**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

### **FORM 10-Q**

**(Mark One)**

 

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

 

**FOR THEQUARTERLY PERIOD ENDED JUNE 30, 2004**

 

**OR**

 

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

 

**FOR THETRANSITION 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 areacode

 

**No Changes**

(Former name, former address and formerfiscal year, if changed since last report).

 

Indicate by check mark whether the registrant(1) has filed all reports 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 of the Exchange Act). Yes  ý  No  o

 

On August 1, 2004, there were 73,760,311shares of the registrant’s Common Stock outstanding.

 

 

----

 

**Western Gas Resources, Inc.**

**Form 10-Q**

**Table of Contents**

 
| PART I - Financial Information |     |
|--------------------------------|----------|
|                           |     |   |   |
|                           | Item 1.  | Financial Statements |   |
|                           |     |   |   |
|                           |     | Consolidated Balance Sheet - June 30, 2004 and December 31, 2003 |   |
|                           |     |   |   |
|                           |     | Consolidated Statement of Cash Flows -  Three Months Ended June 30, 2004 and 2003 |   |
|                           |     |   |   |
|                           |     | Consolidated Statement of Operations -  Three Months Ended June 30, 2004 and 2003 |   |
|                           |     |   |   |
|                           |     | Consolidated Statement of Changes in  Stockholders’ Equity - Three Months Ended June 30, 2004 |   |
|                           |     |   |   |
|                           |     | Notes to Consolidated Financial Statements |   |
|                           |     |   |   |
|                           | Item 2.  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                           |     |   |   |
|                           | Item 3.  | Quantitative and Qualitative Disclosures  about Market Risk |   |
|                           |     |   |   |
|                           | Item 4.  | Controls and Procedures |   |
|                           |     |   |   |
| PART II - Other Information    |     |
|                           |     |   |   |
|                           | Item 1.  | Legal Proceedings |   |
|                           |     |   |   |
|                           | Item  2. | Changes  in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |   |
|                           |     |   |   |
|                           | 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.       FINANCIAL STATEMENTS**

 

WESTERNGAS RESOURCES, INC.

CONSOLIDATED BALANCE SHEET

(Dollars in thousands, except share data)

 
| ** **                                                                                                            | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                            | ** ** | **(unaudited)**    | ** ** | ** **             | ** ** |
| ASSETS                                                                                                                |       |               |       |                   |       |
|                                                                                                                  |       |               |       |                   |       |
| Current assets:                                                                                                       |       |               |       |                   |       |
| Cash and cash equivalents                                                                                             |       | $                  | 2,886      |                   | $          | 26,116 |   |
| Trade accounts receivable, net                                                                                        |       | 285,556            |       | 262,509                |       |
| Inventory                                                                                                             |       | 74,743             |       | 70,304                 |       |
| Assets from price risk management  activities                                                                         |       | 12,884             |       | 17,149                 |       |
| Other                                                                                                                 |       | 12,978             |       | 11,225                 |       |
| Total current assets                                                                                                  |       | 389,047            |       | 387,303                |       |
| Property and equipment:                                                                                               |       |               |       |                   |       |
| Gas gathering, processing and  transportation                                                                         |       | 1,063,896          |       | 1,028,176              |       |
| Oil and gas properties and equipment  (successful efforts method)                                                     |       | 362,443            |       | 329,555                |       |
| Construction in progress                                                                                              |       | 143,240            |       | 134,751                |       |
|                                                                                                                  |       | 1,569,579          |       | 1,492,482              |       |
| Less:   Accumulated depreciation, depletion and amortization                                                     |       | (529,439           | )          | (495,721               | )          |
| Total property and equipment, net                                                                                     |       | 1,040,140          |       | 996,761                |       |
| Other assets:                                                                                                         |       |               |       |                   |       |
| Gas purchase contracts (net of accumulated  amortization of $39,794 and $38,937, respectively)                        |       | 28,361             |       | 29,219                 |       |
| Assets from price risk management  activities                                                                         |       | 1,309              |       | 1,466                  |       |
| Equity investments                                                                                                    |       | 36,783             |       | 39,289                 |       |
| Other                                                                                                                 |       | 4,197              |       | 6,486                  |       |
| Total other assets                                                                                                    |       | 70,650             |       | 76,460                 |       |
| TOTAL ASSETS                                                                                                          |       | $                  | 1,499,837  |                   | $          | 1,460,524 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                             |       |               |       |                   |       |
| Current liabilities:                                                                                                  |       |               |       |                   |       |
| Accounts payable                                                                                                      |       | $                  | 333,432    |                   | $          | 303,186 |   |
| Accrued expenses                                                                                                      |       | 38,201             |       | 42,136                 |       |
| Liabilities from price risk management  activities                                                                    |       | 13,620             |       | 10,603                 |       |
| Dividends payable                                                                                                     |       | 3,684              |       | 3,056                  |       |
| Total current liabilities                                                                                             |       | 388,937            |       | 358,981                |       |
| Long-term debt                                                                                                        |       | 285,000            |       | 339,000                |       |
| Liabilities from price risk management  activities                                                                    |       | 1,281              |       | 1,304                  |       |
| Other long-term liabilities                                                                                           |       | 23,749             |       | 22,057                 |       |
| Deferred income taxes payable, net                                                                                    |       | 202,782            |       | 176,673                |       |
| Total liabilities                                                                                                     |       | 901,749            |       | 898,015                |       |
| Stockholders’ equity:                                                                                            |       |               |       |                   |       |
| Preferred Stock; 10,000,000 shares  authorized:                                                                       |       |               |       |                   |       |
| $2.625 cumulative convertible preferred  stock, par value $0.10; 0 and 2,060,000 issued and outstanding, respectively |       | —             |       | 206                    |       |
| Common stock, par value $0.10; 100,000,000  shares authorized; 73,672,428 and 68,271,802 shares issued, respectively  |       | 7,390              |       | 6,876                  |       |
| Treasury stock, at cost; 50,032 common  shares in treasury                                                            |       | (788               | )          | (788                   | )          |
| Additional paid-in capital                                                                                            |       | 383,279            |       | 381,581                |       |
| Retained earnings                                                                                                     |       | 209,933            |       | 173,076                |       |
| Accumulated other comprehensive income                                                                                |       | (1,726             | )          | 1,558                  |       |
| Total stockholders’ equity                                                                                       |       | 598,088            |       | 562,509                |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                       |       | $                  | 1,499,837  |                   | $          | 1,460,524 |   |

 

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

 

3

----

 

WESTERN GAS RESOURCES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 
| ** **                                                                              | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                              | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| Reconciliation of net income to net cash  provided by operating activities:             |       |                           |       |   |   |
| Net income                                                                              |       | $                              | 43,063     |   | $ | 44,275 |   |
| Add income items that do not affect cash:                                               |       |                           |       |   |   |
| Depreciation, depletion and amortization                                                |       | 44,974                         |       | 35,828 |   |
| Loss on the sale of property and equipment                                              |       | 1,639                          |       | 86 |   |
| Cumulative effect of a change in accounting  principle                                  |       | (4,714                         | )          | 6,724 |   |
| Deferred income taxes                                                                   |       | 24,089                         |       | 26,989 |   |
| Non-cash change in fair value of  derivatives                                           |       | 4,696                          |       | 480 |   |
| Other non-cash items, net                                                               |       | 2,291                          |       | 1,015 |   |
|                                                                                    |       |                           |       |   |   |
| Adjustments to working capital to arrive at  net cash provided by operating activities: |       |                           |       |   |   |
| Increase in trade accounts receivable                                                   |       | (22,016                        | )          | (29,987 | ) |
| Increase product inventory                                                              |       | (3,008                         | )          | (16,410 | ) |
| (Increase) decrease in other current assets                                             |       | (3,856                         | )          | 18,958 |   |
| (Increase) decrease in other assets and  liabilities, net                               |       | 322                            |       | (298 | ) |
| Increase in accounts payable                                                            |       | 30,246                         |       | 62,811 |   |
| Decrease in accrued expenses                                                            |       | (2,323                         | )          | (8,821 | ) |
|                                                                                    |       |                           |       |   |   |
| Net cash provided by operating activities                                               |       | 115,403                        |       | 141,650 |   |
|                                                                                    |       |                           |       |   |   |
| Cash flows from investing activities:                                                   |       |                           |       |   |   |
| Purchases of property and equipment                                                     |       | (80,651                        | )          | (79,551 | ) |
| Proceeds from the dispositions of property  and equipment                               |       | 697                            |       | 3,564 |   |
| Distributions from equity investees                                                     |       | 1,196                          |       | — |   |
|                                                                                    |       |                           |       |   |   |
| Net cash used in investing activities                                                   |       | (78,758                        | )          | (75,987 | ) |
|                                                                                    |       |                           |       |   |   |
| Cash flows from financing activities:                                                   |       |                           |       |   |   |
| Net proceeds from exercise of common stock  options                                     |       | 3,492                          |       | 2,618 |   |
| Payments for the redemption of preferred  stock                                         |       | (1,930                         | )          | — |   |
| Debt issue costs paid                                                                   |       | (1,827                         | )          | (1,829 | ) |
| Borrowings of long-term debt                                                            |       | 100,000                        |       | 25,000 |   |
| Payments on long-term debt                                                              |       | (155,000                       | )          | — |   |
| Payments on revolving credit facility                                                   |       | (809,630                       | )          | (625,500 | ) |
| Borrowings under revolving credit facility                                              |       | 810,630                        |       | 573,900 |   |
| Dividends paid                                                                          |       | (5,610                         | )          | (6,933 | ) |
|                                                                                    |       |                           |       |   |   |
| Net cash used in financing activities                                                   |       | (59,875                        | )          | (32,744 | ) |
| Net increase (decrease) in cash and cash  equivalents                                   |       | (23,230                        | )     | 32,919 |   |
| Cash and cash equivalents at beginning of  period                                       |       | 26,116                         |       | 7,312 |   |
| Cash and cash equivalents at end of period                                              |       | $                              | 2,886      |   | $ | 40,231 |   |

 

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

 

4

----

 

WESTERNGAS RESOURCES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share and pershare amounts)

 
| ** **                                                                                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                                                                   |       |                             |       |                           |       |   |   |   |   |
| Sale of gas                                                                                                                 |       | $                                | 595,793    |                           | $          | 558,921 |   | $ | 1,260,991 |   | $ | 1,352,191 |   |
| Sale of natural gas liquids                                                                                                 |       | 102,021                          |       | 80,783                         |       | 194,936 |   | 172,832 |   |
| Gathering, processing and transportation  revenue                                                                           |       | 24,410                           |       | 21,458                         |       | 41,239 |   | 41,235 |   |
| Price risk management activities                                                                                            |       | 3,548                            |       | (1,421                         | )          | (1,820 | ) | (19,115 | ) |
| Other                                                                                                                       |       | 531                              |       | 750                            |       | 2,173 |   | 1,454 |   |
| Total revenues                                                                                                              |       | 726,303                          |       | 660,491                        |       | 1,497,519 |   | 1,548,597 |   |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Costs and expenses:                                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Product purchases                                                                                                           |       | 602,166                          |       | 559,836                        |       | 1,259,508 |   | 1,331,438 |   |
| Plant and transportation operating expense                                                                                  |       | 22,255                           |       | 22,612                         |       | 44,189 |   | 44,534 |   |
| Oil and gas exploration and production  expense                                                                             |       | 19,812                           |       | 13,290                         |       | 36,922 |   | 25,801 |   |
| Depreciation, depletion and amortization                                                                                    |       | 22,348                           |       | 17,685                         |       | 44,974 |   | 35,828 |   |
| (Gain) loss on sale of assets                                                                                               |       | 1,639                            |       | (195                           | )          | 1,639 |   | 86 |   |
| Selling and administrative expense                                                                                          |       | 17,255                           |       | 9,923                          |       | 27,201 |   | 20,515 |   |
| Earnings from equity investments                                                                                            |       | (1,776                           | )          | (1,867                         | )          | (3,702 | ) | (3,429 | ) |
| Loss from early extinguishment of debt                                                                                      |       | 10,662                           |       | —                         |       | 10,662 |   | — |   |
| Interest expense                                                                                                            |       | 5,351                            |       | 6,429                          |       | 11,153 |   | 13,243 |   |
| Total costs and expenses                                                                                                    |       | 699,712                          |       | 627,713                        |       | 1,432,546 |   | 1,468,016 |   |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Income before income taxes                                                                                                  |       | 26,591                           |       | 32,778                         |       | 64,973 |   | 80,581 |   |
| Provision for income taxes:                                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Current                                                                                                                     |       | (1,008                           | )          | 2,072                          |       | 2,535 |   | 2,593 |   |
| Deferred                                                                                                                    |       | 13,624                           |       | 9,806                          |       | 24,089 |   | 26,989 |   |
| Total provision for income taxes                                                                                            |       | 12,616                           |       | 11,878                         |       | 26,624 |   | 29,582 |   |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Income before cumulative effect of change  in accounting principle                                                          |       | 13,975                           |       | 20,900                         |       | 38,349 |   | 50,999 |   |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Cumulative effect of changes in accounting  principles net of tax of $2,710 and net of tax benefit of $3,967,  respectively |       | —                           |       | —                         |       | 4,714 |   | (6,724 | ) |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Net income                                                                                                                  |       | 13,975                           |       | 20,900                         |       | 43,063 |   | 44,275 |   |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Preferred stock requirements                                                                                                |       | (19                              | )          | (1,811                         | )          | (835 | ) | (3,623 | ) |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Income attributable to common stock                                                                                         |       | $                                | 13,956     |                           | $          | 19,089 |   | $ | 42,228 |   | $ | 40,652 |   |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Net income per share of common stock before  cumulative effect of change in accounting principle                            |       | $                                | .19        |                           | $          | .29 |   | $ | .53 |   | $ | .71 |   |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Cumulative effect of change in accounting  principle                                                                        |       | $                                | —     |                           | $          | — |   | $ | .07 |   | $ | (.10 | ) |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Earnings per share of common stock                                                                                          |       | $                                | .19        |                           | $          | .29 |   | $ | .60 |   | $ | .61 |   |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Weighted average shares of common stock  outstanding(1)                                                                     |       | 73,158,240                       |       | 66,295,886                     |       | 70,514,420 |   | 66,235,624 |   |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Income attributable to common stock –  assuming dilution                                                               |       | $                                | 13,975     |                           | $          | 20,900 |   | $ | 42,228 |   | $ | 44,275 |   |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Earnings per  share of common stock – assuming dilution                                                                |       | $                                | .19        |                           | $          | .28 |   | $ | .58 |   | $ | .59 |   |
|                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Weighted average shares of common stock  outstanding - assuming dilution                                                    |       | 75,329,143                       |       | 74,526,718                     |       | 72,820,040 |   | 74,416,882 |   |

 

----

(1)   Common stock outstanding reflects the effectof a stock split.

 

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

 

5

----

 

WESTERN GAS RESOURCES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except share amounts)

 
| ** **                                                           | ** ** | **$2.625  Cumulative  Convertible  Preferred  Stock** | ** ** | **Shares  of Common  Stock(1)** | ** ** | **Shares  of Common  Stock  in Treasury(1)** | ** ** | **$2.625  Cumulative  Convertible  Preferred  Stock** | ** ** | **Common  Stock(1)** | ** ** | **Treasury  Stock** | ** ** | **Additional  Paid-In  Capital(1)** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income  Net of Tax** | ** ** | **Total  Stock-  holders’  Equity** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------|------------|----------------------|------------|---------------------|------------|-------------------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------|------------|
|                                                                 |       |                                                  |       |                            |       |                                         |       |                                                  |       |                 |       |                |       |                                |       |                   |       |                                                      |       |                                     |       |
| Balance at December 31, 2003                                         |       | 2,060,000                                             |       | 68,271,802                      |       | 50,032                                       |       | $                                                     | 206        |                 | $          | 3,438               |       | $                                   | (788       | )                      | $          | 385,019                                                   |       | $                                        | 173,076    |   | $ | 1,558 |   | $ | 562,509 |   |
| Comprehensive income:                                                |       |                                                  |       |                            |       |                                         |       |                                                  |       |                 |       |                |       |                                |       |                   |       |                                                      |       |                                     |       |
| Net income, six months ended June 30, 2004                           |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | 43,063                 |       | —                                                    |       | 43,063                                   |       |
| Translation adjustments                                              |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | —                 |       | (1,104                                                    | )          | (1,104                                   | )          |
| Other comprehensive income                                           |       |                                                  |       |                            |       |                                         |       |                                                  |       |                 |       |                |       |                                |       |                   |       |                                                      |       |                                     |       |
| From equity investees                                                |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | —                 |       | (976                                                      | )          | (976                                     | )          |
| Reclassification adjustment for settled contracts                    |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | —                 |       | 1,483                                                     |       | 1,483                                    |       |
| Changes in fair value of outstanding hedge  positions                |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | —                 |       | (2,500                                                    | )          | (2,500                                   | )          |
| Reduction to estimated ineffectiveness                               |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | —                 |       | (16                                                       | )          | (16                                      | )          |
| Fair value of new hedge positions                                    |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | —                 |       | (171                                                      | )          | (171                                     | )          |
| Change in accumulated derivative comprehensive  income               |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | —                 |       | (1,204                                                    | )          | (1,204                                   | )          |
| Total comprehensive income, net of tax                               |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | —                 |       | —                                                    |       | 39,779                                   |       |
| Stock options exercised                                              |       | —                                                |       | 275,398                         |       | —                                       |       | —                                                |       | 14                   |       | —              |       | 3,478                               |       | —                 |       | —                                                    |       | 3,492                                    |       |
| Effect of re-priced options                                          |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | 476                                 |       | —                 |       | —                                                    |       | 476                                      |       |
| Officer loans forgiven                                               |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | —                 |       | —                                                    |       | —                                   |       |
| Tax benefit related to stock options exercised                       |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | —                 |       | —                                                    |       | —                                   |       |
| Dividends declared on common stock                                   |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | (5,449                 | )          | —                                                    |       | (5,449                                   | )          |
| Dividends declared on $2.625 cumulative  convertible preferred stock |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | —               |       | —              |       | —                              |       | (789                   | )          | —                                                    |       | (789                                     | )          |
| Conversion of $2.625 cumulative convertible  preferred stock         |       | (2,024,404                                            | )          | 5,125,228                       |       | —                                       |       | (204                                                  | )          | 255                  |       | —              |       | (93                                 | )          | —                 |       | —                                                    |       | (42                                      | )          |
| Two-for-one common stock split                                       |       | —                                                |       | —                          |       | —                                       |       | —                                                |       | 3,683                |       | —              |       | (3,683                              | )          | —                 |       | —                                                    |       | —                                   |       |
| Redemption of $2.625 cumulative convertible  preferred stock         |       | (35,596                                               | )          | —                          |       | —                                       |       | (2                                                    | )          | —               |       | —              |       | (1,918                              | )          | 32                     |       | —                                                    |       | (1,888                                   | )          |
|                                                                 |       |                                                  |       |                            |       |                                         |       |                                                  |       |                 |       |                |       |                                |       |                   |       |                                                      |       |                                     |       |
| Balance at June 30, 2004                                             |       | —                                                |       | 73,672,428                      |       | 50,032                                       |       | $                                                     | —     |                 | $          | 7,390               |       | $                                   | (788       | )                      | $          | 383,279                                                   |       | $                                        | 209,933    |   | $ | (1,726 | ) | $ | 598,088 |   |

 

----

(1)   Reflects the effect of a stock split.

 

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

 

6

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WESTERNGAS RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

***GENERAL***

 

We have prepared the accompanying unauditedinterim consolidated financial statements under the rules and regulations ofthe Securities and Exchange Commission, or SEC. As provided by such rules and regulations, we have condensed or omittedcertain information and notes normally included in annual financial statementsprepared in conformity with accounting principles generally accepted in theUnited States of America.

 

The interim consolidated financial statementspresented herein should be read in conjunction with the Consolidated FinancialStatements and Notes thereto included in our Annual Report on Form 10-K for theyear ended December 31, 2003.  Theinterim consolidated financial statements as of June 30, 2004 and for the threeand six-month periods ended June 30, 2004 and 2003 included herein areunaudited but reflect, in the opinion of management, all adjustments (whichinclude only normal recurring adjustments) necessary to fairly present theresults for such periods.  The results ofoperations for the three and six-months ended June 30, 2004 are not necessarilyindicative of the results of operations expected for the year ended December31, 2004.

 

Prior period amounts in the interimconsolidated financial statements and notes have been reclassified asappropriate to conform to the presentation used in 2004, including itemsassociated with price risk management activities and the common stock split.

 

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

 

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

 

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

 

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

 

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

 
| ** **                    | ** ** | **Quarter Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **2004**                   | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Common Stock                  |       | $                          | 3,684      |                          | $          | 1,657 |   | $ | 5,449 |   | $ | 3,315 |   |
| Preferred Stock               |       | 19                         |       | 1,811                         |       | 835 |   | 3,623 |   |
| Total Dividends Declared      |       | $                          | 3,703      |                          | $          | 3,468 |   | $ | 6,284 |   | $ | 6,938 |   |
|                          |       |                       |       |                          |       |   |   |   |   |
| Dividends Declared Per Share: |       |                       |       |                          |       |   |   |   |   |
| Common Stock                  |       | $                          | 0.05       |                          | $          | 0.03 |   | $ | 0.08 |   | $ | 0.05 |   |
| Preferred Stock               |       | $                          | 0.66       |                          | $          | 0.66 |   | $ | 1.31 |   | $ | 1.31 |   |

 

7

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

 
| ** **                                                               | ** ** | **Quarter Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                                               | ** ** | **2004**                   | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted average shares of common stock  outstanding                     |       | 73,158,240                 |       | 66,295,886                    |       | 70,942,578 |   | 66,235,624 |   |
| Potential common shares from:                                            |       |                       |       |                          |       |   |   |   |   |
| Common stock options                                                     |       | 1,921,653                  |       | 1,286,924                     |       | 1,877,462 |   | 1,237,668 |   |
| $2.625 Cumulative Convertible Preferred  Stock                           |       | 249,250                    |       | 6,943,908                     |       | — |   | 6,943,590 |   |
| Weighted average shares of common stock  outstanding - assuming dilution |       | 75,329,143                 |       | 74,526,718                    |       | 72,820,040 |   | 74,416,882 |   |

 

The numerators and the denominators for these periods wereadjusted to reflect these potential common shares and any related preferreddividends in calculating fully diluted earnings per share.  Our $2.625 cumulative convertiblepreferred stock was antidilutive to earnings per share in the six monthsended June 30, 2004 and as such are not considered potential common shares inthat period.

 

***ACCUMULATED OTHERCOMPREHENSIVE INCOME***

 

Included in Accumulated other comprehensive income at June30, 2004 were unrealized losses of $3.5 million from the fair value ofderivatives designated as cash flow hedges and unrealized gains of $1.7 millionof cumulative foreign currency translation adjustments.  In the first quarter of 2004, we discontinuedcash flow hedge accounting treatment on our hedges of equity butane productionwhich utilized crude oil puts as a surrogate. The value of these hedging instruments will remain in Accumulated othercomprehensive income and will be reclassified to our results of operations asthe underlying transactions occur.  Aloss of $213,000 was included in Accumulated other comprehensive income at June30, 2004 for these items.

 

Included in Accumulated other comprehensive income at June30, 2003 were unrealized losses of $11.8 million from the fair value ofderivatives designated as cash flow hedges and unrealized gains of $3.3 millionof cumulative foreign currency translation adjustments.

##### *** ***

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

 

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

 

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

 

##### ***Depreciation, Depletion and Amortization forOil and Gas Properties***

 

Wefollow the successful efforts method of accounting for oil and gas explorationand production activities.  Producingproperties and related equipment are depreciated and depleted by theunits-of-production method based on estimated proved reserves.  Effective January 1, 2004, we redefined theasset groupings for the calculation of depreciation and depletion from awell-by-well basis to a field wide basis for each of the Jonah, Pinedale andSand Wash fields and to a grouping of all wells drilled into related coal seamsfor the Powder River Basin.

 

8

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Thechange in the asset groupings for depreciation and depletion purposes istreated as a change in accounting principle. Accordingly, the Accumulated depreciation, depletion and amortizationfor these assets has been recalculated under the new asset groupings.  The cumulative effect of the change indepreciation and depletion method of $4.7 million, net of tax, or $0.07 pershare of common stock and $0.06 per share of common stock - assuming dilution,is presented in the Consolidated Statement of Operations under the captionCumulative effect of changes in accounting principles, net of tax.  This change resulted in an increase inDepreciation, depletion and amortization expense of $653,000, or $0.01 pershare of common stock dilution, in the second quarter of 2004 and $1.6 million,or $0.02 per share of common stock and per share of common stock - assuming, inthe six months ended June 30, 2004.

 

Ifwe had adopted the change in asset groupings for depreciation and depletionpurposes on January 1, 2003, we estimate that Depreciation, depletion andamortization expense would have been $162,000 higher in the second quarter of2003 than reported on the Consolidated Statement of Operations and $399,000lower in the six months ended June 30, 2003. The estimated pro forma cumulative effect of a January 1, 2003 change inour depreciation and depletion methodology would have been an increase of $5.5million in net income, or $0.08 in earnings per share of common stock and $0.07per share of common stock - assuming dilution.

 

Earningsper share of common stock in the second quarter ended June 30, 2003 was $0.29per share of common stock and $0.28 per share of common stock-assumingdilution.  If we had adopted the changein asset groupings for depreciation and depletion purposes on January 1, 2003,earnings per share of common stock for the second quarter ended June 30, 2003would not have changed.  Earnings pershare of common stock in the six months ended June 30, 2003 was $0.61 per shareof common stock and $0.59 per share of common stock-assuming dilution.  If we had adopted the change in assetgroupings for depreciation and depletion purposes on January 1, 2003, earningsper share of common stock in the six months ended June 30, 2003 would have been$0.70 per share of common stock and $0.67 per share of common stock-assumingdilution.

 

***Accounting for Asset Retirement Obligations***

##### *** ***

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

 

The following is a reconciliation of theasset retirement obligation for the six months ended June 30, 2004 (dollars inthousands):

 

| Asset retirement obligation as of December  31, 2003 |   | $   | 20,644 |   |
|------------------------------------------------------|--------|-----|--------|--------|
| Liability accrued upon capital expenditures          |   | 688 |   |
| Liability settled                                    |   | (2  | )      |
| Accretion of discount expense                        |   | 610 |   |
| Asset retirement obligation as of June 30,  2004     |   | $   | 21,940 |   |

 

***SUBSEQUENT EVENTS***

 

***Price Reporting to Gas Trade Publications. *** As previously reported, in the third quarterof 2003, we learned that several employees in our marketing departmentfurnished inaccurate information regarding natural gas transactions to energypublications, which compile and report energy index prices.  We discovered the inaccuracies during a reviewof our marketing activities, which was being conducted in response to asubpoena issued by the Commodity Futures Trading Commission, or CFTC.  These employees have identified inaccuraciesassociated with reporting of natural gas transactions primarily related topoints in Texas.  We have discontinuedthe practice of reporting pricing information to industry publications.  In conjunction with our investigation intothis matter, we have taken appropriate disciplinary actions including therelease of one manager in our marketing department.  In July 2004, we reached a settlement of thismatter with the CFTC.  In conjunctionwith this settlement, we paid a civil penalty of $7.0 million, and as a resultour earnings per common share in the second quarter and six months ended June30, 2004 were reduced by $0.09 and $0.10, respectively.

 

The Total provision for income taxes, as a percentage of Income beforeincome taxes, was approximately 47.4% during the quarter ended June 30, 2004 ascompared to 36.2% in the same period of 2003. This increase is due to the civil penalty paid to the CFTC, which wasnon-deductible for tax purposes.

 

***Post Retirement Benefits. ***In July 2004, the board of directors authorizedthe development of an amendment to the board’s existing health care plan toprovide for health care benefits for qualifying members, and their spouses,after their retirement from our board of directors.  The terms of the plan have not yet beenfinalized and, accordingly, no accrual for the future cost of this benefit hasbeen made in the financial statements for the quarter and six months ended June30, 2004.

 

9

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***Acquisition of SanJuan Basin Properties.****  *In July 2004, wesigned a purchase and sale agreement to acquire oil and gas assets in the SanJuan Basin of New Mexico for approximately $82.2 million.  Closing is expected to occur on October 1,2004 and is subject to due diligence.  Weexpect to fund this acquisition with amounts available under our revolving creditfacility.  In conjunction with signingthe agreement, we paid a deposit of $4.1 million to be applied against thepurchase price at closing.

 

***DERIVATIVE INSTRUMENTS AND HEDGINGACTIVITIES***

 

The net loss recognized in earnings through Sale of gas and Sale ofnatural gas liquids during the first six months of 2004 from hedging activitieswas $1.6 million, and we recognized a loss from hedge ineffectiveness of$26,000. In the first quarter of 2004, we determined in our quarterlyeffectiveness testing that our hedges of equity butane production whichutilized crude oil puts as a surrogate were no longer effective hedges.  Therefore, in the first quarter of 2004, wediscontinued cash flow hedge accounting treatment on these instruments.  The value of these hedging instruments willremain in Accumulated other comprehensive income and will be reclassified toour results of operations as the underlying transactions occur.  A loss of $213,000 was included inAccumulated other comprehensive income at June 30, 2004 for these items.  Our remaining hedges for our other productsare expected to continue to be “highly effective” under SFAS No. 133 in thefuture.

 

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 June 30, 2004, approximately $3.3 million and $200,000 of lossesin Accumulated other comprehensive income will be reclassified to earnings in2004 and 2005, respectively.

 

***SUPPLEMENTARYCASH FLOW INFORMATION***

 

Interest paid was $13.3 million and $13.7 million for the six monthsended June 30, 2004 and 2003, respectively.A total of $7.7 million and $6.0 million was paid in income taxes in the sixmonths ended June 30, 2004 and 2003, respectively.

 

***STOCK COMPENSATION***

 

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

 

Weare required to record compensation expense (if not previously accrued) equalto the number of unexercised re-priced options multiplied by the amount bywhich our stock price at the end of any quarter exceeds $10.50 per share.  We had options covering 28,438 and 81,500common shares outstanding at June 30, 2004 and 2003, respectively, which weretreated as repriced options.  Based onour stock price at June 30, 2004 of $32.48 per share and our stock price atJune 30, 2003 of $19.80 per share, expense of $288,000 and $340,000,respectively, was recorded in the six months ended June 30, 2004 and 2003.

 

SFASNo. 123 requires pro forma disclosures for each quarter that a statement ofoperations is presented.  The following isa summary of the options to purchase our common stock granted during thequarters and six months ended June 30, 2004 and 2003, respectively.
| ** **                | ** ** | **Quarter Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                | ** ** | **2004**                   | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| 2002 Plan                 |       | 40,000                     |       | 30,000                        |       | 75,000 |   | 90,000 |   |
| 2002 Directors’ Plan |       | 32,000                     |       | 36,000                        |       | 32,000 |   | 36,000 |   |
| Total options granted     |       | 72,000                     |       | 66,000                        |       | 107,000 |   | 126,000 |   |

 

Thefollowing is a summary of the weighted average fair value per share of theoptions granted during the quarters andsix months ended June 30, 2004 and 2003, respectively.

 

10

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| ** **                | ** ** | **Quarter Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                | ** ** | **2004**                   | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| 2002 Plan                 |       | $                          | 14.89      |                          | $          | 11.00 |   | $ | 13.20 |   | $ | 9.76 |   |
| 2002 Directors’ Plan |       | $                          | 12.13      |                          | $          | 10.70 |   | $ | 12.13 |   | $ | 10.70 |   |

 

Thesevalues for the options granted during the quarter andsix months ended June 30, 2004 were estimated using the Black-Scholesoption-pricing model with the following assumptions:

 
| ** **                     | ** ** | **Quarter Ended June 30, 2004** | ** ** | **Six Months Ended June 30, 2004** | ** ** |
|--------------------------------|------------|---------------------------------|------------|------------------------------------|------------|
| ** **                     | ** ** | **2002 Plan**                   | ** ** | **2002 Directors’  Plan**     | ** ** | **2002 Plan** | ** ** | **2002 Directors’  Plan** | ** ** |
| Risk-free interest rate        |       | 4.42                            | %          | 4.46                               | %          | 4.02 | % | 4.46 | % |
| Expected life (in years)       |       | 7                               |       | 7                                  |       | 7 |   | 7 |   |
| Expected volatility            |       | 40                              | %          | 40                                 | %          | 42 | % | 40 | % |
| Expected dividends (quarterly) |       | $                               | 0.05       |                               | $          | 0.05 |   | $ | 0.05 |   | $ | 0.05 |   |
|                                |            |                                 |            |                                    |            |  |  |  |  |  |  |  |  |

 

UnderSFAS No. 123, the fair market value of the options at the grant date isamortized over the appropriate vesting period for purposes of calculatingcompensation expense.  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 June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2004**                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                     | ** ** | **As Reported**            | ** ** | **Pro Forma** | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
| Net income                                                                                                                                     |       | $                          | 13,975     |   | $ | 12,808 |   | $ | 20,900 |   | $ | 20,144 |   |
| Net income attributable to common stock                                                                                                        |       | 13,956                     |       | 12,789 |   | 19,089 |   | 18,333 |   |
| Earnings per share of common stock                                                                                                             |       | 0.19                       |       | 0.17 |   | 0.29 |   | 0.28 |   |
| Earnings per share of common stock -  assuming dilution                                                                                        |       | 0.19                       |       | 0.17 |   | 0.28 |   | 0.27 |   |
| Stock-based employee compensation cost, net  of related tax effects, included in net income                                                    |       | 186                        |       | — |   | 241 |   | — |   |
| Stock-based employee compensation cost, net  of related tax effects, includable in net income if the fair value based  method had been applied |       | $                          | —     |   | $ | 1,353 |   | $ | — |   | $ | 997 |   |

 

 
| ** **                                                                                                                                     | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2004**                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                     | ** ** | **As Reported**               | ** ** | **Pro Forma** | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
| Net income                                                                                                                                     |       | $                             | 43,063     |   | $ | 40,754 |   | $ | 44,275 |   | $ | 42,755 |   |
| Net income attributable to common stock                                                                                                        |       | 42,228                        |       | 39,919 |   | 40,652 |   | 39,132 |   |
| Earnings per share of common stock                                                                                                             |       | 0.60                          |       | 0.57 |   | 0.61 |   | 0.59 |   |
| Earnings per share of common stock  –assuming dilution                                                                                    |       | 0.58                          |       | 0.55 |   | 0.59 |   | 0.57 |   |
| Stock-based employee compensation cost, net  of related tax effects, included in net income                                                    |       | 300                           |       | — |   | 334 |   | — |   |
| Stock-based employee compensation cost, net  of related tax effects, includable in net income if the fair value based  method had been applied |       | $                             | —     |   | $ | 2,609 |   | $ | — |   | $ | 1,854 |   |

 

11

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***SEGMENT REPORTING***

 

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

 

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

 

In this segment, we recognize revenue for ourservices at the time the service is performed. Included in this segment is our PowderRiver coal bed methane gathering operation, which gathers gas from producers,including our Exploration and Production segment.  In 2003, this service for the Exploration andProduction segment was performed under a percentage-of-proceeds contract and in2004, this service was performed under a fee-based contract.  The change of contract type has no effect onthe Operating profit of either the Gas Gathering, Processing and Treatingsegment or the Exploration and Production segment.

 

Substantially all gas flowing through ourgathering, processing and treating facilities is supplied under three types ofcontracts providing for the purchase, treating or processing of natural gas forperiods ranging from one month to twenty years or in some cases for the life ofthe oil and gas lease.  Approximately 61%of our plant facilities’ gross margin, or revenues at the plant less productpurchases, for the month of June 2004 was under percentage-of-proceedsagreements in which we are typically responsible for the marketing of the gasand NGLs.  Under these agreements, we payproducers a specified percentage of the net proceeds received from the sale ofthe gas and the NGLs.

 

Approximately 26% of our plant facilities’gross margin for the month of June 2004 was under contracts that are primarilyfee-based from which we receive a set fee for each Mcf of gas gathered and/orprocessed. This type of contract provides us with a steady revenue stream thatis not dependent on commodity prices, except to the extent that low prices maycause a producer to delay drilling.

 

Approximately 13% of our plant facilities’ gross margin for the monthof June 2004 was under contracts with “keepwhole” arrangements or wellheadpurchase contracts.  Under thesecontracts, we retain the NGLs recovered by the processing facility and keep theproducers whole by returning to the producers at the tailgate of the plant anamount of gas equal on a Btu basis to the natural gas received at the plantinlet.  The “keepwhole” component of thecontracts permits us to benefit when the value of the NGLs is greater as aliquid than as a portion of the residue gas stream.  However, we are adversely affected when thevalue of the NGLs is lower as a liquid than as a portion of the residue gasstream.

 

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

 

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

 

***Transportation.***  The Transportation segment reflects theoperations of Western’s MIGC, Inc. and MGTC, Inc.  pipelines.  The majority of the revenue presented in this segment is derived fromtransportation of residue gas for our Marketing segment and other thirdparties.  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 from

 

12

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interruptiblecontracts where a fee is charged based upon volumes received into thepipeline.  The Transportation segment’sfirm capacity contracts range in duration from four months to fourteen years.

 

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

 
| ** **                                       | ** ** | **Gas Gathering,  and  Processing** | ** **    | **Exploration  and  Production** | ** ** | **Marketing** | ** ** | **Trans-  portation** | ** ** | **Corporate** | ** ** | **Elim-  inating  Entries** | ** ** | **Total**  | ** ** |
|--------------------------------------------------|------------|-------------------------------------|---------------|----------------------------------|------------|---------------|------------|-----------------------|------------|---------------|------------|-----------------------------|------------|------------|------------|
| **Quarter Ended June 30, 2004**                  | ** ** | ** **                          | ** **    | ** **                       | ** ** | ** **    | ** ** | ** **            | ** ** | ** **    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Revenues from unaffiliated customers             |       |                                |          |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Sale of gas                                      |       | $                                   | 965           |                             | $          | 1,544         |       | $                     | 591,248    |          | $          | 303                         |       | $          | —     |   | $ | — |   | $ | 594,060 |   |
| Sale of natural gas liquids                      |       | 2                                   |          | —                           |       | 104,613       |       | —                |       | (8            | )          | —                      |       | 104,607    |       |
| Equity hedges:                                   |       |                                |          |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Gas                                              |       | 116                                 |          | 1,617                            |       | —        |       | —                |       | —        |       | —                      |       | 1,733      |       |
| Liquids                                          |       | (2,586                              | )             | —                           |       | —        |       | —                |       | —        |       | —                      |       | (2,586     | )          |
| Gathering, processing and transportation revenue |       | 22,754                              |          | —                           |       | —        |       | 1,654                 |       | 2             |       | —                      |       | 24,410     |       |
| Total revenues from unaffiliated customers       |       | 21,251                              |          | 3,161                            |       | 695,861       |       | 1,957                 |       | (6            | )          | —                      |       | 722,224    |       |
| Inter-segment revenues                           |       | 251,766                             |          | 60,425                           |       | 14,796        |       | 3,711                 |       | 6             |       | (330,704                    | )          | —     |       |
| Price risk management activities                 |       | (5                                  | )             | —                           |       | 3,553         |       | —                |       | —        |       | —                      |       | 3,548      |       |
| Interest income                                  |       | —                              |          | (3                               | )          | —        |       | —                |       | 4,333         |       | (4,336                      | )          | —     |       |
| Other, net                                       |       | 471                                 |          | —                           |       | 7             |       | 47                    |       | 6             |       | —                      |       | 531        |       |
| Total revenues                                   |       | 273,483                             |          | 63,590                           |       | 714,217       |       | 5,715                 |       | 4,339         |       | (335,040                    | )          | 726,303    |       |
| Product purchases                                |       | 212,543                             |          | 304                              |       | 710,825       |       | 1,374                 |       | —        |       | (322,880                    | )          | 602,166    |       |
| Plant operating and transportation expense       |       | 21,673                              |          | (178                             | )          | 70            |       | 1,812                 |       | (484          | )          | (638                        | )          | 22,255     |       |
| Oil and gas exploration and production expense   |       | —                              |          | 26,904                           |       | —        |       | —                |       | —        |       | (7,092                      | )          | 19,812     |       |
| Earnings from equity investments                 |       | (1,776                              | )             | —                           |       | —        |       | —                |       | —        |       | —                      |       | (1,776     | )          |
| Operating profit                                 |       | 41,043                              |          | 36,559                           |       | 3,322         |       | 2,529                 |       | 4,823         |       | (4,430                      | )          | 83,846     |       |
|                                             |       |                                |          |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Depreciation, depletion and amortization         |       | 9,211                               |          | 10,875                           |       | 35            |       | 408                   |       | 1,819         |       | —                      |       | 22,348     |       |
| Selling and administrative expense               |       | —                              |          | —                           |       | —        |       | —                |       | 17,266        |       | (11                         | )          | 17,255     |       |
| (Gain) loss from sale of assets                  |       | 244                                 |          | (196                             | )          | —        |       | —                |       | 292           |       | 1,299                       |       | 1,639      |       |
| Loss from early extinguishment of debt           |       | —                              |          | —                           |       | —        |       | —                |       | 10,662        |       | —                      |       | 10,662     |       |
| Interest expense                                 |       | —                              |          | 8                                |       | 82            |       | (71                   | )          | 9,668         |       | (4,336                      | )          | 5,351      |       |
| Income before income taxes                       |       | $                                   |  31,588  |                             | $          | 25,872        |       | $                     | 3,205      |          | $          | 2,192                       |       | $          | (34,884    | ) | $ | (1,382 | ) | $ | 26,591 |   |
|                                             | ** ** | ** **                          | ** **    | ** **                       | ** ** | ** **    | ** ** | ** **            | ** ** | ** **    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Identifiable assets                              |       |                                |          |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Other allocated assets                           |       | $                                   |  2,739   |                             | $          | 7,004         |       | $                     | 124,759    |          | $          | 44,951                      |       | $          | 281,912    |   | $ | (38,451 | ) | $ | 422,914 |   |
| Investment in others                             |       | 2,469                               |          | —                           |       | —        |       | —                |       | 697,196       |       | (662,882                    | )          | 36,783     |       |
| Capital assets                                   |       | 623,982                             |          | 321,009                          |       | 1,253         |       | 38,225                |       | 56,240        |       | (569                        | )          | 1,040,140  |       |
| Total identifiable assets                        |       | $                                   |  629,190 |                             | $          | 328,013       |       | $                     | 126,012    |          | $          | 83,176                      |       | $          | 1,035,348  |   | $ | (701,902 | ) | $ | 1,499,837 |   |

 

13

----

 
| ** **                                       | ** ** | **Gas Gathering  and  Processing** | ** ** | **Exploration  and  Production** | ** ** | **Marketing** | ** ** | **Trans-  portation** | ** ** | **Corporate** | ** ** | **Elim-  inating  Entries** | ** ** | **Total**  | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|---------------|------------|-----------------------|------------|---------------|------------|-----------------------------|------------|------------|------------|
| **Quarter Ended June 30, 2003**                  | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **            | ** ** | ** **    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Revenues from unaffiliated customers             |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Sale of gas                                      |       | $                                  | 817        |                             | $          | 1,221         |       | $                     | 562,041    |          | $          | 138                         |       | $          | —     |   | $ | — |   | $ | 564,216 |   |
| Sale of natural gas liquids                      |       | 2                                  |       | —                           |       | 82,589        |       | —                |       |          |       |                        |       | 82,591     |       |
| Equity hedges:                                   |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Gas                                              |       | (593                               | )          | (4,702                           | )          | —        |       | —                |       | —        |       | —                      |       | (5,295     | )          |
| Liquids                                          |       | (1,808                             | )          | —                           |       | —        |       | —                |       | —        |       | —                      |       | (1,808     | )          |
| Gathering, processing and transportation revenue |       | 19,911                             |       | ––                     |       | —        |       | 1,691                 |       | (144          | )          | —                      |       | 21,458     |       |
| Total revenues from unaffiliated customers       |       | 18,329                             |       | (3,481                           | )          | 644,630       |       | 1,829                 |       | (144          | )          | —                      |       | 661,162    |       |
| Inter-segment revenues                           |       | 262,092                            |       | 53,784                           |       | 6,658         |       | 3,356                 |       | (7            | )          | (325,883                    | )          | —     |       |
| Price risk management activities                 |       | 306                                |       | 210                              |       | (1,938        | )          | —                |       | —        |       | —                      |       | (1,421     | )          |
| Interest income                                  |       | 6                                  |       | 5                                |       | —        |       | —                |       | 2,978         |       | (2,989                      | )          | —     |       |
| Other, net                                       |       | 534                                |       | (2                               | )          | 281           |       | 42                    |       | (105          | )          | —                      |       | 750        |       |
| Total revenues                                   |       | 281,267                            |       | 50,516                           |       | 649,631       |       | 5,227                 |       | 2,722         |       | (328,872                    | )          | 660,491    |       |
| Product purchases                                |       | 235,290                            |       | 643                              |       | 640,743       |       | 400                   |       | —        |       | (317,240                    | )          | 559,836    |       |
| Plant operating and transportation expense       |       | 21,664                             |       | 25                               |       | 80            |       | 1,881                 |       | (351          | )          | (687                        | )          | 22,612     |       |
| Oil and gas exploration and production expense   |       | —                             |       | 21,332                           |       | —        |       | —                |       | —        |       | (8,042                      | )          | 13,290     |       |
| Earnings from equity investments                 |       | (1,867                             | )          | —                           |       | —        |       | —                |       | —        |       | —                      |       | (1,867     | )          |
| Operating profit                                 |       | 26,180                             |       | 28,516                           |       | 8,808         |       | 2,946                 |       | 3,073         |       | (2,903                      | )          | 66,620     |       |
|                                             |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Depreciation, depletion and amortization         |       | 7,583                              |       | 7,608                            |       | 36            |       | 429                   |       | 2,029         |       | —                      |       | 17,685     |       |
| Selling and administrative expense               |       | —                             |       | —                           |       | —        |       | —                |       | 9,936         |       | (13                         | )          | 9,923      |       |
| (Gain) loss from sale of assets                  |       | 246                                |       | —                           |       | —        |       | (118                  | )          | (323          | )          | —                      |       | (195       | )          |
| Interest expense                                 |       | (1                                 | )          | —                           |       | 1             |       | (32                   | )          | 9,450         |       | (2,989                      | )          | 6,429      |       |
| Income before income taxes                       |       | $                                  | 18,352     |                             | $          | 20,908        |       | $                     | 8,771      |          | $          | 2,667                       |       | $          | (18,019    | ) | $ | 99 |   | $ | 32,778 |   |
|                                             | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **            | ** ** | ** **    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Identifiable assets                              |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Other allocated assets                           |       | $                                  | —     |                             | $          | 3,633         |       | $                     | 132,235    |          | $          | 1,601                       |       | $          | 375,185    |   | $ | (57,519 | ) | $ | 455,135 |   |
| Investment in others                             |       | 3,028                              |       | —                           |       | —        |       | —                |       | 475,630       |       | (453,086                    | )          | 25,572     |       |
| Capital assets                                   |       | 589,299                            |       | 229,250                          |       | 1,602         |       | 41,536                |       | 55,777        |       | 7                           |       | 917,471    |       |
| Total identifiable assets                        |       | $                                  | 592,327    |                             | $          | 232,883       |       | $                     | 133,837    |          | $          | 43,137                      |       | $          | 906,592    |   | $ | (510,598 | ) | $ | 1,398,178 |   |

 
| ** **                                       | ** ** | **Gas Gathering  and  Processing** | ** ** | **Exploration  and  Production** | ** ** | **Marketing** | ** ** | **Trans-  portation** | ** ** | **Corporate** | ** ** | **Elim-  inating  Entries** | ** ** | **Total**  | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|---------------|------------|-----------------------|------------|---------------|------------|-----------------------------|------------|------------|------------|
| **Six Months Ended June 30, 2004**               | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **            | ** ** | ** **    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Revenues from unaffiliated customers             |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Sale of gas                                      |       | $                                  | 1,889      |                             | $          | 3,783         |       | $                     | 1,251,072  |          | $          | 865                         |       | $          | —     |   | $ | — |   | $ | 1,257,609 |   |
| Sale of natural gas liquids                      |       | 3                                  |       | —                           |       | 199,911       |       | —                |       | —        |       |                        |       | 199,914    |       |
| Equity hedges:                                   |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Gas                                              |       | 265                                |       | 3,117                            |       | —        |       | —                |       | —        |       | —                      |       | 3,382      |       |
| Liquids                                          |       | (4,978                             | )          | —                           |       | —        |       | —                |       | —        |       | —                      |       | (4,978     | )          |
| Gathering, processing and transportation revenue |       | 37,680                             |       | —                           |       | —        |       | 3,397                 |       | 162           |       | —                      |       | 41,239     |       |
| Total revenues from unaffiliated customers       |       | 34,859                             |       | 6,900                            |       | 1,450,983     |       | 4,262                 |       | 162           |       | —                      |       | 1,497,166  |       |
| Inter-segment revenues                           |       | 509,403                            |       | 116,356                          |       | 27,601        |       | 7,145                 |       | 21            |       | (660,526                    | )          | —     |       |
| Price risk management activities                 |       | (26                                | )          | —                           |       | (1,794        | )          | —                |       | —        |       | —                      |       | (1,820     | )          |
| Interest income                                  |       | —                             |       | 3                                |       | —        |       | —                |       | 8,342         |       | (8,345                      | )          | —     |       |
| Other, net                                       |       | 812                                |       | 1                                |       | 5             |       | 47                    |       | 1,308         |       | —                      |       | 2,173      |       |
| Total revenues                                   |       | 545,048                            |       | 123,260                          |       | 1,476,795     |       | 11,454                |       | 9,833         |       | (668,871                    | )          | 1,497,519  |       |
| Product purchases                                |       | 428,120                            |       | 932                              |       | 1,470,694     |       | 2,955                 |       | —        |       | (643,193                    | )          | 1,259,508  |       |
| Plant operating and transportation expense       |       | 41,837                             |       | 70                               |       | (172          | )          | 3,572                 |       | 451           |       | (1,569                      | )          | 44,189     |       |
| Oil and gas exploration and production expense   |       | —                             |       | 52,585                           |       | —        |       | —                |       | —        |       | (15,663                     | )          | 36,922     |       |
| Earnings from equity investments                 |       | (3,702                             | )          | —                           |       | —        |       | —                |       | —        |       | —                      |       | (3,702     | )          |
| Operating profit                                 |       | 78,792                             |       | 69,673                           |       | 6,273         |       | 4,927                 |       | 9,382         |       | (8,446                      | )          | 160,602    |       |
|                                             |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Depreciation, depletion and amortization         |       | 18,212                             |       | 21,866                           |       | 52            |       | 824                   |       | 4,020         |       | —                      |       | 44,974     |       |
| Selling and administrative expense               |       | —                             |       | —                           |       | —        |       | —                |       | 27,227        |       | (26                         | )          | 27,201     |       |
| (Gain) loss from sale of assets                  |       | 244                                |       | (196                             | )          | —        |       | —                |       | 292           |       | 1,299                       |       | 1,639      |       |
| Loss from early extinguishment of debt           |       | —                             |       | —                           |       | —        |       | —                |       | 10,662        |       | —                      |       | 10,662     |       |
| Interest expense                                 |       | —                             |       | 42                               |       | 177           |       | (133                  | )          | 19,412        |       | (8,345                      | )          | 11,153     |       |
| Income before income taxes                       |       | $                                  | 60,337     |                             | $          | 47,961        |       | $                     | 6,044      |          | $          | 4,236                       |       | $          | (52,231    | ) | $ | (1,374 | ) | $ | 64,973 |   |
|                                             | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **            | ** ** | ** **    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Identifiable assets                              |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Other allocated assets                           |       | $                                  | 2,739      |                             | $          | 7,004         |       | $                     | 124,759    |          | $          | 44,951                      |       | $          | 281,912    |   | $ | (38,451 | ) | $ | 422,914 |   |
| Investment in others                             |       | 2,469                              |       | —                           |       | —        |       | —                |       | 697,196       |       | (662,882                    | )          | 36,783     |       |
| Capital assets                                   |       | 623,982                            |       | 321,009                          |       | 1,253         |       | 38,225                |       | 56,240        |       | (569                        | )          | 1,040,140  |       |
| Total identifiable assets                        |       | $                                  | 629,190    |                             | $          | 328,013       |       | $                     | 126,012    |          | $          | 83,176                      |       | $          | 1,035,348  |   | $ | (701,902 | ) | $ | 1,499,837 |   |

 

14

----

 
| ** **                                       | ** ** | **Gas Gathering  and  Processing** | ** ** | **Exploration  and  Production** | ** ** | **Marketing** | ** ** | **Trans-  portation** | ** ** | **Corporate** | ** ** | **Elim-  inating  Entries** | ** ** | **Total**  | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|---------------|------------|-----------------------|------------|---------------|------------|-----------------------------|------------|------------|------------|
| **Six Months Ended June 30, 2003**               | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **            | ** ** | ** **    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Revenues from unaffiliated customers             |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Sale of gas                                      |       | $                                  | 1,871      |                             | $          | 2,141         |       | $                     | 1,360,799  |          | $          | 434                         |       | $          | —     |   | $ | — |   | $ | 1,365,245 |   |
| Sale of natural gas liquids                      |       | 6                                  |       | —                           |       | 179,526       |       | —                |       | —        |       | —                      |       | 179,532    |       |
| Equity hedges:                                   |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Gas                                              |       | (1,561                             | )          | (11,493                          | )          | —        |       | —                |       | —        |       | —                      |       | (13,054    | )          |
| Liquids                                          |       | (6,700                             | )          | —                           |       | —        |       | —                |       | —        |       | —                      |       | (6,700     | )          |
| Gathering, processing and transportation revenue |       | 37,815                             |       | —                           |       | —        |       | 3,529                 |       | (109          | )          | —                      |       | 41,235     |       |
| Total revenues from unaffiliated customers       |       | 31,431                             |       | (9,352                           | )          | 1,540,325     |       | 3,963                 |       | (109          | )          | —                      |       | 1,566,258  |       |
| Inter-segment revenues                           |       | 564,128                            |       | 117,126                          |       | 18,625        |       | 7,229                 |       | 27            |       | (707,135                    | )          | —     |       |
| Price risk management activities                 |       | (470                               | )          | (1,835                           | )          | (16,810       | )          | —                |       | —        |       | —                      |       | (19,115    | )          |
| Interest income                                  |       | 6                                  |       | 13                               |       | —        |       | 2                     |       | 5,317         |       | (5,338                      | )          | —     |       |
| Other, net                                       |       | 1,118                              |       | 13                               |       | 281           |       | 42                    |       | —        |       | —                      |       | 1,454      |       |
| Total revenues                                   |       | 596,213                            |       | 105,965                          |       | 1,542,421     |       | 11,236                |       | 5,235         |       | (712,473                    | )          | 1,548,597  |       |
| Product purchases                                |       | 499,577                            |       | 1,031                            |       | 1,518,670     |       | 601                   |       | 250           |       | (688,441                    | )          | 1,331,438  |       |
| Plant operating and transportation expense       |       | 41,863                             |       | 126                              |       | 160           |       | 3,628                 |       | —        |       | (1,493                      | )          | 44,534     |       |
| Oil and gas exploration and production expense   |       | —                             |       | 42,893                           |       | —        |       | —                |       | —        |       | (17,092                     | )          | 25,801     |       |
| Earnings from equity investments                 |       | (3,429                             | )          | —                           |       | —        |       | —                |       | —        |       | —                      |       | (3,429     | )          |
| Operating profit                                 |       | 58,202                             |       | 61,915                           |       | 23,591        |       | 7,007                 |       | 4,985         |       | (5,447                      | )          | 150,253    |       |
|                                             |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Depreciation, depletion and amortization         |       | 15,117                             |       | 16,029                           |       | 71            |       | 862                   |       | 3,749         |       | —                      |       | 35,828     |       |
| Selling and administrative expense               |       | —                             |       | —                           |       | —        |       | —                |       | 20,541        |       | (26                         | )          | 20,515     |       |
| (Gain) loss from sale of assets                  |       | 154                                |       | —                           |       | —        |       | (118                  | )          | 50            |       | —                      |       | 86         |       |
| Interest expense                                 |       | —                             |       | —                           |       | 41            |       | (56                   | )          | 18,596        |       | (5,338                      | )          | 13,243     |       |
| Income before income taxes                       |       | $                                  | 42,931     |                             | $          | 45,886        |       | $                     | 23,479     |          | $          | 6,319                       |       | $          | (37,951    | ) | $ | (83 | ) | $ | 80,581 |   |
|                                             | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **            | ** ** | ** **    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Identifiable assets                              |       |                               |       |                             |       |          |       |                  |       |          |       |                        |       |       |       |
| Other allocated assets                           |       | $                                  | —     |                             | $          | 3,633         |       | $                     | 132,235    |          | $          | 1,601                       |       | $          | 375,185    |   | $ | (57,519 | ) | $ | 455,135 |   |
| Investment in others                             |       | 3,028                              |       | —                           |       | —        |       | —                |       | 475,630       |       | (453,086                    | )          | 25,572     |       |
| Capital assets                                   |       | 589,299                            |       | 229,250                          |       | 1,602         |       | 41,536                |       | 55,777        |       | 7                           |       | 917,471    |       |
| Total identifiable assets                        |       | $                                  | 592,327    |                             | $          | 232,883       |       | $                     | 133,837    |          | $          | 43,137                      |       | $          | 906,592    |   | $ | (510,598 | ) | $ | 1,398,178 |   |

 

***LEGAL PROCEEDINGS***

 

***United States of America and ex rel. Jack J.Grynberg v. Western Gas Resources, Inc., et al., United States District Court,District of Colorado, Civil Action No. 97-D-1427. ***As reported inour Form 10-Q for the quarter ended March 31, 2004 and in previous periodicreports, we, along with over 300 natural gas companies, are adefendant in litigation filed on June 30, 1997, in 72 separate actions filed byMr. Grynberg on behalf of the federal government.  The allegations made by Mr. Grynberg are thatestablished gas measurement and royalty calculation practices improperlydeprived the federal government of appropriate natural gas royalties andviolate 31 U. S. C. 3729 (a) (7) of the False Claims Act.  The cases have been consolidated to theUnited States District Court for the District of Wyoming.  Discovery on the jurisdictional issues isbeing completed to determine if this matter qualifies as a qui tam (or class)action.  On October 9, 2002, the courtdismissed Mr. Grynberg’s valuation claims, and his appeal against this decisionwas also unsuccessful.  We believe thatMr. Grynberg’s remaining claims are baseless and without merit and intend tovigorously contest the allegations in this case.

 

15

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***Price, et al. v. Gas Pipelines, Western GasResources, Inc., et al., District Court, Stevens County, Kansas, Case No.99-C-30. ***Asreported in our Form 10-Q for the quarter ended March 31, 2004 and in previousperiodic reports, Western is a defendant in litigation filed on September 23,1999, along with numerous other natural gas companies, in which Mr. Price isclaiming an under measurement of gas and Btu volumes throughout thecountry.  We along with other natural gascompanies filed a motion to dismiss for failure to state a claim.  The court denied these motions todismiss.   The court denied plaintiff’s motion forcertification as a class and, in the second quarter of 2003, the plaintiffamended and refiled for certification as a class.  On May 12, 2003, Mr. Price filed a furtherclaim, *Will Price et al v. Western GasResources, Inc. et al., District Court, Stevens County, Kansas, Case No. 03C23*,relating to certain matters previously removed from the foregoing action.  We believe that Mr. Price’s claims arewithout merit and intend to vigorously contest the allegations in this case.

 

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

 

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

 

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

 

16

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Any participant who elected to allocate a percentage of suchparticipant’s funds in the Retirement Plan to the purchase of Units in theWestern Gas Fund at any time during the Rescission Period, and who still holdsthose Units during the period of the rescission offer, may direct a sale of thoseUnits to us at the price the participant paid for the Units, plusinterest.  This election would bebeneficial to any participant who purchased Units at a price higher than ourstock price at the end of the period of the rescission offer.  If a participant has already directed andcaused the sale of those Units purchased during the Rescission Period at aloss, then the trustee or the participant may receive from us, the price paidfor those Units less the sale proceeds, plus interest.  This election would be beneficial to anyparticipant who sold Units at a loss.

 

While we are unable to estimate the cost or results of the rescissionoffer, we do not expect the costs to have a material adverse effect on ourfinancial position, results of operations or cash flows.   We also believe that the amounts subject tothe rescission offer are immaterial for separate classification as temporaryequity on the Consolidated Balance Sheet at June 30, 2004 or at December 31,2003.

 

***RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS.***

 

*** *SFAS No. 141 and SFASNo. 142. **SFAS No. 141, “BusinessCombinations” and SFAS No. 142*, “*Goodwilland Intangible Assets*”* wereissued in June 2001 and became effective for us on July 1, 2001 and January 1,2002, respectively.  SFAS No. 141requires companies to disaggregate and report separately from goodwill certainintangible assets.  SFAS No. 142establishes new guidelines for accounting for goodwill and other intangibleassets.  Under SFAS No. 142, goodwill andcertain other intangible assets are not amortized, but rather are reviewedannually for impairment.  In April 2004,the Financial Accounting Standards Board issued an amendment to SFAS Nos.141and 142 clarifying that oil and gas mineral rights held under lease andother contractual arrangements representing the right to extract such reservesfor both undeveloped and developed leaseholds should be classified as tangibleassets on the Consolidated Balance Sheet. As we have historically presented these types of assets as part of theOil and gas properties and equipment, this amendment has no impact on ourfinancial statements.

 

17

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**ITEM 2.       MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionand analysis relates to factors that have affected our consolidated financialcondition and results of operations for the three and six months ended June 30,2004 and 2003.  Certain prior yearamounts have been reclassified to conform to the presentation used in2004.  You should also refer to ourinterim consolidated financial statements and notes thereto included elsewherein this document.  This section, as wellas other sections in this Form 10-Q, contain “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995,which can be identified by the use of forward-looking terminology, such as“may,” “intend,” “will,” “expect,” “anticipate,” “estimate,” or “continue” orthe negative thereof or other variations thereon or comparableterminology.  In addition to theimportant factors referred to herein, numerous factors affecting the gasprocessing industry generally and in the specific markets for gas and naturalgas liquids, NGLs, in which we operate could cause actual results to differmaterially from those in such forward-looking statements.

 

***Company Overview***

 

***Business Strategy***—Maximizing the value of our existing core assets is the focal point of ourbusiness strategy.   Our core assets areour fully integrated upstream and midstream assets in the Powder River andGreater Green River Basins in Wyoming and Colorado and our midstream operationsin west Texas, Oklahoma and New Mexico. Our long-term business plan is to increase stockholder value by: (i)doubling proven reserves and equity production of natural gas from the levelsachieved in 2001 over a five year period; (ii) meeting or exceeding throughputprojections in our midstream operations; and (iii) optimizing annual returns.

 

***Industry and CompanyOverview—***In North America, our industry hasexperienced several consecutive years of declining natural gas production.  Most of the major gas producing areas, suchas the Gulf of Mexico, are mature and are in production decline.  We are concentrating our efforts in the RockyMountain gas producing basins where there are estimated to be large quantitiesof undeveloped gas.  The U.S. governmentlargely retains the mineral rights to these undeveloped reserves; accordingly,the development and production of these reserves require permits from severalgovernmental agencies including the Bureau of Land Management, or BLM.  We are well positioned for future productiongrowth with a large inventory of undeveloped drilling locations in the PowderRiver and Greater Green River Basins to meet the growing demand for cleanburning natural gas.  In addition, ourexperience and technical expertise position us to acquire new opportunities todevelop natural gas in the Rocky Mountain region.  Our challenges will be to accomplish thesegoals with the difficulties encountered by the industry in obtaining thenecessary permits from the BLM.  Webelieve that our technical expertise in developing environmentally responsiblesolutions to the problems encountered in the development of gas reserves willbe a competitive advantage in overcoming these challenges.

 

Our operations are conducted through the following four businesssegments:

 

***Exploration and Production***—Weexplore for, develop and produce natural gas reserves independently and toenhance and support our existing gathering and processing operations. Ourproducing properties are primarily located in the Powder River and GreaterGreen River Basins of Wyoming and Colorado and will also include the San JuanBasin of New Mexico after the completion of a pending acquisition.  These plays are low-risk, long-liveddevelopment projects.  These provide uswith the opportunity to steadily increase our production volume at low operatingand finding and development costs.  Inthe second quarter of 2004 our average production sold was 148 MMcfe per day,which is comparable to the average production volume sold in the second quarterof 2003.

 

We continue to seek to add additional upstream core projects that arefocused on Rocky Mountain natural gas. We will utilize our expertise in exploration and low-risk development oftight-gas sands, coal bed methane and fractured shale plays to evaluateacquisitions of either additional leaseholds, proven and undeveloped reservesor companies with operations focused in the Rockies.  Toward this goal, through June 30, 2004, wehave acquired the drilling rights on approximately 397,000 net acres, in otherRocky Mountain basins and continue to expand our leasehold positions.  Additionally, in July 2004, we signed apurchase and sale agreement to acquire oil and gas assets in the San Juan Basinof New Mexico for approximately $82.2 million. Closing is expected to occur on October 1, 2004 and is subject to duediligence.

 

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***Gathering, Processing andTreating***—Our core operations are inwell-established areas such as the Permian, Anadarko, Powder River, GreaterGreen River, and San Juan Basins.  Weconnect natural gas from gas and oil wells to our gathering systems for deliveryto our processing or treating plants under long-term contracts. At our plantswe process natural gas to extract NGLs and treat natural gas in order to meetpipeline specifications. We provide these services to major oil and gascompanies, to independent producers of various sizes and for our ownproduction.  We believe that our low costof operations, our high on-line time, and our safety records are key elementsin our ability to compete effectively and provide service to ourcustomers.  Our expertise in gathering,processing and treating operations can enhance the economics of developing newupstream projects.

 

This segment of our operations has provided astream of operating profit that is available for reinvestment into otherprojects or other segments of our business. Overall throughput in our facilities during the second quarter of 2004has remained relatively constant as compared to the second quarter of 2003 andaveraged a total of 1.3 Bcf per day.

 

***Transportation***—In the Powder River Basin, we own one interstate pipeline, MIGC, Inc., and oneintrastate pipeline, MGTC, Inc., which transport natural gas for producers andenergy marketers under fee schedules regulated by state or federal agencies.

 

***Marketing***—Ourgas marketing segment is an outgrowth of our gas processing and upstreamactivities.  One of the primary goals ofour gas marketing operations is the preservation and enhancement of the valuereceived for our equity volumes of natural gas. This goal is achieved through the use of hedges on the production of ourequity natural gas and NGLs and through the use of firm transportationcapacity.  We also buy and sell naturalgas and NGLs in the wholesale market in the United States and in Canada.  These third-party sales, our firmtransportation capacity on interstate pipelines and our gas storage positions,combined with the stable supply of gas from our facilities and production,enable us to respond quickly to changing market conditions and to takeadvantage of seasonal price variations and peak demand periods.

 

***RESULTS OFOPERATIONS***

 

**Three and six months ended June 30, 2004compared to the three and six months ended June 30, 2003**

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

 
| ** **                                           | ** ** | **Three Months Ended  June 30,** | ** **          | ** ** | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|----------------------------------|---------------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **                                           | ** ** | ** **                       | **Percent  Change** | ** ** | ** ** | **Percent  Change**            | ** ** |
| ** **                                           | ** ** | **2004**                         | ** **          | **2003**   | ** ** | ** **                     | **2004**   | ** ** | **2003**   | ** ** | ** ** |
|                                                 |       |                             |                |       |       |                           |       |       |       |   |   |   |   |
| **Financial results:**                               |       |                             |                |       |       |                           |       |       |       |   |   |   |   |
| Revenues                                             |       | $                                | 726,303             |       | $          | 660,491                        |       | 10         |       | $ | 1,497,519 |   | $ | 1,548,597 |   | (3 | ) |
| Gross profit                                         |       | 50,836                           |                | 48,935     |       | 4                              |       | 104,966    |       | 114,425 |   | (8 | ) |
| Net income                                           |       | 13,975                           |                | 20,900     |       | (33                            | )          | 43,063     |       | 44,275 |   | (3 | ) |
| Earnings per  share of common stock                  |       | 0.19                             |                | 0.29       |       | (35                            | )          | 0.60       |       | 0.61 |   | (2 | ) |
| Earnings per share of common stock -  diluted        |       | 0.19                             |                | 0.28       |       | (32                            | )          | 0.58       |       | 0.59 |   | (3 | ) |
| Net cash provided by operating activities            |       | 21,698                           |                | 26,495     |       | (12                            | )          | 115,403    |       | 141,650 |   | (19 | ) |
| Net cash used in (provided by) investing  activities |       | (42,118                          | )                   | 18,952     |       | (122                           | )          | (78,758    | )          | (75,987 | ) | (4 | ) |
| Net cash used in (provided by) financing  activities |       | $                                | 34,935              |       | $          | 19,500                         |       | 79         |       | $ | (59,875 | ) | $ | (32,744 | ) | 82 |   |
|                                                 |       |                             |                |       |       |                           |       |       |       |   |   |   |   |
| **Operating data:**                                  |       |                             |                |       |       |                           |       |       |       |   |   |   |   |
| Average gas sales (MMcf/D)                           |       | 1,190                            |                | 1,247      |       | (5                             | )          | 1,279      |       | 1,419 |   | (10 | ) |
| Average NGL sales (MGal/D)                           |       | 1,643                            |                | 1,625      |       | 1                              |       | 1,627      |       | 1,639 |   | (1 | ) |
| Average gas  prices ($/Mcf)                          |       | $                                | 5.49                |       | $          | 4.91                           |       | 12         |       | $ | 5.40 |   | $ | 5.26 |   | 3 |   |
| Average NGL  prices ($/Gal)                          |       | $                                | 0.68                |       | $          | 0.55                           |       | 24         |       | $ | 0.66 |   | $ | 0.58 |   | 14 |   |
|                                                      |            |                                  |                     |            |            |                                |            |            |            |  |  |  |  |  |  |  |  |  |

 

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Net income decreased $6.9 million and $1.2million for the three and six months ended June 30, 2004, respectively,compared to the same periods in 2003. The decrease in net income in the second quarter ended June 30, 2004compared to the second quarter of 2003 was primarily attributable to after-taxcharges associated with a settlement with the CFTC of $7.0 million and theearly extinguishment of long-term debt of $6.7 million.  These charges more than offset the benefitsof higher product prices.  The decreasein net income in the six months ended June 30, 2004 compared to the same periodin 2003 were primarily attributable to the settlement with the CFTC, the earlyextinguishment of long-term debt and a $6.7 million after-tax loss from the Cumulative effect of a change inaccounting principle from the adoption of SFAS No. 143 “Accounting for AssetRetirement Obligations” on January 1, 2003which were substantially offset by higher prices and a change inaccounting principle resulted in a cumulative reduction of depreciation forperiods prior to 2004 of $4.7 million, net of tax.

 

Revenues from the sale of gas increased $36.9million to $595.8 million for the three months ended June 30, 2004 compared tothe same period in 2003.  This increasewas primarily due to an increase in product prices, which more than offset adecrease in sales volume in the three months ended June 30, 2004.  Average gas prices realized by us increased$0.58 per Mcf to $5.49 per Mcf for the quarter ended June 30, 2004 compared tothe same period in 2003.  Included in therealized gas price were approximately $1.7 million of gains recognized in thethree months ended June 30, 2004 related to futures positions on equity gasvolumes.  We have entered into additionalfutures positions for approximately half of our equity gas for the remainder of2004 and to a lesser extent in 2005.  Seefurther discussion in “Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.”  Average gas sales volumesdecreased to 1,190 MMcf per day for the quarter ended June 30, 2004 compared tothe same period in 2003.  This decreasewas due to a reduction in third party sales volume resulting from the increasein product prices and related credit exposure.

 

Revenues from the sale of gas decreased $91.2million to $1,261.0 million for the six months ended June 30, 2004 compared tothe same period in 2003.  This decreasewas primarily due to a decrease in sales volume, which more than offset anincrease in product prices in the six months ended June 30, 2004.  Average gas prices realized by us increased$0.14 per Mcf to $5.40 per Mcf for the six months ended June 30, 2004 comparedto the same period in 2003.  Included inthe realized gas price were approximately $3.4 million of gains recognized inthe six months ended June 30, 2004 related to futures positions on equity gasvolumes.  We have entered into additionalfutures positions for approximately half of our equity gas for the remainder of2004 and to a lesser extent in 2005.  Seefurther discussion in “Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.”  Average gas sales volumesdecreased to 1,279 MMcf per day for the six months ended June 30, 2004 comparedto the same period in 2003.  Thisdecrease was due to a reduction in third party sales volume resulting from theincrease in product prices and related credit exposure.

 

Revenues from the sale of NGLs increased$21.2 million to $102.0 million for the three months ended June 30, 2004compared to the same period in 2003. This is primarily due to a significant increase in product prices assales volumes were relatively constant. Average NGL prices realized by us increased $0.13 per gallon to $0.68per gallon for the three months ended June 30, 2004 compared to the same periodin 2003.  Included in the realized NGLprice were approximately $2.6 million of losses recognized in the three monthsended June 30, 2004 related to futures positions on equity NGL volumes.  We have entered into additional futurespositions for the majority of our equity NGL production for the remainder of2004.  See further discussion in “Item 3.Quantitative and Qualitative Disclosures About Market Risk.”  Average NGL sales volumes increased 17 MGalper day to 1,643 MGal per day for the three months ended June 30, 2004 comparedto the same period in 2003.

 

Revenues from the sale of NGLs increasedapproximately $22.1 million to $194.9 million for the six months ended June 30,2004 compared to the same period in 2003. This is primarily due to a significant increase in product prices assales volumes were relatively constant. Average NGL prices realized by us increased $0.08 per gallon to $0.66per gallon for the six months ended June 30, 2004 compared to the same periodin 2003.  Included in the realized NGLprice were approximately $5.0 million of losses recognized in the six monthsended June 30, 2004 related to futures positions on equity NGL volumes.  We have entered into additional futurespositions for the majority of our equity NGL production for the remainder of2004.  See further discussion in “Item 3.Quantitative and Qualitative Disclosures About Market Risk.”  Average NGL sales volumes decreased 13 MGalper day to 1,627 MGal per day for the six months ended June 30, 2004 comparedto the same period in 2003.

 

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Product purchases increased by $42.3 millionand decreased by $71.9 million for the quarter and six months ended June 30,2004 compared to the same periods in 2003.  The increase in product purchases in the second quarter of 2004 comparedto the same period in 2003 was the result of an increase in productprices.   The decrease in productpurchases for the six months ended June 30, 2004 compared to the same period in2003 was the result of the reduction in third party sales volume which morethan offset an increase in product prices. Overall, combined product purchases as a percentage of sales of allproducts decreased to 86% in both the quarter and six months ended June 30,2004 from 88% in both of the 2003 comparable periods.  The reduction in this percentage is primarilythe result of increases in product prices and a decrease in the sale of thirdparty product.

 

Oil and gas exploration and productionexpenses increased by $6.5 million and $11.1 million, respectively, for thethree and six months ended June 30, 2004 compared to the same periods in2003.  These increases were substantiallydue to increased lease operating expenses, or LOE, in the Powder River Basincoal bed development. Overall, LOE averaged $0.66 per Mcf and $0.65 per Mcf forthe quarter and six months ended June 30, 2004 and LOE in the Powder RiverBasin coal bed development averaged $0.78 per Mcf in both the quarter and sixmonths ended June 30, 2004.  In thePowder River Basin, these represent increases of $0.26 and $0.33 per Mcf fromthe same periods in 2003.  The increasesin LOE are substantially due to higher water handling charges, contract labor,and fuel and operating costs of wellhead blowers.

 

##### ***Depreciation, depletion and amortization increased by $4.7million and $9.1 million, respectively, for the three and six months ended June30, 2004 as compared to the same periods in 2003.  These increases are the result of additionalcapital expenditures and depreciation and depletion on our oil and gas assets.   Effective January 1, 2004, we redefined theasset groupings for the calculation of depreciation and depletion on our oiland gas properties from a well-by-well basis to a field wide basis for each ofthe Jonah, Pinedale and Sand Wash fields and to a grouping of all wells drilledinto related coal seams for the Powder River Basin. This change resulted in anincrease in Depreciation, depletion and amortization expense of $653,000 and$1.6 million in the second quarter and six months ended June 30, 2004,respectively.***

##### *** ***

The change in thedepreciation and depletion methodology is treated as a change in accountingprinciple.  Accordingly, the Accumulateddepreciation, depletion and amortization for these assets has been recalculatedunder the new methodology.  Thecumulative effect of the change in depreciation and depletion methodology of$4.7 million, net of tax, is presented in the Consolidated Statement ofOperations under the caption Cumulative effect of changes in accountingprinciples, net of tax.

 

Selling andadministrative expenses increased by $7.3 million and $6.7 million for thethree and six months ended June 30, 2004 as compared to the same period in2003.  The increase in selling andadministrative expenses was the result of a July 2004 settlement with the CTFCrelated to reporting of price information to industry publications.  The civil penalty of $7.0 million paid inconnection with this matter was accrued in the second quarter of 2004.

 

The Total provision for income taxes, as a percentage of Income beforeincome taxes was approximately 47.4% during the quarter ended June 30, 2004 ascompared to 36.2% in same period of 2003. This increase is due to the civil penalty paid to the CFTC, which wasnon-deductible for tax purposes.  Weexpect that the provision for income taxes as a percentage of Income beforeincome taxes will average approximately 37.0% for the remainder of 2004.

 

***Cash Flow Information***

 

Cash flows from operatingactivities decreased by $26.2 million in the first six months of 2004 comparedto the first six months of 2003. This decrease was primarily due to the timingof cash receipts and payables.

 

Cash flows used in investingactivities increased by $2.8 million in the first six months of 2004 comparedto the first six months of 2003.

 

Cash flows used in financingactivities increased by $27.1 million in the first six months of 2004 comparedto the first six months of 2003.  Thisincrease was due to a reduction in our long-term debt.

 

***SegmentInformation***

 

**  *Gas Gathering, Processing and Treating.***  The Gas Gathering, Processing and Treatingsegment realized segment-operating profit of $78.8 million for the six monthsended June 30, 2004 as compared to $58.2 million for

 

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thesame period in 2003.  The increase inoperating profit in this segment in the 2004 period is primarily due to higherrealized prices and improved contractual terms on gas gathered in the PowderRiver Basin.

 

***Exploration and Production.***  The Exploration and Production segmentrealized segment-operating profit of $69.7 million for the six months endedJune 30, 2004 compared to $61.9 million in the same period of 2003. Theincrease is due an improvement in realized prices.

 

Thefollowing table sets forth the average sales price received for our oil and gasproducts and production costs per Mcfe for the second quarter and six monthsended June 30, 2004 and 2003.

 
| ** **                                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                     | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Average sales price: (1)                       |       |                            |       |                          |       |   |   |   |   |
| Oil ($/Bbl)                                    |       | $                               | 33.89      |                          | $          | 30.91 |   | $ | 33.68 |   | $ | 29.86 |   |
| Gas ($/Mcf) (2)                                |       | 4.61                            |       | 4.05                          |       | 4.51 |   | 4.46 |   |
|                                           |       |                            |       |                          |       |   |   |   |   |
| Production and other costs:                    |       |                            |       |                          |       |   |   |   |   |
| Lease operating expense ($/Mcfe)               |       | 0.66                            |       | 0.45                          |       | 0.65 |   | 0.41 |   |
| Production tax expense ($/Mcfe)                |       | 0.48                            |       | 0.42                          |       | 0.50 |   | 0.48 |   |
| Gathering and transportation expense  ($/Mcfe) |       | 0.73                            |       | 0.65                          |       | 0.72 |   | 0.68 |   |
| Other expenses ($/Mcfe)                        |       | 0.02                            |       | 0.05                          |       | 0.01 |   | 0.03 |   |
| Total costs ($/Mcfe)                           |       | $                               | 1.89       |                          | $          | 1.57 |   | $ | 1.88 |   | $ | 1.60 |   |

 

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| (1)    | The average sales prices exclude the  effects of hedging. See “Management’s Discussion and Analysis of Financial  Condition and Results of Operations” for a discussion of our oil and gas  hedging positions. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                          |
| (2)    | The prices received for NGLs are included  in the price received for gas.                                                                                                                                                |   |

 

***Marketing.***  The Marketing segment realizedsegment-operating profit of $6.3 million for the six months ended June 30, 2004compared to $23.6 million in the same period of 2003.  Thedecrease in the marketing profit is primarily due to transactions associatedwith our firm 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 thereduced margins will continue in future periods.

 

***Transportation.***  The Transportation segment realizedsegment-operating profit of $4.9 million for the six months ended June 30, 2004compared to $7.0 million in the same period of 2003.  The transportation segment includes theresults from the MIGC and MGTC pipelines in the Powder River Basin.  The decrease in profit in this segment is dueto lower interruptible transportation volume in the 2004 periods as more gaswas transported out of the basin through other pipelines.

 

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***Recently Issued Accounting Pronouncements.***  We continually monitor and revise ouraccounting policies as new rules are issued.

 

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See Notes to ConsolidatedFinancial Statements (Unaudited) in Item 1 of this Form 10-Q for a detaileddescription of recently issued accounting pronouncements.

 

**Liquidity and Capital Resources**

 

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

 

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

 

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

 

Webelieve that the amounts available to be borrowed under the revolving creditfacility, together with net cash provided by operating activities, will provideus with sufficient funds to connect new reserves, maintain our existingfacilities and complete our current capital expenditure program.  Depending on the timing and the amount of ourfuture projects, we may be required to seek additional sources of capital.  Our ability to secure such capital isrestricted by our financing facilities, although we may request additional borrowingcapacity from our lenders, seek waivers from our lenders to permit us to borrowfunds from third-parties, seek replacement financing facilities from otherlenders, use stock as a currency for acquisitions, sell existing assets or usea combination of alternatives.  While webelieve that we would be able to secure additional financing, if required, wecan provide no assurance that we will be able to do so or as to the terms ofany additional financing.

 

Weutilized amounts available under the revolving credit facility along with anadditional $100.0 million borrowing under the master shelf agreement, to redeemour outstanding $155.0 million, 10% senior subordinated notes, to pay a $7.8million prepayment penalty on this redemption, and to meet scheduled principalrepayments during the first seven months of 2004 of $10.0 million under themaster shelf agreement.   We believe thatcash provided by operating activities and amounts available under the revolvingcredit facility will be sufficient to meet scheduled principal repaymentsduring the remainder of 2004 of $25.0 million under the master shelf agreement.

 

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

 

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

 

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

 

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

 

***Sources and Uses ofFunds*.**  Oursources and uses of funds for the six months ended June 30, 2004 are summarizedas follows (dollars in thousands):

 

| **Sources of funds:**                                            |   |    |      |
|------------------------------------------------------------------|--------|---------|-----------|
| Borrowings under the revolving credit  facility                  |   | $       | 810,630   |   |
| Borrowings on long-term debt                                     |   | 100,000 |      |
| Proceeds from the dispositions of property  and equipment        |   | 697     |      |
| Net cash provided by operating activities                        |   | 115,403 |      |
| Distributions from equity investees                              |   | 1,196   |      |
| Proceeds from exercise of common stock  options                  |   | 3,492   |      |
| Total sources of funds                                           |   | $       | 1,031,418 |   |
| **Uses of funds:**                                               |   |    |      |
| Payments related to long-term debt  (including debt issue costs) |   | $       | 966,457   |   |
| Capital expenditures                                             |   | 80,651  |      |
| Redemption of $2.625 cumulative convertible  preferred stock     |   | 1,930   |      |
| Preferred dividends paid                                         |   | 1,926   |      |
| Common dividends paid                                            |   | 3,684   |      |
| Total uses of funds                                              |   | $       | 1,054,648 |   |

 

***Capital InvestmentProgram.***  Wecurrently anticipate capital expenditures in 2004 of approximately $339.7million.  Due to drilling and regulatoryuncertainties that are beyond our control, we can make no assurance that ourcapital budget for 2004 will not change. This budget may be further increased to provide for acquisitions ifapproved by our board of directors.

 

The 2004 capital budget and our capital expenditures during the sixmonths ended June 30, 2004 are presented in the following table (dollars inthousands). 

 
| **Type  of Capital Expenditure**                             | ** ** | **2004 Capital  Budget** | ** ** | **Amount Spent During  the Six Months  Ended  June 30, 2004** | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|---------------------------------------------------------------|------------|
| Gathering, processing, treating and  pipeline assets         |       | $                        | 104.6      | *                                                             | $          | 30.1 | * |
| Exploration and production and lease  acquisition activities |       | 142.1                    |       | 45.1                                                          |       |
| Acquisition of San Juan Basin oil and gas  properties        |       | 82.2                     |       | —                                                        |       |
| Information technology and other items                       |       | 3.0                      |       | 1.5                                                           |       |
| Capitalized interest and overhead                            |       | 7.8                      |       | 2.8                                                           |       |
| Total Capital Expenditures                                   |       | $                        | 339.7      |                                                          | $          | 79.5 |   |

 

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* Includes $14.6 million in 2004 and $4.3 million in the first sixmonths of 2004 for maintaining existing facilities.

 

***ContractualCommitments and Obligations***

 

##### ***Contractual CashObligations. ***A summary of our contractual cash obligations as ofJune 30, 2004, excluding the pending acquisition of San Juan oil and gasproperties, is as follows (dollars in thousands): 

 
| ** **                                             | ** ** | ** **             | ** ** | **Payments by Period** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **Type  of Obligation**                                | ** ** | **Total  Obligations** | ** ** | **Due in  2004**       | ** ** | **Due in  2005 – 2006** | ** ** | **Due in  2007 – 2008** | ** ** | **Due  Thereafter** | ** ** |
| Guarantee of Fort Union Project Financing              |       | $                      | 5,151      |                   | $          | 408 |   | $ | 1,795 |   | $ | 2,081 |   | $ | 867 |   |
| Operating Leases                                       |       | 78,192                 |       | 7,379                  |       | 30,075 |   | 25,349 |   | 15,389 |   |
| Firm Transportation Capacity and Gathering  Agreements |       | 264,356                |       | 17,492                 |       | 73,612 |   | 67,185 |   | 106,067 |   |
| Firm Storage Capacity Agreements                       |       | 33,765                 |       | 4,751                  |       | 12,102 |   | 5,899 |   | 11,013 |   |
| Long-term Debt                                         |       | 285,000                |       | 35,000                 |       | 20,000 |   | 35,000 |   | 195,000 |   |
| Total Contractual Cash Obligations                     |       | $                      | 666,464    |                   | $          | 65,030 |   | $ | 137,584 |   | $ | 135,514 |   | $ | 328,336 |   |

 

***Guarantee of FortUnion Project Financing.***   We own a 13% equity interest in Fort UnionGas Gathering, L.L.C., or Fort Union, and are the construction manager andfield operator.  Fort Union gathers andtreats natural 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 $5.2 million of the debt of Fort Union atJune 30, 2004.  Our requirement to fundunder this guarantee would be reduced by the value of assets held by FortUnion.  This guarantee is not reflectedon our Consolidated Balance Sheet.

 

***OperatingLeases. ***In theordinary course of our business operations, we enter into operating leases foroffice space, office equipment, communication equipment and transportationequipment.  In addition, we have enteredinto operating leases for compression equipment.   Payments made on these leases are acomponent of operating expenses and are reflected on the Consolidated Statementof Operations and, as operating leases, are not reflected on our ConsolidatedBalance Sheet.  These leases have termsranging from one month to ten years with return or fair market purchase optionsavailable at various times during the lease.  If we were to exercise the purchase options on all the leased equipment,these purchase options would require the capital expenditure of approximately$39.9 million between 2007 and 2012.

 

***Firm Transportation Capacity and GatheringAgreements.***  Accessto firm transportation is also a significant element of our businessstrategy.  Firm transportation ensuresthat our equity production has access to downstream markets and allows us tocapture incremental profit in our marketing segment when pricing differentialsbetween physical locations occur.  As ofJune 30, 2004, we had contracts for approximately 625 MMcf per day of firmtransportation.  This amount representsour total contracted amount on many individual pipelines.  In many cases it is necessary to utilizesequential pipelines to deliver gas into a specific sales market. In total, wehave the capacity to transport 172 MMcf per day of gas from the Rocky Mountainarea to the Mid-Continent.  This utilizesa total of approximately 376 MMcf per day of firm capacity on three separatepipelines.   The total rate under theselong-term contracts to transport this gas to the Mid-Continent from thesouthern Powder River Basin approximates $0.35 per Mcf.  Our remaining firm capacity consists of 110MMcf per day to markets within the Rocky Mountains and 140 MMcf per daycontracted in various other markets throughout the country.  In addition, we hold 83 MMcf per day of firmgathering capacity on the Fort Union gathering line.  These agreements are not reflected on ourConsolidated Balance Sheet.

 

The fixed fees associated with our existing contracts for firmtransportation capacity during the remainder of 2004 will average approximately$0.15 per Mcf per day.  The associatedcontract periods range from four months to thirteen years.  Under firm transportation contracts, we arerequired to pay the fees associated with these contracts whether or not thetransportation is used.

 

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***Firm Storage Capacity Agreements*.**  Wecustomarily store gas in underground storage facilities to ensure an adequatesupply for long-term sales contracts and to capture seasonal pricedifferentials.  As of June 30, 2004, wehad contracts in place for approximately 18.6 Bcf of storage capacity atvarious third-party facilities.  Of thetotal storage capacity under contract, approximately 8.0 Bcf is under contract toour Canadian subsidiary, WGR Canada, Inc., and Western guarantees thesubsidiary’s performance under these contracts. This subsidiary is wholly owned by us and consolidated in our financialstatements.

 

The feesassociated with these contracts in the remainder of 2004 will average $0.52 per Mcf of annualcapacity.  The associated contractperiods at June 30, 2004 have an average term of 37 months.  At June 30, 2004, we held gas in ourcontracted storage facilities and in pipeline imbalances of approximately 14.5Bcf at an average cost of $5.33 per Mcf compared to 12.9 Bcf at an average cost of $4.47per Mcf atJune 30, 2003.  These positions are forstorage withdrawals within the next nine months.  At the time we place product into storage, wecontract for the sale of that product, physically or financially, and do notspeculate on the future value of the product. These agreements for storage capacity are not reflected on ourConsolidated Balance Sheet.

 

From time to time, we lease NGL storage space at major tradinglocations to facilitate the distribution of products. At June 30, 2004, we heldNGLs in storage at various third-party facilities of 2,755 MGal, consistingprimarily of propane and ethane, at an average cost of $0.28 per galloncompared to 2,662 MGal at an average cost of $0.25 per gallon at June 30,2003.  These agreements for storagecapacity are not reflected on our Consolidated Balance Sheet.

#### ** **

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

 

*** Revolving Credit Facility. ***In June 2004, we amended and restated ourrevolving credit facility.  The amendedand restated facility is a five-year, $400 million revolving credit facilitymaturing in June 2009.   At June 30,2004, $95.0 million was outstanding under this facility.  Loans made under this facility are secured bya pledge of the capital stock of our significant subsidiaries.  These subsidiaries also guarantee theborrowings under the facility.

 

Theborrowings under the credit facility bear interest at Eurodollar rates or abase rate, as requested by us, plus an applicable percentage based on our debtto capitalization ratio.  The base rateis the agent’s published prime rate.  Wealso pay a quarterly commitment fee ranging between 0.20% and 0.375%, dependingon our debt to capitalization ratio. This fee is paid on unused amounts of the commitment.  At June 30, 2004, the interest rate payableon borrowings under this facility was approximately 2.6%.  Under the credit facility, we are subject toa number of covenants, including: maintaining a total debt to capitalizationratio of not more than 55%; and maintaining a ratio of EBITDA, as defined inthe credit facility, to interest over the last four quarters in excess of 3.0to 1.0.  The credit facility ranksequally with borrowings under our master shelf agreement with The PrudentialInsurance Company.

 

***Master Shelf Agreement. ***In June 2004, weamended and restated the master shelf agreement with The PrudentialInsurance Company of America.  Also onJune 30, 2004, we borrowed an additional $100.0 million under the master shelfagreement that matures in a single payment on June 30, 2011.  The proceeds from this borrowing were used tofund a portion of the redemption of our senior subordinated notes.  Amounts outstanding under the master shelf agreementwith The Prudential Insurance Company of America at July 31, 2004 are asindicated in the following table (dollars in thousands):

 
| **Issue  Date**  | ** ** | **Amount** | ** ** | **Interest  Rate** | ** ** | **Final  Maturity** | ** **       | **Principal Payment Schedule**                | ** **                 |
|------------------|------------|------------|------------|--------------------|------------|---------------------|------------------|-----------------------------------------------|----------------------------|
| 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, 2005 through 2007 |                       |
| January 17, 2003 |       | 25,000     |       | 6.36               | %          | January 17, 2008    |             | single payment at maturity                    |                       |
| June 30, 2004    |       | 100,000    |       | 5.92               | %          | June 30, 2011       |             | single payment at maturity                    |                       |
|             |       | $          | 180,000    |               |       |                |             |                                          |                       |   |

 

Ourborrowings under the master shelf agreement are secured by a pledge of thecapital stock of our significant subsidiaries, some of which have also provideda guaranty of payments we owe under the facility.  All of the borrowings under the master shelfagreement can be prepaid prior to their final maturity by paying ayield-maintenance fee.   Under our mastershelf agreement, as amended, we are subject to a number of covenants,including: maintaining a total debt to capitalization ratio of not more than55%; and maintaining a quarterly test of

 

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EBITDA,as defined in the master shelf agreement, to interest for the last fourquarters in excess of 3.0 to 1.0.  In theremainder of 2004, we will make scheduled principal payments totaling $25.0million on this facility.  We intend tofund these repayments with funds available under the revolving credit facility.

 

***Senior Subordinated Notes. ***In 1999, we sold$155.0 million of senior subordinated notes in a private placement with a finalmaturity of 2009 due in a single payment which were subsequently exchanged forregistered publicly tradable notes under the same terms and conditions.  The subordinated notes bore interest at 10%per annum.  We incurred approximately $5.0million in offering commissions and expenses, which were capitalized and werebeing amortized over the term of the notes. We redeemed the senior subordinated notes on June 24, 2004 using amountsavailable under the revolving credit facility and an additional borrowing underthe master shelf agreement.  Inconnection with this redemption, we paid a prepayment penalty of $7.75 millionand expensed approximately $2.9 million of unamortized offering commissions andexpenses.

 

***Covenant Compliance. ***We were incompliance with all covenants in our debt agreements at June 30, 2004.

 

#### **Explorationand Production**

 

A vital aspect of ourlong-term business plan is to double proven reserves and equity production ofnatural gas from the level at December 31, 2001 over a five year period.  In order to achieve this goal, we willcontinue to focus on continued development of our leasehold positions in thePowder River CBM development and the Greater Green River Basin.  Each of our existing upstream projects isfully integrated with our midstream operations. In other words, we provide the gathering, compression, processing,marketing or transportation services for both our own production and forthird-party operators.  Additionally, weare actively pursuing new exploration, development and producing propertyacquisition opportunities.

#### ** **

#### **Ourprincipal upstream operations are summarized in the following table:**

 
| **Production  Area**   | ** ** | **Gross Acres  Under Lease At  June 30, 2004** | ** ** | **Net Acres  Under Lease At  June 30, 2004** | ** ** | **Average Net  Production Sold  for the Quarter  Ended  June 30, 2004** | ** ** | **Gross  Productive Gas  Wells at  June 30, 2004** | ** ** | **Net Productive  Gas Wells at  June 30, 2004** | ** ** |
|------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------|------------|
| Powder River Basin CBM |       | 1,052,000                                      |       | 534,000                                      |       | 118 Mmcfe/day                                                           |       | 3,665                                              |       | 1,736                                           |       |
| Pinedale/Jonah Basin   |       | 169,000                                        |       | 27,000                                       |       | 22 Mmcfe/day                                                            |       | 168                                                |       | 18                                              |       |
| Sand Wash Basin        |       | 174,000                                        |       | 144,000                                      |       | 7 Mmcfe/day                                                             |       | 17                                                 |       | 17                                              |       |
| Northeast Colorado     |       | 394,000                                        |       | 340,000                                      |       | —                                                                  |       | —                                             |       | —                                          |       |
| Other                  |       | 77,000                                         |       | 57,000                                       |       | 1 Mmcfe/day                                                             |       | 10                                                 |       | 2                                               |       |

 

***Powder River BasinCoal Bed Methane.  ***Wecontinue to develop our Powder River Basin CBM reserves and expand theassociated gathering system in northeast Wyoming.  The Powder River Basin CBM area is currentlyone of the largest on-shore plays for the development of natural gas in theUnited States.  Within this area, togetherwith our co-developer, we continue to be the largest producer of naturalgas.  Additionally, Western is thelargest gatherer of natural gas and, through our MIGC pipeline, we transport asignificant volume of gas out of this basin.

 

The drilling operations in the Powder River Basin have been primarilyfocused on developing reserves in the Wyodak and related coals, which arelocated on the east side of the coal bed development.  Our net production sold from the Wyodak coalaveraged 94 MMcfd in the second quarter ended June 30, 2004.  Overall, we believe the Wyodak coals havereached their peak production and will gradually decline over the next severalyears.

 

  The majority of future development will be concentrated ondeveloping the Big George and related coal seams.  Our net production from the Big George coalcontinues to increase and in July 2004 was over 23 MMcfd from the All NightCreek Unit, Pleasantville, SG Palo, Bullwhacker and Kingsbury Unit developmentareas.  As of July 2004, we had 474 BigGeorge wells that are dewatering and producing gas.  An additional 221Big George wells aredewatering and 245 Big George wells have been drilled and are in various stages of completion and hook-up inpreparation for production.

 

In order to develop the majority of our undeveloped acreage in thisbasin, we are required to obtain federal drilling permits from the BLM.  The BLM has been reviewing its permittingprocess in an effort to issue to industry a total of approximately 3,000permits per year under the EIS.  As ofJuly 31, 2004, we have received 244 permits to drill on federal acreage andrequire an additional 181 permits to complete our 2004-drilling plan.  We are unable to

 

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predict the rate at which permits will be granted in the future or ifwe can receive the permits necessary to accomplish our drilling targets.

 

Additionally, the Wyoming Department of Environmental Quality, or DEQ,has revised some standards for surface water discharge that have allowed theissuance of most of the permits that apply to the Cheyenne and Belle Fourchedrainage areas. The majority of our existing production is from wells draininginto these areas.  Most of ourundeveloped prospects from the Big George formation are located in the PowderRiver drainage area.  The Wyoming DEQwill and has required additional water management techniques, such ascontainment or treating, in these areas. We are treating the water produced in some areas of the basin.  These treating operations have added to thecost of development and operations in these areas.  We continue to evaluate several options forwater treatment to identify alternative methodologies, which may be moreeffective and cost efficient.

 

Our 2004 capital budget for the Powder River Basin coal bed project isestimated at $81.1 million, of which $27.2 million was spent through June 30,2004.   We currently plan to participatein the drilling of a total of 800 gross wells in 2004.   Of this total, we plan to drill 500 grosswells in the Big George coals and 300 gross wells in the Wyodak coals.  Through July 31, 2004, we drilled a total of213 gross wells in the Big George coals and 96 wells in the Wyodak coals.  Due to regulatory uncertainties, which arebeyond our control, we can make no assurance that we will incur this level ofcapital expenditure during 2004.

 

***Jonah/PinedaleFields.* **Ourexploration and production assets in the Green River Basin of southwest Wyomingare located in the Jonah Field and Pinedale Anticline areas.  Our capital budget for 2004 in the JonahField and Pinedale Anticline areas provides for expenditures of approximately$37.9 million for drilling costs and production equipment, of which $7.2million was spent in the first six months of 2004.  During 2004, we currently expect toparticipate in the drilling of 68 gross wells, or approximately seven netwells, on the Pinedale Anticline, of which 22 gross wells, or two net wells,were drilled in the first half of this year. Drilling to date on the Pinedale Anticline has been allowed on one wellper 40-acre tract.  In July 2004, oneoperator on the Pinedale anticline received permission from the State ofWyoming to drill two wells per 40-acre tract. If this spacing were approved along the expanse of the PinedaleAnticline and proves successful, we would significantly increase our number ofdrilling locations and our reserve potential. Due to drilling and regulatory uncertainties, which are beyond ourcontrol, there can be no assurance that we will incur this level of capitalexpenditure during 2004.

 

***Sand Wash Basin.***   We continue to explore and develop ouracreage position in the Sand Wash Basin in northwest Colorado, located in theGreater Green River Basin.   Our 2004capital budget in this area provides for expenditures of approximately $12.6million for the drilling of eight gross and net development wells and oneexploratory well.  In the first sixmonths of 2004, we spent $7.0 million primarily for the drilling of four grossand net development wells in this area, and one exploratory well, which wasplugged and abandoned.

 

***Acquisition of SanJuan Basin Properties.****  *On July 21, 2004,we signed a purchase and sale agreement to acquire oil and gas assets in theSan Juan Basin of New Mexico for approximately $82.2 million.  Closing is expected to occur on October 1,2004 and is subject to due diligence.  Weexpect to fund this acquisition with amounts available under our revolving creditfacility.  In conjunction with signingthe agreement, we paid a deposit of $4.1 million to be applied against thepurchase price at closing.  Thepurchase includes 32,000 gross acres, or 24,000 net acres, with approximately100 wells producing 13 MMcf per day gross, or 9 MMcf per day net, of coal bedmethane.   Proved reserves as of December31, 2003 were estimated to be approximately 60 Bcfe.  The purchase also includes approximately 130miles of related gathering systems, which are currently connected to ourexisting San Juan River plant. Approximately 30% of the properties are subject to a preferential rightto purchase by a third party.

 

***Exploration. *** Weare also actively seeking to add additional exploration core projects that arefocused on Rocky Mountain natural gas.  We will utilize our expertise in exploration and low-risk development oftight-gas sands, coal bed methane and fractured shale plays to evaluateacquisitions of either additional leaseholds, proven and undeveloped reservesor companies with operations focused in the Rockies.

 

Toward this goal, as of June 30, 2004, we have acquired the drillingrights in the northeastern area of the Denver-Julesburg Basin in northeastColorado and southwest Nebraska.  In thefourth quarter of 2003, we drilled two test wells in this area to furtherevaluate its potential.  These wells arecompleted and have been flow tested. Overall the gas flow rates from these test wells were encouraging and wewill continue to evaluate the economics of these properties.  We plan to drill at least 9 test wells inthis area in 2004, of which four have been drilled through July 31, 2004.  These wells are not yet

 

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completed.  We are targeting theNiobrara formation at a depth of approximately 2,500 feet.  The drilling and completion costs per grosswell are expected to approximate $200,000.

 

In the fourth quarter of 2003, we alsoparticipated in two gross exploratory wells, or one net well, in the easternGreen River Basin.  One of these wells ison production, and the other well is waiting on completion.  If these wells are successful, additionaloffset locations may be proposed.

 

Our capital expenditure budget for 2004 in the exploration area totals$10.5 million, primarily for our participation in drilling activities, seismicsurveys and leasehold acquisition.   Inthe first six months of 2004, we spent a total of $2.8 million.

 

#### **MidstreamOperations**

#### ** **

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

 

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

#### ** **

At June 30, 2004, we operated a variety of gathering, processing andtreating facilities, or plant operations, as presented on the PrincipalGathering and Processing Facilities Table set forth below.  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 coreassets include our plant operations located in west Texas, Oklahoma and NewMexico.  We believe that our core assetshave stable production rates, provide a significant operating cash flow andcontinue to provide us with strategic growth opportunities.

 

#### **Powder River Basin. **Our operations in the Powder River Basin are fully integrated with ourexploration and production operations as we provide gathering services for ourown production.  Additionally we providethe same types of services for third-parties. Our assets in the Powder River Basin in northeast Wyoming are primarilycomprised of our coal bed methane gathering system, several gas processingfacilities and our 13% equity interest in Fort Union.

 

Our capitalbudget in the Powder River Basin for midstream activitiesprovides for expenditures of approximately $31.3 million during 2004, of which$6.4 million was spent in the six months ended June 30, 2004.  Dueto drilling, regulatory, commodity pricing and other uncertainties, which arebeyond our control, there can be no assurance that we will incur this level ofcapital expenditure during 2004 or that we will not be required to makeadditional capital commitments to continue expansion in this basin.

 

***Green RiverBasin***.  Our gathering andprocessing operations in the Green River Basin of southwest Wyoming are alsofully integrated with our exploration and production operations in thisarea.  Our midstream assets in this basinare comprised of the Granger and Lincoln Road processing facilities, orcollectively the Granger complex, our 50% equity interest in Rendezvous GasServices, L.L.C., or Rendezvous, our Red Desert processing plant and our TableRock, Wamsutter and Desert Springs gathering systems.

 

Our 2004capital budget for midstream activities in this basin providesfor expenditures of approximately $42.3 million, of which $11.4 million wasspent in the first six months of 2004. This capital budget includes approximately $41.0 million for gatheringlines and installation of compression to expand the capacity of our GrangerComplex, our Wamsutter gathering system and our Red Desert processing plant,and $1.3 million for additional contributions to Rendezvous for the expansionof its systems.  In the second half of 2004,we also expect to construct a 200 MMcf per day processing facility adjacent tothe Granger Complex to process gas flowing on a third-party pipeline.  Due to drilling, commodity pricing andregulatory uncertainties, which are beyond our control, there can be noassurance that we will incur this level of capital expenditure during 2004.

 

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***West Texas******.*****  **Our primary assets in west Texas are the Midkiff/Benedum gathering andprocessing complex and the Gomez and Mitchell Puckett treating facilities.  Our capital budget in this area provides forexpenditures of approximately $9.5 million during 2004, of which $3.3 millionwas spent in the first six months of 2004. This budget includes approximately $6.4 million for additions to thegathering systems and processing facilities and approximately $3.1 million forreplacing and upgrading field and plant equipment.

 

***Oklahoma******.* **Our primary assets in Oklahoma are theChaney Dell gathering and processing facility and the Westana gatheringsystem.  Our capital budget in this areaprovides for expenditures of approximately $14.5 million during 2004, of which$6.6 million was spent in the first six months of 2004.  This budget includes approximately $11.1million for additions to the gathering systems and plant facilities andapproximately $3.4 million for replacing and upgrading field and plantequipment.

 

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***Principal Gatheringand Processing Facilities Table.***  The following table provides informationconcerning our principal gathering, processing and treating facilities at June30, 2004.

 
| ** **                    | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **                                  | ** ** | **Average for the Six Months Ended  June 30, 2004** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | ** **                  | ** ** | **Gas  Gathering  System  Miles** | ** ** | **Gas  Throughput  Capacity  (MMcf/D) (2)** | ** ** | ** **                                          |
| **Facilities  (1)**           | ** ** | **Year Placed  In Service** | ** ** | ** **                        | ** ** | **Gas  Throughput  (MMcf/D) (3)**           | ** ** | **Gas  Production  (MMcf/D) (4)**                   | ** ** | **NGL  Production  (MGal/D) (4)** | ** ** |
| Texas                         |       |                        |       |                              |       |                                        |       |                                                |       |   |   |   |   |
| Gomez Treating (5)            |       | 1971                        |       | 389                               |       | 280                                         |       | 98                                                  |       | 89 |   | — |   |
| Midkiff/Benedum               |       | 1949                        |       | 2,286                             |       | 165                                         |       | 141                                                 |       | 93 |   | 850 |   |
| Mitchell Puckett Treating (5) |       | 1972                        |       | 126                               |       | 120                                         |       | 50                                                  |       | 32 |   | 1 |   |
| Wyoming                       | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **                                  | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Coal Bed Methane Gathering    |       | 1990                        |       | 1,368                             |       | 525                                         |       | 395                                                 |       | 93 |   | — |   |
| Desert Springs Gathering      |       | 1979                        |       | 65                                |       | 10                                          |       | 6                                                   |       | 6 |   | 23 |   |
| Fort Union Gas Gathering      |       | 1999                        |       | 167                               |       | 635                                         |       | 461                                                 |       | 461 |   | — |   |
| Granger (6)(7)(8)             |       | 1987                        |       | 559                               |       | 235                                         |       | 202                                                 |       | 150 |   | 320 |   |
| Hilight Complex (6)           |       | 1969                        |       | 657                               |       | 124                                         |       | 18                                                  |       | 14 |   | 60 |   |
| Kitty/Amos Draw (6)           |       | 1969                        |       | 321                               |       | 17                                          |       | 6                                                   |       | 4 |   | 25 |   |
| Lincoln Road                  |       | 1988                        |       | 149                               |       | 50                                          |       | —                                              |       | — |   | — |   |
| Newcastle (6)                 |       | 1981                        |       | 146                               |       | 5                                           |       | 3                                                   |       | 2 |   | 21 |   |
| Red Desert (6)                |       | 1979                        |       | 119                               |       | 42                                          |       | 40                                                  |       | 27 |   | 49 |   |
| Rendezvous                    |       | 2001                        |       | 238                               |       | 275                                         |       | 246                                                 |       | 246 |   | — |   |
| Reno Junction (7)             |       | 1991                        |       | —                            |       | —                                      |       | —                                              |       | — |   | 130 |   |
| Table Rock Gathering          |       | 1979                        |       | 69                                |       | 20                                          |       | 14                                                  |       | 14 |   | — |   |
| Wamsutter Gathering           |       | 1979                        |       | 239                               |       | 50                                          |       | 46                                                  |       | 41 |   | 20 |   |
| Wind River Gathering          |       | 1979                        |       | 111                               |       | 80                                          |       | 52                                                  |       | 51 |   | — |   |
| Oklahoma                      |       |                        |       |                              |       |                                        |       |                                                |       |   |   |   |   |
| Chaney Dell/Westana           |       | 1966                        |       | 3,242                             |       | 175                                         |       | 183                                                 |       | 159 |   | 306 |   |
| New Mexico                    |       |                        |       |                              |       |                                        |       |                                                |       |   |   |   |   |
| San Juan River (5)            |       | 1955                        |       | 140                               |       | 60                                          |       | 27                                                  |       | 22 |   | 42 |   |
| Utah                          |       |                        |       |                              |       |                                        |       |                                                |       |   |   |   |   |
| Four Corners Gathering        |       | 1988                        |       | 104                               |       | 15                                          |       | 2                                                   |       | 1 |   | 12 |   |
| Total                         |       |                        |       | 10,495                            |       | 2,883                                       |       | 1,990                                               |       | 1,505 |   | 1,859 |   |

 

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(1)                      Our interest in all facilities is100% except for Midkiff/Benedum (73%); Newcastle (50%); Fort Union (13%) andRendezvous (50%).  We operate all facilities,and all data include our interests and the interests of other joint interestowners and producers of gas volumes dedicated to the facility.  Unless otherwise indicated, all facilitiesshown in the table are gathering, processing or treating facilities.

(2)                      Gas throughput capacity is as ofJune 30, 2004 and represents capacity in accordance with design specificationsunless other constraints exist, including permitting or field compressionlimits.

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

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

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

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

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

(8)                      Lincoln Road is operated on anintermittent basis to process excess gas from the Granger system. As of January1, 2004, the volume information for this facility is reported with the volumeinformation reported for Granger.

 

***Transportation Operations***

#### ** **

Weown and operate MIGC, Inc., an interstate pipeline located in the Powder RiverBasin in Wyoming, and MGTC, Inc., an intrastate pipeline located in northeastWyoming.  MIGC charges a Federal EnergyRegulatory Commission, or FERC, approved tariff and is connected to pipelinesowned by Colorado Interstate Gas Company, Williston Basin Interstate PipelineCompany, Kinder Morgan Interstate Pipeline Co., Wyoming Interstate Company,Ltd. and MGTC.  MIGC earns fees on amonthly basis from firm capacity contracts under which the shipper pays for

 

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transportcapacity whether or not the capacity is used and from interruptible contractswhere a fee is charged based upon volumes received into the pipeline.  Contracts with third parties for firm capacityon MIGC range in duration from one month to five years and the fees chargedaveraged $0.33 per Mcf in the first six months of 2004.  MGTC provides transportation and gas sales tovarious cities in Wyoming at rates that are subject to the approval of theWyoming Public Service Commission.

 

The FERC has implemented changes over the past several years torestrict transactions between regulated pipelines and affiliatedcompanies.  In November 2003, the FERCissued a notice of rulemaking limiting the use of affiliates’ employees in theoperation of regulated entities.  In July2004, we received a partial waiver from the FERC allowing us to share someemployees in the operation of these entities.

 

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

 
| ** **                         | ** ** | ** **                  | ** ** | ** **                | ** ** | **Average for the Six Months  June 30, 2004** | ** ** |
|------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------------------------------|------------|
| **Transportation  Facilities (1)** | ** ** | **Year Placed  In Service** | ** ** | **Transportation  Miles** | ** ** | **Pipeline Capacity  (MMcf/D) (2)**           | ** ** | **Gas Throughput  (MMcf/D) (3)** | ** ** |
| MIGC (4)                           |       | 1970                        |       | 263                       |       | 130                                           |       | 149 |   |
| MGTC (5)                           |       | 1963                        |       | 251                       |       | 18                                            |       | 7 |   |
| Total                              |       |                        |       | 514                       |       | 148                                           |       | 156 |   |

 

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

(2)                      Pipeline capacity representscertificated capacity at the Powder River junction only and does not includeinterruptible capacity or capacity at other delivery points.

(3)                      Aggregate volumes transported bya pipeline.

(4)                      MIGC is an interstate pipelinelocated in Wyoming and is regulated by the FERC.

(5)                      MGTC is a public utility locatedin Wyoming and is regulated by the Wyoming Public Service Commission.

 

***Marketing Operations***

 

***Gas*.*   ***We market gas produced atour wells and our plants and purchased from third-parties to end-users, localdistribution companies, or LDCs, pipelines and other marketing companiesthroughout the United States and Canada. In addition to our offices in Denver, we have marketing offices inHouston, Texas and Calgary, Alberta. Third-party sales, firm transportation capacity on interstate pipelinesand our gas storage positions, combined with the stable supply of gas from ourfacilities and production, enable us to respond quickly to changing marketconditions and to take advantage of seasonal price variations and peak demandperiods.

 

One of the primary goals of our gas marketing operations continues tobe the preservation and enhancement of the value received for our equityvolumes of natural gas.  This goal isachieved through the use of hedges on the production of our equity natural gasand through the use of firm transportation capacity.  Historically, the gas produced in the RockyMountain region has traded at a substantial discount to the Mid-Continent andwest coast areas as a result of limited pipeline capacity from the region.  During the second quarter of 2003, additionalpipeline capacity out of the Rocky Mountain region went into service.  This pipeline expansion contributed to areduction in the price difference between the Rocky Mountain region andMid-Continent market center.  We expectthis additional pipeline capacity to continue to have an ongoing impact on theprice differences between the Rocky Mountain and Mid-Continent regions.

 

For the six months ended June 30, 2004, our total gas sales volumesaveraged 1.3 Bcf per day, of which 494 MMcf per day was produced at our plantsor from our producing properties.  Thisvolume of sales is an approximate 14% decrease as compared to the same periodin 2003.  In general, we reduced oursales volume due to price volatility and credit concerns with manycounterparties in the energy industry. The marketing of products purchased from third-parties typically resultsin low profit margins relative to the sales price.  We sell gas under agreements with varyingterms and conditions in order to match seasonal and other changes in demand.

 

Revenues for sales of product are recognized at the time the gas isdelivered to the customer and are sensitive to changes in the market prices ofthe underlying commodities.  Gains andlosses on any accompanying financial transactions are recorded net.  Additionally, for our marketing activities,we utilize mark-to-market accounting. Under mark-to-market accounting, the expected margin to be realized overthe term of the transaction is recorded in

 

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the month of origination.  To theextent that a transaction is not fully hedged or there is any hedgeineffectiveness, additional gains or losses associated with the transaction maybe reported in future periods.

 

***NGLs*.*  ***We market NGLs, includingethane, propane, iso-butane, normal butane, natural gasoline and condensate,produced at our plants and purchased from third-parties, in the Rocky Mountain,Mid-Continent and Southwestern regions of the United States.  A majority of our production of NGLs moves tothe Gulf Coast area, which is the largest NGL market in the United States.  Through the development of end-use marketsand distribution capabilities, we seek to ensure that products from our plantsmove on a reliable basis, avoiding curtailment of production.  For the six months ended June 30, 2004, NGLsales averaged 1,627 MGal per day, of which 1,388 MGal per day was produced atour plants.

 

Consumers of NGLs are primarily the petrochemical industry, thepetroleum refining industry and the retail and industrial fuel markets.  As an example, the petrochemical industryuses ethane, propane, normal butane and natural gasoline as feedstocks in theproduction of ethylene, which is used in the production of various plasticsproducts.  Further, consumers use propanefor home heating, transportation and agricultural applications.  Price, seasonality and the economy primarilyaffect the demand for NGLs.

 

Wesell NGLs under agreements with varying terms and conditions in order to matchseasonal and other changes in demand. The marketing of products purchased from third-parties typically resultsin low profit margins relative to the sales price.  As in the case of natural gas, we continuallymonitor and review the credit exposure to our NGL marketing counterparties.

 

Revenuesfor sales of NGLs are recognized at the time the NGLs are delivered to thecustomer and are sensitive to changes in the market prices of the underlyingcommodities.  Gains and losses on anyaccompanying financial transactions are recorded net.  Additionally, for our marketing activities weutilize mark-to-market accounting.  Asdiscussed above, under mark-to-market accounting, the expected margin to berealized over the term of the transaction is recorded in the month oforigination.  To the extent that a transaction is not fully hedged or there is anyhedge ineffectiveness, additional gains or losses associated with thetransaction may be reported in future periods.

 

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**ITEM 3.**                      **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

We utilize a combination of fixed price forward contracts,exchange-traded futures and options, as well as fixed index swaps, basis swapsand options traded in the over-the-counter, or OTC, market to accomplish thesegoals.  These instruments allow us topreserve value and protect margins because corresponding losses or gains in thevalue of the financial instruments offset gains or losses in the physicalmarket.

 

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

 

We enter into futures transactions on the New York Mercantile Exchange,or NYMEX, and through OTC swaps and options with various counterparties,consisting primarily of investment banks, financial institutions and othernatural gas companies.  We conduct creditreviews of all of our OTC counterparties and have agreements with many of theseparties that contain collateral requirements. We generally use standardized swap agreements that allow for offset ofpositive and negative OTC exposures with the same counterparty.  OTC exposure is marked-to-market daily forthe credit review process.  Our exposureto OTC credit risk is reduced by our ability to require a margin deposit fromour counterparties based upon the mark-to-market value of their net exposure.  We are also subject to margin depositrequirements under these same agreements and under margin deposit requirementsfor our NYMEX transactions.  At June 30,2004, we had $1.9 million of margin deposits outstanding.

 

We continually monitor and review the creditexposure to our marketing counterparties. In order to minimize our credit exposures, we have utilized existingnetting agreements to reduce our net credit exposure, established new nettingagreements with additional customers, terminated several long-term marketingobligations, negotiated accelerated payment terms with several customers, andreduced the amount of credit which we make available to various customers.  Although netting agreements similar to thosethat we utilize have been upheld by bankruptcy courts in the past, if any ofthese customers with whom we have netting agreements were to file forbankruptcy, we can provide no assurance that our agreements will not bechallenged or as to the outcome of any 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 engage inhedging activities, we may be prevented from realizing the benefits offavorable price changes in the physical market. However, we are similarly insulated against decreases in these prices.

 

***Risk Policy andControl.**** *We control the extent of riskmanagement and marketing activities through policies and procedures thatinvolve the senior level of management. On a daily basis, our marketing activities are audited and monitored by ourindependent 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 risklimit parameters and risk management policy.

 

***Hedge Positions.* **As of June 30, 2004, we have hedgedapproximately 49% of our projected 2004 equity natural gas volumes andapproximately 48% of our projected equity production of crude oil, condensate,and NGLs.  All of these contracts aredesignated and accounted for as cash flow hedges.  As such, gains and losses related to theeffective portions of the changes in the fair value of the derivatives arerecorded in Accumulated other comprehensive income, a component ofStockholders’ equity.  Realized gains orlosses on these cash flow hedges are recognized in the Consolidated Statementof Operations through Sale of gas or Sale of natural gas liquids when thehedged transactions occur.

 

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

 

In the first quarter of 2004, we determinedin our quarterly effectiveness testing thatourhedges of equity butane production which utilized crude oil puts as a surrogateare no longer effective hedges.  Therefore, in the first quarter,we discontinued cash flow hedge accountingtreatment onthese instruments.  The value of these financial instruments willremain in Accumulated other comprehensive income and will be reclassified toour results of operations as the underlying transactions occur.  A loss of $213,000 was included inAccumulated other comprehensive income at June 30, 2004 for these items.   Our remaining hedges for our other productsare expected to continue to be “highly effective” under SFAS No. 133 in thefuture.  Gains or losses from theineffective portions of changes in the fair value of cash flow hedges arerecognized currently in earnings through Price risk management activities.  During the six months ended June 30, 2004, werecognized a loss of $26,000 from the ineffective portions of our hedges.

 

### ***Outstanding Equity Hedge Positions and the Associated Basisfor 2004 and 2005****.* The following table details our hedge positions as of June 30,2004.  In order to determine the hedgedprice to the particular operating region, deduct the basis differential fromthe NYMEX price.  The prices for NGLs do not include the cost of the hedges of approximately$284,000 as of June 30, 2004.  There is no associated cost forthe natural gas hedges.

 
| **Product**                          | ** ** | **Year** | ** ** | **Quantity and Settle Price**                                                                                                               | ** ** | **Hedge of Basis Differential**                                                                                                                                                                                                                                                   |
|--------------------------------------|------------|----------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Natural gas                          |       | 2004     |       | 70,000 MMBtu per day with a minimum price of $4.00 and a maximum  price ranging from $6.50 to $9.45 per MMbtu (average of $7.81 per MMBtu.) |       | Mid-Continent – 55,000 MMBtu per day with an average basis price of  ($0.27) per MMbtu.  Permian – 5,000 MMBtu per day with an average basis price of ($0.34) per  MMbtu.  Rocky Mountain – 10,000 MMBtu per day with an average basis price of  ($0.74)per MMbtu. |
|                                 |       |     |       |                                                                                                                                        |       |                                                                                                                                                                                                                                                                              |
|                                 |       | 2005     |       | 40,000 MMBtu per day with a minimum price of $4.50 and a maximum  price ranging of $8.74 per MMbtu.                                         |       | Mid-Continent – 40,000 MMBtu per day with an average basis price of  ($0.43) per MMbtu.                                                                                                                                                                                      |
|                                 |       |     |       |                                                                                                                                        |       |                                                                                                                                                                                                                                                                              |
| Crude, Condensate, Natural  Gasoline |       | 2004     |       | 50,000 Barrels per month with a minimum price of $22.00 per barrel  and a maximum price of $30.08 per barrel.                               |       | Not Applicable                                                                                                                                                                                                                                                                    |
|                                 |       |     |       |                                                                                                                                        |       |                                                                                                                                                                                                                                                                              |
|                                 |       | 2005     |       | 25,000 Barrels per month with a minimum price of $30.00 per barrel  and a maximum price of $42.75 per barrel.                               |       | Not Applicable                                                                                                                                                                                                                                                                    |

 

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| Propane |   | 2004   |   | 90,000 Barrels per month with a minimum price of $0.42 per gallon and  a maximum price of $0.56 per gallon.    |   | Not Applicable |
|---------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------|--------|----------------|
|    |   |   |   |                                                                                                           |   |           |
|    |   | 2005   |   | 50,000 Barrels per month with a minimum price of $0.535 per gallon  and a maximum price of $0.8175 per gallon. |   | Not Applicable |
|    |   |   |   |                                                                                                           |   |           |
| Ethane  |   | 2004   |   | 50,000 Barrels per month.   Floor at $0.305 per gallon.                                                   |   | Not Applicable |

 

Account balances related to equity and transportation hedgingtransactions (designated as hedges under SFAS 133) at June 30, 2004 were $2.1million in Current assets from price risk management activities, $200,000 inLong-term assets from price risk management activities, $7.8 million in CurrentLiabilities from price risk management activities, ($2.0) million in Deferredincome taxes payable, net, and a $3.5 million after-tax unrealized loss inAccumulated other comprehensive income, a component of Stockholders’Equity.  Based on prices as of June 30,2004, approximately $3.3 million of losses in Accumulated other comprehensiveincome will be reclassified to earnings in the remainder of 2004.

 

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

 
| Fair value of contracts outstanding at  December 31, 2003              |   | $      | 6,707  |   |
|------------------------------------------------------------------------|--------|--------|--------|--------|
| Increase in value due to change in price                               |   | (3,891 | )      |
| Decrease in value due to new contracts  entered into during the period |   | 3,786  |   |
| Gains realized during the period from  existing and new contracts      |   | (7,310 | )      |
| Changes in fair value attributable to  changes in valuation techniques |   | — |   |
| Fair value of contracts outstanding at June  30, 2004                  |   | $      | (708   | )      |

 

A summary of our outstanding derivative positions at June 30, 2004 isas follows (dollars in thousands):

 
| ** **                       | ** ** | **Fair Value of Contracts at June 30, 2004** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|
| **Source  of Fair Value**        | ** ** | **Total  Fair Value**                        | ** ** | **Maturing  In 2004** | ** ** | **Maturing In  2005-2006** | ** ** | **Maturing In  2007-2008** | ** ** | **Maturing  Thereafter** | ** ** |
| Exchange published prices        |       | $                                            | (914       | ) | $ | (1,659 | ) | $ | 745 |   | — |   | — |   |
| Other actively quoted prices (1) |       | 5,671                                        |       | 3,809 |   | 1,862 |   | — |   | — |   |
| Other valuation methods (2)      |       | (5,465                                       | )          | (5,965 | ) | 500 |   | — |   | — |   |
| Total fair value                 |       | $                                            | (708       | ) | $ | (3,815 | ) | $ | 3,107 |   | — |   | — |   |

 

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(1)          Other actively quotedprices are derived from broker quotations, trade publications, and industryindices.

(2)          Other valuation methodsare the Black-Scholes option-pricing model utilizing prices and volatilityobtained from broker quotations, trade publications, and industry indices.

 

***Foreign Currency Derivative Market Risk***.  As a normal part of our business, we enterinto physical gas transactions which are payable in Canadian dollars.  We enter into forward purchases and sales ofCanadian dollars from time to time to fix the cost of our future Canadiandollar denominated natural gas purchase, sale, storage, and transportationobligations.  This is done to protectmarketing margins from adverse changes in the U.S. and Canadian dollar exchangerate between the time the commitment for the payment obligation is made and theactual payment date of such obligation. As of June 30, 2004, the net notional value of such contracts wasapproximately $37.5 million in Canadian dollars.  As of June 30, 2004, the fair market value ofthese contracts is $27.5 million in U.S. dollars.

 

**ITEM 4.**                      **CONTROLSAND PROCEDURES**

 

***Disclosure Controls and Procedures.***

 

Under the direction of the Chief Executive Officerand President and the Executive Vice President and Chief Financial Officer, wecarried out an evaluation of the effectiveness of our disclosure controls andprocedures (as

 

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defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934) as of the end of the period covered by thisreport, and believe, based upon this evaluation, that our disclosure controlsand procedures are effective as of June 30, 2004.

 

***Internal Control over Financial Reporting.***

 

        There has been no change in our internal control over financial reportingthat occurred during the quarter ended June 30, 2004, that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PARTII - OTHER INFORMATION**

 

ITEM 1.                      LEGAL PROCEEDINGS

 

Reference is made to “Notes to ConsolidatedFinancial Statements (Unaudited) – Legal Proceedings,” in Item 1 of this Form10-Q and incorporated by reference in this Item 1.

 

**ITEM 2.****                       CHANGESIN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 
| **Period**    | ** ** | **Total Number of  Shares (or Units)  Purchased (a)** | ** ** | **Average Price Paid  per Share or Unit (b)** | ** ** | **Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number (or  Approximate Dollar  Value) of Shares (or  Units) that May Yet Be  Purchased Under the  Plans or Programs** | ** ** |
|---------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1 to 30 |       | 7,939                                                 |       | $                                             | 50.467     |                                                                                                | 7,939      |                                                                                                                             | —     |   |
| May 1 to 31   |       | —                                                |       | —                                        |       | —                                                                                              |       | —                                                                                                                           |       |
| June 1 to 30  |       | —                                                |       | —                                        |       | —                                                                                              |       | —                                                                                                                           |       |
|               |            |                                                       |            |                                               |            |                                                                                                     |            |                                                                                                                                  |            |  |

 

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(a)                      Representsshares of our $2.625 Cumulative Convertible Preferred Stock redeemed on April20, 2004.  Holders of 792,061 shares ofthe preferred stock converted such shares into shares of Common Stock in lieuof being redeemed.

(b)                     Includes theredemption price per share of $50.00 plus accrued and unpaid dividends.

 

39

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**ITEM4.****                       SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The following matters were voted on at our Annual Meeting ofStockholders held on May 7, 2004:

 

James A. Senty, Dean Phillips, Bill M.Sanderson and Walter L. Stonehocker were elected as Class Three Directors toserve until their terms expire in 2007 and until their successors have beenelected.  Our other directors whose termsdid not expire on the date of the Annual Meeting, Joseph E. Reid, Richard B.Robinson, Ward Sauvage, Brion Wise and Peter Dea, continued in office.  The results of the election were as follows.

 
| ** **            | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** | **Abstentions** | ** ** | **Broker Non-votes** | ** ** |
|-----------------------|------------|---------------|------------|--------------------|------------|-----------------|------------|----------------------|------------|
| James A. Senty        |       | 58,298,318    |       | 5,959,128          |       | —          |       | —               |       |
| Dean Phillips         |       | 59,872,368    |       | 5,385,078          |       | —          |       | —               |       |
| Bill M. Sanderson     |       | 44,306,400    |       | 19,951,046         |       | —          |       | —               |       |
| Walter L. Stonehocker |       | 43,682,788    |       | 20,547,658         |       | —          |       | —               |       |

 

PricewaterhouseCoopers LLP appointment toserve as our independent auditors for the fiscal year ending December 31, 2003was ratified as follows. 

 
| ** **                 | ** ** | **Votes For** | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-votes** | ** ** |
|----------------------------|------------|---------------|------------|-------------------|------------|-----------------|------------|----------------------|------------|
| PricewaterhouseCoopers LLP |       | 60,065,538    |       | 133,848           |       | 58,060          |       | —               |       |

 

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**ITEM6.****                       EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)                      Exhibits:

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1                 |       | Certificate  of Incorporation of Western Gas Resources, Inc. (previously filed as Exhibit  3.1 to our Registration Statement on Form S-1, Registration No. 33-31604 and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2                 |       | Certificate  of Amendment to the Certificate of Incorporation of Western Gas Resources,  Inc. (previously filed as Exhibit 3.2 to our Registration Statement on Form  S-1, Registration No. 33-31604 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.3                 |       | Certificate of  Designation, Preferences and Rights of Series A Junior Participating  Preferred Stock (previously filed as part of Exhibit 1 to our Form 8-A filed  on March 30, 2001 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.4                 |       | Amended and Restated Bylaws of Western Gas Resources, Inc. adopted by  the Board of Directors on April 7, 2003 (previously filed as Exhibit 3.5 to  our Quarterly Report on Form 10-Q filed on May 14, 2003 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1                |       | Amended and Restated Credit Agreement, dated as of June 29, 2004,  among Western Gas Resources, Inc., as Borrower, Bank of America, N.A., as  Administrative Agent and L/C Issuer, BNP Paribas, JPMorgan Chase Bank, The  Royal Bank of Scotland plc and Wachovia Bank, National Association, as  Co-Syndication Agents, Union Bank of California, N.A., U.S. Bank National  Association and Wells Fargo Bank, N.A., as Co-Documentation Agents, and the  Other Lenders a Party Thereto (previously filed as Exhibit 10.1 to our  Current Report on Form 8-K filed on July 1, 2004 and incorporated herein by  reference).                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2                |       | Continuing Guaranty, dated as of June 29, 2004, by MIGC, Inc.,  Western Gas Resources – Texas, Inc., MGTC, Inc., Mountain Gas Resources, Inc.  Lance Oil & Gas Company, Inc. and Western Gas Wyoming, L.L.C. in favor of  Bank of America, N.A., as Administrative Agent (previously filed as Exhibit  10.2 to our Current Report on Form 8-K filed on July 1, 2004 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3                |       | Amended and Restated Pledge Agreement, dated as of June 29, 2004, by  Western Gas Resources, Inc., in favor of Bank of America, N.A., as  Administrative Agent (previously filed as Exhibit 10.3 to our Current Report  on Form 8-K filed on July 1, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4                |       | Amended and Restated Subsidiary Pledge Agreement, dated as of June  29, 2004, by MIGC, Inc., in favor of Bank of America, N.A., as Administrative  Agent (previously filed as Exhibit 10.4 to our Current Report on Form 8-K  filed on July 1, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.5                |       | Amended and Restated Intercreditor Agreement, dated as of June 29,  2004, by and among the Banks, Bank of America, N.A., as Administrative Agent  for the Banks and The Prudential Insurance Company of America, Pruco Life  Insurance Company, ING Life Insurance & Annuity Company, Prudential Investment  Management, Inc., Pruco Life Insurance Company of New Jersey, Gibralter Life  Insurance Co., Ltd., RGA Reinsurance Company, American Bankers Life Assurance  Company of Florida, Inc., Fortis Benefits Insurance Company and Connecticut  General Life Insurance Company, consented to agreed by Western Gas Resources,  Inc. and its subsidiaries listed therein (previously filed as Exhibit 10.5 to  our Current Report on Form 8-K filed on July 1, 2004 and incorporated herein  by reference). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.6                |       | Letter Amendment No. 2 to Third Amended and Restated Master Shelf  Agreement, dated as of June 29, 2004, by and among Western Gas Resources,  Inc. and The Prudential Insurance Company of America, Pruco Life Insurance  Company, Prudential Investment Management, Inc., ING Life Insurance &  Annuity Company and each Purchaser listed on the Purchaser Schedule attached                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

41

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|   |   | Thereto (previously filed as Exhibit 10.6 to our Current Report on  Form 8-K filed on July 1, 2004 and incorporated herein by reference). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                      |
| 31.1   |   | Section 302  Certification of the Chief Executive Officer.                                                                           |
|   |   |                                                                                                                                      |
| 31.2   |   | Section 302  Certification of the Chief Financial Officer.                                                                           |
|   |   |                                                                                                                                      |
| 32.1   |   | Section 906  Certification of the Chief Executive Officer and Chief Financial Officer                                                |

 

 (b)          Reports on Form 8-K:

 

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

 

•                  CurrentReport on Form 8-K filed on April 22, 2004, announcing the completion of theredemption of all remaining outstanding shares of $2.625 Cumulative ConvertiblePreferred Stock.

 

•                  CurrentReport on Form 8-K furnished May 6, 2004, announcing our financial results forthe quarter ended March 31, 2004.

 

•                  CurrentReport on Form 8-K filed on May 11, 2004, filing amended Bylaws.

 

•                  CurrentReport on Form 8-K filed on May 24, 2004, announcing two-for-one split of thecommon stock.

 

•                  CurrentReport on Form 8-K filed on May 25, 2004, announcing the redemption onJune 24, 2004 of all outstanding 10% Senior Subordinated Notes due 2009.

 

•                  CurrentReport on Form 8-K filed June 25, 2004 announcing the completion of theredemption of all outstanding 10% Senior Subordinated Notes due 2009.

 

42

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                 | WESTERN GAS RESOURCES, INC. |                                                |
|----------------------|-----------------------------|-----------------------------------------------------|
|                 | (Registrant)                |
|                 |                        |                                                |
|                 |                        |                                                |
| Date: August 9, 2004 | By:                         | /s/ PETER A. DEA                                    |   |
|                 |                        | Peter A. Dea                                        |
|                 |                        | Chief Executive Officer and President               |
|                 |                        |                                                |
|                 |                        |                                                |
| Date: August 9, 2004 | By:                         | /s/WILLIAM J. KRYSIAK                               |   |
|                 |                        | William J. Krysiak                                  |
|                 |                        | Executive Vice President - Chief Financial  Officer |
|                 |                        | (Principal Financial and Accounting  Officer)       |
|                      |                             |                                                     |  |  |

 

43

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INDEX TO EXHIBITS

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1                 |       | Certificate  of Incorporation of Western Gas Resources, Inc. (previously filed as Exhibit  3.1 to our Registration Statement on Form S-1, Registration No. 33-31604 and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2                 |       | Certificate  of Amendment to the Certificate of Incorporation of Western Gas Resources,  Inc. (previously filed as Exhibit 3.2 to our Registration Statement on Form  S-1, Registration No. 33-31604 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.3                 |       | Certificate of  Designation, Preferences and Rights of Series A Junior Participating  Preferred Stock (previously filed as part of Exhibit 1 to our Form 8-A filed  on March 30, 2001 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.5                 |       | 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 14, 2003 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.7                |       | Amended and Restated Credit Agreement, dated as of June 29, 2004,  among Western Gas Resources, Inc., as Borrower, Bank of America, N.A., as  Administrative Agent and L/C Issuer, BNP Paribas, JPMorgan Chase Bank, The  Royal Bank of Scotland plc and Wachovia Bank, National Association, as  Co-Syndication Agents, Union Bank of California, N.A., U.S. Bank National  Association and Wells Fargo Bank, N.A., as Co-Documentation Agents, and the  Other Lenders a Party Thereto (previously filed as Exhibit 10.1 to our  Current Report on Form 8-K filed on July 1, 2004 and incorporated herein by  reference).                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.8                |       | Continuing Guaranty, dated as of June 29, 2004, by MIGC, Inc.,  Western Gas Resources – Texas, Inc., MGTC, Inc., Mountain Gas Resources, Inc.  Lance Oil & Gas Company, Inc. and Western Gas Wyoming, L.L.C. in favor of  Bank of America, N.A., as Administrative Agent (previously filed as Exhibit  10.2 to our Current Report on Form 8-K filed on July 1, 2004 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.9                |       | Amended and Restated Pledge Agreement, dated as of June 29, 2004, by  Western Gas Resources, Inc., in favor of Bank of America, N.A., as  Administrative Agent (previously filed as Exhibit 10.3 to our Current Report  on Form 8-K filed on July 1, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.10               |       | Amended and Restated Subsidiary Pledge Agreement, dated as of June  29, 2004, by MIGC, Inc., in favor of Bank of America, N.A., as Administrative  Agent (previously filed as Exhibit 10.4 to our Current Report on Form 8-K  filed on July 1, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.11               |       | Amended and Restated Intercreditor Agreement, dated as of June 29,  2004, by and among the Banks, Bank of America, N.A., as Administrative Agent  for the Banks and The Prudential Insurance Company of America, Pruco Life  Insurance Company, ING Life Insurance & Annuity Company, Prudential  Investment Management, Inc., Pruco Life Insurance Company of New Jersey,  Gibralter Life Insurance Co., Ltd., RGA Reinsurance Company, American Bankers  Life Assurance Company of Florida, Inc., Fortis Benefits Insurance Company  and Connecticut General Life Insurance Company, consented to agreed by  Western Gas Resources, Inc. and its subsidiaries listed therein (previously  filed as Exhibit 10.5 to our Current Report on Form 8-K filed on July 1, 2004  and incorporated herein by reference). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.12               |       | Letter Amendment No. 2 to Third Amended and Restated Master Shelf  Agreement, dated as of June 29, 2004, by and among Western Gas Resources,  Inc. and The Prudential Insurance Company of America, Pruco Life Insurance  Company, Prudential Investment Management, Inc., ING Life Insurance &  Annuity Company and each Purchaser listed on the Purchaser Schedule attached  Thereto (previously filed as Exhibit 10.6 to our Current Report on Form 8-K  filed on July 1, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                          |

 

44

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| 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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