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Transactions with Affiliates

6 Months Ended

Jun. 30, 2019

6. TRANSACTIONS WITH AFFILIATES

Affiliate transactions. Revenues from affiliates include amounts earned by the Partnership from services provided to Anadarko as well as from the sale of natural gas, condensate and NGLs to Anadarko. Anadarko sells such natural gas, condensate and NGLs as an agent on behalf of either the Partnership or the Partnership’s customers. When such sales are on the Partnership’s customers’ behalf, the Partnership recognizes associated service revenues and cost of product expense. When such sales are on the Partnership’s behalf, the Partnership recognizes product sales revenues based on the Anadarko sales price to the third party and cost of product expense associated with these sales activities.

In addition, the Partnership purchases natural gas, condensate and NGLs from an affiliate of Anadarko pursuant to gas purchase agreements. Operation and maintenance expense includes amounts accrued for or paid to affiliates for the operation of the Partnership 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 the Partnership and WES Operating. 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.

Merger transactions. As discussed in more detail in Note 1, on February 28, 2019, the Partnership, WES Operating, Anadarko and certain of their affiliates consummated the Merger and the other transactions contemplated in the Merger Agreement, which included the acquisition of AMA from Anadarko. See Note 3.

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 Partnership assets, third-party sales and purchases related to such assets were received or paid in cash by Anadarko within its centralized cash management system. The outstanding affiliate balances were entirely settled through an adjustment to net investment by Anadarko in connection with the acquisition of the Partnership assets. Subsequent to the acquisition of Partnership assets from Anadarko, transactions related to such assets are cash-settled directly with third parties and with Anadarko affiliates. Chipeta cash settles its transactions directly with third parties and Anadarko, as well as with the other subsidiaries of the Partnership.

Note receivable - Anadarko. In May 2008, WES Operating 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 $325.6 million and $279.6 million at June 30, 2019, and December 31, 2018, 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.

APCWH Note Payable. In June 2017, APCWH entered into an eight-year note payable agreement with Anadarko, which was repaid upon consummation of the Merger. See Note 1 and Note 10.

Commodity price swap agreements. WES Operating had commodity price swap agreements with Anadarko to mitigate exposure to the commodity price risk inherent in its percent-of-proceeds, percent-of-product and keep-whole contracts. Notional volumes for each of the commodity price swap agreements were not specifically defined. Instead, the commodity price swap agreements applied to the actual volume of natural gas, condensate and NGLs purchased and sold. The commodity price swap agreements did not satisfy the definition of a derivative financial instrument and, therefore, were not required to be measured at fair value. Net gains (losses) on commodity price swap agreements were zero and $(0.7) million (due to settlement of 2018 activity in 2019) for the three and six months ended June 30, 2019, respectively, and $(1.4) million and $(2.6) million for the three and six months ended June 30, 2018, respectively, and are reported in the consolidated statements of operations as affiliate Product sales. These commodity price swap agreements expired without renewal on December 31, 2018.

6. TRANSACTIONS WITH AFFILIATES (CONTINUED)

Revenues or costs attributable to volumes sold and purchased during 2018 and/or settled during 2019 for the DJ Basin complex and the MGR assets are recognized in the consolidated statements of operations at the applicable market price in the tables below. A capital contribution from Anadarko is recorded in the consolidated statements of equity and partners’ capital for an amount equal to (i) the amount by which the swap price for product sales exceeds the applicable market price in the tables below, minus (ii) the amount by which the swap price for product purchases exceeds the applicable market price in the tables below. The tables below summarize the swap prices compared to the forward market prices:



	DJ Basin Complex
per barrel except natural gas	2018 Swap Prices		2018 Market Prices ⁽¹⁾
Ethane	$	18.41	$	5.41
Propane	47.08		28.72
Isobutane	62.09		32.92
Normal butane	54.62		32.71
Natural gasoline	72.88		48.04
Condensate	76.47		49.36
Natural gas (per MMBtu)	5.96		2.21



	MGR Assets
per barrel except natural gas	2018 Swap Prices		2018 Market Prices ⁽¹⁾
Ethane	$	23.11	$	2.52
Propane	52.90		25.83
Isobutane	73.89		30.03
Normal butane	64.93		29.82
Natural gasoline	81.68		47.25
Condensate	81.68		56.76
Natural gas (per MMBtu)	4.87		2.21


⁽¹⁾	Represents the New York Mercantile Exchange forward strip price as of December 20, 2017, for the 2018 Market Prices, adjusted for product specification, location, basis and, in the case of NGLs, transportation and fractionation costs.

6. TRANSACTIONS WITH AFFILIATES (CONTINUED)

Gathering and processing agreements. The Partnership has significant gathering and processing arrangements with affiliates of Anadarko on a majority of its systems. Natural gas gathering, treating and transportation throughput (excluding equity investment throughput) attributable to production owned or controlled by Anadarko was 5% and 6% for the three and six months ended June 30, 2019, respectively, and 6% and 7% for the three and six months ended June 30, 2018, respectively. Natural gas processing throughput (excluding equity investment throughput) attributable to production owned or controlled by Anadarko was 42% and 41% for the three and six months ended June 30, 2019, respectively, and 39% and 40% for the three and six months ended June 30, 2018, respectively. Crude oil, NGLs and produced water gathering, treating, transportation and disposal throughput (excluding equity investment throughput) attributable to production owned or controlled by Anadarko was 82% and 83% for the three and six months ended June 30, 2019, respectively, and 82% and 80% for the three and six months ended June 30, 2018, respectively.

Commodity purchase and sale agreements. The Partnership sells a significant amount of its natural gas, condensate and NGLs to Anadarko Energy Services Company (“AESC”), Anadarko’s marketing affiliate that acts as an agent in the sale to a third party. In addition, the Partnership purchases natural gas, condensate and NGLs from AESC pursuant to purchase agreements. The purchase and sale agreements with AESC are generally one-year contracts, subject to annual renewal.

LTIPs. The general partner awards phantom units under the Western Gas Partners, LP 2017 Long-Term Incentive Plan (assumed by the Partnership in connection with the Merger) and the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan (collectively referred to as the “LTIPs”) to its independent directors, but also from time to time to the executive officers and Anadarko employees performing services for the Partnership. 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.

Anadarko Incentive Plan. General and administrative expenses included equity-based compensation expense allocated to the Partnership by Anadarko, for awards granted to the executive officers of the general partner and other employees under the Anadarko Petroleum Corporation 2012 Omnibus Incentive Compensation Plan, as amended and restated (the “Anadarko Incentive Plan”). Portions of these amounts are reflected as contributions to partners’ capital in the consolidated statements of equity and partners’ capital.

6. TRANSACTIONS WITH AFFILIATES (CONTINUED)

Summary of affiliate transactions. The following table summarizes material affiliate transactions included in the Partnership’s consolidated financial statements:



	Three Months Ended June 30,				Six Months Ended June 30,
thousands	2019		2018		2019		2018
Revenues and other ⁽¹⁾	$	385,184	$	289,544	$	763,621	$	574,720
Equity income, net – affiliates ⁽¹⁾	63,598		49,430		121,590		79,659
Cost of product ⁽¹⁾	68,225		38,001		124,397		72,820
Operation and maintenance ⁽¹⁾	32,318		26,826		71,459		49,827
General and administrative ⁽²⁾	26,892		12,262		45,786		24,950
Operating expenses	127,435		77,089		241,642		147,597
Interest income ⁽³⁾	4,225		4,225		8,450		8,450
Interest expense ⁽⁴⁾	20		1,409		1,853		1,986
APCWH Note Payable borrowings ⁽⁵⁾	—		81,343		11,000		187,908
Repayment of APCWH Note Payable ⁽⁵⁾	—		—		439,595		—
Distributions to Partnership unitholders ⁽⁶⁾	153,231		101,571		255,885		199,571
Distributions to WES Operating unitholders ⁽⁷⁾	5,667		1,881		8,210		3,731
Above-market component of swap agreements with Anadarko	—		13,839		7,407		28,121


⁽¹⁾	Represents amounts earned or incurred on and subsequent to the date of the acquisition of Partnership assets, as well as amounts earned or incurred by Anadarko on a historical basis related to the Partnership assets prior to the acquisition of such assets.

⁽²⁾

Represents general and administrative expense incurred on and subsequent to the date of the acquisition of Partnership assets, as well as a management services fee for expenses incurred by Anadarko for periods prior to the acquisition of such assets. These amounts include equity-based compensation expense allocated to the Partnership by Anadarko (see LTIPs and Anadarko Incentive Plan within this Note 6) and amounts charged by Anadarko under the omnibus agreements of the Partnership and WES Operating.


⁽³⁾	Represents interest income recognized on the note receivable from Anadarko.


⁽⁴⁾	See Note 10.


⁽⁵⁾	See Note 1.


⁽⁶⁾	Represents distributions paid to Anadarko under the partnership agreement of the Partnership (see Note 4 and Note 5).


⁽⁷⁾	Represents distributions paid to other subsidiaries of Anadarko under WES Operating’s partnership agreement (see Note 4 and Note 5).

The following table summarizes affiliate transactions for WES Operating (which are included in the Partnership’s consolidated financial statements) to the extent the amounts differ from the Partnership’s consolidated financial statements:



	Three Months Ended June 30,				Six Months Ended June 30,
thousands	2019		2018		2019		2018
General and administrative ⁽¹⁾	$	26,380	$	12,044	$	44,878	$	24,523
Distributions to WES Operating unitholders ⁽²⁾	283,271		127,204		448,173		251,368

⁽¹⁾

Represents general and administrative expense incurred on and subsequent to the date of the acquisition of Partnership assets, as well as a management services fee for expenses incurred by Anadarko for periods prior to the acquisition of such assets. These amounts include equity-based compensation expense allocated to WES Operating by Anadarko (see LTIPs and Anadarko Incentive Plan within this Note 6) and amounts charged by Anadarko under the omnibus agreement of WES Operating.


⁽²⁾	Represents distributions paid to the Partnership and other subsidiaries of Anadarko under WES Operating’s partnership agreement (see Note 4 and Note 5). For the six months ended June 30, 2019, includes distributions to the Partnership and a subsidiary of Anadarko related to the repayment of the WGP RCF (see Note 10).

6. TRANSACTIONS WITH AFFILIATES (CONTINUED)

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 operations.