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 1 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.

WES note receivable from Anadarko. Concurrently with the closing of WES’s May 2008 initial public offering, 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 $322.3 million and $296.7 million at September 30, 2014, and December 31, 2013, 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.

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 and MGR assets, as well as the DJ Basin complex, with various expiration dates through December 2016. In December 2013, WES extended the commodity price swap agreements for the Hilight and Newcastle assets through December 2014. 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.

Below is a summary of the fixed price ranges on WES’s outstanding commodity price swap agreements as of September 30, 2014:



per barrel except natural gas	2014					2015					2016
Ethane	$	18.36	−	$	30.53	$	18.41	−	$	23.41	$	23.11
Propane	40.38		−	53.78		47.08		−	52.99		52.90
Isobutane	61.24		−	75.13		62.09		−	74.02		73.89
Normal butane	53.89		−	66.83		54.62		−	65.04		64.93
Natural gasoline	71.85		−	90.89		72.88		−	81.82		81.68
Condensate	75.22		−	87.30		76.47		−	81.82		81.68
Natural gas (per MMBtu)	3.45		−	6.20		4.66		−	5.96		4.87

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

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



	Three Months Ended September 30,						Nine Months Ended September 30,
thousands	2014			2013			2014			2013
Gains (losses) on commodity price swap agreements related to sales:⁽¹⁾
Natural gas sales	$	3,179		$	6,923		$	1,525		$	14,707
Natural gas liquids sales	22,737			27,541			66,746			83,049
Total	25,916			34,464			68,271			97,756
Losses on commodity price swap agreements related to purchases ⁽²⁾	(19,533		)	(23,902		)	(38,081		)	(66,613		)
Net gains (losses) on commodity price swap agreements	$	6,383		$	10,562		$	30,190		$	31,143


⁽¹⁾	Reported in affiliate natural gas, natural gas liquids 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. WES’s gathering, transportation and treating throughput (excluding equity investment throughput and throughput measured in barrels) attributable to natural gas production owned or controlled by Anadarko was 47% and 53% for the three months ended September 30, 2014 and 2013, respectively, and 48% and 55% for the nine months ended September 30, 2014 and 2013, respectively. WES’s processing throughput (excluding equity investment throughput and throughput measured in barrels) attributable to natural gas production owned or controlled by Anadarko was 58% and 60% for the three months ended September 30, 2014 and 2013, respectively, and 58% and 59% for the nine months ended September 30, 2014 and 2013.

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,
	2014		2013		2014		2013
thousands	Purchases				Sales
Cash consideration	$	16,143	$	6,167	$	—	$	82
Net carrying value	9,745		2,039		—		34
Partners’ capital adjustment	$	6,398	$	4,128	$	—	$	48

WGP LTIP. WGP GP awards phantom units under the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan (“WGP 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. Compensation expense over the vesting period was $57,000 and $0.1 million for the three and nine months ended September 30, 2014, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2013, respectively.

WES LTIP. WES GP awards phantom units under the Western Gas Partners, LP 2008 Long-Term Incentive Plan (“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 $0.2 million and $0.5 million for the three and nine months ended September 30, 2014, respectively, and $0.1 million and $0.4 million for the three and nine months ended September 30, 2013, respectively.

5. TRANSACTIONS WITH AFFILIATES (CONTINUED)

WGP LTIP and Anadarko Incentive Plans. General and administrative expenses included $0.9 million and $2.7 million for the three and nine months ended September 30, 2014, respectively, and $0.8 million and $2.2 million for the three and nine months ended September 30, 2013, respectively, of equity-based compensation expense, allocated to WES by Anadarko, for awards granted to the executive officers of WES GP and other employees under the WGP LTIP and Anadarko Incentive Plans. For the nine months ended September 30, 2014, $2.5 million of allocated equity-based compensation expense is reflected as a contribution to partners’ capital in the consolidated statement of equity and partners’ capital.

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	2014		2013		2014		2013
Revenues ⁽¹⁾	$	245,500	$	213,125	$	708,456	$	591,010
Equity income, net ⁽¹⁾	19,063		4,520		41,322		11,944
Cost of product ⁽¹⁾	22,728		33,753		74,592		97,801
Operation and maintenance ⁽²⁾	14,556		13,469		42,472		41,021
General and administrative ⁽³⁾	6,765		6,090		20,402		17,981
Operating expenses	44,049		53,312		137,466		156,803
Interest income, net ⁽⁴⁾	4,225		4,225		12,675		12,675
Distributions to WGP unitholders ⁽⁵⁾	52,456		39,329		148,291		82,068
Distributions to WES unitholders ⁽⁶⁾	492		252		1,235		495


⁽¹⁾	Represents amounts earned or incurred on and subsequent to the date of acquisition of WES assets, as well as amounts earned or incurred by Anadarko on a historical basis related to WES assets prior to the acquisition of such assets by WES, 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 and WGP by Anadarko (see WES LTIP and WGP LTIP 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⁾	Represents distributions paid under WGP’s partnership agreement (see Note 3 and Note 4).


⁽⁶⁾	Represents distributions paid to other subsidiaries of Anadarko under WES’s partnership agreement (see Note 3 and Note 4).

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