,778                            | )      | 96,555                     |    | (5,209    | )      |
| Interest  expense                                                      |   | 19,663              |      | 8,611                       |   | 131                               |   | (8,713                     | )       | 19,692    |   |
| Total costs  and expenses                                              |   | 2,742,164           |      | 176,586                     |   | 136,210                           |   | (953,860                   | )       | 2,101,100 |   |
| Income  before income taxes                                            |   | 109,152             |      | 98,951                      |   | 2826                              |   | (96,632                    | )       | 114,297   |   |
| Total  provision for income taxes                                      |   | 42,409              |      | —                      |   | —                            |   | —                     |    | 42,409    |   |
| Net income  before cumulative effect of change in accounting principle |   | 66,743              |      | 98,951                      |   | 2,826                             |   | (96,632                    | )       | 71,888    |   |
| Cumulative  effect of change in accounting principle                   |   | (1,502              | )         | (4,969                      | )      | (253                              | )      | —                     |    | (6,724    | )      |
| Net income                                                             |   | $                   | 65,241    |                        | $      | 93,982                            |   | $                          | 2,573   |      | $      | (96,632 | ) | $ | 65,164 |   |

 

**SupplementalCondensed Consolidating Statement of Cash FlowsFor the Nine Months ended September 30, 2003**

 
|                                                         |   | **Parent  Company** |    | **Guarantor  Subsidiaries** |   | **Non-  Guarantor  Subsidiaries** |   | **Consolidating  Entries** |   | **Total** |   |
|--------------------------------------------------------------|--------|---------------------|---------|-----------------------------|--------|-----------------------------------|--------|----------------------------|--------|-----------|--------|
| Net cash  provided by operating activities                   |   | $                   | 145,844 |                        | $      | 58,442                            |   | $                          | 5,463  |      | $      | 724 |   | $ | 210,473 |   |
| Cash flows  from investing activities:                       |   |                |    |                        |   |                              |   |                       |   |      |   |
| Purchases of property and  equipment, including acquisitions |   | (63,808             | )       | (44,164                     | )      | (18,227                           | )      | 715                        |   | (125,484  | )      |
| Proceeds from the disposition of  property and equipment     |   | 3,896               |    | 1,374                       |   | —                            |   | (1,439                     | )      | 3,831     |   |
| Other net  cash used in investing activities                 |   | (13,285             | )       | (10,450                     | )      | 13,285                            |   | —                     |   | (10,450   | )      |
| Net cash  used in investing activities                       |   | (73,197             | )       | (53,240                     | )      | (4,942                            | )      | (724                       | )      | (132,103  | )      |
| Cash flows  from financing activities:                       |   |                |    |                        |   |                              |   |                       |   |      |   |
| Payments on  revolving credit facility                       |   | (780,800            | )       | —                      |   | —                            |   | —                     |   | (780,800  | )      |
| Borrowings  under revolving credit facility                  |   | 747,200             |    | —                      |   | —                            |   | —                     |   | 747,200   |   |
| Dividends  paid                                              |   | (10,403             | )       | —                      |   | —                            |   | —                     |   | (10,403   | )      |
| Other net  cash used in financing activities                 |   | 16,211              |    | —                      |   | —                            |   | —                     |   | 16,211    |   |
| Net cash  used in financing activities                       |   | (27,792             | )       | —                      |   | —                            |   | —                     |   | (27,792   | )      |
| Net  decrease in cash and cash equivalents                   |   | 44,855              |    | 5,202                       |   | 521                               |   | —                     |   | 50,578    |   |
| Cash and  cash equivalents at beginning of year              |   | 7,138               |    | 128                         |   | 46                                |   | —                     |   | 7,312     |   |
| Cash and  cash equivalents at end of year                    |   | $                   | 51,993  |                        | $      | 5,330                             |   | $                          | 567    |      | $      | — |   | $ | 57,890 |   |

 

17

----

 

**SupplementalCondensed Consolidating Balance SheetAs of December 31, 2002**

 
|                                               |   | **Parent  Company** |      | **Guarantor  Subsidiaries** |   | **Non-  Guarantor  Subsidiaries** |   | **Consolidating  Entries** |   | **TOTAL** |   |
|----------------------------------------------------|--------|---------------------|-----------|-----------------------------|--------|-----------------------------------|--------|----------------------------|--------|-----------|--------|
| ASSETS                                             |   |                |      |                        |   |                              |   |                       |   |      |   |
| Current  assets:                                   |   |                |      |                        |   |                              |   |                       |   |      |   |
| Cash and  cash equivalents                         |   | $                   | 7,138     |                        | $      | 128                               |   | $                          | 46     |      | $      | — |   | $ | 7,312 |   |
| Trade  accounts receivable, net                    |   | 256,508             |      | 14,013                      |   | 10,382                            |   | (27,316                    | )      | 253,587   |   |
| Inventory                                          |   | 36,406              |      | —                      |   | 7,076                             |   | —                     |   | 43,482    |   |
| Assets held  for sale                              |   | 3,250               |      | —                      |   | —                            |   | —                     |   | 3,250     |   |
| Assets from  price risk management activities      |   | 34,873              |      | —                      |   | —                            |   | —                     |   | 34,873    |   |
| Other                                              |   | 29,847              |      | (2,675                      | )      | 572                               |   | —                     |   | 27,744    |   |
| Total current  assets                              |   | 368,022             |      | 11,466                      |   | 18,076                            |   | (27,316                    | )      | 370,248   |   |
|                                               |   |                |      |                        |   |                              |   |                       |   |      |   |
| Total  property and equipment, net                 |   | 348,937             |      | 466,538                     |   | 51,271                            |   | (100                       | )      | 866,646   |   |
| Other  assets:                                     |   |                |      |                        |   |                              |   |                       |   |      |   |
| Gas  purchase contracts, net                       |   | 7,722               |      | 23,202                      |   | —                            |   | —                     |   | 30,924    |   |
| Assets from  price risk management activities      |   | 406                 |      | —                      |   | —                            |   | —                     |   | 406       |   |
| Other  assets                                      |   | 58,864              |      | 486                         |   | 5                                 |   | (51,051                    | )      | 8,304     |   |
| Investments  in subsidiaries                       |   | 450,397             |      | 22,777                      |   | 2,839                             |   | (450,397                   | )      | 25,616    |   |
| Total other  assets                                |   | 517,389             |      | 46,465                      |   | 2,844                             |   | (501,448                   | )      | 65,250    |   |
|                                               |   |                |      |                        |   |                              |   |                       |   |      |   |
| Total  assets                                      |   | $                   | 1,234,348 |                        | $      | 524,469                           |   | $                          | 72,191 |      | $      | (528,864 | ) | $ | 1,302,144 |   |
|                                               |   |                |      |                        |   |                              |   |                       |   |      |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY         |   |                |      |                        |   |                              |   |                       |   |      |   |
| Current  liabilities:                              |   |                |      |                        |   |                              |   |                       |   |      |   |
| Accounts  payable                                  |   | $                   | 211,220   |                        | $      | 45,003                            |   | $                          | 15,078 |      | $      | (28,314 | ) | $ | 242,987 |   |
| Accrued  expenses                                  |   | 40,091              |      | 9,472                       |   | 1,946                             |   | —                     |   | 51,509    |   |
| Liabilities  from price risk management activities |   | 34,811              |      | —                      |   | —                            |   | —                     |   | 34,811    |   |
| Dividends  payable                                 |   | 3,464               |      | —                      |   | —                            |   | —                     |   | 3,464     |   |
| Total  current liabilities                         |   | 289,586             |      | 54,475                      |   | 17,024                            |   | (28,314                    | )      | 332,771   |   |
|                                               |   |                |      |                        |   |                              |   |                       |   |      |   |
| Long-term  debt                                    |   | 359,933             |      | —                      |   | —                            |   | —                     |   | 359,933   |   |
| Other  long-term liabilities                       |   | 1,713               |      | 44,967                      |   | 6,084                             |   | (51,051                    | )      | 1,713     |   |
| Liabilities  from price risk management activities |   | 406                 |      | —                      |   | —                            |   | —                     |   | 406       |   |
| Deferred  income taxes payable                     |   | 99,642              |      | 29,287                      |   | —                            |   | (4,676                     | )      | 124,253   |   |
|                                               |   |                |      |                        |   |                              |   |                       |   |      |   |
| Total  liabilities                                 |   | 751,280             |      | 128,729                     |   | 23,108                            |   | (84,041                    | )      | 819,076   |   |
|                                               |   |                |      |                        |   |                              |   |                       |   |      |   |
| Total stockholders’ equity                    |   | 483,068             |      | 395,740                     |   | 49,083                            |   | (444,823                   | )      | 483,068   |   |
|                                               |   |                |      |                        |   |                              |   |                       |   |      |   |
| Total liabilities and  stockholders’ equity   |   | $                   | 1,234,348 |                        | $      | 524,469                           |   | $                          | 72,191 |      | $      | (528,864 | ) | $ | 1,302,144 |   |

 

**SupplementalCondensed Consolidating Statement of OperationsFor the Quarter ended September 30, 2002**

 
|                                          |   | **Parent  Company** |    | **Guarantor  Subsidiaries** |   | **Non-  Guarantor  Subsidiaries** |   | **Consolidating  Entries** |   | **Total** |   |
|-----------------------------------------------|--------|---------------------|---------|-----------------------------|--------|-----------------------------------|--------|----------------------------|--------|-----------|--------|
| Total  revenues                               |   | $                   | 730,016 |                        | $      | 51,092                            |   | $                          | 27,487 |      | $      | (194,513 | ) | $ | 614,082 |   |
| Costs and  expenses:                          |   |                |    |                        |   |                              |   |                       |   |      |   |
| Product  purchases                            |   | 680,940             |    | 8,565                       |   | 24,310                            |   | (183,904                   | )      | 529,911   |   |
| Plant  operating expense                      |   | 14,187              |    | 6,298                       |   | 714                               |   | (375                       | )      | 20,824    |   |
| Oil and gas  exploration and production costs |   | 160                 |    | 15,333                      |   | —                            |   | (7,940                     | )      | 7,553     |   |
| Depreciation,  depletion and amortization     |   | 7,620               |    | 10,427                      |   | 766                               |   | —                     |   | 18,813    |   |
| Selling and  administrative expense           |   | 7,274               |    | 736                         |   | 66                                |   | (15                        | )      | 8,061     |   |
| (Gain) loss  on sale of assets                |   | 583                 |    | 283                         |   | 272                               |   | (576                       | )      | 562       |   |
| Earnings  from equity investments             |   | —              |    | (548                        | )      | (593                              | )      | —                     |   | (1,141    | )      |
| Interest  expense                             |   | 6,858               |    | 2,241                       |   | 40                                |   | (2,281                     | )      | 6,858     |   |
| Total costs  and expenses                     |   | 717,622             |    | 43,335                      |   | 25,575                            |   | (195,091                   | )      | 591,441   |   |
| Income  before income taxes                   |   | 12,394              |    | 7,757                       |   | 1,912                             |   | 578                        |   | 22,641    |   |
| Total  provision for income taxes             |   | 9,254               |    | —                      |   | —                            |   | —                     |   | 9,254     |   |
| Net income                                    |   | $                   | 3,140   |                        | $      | 7,757                             |   | $                          | 1,912  |      | $      | 578 |   | $ | 13,387 |   |
|                                               |        |                     |         |                             |        |                                   |        |                            |        |           |        |  |  |  |  |  |  |

 

**Supplemental Condensed ConsolidatingStatement of Operations**

**Forthe Nine Months ended September 30, 2002**

 
|                                          |   | **ParentCompany** |      | **GuarantorSubsidiaries** |   | **Non-  GuarantorSubsidiaries** |   | **ConsolidatingEntries** |   | **Total** |   |
|-----------------------------------------------|--------|-------------------|-----------|---------------------------|--------|---------------------------------|--------|--------------------------|--------|-----------|--------|
| Total  revenues                               |   | $                 | 2,151,234 |                      | $      | 144,011                         |   | $                        | 94,030 |      | $      | (545,149 | ) | $ | 1,844,126 |   |
| Costs and  expenses:                          |   |              |      |                      |   |                            |   |                     |   |      |   |
| Product  purchases                            |   | 2,007,653         |      | 28,112                    |   | 84,423                          |   | (517,382                 | )      | 1,602,806 |   |
| Plant  operating expense                      |   | 40,486            |      | 18,231                    |   | 2,124                           |   | (1,356                   | )      | 59,485    |   |
| Oil and gas  exploration and production costs |   | 1,007             |      | 43,387                    |   | —                          |   | (20,310                  | )      | 24,084    |   |
| Depreciation,  depletion and amortization     |   | 23,322            |      | 28,552                    |   | 2,128                           |   | —                   |   | 54,002    |   |
| Selling and  administrative expense           |   | 26,602            |      | 1,829                     |   | 250                             |   | (42                      | )      | 28,639    |   |
| (Gain) loss  on sale of assets                |   | 718               |      | 230                       |   | 272                             |   | (576                     | )      | 644       |   |
| Earnings  from equity investments             |   | —            |      | (1,208                    | )      | (1,585                          | )      | —                   |   | (2,793    | )      |
| Interest  expense                             |   | 20,288            |      | 6,015                     |   | 92                              |   | (6,107                   | )      | 20,288    |   |
| Total costs  and expenses                     |   | 2,120,076         |      | 125,148                   |   | 87,704                          |   | (545,773                 | )      | 1,787,155 |   |
| Income  before income taxes                   |   | 31,158            |      | 18,863                    |   | 6,326                           |   | 624                      |   | 56,971    |   |
| Total  provision for income taxes             |   | 21,334            |      | —                    |   | 484                             |   | —                   |   | 21,818    |   |
| Net income                                    |   | $                 | 9,824     |                      | $      | 18,863                          |   | $                        | 5,842  |      | $      | 624 |   | $ | 35,153 |   |

 

18

----

 

**SupplementalCondensed Consolidating Statement of Cash FlowsFor the Nine Months ended September 30, 2002**

 
|                                                         |   | **Parent  Company** |   | **Guarantor  Subsidiaries** |   | **Non-  Guarantor  Subsidiaries** |   | **Consolidating  Entries** |   | **Total** |   |
|--------------------------------------------------------------|--------|---------------------|--------|-----------------------------|--------|-----------------------------------|--------|----------------------------|--------|-----------|--------|
| Net cash  provided by operating activities                   |   | $                   | (9,331 | )                           | $      | 72,762                            |   | $                          | 9,434  |      | $      | — |   | $ | 72,866 |   |
| Cash flows  from investing activities:                       |   |                |   |                        |   |                              |   |                       |   |      |   |
| Purchases of property and  equipment, including acquisitions |   | (17,923             | )      | (65,641                     | )      | (6,238                            | )      | 2,018                      |   | (87,784   | )      |
| Proceeds from the disposition of  property and equipment     |   | 32,851              |   | 2,496                       |   | 75                                |   | (2,018                     | )      | 33,404    |   |
| Other net  cash used in investing activities                 |   | 5,250               |   | (7,622                      | )      | (5,265                            | )      | —                     |   | (7,637    | )      |
| Net cash  used in investing activities                       |   | 20,178              |   | (70,767                     | )      | (11,428                           | )      | —                     |   | (62,017   | )      |
| Cash flows  from financing activities:                       |   |                |   |                        |   |                              |   |                       |   |      |   |
| Payments on  revolving credit facility                       |   | (732,780            | )      | —                      |   | —                            |   | —                     |   | (732,780  | )      |
| Borrowings  under revolving credit facility                  |   | 723,280             |   | —                      |   | —                            |   | —                     |   | 723,280   |   |
| Dividends  paid                                              |   | (11,326             | )      | —                      |   | —                            |   | —                     |   | (11,326   | )      |
| Other net  cash used in financing activities                 |   | 6,311               |   | —                      |   | —                            |   | —                     |   | 6,311     |   |
| Net cash  used in financing activities                       |   | (14,515             | )      | —                      |   | —                            |   | —                     |   | (14,515   | )      |
| Net  decrease in cash and cash equivalents                   |   | (3,668              | )      | 1,995                       |   | (1,994                            | )      | —                     |   | (3,667    | )      |
| Cash and  cash equivalents at beginning of year              |   | 9,359               |   | (1,833                      | )      | 2,506                             |   | —                     |   | 10,032    |   |
| Cash and  cash equivalents at end of year                    |   | $                   | 5,691  |                        | $      | 162                               |   | $                          | 512    |      | $      | — |   | $ | 6,365 |   |

 

##### ***RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS***

##### *** ***

**SFAS No. 141 and SFAS No. 142. **Statement ofFinancial Accounting Standards No. 141, *BusinessCombinations* (FAS 141) and Statement of Financial Accounting Standards,No. 142*, Goodwill and Intangible Assets*(FAS 142) were issued by the Financial Accounting Standards Board (FASB) inJune 2001 and became effective for us on July 1, 2001 and January 1, 2002,respectively.   FAS 141 requires allbusiness combinations initiated after June 30, 2001 to be accounted for usingthe purchase method.  Additionally, FAS141 requires companies to disaggregate and report separately from goodwillcertain intangible assets.  FAS 142establishes new guidelines for accounting for goodwill and other intangibleassets.  Under FAS 142, goodwill andcertain other intangible assets are not amortized, but rather are reviewedannually for impairment.   One interpretationbeing considered relative to these standards is that oil and gas mineral rightsheld under lease and other contractual arrangements representing the right toextract such reserves for both undeveloped and developed leaseholds should beclassified separately from oil and gas properties, as intangible assets on ourbalance sheets.  In addition, thedisclosures required by FAS 141 and 142 relative to intangibles would beincluded in the notes to financial statements. Historically, we have included these oil and gas mineral rights heldunder lease and other contractual arrangements representing the right toextract such reserves as part of the oil and gas properties, even after FAS 141and 142 became effective.

 

Thisinterpretation of FAS 141 and 142 described above would only affect our balancesheet classification of oil and gas leaseholds.  Our results of operations and cash flows would not be affected,since these oil and gas mineral rights held under lease and other contractualarrangements representing the right to extract such reserves would continue tobe amortized in accordance with accounting rules for oil and gas companiesprovided in Statement of Financial Accounting Standards No. 19, *Financial Accounting and Reporting by Oil and GasProducing Companies*(FAS 19).

 

At September30, 2003, we had undeveloped leaseholds of approximately $53.7 million thatwould be classified on our balance sheet as “intangible undeveloped leasehold”and developed leaseholds of an estimated $31.4 that would be classified as“intangible developed leaseholds” if we applied the interpretation currentlybeing considered.

 

We willcontinue to classify our oil and gas mineral rights held under lease and othercontractual rights representing the right to extract such reserves as tangibleoil and gas properties until further guidance is provided.

 

19

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**FIN46.**  InJanuary 2003, the FASB issued Interpretation No. 46, or “FIN 46”,“Consolidation of Variable Interest Entities.” FIN 46 provides guidance on how to identify a variable interest entity,or VIE, and determine when the assets, liabilities, and results of operationsof a VIE need to be included in a company’s consolidated financialstatements.  FIN 46 also requiresadditional disclosures by primary beneficiaries and other significant variableinterest holders in a VIE.  Theprovisions of FIN 46 are effective immediately for all VIEs created afterJanuary 31, 2003.  For VIEs createdbefore February 1, 2003, the provisions of FIN 46, as amended, must beadopted at the beginning of the fourth quarter of 2003.   We are continuing to evaluate the impact ofFIN 46 and will adopt this pronouncement as required.

 

**SFASNo. 149. **InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities.”  SFAS No. 149 is effective for contracts entered into or modifiedafter September 30, 2003.  Thisstatement amends and clarifies financial accounting reporting for derivativeinstruments and for hedging activities under SFAS Statement No. 133,“Accounting for Derivative Instruments and Hedging Activities.”  We adopted SFAS No. 149 on October 1,2003 and the adoption of thispronouncement did not impact our earnings or financial position.

 

**SFASNo. 150.**  InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity.”  SFAS No. 150 is effective for instrumentsentered into or modified after May 31, 2003 and is otherwise effective atthe beginning of the first interim period beginning after June 15,2003.  This statement establishesstandards for classifying and measuring financial instruments of bothliabilities and equity.  We adopted SFASNo. 150 on June 1, 2003.  Theadoption of this pronouncement did not have an impact on our financialstatements as we do not have any instruments that were the subject of thispronouncement.

 

**EITFIssue No. 03-11. **At the July 31, 2003 meeting of the EITF, aconsensus was reached on Issue No. 03-11, “Reporting Realized Gains and Losseson Derivative Instruments That Are Subject to FASB Statement No. 133 and Not“Held for Trading Purposes” as Defined in EITF Issue No. 02-3”.  This statement, among other issues,addresses the financial presentation of derivative contracts not held fortrading purposes and whether they should be reported gross or net of associatedcosts.  This statement does not have animpact on our financial statements as we record revenue on our physicalgas and NGL marketing activities on a gross basis versus sales net of purchasesbasis because we obtain title to all the gas and NGLs that we buy includingthird-party purchases, bear the risk of loss and credit exposure on thesetransactions, and it is our intention upon entering these contracts to takephysical delivery of the product.  Ourpresentation is in compliance with EITF Issue No. 03-11.

 

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

 

The followingdiscussion and analysis relates to factors which have affected our consolidatedfinancial condition and results of operations for the three and nine monthsended September 30, 2003 and 2002.  Some prior year amounts have been reclassified as appropriate to conformto the presentation used in 2003.  Youshould also refer to our interim consolidated financial statements and notesincluded in “Part 1 – Financial Information – Item 1. Financial Statements” ofthis report.  This section, as well asother sections in this Quarterly Report on Form 10-Q, contain “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, which can be identified by the use of forward-looking terminology,such as “may,” “intend,” “will,” “expect,” “anticipate,” “estimate,” or“continue” or the negative thereof or other variations thereon or comparableterminology.  In addition to theimportant factors referred to herein, numerous factors affecting the gasprocessing or the oil and gas industry generally and in the specific marketsfor gas and NGLs in which we operate could cause actual results to differmaterially from those in such forward-looking statements.

 

***Results of Operations***

*** ***

**Three and nine monthsended September 30, 2003 compared to the three and nine months endedSeptember 30, 2002**

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

 
|                                                 |   | **Three  Months Ended  September 30,** |    | **Percent** |   | **Nine  months Ended  September 30,** |   | **Percent** |   |
|------------------------------------------------------|--------|---------------------------------------------|---------|-------------|--------|--------------------------------------------|--------|-------------|--------|
|                                                 |   | **2003**                                    |    | **2002**    |   | **Change**                                 |   | **2003**    |   | **2002** |   | **Change** |   |
|                                                 |   |                                        |    |        |   |                                       |   |        |   |   |   |   |   |
| **Financial results:**                               |   |                                        |    |        |   |                                       |   |        |   |   |   |   |   |
| Revenues                                             |   | $                                           | 666,800 |        | $      | 614,082                                    |   | 9           |   | $ | 2,215,397 |   | $ | 1,844,126 |   | 20 |   |
| Gross profit                                         |   | 49,137                                      |    | 37,560      |   | 31                                         |   | 163,476     |   | 105,898 |   | 54 |   |
| Net income                                           |   | 20,889                                      |    | 13,387      |   | 56                                         |   | 65,164      |   | 35,153 |   | 85 |   |
| Earnings per share of common stock                   |   | .57                                         |    | .34         |   | 68                                         |   | 1.80        |   | .87 |   | 107 |   |
| Earnings  per share of common stock - diluted        |   | .56                                         |    | .34         |   | 65                                         |   | 1.75        |   | .86 |   | 103 |   |
| Net cash provided by operating activities            |   | $                                           | 68,823  |        | $      | 4,627                                      |   | 1387        |   | $ | 210,473 |   | $ | 72,865 |   | 188 |   |
| Net cash provided by  (used in) investing activities |   | $                                           | (56,616 | )           | $      | 1,956                                      |   | (2994       | )      | $ | (132,103 | ) | $ | (62,017 | ) | (113 | ) |
| Net cash provided by (used in) financing  activities |   | $                                           | 4,952   |        | $      | 27,946                                     |   | 118         |   | $ | (27,792 | ) | $ | (14,515 | ) | (91 | ) |
|                                                 |   |                                        |    |        |   |                                       |   |        |   |   |   |   |   |
| **Operating data:**                                  |   |                                        |    |        |   |                                       |   |        |   |   |   |   |   |
| Average gas sales (MMcf/D)                           |   | 1,285                                       |    | 2,001       |   | (36                                        | )      | 1,374       |   | 2,098 |   | (35 | ) |
| Average  NGL sales (MGal/D)                          |   | 1,639                                       |    | 2,219       |   | (26                                        | )      | 1,640       |   | 2,095 |   | (22 | ) |
| Average gas prices ($/Mcf)                           |   | $                                           | 4.70    |        | $      | 2.77                                       |   | 70          |   | $ | 5.03 |   | $ | 2.73 |   | 84 |   |
| Average NGL prices ($/Gal)                           |   | $                                           | .57     |        | $      | .42                                        |   | 36          |   | $ | .58 |   | $ | .40 |   | 45 |   |

 

Net income increased $7.5 million and $30.0 million for the three andnine months ended September 30, 2003 compared to the same periods in2002.  The increases in net income wereprimarily attributable to a significant increase in gas and NGL prices in 2003compared to the same periods last year. This increase in prices was supplemented by increased equity productionfrom the Powder River Basin coal bed methane project and the Green River Basin.  Partially offsetting the increases to netincome in the nine months ended September 30, 2003 was a pre-tax loss of$1.2 million from the discontinuance of hedge treatment on some financial instruments and a $6.7 million 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 $45.8 million to $556.6 millionfor the three months ended September 30, 2003 compared to the same periodin 2002.  This increase was primarilydue to an increase in product prices, which more than offset a decrease insales volume in the three months ended September 30, 2003.  Average gas prices realized by us increased$1.93 per Mcf to $4.70 per Mcf for the quarter ended September 30, 2003compared to the same period in 2002. Included in the calculation of the realized gas price were approximately $6.0 million of losses recognized in the threemonths ended September 30, 2003 related to futures positions on equity gasvolumes.  We have entered intoadditional futures positions for approximately half of our equity gas for theremainder of 2003 and in 2004.  Seefurther discussion in “Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.”  Average gas sales volumesdecreased 716 MMcf per day to 1,285 MMcf per day for the

 

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quarterended September 30, 2003 compared to the same period in 2002.  This decrease was due to a reduction inthird party sales volume resulting from the increase in product prices and anintentional effort to reduce related credit exposure.

 

Revenues from the sale of gas increased $323.8 million to $1,890.4million for the nine months ended September 30, 2003 compared to the sameperiod in 2002.  This increase wasprimarily due to an increase in product prices, which more than offset adecrease in sales volume in the nine months ended September 30, 2003.  Average gas prices realized by us increased$2.30 per Mcf to $5.03 per Mcf for the nine months ended September 30,2003 compared to the same period in 2002. Included in the calculation of the realized gas price were approximately$19.1 million of losses recognized in the nine months ended September 30,2003 related to futures positions on equity gas volumes. We have entered into additional futures positions for approximately halfof our equity gas for the remainder of 2003 and in 2004.  See further discussion in “Item 3.Quantitative and Qualitative Disclosures About Market Risk.”  Average gas sales volumes decreased 724 MMcfper day to 1,374 MMcf per day for the nine months ended September 30, 2003compared to the same period in 2002. This decrease was due to a reduction in third party sales volumeresulting from the increase in product prices and an intentional effort toreduce related credit exposure.

 

Revenues from the sale of NGLs remained constant at $86.0 million forthe three months ended September 30, 2003 compared to the same period in2002.  This is primarily due to asignificant increase in product prices that was substantially offset by areduction in third party sales volumes and as a result of reduced NGLproduction at our Granger facility as it was more economic to sell ethane as residue gas. Average NGL prices realized by us increased $0.15 per gallon to $0.57per gallon for the three months ended September 30, 2003 compared to thesame period in 2002.  Included in thecalculation of the realized NGL price were approximately $1.9 million of lossesrecognized in the three months ended September 30, 2003 related to futurespositions on equity NGL volumes.  Wehave entered into additional futures positions for the majority of our equityNGL production for the remainder of 2003 and in 2004.  See further discussion in “Item 3. Quantitative and QualitativeDisclosures About Market Risk.”  AverageNGL sales volumes decreased 579 MGal per day to 1,640 MGal per day for thethree months ended September 30, 2003 compared to the same period in 2002.

 

Revenues from the sale of NGLs increased approximately $28.7 million to$258.6 million for the nine months ended September 30, 2003 compared tothe same period in 2002.  This increaseis primarily due to a significant increase in product prices, which waspartially offset by a reduction in third-party sales volumes.  Average NGL prices realized by us increased$0.18 per gallon to $0.58 per gallon for the nine months endedSeptember 30, 2003 compared to the same period in 2002.  Included in the calculation of the realizedNGL price were approximately $8.6 million of losses recognized in the ninemonths ended September 30, 2003 related to futures positions on equity NGLvolumes.  We have entered intoadditional futures positions for the majority of our equity NGL production forthe remainder of 2003 and in 2004.  Seefurther discussion in “Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.”  Average NGL sales volumesdecreased 455 MGal per day to 1,640 MGal per day for the nine months endedSeptember 30, 2003 compared to the same period in 2002.

 

Product purchases increased by $37.0 million and $295.6 million for thequarter and nine months ended September 30, 2003 compared to the sameperiods in 2002 as a result of the significant increase in commodity prices.  Overall, combined product purchases as a percentage of sales of all productsremained constant at 89% in both the quarter and nine months endedSeptember 30, 2003.

 

Plant and transportation operating expense increased by $1.1 millionand $7.0 million, respectively, for the three and nine months endedSeptember 30, 2003 compared to the same periods in 2002.  The increases in both the quarter and ninemonths ended September 30, 2003 were primarily due to increased throughputat our facilities, the acquisition of several gathering systems in the firstquarter of 2003 and additional leased compression in the Powder River Basincoal bed development.  Also contributingto this increase were the fees paid to other companies, primarily RendezvousGas Services, L.L.C., or Rendezvous, for gas gathering services.  Rendezvous is a 50%-owned entity thatdelivers gas to our Granger Complex. Rendezvous is accounted for under the equity method and our share of itsgathering revenues is reflected in Earnings from equity investments.

 

Oil and gas exploration and production expenses increased by $5.5million and $14.7 million, respectively, for the three and nine months ended September 30, 2003 compared to thesame periods in 2002.  In our operatingareas, the significant increase in residue gas prices in 2003 resulted insubstantially higher severance tax expenses. Overall, lease operating expense for the nine months ended September 30,2003 remained constant compared to the same period in 2002 and averaged $0.43per Mcfe.

 

Depreciation, depletion and amortization decreased by $1.3 million and $697,000, respectively, for the three andnine months ended September 30,2003 as compared to the same periods in 2002. These decreases were the result of revisions to

 

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theoperating lives and salvage values of our operating assets, which werepartially offset by additional depreciation in 2003 from new projects in2003.  The revisions to the operatinglives and salvage values were the result of analysis performed in connectionwith the adoption of SFAS No. 143 on January 1, 2003 and were treatedas a revision of an estimate and are accounted for on a prospective basis.

 

Selling and administrative expenses increased by approximately $900,000in both the three and nine months ended September 30, 2003 as compared tothe same periods in 2002.  Theseincreases were due to higher compensation expenses for the three-month periodand higher compensation and professional fees partially offset by a reductionin the accruals for doubtful accounts in the nine-month period of 2003.

 

In the first nine months of 2003, in order toproperly align our hedged volumes of natural gas to our forecasted equityproduction for 2003, we discontinuedhedge treatment on financial instruments for 10 MMcf per day of natural gas and50,000 Barrels per month of ethane.  Asa result, a pre-tax loss of $2.8 million was reclassified into earnings in thenine months ended September 30, 2003 from Accumulated other comprehensiveincome.

 

***Cash Flow Information***

 

Cash flows from operatingactivities increased by $137.6 million in the first nine months of 2003compared to the same period in 2002. This increase was primarily due to anincrease in net income in the first nine months of 2003 compared to the prioryear and the timing of cash receipts and payables.

 

Cash flows used in investingactivities increased by $70.1 million in the first nine months of 2003 comparedto the same period in 2002.  Thisincrease was primarily due to a higher level of capital expenditures.

 

Cash flows used in financing activities increasedby $13.3 million in the first nine months of 2003 compared to the same periodin 2002.  This increase was due toincreased cash flows from operating activities, which was used to reduce ourlong-term debt.

 

***Other Information***

 

***Acquisition andDisposition of Gathering Systems.***  Effective February 1, 2003, we acquired18 gathering systems in Wyoming, primarily located in the Green River Basinwith smaller operations in the Powder River and Wind River Basins, for a totalof $37.1 million.  Several of thesystems located in the Powder River do not integrate directly into our existingsystems, and accordingly we are negotiating for the sale of these systems.  We completed the sale of several of thesesystems during the third quarter of 2003, and the remaining systems areclassified as Assets held for sale on the Consolidated Balance Sheet atSeptember 30, 2003.  During thethree and nine months ended September 30, 2003, the income, if any,generated by the assets included in Assets held for sale are immaterial forseparate presentation as a discontinued operation.

 

##### ***Acquisitionof Sand Wash Properties.***  In August 2003, through the acquisitionof the stock of a private corporation for $12.9 million, we acquired additionalreserves, production and acreage in this area. The assets of this entity consist primarily of non-operating interestsin various Sand Wash properties operated by us.  This acquisition included 10.6 Billion Cubic Feet equivalent, orBcfe, of proved reserves, 2.1 MMcfed of production and approximately 11,000 netacres under lease.

##### *** ***

***Segment Information***

 

***Gas Gathering,Processing and Treating.***  The Gas gathering, Processing and Treating segment realizedsegment-operating profit of $30.7 million for the third quarter of 2003 and$88.9 million in the nine months ended September 30, 2003.  This compares to $25.6 million for the thirdquarter of 2002 and $69.8 million in the nine months ended September 30,2002.  The increase in operating profitin this segment in the 2003 periods is primarily due to higher commodityprices, increased gathering volumes and the acquisition of several gatheringsystems in February 2003.

 

***Exploration andProduction.*** The Exploration and Production segment realized segment-operating profitof $28.2 million for the third quarter of 2003 and $90.2 million in the ninemonths ended September 30, 2003. This compares to $18.4 million for the third quarter of 2002 and $48.9million in the nine months ended September 30, 2002. The increase inoperating profit in this segment in the 2003 periods was primarily due tosubstantially higher natural gas prices and production volume growth from thePowder River Basin coal bed methane area and the Pinedale Anticline field.

 

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***Marketing.***  The Marketing segment realizedsegment-operating profit of $4.6 million for the third quarter of 2003 and$28.2 million in the nine months ended September 30, 2003.  This compares to $9.1 million for the thirdquarter of 2002 and $30.7 million in the nine months ended September 30,2002.

 

Marketing margins on residue gas averaged $0.03 and $0.06 per Mcf inthe third quarter and the nine months ended September 30, 2003,respectively.  This represents adecrease of approximately $0.01 per Mcf as compared to the margin realizedduring the third quarter of 2002 and an increase of approximately $0.01 per Mcfas compared to the margin realized during the nine months endedSeptember 30, 2002.  The changes inthe marketing margins are primarily due to transactions associated with ourfirm transportation capacity from the Rocky Mountain region to theMid-Continent.  Our firm transportationallows us to purchase gas in the Rocky Mountain region for resale in the higherpriced Mid-Continent markets.  In thesecond quarter of 2003, additional transportation capacity out of the RockyMountain region became operational, which reduced the price difference betweenthe two regions.  We expect that the reducedmargins experienced in the third quarter of 2003 will continue in futureperiods. There is no assurance that the margins we realized on the sale of ourresidue gas in the third quarter will continue in the future, or that we willcontinue to originate the same amount of transactions in future quarters.

 

***Transportation.***  The Transportation segment realizedsegment-operating profit of $2.2 million for the third quarter of 2003 and $9.2million in the nine months ended September 30, 2003.  This compares to $4.2 million for the thirdquarter of 2002 and $11.7 million in the nine months ended September 30,2002.  The transportation segmentincludes the results from the MIGC and MGTC pipelines in the Powder RiverBasin.

 

#### ***Liquidity andCapital Resources***

#### ** **

Our sources ofliquidity and capital resources historically have been net cash provided byoperating activities, funds available under our financing facilities andproceeds 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, sales of inventory, the volumes of natural gas processedby our facilities, the volume of natural gas produced from our producingproperties, the margin on third-party product purchased for resale, as well asthe timely collection of our receivables will all affect future net cashprovided by operating activities. Additionally, our future growth will be dependent upon obtainingadditions to dedicated plant reserves, acquisitions, new project development,marketing results, efficient operation of our facilities and our ability toobtain financing at favorable terms.

 

Although someof our plants have experienced natural declines in dedicated reserves, overallwe have been successful in connecting additional reserves to more than offsetthese declines and in fact have increased throughput volumes at our plantfacilities.  However, the overall levelof drilling associated with our plant facilities will depend upon, among otherfactors, the prices for oil and gas, the drilling budgets of third-partyproducers, availability of transportation capacity to market centers, theenergy and environmental policy and regulation by governmental agencies, andthe availability of foreign oil and gas, none of which is within our control.There is no assurance that we will continue to be successful in replacing thededicated reserves processed at our facilities.  Any prolonged reduction in prices for natural gas and NGLs maydepress the levels of exploration, development and production bythird-parties.  Lower levels of theseactivities could result in a corresponding decline in the demand for ourgathering, processing and treating services. A reduction in any of these activities could have a material adverseeffect on our financial condition, results of operations and cash flows.

 

During thepast several years, we have been successful in developing additional reservesof 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 productionby us or a significant reduction in natural gas prices could have a materialadverse effect on our financial condition, results of operations and cashflows.

 

We believe that the amounts available to be borrowed under therevolving credit facility, together with net cash provided by operatingactivities, will provide us with sufficient funds to connect new reserves,maintain our existing facilities and complete our current capital expenditureprogram.  Depending on the timing andthe amount of our future projects, we may be required to seek additional sourcesof capital.  Our ability to secure suchcapital is restricted by our financing facilities, although we may requestadditional borrowing capacity from our lenders, seek waivers from our lendersto permit us to

 

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borrow funds from third-parties,seek replacement financing facilities from other lenders, use stock as acurrency for acquisitions, sell existing assets or 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.  In October 2003, weutilized a portion of the revolving credit facility to fund a $8.3 millionscheduled payment on the master shelf agreement.  We believe that cash provided by operating activities and amountsavailable under the revolving credit facility will be sufficient to meetremaining scheduled principal repayments during 2003 of $25.0 million under themaster shelf agreement, scheduled principal repayments during 2004 on thisfacility of $35.0 million, our preferred stock dividend requirements during theremainder of 2003 of approximately $1.7 million, and our projected preferredstock dividend requirements during 2004.

 

We haveeffective shelf registration statements filed with the SEC for an aggregate of$200 million of debt securities and preferred stock, along with the shares ofcommon stock, if any, into which those securities are convertible, and $62million of debt securities, preferred stock or common stock.  These shelf registrations allow us to accessthe debt and equity markets without the requirement of further SEC review.

 

***Preferred StockRedemption.*** On November 7, 2003, we issued a notice of redemption forapproximately 700,000 shares of our $2.625 cumulative convertible preferredstock at its liquidation preference plus 0.525% premium.  The holders of this preferred stock have theright to convert in whole or in part into shares of our common stock in lieu ofreceiving the redemption price in cash. The holders may make their election at any time prior to the redemptiondate.  The redemption date is scheduledfor December 11, 2003 and to the extent required, will be funded withamounts available under our revolving credit facility.  If all holders elect to receive shares ofour common stock, we will issue an additional 882,000 shares of common stock,and if all holders elect to receive cash, the redemption will total $35.6million including accrued and unpaid dividends.  Also if all holders elect to receive cash, the pro ratacapitalized offering costs associated with the redeemed preferred stock of $1.3million will be reflected as a special dividend to preferred shareholders in2003 and will reduce earnings per share of common stock by approximately $0.04per common share in the fourth quarter of 2003.

 

Our sourcesand uses of funds for the nine months ended September 30, 2003 aresummarized as follows (dollars in thousands):

 
| **Sources of funds:**                                            |   |    |    |
|------------------------------------------------------------------|--------|---------|---------|
| Borrowings under the revolving credit  facility                  |   | $       | 747,200 |   |
| Borrowings under the master shelf agreement                      |   | 25,000  |    |
| Proceeds from the dispositions of property and equipment         |   | 3,831   |    |
| Net cash provided by operating activities                        |   | 210,473 |    |
| Proceeds from exercise of common stock  options                  |   | 3,062   |    |
| Total sources of funds                                           |   | $       | 989,566 |   |
|                                                             |   |    |    |
| **Uses of funds:**                                               |   |    |    |
| Payments related to long-term debt  (including debt issue costs) |   | $       | 792,651 |   |
| Capital expenditures                                             |   | 125,484 |    |
| Contributions to equity investees                                |   | 10,450  |    |
| Preferred dividends paid                                         |   | 5,434   |    |
| Common dividends paid                                            |   | 4,969   |    |
| Total uses of funds                                              |   | $       | 938,988 |   |

 

***Capital InvestmentProgram.*** We currently anticipate capital expenditures in 2003 of approximately$223.0 million.   Overall, capitalexpenditures in the Powder River Basin coal bed methane development and insouthwest Wyoming operations represent 26% and 54%, respectively, of the total2003 budget.  Due to drilling andregulatory uncertainties that are beyond our control, we can make no assurancethat our capital budget for 2003 will not change.  This budget may be increased to provide for acquisitions ifapproved by our board of directors.

 

The 2003capital budget and our capital expenditures during the nine months endedSeptember 30, 2003, which totaled approximately $136.0 million, arepresented in the following table (dollars in thousands). 

 

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| **Type of Capital Expenditure**                                                                 |   | **Amount  Expended  Through  September 30, 2003** |   | **2003  Capital  Budget** |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|---------------------------|--------|
| Gathering, processing, treating and  pipeline assets                                            |   | $                                                      | 40.3   | *                         | $      | 83.9 | * |
| Exploration and production and lease  acquisition activities                                    |   | 37.4                                                   |   | 77.0                      |   |
| Acquisition of gathering systems, which  closed in January 2003                            |   | 37.1                                                   |   | 37.1                      |   |
| Acquisition of all the capital stock of a  private corporation which closed in August 2003 |   | 12.9                                                   |   | 12.9                      |   |
| Information technology and other items                                                          |   | 4.2                                                    |   | 4.3                       |   |
| Capitalized interest and overhead                                                               |   | 4.1                                                    |   | 7.8                       |   |
| Total                                                                                           |   | $                                                      | 136.0  |                      | $      | 223.0 |   |

 

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 * Includes $6.9 million and $13.3 million, respectively formaintaining existing facilities.

 

##### ***ContractualCommitments and Obligations***

##### *** ***

***ContractualCash Obligations.*** A summary of our contractual cash obligations as of September 30,2003 is as follows (dollars in thousands):

 
|                                                   |   |                  |    | **Payments  by Period** |   |
|--------------------------------------------------------|--------|-----------------------|---------|-------------------------|--------|
| **Type of Obligation**                                 |   | **Total  Obligation** |    | **Due in  2003**        |   | **Due in  2004 – 2005** |   | **Due in  2006 – 2007** |   | **Due  Thereafter** |   |
| Guarantee of Fort Union Project Financing              |   | $                     | 5,738   |                    | $      | 192 |   | $ | 1,669 |   | $ | 1,931 |   | $ | 1,946 |   |
| Operating Leases                                       |   | 76,992                |    | 5,754                   |   | 24,256 |   | 23,237 |   | 23,745 |   |
| Firm Transportation Capacity and Gathering  Agreements |   | 216,141               |    | 7,807                   |   | 56,201 |   | 54,339 |   | 97,794 |   |
| Firm Storage Capacity Agreements                       |   | 13,018                |    | 1,720                   |   | 6,698 |   | 2,677 |   | 1,923 |   |
| Long-term Debt                                         |   | 341,333               |    | 33,333                  |   | 45,000 |   | 83,000 |   | 180,000 |   |
| Total Contractual Cash Obligations                     |   | $                     | 653,222 |                    | $      | 48,806 |   | $ | 133,824 |   | $ | 165,184 |   | $ | 305,408 |   |

 

***Guarantee of FortUnion Project Financing.***   We own a 13% equity interest in the Fort Union Gas Gathering,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 any expansions ofthe gathering 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.  All participants in Fort Union haveguaranteed Fort Union’s payment of the project financing on a proportionalbasis, resulting in our guarantee of $5.7 million of the debt of Fort Union atSeptember 30, 2003.  Ourrequirement to fund under this guarantee would be reduced by the value ofassets held by Fort Union.  Thisguarantee is not reflected on our Consolidated Balance Sheet.

 

***OperatingLeases. ***Inthe ordinary course of our business operations, we enter into operating leasesfor office space, office equipment, communication equipment and transportationequipment.  In addition, we have enteredinto operating leases for compression equipment.   Payments made on these leases are a component of operatingexpenses and are reflected on the Consolidated Statement of Operations and, asoperating leases, are not reflected on our Consolidated Balance Sheet.  These leases have terms ranging from onemonth to ten years with return or fair market purchase options available atvarious times during the lease.   If wewere to exercise the purchase options on all the leased equipment, thesepurchase options would require the capital expenditure of approximately $36.9million between 2007 and 2012.

 

***Firm TransportationCapacity and Gathering Agreements.***  Access to firm transportation is alsoa significant element of our business strategy.  Firm transportation ensures that our equity production has accessto downstream markets and allows us to capture incremental profit when pricingdifferentials between physical locations occur.  As of September 30, 2003, we had contracts for approximately625 MMcf per day of firm transportation. This amount represents our total contracted amount on many individualpipelines.  In many cases it isnecessary to utilize sequential pipelines to deliver gas into a specific salesmarket. In total, we have the capacity to transport 171 MMcf per day of gasfrom the Rocky Mountain area to the Mid-Continent.  This utilizes a total of approximately 376 MMcf per day of firmcapacity on three separate pipelines.  The total rate under these long-term contracts to transport this gas tothe Mid-Continent approximates $0.35 per Mcf. Our remaining firm capacity consists of 108 MMcf per day to marketswithin the Rocky Mountains and 140 MMcf per day contracted in various othermarkets throughout the country.  Inaddition, we hold 83 MMcf per day of firm gathering capacity on the Fort Uniongathering line.  These agreements arenot reflected on our Consolidated Balance Sheet.

 

26

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A portion ofthis firm transportation capacity was contracted for use in our Marketingoperations.  For example, our Marketingsegment purchases gas in the Rocky Mountain region, transports this gasutilizing its 56 MMcf per day of our firm transportation capacity to theMid-Continent, and resells the gas to various markets.  During the nine months endedSeptember 30, 2003, these types of transactions have been profitable asthe price difference, or basis, between the Rocky Mountain and Mid-Continentregions has exceeded the cost of transportation. We expect that the fixed feesassociated with our contracts for firm transportation capacity during thefourth quarter of 2003 will average approximately $0.13 per Mcf per day.  The associated contract periods range fromone month to fourteen years.  Under firmtransportation contracts, we are required to pay the fees associated with thesecontracts whether or not the transportation is used.

 

***Firm StorageCapacity Agreements*.**  We customarily store gas inunderground storage facilities to ensure an adequate supply for long-term salescontracts and to capture seasonal price differentials.  As of September 30, 2003, we hadcontracts in place for approximately 13.3 Bcf of storage capacity at variousthird-party facilities.  Of the totalstorage capacity under contract, approximately 6.2 Bcf is under contract to ourCanadian subsidiary, WGR – Canada, Inc., and Western guarantees thesubsidiary’s performance under these contracts.  This subsidiary is wholly owned by us and fully consolidated inour financial statements.

 

The fees associated with these contractsduring the remainder of 2003 will average $0.41 per Mcf of annualcapacity.  The associated contractperiods at September 30, 2003 have an average term of twenty months.  At September 30, 2003, we held gas inour contracted storage facilities and in imbalances of approximately 14.5 Bcfat an average cost of $4.56 per Mcf compared to 19.7 Bcf at an average cost of $2.34per Mcf atSeptember 30, 2002.  These positions are forstorage withdrawals within the next thirteen months.  At the time that we place product into storage, we contract forthe sale of that product, physically or financially, and do not speculate on thefuture value of the product.  Theseagreements for storage capacity are not reflected on our Consolidated BalanceSheet.

 

From time totime, we lease NGL storage space at major trading locations to facilitate thedistribution of products. At September 30, 2003, we held NGLs in storageat various third-party facilities of 2,687 MGal, consisting primarily ofpropane and normal butane, at an average cost of $0.26 per gallon compared to4,005 MGal at an average cost of $0.31 per gallon at September 30, 2002.  These agreements for storage capacity arenot reflected on our Consolidated Balance Sheet.

 

***Long-termDebt***

#### ** **

***Revolving CreditFacility. ***AtSeptember 30, 2003, $63.0 million was outstanding under our existingfour-year, $300 million revolving credit facility.  Loans made under this facility are secured by a pledge of thecapital stock of our significant subsidiaries. These subsidiaries also guarantee the borrowings under thefacility.  The facility contains aprovision that requires us to secure loans under the facility with 75% of ouroil and gas reserves.  This provisionwould only be triggered in the event of a reduction to a debt rating on therevolving credit facility of Ba3 or lower by Moody’s Investors Service, Inc.,or Moody’s, or the reduction to a debt rating on the revolving credit facilityof BB- or lower by Standard & Poor’s Rating Services, a division of TheMcGraw-Hill Companies, Inc., or S&P. This facility has been rated Ba1 by Moody’s and BB+ by S&P.

 

The borrowingsunder the credit facility bear interest at Eurodollar rates or a base rate, asrequested by us, plus an applicable percentage based on our debt tocapitalization ratio.  The base rate isthe agent’s published prime rate.  We alsopay a quarterly facility fee ranging between 0.30% and 0.50%, depending on ourdebt to capitalization ratio.  This feeis paid on the total commitment.  AtSeptember 30, 2003, the interest rate payable on borrowings under the newfacility was approximately 2.87%.

 

Under thecredit facility, we are subject to a number of covenants, including:maintaining a total debt to capitalization ratio of not more than 55%;maintaining a senior debt to capitalization ratio of not more than 40%; andmaintaining a ratio of EBITDA, as defined in the credit facility, to interestand dividends on preferred stock over the last four quarters in excess of 3.25to 1.0, increasing to 4.25 to 1.0 by March 31, 2005.

 

The creditfacility ranks equally with borrowings under our master shelf agreement withThe Prudential Insurance Company.

 

***Master Shelf Agreement. ***Amountsoutstanding under the master shelf agreement with The Prudential InsuranceCompany of America at September 30, 2003 are as indicated in the followingtable (dollars in thousands):

 

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| **Issue Date**         |   | **Amount** |    | **Interest  Rate** |    | **Final  Maturity**    |                   | **Principal  Payments Due**                         |                        |
|------------------------|--------|------------|---------|--------------------|---------|------------------------|------------------------|-----------------------------------------------------|-----------------------------|
| October 27,  1992 |   | $          | 8,333   |               | 7.99    | %                      | October 27,  2003 |                                                | single  payment at maturity |   |
| December 27, 1993 |   | 25,000     |    | 7.23               | %       | December 27, 2003 |                   | single payment at maturity                          |                        |
| October 27, 1994  |   | 25,000     |    | 9.24               | %       | October 27, 2004  |                   | single payment at maturity                          |                        |
| July 28, 1995     |   | 40,000     |    | 7.61               | %  | July 28, 2007     |                   | $ 10,000 on each of July 28, 2004 through 2007 |                        |
| January 17, 2003  |   | 25,000     |    | 6.36               | %       | January 17, 2008  |                   | single payment at maturity                          |                        |
|                   |   | $          | 123,333 |               |    |                   |                   |                                                |                        |   |

 

Our borrowingsunder the master shelf agreement are secured by a pledge of the capital stockof our significant subsidiaries, some of which have also provided a guaranty ofpayments owed by us under the facility.  The master shelf requires us to secure loans under the facility with 75%of our oil and gas reserves.  Thisprovision would only be triggered in the event of a reduction to the debtrating on the revolving credit facility of Ba3 or lower by Moody’s or thereduction to the debt rating on the revolving credit facility of BB- or lowerby S&P.

 

 Under our master shelf agreement, we aresubject to a number of covenants, including: maintaining a minimum tangible networth equal to the sum of $300 million plus 50% of consolidated net earnings earnedfrom January 1, 1999 plus 75% of the net proceeds of any equity offeringsafter January 1, 1999; maintaining a total debt to capitalization ratio ofnot more than 55% and a senior debt to capitalization ratio of not more than40%; maintaining a quarterly test of EBITDA to interest for the last fourquarters in excess of 3.25 to 1.0, increasing to 4.25 to 1.0 by March 31,2005; and maintaining a ratio of senior debt to EBITDA, as defined in theMaster Shelf Agreement, of no greater than 4.0 to 1.0.

 

InOctober 2003, we utilized funds available under the revolving creditfacility to fund a $8.3 million scheduled payment under the master shelfagreement.  In December 2003, wewill make another required principal repayment under the master shelf agreementtotaling $25.0 million, and in 2004, we will make scheduled payments totaling$35.0 million on this facility.  Weintend to fund these repayments with funds available under the revolving creditfacility.

 

***Senior SubordinatedNotes. ***In1999, we sold $155.0 million of senior subordinated notes in a privateplacement with a final maturity of 2009 due in a single payment which weresubsequently exchanged for registered publicly tradable notes under the sameterms and conditions.  The SubordinatedNotes bear interest at 10% per annum and were priced at 99.225% to yield10.125%.  These notes contain covenants,which include limitations on debt incurrence, restricted payments, liens andsales of assets.  The Subordinated Notesare unsecured and are guaranteed on a subordinated basis by our materialsubsidiaries.  We incurred approximately$5.0 million in offering commissions and expenses, which were capitalized andare being amortized over the term of the notes.  The senior subordinated notes are callable at our option, inwhole or in part, at decreasing premiums, beginning in June 2004.  Our ability to call these notes may berestricted by the covenants under our other debt facilities.

 

***CovenantCompliance. ***Wewere in compliance with all covenants in our debt agreements atSeptember 30, 2003.

 

#### ***Upstream Operations***

#### ** **

#### **Each of our existing upstream projects are fullyintegrated with our midstream operations. In other words, we provide thegathering, compression, processing, marketing or transportation services forboth our own production and for third-party operators.  Additionally, we are actively pursuing newexploration, development and producing property acquisition opportunities.  Our principal upstream operations aresummarized in the following table:**

 
| **Production Area**                 |   | **Net Acres  Under  Lease At  September 30, 2003** |   | **Proven  Reserves at  December 31, 2002*** |   | **Average  Net Production for  the Nine Months Ended  September 30, 2003** |   |
|-------------------------------------|--------|---------------------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|
| Powder River Basin Coal Bed Methane |   | 524,000                                                 |   | 414 Bcfe                                         |   | 124 MMcfe per day                                                               |   |
| Pinedale/Jonah Basin                |   | 33,000                                                  |   | 162 Bcfe                                         |   | 20 MMcfe per day                                                                |   |
| Sand Wash Basin                     |   | 188,000                                                 |   | 23 Bcfe                                          |   | 4 MMcfe per day                                                                 |   |
| Other                               |   | 275,000                                                 |   | —                                           |   | —                                                                          |   |

 

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* Includes the additional reserves acquired in Sand Wash inAugust 2003.

 

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***PowderRiver Basin Coal Bed Methane. ***Wecontinue to develop our Powder River Basin coal bed methane reserves and expandthe associated gathering system in northeast Wyoming.  The Powder River Basin coal bed methane area is currently one ofthe largest on-shore plays for the development of natural gas in the UnitedStates.  Within this area, together withour co-developer, in the first nine months of 2003, we were the largestproducer of natural gas.  In addition,Western is the largest gatherer of natural gas and, through our MIGC pipeline,transports a significant volume of gas out of this basin.

 

InOctober 2003, we settled on-going litigation with our co-developer in thisarea.  Under the terms of the settlementagreement, both our co-developer and we will each operate the drilling andproduction on approximately half of the jointly owned leasehold in the coal-bedmethane development of the Powder River Basin of Wyoming.  We began operating our half of the propertieson November 1, 2003.

 

The drillingoperations in the Powder River Basin through September 30, 2003 haveprimarily focused on developing reserves in the Wyodak coal, which is locatedon the east side of the coal bed development. The average drilling and completion cost for our coal bed methane gaswells has averaged approximately $105,000 per well, with average reserves persuccessful Wyodak well of approximately 275 MMcf.  The majority of future development will be concentrated ondeveloping the Big George and other coal seams.  Much of the Big George coal seam is deeper and thicker than theWyodak coal.  We expect that as wellsare drilled and developed in the Big George coal, the gas reserves andproduction per well and the average drilling and completion cost per well willincrease.

 

We currentlyplan to participate in a total of 600 to 650 gross wells in 2003, which is areduction from our original estimate of 845 wells.  The reduction is the result of delays in receiving permits todrill on federal lands from the Bureau of Land Management, or BLM.  Our share of production from wells in whichwe own an interest averaged approximately 124 MMcfe per day in the first ninemonths of 2003.  This represents anincrease of 9% from the average daily production in the first nine months of2002.  We currently anticipate dailyproduction to remain relatively constant through the end of 2003.

 

Industry-wide,production from the Big George coal increased to approximately 112 MMcf per dayin August 2003 from nine individual areas separated by as much as 40 miles.  This represents an increase of 158% sinceAugust 2002.  We are currentlyevaluating 11 pilot areas and one development area in the Big George.  We have marketable production quantities inthe All Night Creek, Pleasantville and Kingsbury areas.  In October 2003, these areas wereproducing a combined 37 gross MMcf per day.

 

OnApril 30, 2003, the BLM issued the final Record of Decision, or ROD, inrelation to its Environmental Impact Statement, or EIS regarding future coalbed methane, or CBM, drilling in the Powder River Basin.  The ROD requires additional surveys forplant and animal species, cultural surveys and noxious weed mitigation.  We have filed permit applications forapproval by the BLM under the terms of the new EIS, but are unable to predictthe rate at which permits will be granted. Since the issuance of the final ROD, the BLM has been reviewing theirpermitting process in an effort to issue to industry, a total of 3,000 permitsper year.  In the last four months, theBLM has issued to industry, a total of 270 permits.  This timing may be further affected by several lawsuits, whichwere filed on May 1, 2003 in the U.S. District Court in Billings, Montanachallenging the BLM’s decision.  Whilewe believe that these lawsuits are unlikely to be successful, we are unable topredict the outcome of the litigation or the impact, if any, on the timing ofour development.  For furtherinformation, see “Part II – Other Information – Item 1. Legal Proceedings” ofthis Form 10-Q.

 

Additionally,the Wyoming Department of Environmental Quality, or DEQ, has revised somestandards for surface water discharge that have allowed the issuance of most ofthe permits that apply to the Cheyenne and Belle Fourche drainage areas. Themajority of our existing production is from wells draining into theseareas.  Most of our undevelopedprospects from the Big George formation are located in the Powder Riverdrainage area.  The Wyoming DEQ willrequire additional water management techniques, such as containment or treating,in these areas pursuant to the conditions described in the EIS referred toabove.  While we believe theseadditional requirements will add to the cost of development of this area we donot believe they will have a significant impact on our results of operation orfinancial position.

 

Our 2003capital budget in the Powder River Basin coal bed project includesapproximately $45.2 million for drilling costs, production equipment and leaseacquisitions, of which approximately $28.3 million was spent in the first ninemonths of 2003.  Depending upon futuredrilling success, we may need to make additional capital expenditures orleasing commitments to continue expansion in this basin.  In addition, due to regulatoryuncertainties, which are beyond our control, we can make no assurance that wewill incur this level of capital expenditure during 2003.

 

***Jonah/PinedaleFields.* **Ourupstream assets in the Green River Basin of southwest Wyoming are located inthe Jonah Field and Pinedale Anticline areas. During the first nine months of 2003, we participated in 43 gross wells,or four net wells,

 

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in these areas, at a cost of$5.4 million and experienced a success rate of 100%.  Our capital budget for 2003 in the Jonah Field and PinedaleAnticline areas provides for expenditures of approximately $20.1 million fordrilling costs and production equipment. Due to drilling and regulatory uncertainties, which are beyond ourcontrol, there can be no assurance that we will incur this level of capitalexpenditure.  During the remainder of2003, we expect to participate in the drilling of 13 gross wells, orapproximately one net wells on the Pinedale Anticline.

 

In the thirdquarter of 2003, the Wyoming Oil & Gas Commission approved two in-fillpilot programs on our leasehold to evaluate decreasing the well spacing on thePinedale Anticline to 20 acres per well from 40 acres per well.  A total of 64 wells are expected to bedrilled by two of the operators in this area during the next 12 to 24 months inthis program.  We will have the optionto participate in this new drilling program on a well-by-well basis.

 

The expectedgross costs to drill a successful well in this area range from approximately$3.5 million to $5.0 million, depending on location of the well site and thedepth of the well.  Average well depthsin this area range from approximately 13,000 feet to 14,200 feet, and averagegross reserves per successful well approximate 6 to 8 Bcfe.  During the third quarter of 2003, weproduced an average of 20 MMcfe per day, net, from these areas.

 

***Sand Wash Basin.*** We continue to explore and developour acreage position in the Sand Wash Basin in northwest Colorado, located inthe Greater Green River Basin.  InAugust 2003, through the acquisition of the stock of a private corporationfor $12.9 million, we acquired additional reserves, production and acreage inthis area.  This acquisition included10.6 Bcfe of proved reserves, 2.1 MMcfed of production and approximately 11,000net acres under lease.

 

We now ownapproximately 208,000 gross oil and gas leasehold acres, or approximately188,000 net acres, in this basin.  Themajority of this acreage is in the exploration phase and will be evaluated infuture years.  In September and October 2003,we drilled an exploratory well, which encountered mechanical difficulties priorto reaching the targeted reservoir. This well has been plugged and abandoned.  In connection with this well, we recorded a dry hole expense ofapproximately $300,000 in the third quarter of 2003 and will record anadditional charge of approximately $1.0 million in the fourth quarter of2003.  Our capital budget in this areaprovides for expenditures of approximately $18.2 million during 2003 for ourparticipation in the drilling of eight gross developmental wells, or one netwells, and two workovers of existing wells. Of the total 2003 capital budget, approximately $11.8 million was spentin the first nine months of 2003.

 

***Exploration.***   We are also actively seeking to addadditional upstream core projects that are focused on Rocky Mountain naturalgas.   We will utilize our expertise inexploration and low-risk development of tight-gas sands, coal bed methane andfractured shale plays to evaluate acquisitions of either additional leaseholds,proven and undeveloped reserves or companies with operations focused in theRockies.  Toward this goal, we haveacquired the drilling rights on approximately 275,000 net acres in another basin.  In the fourth quarter of 2003, we intend todrill two wells in this area to further evaluate its potential.

 

In the fourthquarter of 2003, we also participated in an exploratory well for a 25% workinginterest in the eastern Green River Basin. The well is waiting on completion. If this well is successful, additional offset locations may be proposed.

 

#### ***Midstream Operations***

#### ** **

Our midstreamoperations consist of our gathering, processing, treating, marketing andtransportation operations.  An importantelement of our long-term business plan is to meet or exceed throughputprojections 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 theconsolidation of existing facilities.

 

***Gas Gathering,Processing and Treating.***

 

AtSeptember 30, 2003, we operated a variety of gathering, processing andtreating facilities, or plant operations, with approximately 9,933 miles ofgathering lines, as presented on the Principle Gathering and ProcessingFacilities Table, as set forth below. These facilities are primarily located in five states and have acombined throughput capacity of 2.9 billion cubic feet, Bcf, per day of naturalgas.  Our operations are located in some of the mostactively drilled oil and gas producing basins in the United States.  Five of our processing plants canfurther separate, or fractionate, the mixed NGL stream into ethane, propane,normal butane and natural gasoline to obtain a higher value for the NGLs, andthree of our plants are capable of processing and treating natural gascontaining hydrogen sulfide or other impurities that require removal prior todelivery to market pipelines.   In addition to our integrated upstreamand midstream operations in the Powder River and Green River Basins in Wyoming,our

 

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core assets include our plant operationslocated in west Texas and Oklahoma.  Webelieve that our core assets have stable production rates, provide asignificant operating cash flow and continue to provide us with strategicgrowth opportunities.

 

#### ***PowderRiver Basin*. **Our midstream operationsin the Powder River Basin are fully integrated with our upstream operations aswe provide the gathering, compression and processing services for our ownproduction.  Additionally we provide thesame types of services for third-parties. As of September 30, 2003, our assets in the Powder River Basin innortheast Wyoming were primarily comprised of our coal bed methane gatheringsystem with a capacity of 525 MMcf per day, several gas processing facilitieswith a combined capacity of 146 MMcf per day, and our 13% equity interest inFort Union.

#### ** **

#### **We averaged 423 MMcf per day of CBM gatheringvolumes, including third-party gas, during the third quarter of 2003. Of thatvolume, approximately 111 MMcf per day was transported through our MIGCpipeline.   As part of our settlement ofon-going litigation with our co-developer in this area, we amended ourlong-term gathering contract for gas produced by our co-developer tosignificantly increase the area of dedication, to extend the term of thecontract, and to modify the fee schedule. While this does not immediately increase our gathering volumes, webelieve that we are well positioned for future growth opportunities.**

#### ** **

We are theconstruction manager and field operator of the Fort Union gathering system andheader.  The Fort Union system deliverscoal bed methane gas to a treating facility near Glenrock, Wyoming and accessesinterstate pipelines serving gas markets in the Rocky Mountain and Midwestregions of the United States.  Thegathering pipeline has a capacity of 635 MMcf per day.  We have a long-term, firm gatheringagreement with Fort Union for 83 MMcf per day of this capacity at $0.14 per Mcf.

 

Our capital budget in thePowder River Basin for midstream activities provides for expenditures ofapproximately $15.2 million during 2003, of which approximately $8.1 millionwas spent in the first nine months of the year.  Depending upon our future drilling success, we may need to make additionalcapital expenditures or leasing commitments to continue expansion in thisbasin.  Due to drilling, regulatory,commodity pricing and other uncertainties, which are beyond our control, therecan be no assurance that we will incur this level of capital expenditure.

 

***GreenRiver Basin***.  Our midstream operations in the GreenRiver Basin of southwest Wyoming are also fully integrated with our upstreamoperations in this area.  Our midstreamassets in this basin are comprised of the Granger and Lincoln Road facilities,or collectively the Granger complex, our 50% equity interest in Rendezvous, ourRed Desert facility and our recently acquired Table Rock, Wamsutter and DesertSprings gathering systems.  Thesefacilities have a combined gathering capacity of 682 MMcf per day, and in thenine months ended September 30, 2003, these facilities averaged throughputof 548 MMcf per day.   Additionally,these systems have a combined processing capacity of 327 MMcf per day and inthe nine months ended September 30, 2003, processed an average of 216 MMcfper day.

 

Our 2003 capital budget formidstream activities in this basin provides for expenditures of approximately$81.3 million during 2003 of which $52.5 million was spent in the first ninemonths of the year.  This capital budgetincludes approximately $28.1 million for gathering lines and installation ofcompression to expand the capacity of our Granger Complex, our Wamsuttergathering system and our Red Desert facility, $16.1 million for additionalcontributions to Rendezvous for the expansion of its system and $37.1 millionfor the acquisition of additional gathering systems in February 2003.   Due to drilling, commodity pricing andregulatory uncertainties, which are beyond our control, there can be no assurancethat we will incur this level of capital expenditure.

 

In 2001, we,together with an unrelated third-party, formed Rendezvous.  Rendezvous gathers gas along the PinedaleAnticline for blending or processing at either our Granger Complex or at thethird-party owned and operated Blacks Fork processing facility.   Each company owns a 50% interest inRendezvous, and we serve as field operator of its systems. Rendezvous has acapacity of 275 MMcf per day and in the nine months ended September 30,2003 gathered an average of 215 MMcf per day.  An expansion of the system is planned for completion inDecember 2003.  The expansion wouldextend the system approximately 24 miles further into the Pinedale Anticlineand increase the overall capacity of the system to 350 MMcf per day.  The estimated cost of this expansion is$32.0 million gross, of which our share is approximately $16.0 million.  As part of Rendezvous’ expansion process, weare implementing a 100 MMcf per day processing capacity upgrade at our Granger plantat a cost of $2.0 million.

 

***West Texas******.* **Ourprimary assets in west Texas are the Midkiff/Benedum complex and the Gomez andMitchell Puckett treating facilities. These facilities process gas produced by third-parties in the PermianBasin, have a combined operational capacity of 565 MMcf per day and processedan average of 287 MMcf per day in the first nine months of 2003.  Also for this

 

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period, these facilitiesproduced an average of 208 MMcf per day of natural gas for delivery to sales marketsand produced an average of 796 MGal per day of NGLs.  Our capital budget in this area provides for expenditures ofapproximately $7.4 million during 2003, of which $5.2 million was spent in thefirst nine months.

 

***Oklahoma******.* **Ourprimary assets in Oklahoma are the Chaney Dell and Westana systems.  These facilities gather and process gasproduced by third-parties in the Anadarko Basin and have a combined operationalcapacity of 175 MMcf per day.  In thenine months ended September 30, 2003, these facilities gathered an averageof 160 MMcf per day, produced an average of 139 MMcf per day of natural gas fordelivery to sales markets and produced 307 MGal per day of NGLs.  Our capital budget in this area provides forexpenditures of approximately $15.7 million during 2003, of which approximately$10.3 million has been spent in the first nine months.

 

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***Principal Gatheringand Processing Facilities Table.***  The following tables provide informationconcerning our principal gathering, processing and treating facilities atSeptember 30, 2003.

 
| **Facilities (1)**            |                              | **Year  Placed  In Service** |                              | **Gas  Gathering  System  Miles (2)** |                              | **Gas  Throughput  Capacity  (MMcf/D) (3)** |   | **Average  for the Nine months Ended  September 30, 2003** |
|-------------------------------|-----------------------------------|------------------------------|-----------------------------------|---------------------------------------|-----------------------------------|---------------------------------------------|--------|-----------------------------------------------------------------|
|                          | **Gas  Throughput  (MMcf/D) (4)** |                         | **Gas  Production  (MMcf/D) (5)** |                                  | **NGL  Production  (MGal/D) (5)** |                                        |
| Texas                         |                              |                         |                              |                                  |                              |                                        |   |                                                            |   |   |   |   |   |
| Gomez Treating (6)            |                              | 1971                         |                              | 386                                   |                              | 280                                         |   | 88                                                              |   | 81 |   | — |   |
| Midkiff/Benedum               |                              | 1949                         |                              | 2,245                                 |                              | 165                                         |   | 137                                                             |   | 87 |   | 795 |   |
| Mitchell Puckett Treating (6) |                              | 1972                         |                              | 93                                    |                              | 120                                         |   | 62                                                              |   | 40 |   | 1 |   |
| Wyoming                       |                              |                         |                              |                                  |                              |                                        |   |                                                            |   |   |   |   |   |
| Coal Bed Methane Gathering    |                              | 1990                         |                              | 1,312                                 |                              | 525                                         |   | 416                                                             |   | 218 |   | — |   |
| Desert Springs Gathering (10) |                              | 1979                         |                              | 65                                    |                              | 10                                          |   | 6                                                               |   | 6 |   | 16 |   |
| Fort Union Gas Gathering      |                              | 1999                         |                              | 167                                   |                              | 635                                         |   | 481                                                             |   | 481 |   | — |   |
| Granger (7)(8)(9)             |                              | 1987                         |                              | 538                                   |                              | 235                                         |   | 227                                                             |   | 150 |   | 309 |   |
| Hilight Complex (7)           |                              | 1969                         |                              | 626                                   |                              | 124                                         |   | 16                                                              |   | 11 |   | 52 |   |
| Kitty/Amos Draw (7)           |                              | 1969                         |                              | 314                                   |                              | 17                                          |   | 6                                                               |   | 4 |   | 27 |   |
| Lincoln Road (9)              |                              | 1988                         |                              | 149                                   |                              | 50                                          |   | 36                                                              |   | 20 |   | 9 |   |
| Newcastle (7)                 |                              | 1981                         |                              | 146                                   |                              | 5                                           |   | 3                                                               |   | 2 |   | 20 |   |
| Red Desert (7)                |                              | 1979                         |                              | 111                                   |                              | 42                                          |   | 13                                                              |   | 11 |   | 21 |   |
| Rendezvous                    |                              | 2001                         |                              | —                                |                              | 275                                         |   | 215                                                             |   | 215 |   | — |   |
| Reno Junction (8)             |                              | 1991                         |                              | —                                |                              | —                                      |   | —                                                          |   | — |   | 102 |   |
| Table Rock Gathering (10)     |                              | 1979                         |                              | 101                                   |                              | 20                                          |   | 14                                                              |   | 14 |   | — |   |
| Wamsutter Gathering (10)      |                              | 1979                         |                              | 186                                   |                              | 50                                          |   | 37                                                              |   | 37 |   | 5 |   |
| Wind River Gathering (10)     |                              | 1979                         |                              | 109                                   |                              | 80                                          |   | 47                                                              |   | 47 |   | — |   |
| Oklahoma                      |                              |                         |                              |                                  |                              |                                        |   |                                                            |   |   |   |   |   |
| Chaney Dell/Westana           |                              | 1966                         |                              | 3,141                                 |                              | 175                                         |   | 160                                                             |   | 139 |   | 307 |   |
| New Mexico                    |                              |                         |                              |                                  |                              |                                        |   |                                                            |   |   |   |   |   |
| San Juan River (6)            |                              | 1955                         |                              | 140                                   |                              | 60                                          |   | 29                                                              |   | 23 |   | 46 |   |
| Utah                          |                              |                         |                              |                                  |                              |                                        |   |                                                            |   |   |   |   |   |
| Four Corners Gathering        |                              | 1988                         |                              | 104                                   |                              | 15                                          |   | 3                                                               |   | 2 |   | 16 |   |
| Total                         |                              |                         |                              | 9,933                                 |                              | 2,883                                       |   | 1,996                                                           |   | 1,588 |   | 1,726 |   |

 

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(1)                      Our interest in all facilities is100% except for Midkiff/Benedum (73%); Newcastle (50%); Fort Union gatheringsystem (13%) and Rendezvous (50%).  Weoperate all facilities, and all data include our interests and the interests ofother joint interest owners and producers of gas volumes dedicated to thefacility.  Unless otherwise indicated,all facilities shown in the table are gathering, processing or treatingfacilities.

(2)                      Gas gathering system miles are asof September 30, 2003.

(3)                      Gas throughput capacity is as ofSeptember 30, 2003 and represents capacity in accordance with designspecifications unless other constraints exist, including permitting or fieldcompression limits.

(4)                      Aggregate wellhead natural gasvolumes collected by a gathering system.

(5)                      Volumes of gas and NGLs areallocated to a facility when a well is connected to that facility; volumesexclude NGLs fractionated for third-parties.

(6)                      Sour gas facility (capable ofprocessing or treating gas containing hydrogen sulfide and/or carbon dioxide).

(7)                      Processing facility that includesfractionation (capable of fractionating raw NGLs into end-use products).

(8)                      NGL production includesconversion of third-party feedstock to iso-butane.

*(9)**                  *LincolnRoad is operated on an intermittent basis to process excess gas from theGranger system.

*(10)**           *These facilitieswere acquired on February 1, 2003.

 

***Transportation. ***We own and operateMIGC, Inc. an interstate pipeline located in the Powder River Basin in Wyoming,and MGTC, Inc., an intrastate 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.  During the nine months endedSeptember 30 2003, MIGC transported an average of 159 MMcf per day.  It is anticipated that

 

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MIGC will continue to operatearound that level in the fourth quarter of 2003 as well.  MIGC earns fees 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.  Contracts for firm capacity on MIGC range induration from one month to six years and the fees charged averaged $0.33 perMcf in the first nine months of 2003. MGTC provides transportation and gas sales to various cities in Wyomingat rates that are subject to the approval of the Wyoming Public ServiceCommission.

 

The followingtable provides information concerning our principal transportation assets atSeptember 30, 2003.

 
|                              |   |                         |   |                          |   | **Average  for the Nine Months Ended  September 30, 2003** |   |
|-----------------------------------|--------|------------------------------|--------|-------------------------------|--------|-----------------------------------------------------------------|--------|
| **Transportation Facilities (1)** |   | **Year  Placed  In Service** |   | **Transportation  Miles (2)** |   | **Pipeline Capacity  (MMcf/D) (2)**                             |   | **Gas  Throughput  (MMcf/D) (3)** |   |
| MIGC (4)                          |   | 1970                         |   | 245                           |   | 130                                                             |   | 159 |   |
| MGTC (5)                          |   | 1963                         |   | 252                           |   | 18                                                              |   | 6 |   |
| Total                             |   |                         |   | 497                           |   | 148                                                             |   | 165 |   |

 

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(1)                        Our interest in all facilitiesis 100%, and we operate all facilities.

(2)                        Ttransportation miles and pipelinecapacity are as of September 30, 2003. Pipeline capacity representscertificated capacity at the Powder River junction only and does not includeinterruptible capacity or capacity at other delivery points.

(3)                        Aggregate volumes transportedby a pipeline.

(4)                        MIGC is an interstate pipelinelocated in Wyoming and is regulated by the Federal Energy RegulatoryCommission.

*(5)**                    *MGTC is apublic utility located in Wyoming and is regulated by the Wyoming PublicService Commission.

 

***Marketing.***

 

***Gas*.*  ***Wemarket gas produced at our wells and our plants and purchased fromthird-parties to end-users, local distribution companies, or LDCs, pipelinesand other marketing companies throughout the United States and Canada.  In addition to our offices in Denver, we havea marketing office in both Houston, Texas and Calgary, Alberta.  Third-party sales, firm transportationcapacity on interstate pipelines and our gas storage positions, combined withthe stable supply of gas from our facilities and production, enable us torespond quickly to changing market conditions and to take advantage of seasonalprice variations and peak demand periods. For the nine months ended September 30, 2003, our total gas salesvolumes averaged 1.4 Bcf per day, of which 475 MMcf per day was produced at ourplants or from our producing properties, or equity volumes.

 

One of theprimary goals of our gas marketing operations continues to be the preservationand enhancement of the value received for our equity volumes of naturalgas.  This goal is achieved through theuse of hedges on the production of our equity natural gas and through the useof firm transportation capacity. Historically, the gas produced in the Rocky Mountain region has tradedat a substantial discount to the Mid-Continent and west coast areas as a resultof limited pipeline capacity from the region. In the nine months ended September 30, 2003, as a result of ourfirm transportation capacity, we realized an approximate $0.20 per Mcfimprovement in price for natural gas relative to the price that would have beenreceived if these capacity rights had not existed.  In the second quarter of 2003, additional pipeline capacity outof the Rocky Mountain region went into service.  This pipeline expansion contributed to a reduction in the pricedifference between the Rocky Mountain region and Mid-Continent market center toapproximately $0.48 per Mcf in September 2003 as compared to an average of$2.30 per Mcf in the first quarter of 2003. We expect this additional pipeline capacity to continue to an ongoingimpact on the price differences between the Rocky Mountain and Mid-Continentregions.  The remainder of our equityproduction of natural gas in the Rocky Mountain region that is not transportedto the Mid-Continent is hedged for the remainder of 2003 using financialinstruments.

 

We sell gasunder agreements with varying terms and conditions in order to match seasonaland other changes in demand. As of September 30, 2003, the averageduration of our sales contracts was 14 months. The marketing of products purchased from third-parties typically resultsin low profit margins relative to the sales price.  In general, due to price volatility and credit concerns in theenergy industry, our overall sales volume in 2003 has decreased as compared toprior years.

 

***Price Reporting toGas Trade Publications. *** In the third quarter of 2003, we learned thatcertain employees in our marketing department furnished inaccurate informationregarding natural gas transactions to energy publications, which compile andreport energy index prices.   We havediscontinued the practice of reporting pricing information to the industry

 

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publications.  See further discussion in “Part II – OtherInformation, Item 1. Legal Proceedings.”

 

***NGLs*.*  ***Wemarket NGLs, or ethane, propane, iso-butane, normal butane, natural gasolineand condensate, produced at our plants and purchased from third-parties, in theRocky Mountain, Mid-Continent and Southwestern regions of the UnitedStates.  A majority of our production ofNGLs moves to the Gulf Coast area, which is the largest NGL market in theUnited States.  Through the developmentof end-use markets and distribution capabilities, we seek to ensure thatproducts from our plants move on a reliable basis, avoiding curtailment ofproduction.  For the nine months endedSeptember 30, 2003, NGL sales averaged 1,640 MGal per day, of which 1,350MGal per day was produced at our plants.

 

Consumers ofNGLs are primarily the petrochemical industry, the petroleum refining industryand the retail and industrial fuel markets. As an example, the petrochemical industry uses ethane, propane, normalbutane and natural gasoline as feedstocks in the production of ethylene, whichis used in the production of various plastics products.  Over the last several years, thepetrochemical industry has increased its use of NGLs as a major feedstock andis projected to continue to increase such usage.  Further, consumers use propane for home heating, transportationand agricultural applications.  Price,seasonality and the economy primarily affect the demand for NGLs.  As in the case of natural gas, wecontinually monitor and review the credit exposure to our NGL marketingcounterparties.

 

We sell NGLsunder agreements with varying terms and conditions in order to match seasonaland other changes in demand. At September 30, 2003, the terms of our salescontracts range from one month to three years. The marketing of products purchased from third-parties typically resultsin low profit margins relative to the sales price.

 

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**ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our commodityprice risk management program has two primary objectives.  The first goal is to preserve and enhancethe value of our equity volumes of gas and NGLs with regard to the impact ofcommodity price movements on cash flow and net income in relation to thoseanticipated by our operating budget. The second goal is to manage price risk related to our marketingactivities to protect profit margins. This risk relates to fixed price purchase and sale commitments, thevalue of storage inventories and exposure to physical market price volatility.

 

We utilize acombination of fixed price forward contracts, exchange-traded futures andoptions, as well as fixed index swaps, basis swaps and options traded in theover-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 usefinancial instruments to reduce basis risk. Basis is the difference in price between the physical commodity beinghedged and the price of the futures contract used for hedging.  Basis risk is the risk that an adversechange in the futures market will not be completely offset by an equal andopposite 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 intofutures transactions on the New York Mercantile Exchange, or NYMEX, and throughOTC swaps and options with various counterparties, consisting primarily ofinvestment banks, financial institutions and other natural gas companies.  We conduct credit reviews of all of our OTCcounterparties and have agreements with many of these parties that containcollateral requirements.  We generallyuse standardized swap agreements that allow for offset of positive and negativeOTC exposures.  OTC exposure ismarked-to-market daily for the credit review process.  Our exposure to OTC credit risk is reduced by our ability torequire a margin deposit from our counterparties based upon the mark-to-marketvalue of their net exposure.  We arealso subject to margin deposit requirements under these same agreements and undermargin deposit requirements for our NYMEX transactions.  At October 31, 2003, we did not have amaterial amount of margin deposits outstanding.

 

We continuallymonitor and review the credit exposure to our marketing counterparties.  In order to minimize our credit exposures,we have utilized existing netting agreements to reduce our net credit exposure,established new netting agreements with additional customers, terminatedseveral long-term marketing obligations, negotiated accelerated payment termswith several customers, and reduced the amount of credit which we makeavailable to various customers. Although netting agreements similar to those that we utilize have beenupheld by bankruptcy courts in the past, if any of these customers with whom wehave netting agreements were to file for bankruptcy, we can provide noassurance that our agreements will not be challenged or as to the outcome ofany challenge.

 

The use offinancial instruments may expose us to the risk of financial loss in somecircumstances, including instances when (i) our equity volumes are less thanexpected, (ii) our customers fail to purchase or deliver the contractedquantities of natural gas or NGLs, or (iii) our OTC counterparties fail toperform.  To the extent that we engagein hedging activities, we may be prevented from realizing the benefits offavorable price changes in the physical market.  However, we are similarly insulated against decreases in theseprices.

 

***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 Chief Financial Officer, therebyproviding a separation of duties from the marketing department.  Additionally, the IRO reports monthly to theRisk Management Committee, or RMC.  Thiscommittee is comprised of corporate managers and officers and is responsiblefor developing the policies and guidelines that control the management andmeasurement of risk. The RMC is also responsible for setting risk limitsincluding value-at-risk and dollar stop loss limits.  Our board of directors approves the risk limit parameters andrisk management policy.

 

***HedgePositions.* **Asof October 31, 2003, we have hedged approximately 51% of our projected2003 equity natural gas volumes and approximately 78% of our estimated equityproduction of crude oil, condensate, and NGLs. We have also begun to enter into hedges for our projected 2004 equitynatural gas volumes and for our estimated equity production of crude oil,condensate, and NGLs.  All of thesecontracts are designated 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 arerecorded in Accumulated other comprehensive income, a component ofStockholders’ equity.  Any gains orlosses on these cash flow hedges are recognized

 

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in the Consolidated Statementof Operations through Product purchases when the hedged transactionsoccur.  Gains or losses from theineffective portions of changes in the fair value of cash flow hedges arerecognized currently in earnings through Non-cash change in fair value ofderivatives.  We regularly use crude oilswaps in hedging the variability in the sales price of butanes, which mayresult in hedge ineffectiveness from time to time.  During the nine months ended September 30, 2003, werecognized a loss of $46,000 from the ineffective portions of our hedges.  Overall, our hedges are expected to continueto be “highly effective” under SFAS 133 in the future.

 

To qualify ascash flow hedges, the hedge instruments must be designated as cash flow hedgesand changes in their fair value must be highly correlated with changes in theprice of the forecasted transaction being hedged so that our exposure to therisk of commodity price changes is reduced. To meet this requirement, we hedge both the price of the commodity andthe basis between that derivative’s contract delivery location and the cashmarket location used for the actual sale of the product.  This structure attains a high level ofeffectiveness, insuring that a change in the price of the forecastedtransaction will result in an equal and opposite change in the cash price ofthe hedged commodity.  We utilize crudeoil as a surrogate hedge for butanes.  Thistypically results in an effective hedge as crude oil and butane prices historicallyhave moved in tandem.

 

### ***OutstandingEquity Hedge Positions and the Associated Basis for 2003***.  The following table details our hedgepositions as of October 31, 2003. In order to determine the hedged price to the particular operatingregion, deduct the basis differential from the NYMEX price.  The prices for NGLs do not include the cost of the hedges ofapproximately $155,000.  There is noassociated cost for the natural gas hedges.

** **
| **Product** |   | **Quantity  and NYMEX or Settlement Price**                                                                                                                                    |   | **Hedge of  Basis Differential**                                                                                                                                                                                                                                                   |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Natural gas |   | 50,000 MMbtu per day with an average price of $3.94 per MMbtu.  20,000 MMbtu per day with a minimum price of $3.50 per MMbtu and an average  maximum price of $4.43 per MMbtu. |   | Mid-Continent – 20,000 MMbtu per day with an average basis price of  ($0.15) per MMbtu.  Permian – 5,000 MMbtu per day with an average basis price of ($0.13) per  MMbtu.  Rocky Mountain – 45,000 MMbtu per day with an average basis price of ($0.78)  per MMbtu. |
|        |   |                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                               |
| Crude Oil   |   | 55,000 Barrels of crude oil per month with an average price of $24.97  per barrel.                                                                                             |   | Not Applicable                                                                                                                                                                                                                                                                     |
|        |   |                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                               |
| Butanes     |   | 50,000 Barrels of crude oil per month.  Floor at $24.00 per barrel.   (Crude oil is used as a surrogate for butanes).                                                |   | Not Applicable                                                                                                                                                                                                                                                                     |
|        |   |                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                               |
| Propane     |   | 100,000 Barrels per month.  Average  minimum and maximum price of $0.37 per gallon and $0.50 per gallon,  respectively.                                                   |   | Not Applicable                                                                                                                                                                                                                                                                     |
|        |   |                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                               |
| Ethane      |   | 75,000 Barrels per month.   Average minimum and maximum price of $0.25 per gallon and $0.37 per  gallon, respectively.                                                    |   | Not Applicable                                                                                                                                                                                                                                                                     |

 

### ***OutstandingEquity Hedge Positions and the Associated Basis for 2004***.  The following table details our hedgepositions as of October 31, 2003. In order to determine the hedged price to the particular operatingregion, deduct the basis differential from the NYMEX price.  The prices for NGLs do not include the cost of the hedges ofapproximately $1.2 million.  There is no associated cost for the naturalgas hedges.

 

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| **Product**                         |   | **Quantity and Settle Price**                                                                                                      |   | **Hedge of Basis Differential**                                                                                                                                                                                                                                            |
|-------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Natural gas                         |   | 70,000 MMBtu per day  with a minimum price of $4.00 and a maximum price ranging from $6.50 to $9.45  (average of $7.81 per MMBtu.) |   | Mid-Continent – 55,000  MMBtu per day with an average basis price of ($0.266).  Permian – 5,000 MMBtu per day with an average basis price of ($0.345) per  MMbtu. Rocky Mountain – 10,000 MMBtu per day with an average basis price of  ($0.745) per MMbtu. |
|                                |   |                                                                                                                               |   |                                                                                                                                                                                                                                                                       |
| Crude, Condensate, Natural Gasoline |   | 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                                                                                                                                                                                                                                                             |
|                                |   |                                                                                                                               |   |                                                                                                                                                                                                                                                                       |
| Butanes                             |   | 50,000 Barrels per  month.  Floor at $22.00 per  barrel.  (Crude oil used as surrogate  for butanes.)                    |   | Not Applicable                                                                                                                                                                                                                                                             |
|                                |   |                                                                                                                               |   |                                                                                                                                                                                                                                                                       |
| Propane                             |   | 90,000 Barrels per  month with minimum and maximum price of $0.425 per gallon and $0.56 per  gallon, respectively.                 |   | Not Applicable                                                                                                                                                                                                                                                             |
|                                |   |                                                                                                                               |   |                                                                                                                                                                                                                                                                       |
| Ethane                              |   | 50,000 Barrels per  month.  Floor at $0.305 per gallon.                                                                       |   | Not Applicable                                                                                                                                                                                                                                                             |

 

Accountbalances related to equity and transportation hedging transactions atSeptember 30, 2003 were $2.7 million in Current Assets from price riskmanagement activities, $7.7 million in Current Liabilities from price riskmanagement activities, $875,000 in Non-current assets from price riskmanagement activities, $162,000 in Non-current liabilities from price riskmanagement activities, ($1.6) million in Deferred income taxes payable, net,and a $2.8 million after-tax unrealized loss in Accumulated other comprehensiveincome, a component of Shareholders’ Equity. Based on prices as of September 30, 2003, approximately $4.3million of losses in Accumulated other comprehensive income will bereclassified to earnings in 2003 and $1.5 million of gains in Accumulated othercomprehensive income will be reclassified to earnings in 2004.

 

***Summary ofDerivative Positions.***  A summary of the change in our derivative position fromDecember 31, 2002 to September 30, 2003 is as follows (dollars inthousands):

 
| Fair value of contracts outstanding at December 31, 2002          |   | $       | 63     |   |
|------------------------------------------------------------------------|--------|---------|--------|--------|
| Decrease in value due to change in price                               |   | (29,928 | )      |
| Increase in value due to new contracts  entered into during the period |   | 30,865  |   |
| Losses realized during the period from  existing and new contracts     |   | 6,285   |   |
| Changes in fair value attributable to  changes in valuation techniques |   | —  |   |
| Fair value of contracts outstanding at  September 30, 2003        |   | $       | 7,285  |   |

 

A summary ofour outstanding derivative positions at September 30, 2003 is as follows(dollars in thousands):

 
|                             |   | **Fair Value  of Contracts at September 30, 2003** |   |
|----------------------------------|--------|---------------------------------------------------------|--------|
| **Source of Fair Value**         |   | **Total Fair  Value**                                   |   | **Maturing  In 2003** |   | **Maturing  In  2004-2005** |   | **Maturing  In  2006-2007** |   | **Maturing  Thereafter** |   |
| Exchange published prices        |   | $                                                       | (4,189 | ) | $ | (6,196 | ) | $ | 2,007 |   | — |   | — |   |
| Other actively quoted prices (1) |   | 5,603                                                   |   | 3,000 |   | 2,611 |   | $ | (8 | ) | — |   |
| Other valuation methods (2)      |   | 5,871                                                   |   | (63 | ) | 5,934 |   | — |   | — |   |
| Total fair value                 |   | $                                                       | 7,285  |   | $ | (3,259 | ) | $ | 10,552 |   | $ | (8 | ) | — |   |
|                                  |        |                                                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Other actively quoted prices are derived frombroker quotations, trade publications, and industry indices.

(2)          Other valuation methods are the Black-Scholesoption-pricing model utilizing prices and volatility obtained from brokerquotations, trade publications, and industry indices.

 

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***Foreign CurrencyDerivative Market Risk***.  As a normal part of our business, we enter into physical gastransactions which are payable in Canadian dollars.  We enter into forward purchases and sales of Canadian dollarsfrom time to time to fix the cost of our future Canadian dollar denominatednatural gas purchase, sale, storage, and transportation obligations.  This is done to protect marketing marginsfrom adverse changes in the U.S. and Canadian dollar exchange rate between thetime the commitment for the payment obligation is made and the actual payment dateof such obligation.  As ofSeptember 30, 2003, the net notional value of such contracts wasapproximately $25.0 million in Canadian dollars, which approximates fair marketvalue.

 

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**ITEM4.**      **CONTROLSAND PROCEDURES**

 

***Evaluation of Disclosure Controls andProcedures.***

 

At the end of the reporting period, we carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and President and ExecutiveVice President and Chief Financial Officer, of the effectiveness of the designand operation of our disclosure controls and procedures pursuant to Rule 13a-15of the Securities Exchange Act of 1934 (the “Exchange Act”).  Based upon that evaluation, the Company’sChief Executive Officer and President and Executive Vice President and ChiefFinancial Officer concluded that our disclosure controls and procedures areeffective to ensure that information required to be disclosed by the Company inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

***Changes in InternalControls Over Financial Reporting.***

 

Our ChiefExecutive Officer and Chief Financial Officer have also concluded that therehas not been any change in our internal control over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting. There were no significant changes in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation.

 

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**PARTII - OTHER INFORMATION**

 

**ITEM 1.**      **LEGAL PROCEEDINGS**

 

***Western Gas Resources, Inc. and Lance Oil & Gas Company,Inc. v. Williams Production RMT Company, (Defendant), Civil Action No.CO2-10-394, District Court, County of Sheridan, Wyoming. *** As most recently reported in our Form 10-Qfor the quarter ended June 30, 2003, in October 2002, we filed acomplaint for declaratory relief and damages related to a dispute arising undera development agreement and other agreements between the parties.  On October 24, 2003, we reached anagreement with the Defendant to settle these disputes, as previously disclosedin our Form 8-K filed on October 24, 2003.  Under the terms of the settlement agreement, the Defendant and weeach operate the drilling and production on approximately half of the jointlyowned leasehold in the coal-bed methane development of the Powder River Basinof Wyoming.  Effective November 1,2003, the parties agreed to an expanded area of mutual interest and Westernassumed an expanded area of dedication in its gas gathering operations in thePowder River Basin.  The parties havealso agreed to modifications to the fee schedule.   On November 3, 2003, we filed, in conjunction with theDefendant, a joint stipulation of voluntary dismissal of this action.

 

***Price, et al. v. GasPipelines, Western Gas Resources, Inc., et al., District Court, Stevens County,Kansas, Case No. 99-C-30. ***Asmost recently reported in our Form 10-Q for the quarter ended June 30,2003, we area defendant in litigation filed in 1999, along with numerous othernatural gas companies, in which Mr. Price is claiming an under measurement ofgas and Btu volumes throughout the country.  We along with other natural gas companies filed a motion todismiss for failure to state a claim. The court denied these motions to dismiss.   The court denied plaintiff’s motion for certification as a classand, in the second quarter of 2003, the plaintiff amended and refiled forcertification as a class.  OnMay 12, 2003, Mr. Price filed a further claim *Will Price et al v. Western Gas Resources, Inc. et al., District Court,Stevens County, Kansas, Case No. 03C23*, relating to certain matterspreviously removed from the foregoing action. We believe that Mr. Price’s claims are without merit and intend tovigorously contest the allegations in this case.  At this time, we are unable to predict the outcome of thismatter.

 

***In the Matter of theAppeal of Lance Oil & Gas Company from a Decision by the Department ofRevenue, Docket No. 2003-44, Before the State Board of Equalization for theState of Wyoming.**** *As most recently reported in ourForm 10-Q for the quarter ended June 30, 2003, the Wyoming Department ofRevenue has conducted an audit of Lance Oil & Gas Company, Inc. for theperiod from January 1, 1998 through December 31, 1999.  On March 24, 2003, the Department ofRevenue notified us that it had assessed additional severance taxes andincreased taxable value for ad valorem tax purposes.  The additional severance and ad valorem taxes claimed by theDepartment of Revenue amount to $196,000 and $351,000, respectively, togetherwith statutory interest.  We believethat the Wyoming Department of Revenue claims are without merit and intend tovigorously contest their assessments. On April 23, 2003, we filed a Notice of Appeal with the WyomingState Board of Equalization.   Thehearing has been set for March 15, 2004. We also filed an appeal on October 24, 2003 in *Lance Oil & Gas Company v. Campbell CountyTreasurer, District Court, Campbell County, Wyoming, Civil Action No. 25203*,to appeal the assessment of interest claimed by the Campbell County Treasurerin relation to the additional taxes assessed by the Wyoming Department ofRevenue.

 

***In the Matter of theNotice of Violation Issued to Mountain Gas Resources, Inc., Department ofEnvironmental Quality, State of Wyoming. ***As reported in our Form 10-Q for thequarter ended June 30, 2003, we received a Notice of Violation issued bythe State of Wyoming Department of Environmental Quality for failing to obtaina permit prior to constructing certain dehydration units at facilities inSublette County, Wyoming.  This Notice ofViolation was received after we self-reported to the Department ofEnvironmental Quality in April 2003 that we had inadvertently failed tosubmit notices of intent and air permit applications for such dehydrationunits.  We anticipate that we will beable to resolve this matter in the fourth quarter of 2003 and that it will nothave a material adverse effect on our financial position, results of operationsor cash flows.

 

***National PipelineMapping System*.** As reported in our Form 10-Q for the quarter ended June 30, 2003,we received correspondence from the U.S. Department of Transportation regardingour failure to submit information for incorporation into the National PipelineMapping System within nine months of enactment of the Pipeline SafetyImprovement Act of 2002.  We have workedwith the U.S. Department of Transportation Office of Pipeline Safety to supplythe required information.  We are unableto predict whether we will be subject to any fines or penalties under thePipeline Safety Improvement Act, and what the amount of such fines would be ifimposed.

 

***Price Reporting to Gas Trade Publications. *** In the third quarter of 2003, we learned thatcertain employees in our marketing department furnished inaccurate informationregarding natural gas transactions to energy publications, which compile andreport energy index prices.  Wediscovered the inaccuracies during a review of certain marketing activities,which is being

 

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conducted in response to a subpoena issued by theCommodity Futures Trading Commission, or CFTC. Certain of our employees have identified inaccuracies associated withreporting of natural gas transactions primarily related to points inTexas.  Our review of this and otherregions is continuing as we respond to the CFTC subpoena.  We are unable to predict whether we will besubject to any fines or penalties by CFTC, and what the amount of such fineswould be if imposed.

 

***Challenges to thePowder River Basin EIS*.**  As reported in our Form 10-Q for the quarter ended June 30,2003, two lawsuits were filed challenging the Federal Bureau of LandManagement’s Record of Decision on the Environmental Impact Statement issued onApril 30, 2003 as it relates to the State of Wyoming.  The respective suits are *Western Organization of Resource Councils vs.Kathleen Clarke et al., Case No. CV-03-70-BLG-RWA, U.S. District Court for theDistrict of Montana* and *AmericanLands Alliance v. U.S. Bureau of Land Management et al., Case No.CV-03-71-BLG-RWA, U.S. District Court for the District of Montana*.

 

Both the Bureau of Land Management and the State of Wyoming have filedseparate motions to dismiss for lack of venue or, in the alternative, totransfer the cases to the U.S. District Court, for the District ofWyoming.  We, along with various industrycompanies, have filed motions to intervene and responses to the complaints,including motions to dismiss.  At thistime we are unable to predict the outcome of this matter or its impact on ourfuture development plans in the Powder River Basin.

 

***Other Litigation.**** * We are involved invarious other litigation and administrative proceedings arising in the normalcourse of business.  In the opinion ofour management, any liabilities that may result from these claims will not,individually or in the aggregate, have a material adverse effect on ourfinancial position or results of operations or cash flows.

 

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**ITEM4.      SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM6.      EXHIBITS AND REPORTS ON FORM8-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 of 7.25% Cumulative Senior Perpetual  Convertible Preferred Stock of the Company (previously filed as Exhibit 3.5  to Western Gas Resources, Inc.’s Registration Statement on Form S-1,  Registration No. 33-43077 and incorporated herein by reference). |
|   |   |                                                                                                            |   |                                                                                                                                                                                                                                                                                      |
|   |   | 3.4                                                                                                             |   | Amended and Restated Bylaws of Western Gas Resources, Inc. adopted by  the Board of Directors on April 7, 2003 (previously filed as Exhibit 3.5  to our Quarterly Report on Form 10-Q filed on May 13, 2003 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 ended September 30, 2003, we furnished the following reports on  Form 8-K: |

 

•                  Current Reporton Form 8-K filed on August 12, 2003, announcing financial results for thequarter and six months ending June 30, 2003.

 

•                  Current Reporton Form 8-K filed on September 30, 2003, reporting an internal reviewof historical price reporting to gas trade publications.

 

•                  Current Reporton Form 8-K filed on October 24, 2003, announcing the settlement oflitigation with Williams Production RMT Company.

 

43

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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 12, 2003 | By:                         | /s/ PETER A. DEA                                   |   |
|                         |                        | Peter A. Dea                                       |
|                         |                        | Chief Executive Officer and President              |
|                         |                        |                                               |
|                         |                        |                                               |
| Date: November 12, 2003 | By:                         | /s/ WILLIAM J. KRYSIAK                             |   |
|                         |                        | William J. Krysiak                                 |
|                         |                        | Executive Vice President - Chief Financial Officer |
|                         |                        | (Principal Financial and Accounting Officer)       |

 

44

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Exhibit Index

 
| 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 of 7.25% Cumulative Senior Perpetual Convertible  Preferred Stock of the Company (previously filed as Exhibit 3.5 to Western  Gas Resources, Inc.’s Registration Statement on Form S-1, Registration No.  33-43077 and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                      |
| 3.4    |   | Amended and Restated Bylaws of Western Gas Resources, Inc. adopted by  the Board of Directors on April 7, 2003 (previously filed as Exhibit 3.5  to our Quarterly Report on Form 10-Q filed on May 13, 2003 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.                                                                                                                                                                                               |

 

45

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