5. TRANSACTIONS WITH AFFILIATES

Affiliate transactions. Revenues from affiliates include amounts earned by WES from services provided to Anadarko as well as from the sale of residue, condensate and NGLs to Anadarko. In addition, WES purchases natural gas from an affiliate of Anadarko pursuant to gas purchase agreements. Operating and maintenance expense includes amounts accrued for or paid to affiliates for the operation of WES assets, whether in providing services to affiliates or to third parties, including field labor, measurement and analysis, and other disbursements. A portion of general and administrative expenses is paid by Anadarko, which results in affiliate transactions pursuant to the reimbursement provisions of the omnibus agreements of WES and WGP. Affiliate expenses do not bear a direct relationship to affiliate revenues, and third-party expenses do not bear a direct relationship to third-party revenues. See Note 2 for further information related to contributions of assets to WES by Anadarko.

Cash management. Anadarko operates a cash management system whereby excess cash from most of its subsidiaries’ separate bank accounts is generally swept to centralized accounts. Prior to the acquisition of WES assets, third-party sales and purchases related to such assets were received or paid in cash by Anadarko within its centralized cash management system. Anadarko charged or credited WES interest at a variable rate on outstanding affiliate balances for the periods these balances remained outstanding. The outstanding affiliate balances were entirely settled through an adjustment to net investment by Anadarko in connection with the acquisition of WES assets. Subsequent to the acquisition of WES assets from Anadarko, transactions related to such assets are cash-settled directly with third parties and with Anadarko affiliates, and affiliate-based interest expense on current intercompany balances is not charged. Chipeta cash settles its transactions directly with third parties and Anadarko, as well as with the other subsidiaries of WES.

Note receivable from and amounts payable to Anadarko. Concurrently with the closing of WES’s May 2008 IPO, WES loaned $260.0 million to Anadarko in exchange for a 30-year note bearing interest at a fixed annual rate of 6.50%, payable quarterly. The fair value of the note receivable from Anadarko was approximately $301.5 million and $334.8 million at September 30, 2013, and December 31, 2012, respectively. The fair value of the note reflects consideration of credit risk and any premium or discount for the differential between the stated interest rate and quarter-end market interest rate, based on quoted market prices of similar debt instruments. Accordingly, the fair value of the note receivable from Anadarko is measured using Level 2 inputs.

In 2008, WES entered into a five-year $175.0 million term loan agreement with Anadarko, which was repaid in full in June 2012 using the proceeds from the issuance of 4.000% Senior Notes due 2022. See Note 8.

Commodity price swap agreements. WES has commodity price swap agreements with Anadarko to mitigate exposure to commodity price volatility that would otherwise be present as a result of the purchase and sale of natural gas, condensate or NGLs. Notional volumes for each of the commodity price swap agreements are not specifically defined; instead, the commodity price swap agreements apply to the actual volume of natural gas, condensate and NGLs purchased and sold at the Granger, Hilight, Hugoton, Newcastle, MGR and Wattenberg assets, with various expiration dates through December 2016. The commodity price swap agreements do not satisfy the definition of a derivative financial instrument and, therefore, are not required to be measured at fair value. WES has not entered into any new commodity price swap agreements since the fourth quarter of 2011.

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

Below is a summary of the fixed price ranges on WES’s outstanding commodity price swap agreements as of September 30, 2013:



per barrel except natural gas	2013				2014				2015				2016
Ethane	$	18.32	−	30.10	$	18.36	−	30.53	$	18.41	−	23.41	$	23.11
Propane	$	45.90	−	55.84	$	46.47	−	53.78	$	47.08	−	52.99	$	52.90
Isobutane	$	60.44	−	77.66	$	61.24	−	75.13	$	62.09	−	74.02	$	73.89
Normal butane	$	53.20	−	68.24	$	53.89	−	66.01	$	54.62	−	65.04	$	64.93
Natural gasoline	$	70.89	−	92.23	$	71.85	−	83.04	$	72.88	−	81.82	$	81.68
Condensate	$	74.04	−	85.84	$	75.22	−	83.04	$	76.47	−	81.82	$	81.68
Natural gas (per MMbtu)	$	3.75	−	6.09	$	4.45	−	6.20	$	4.66	−	5.96	$	4.87

The following table summarizes realized gains and losses on commodity price swap agreements:



	Three Months Ended September 30,						Nine Months Ended September 30,
thousands	2013			2012			2013			2012
Gains (losses) on commodity price swap agreements related to sales:⁽¹⁾
Natural gas sales	$	6,923		$	9,132		$	14,707		$	30,728
Natural gas liquids sales	27,541			25,986			83,049			46,020
Total	34,464			35,118			97,756			76,748
Losses on commodity price swap agreements related to purchases ⁽²⁾	(23,902		)	(25,803		)	(66,613		)	(70,342		)
Net gains (losses) on commodity price swap agreements	$	10,562		$	9,315		$	31,143		$	6,406


⁽¹⁾	Reported in affiliate natural gas, NGLs and condensate sales in the consolidated statements of income in the period in which the related sale is recorded.


⁽²⁾	Reported in cost of product in the consolidated statements of income in the period in which the related purchase is recorded.

Gas gathering and processing agreements. WES has significant gas gathering and processing arrangements with affiliates of Anadarko on a majority of its systems. Approximately 56% and 63% of WES’s gathering, transportation and treating throughput (excluding equity investment throughput and volumes measured in barrels) for the three months ended September 30, 2013 and 2012, respectively, and 58% and 64% for the nine months ended September 30, 2013 and 2012, respectively, was attributable to natural gas production owned or controlled by Anadarko. Approximately 58% and 61% of WES’s processing throughput (excluding equity investment throughput and volumes measured in barrels) for the three months ended September 30, 2013 and 2012, respectively, and 56% and 59% for the nine months ended September 30, 2013 and 2012, respectively, was attributable to natural gas production owned or controlled by Anadarko.

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

Equipment purchases and sales. The following table summarizes WES’s purchases from and sales to Anadarko of pipe and equipment:



	Nine Months Ended September 30,
	2013		2012		2013		2012
thousands	Purchases				Sales
Consideration ⁽¹⁾	$	6,167	$	18,946	$	82	$	760
Net carrying value	2,039		6,765		34		392
Partners’ capital adjustment	$	4,128	$	12,181	$	48	$	368


⁽¹⁾	Includes a payable of $1.8 million for pipe and equipment purchased in September 2013.

Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan (“WGP LTIP”). During the nine months ended September 30, 2013, WGP GP awarded phantom units under the WGP LTIP to its independent directors, which will vest in January 2014, which is one year from the grant date. Compensation expense is recognized ratably over the vesting period and was approximately $0.1 million and $0.2 million for the three and nine months ended September 30, 2013, respectively.

Western Gas Partners, LP 2008 Long-Term Incentive Plan (“WES LTIP”). WES GP awards phantom units under the WES LTIP primarily to its independent directors and its Chief Executive Officer. The phantom units awarded to the independent directors vest one year from the grant date, while all other awards are subject to graded vesting over a three-year service period. Compensation expense is recognized over the vesting period and was $0.1 million and $0.4 million for the three and nine months ended September 30, 2013, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2012, respectively.

Equity incentive plan and Anadarko incentive plans. General and administrative expenses include equity-based compensation costs allocated by Anadarko for grants made pursuant to (i) the Western Gas Holdings, LLC Equity Incentive Plan, as amended and restated (the “Incentive Plan”) and (ii) the Anadarko Petroleum Corporation 2008 and 2012 Omnibus Incentive Compensation Plans (“Anadarko Incentive Plans”).

General and administrative expenses included $0.8 million and $2.2 million for the three and nine months ended September 30, 2013, respectively, and $0.8 million and $2.4 million for the three and nine months ended September 30, 2012, respectively, of equity-based compensation expense for awards granted to the executive officers of WES GP and other employees under the Anadarko Incentive Plans, which was allocated to WES by Anadarko.

For the three and nine months ended September 30, 2012, general and administrative expenses included $8.6 million and $13.9 million, respectively, of compensation expense for grants of Unit Value Rights, Unit Appreciation Rights (“UARs”) and Distribution Equivalent Rights under the Incentive Plan to certain executive officers of WES GP as a component of their compensation, which was allocated to WES by Anadarko. Awards outstanding under the Incentive Plan at September 30, 2012, were valued at $1,053 per UAR. WGP’s IPO in December 2012 resulted in the vesting of all then unvested Incentive Plan awards and the effective termination of the Incentive Plan.

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

Summary of affiliate transactions. The following table summarizes affiliate transactions, which include revenue from affiliates, reimbursement of operating expenses and purchases of natural gas:



	Three Months Ended September 30,				Nine Months Ended September 30,
thousands	2013		2012		2013		2012
Revenues ⁽¹⁾	$	217,624	$	180,605	$	603,214	$	519,460
Cost of product ⁽¹⁾	33,753		42,839		97,801		115,603
Operation and maintenance ⁽²⁾	13,469		12,638		41,021		38,040
General and administrative ⁽³⁾	6,090		14,227		17,981		30,811
Operating expenses	53,312		69,704		156,803		184,454
Interest income, net ⁽⁴⁾	4,225		4,225		12,675		12,675
Interest expense ⁽⁵⁾	—		81		—		2,684
Distributions to WGP unitholders ⁽⁶⁾	39,329		—		82,068		—
Distributions to WES unitholders ⁽⁷⁾	252		—		494		—
Contributions from Anadarko as a Chipeta noncontrolling interest owner ⁽⁸⁾	—		2,148		—		12,588
Distributions to Anadarko as a Chipeta noncontrolling interest owner ⁽⁸⁾	—		1,464		—		6,528


⁽¹⁾	Represents amounts recognized under gathering, treating or processing agreements, and purchase and sale agreements.


⁽²⁾	Represents expenses incurred on and subsequent to the date of the acquisition of WES assets, as well as expenses incurred by Anadarko on a historical basis related to WES assets prior to the acquisition of such assets by WES.

⁽³⁾

Represents general and administrative expense incurred on and subsequent to the date of WES’s acquisition of WES assets, as well as a management services fee for reimbursement of expenses incurred by Anadarko for periods prior to the acquisition of WES assets by WES. These amounts include equity-based compensation expense allocated to WES by Anadarko (see Equity incentive plan and Anadarko incentive plans within this Note 5) and amounts charged by Anadarko under the WGP omnibus agreement.


⁽⁴⁾	Represents interest income recognized on the note receivable from Anadarko.

⁽⁵⁾

For the three and nine months ended September 30, 2012, includes interest expense recognized on the WES note payable to Anadarko (see Note 8) and interest imputed on the reimbursement payable to Anadarko for certain expenditures Anadarko incurred in 2011 related to the construction of the Brasada and Lancaster plants. WES repaid the WES note payable to Anadarko in June 2012, and repaid the reimbursement payable to Anadarko related to the construction of the Brasada and Lancaster plants in the fourth quarter of 2012. See Note receivable from and amounts payable to Anadarko within this Note 5.


⁽⁶⁾	Represents distributions paid under WGP’s partnership agreement.


⁽⁷⁾	Represents distributions paid under WES’s partnership agreement (see Holdings of WES equity in Note 4).


⁽⁸⁾	As described in Note 2, WES acquired Anadarko’s then remaining 24% membership interest in Chipeta on August 1, 2012, and accounted for the acquisition on a prospective basis. As such, contributions from noncontrolling interest owners and distributions to noncontrolling interest owners subsequent to the acquisition date no longer reflect contributions from or distributions to Anadarko.

Concentration of credit risk. Anadarko was the only customer from whom revenues exceeded 10% of consolidated revenues for all periods presented on the consolidated statements of income.