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Transactions with Affiliates

9 Months Ended

Sep. 30, 2019

6. TRANSACTIONS WITH AFFILIATES

Affiliate transactions. Revenues from affiliates include amounts earned by the Partnership from services provided to Occidental and from the sale of natural gas, condensate, and NGLs to Occidental. Occidental sells natural gas, condensate, and NGLs as an agent on behalf of either the Partnership or the Partnership’s customers. When product sales are on the Partnership’s customers’ behalf, the Partnership recognizes associated service revenues and cost of product expense. When product sales are on the Partnership’s behalf, the Partnership recognizes product sales revenues based on Occidental’s sales price to the third party and records the associated cost of product expense. In addition, the Partnership purchases natural gas, condensate, and NGLs from an affiliate of Occidental pursuant to gas purchase agreements.

Operation and maintenance expense includes amounts accrued for or paid to affiliates for the operation of the Partnership’s assets, and for services provided to affiliates and third parties, including field labor, measurement and analysis, and other disbursements. A portion of general and administrative expense is paid by Occidental, which results in affiliate transactions pursuant to the reimbursement provisions of the Partnership’s and WES Operating’s omnibus agreements with Occidental. 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 completed the Merger and the other transactions contemplated in the Merger Agreement, which included the acquisition of AMA from Anadarko. See Note 3.

Cash management. Occidental operates a cash management system whereby excess cash from most of its subsidiaries’ separate bank accounts, including accounts for the Partnership and WES Operating, is generally swept to centralized accounts. Prior to the acquisition of assets from Anadarko, third-party sales and purchases related to such assets were received or paid in cash by Anadarko within its centralized cash management system. Outstanding affiliate balances as of the dates of acquisition were settled entirely through an adjustment to net investment by Anadarko in connection with the acquisitions. Subsequent to asset acquisitions from Anadarko, transactions related to the acquired assets were cash-settled directly by the Partnership with third parties and Anadarko affiliates. Chipeta cash settles its transactions directly with third parties, Occidental, and 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 Anadarko note receivable was $341.9 million and $279.6 million at September 30, 2019, and December 31, 2018, respectively. Following Occidental’s acquisition by merger of Anadarko, the fair value of the Anadarko note receivable reflects consideration of Occidental’s 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 is measured using Level-2 fair value inputs.

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

Commodity-price swap agreements. WES Operating entered into commodity-price swap agreements with Anadarko to mitigate exposure to the commodity-price risk inherent in WES Operating’s percent-of-proceeds, percent-of-product, and keep-whole natural gas processing contracts. Notional volumes for each product-based commodity-price swap agreement were not specifically defined. Instead, the commodity-price swap agreements applied to the actual volumes 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 did not require fair-value measurement. 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 nine months ended September 30, 2019, respectively, and $(3.7) million and $(6.4) million for the three and nine months ended September 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 was 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 Occidental on most of its systems. Natural gas gathering, treating, and transportation throughput (excluding equity investment throughput) attributable to production owned or controlled by Occidental was 7% and 6% for the three and nine months ended September 30, 2019, respectively, and 8% and 7% for the three and nine months ended September 30, 2018, respectively. Natural gas processing throughput (excluding equity investment throughput) attributable to production owned or controlled by Occidental was 42% for the three and nine months ended September 30, 2019, and 41% and 40% for the three and nine months ended September 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 Occidental was 82% for the three and nine months ended September 30, 2019, and 91% and 85% for the three and nine months ended September 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”), Occidental’s marketing affiliate that acts as the Partnership’s agent for third-party sales. 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, executive officers, and Occidental employees performing services for the Partnership from time to time. Phantom units awarded to the independent directors vest one year from the grant date, while all other phantom unit awards are subject to ratable vesting over a three-year service period.

Incentive Plans. General and administrative expense includes equity-based compensation expense allocated to the Partnership by Occidental for awards granted to the executive officers of the general partner and to other employees under (i) the Anadarko Petroleum Corporation 2012 Omnibus Incentive Compensation Plan, as amended and restated, (ii) Occidental’s 2015 Long-Term Incentive Plan, and (iii) Occidental’s Phantom Share Unit Award Plan (collectively referred to as the “Incentive Plans”). General and administrative expense includes costs related to the Incentive Plans of $3.5 million and $9.3 million for the three and nine months ended September 30, 2019, respectively, and $1.4 million and $5.2 million for the three and nine months ended September 30, 2018, respectively. Portions of these amounts are reflected as contributions to partners’ capital in the consolidated statements of equity and partners’ capital.

Purchases from affiliates. During the third quarter of 2019, the Partnership purchased $18.4 million of materials and supplies inventory from Occidental, which is included in Other current assets on the consolidated balance sheets.

Affiliate asset contributions. The following table summarizes affiliate contributions of other assets to the Partnership:



	Nine Months Ended September 30,
	2019		2018
thousands	Purchases
Cash consideration	$	—	$	(254	)
Net carrying value	—		59,089
Partners’ capital adjustment	$	—	$	58,835

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 September 30,				Nine Months Ended September 30,
thousands	2019		2018		2019		2018
Revenues and other ⁽¹⁾	$	398,753	$	350,291	$	1,162,374	$	925,011
Equity income, net – affiliates ⁽¹⁾	53,893		54,215		175,483		133,874
Operating expenses
Cost of product ⁽¹⁾	61,066		39,702		185,463		112,522
Operation and maintenance ⁽¹⁾	39,459		29,794		110,918		79,621
General and administrative ⁽²⁾	27,724		12,645		73,510		37,595
Total operating expenses	128,249		82,141		369,891		229,738
Interest income ⁽³⁾	4,225		4,225		12,675		12,675
Interest expense ⁽⁴⁾	59		2,035		1,912		4,021
APCWH Note Payable borrowings ⁽⁵⁾	—		77,560		11,000		265,468
Repayment of APCWH Note Payable ⁽⁵⁾	—		—		439,595		—
Distributions to Partnership unitholders ⁽⁶⁾	155,240		99,247		411,125		298,818
Distributions to WES Operating unitholders ⁽⁷⁾	5,763		1,911		13,973		5,642
Above-market component of swap agreements with Anadarko	—		12,601		7,407		40,722


⁽¹⁾	Represents amounts earned or incurred on and subsequent to the date of the acquisition of assets from Anadarko, and amounts earned or incurred by Anadarko on a historical basis for periods prior to the acquisition of such assets.

⁽²⁾

Represents general and administrative expense incurred on and subsequent to the date of the acquisition of assets from Anadarko, and 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 Occidental (see LTIPs and Incentive Plans within this Note 6) and amounts charged by Occidental under the omnibus agreements of the Partnership and WES Operating.


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


⁽⁴⁾	See Note 10.


⁽⁵⁾	See Note 1.


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


⁽⁷⁾	Represents distributions paid to other subsidiaries of Occidental pursuant to 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 September 30,				Nine Months Ended September 30,
thousands	2019		2018		2019		2018
General and administrative ⁽¹⁾	$	26,915	$	12,443	$	71,793	$	36,966
Distributions to WES Operating unitholders ⁽²⁾	288,083		130,249		736,256		381,617

⁽¹⁾

Represents general and administrative expense incurred on and subsequent to the date of the acquisition of assets from Anadarko, and 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 Occidental (see LTIPs and Incentive Plans within this Note 6) and amounts charged by Occidental pursuant to the omnibus agreement of WES Operating.


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

6. TRANSACTIONS WITH AFFILIATES (CONTINUED)

Concentration of credit risk. Occidental was the only customer from which revenues exceeded 10% of consolidated revenues for all periods presented in the consolidated statements of operations.