10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
  
(Mark One)
      
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
 
Or 
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to       
 
Commission file number: 001-34046
    
WESTERN GAS PARTNERS, LP
(Exact name of registrant as specified in its charter)
Delaware
 
26-1075808
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1201 Lake Robbins Drive
The Woodlands, Texas
 
77380
(Address of principal executive offices)
 
(Zip Code)
   
(832) 636-6000
(Registrant’s telephone number, including area code)
   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
  
Accelerated filer
  
Non-accelerated filer
  
Smaller reporting company
 
  
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

There were 128,574,646 common units outstanding as of October 26, 2015.


Table of Contents

TABLE OF CONTENTS

 
 
 
PAGE
PART I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
Item 4.
PART II
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 6.


2

Table of Contents

DEFINITIONS

As generally used within the energy industry and in this quarterly report on Form 10-Q, the identified terms have the following meanings:
Barrel or Bbl: 42 U.S. gallons measured at 60 degrees Fahrenheit.
Btu: British thermal unit; the approximate amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
Condensate: A natural gas liquid with a low vapor pressure mainly composed of propane, butane, pentane and heavier hydrocarbon fractions.
Cryogenic: The process in which liquefied gases, such as liquid nitrogen or liquid helium, are used to bring volumes to very low temperatures (below approximately -238 degrees Fahrenheit) to separate natural gas liquids from natural gas. Through cryogenic processing, more natural gas liquids are extracted than when traditional refrigeration methods are used.
Drip condensate: Heavier hydrocarbon liquids that fall out of the natural gas stream and are recovered in the gathering system without processing.
Imbalance: Imbalances result from (i) differences between gas volumes nominated by customers and gas volumes received from those customers and (ii) differences between gas volumes received from customers and gas volumes delivered to those customers.
MBbls/d: One thousand barrels per day.
MMBtu: One million British thermal units.
MMcf/d: One million cubic feet per day.
Natural gas liquid(s) or NGL(s): The combination of ethane, propane, normal butane, isobutane and natural gasolines that, when removed from natural gas, become liquid under various levels of higher pressure and lower temperature.
Residue: The natural gas remaining after the unprocessed natural gas stream has been processed or treated.


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Table of Contents

PART I.  FINANCIAL INFORMATION (UNAUDITED)
Item 1.  Financial Statements
WESTERN GAS PARTNERS, LP
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
thousands except per-unit amounts
 
2015
 
2014 (1)
 
2015
 
2014 (1)
Revenues and other – affiliates
 
 
 
 
 
 
 
 
Gathering, processing and transportation of natural gas and natural gas liquids
 
$
141,556

 
$
124,829

 
$
431,182

 
$
340,775

Natural gas, natural gas liquids and drip condensate sales
 
105,032

 
142,025

 
345,385

 
424,207

Other
 
870

 
2,778

 
1,172

 
4,349

Total revenues and other – affiliates
 
247,458

 
269,632

 
777,739

 
769,331

Revenues and other – third parties
 
 
 
 
 
 
 
 
Gathering, processing and transportation of natural gas and natural gas liquids
 
94,082

 
70,996

 
267,566

 
201,985

Natural gas, natural gas liquids and drip condensate sales
 
41,968

 
11,647

 
141,489

 
37,533

Other
 
1,593

 
5,246

 
3,288

 
7,302

Total revenues and other – third parties
 
137,643

 
87,889

 
412,343

 
246,820

Total revenues and other
 
385,101

 
357,521

 
1,190,082

 
1,016,151

Equity income, net (2)
 
21,976

 
19,063

 
59,137

 
41,322

Operating expenses
 
 
 
 
 
 
 
 
Cost of product (3)
 
127,721

 
113,217

 
414,378

 
330,926

Operation and maintenance (3)
 
80,633

 
67,489

 
218,640

 
184,023

General and administrative (3)
 
9,318

 
8,339

 
28,497

 
25,688

Property and other taxes
 
8,343

 
6,793

 
25,641

 
21,343

Depreciation, amortization and impairments
 
65,688

 
47,277

 
201,941

 
134,667

Total operating expenses
 
291,703

 
243,115

 
889,097

 
696,647

Gain on divestiture, net
 
77,244

 

 
77,244

 

Operating income
 
192,618

 
133,469

 
437,366

 
360,826

Interest income – affiliates
 
4,225

 
4,225

 
12,675

 
12,675

Interest expense (4)
 
(31,773
)
 
(20,878
)
 
(82,337
)
 
(55,703
)
Other income (expense), net
 
85

 
97

 
227

 
788

Income before income taxes
 
165,155

 
116,913

 
367,931

 
318,586

Income tax (benefit) expense
 
1,661

 
3,891

 
4,305

 
8,199

Net income
 
163,494

 
113,022

 
363,626

 
310,387

Net income attributable to noncontrolling interest
 
2,188

 
3,863

 
8,230

 
11,005

Net income attributable to Western Gas Partners, LP
 
$
161,306

 
$
109,159

 
$
355,396

 
$
299,382

Limited partners’ interest in net income:
 
 
 
 
 
 
 
 
Net income attributable to Western Gas Partners, LP
 
$
161,306

 
$
109,159

 
$
355,396

 
$
299,382

Pre-acquisition net (income) loss allocated to Anadarko
 

 
(6,482
)
 
(1,742
)
 
(13,282
)
General partner interest in net (income) loss (5)
 
(50,213
)
 
(31,058
)
 
(138,121
)
 
(83,939
)
Limited partners’ interest in net income (5)
 
111,093

 
71,619

 
215,533

 
202,161

Net income per common unit – basic (6)
 
$
0.77

 
$
0.60

 
$
1.46

 
$
1.71

Net income per common unit – diluted (6)
 
0.77

 
0.60

 
1.46

 
1.71

 
                                                                                                                                                                                         
(1) 
Financial information has been recast to include the financial position and results attributable to the DBJV system. See Note 1 and Note 2.
(2) 
Income earned from equity investments is classified as affiliate. See Note 1.
(3) 
Cost of product includes product purchases from Anadarko (as defined in Note 1) of $35.7 million and $132.7 million for the three and nine months ended September 30, 2015, respectively, and $27.0 million and $85.1 million for the three and nine months ended September 30, 2014, respectively. Operation and maintenance includes charges from Anadarko of $17.7 million and $50.5 million for the three and nine months ended September 30, 2015, respectively, and $15.6 million and $45.0 million for the three and nine months ended September 30, 2014, respectively. General and administrative includes charges from Anadarko of $7.7 million and $22.6 million for the three and nine months ended September 30, 2015, respectively, and $7.0 million and $21.2 million for the three and nine months ended September 30, 2014, respectively. See Note 5.
(4) 
Includes affiliate (as defined in Note 1) interest expense of $4.3 million and $9.9 million for the three and nine months ended September 30, 2015, respectively, and zero for each of the three and nine months ended September 30, 2014. See Note 2 and Note 9.
(5) 
Represents net income earned on and subsequent to the date of acquisition of the Partnership assets (as defined in Note 1). See Note 4.
(6) 
See Note 4 for the calculation of net income per unit.

See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

WESTERN GAS PARTNERS, LP
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
thousands except number of units
 
September 30, 2015
 
December 31, 2014 (1)
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
73,200

 
$
67,054

Accounts receivable, net (2)
 
150,538

 
109,243

Other current assets (3)
 
11,399

 
10,067

Total current assets
 
235,137

 
186,364

Note receivable – Anadarko
 
260,000

 
260,000

Property, plant and equipment
 
 
 
 
Cost
 
5,862,721

 
5,626,650

Less accumulated depreciation
 
1,072,799

 
1,055,207

Net property, plant and equipment
 
4,789,922

 
4,571,443

Goodwill
 
387,633

 
389,087

Other intangible assets
 
839,234

 
884,857

Equity investments
 
629,627

 
634,492

Other assets
 
30,779

 
28,289

Total assets
 
$
7,172,332

 
$
6,954,532

LIABILITIES, EQUITY AND PARTNERS’ CAPITAL
 
 
 
 
Current liabilities
 
 
 
 
Accounts and natural gas imbalance payables (4)
 
$
57,598

 
$
54,232

Accrued ad valorem taxes
 
26,416

 
14,812

Accrued liabilities
 
138,812

 
170,789

Total current liabilities
 
222,826

 
239,833

Long-term debt
 
2,587,189

 
2,422,954

Deferred income taxes
 
7,037

 
45,656

Asset retirement obligations and other
 
119,422

 
111,714

Deferred purchase price obligation – Anadarko (5)
 
184,196

 

Total long-term liabilities
 
2,897,844

 
2,580,324

Total liabilities
 
3,120,670

 
2,820,157

Equity and partners’ capital
 
 
 
 
Common units (128,574,646 and 127,695,130 units issued and outstanding at September 30, 2015, and December 31, 2014, respectively)
 
3,115,480

 
3,119,714

Class C units (11,230,814 and 10,913,853 units issued and outstanding at September 30, 2015, and December 31, 2014, respectively)
 
744,840

 
716,957

General partner units (2,583,068 units issued and outstanding at September 30, 2015, and December 31, 2014)
 
123,792

 
105,725

Net investment by Anadarko
 

 
122,509

Total partners’ capital
 
3,984,112

 
4,064,905

Noncontrolling interest
 
67,550

 
69,470

Total equity and partners’ capital
 
4,051,662

 
4,134,375

Total liabilities, equity and partners’ capital
 
$
7,172,332

 
$
6,954,532

                                                                                                                                                                                    
(1) 
Financial information has been recast to include the financial position and results attributable to the DBJV system. See Note 1 and Note 2.
(2) 
Accounts receivable, net includes amounts receivable from affiliates (as defined in Note 1) of $46.9 million and $64.7 million as of September 30, 2015, and December 31, 2014, respectively.
(3) 
Other current assets includes natural gas imbalance receivables from affiliates of zero and $0.2 million as of September 30, 2015, and December 31, 2014, respectively.
(4) 
Accounts and natural gas imbalance payables includes amounts payable to affiliates of zero and $0.1 million as of September 30, 2015, and December 31, 2014, respectively.
(5) 
See Note 2.

See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

WESTERN GAS PARTNERS, LP
CONSOLIDATED STATEMENT OF EQUITY AND PARTNERS’ CAPITAL
(UNAUDITED)
 
 
Partners’ Capital
 
 
 
 
thousands
 
Net
Investment
by Anadarko
 
Common
Units
 
Class C
Units
 
General
Partner 
Units
 
Noncontrolling
Interest
 
Total
Balance at December 31, 2014 (1)
 
$
122,509

 
$
3,119,714

 
$
716,957

 
$
105,725

 
$
69,470

 
$
4,134,375

Net income (loss)
 
1,742

 
196,897

 
18,636

 
138,121

 
8,230

 
363,626

Above-market component of swap extensions with Anadarko (2)
 

 
7,916

 

 

 

 
7,916

Issuance of common units, net of offering expenses
 

 
57,353

 

 

 

 
57,353

Amortization of beneficial conversion feature of Class C units
 

 
(9,247
)
 
9,247

 

 

 

Distributions to noncontrolling interest owner
 

 

 

 

 
(10,150
)
 
(10,150
)
Distributions to unitholders
 

 
(278,956
)
 

 
(120,027
)
 

 
(398,983
)
Acquisitions from affiliates
 
(197,562
)
 
23,286

 

 

 

 
(174,276
)
Contributions of equity-based compensation from Anadarko
 

 
2,625

 

 
54

 

 
2,679

Net pre-acquisition contributions from (distributions to) Anadarko
 
31,467

 

 

 

 

 
31,467

Net distributions to Anadarko of other assets
 

 
(4,305
)
 

 
(81
)
 

 
(4,386
)
Elimination of net deferred tax liabilities
 
41,844

 

 

 

 

 
41,844

Other
 

 
197

 

 

 

 
197

Balance at September 30, 2015
 
$

 
$
3,115,480

 
$
744,840

 
$
123,792

 
$
67,550

 
$
4,051,662

                                                                                                                                                                                    
(1) 
Financial information has been recast to include the financial position and results attributable to the DBJV system. See Note 1 and Note 2.
(2) 
See Note 5.


See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

WESTERN GAS PARTNERS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Nine Months Ended 
 September 30,
thousands
 
2015
 
2014 (1)
Cash flows from operating activities
 
 
 
 
Net income
 
$
363,626

 
$
310,387

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization and impairments
 
201,941

 
134,667

Non-cash equity-based compensation expense
 
3,257

 
3,210

Deferred income taxes
 
2,993

 
4,024

Accretion and amortization of long-term obligations, net
 
12,296

 
2,045

Equity income, net (2)
 
(59,137
)
 
(41,322
)
Distributions from equity investment earnings (2)
 
60,645

 
43,061

Gain on divestiture, net
 
(77,244
)
 

Changes in assets and liabilities:
 
 
 
 
(Increase) decrease in accounts receivable, net
 
(24,104
)
 
(52,659
)
Increase (decrease) in accounts and natural gas imbalance payables and accrued liabilities, net
 
15,952

 
35,807

Change in other items, net
 
(1,817
)
 
1,645

Net cash provided by operating activities
 
498,408


440,865

Cash flows from investing activities
 
 
 
 
Capital expenditures
 
(473,394
)
 
(529,197
)
Contributions in aid of construction costs from affiliates
 

 
183

Acquisitions from affiliates
 
(12,131
)
 
(372,393
)
Acquisitions from third parties
 
(3,514
)
 

Investments in equity affiliates
 
(9,052
)
 
(63,267
)
Distributions from equity investments in excess of cumulative earnings (2)
 
12,409

 
14,387

Proceeds from the sale of assets to affiliates
 
700

 

Proceeds from the sale of assets to third parties
 
146,993

 
5

Net cash used in investing activities
 
(337,989
)

(950,282
)
Cash flows from financing activities
 
 
 
 
Borrowings, net of debt issuance costs
 
769,606

 
1,136,878

Repayments of debt
 
(610,000
)
 
(480,000
)
Increase (decrease) in outstanding checks
 
(1,482
)
 
2,908

Proceeds from the issuance of common and general partner units, net of offering expenses
 
57,353

 
101,502

Distributions to unitholders
 
(398,983
)
 
(297,013
)
Distributions to noncontrolling interest owner
 
(10,150
)
 
(11,349
)
Net contributions from Anadarko
 
31,467

 
23,600

Above-market component of swap extensions with Anadarko (3)
 
7,916

 

Net cash provided by (used in) financing activities
 
(154,273
)

476,526

Net increase (decrease) in cash and cash equivalents
 
6,146


(32,891
)
Cash and cash equivalents at beginning of period
 
67,054

 
100,728

Cash and cash equivalents at end of period
 
$
73,200


$
67,837

Supplemental disclosures
 
 
 
 
Acquisition of DBJV from Anadarko (4)
 
$
174,276

 
$

Net distributions to (contributions from) Anadarko of other assets
 
4,386

 
6,398

Interest paid, net of capitalized interest
 
60,612

 
43,504

Taxes paid (reimbursements received)
 
(138
)
 
(340
)
Capital lease asset transfer (5)
 

 
4,833

                                                                                                                                                                                    
(1) 
Financial information has been recast to include the financial position and results attributable to the DBJV system. See Note 1 and Note 2.
(2) 
Income earned on, distributions from and contributions to equity investments are classified as affiliate. See Note 1.
(3) 
See Note 5.
(4) 
See Note 2.
(5) 
For the nine months ended September 30, 2014, represents transfers of $4.6 million from other long-term assets associated with the capital lease component of a processing agreement.

See accompanying Notes to Consolidated Financial Statements.

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Table of Contents
WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

General. Western Gas Partners, LP is a growth-oriented Delaware master limited partnership formed by Anadarko Petroleum Corporation in 2007 to acquire, own, develop and operate midstream energy assets.
For purposes of these consolidated financial statements, the “Partnership” refers to Western Gas Partners, LP and its subsidiaries. The Partnership’s general partner, Western Gas Holdings, LLC (the “general partner” or “GP”), is owned by Western Gas Equity Partners, LP (“WGP”), a Delaware master limited partnership formed by Anadarko Petroleum Corporation in September 2012 to own the Partnership’s general partner, as well as a significant limited partner interest in the Partnership (see Western Gas Equity Partners, LP below). Western Gas Equity Holdings, LLC is WGP’s general partner and is a wholly owned subsidiary of Anadarko Petroleum Corporation. “Anadarko” refers to Anadarko Petroleum Corporation and its subsidiaries, excluding the Partnership and the general partner, and “affiliates” refers to subsidiaries of Anadarko, excluding the Partnership, and includes equity interests in Fort Union Gas Gathering, LLC (“Fort Union”), White Cliffs Pipeline, LLC (“White Cliffs”), Rendezvous Gas Services, LLC (“Rendezvous”), Enterprise EF78 LLC (the “Mont Belvieu JV”), Texas Express Pipeline LLC (“TEP”), Texas Express Gathering LLC (“TEG”) and Front Range Pipeline LLC (“FRP”). The interests in TEP, TEG and FRP are referred to collectively as the “TEFR Interests.” “Equity investment throughput” refers to the Partnership’s 14.81% share of average Fort Union throughput and 22% share of average Rendezvous throughput, but excludes throughput measured in barrels, consisting of the Partnership’s 10% share of average White Cliffs throughput, 25% share of average Mont Belvieu JV throughput, 20% share of average TEP and TEG throughput and 33.33% share of average FRP throughput. The “DJ Basin complex” refers to the Platte Valley system, Wattenberg system and Lancaster plant, all of which were combined into a single complex in the first quarter of 2014. The “MGR assets” include the Red Desert complex, the Granger straddle plant and the 22% interest in Rendezvous.
The Partnership is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, NGLs and crude oil for Anadarko, as well as for third-party producers and customers. As of September 30, 2015, the Partnership’s assets and investments accounted for under the equity method consisted of the following:
 
 
Owned and
Operated
 
Operated
Interests
 
Non-Operated
Interests
 
Equity
Interests
Natural gas gathering systems
 
12

 
2

 
5

 
2

Natural gas treating facilities
 
9

 
4

 

 
1

Natural gas processing facilities
 
14

 
5

 

 
2

NGL pipelines
 
3

 

 

 
3

Natural gas pipelines
 
4

 

 

 

Oil pipelines
 
1

 

 

 
1


These assets and investments are located in the Rocky Mountains (Colorado, Utah and Wyoming), the Mid-Continent (Kansas and Oklahoma), North-central Pennsylvania and Texas. In June 2015, the Partnership completed the construction and commenced operations of Lancaster Train II, a processing plant located in the DJ Basin complex. In addition, the Partnership is constructing Trains IV, V and VI, all processing plants, at the DBM complex (see Note 2), with operations expected to commence during the first half (Train IV) and second half (Train V) of 2016, and mid-2017 (Train VI).


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Table of Contents
WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)

Western Gas Equity Partners, LP. WGP owns the following types of interests in the Partnership: (i) the general partner interest and all of the incentive distribution rights (“IDRs”) in the Partnership, both owned through WGP’s 100% ownership of the Partnership’s general partner and (ii) a significant limited partner interest (see Holdings of Partnership equity in Note 4). WGP has no independent operations or material assets other than owning such partnership interests.

Basis of presentation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The consolidated financial statements include the accounts of the Partnership and entities in which it holds a controlling financial interest. All significant intercompany transactions have been eliminated. Investments in non-controlled entities over which the Partnership exercises significant influence are accounted for under the equity method. The Partnership proportionately consolidates its 33.75% share of the assets, liabilities, revenues and expenses attributable to the Non-Operated Marcellus Interest systems and Anadarko-Operated Marcellus Interest systems and its 50% share of the assets, liabilities, revenues and expenses attributable to the Newcastle system and the DBJV system (see Note 2) in the accompanying consolidated financial statements. The 25% membership interest in Chipeta Processing LLC (“Chipeta”) held by a third-party member is reflected within noncontrolling interest in the consolidated financial statements for all periods presented.
In preparing financial statements in accordance with GAAP, management makes informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Management evaluates its estimates and related assumptions regularly, using historical experience and other methods considered reasonable. Changes in facts and circumstances or additional information may result in revised estimates and actual results may differ from these estimates. Effects on the business, financial condition and results of operations resulting from revisions to estimates are recognized when the facts that give rise to the revisions become known. The information furnished herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the consolidated financial statements, and certain prior-period amounts have been reclassified to conform to the current-year presentation.
The Partnership’s unaudited consolidated statements of income reflect the reclassifications of the following amounts, which previously reduced Operation and maintenance expense, to revenues related to Gathering, processing and transportation of natural gas and natural gas liquids: (i) $25.0 million for the nine months ended September 30, 2015 (all of which relates to the six months ended June 30, 2015) and (ii) $12.0 million and $28.6 million for the three and nine months ended September 30, 2014, respectively. Management determined that the third-party producer reimbursements received for electricity purchased by the Partnership is more appropriately classified as revenues, instead of a reduction to Operation and maintenance expense. This correction of an error has no impact to Net income, cash flows, or any non-GAAP metric the Partnership uses to evaluate its operations (see Key Performance Metrics under Item 2 of this Form 10-Q) and is not considered material to the Partnership’s results of operations for the three and nine months ended September 30, 2015 and 2014. The Partnership will revise its previously reported 2013, 2014 and 2015 consolidated financial statements, and unaudited interim periods therein as applicable, to reflect the reclassification in future filings.
Certain information and note disclosures commonly included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, the accompanying consolidated financial statements and notes should be read in conjunction with the Partnership’s 2014 Form 10-K, as filed with the SEC on February 26, 2015. Management believes that the disclosures made are adequate to make the information not misleading.

Presentation of Partnership assets. The term “Partnership assets” refers to the assets owned and interests accounted for under the equity method (see Note 7) by the Partnership as of September 30, 2015. Because Anadarko controls the Partnership through its ownership and control of WGP, which owns the Partnership’s entire general partner interest, each acquisition of Partnership assets from Anadarko has been considered a transfer of net assets between entities under common control. As such, the Partnership assets acquired from Anadarko were initially recorded at Anadarko’s historic carrying value, which did not correlate to the total acquisition price paid by the Partnership. Further, after an acquisition of Partnership assets from Anadarko, the Partnership may be required to recast its financial statements to include the activities of such Partnership assets from the date of common control. See Note 2.


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Table of Contents
WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)

For those periods requiring recast, the consolidated financial statements for periods prior to the Partnership’s acquisition of the Partnership assets from Anadarko have been prepared from Anadarko’s historical cost-basis accounts and may not necessarily be indicative of the actual results of operations that would have occurred if the Partnership had owned the Partnership assets during the periods reported. Net income attributable to the Partnership assets acquired from Anadarko for periods prior to the Partnership’s acquisition of the Partnership assets is not allocated to the limited partners.

Recently issued accounting standards. The Financial Accounting Standards Board recently issued the following Accounting Standards Updates (“ASUs”):

ASU 2015-06, Earnings Per Share (Topic - 260)—Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. This ASU contains guidance that addresses the historical earnings per unit presentation for master limited partnerships that apply the two-class method of calculating earnings per unit. When a general partner transfers or “drops down” net assets to a master limited partnership the transaction is accounted for as a transaction between entities under common control and the statements of operations are adjusted retrospectively to reflect the transaction. This ASU specifies that the historical earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner, and the previously reported earnings per unit of the limited partners should not change as a result of the dropdown transaction. The ASU also requires additional disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method. This ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective approach, with early adoption permitted. While the Partnership believes it is currently in compliance with this ASU, it continues to evaluate the impact of the adoption of this ASU on its consolidated financial statements.
ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30)—Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30)—Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. These ASUs will simplify the presentation of debt issuance costs by requiring such costs, except for those related to revolving credit facilities, to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, rather than as an asset. These ASUs are effective for annual and interim periods beginning in 2016 and are required to be adopted using a retrospective approach, with early adoption permitted. The Partnership does not expect the adoption to have a material impact on its consolidated financial statements.
ASU 2015-02, Consolidation—Amendments to the Consolidation Analysis. This ASU will simplify existing requirements by reducing the number of acceptable consolidation models and placing more emphasis on risk of loss when determining a controlling financial interest. The provisions will affect how limited partnerships and similar entities are assessed for consolidation, including the elimination of the presumption that a general partner should consolidate a limited partnership. This ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective or modified retrospective approach, with early adoption permitted. The Partnership is evaluating the impact of the adoption of this ASU on its consolidated financial statements.
ASU 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and industry-specific guidance in Subtopic 932-605, Extractive Activities—Oil and Gas—Revenue Recognition, and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The effective date for ASU 2014-09 was delayed through the issuance of ASU 2015-14, Revenue from Contracts with Customers—Deferral of the Effective Date, to annual and interim periods beginning in 2018 and is required to be adopted using one of two retrospective application methods, with early adoption permitted in 2017. The Partnership is evaluating the impact of the adoption of this ASU on its consolidated financial statements.


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WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2.  ACQUISITIONS AND DIVESTITURES

The following table presents the acquisitions completed by the Partnership during 2015 and 2014, and identifies the funding sources for such acquisitions:
thousands except unit and percent amounts
 
Acquisition
Date
 
Percentage
Acquired
 
Deferred Purchase Price
Obligation - Anadarko
 
Borrowings
 
Cash
On Hand
 
Common Units
Issued to Anadarko
 
Class C Units
Issued to Anadarko
TEFR Interests (1)
 
03/03/2014
 
Various (1)

 
$

 
$
350,000

 
$
6,250

 
308,490

 

DBM (2)
 
11/25/2014
 
100
%
 

 
475,000

 
298,327

 

 
10,913,853

DBJV system (3)
 
03/02/2015
 
50
%
 
174,276

 

 

 

 

                                                                                                                                                                                    
(1) 
The Partnership acquired a 20% interest in each of TEG and TEP and a 33.33% interest in FRP from Anadarko. These assets gather and transport NGLs primarily from the Anadarko and Denver-Julesburg (“DJ”) Basins. The interests in these entities are accounted for under the equity method of accounting. In connection with the issuance of the common units, the Partnership issued 6,296 general partner units to the general partner in exchange for the general partner’s proportionate capital contribution of $0.4 million.
(2) 
The Partnership acquired Nuevo Midstream, LLC (“Nuevo”) from a third party. Following the acquisition, the Partnership changed the name of Nuevo to Delaware Basin Midstream, LLC (“DBM”). The assets acquired include cryogenic processing plants, a gas gathering system, and related facilities and equipment, which are collectively referred to as the “DBM complex” and serve production from Reeves, Loving and Culberson Counties, Texas and Eddy and Lea Counties, New Mexico. See DBM acquisition below for further information, including the preliminary allocation of the purchase price.
(3) 
The Partnership acquired Anadarko’s interest in Delaware Basin JV Gathering LLC (“DBJV”), which owns a 50% interest in a gathering system and related facilities (the “DBJV system”). The DBJV system is located in the Delaware Basin in Loving, Ward, Winkler and Reeves Counties, Texas. The Partnership will make a cash payment on March 31, 2020, to Anadarko as consideration for the acquisition of DBJV. The Partnership currently estimates the future payment will be $282.8 million, the net present value of which was $174.3 million as of the acquisition date. See DBJV acquisition—Deferred purchase price obligation - Anadarko below.

DBJV acquisition. Because the acquisition of DBJV was a transfer of net assets between entities under common control, the Partnership’s historical financial statements previously filed with the SEC have been recast in this Form 10-Q to include the results attributable to the DBJV system as if the Partnership owned DBJV for all periods presented. The consolidated financial statements for periods prior to the Partnership’s acquisition of DBJV have been prepared from Anadarko’s historical cost-basis accounts and may not necessarily be indicative of the actual results of operations that would have occurred if the Partnership had owned DBJV during the periods reported.
The following table presents the impact of the DBJV system on revenues and other, equity income, net and net income as presented in the Partnership’s historical consolidated statements of income:
 
 
Three Months Ended September 30, 2014
thousands
 
Partnership Historical (1)
 
DBJV System
 
Combined
Revenues and other
 
$
341,282

 
$
16,239

 
$
357,521

Equity income, net
 
19,063

 

 
19,063

Net income
 
106,540

 
6,482

 
113,022

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
thousands
 
Partnership Historical (1)
 
DBJV System
 
Combined
Revenues and other
 
$
970,027

 
$
46,124

 
$
1,016,151

Equity income, net
 
41,322

 

 
41,322

Net income
 
296,149

 
14,238

 
310,387

                                                                                                                                                                                    
(1) 
As adjusted for the reclassification described in Note 1.



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WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)

Deferred purchase price obligation - Anadarko. The consideration to be paid by the Partnership for the acquisition of DBJV consists of a cash payment to Anadarko due on March 31, 2020. The cash payment will be equal to (a) eight multiplied by the average of the Partnership’s share in the Net Earnings (see definition below) of the DBJV system for the calendar years 2018 and 2019, less (b) the Partnership’s share of all capital expenditures incurred for the DBJV system between March 1, 2015, and February 29, 2020. Net Earnings is defined as all revenues less cost of product, operating expenses and property taxes, in each case attributable to the DBJV system on an accrual basis. As of the acquisition date, the estimated future payment obligation was $282.8 million, which had a net present value of $174.3 million, using a discount rate of 10%. As of September 30, 2015, the net present value of this obligation was $184.2 million and has been recorded on the consolidated balance sheet under Deferred purchase price obligation - Anadarko. Accretion expense for the three and nine months ended September 30, 2015, was $4.3 million and $9.9 million, respectively, and has been recorded as a charge to interest expense. The fair value measurement was calculated using Level 3 inputs, which consisted of management’s estimate of the Partnership’s share of forecasted Net Earnings and capital expenditures for the DBJV system.

DBM acquisition. The DBM acquisition has been accounted for under the acquisition method of accounting. The assets acquired and liabilities assumed in the DBM acquisition were recorded in the consolidated balance sheet at their estimated fair values as of the acquisition date. Results of operations attributable to the DBM acquisition were included in the Partnership’s consolidated statement of income beginning on the acquisition date in the fourth quarter of 2014.
The following is the preliminary allocation of the purchase price as of September 30, 2015, including $3.5 million of post-closing purchase price adjustments, to the assets acquired and liabilities assumed in the DBM acquisition as of the acquisition date, pending final review of certain support related to the acquired entity’s assets and liabilities:
thousands
 
 
Current assets
 
$
62,940

Property, plant and equipment
 
467,171

Goodwill
 
282,697

Other intangible assets
 
811,048

Accounts payables
 
(18,621
)
Accrued liabilities
 
(37,360
)
Deferred income taxes
 
(1,342
)
Asset retirement obligations and other
 
(9,060
)
Total purchase price
 
$
1,557,473


The purchase price allocation is based on an assessment of the fair value of the assets acquired and liabilities assumed in the DBM acquisition using inputs that are not observable in the market and thus represent Level 3 inputs. The fair values of the processing plants, gathering system, and related facilities and equipment are based on market and cost approaches. The fair value of the intangible assets was determined using an income approach. Deferred taxes represent the tax effects of differences in the tax basis and acquisition-date fair value of the assets acquired and liabilities assumed.

Gain on divestiture - Dew and Pinnacle systems. During the third quarter of 2015, the Dew and Pinnacle systems in East Texas were sold to a third party for net proceeds of $146.7 million, after closing adjustments, resulting in a net gain on sale of $77.2 million recorded as Gain on divestiture, net in the Partnership’s consolidated statements of income.


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WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3.  PARTNERSHIP DISTRIBUTIONS

The partnership agreement of Western Gas Partners, LP requires the Partnership to distribute all of its available cash (as defined in the partnership agreement) to unitholders of record on the applicable record date within 45 days of the end of each quarter. The Board of Directors of the general partner declared the following cash distributions to the Partnership’s common and general partner unitholders for the periods presented:
thousands except per-unit amounts
Quarters Ended
 
Total Quarterly
Distribution
per Unit
 
Total Quarterly
Cash Distribution
 
Date of
Distribution
2014
 
 
 
 
 
 
March 31
 
$
0.625

 
$
98,749

 
May 2014
June 30
 
0.650

 
105,655

 
August 2014
September 30
 
0.675

 
111,608

 
November 2014
December 31
 
0.700

 
126,044

 
February 2015
2015
 
 
 
 
 
 
March 31
 
$
0.725

 
$
133,203

 
May 2015
June 30
 
0.750

 
139,736

 
August 2015
September 30 (1)
 
0.775

 
146,160

 
November 2015
                                                                                                                                                                                    
(1) 
On October 14, 2015, the Board of Directors of the Partnership’s general partner declared a cash distribution to the Partnership’s unitholders of $0.775 per unit, or $146.2 million in aggregate, including incentive distributions, but excluding distributions on Class C units (see Class C unit distributions below). The cash distribution is payable on November 12, 2015, to unitholders of record at the close of business on November 2, 2015.

Class C unit distributions. The Class C units receive quarterly distributions at a rate equivalent to the Partnership’s common units. The distributions are paid in the form of additional Class C units (“PIK Class C units”) until the scheduled conversion date on December 31, 2017 (unless earlier converted), and the Class C units are disregarded with respect to distributions of the Partnership’s available cash until they are converted to common units. The number of additional PIK Class C units to be issued in connection with a distribution payable on the Class C units is determined by dividing the corresponding distribution attributable to the Class C units by the volume-weighted-average price of the Partnership’s common units for the ten days immediately preceding the payment date for the common unit distribution, less a 6% discount. The Partnership records the PIK Class C unit distributions at fair value at the time of issuance. This Level 2 fair value measurement uses the Partnership’s unit price as a significant input in the determination of the fair value.
The Partnership issued the following PIK Class C units to APC Midstream Holdings, LLC (“AMH”), the holder of the Class C units, for the periods presented:
thousands except unit amounts
For the Quarters Ended
 
PIK Class C
Units
 
Implied
Fair Value
 
Date of
Distribution
2014
 
 
 
 
 
 
December 31 (1)
 
45,711

 
$
3,072

 
February 2015
2015
 
 
 
 
 
 
March 31
 
118,230

 
$
8,101

 
May 2015
June 30
 
153,020

 
8,721

 
August 2015
                                                                                                                                                                                    
(1) 
Prorated for the 37-day period the Class C units were outstanding during the fourth quarter of 2014.


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WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

4.  EQUITY AND PARTNERS’ CAPITAL

Equity offerings. The Partnership completed the following public offerings of its common units during 2015 and 2014, including through its Continuous Offering Programs (“COP”):
thousands except unit and per-unit amounts
 
Common Units
Issued
 
GP Units
Issued (1)
 
Price Per
Unit
 
Underwriting
Discount and
Other Offering
Expenses
 
Net
Proceeds
2014
 
 
 
 
 
 
 
 
 
 
$125.0 million COP (2)
 
1,133,384


23,132


$
73.48


$
1,738


$
83,245

November 2014 equity offering (3)
 
8,620,153

 
153,061

 
70.85

 
18,615

 
602,967

2015
 
 
 
 
 
 
 
 
 
 
$500.0 million COP (4)
 
873,525

 

 
$
66.61

 
$
805

 
$
57,385

                                                                                                                                                                                    
(1) 
Represents general partner units issued to the general partner in exchange for the general partner’s proportionate capital contribution.
(2) 
Represents common and general partner units issued during the year ended December 31, 2014, pursuant to the Partnership’s registration statement filed with the SEC in August 2012 authorizing the issuance of up to an aggregate of $125.0 million of common units (the “$125.0 million COP”). Gross proceeds generated (including the general partner’s proportionate capital contributions) during the year ended December 31, 2014, were $85.0 million. The price per unit in the table above represents an average price for all issuances under the $125.0 million COP during the year ended December 31, 2014. As of December 31, 2014, the Partnership had used all the capacity to issue common units under this registration statement.
(3) 
Includes the issuance of 1,120,153 common units pursuant to the partial exercise of the underwriters’ over-allotment option, the net proceeds from which were $77.0 million. Beginning with this partial exercise, the Partnership’s general partner elected not to make a corresponding capital contribution to maintain its 2.0% interest in the Partnership.
(4) 
Represents common units issued during the nine months ended September 30, 2015, pursuant to the Partnership’s registration statement filed with the SEC in August 2014 authorizing the issuance of up to an aggregate of $500.0 million of common units (the “$500.0 million COP”). Gross proceeds generated during the three and nine months ended September 30, 2015, were zero and $58.2 million, respectively. Commissions paid during the three and nine months ended September 30, 2015, were zero and $0.6 million, respectively. The price per unit in the table above represents an average price for all issuances under the $500.0 million COP during the nine months ended September 30, 2015.

Class C units. In connection with the closing of the DBM acquisition in November 2014, the Partnership issued 10,913,853 Class C units to AMH at a price of $68.72 per unit, generating proceeds of $750.0 million, pursuant to the Unit Purchase Agreement (“UPA”) with Anadarko and AMH. All outstanding Class C units will convert into common units on a one-for-one basis on December 31, 2017, unless the Partnership elects to convert such units earlier or Anadarko extends the conversion date. The Class C units were issued to partially fund the acquisition of DBM, and the UPA contains an optional redemption feature that provides the Partnership the ability to redeem up to $150.0 million of the Class C units within 10 days of the receipt of cash proceeds from an entity that is not an affiliate of the Partnership or AMH, if these cash proceeds were in relation to (i) the assets of DBM, (ii) the equity interests in DBM or (iii) the equity interests in a subsidiary of the Partnership that owns a majority of the outstanding equity interests in DBM. As of September 30, 2015, no such proceeds had been received and no Class C units had been redeemed.
The Class C units were issued at a discount to the then-current market price of the common units into which they are convertible. This discount, totaling $34.8 million, represents a beneficial conversion feature and at December 31, 2014, was reflected as an increase in common unitholders’ capital and a decrease in Class C unitholder capital to reflect the fair value of the Class C units at issuance. The beneficial conversion feature is considered a non-cash distribution that will be recognized from the date of issuance through the date of conversion, resulting in an increase in Class C unitholder capital and a decrease in common unitholders’ capital. The Partnership is amortizing the beneficial conversion feature assuming a conversion date of December 31, 2017, using the effective yield method. The impact of the beneficial conversion feature is also included in the calculation of earnings per unit.


14

Table of Contents
WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

4.  EQUITY AND PARTNERS’ CAPITAL (CONTINUED)

Common, Class C and general partner units. The Partnership’s common units are listed on the New York Stock Exchange under the symbol “WES.”
The following table summarizes the common, Class C and general partner units issued during the nine months ended September 30, 2015:
 
 
Common
Units
 
Class C
Units
 
General
Partner Units
 
Total
Balance at December 31, 2014
 
127,695,130

 
10,913,853

 
2,583,068

 
141,192,051

PIK Class C units
 

 
316,961

 

 
316,961

Long-Term Incentive Plan award vestings
 
5,991

 

 

 
5,991

$500.0 million COP
 
873,525

 

 

 
873,525

Balance at September 30, 2015
 
128,574,646

 
11,230,814

 
2,583,068

 
142,388,528


Holdings of Partnership equity. As of September 30, 2015, WGP held 49,296,205 common units, representing a 34.6% limited partner interest in the Partnership, and, through its ownership of the general partner, WGP indirectly held 2,583,068 general partner units, representing a 1.8% general partner interest in the Partnership, and 100% of the IDRs. As of September 30, 2015, other subsidiaries of Anadarko held 757,619 common units and 11,230,814 Class C units, representing an aggregate 8.4% limited partner interest in the Partnership. As of September 30, 2015, the public held 78,520,822 common units, representing a 55.2% limited partner interest in the Partnership.

Net income per unit for common units. The Partnership’s net income earned on and subsequent to the date of the acquisition of the Partnership assets is allocated to the general partner and the limited partners, including any Class C unitholders, in accordance with their respective weighted-average ownership percentages and, when applicable, giving effect to incentive distributions allocable to the general partner. The Partnership’s net income allocable to the limited partners is net of amortization of the beneficial conversion feature related to the Class C units (see Class C units above) and is allocated between the common and Class C unitholders by applying the provisions of the partnership agreement that govern actual cash distributions and capital account allocations, as if all earnings for the period had been distributed. Net income attributable to the Partnership assets acquired from Anadarko for periods prior to the Partnership’s acquisition of the Partnership assets is not allocated to the limited partners for purposes of calculating net income per common unit.
Basic net income per common unit is calculated by dividing the limited partners’ interest in net income attributable to common unitholders by the weighted-average number of common units outstanding during the period. The common units issued in connection with acquisitions and equity offerings are included on a weighted-average basis for periods they were outstanding. Because the Class C units participate in distributions with common units according to a predetermined formula (see Note 3), they are considered a participating security and are included in the computation of earnings per unit pursuant to the two-class method. The Class C unit participation right results in a non-contingent transfer of value each time the Partnership declares a distribution. Diluted net income per common unit is calculated by dividing the sum of (i) the limited partners’ interest in net income attributable to common units, and (ii) the limited partners’ interest in net income allocable to the Class C units as a participating security, by the sum of the weighted-average number of common units outstanding plus the dilutive effect of outstanding Class C units.


15

Table of Contents
WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

4.  EQUITY AND PARTNERS’ CAPITAL (CONTINUED)

The following table illustrates the Partnership’s calculation of net income per unit for common units:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
thousands except per-unit amounts
 
2015
 
2014
 
2015
 
2014
Net income attributable to Western Gas Partners, LP
 
$
161,306

 
$
109,159

 
$
355,396

 
$
299,382

Pre-acquisition net (income) loss allocated to Anadarko
 

 
(6,482
)
 
(1,742
)
 
(13,282
)
General partner interest in net (income) loss
 
(50,213
)
 
(31,058
)
 
(138,121
)
 
(83,939
)
Limited partners’ interest in net income
 
111,093

 
71,619

 
215,533

 
202,161

Net income allocable to common units (1)
 
98,445

 
71,619

 
187,650

 
202,161

Net income allocable to Class C units (1)
 
12,648

 

 
27,883

 

Limited partners’ interest in net income
 
$
111,093

 
$
71,619

 
$
215,533

 
$
202,161

Net income per unit
 
 
 
 
 
 
 
 
Common units - basic
 
$
0.77

 
$
0.60

 
$
1.46

 
$
1.71

Common units – diluted (2)
 
0.77

 
0.60

 
1.46

 
1.71

Weighted-average units outstanding
 
 
 
 
 
 
 
 
Common units – basic
 
128,575

 
119,068

 
128,267

 
118,326

Class C units (2)
 
11,161

 

 
11,042

 

Common units – diluted
 
139,736

 
119,068

 
139,309

 
118,326

                                                                                                                                                                                    
(1) 
Adjusted to reflect amortization for the beneficial conversion feature. See Class C units above for a discussion of the Class C units.
(2) 
Inclusion of Class C units in the calculation would have had an anti-dilutive effect.

5.  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 residue, drip condensate and NGLs to Anadarko. In addition, the Partnership purchases natural gas 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 the Partnership’s general and administrative expenses is paid by Anadarko, which results in affiliate transactions pursuant to the reimbursement provisions of the Partnership’s omnibus agreement. 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 the Partnership 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 Partnership’s acquisition of the 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.


16

Table of Contents
WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

5.  TRANSACTIONS WITH AFFILIATES (CONTINUED)

Note receivable from and Deferred purchase price obligation - Anadarko. Concurrently with the closing of the Partnership’s May 2008 initial public offering, the Partnership 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 $288.9 million and $317.8 million at September 30, 2015, and December 31, 2014, 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.
The consideration to be paid by the Partnership for the March 2015 acquisition of DBJV consists of a cash payment to Anadarko due on March 31, 2020. See Note 2 and Note 9.

Commodity price swap agreements. The Partnership has commodity price swap agreements with Anadarko to mitigate exposure to a substantial majority of the 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 Hugoton system, the MGR assets and the DJ Basin complex, with various expiration dates through December 2016. On December 31, 2014, the Partnership’s commodity price swap agreements for the Hilight and Newcastle systems and the Granger complex (excluding the Granger straddle plant) expired without renewal. 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 all of the Partnership’s outstanding commodity price swap agreements as of September 30, 2015:
per barrel except natural gas
 
2015
 
2016
Ethane
 
$
18.41

23.41

 
$
23.11

Propane
 
47.08

52.99

 
52.90

Isobutane
 
62.09

74.02

 
73.89

Normal butane
 
54.62

65.04

 
64.93

Natural gasoline
 
72.88

81.82

 
81.68

Condensate
 
76.47

81.82

 
81.68

Natural gas (per MMBtu)
 
4.66

5.96

 
4.87


The following table summarizes gains and losses upon settlement of commodity price swap agreements recognized in the consolidated statements of income:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
thousands
 
2015
 
2014
 
2015
 
2014
Gains (losses) on commodity price swap agreements related to sales: (1)
 
 
 
 
 

 
 
Natural gas sales
 
$
5,774

 
$
3,179

 
$
39,100

 
$
1,525

Natural gas liquids sales
 
33,746

 
22,737

 
116,475

 
66,746

Total
 
39,520

 
25,916

 
155,575

 
68,271

Losses on commodity price swap agreements related to purchases (2)
 
(23,998
)
 
(19,533
)
 
(99,897
)
 
(38,081
)
Net gains (losses) on commodity price swap agreements
 
$
15,522

 
$
6,383

 
$
55,678

 
$
30,190

                                                                                                                                                                                    
(1) 
Reported in affiliate natural gas, natural gas liquids and drip 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.


17

Table of Contents
WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

5.  TRANSACTIONS WITH AFFILIATES (CONTINUED)

DJ Basin complex and Hugoton system swap extensions. On June 25, 2015, the Partnership extended its commodity price swap agreements with Anadarko for the DJ Basin complex from July 1, 2015, through December 31, 2015, and for the Hugoton system from October 1, 2015, through December 31, 2015. The table below summarizes the swap prices compared to the forward market prices on the date the commodity price swap extensions were executed.
 
 
DJ Basin Complex
 
Hugoton System
per barrel except natural gas
 
2015 Swap Prices
 
Market Prices (1)
 
2015 Swap Prices
 
Market Prices (1)
Ethane
 
$
18.41

 
$
1.96

 
 
Propane
 
47.08

 
13.10

 
 
Isobutane
 
62.09

 
19.75

 
 
Normal butane
 
54.62

 
18.99

 
 
Natural gasoline
 
72.88

 
52.59

 
 
Condensate
 
76.47

 
52.59

 
$
78.61

 
$
32.56

Natural gas (per MMBtu)
 
5.96

 
2.75

 
5.50

 
2.74

                                                                                                                                                                                    
(1) 
Represents the New York Mercantile Exchange forward strip price as of June 25, 2015, adjusted for location, basis and, in the case of NGLs, transportation and fractionation costs.

Revenues or costs attributable to volumes settled during the respective extension period, at the applicable market price in the above table, will be recognized in the consolidated statements of income. The Partnership will also record a capital contribution from Anadarko in the Partnership’s consolidated statement of equity and partners’ capital for the amount by which the swap price exceeds the applicable market price in the above table. For each of the three and nine months ended September 30, 2015, the capital contribution from Anadarko was $7.9 million.

Gas gathering and processing agreements. The Partnership has significant gas gathering and processing arrangements with affiliates of Anadarko on a majority of its systems. The Partnership’s gathering, treating and transportation throughput (excluding equity investment throughput and throughput measured in barrels) attributable to natural gas production owned or controlled by Anadarko was 42% and 46% for the three and nine months ended September 30, 2015, respectively, and 48% and 49% for the three and nine months ended September 30, 2014, respectively. The Partnership’s processing throughput (excluding equity investment throughput and throughput measured in barrels) attributable to natural gas production owned or controlled by Anadarko was 47% and 51% for the three and nine months ended September 30, 2015, respectively, and 58% for each of the three and nine months ended September 30, 2014.

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. In addition, the Partnership purchases natural gas, condensate and NGLs from AESC pursuant to purchase agreements. The Partnership’s purchase and sale agreements with AESC are generally one-year contracts, subject to annual renewal.

WES LTIP. The general partner awards phantom units under the Western Gas Partners, LP 2008 Long-Term Incentive Plan (“WES LTIP”) primarily to its independent directors, but also from time to time to its 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. 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, 2015, respectively, and $0.2 million and $0.5 million for the three and nine months ended September 30, 2014, respectively.


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WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

5.  TRANSACTIONS WITH AFFILIATES (CONTINUED)

WGP LTIP and Anadarko Incentive Plans. General and administrative expenses included $1.0 million and $3.1 million for the three and nine months ended September 30, 2015, respectively, and $0.9 million and $2.7 million for the three and nine months ended September 30, 2014, respectively, of 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 Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan (“WGP LTIP”) and the Anadarko Petroleum Corporation 2008 and 2012 Omnibus Incentive Compensation Plans (collectively referred to as the “Anadarko Incentive Plans”). Of this amount, $2.7 million is reflected as a contribution to partners’ capital in the Partnership’s consolidated statement of equity and partners’ capital for the nine months ended September 30, 2015.

Equipment purchases and sales. The following table summarizes the Partnership’s purchases from and sales to Anadarko of pipe and equipment:
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
thousands
 
Purchases
 
Sales
Cash consideration
 
$
12,131

 
$
16,143

 
$
700

 
$

Net carrying value
 
7,411

 
9,745

 
366

 

Partners’ capital adjustment
 
$
4,720

 
$
6,398

 
$
334

 
$


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
 
2015
 
2014
 
2015
 
2014
Revenues and other (1)
 
$
247,458

 
$
269,632

 
$
777,739

 
$
769,331

Equity income, net (1)
 
21,976

 
19,063

 
59,137

 
41,322

Cost of product (1)
 
35,673

 
27,034

 
132,663

 
85,071

Operation and maintenance (2)
 
17,662

 
15,583

 
50,534

 
44,961

General and administrative (3)
 
7,671

 
7,016

 
22,556

 
21,243

Operating expenses
 
61,006

 
49,633

 
205,753

 
151,275

Interest income (4)
 
4,225

 
4,225

 
12,675

 
12,675

Interest expense (5)
 
4,310

 

 
9,920



Distributions to unitholders (6)
 
80,845

 
60,794

 
228,893

 
169,001

                                                                                                                                                                                    
(1) 
Represents amounts earned or incurred on and subsequent to the date of acquisition of the 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, 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 the Partnership assets, as well as expenses incurred by Anadarko on a historical basis related to the Partnership assets prior to the acquisition of such assets.
(3) 
Represents general and administrative expense incurred on and subsequent to the date of the Partnership’s acquisition of the Partnership assets, as well as a management services fee for reimbursement of expenses incurred by Anadarko for periods prior to the acquisition of the Partnership assets by the Partnership. These amounts include equity-based compensation expense allocated to the Partnership by Anadarko (see WES LTIP and WGP LTIP and Anadarko Incentive Plans within this Note 5).
(4) 
Represents interest income recognized on the note receivable from Anadarko.
(5) 
For the three and nine months ended September 30, 2015, includes accretion expense recognized on the Deferred purchase price obligation - Anadarko for the acquisition of DBJV (see Note 2 and Note 9).
(6) 
Represents distributions paid under the partnership agreement (see Note 3 and Note 4).

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

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WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6.  PROPERTY, PLANT AND EQUIPMENT

A summary of the historical cost of the Partnership’s property, plant and equipment is as follows:
thousands
 
Estimated Useful Life
 
September 30, 2015
 
December 31, 2014
Land
 
n/a
 
$
3,191

 
$
2,884

Gathering systems
 
3 to 47 years
 
5,431,716

 
4,972,892

Pipelines and equipment
 
15 to 45 years
 
136,303

 
151,107

Assets under construction
 
n/a
 
272,445

 
483,347

Other
 
3 to 40 years
 
19,066

 
16,420

Total property, plant and equipment
 
 
 
5,862,721

 
5,626,650

Accumulated depreciation
 
 
 
1,072,799

 
1,055,207

Net property, plant and equipment
 
 
 
$
4,789,922

 
$
4,571,443


The cost of property classified as “Assets under construction” is excluded from capitalized costs being depreciated. These amounts represent property that is not yet suitable to be placed into productive service as of the respective balance sheet date.
During 2015, the Partnership recognized impairments of $11.8 million, primarily due to the abandonment of compressors at the MIGC system and the DJ Basin complex, and the cancellation of projects at the Non-Operated Marcellus Interest systems, the DBJV system and the Brasada and Red Desert complexes.

7.  EQUITY INVESTMENTS

The following table presents the activity in the Partnership’s equity investments for the nine months ended September 30, 2015:
 
Equity Investments
thousands
Fort
Union
 
White
Cliffs
 
Rendezvous
 
Mont
Belvieu JV
 
TEG
 
TEP
 
FRP
 
Total
Balance at December 31, 2014
$
25,933

 
$
44,315

 
$
56,336

 
$
121,337

 
$
16,790

 
$
198,793

 
$
170,988

 
$
634,492

Investment earnings (loss), net of amortization
4,831

 
10,663

 
1,591

 
17,256

 
475

 
11,691

 
12,630

 
59,137

Contributions

 
6,081

 

 
(432
)
 

 
1,520

 
1,883

 
9,052

Distributions
(4,606
)
 
(10,227
)
 
(3,047
)
 
(17,924
)
 
(685
)
 
(11,880
)
 
(12,276
)
 
(60,645
)
Distributions in excess of cumulative earnings (1)

 
(2,584
)
 
(2,708
)
 
(1,987
)
 
(82
)
 
(4,302
)
 
(746
)
 
(12,409
)
Balance at September 30, 2015
$
26,158

 
$
48,248

 
$
52,172

 
$
118,250

 
$
16,498

 
$
195,822

 
$
172,479

 
$
629,627

                                                                                                                                                                                   
(1) 
Distributions in excess of cumulative earnings, classified as investing cash flows in the consolidated statements of cash flows, is calculated on an individual investment basis.


20

Table of Contents
WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8.  COMPONENTS OF WORKING CAPITAL

A summary of other current assets is as follows:
thousands
 
September 30, 2015
 
December 31, 2014
Natural gas liquids inventory
 
$
6,486

 
$
5,316

Natural gas imbalance receivables
 
177

 
415

Prepaid insurance
 
2,591

 
2,443

Other
 
2,145

 
1,893

Total other current assets
 
$
11,399

 
$
10,067


A summary of accrued liabilities is as follows:
thousands
 
September 30, 2015
 
December 31, 2014
Accrued capital expenditures
 
$
70,118

 
$
128,856

Accrued plant purchases
 
26,068

 
14,023

Accrued interest expense
 
34,169

 
24,741

Short-term asset retirement obligations
 
4,335

 
1,224

Short-term remediation and reclamation obligations
 
475

 
475

Income taxes payable
 
701

 
207

Other
 
2,946

 
1,263

Total accrued liabilities
 
$
138,812

 
$
170,789


9.  DEBT AND INTEREST EXPENSE

At September 30, 2015, the Partnership’s debt consisted of 5.375% Senior Notes due 2021 (the “2021 Notes”), 4.000% Senior Notes due 2022 (the “2022 Notes”), 2.600% Senior Notes due 2018 (the “2018 Notes”), 5.450% Senior Notes due 2044 (the “2044 Notes”), 3.950% Senior Notes due 2025 (the “2025 Notes”), and borrowings on the senior unsecured revolving credit facility (“RCF”).
The following table presents the Partnership’s outstanding debt as of September 30, 2015, and December 31, 2014:
 
 
September 30, 2015
 
December 31, 2014
thousands
 
Principal
 
Carrying
Value
 
Fair
Value (1)
 
Principal
 
Carrying
Value
 
Fair
Value (1)
2021 Notes
 
$
500,000

 
$
496,139

 
$
534,860

 
$
500,000

 
$
495,714

 
$
549,530

2022 Notes
 
670,000

 
672,662

 
654,858

 
670,000

 
672,930

 
681,942

2018 Notes
 
350,000

 
350,380

 
350,151

 
350,000

 
350,474

 
352,162

2044 Notes
 
400,000

 
393,901

 
365,196

 
400,000

 
393,836

 
417,619

2025 Notes
 
500,000

 
494,107

 
465,247

 

 

 

RCF
 
180,000

 
180,000

 
180,000

 
510,000

 
510,000

 
510,000

Total long-term debt
 
$
2,600,000

 
$
2,587,189

 
$
2,550,312

 
$
2,430,000

 
$
2,422,954

 
$
2,511,253

                                                                                                                                                                                    
(1) 
Fair value is measured using the market approach and Level 2 inputs.


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WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

9.  DEBT AND INTEREST EXPENSE (CONTINUED)

Debt activity. The following table presents the debt activity of the Partnership for the nine months ended September 30, 2015:
thousands
 
Carrying Value
Balance at December 31, 2014
 
$
2,422,954

RCF borrowings
 
280,000

Issuance of 2025 Notes
 
500,000

Repayments of RCF borrowings
 
(610,000
)
Other
 
(5,765
)
Balance at September 30, 2015
 
$
2,587,189


Senior Notes. The 2025 Notes issued in June 2015 were offered at a price to the public of 98.789% of the face amount. Including the effects of the issuance and underwriting discounts, the effective interest rate of the 2025 Notes is 4.205%. Interest is paid semi-annually on June 1 and December 1 of each year. Proceeds (net of underwriting discount of $3.3 million, original issue discount and debt issuance costs) were used to repay a portion of the amount outstanding under the RCF.
At September 30, 2015, the Partnership was in compliance with all covenants under the indentures governing its outstanding notes.

Revolving credit facility. The interest rate on the RCF, which matures in February 2019, was 1.49% and 1.46% at September 30, 2015, and September 30, 2014, respectively. The facility fee rate was 0.20% at September 30, 2015, and September 30, 2014.
As of September 30, 2015, the Partnership had $180.0 million of outstanding borrowings, $12.8 million in outstanding letters of credit and $1.0 billion available for borrowing under the RCF. At September 30, 2015, the Partnership was in compliance with all covenants under the RCF.

Interest expense. The following table summarizes the amounts included in interest expense:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
thousands
 
2015
 
2014
 
2015
 
2014
Third parties
 
 
 
 
 
 
 
 
Long-term debt
 
$
26,972

 
$
21,671

 
$
75,047

 
$
59,251

Amortization of debt issuance costs and commitment fees
 
1,530

 
1,107

 
4,196

 
3,799

Capitalized interest
 
(1,039
)
 
(1,900
)
 
(6,826
)
 
(7,347
)
Total interest expense – third parties
 
27,463

 
20,878

 
72,417

 
55,703

Affiliates
 
 
 
 
 
 
 
 
Deferred purchase price obligation – Anadarko (1)
 
4,310

 

 
9,920

 

Total interest expense – affiliates
 
4,310

 

 
9,920

 

Interest expense
 
$
31,773

 
$
20,878

 
$
82,337

 
$
55,703

                                                                                                                                                                                    
(1) 
See Note 2 for a discussion of the accretion and present value of the Deferred purchase price obligation - Anadarko.


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WESTERN GAS PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

10.  COMMITMENTS AND CONTINGENCIES

Litigation and legal proceedings. In March 2011, DCP Midstream, LP (“DCP”) filed a lawsuit against Anadarko and others, including a Partnership subsidiary, Kerr-McGee Gathering, LLC, in Weld County District Court (the “Court”) in Colorado, alleging that Anadarko diverted gas from DCP’s gathering and processing facilities in breach of certain dedication agreements. In addition to various claims against Anadarko, DCP is claiming unjust enrichment and other damages against Kerr-McGee Gathering, LLC, the entity that holds the Wattenberg assets (located in the DJ Basin complex). Anadarko countersued DCP asserting that DCP has not properly allocated values and charges to Anadarko for the gas that DCP gathers and/or processes, and seeks a judgment that DCP has no valid gathering or processing rights to much of the gas production it is claiming, in addition to other claims.
The Court has scheduled this matter for trial in June 2016, and the parties are currently engaged in discovery and motion practice. Management does not believe the outcome of this proceeding will have a material effect on the Partnership’s financial condition, results of operations or cash flows. The Partnership intends to vigorously defend this litigation. Furthermore, without regard to the merit of DCP’s claims, management believes that the Partnership has adequate contractual indemnities covering the claims against it in this lawsuit.
In addition, from time to time, the Partnership is involved in legal, tax, regulatory and other proceedings in various forums regarding performance, contracts and other matters that arise in the ordinary course of business. Management is not aware of any such proceeding the final disposition of which could have a material adverse effect on the Partnership’s financial condition, results of operations or cash flows.

Other commitments. The Partnership has short-term payment obligations, or commitments, related to its capital spending programs, as well as those of its unconsolidated affiliates. As of September 30, 2015, the Partnership had unconditional payment obligations for services to be rendered or products to be delivered in connection with its capital projects of $42.0 million, the majority of which is expected to be paid in the next twelve months. These commitments relate primarily to the construction of Trains IV, V and VI at the DBM complex and expansion projects at the DBJV system and the DJ Basin complex.

Lease commitments. Anadarko, on behalf of the Partnership, has entered into lease agreements for corporate offices, shared field offices and a warehouse supporting the Partnership’s operations, for which Anadarko charges the Partnership rent. The leases for the corporate offices and shared field offices extend through 2017 and 2018, respectively, and the lease for the warehouse extends through February 2017.
Rent expense associated with the office, warehouse and equipment leases was $4.9 million and $13.6 million for the three and nine months ended September 30, 2015, respectively, and $2.4 million and $6.8 million for the three and nine months ended September 30, 2014, respectively.


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Table of Contents

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Western Gas Partners, LP is a growth-oriented