Edgar Filing: Western Gas Partners LP

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018


¨	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 þ 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 þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨	Emerging growth company ¨
		(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

There were 152,602,105 common units outstanding as of April 30, 2018.

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			PAGE
PART I		FINANCIAL INFORMATION (UNAUDITED)
	Item 1.	Financial Statements
		Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017	6
		Consolidated Balance Sheets as of March 31, 2018, and December 31, 2017	7
		Consolidated Statement of Equity and Partners’ Capital for the three months ended March 31, 2018	8
		Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017	9
		Notes to Consolidated Financial Statements	10
		Note 1. Description of Business and Basis of Presentation	10
		Note 2. Revenue from Contracts with Customers	17
		Note 3. Acquisitions and Divestitures	19
		Note 4. Partnership Distributions	19
		Note 5. Equity and Partners’ Capital	21
		Note 6. Transactions with Affiliates	24
		Note 7. Property, Plant and Equipment	28
		Note 8. Equity Investments	28
		Note 9. Components of Working Capital	29
		Note 10. Debt and Interest Expense	30
		Note 11. Commitments and Contingencies	32
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
		Cautionary Note Regarding Forward-Looking Statements	33
		Executive Summary	35
		Acquisitions and Divestitures	36
		Equity Offerings	36
		Results of Operations	37
		Operating Results	37
		Key Performance Metrics	43
		Liquidity and Capital Resources	48
		Contractual Obligations	52
		Off-Balance Sheet Arrangements	52
		Recent Accounting Developments	52
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
	Item 4.	Controls and Procedures	54
PART II		OTHER INFORMATION
	Item 1.	Legal Proceedings	54
	Item 1A.	Risk Factors	55
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
	Item 6.	Exhibits	56

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COMMONLY USED TERMS AND DEFINITIONS

Unless the context otherwise requires, references to “we,” “us,” “our,” the “Partnership” or “Western Gas Partners, LP” refer to Western Gas Partners, LP and its subsidiaries. As used in this Form 10-Q, the terms and definitions below have the following meanings:

Additional DBJV System Interest: Our additional 50% interest in the DBJV system acquired from a third party in March 2017.

Affiliates: Subsidiaries of Anadarko, excluding us, but including equity interests in Fort Union, White Cliffs, Rendezvous, the Mont Belvieu JV, TEP, TEG, and FRP.

Anadarko: Anadarko Petroleum Corporation and its subsidiaries, excluding us and our general partner.

Barrel or Bbl: 42 U.S. gallons measured at 60 degrees Fahrenheit.

Bbls/d: Barrels per day.

Board of Directors: The board of directors of our general partner.

Btu: British thermal unit; the approximate amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

Chipeta: Chipeta Processing, LLC.

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 are used to bring natural gas 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.

DBJV: Delaware Basin JV Gathering LLC.

DBJV system: A gathering system and related facilities located in the Delaware Basin in Loving, Ward, Winkler and Reeves Counties in West Texas.

DBM: Delaware Basin Midstream, LLC.

DBM complex: The cryogenic processing plants, gas gathering system, and related facilities and equipment in West Texas that serve production from Reeves, Loving and Culberson Counties, Texas and Eddy and Lea Counties, New Mexico.

DBM water systems: Two produced water gathering and disposal systems in West Texas.

DJ Basin complex: The Platte Valley system, Wattenberg system and Lancaster plant, all of which were combined into a single complex in the first quarter of 2014.

EBITDA: Earnings before interest, taxes, depreciation, and amortization. For a definition of “Adjusted EBITDA,” see Key Performance Metrics under Part I, Item 2 of this Form 10-Q.

Exchange Act: The Securities Exchange Act of 1934, as amended.

Fort Union: Fort Union Gas Gathering, LLC.

Fractionation: The process of applying various levels of higher pressure and lower temperature to separate a stream of natural gas liquids into ethane, propane, normal butane, isobutane and natural gasoline for end-use sale.

FRP: Front Range Pipeline LLC.

GAAP: Generally accepted accounting principles in the United States.

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General partner: Western Gas Holdings, LLC.

Hydraulic fracturing: The injection of fluids into the wellbore to create fractures in rock formations, stimulating the production of oil or gas.

Imbalance: Imbalances result from (i) differences between gas and NGL volumes nominated by customers and gas and NGL volumes received from those customers and (ii) differences between gas and NGL volumes received from customers and gas and NGL volumes delivered to those customers.

IPO: Initial public offering.

LIBOR: London Interbank Offered Rate.

Marcellus Interest: Our 33.75% interest in the Larry’s Creek, Seely and Warrensville gas gathering systems and related facilities located in northern Pennsylvania.

MBbls/d: One thousand barrels per day.

MGR: Mountain Gas Resources, LLC.

MGR assets: The Red Desert complex and the Granger straddle plant.

MLP: Master limited partnership.

MMBtu: One million British thermal units.

MMcf: One million cubic feet.

MMcf/d: One million cubic feet per day.

Mont Belvieu JV: Enterprise EF78 LLC.

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.

Non-Operated Marcellus Interest: The 33.75% interest in the Liberty and Rome gas gathering systems and related facilities located in northern Pennsylvania that was transferred to a third party in March 2017 pursuant to the Property Exchange.

Produced water: Byproduct associated with the production of crude oil and natural gas that often contains a number of dissolved solids and other materials found in oil and gas reservoirs.

Property Exchange: Our acquisition of the Additional DBJV System Interest from a third party in exchange for the Non-Operated Marcellus Interest and $155.0 million of cash consideration, as further described in our Forms 8-K filed with the SEC on February 9, 2017, and March 23, 2017.

RCF: Our $1.5 billion senior unsecured revolving credit facility.

Red Desert complex: The Patrick Draw processing plant, the Red Desert processing plant, associated gathering lines, and related facilities.

Rendezvous: Rendezvous Gas Services, LLC.

Residue: The natural gas remaining after the unprocessed natural gas stream has been processed or treated.

SEC: U.S. Securities and Exchange Commission.

Springfield gas gathering system: A gas gathering system and related facilities located in Dimmit, La Salle, Maverick and Webb Counties in South Texas.

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Springfield oil gathering system: An oil gathering system and related facilities located in Dimmit, La Salle, Maverick and Webb Counties in South Texas.

Springfield system: The Springfield gas gathering system and Springfield oil gathering system.

TEFR Interests: The interests in TEP, TEG and FRP.

TEG: Texas Express Gathering LLC.

TEP: Texas Express Pipeline LLC.

WGP: Western Gas Equity Partners, LP.

White Cliffs: White Cliffs Pipeline, LLC.

2018 Notes: Our 2.600% Senior Notes due 2018.

2021 Notes: Our 5.375% Senior Notes due 2021.

2022 Notes: Our 4.000% Senior Notes due 2022.

2025 Notes: Our 3.950% Senior Notes due 2025.

2026 Notes: Our 4.650% Senior Notes due 2026.

2028 Notes: Our 4.500% Senior Notes due 2028.

2044 Notes: Our 5.450% Senior Notes due 2044.

2048 Notes: Our 5.300% Senior Notes due 2048.

$500.0 million COP: The continuous offering program that may be undertaken pursuant to the registration statement filed with the SEC in July 2017 for the issuance of up to an aggregate of $500.0 million of our common units.

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PART I. FINANCIAL INFORMATION (UNAUDITED)

Item 1. Financial Statements

WESTERN GAS PARTNERS, LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



	Three Months Ended March 31,
thousands except per-unit amounts	2018			2017
Revenues and other – affiliates
Service revenues – fee based	$	186,001		$	172,314
Service revenues – product based	242			—
Product sales	54,819			142,841
Total revenues and other – affiliates	241,062			315,155
Revenues and other – third parties
Service revenues – fee based	152,418			135,500
Service revenues – product based	22,351			—
Product sales	21,118			63,684
Other	219			1,854
Total revenues and other – third parties	196,106			201,038
Total revenues and other	437,168			516,193
Equity income, net – affiliates	20,424			19,461
Operating expenses
Cost of product ⁽¹⁾	77,799			189,359
Operation and maintenance ⁽¹⁾	88,279			73,760
General and administrative ⁽¹⁾	14,132			12,659
Property and other taxes	12,382			12,294
Depreciation and amortization	76,842			69,702
Impairments	148			164,742
Total operating expenses	269,582			522,516
Gain (loss) on divestiture and other, net ⁽²⁾	116			119,487
Proceeds from business interruption insurance claims	—			5,767
Operating income (loss)	188,126			138,392
Interest income – affiliates	4,225			4,225
Interest expense ⁽³⁾	(39,283		)	(35,504		)
Other income (expense), net	782			430
Income (loss) before income taxes	153,850			107,543
Income tax (benefit) expense	1,502			3,552
Net income (loss)	152,348			103,991
Net income attributable to noncontrolling interest	2,985			2,102
Net income (loss) attributable to Western Gas Partners, LP	$	149,363		$	101,889
Limited partners’ interest in net income (loss):
Net income (loss) attributable to Western Gas Partners, LP	$	149,363		$	101,889
Series A Preferred units interest in net (income) loss	—			(28,174		)
General partner interest in net (income) loss ⁽⁴⁾	(83,439		)	(68,162		)
Common and Class C limited partners’ interest in net income (loss) ⁽⁴⁾	65,924			5,553
Net income (loss) per common unit – basic and diluted ⁽⁵⁾	$	0.38		$	0.01

⁽¹⁾

Cost of product includes product purchases from Anadarko (as defined in Note 1) of $20.2 million and $16.0 million for the three months ended March 31, 2018 and 2017, respectively. Operation and maintenance includes charges from Anadarko of $20.2 million and $17.1 million for the three months ended March 31, 2018 and 2017, respectively. General and administrative includes charges from Anadarko of $11.6 million and $9.5 million for the three months ended March 31, 2018 and 2017, respectively. See Note 6.


⁽²⁾	Includes losses related to an incident at the DBM complex for the three months ended March 31, 2017. See Note 1.


⁽³⁾	Includes affiliate (as defined in Note 1) amounts of zero and $(0.1) million for the three months ended March 31, 2018 and 2017, respectively. See Note 10.


⁽⁴⁾	Represents net income (loss) earned on and subsequent to the date of acquisition of the Partnership assets (as defined in Note 1). See Note 5.


⁽⁵⁾	See Note 5 for the calculation of net income (loss) per common unit.

See accompanying Notes to Consolidated Financial Statements.

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WESTERN GAS PARTNERS, LP

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



thousands except number of units	March 31, 2018		December 31, 2017
ASSETS
Current assets
Cash and cash equivalents	$	521,426	$	78,814
Accounts receivable, net ⁽¹⁾	189,074		160,432
Other current assets ⁽²⁾	22,747		14,816
Total current assets	733,247		254,062
Note receivable – Anadarko	260,000		260,000
Property, plant and equipment
Cost	8,272,083		7,871,102
Less accumulated depreciation	2,208,536		2,140,211
Net property, plant and equipment	6,063,547		5,730,891
Goodwill	416,160		416,160
Other intangible assets	768,162		775,269
Equity investments	557,681		566,211
Other assets ⁽³⁾	14,525		11,757
Total assets	$	8,813,322	$	8,014,350
LIABILITIES, EQUITY AND PARTNERS’ CAPITAL
Current liabilities
Accounts and imbalance payables ⁽⁴⁾	$	360,028	$	349,801
Accrued ad valorem taxes	38,871		26,633
Accrued liabilities ⁽⁵⁾	78,798		47,899
Total current liabilities	477,697		424,333
Long-term liabilities
Long-term debt	4,176,346		3,464,712
Deferred income taxes	8,592		7,409
Asset retirement obligations	147,082		143,394
Other liabilities ⁽⁶⁾	128,757		3,491
Total long-term liabilities	4,460,777		3,619,006
Total liabilities	4,938,474		4,043,339
Equity and partners’ capital
Common units (152,602,105 units issued and outstanding at March 31, 2018, and December 31, 2017)	2,842,612		2,950,010
Class C units (13,505,277 and 13,243,883 units issued and outstanding at March 31, 2018, and December 31, 2017, respectively) ⁽⁷⁾	784,105		780,040
General partner units (2,583,068 units issued and outstanding at March 31, 2018, and December 31, 2017)	185,812		179,232
Total partners’ capital	3,812,529		3,909,282
Noncontrolling interest	62,319		61,729
Total equity and partners’ capital	3,874,848		3,971,011
Total liabilities, equity and partners’ capital	$	8,813,322	$	8,014,350


⁽¹⁾	Accounts receivable, net includes amounts receivable from affiliates (as defined in Note 1) of $56.3 million and $36.3 million as of March 31, 2018, and December 31, 2017, respectively.


⁽²⁾	Other current assets includes affiliate amounts of $5.7 million and zero as of March 31, 2018, and December 31, 2017, respectively.


⁽³⁾	Other assets includes affiliate amounts of $0.2 million and zero as of March 31, 2018, and December 31, 2017, respectively.


⁽⁴⁾	Accounts and imbalance payables includes affiliate amounts of $0.1 million and $0.3 million as of March 31, 2018, and December 31, 2017, respectively.


⁽⁵⁾	Accrued liabilities includes affiliate amounts of $2.1 million and $0.2 million as of March 31, 2018, and December 31, 2017, respectively.


⁽⁶⁾	Other liabilities includes affiliate amounts of $42.4 million and $0.7 million as of March 31, 2018, and December 31, 2017, respectively.


⁽⁷⁾	The Class C units will convert into common units on a one-for-one basis on March 1, 2020, unless the Partnership elects to convert such units earlier or Anadarko extends the conversion date. See Note 5.

See accompanying Notes to Consolidated Financial Statements.

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WESTERN GAS PARTNERS, LP

CONSOLIDATED STATEMENT OF EQUITY AND PARTNERS’ CAPITAL

(UNAUDITED)



	Partners’ Capital
thousands	Common Units			Class C Units			General Partner Units			Noncontrolling Interest			Total
Balance at December 31, 2017	$	2,950,010		$	780,040		$	179,232		$	61,729		$	3,971,011
Cumulative effect of accounting change ⁽¹⁾	(41,135		)	(3,536		)	(696		)	958			(44,409		)
Net income (loss)	59,133			6,791			83,439			2,985			152,348
Above-market component of swap agreements with Anadarko ⁽²⁾	14,282			—			—			—			14,282
Amortization of beneficial conversion feature of Class C units	(810		)	810			—			—			—
Distributions to noncontrolling interest owner	—			—			—			(3,353		)	(3,353		)
Distributions to unitholders	(140,394		)	—			(76,192		)	—			(216,586		)
Contributions of equity-based compensation from Anadarko	1,435			—			29			—			1,464
Other	91			—			—			—			91
Balance at March 31, 2018	$	2,842,612		$	784,105		$	185,812		$	62,319		$	3,874,848


⁽¹⁾	See Note 1.


⁽²⁾	See Note 6.

See accompanying Notes to Consolidated Financial Statements.

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WESTERN GAS PARTNERS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Three Months Ended March 31,
thousands	2018			2017
Cash flows from operating activities
Net income (loss)	$	152,348		$	103,991
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	76,842			69,702
Impairments	148			164,742
Non-cash equity-based compensation expense	1,563			1,209
Deferred income taxes	1,331			3,128
Accretion and amortization of long-term obligations, net	1,378			1,101
Equity income, net – affiliates	(20,424		)	(19,461		)
Distributions from equity investment earnings – affiliates	20,941			19,114
(Gain) loss on divestiture and other, net ⁽¹⁾	(116		)	(119,487		)
Lower of cost or market inventory adjustments	143			45
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net	(28,648		)	(1,513		)
Increase (decrease) in accounts and imbalance payables and accrued liabilities, net	27,075			(29,940		)
Change in other items, net	9,015			(15		)
Net cash provided by operating activities	241,596			192,616
Cash flows from investing activities
Capital expenditures	(302,297		)	(125,944		)
Contributions in aid of construction costs from affiliates	—			1,310
Acquisitions from third parties	—			(155,287		)
Distributions from equity investments in excess of cumulative earnings – affiliates	8,013			3,453
Proceeds from the sale of assets to third parties	116			34
Proceeds from property insurance claims	—			24,000
Net cash used in investing activities	(294,168		)	(252,434		)
Cash flows from financing activities
Borrowings, net of debt issuance costs	1,337,525			(11		)
Repayments of debt	(630,000		)	—
Increase (decrease) in outstanding checks	(6,684		)	1,024
Proceeds from the issuance of common units, net of offering expenses	—			(158		)
Distributions to unitholders⁽²⁾	(216,586		)	(185,565		)
Distributions to noncontrolling interest owner	(3,353		)	(3,370		)
Net contributions from (distributions to) Anadarko	—			(14		)
Above-market component of swap agreements with Anadarko ⁽²⁾	14,282			12,297
Net cash provided by (used in) financing activities	495,184			(175,797		)
Net increase (decrease) in cash and cash equivalents	442,612			(235,615		)
Cash and cash equivalents at beginning of period	78,814			357,925
Cash and cash equivalents at end of period	$	521,426		$	122,310
Supplemental disclosures
Accretion expense and revisions to the Deferred purchase price obligation – Anadarko	$	—		$	(4,094	)
Interest paid, net of capitalized interest	28,514			28,656
Taxes paid (reimbursements received)	(87		)	189
Accrued capital expenditures	229,484			85,280
Fair value of properties and equipment from non-cash third party transactions ⁽³⁾	—			548,628


⁽¹⁾	Includes losses related to an incident at the DBM complex for the three months ended March 31, 2017. See Note 1.


⁽²⁾	See Note 6.


⁽³⁾	See Note 3.

See accompanying Notes to Consolidated Financial Statements.

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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 (“MLP”) formed by Anadarko Petroleum Corporation in 2007 to acquire, own, develop and operate midstream 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”), is owned by Western Gas Equity Partners, LP (“WGP”), a Delaware MLP 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. WGP has no independent operations or material assets other than owning the partnership interests in the Partnership (see Holdings of Partnership equity in Note 5). 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, but including 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.” “MGR assets” refers to the Red Desert complex and the Granger straddle plant.

The Partnership is engaged in the business of gathering, compressing, treating, processing and transporting natural gas; gathering, stabilizing and transporting condensate, natural gas liquids (“NGLs”) and crude oil; and gathering and disposing of produced water. In addition, in its capacity as a processor of natural gas, the Partnership also buys and sells natural gas, NGLs and condensate on behalf of itself and as agent for its customers under certain of its contracts. The Partnership provides these midstream services for Anadarko, as well as for third-party producers and customers. As of March 31, 2018, the Partnership’s assets and investments consisted of the following:



	Owned and Operated	Operated Interests	Non-Operated Interests	Equity Interests
Gathering systems ⁽¹⁾	12	3	3	2
Treating facilities	19	3	—	3
Natural gas processing plants/trains	20	4	—	2
NGL pipelines	2	—	—	3
Natural gas pipelines	5	—	—	—
Oil pipelines	—	1	—	1


⁽¹⁾	Includes the DBM water systems.

These assets and investments are located in the Rocky Mountains (Colorado, Utah and Wyoming), North-central Pennsylvania, Texas and New Mexico.

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WESTERN GAS PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Basis of presentation. The following table outlines the Partnership’s ownership interests and the accounting method of consolidation used in the Partnership’s consolidated financial statements for entities not wholly owned:



	Percentage Interest
Equity investments ⁽¹⁾
Fort Union	14.81	%
White Cliffs	10	%
Rendezvous	22	%
Mont Belvieu JV	25	%
TEP	20	%
TEG	20	%
FRP	33.33	%
Proportionate consolidation ⁽²⁾
Marcellus Interest systems	33.75	%
Newcastle system	50	%
Springfield system	50.1	%
Full consolidation
Chipeta ⁽³⁾	75	%


⁽¹⁾	Investments in non-controlled entities over which the Partnership exercises significant influence are accounted for under the equity method. “Equity investment throughput” refers to the Partnership’s share of average throughput for these investments.


⁽²⁾	The Partnership proportionately consolidates its associated share of the assets, liabilities, revenues and expenses attributable to these assets.


⁽³⁾	The 25% interest in Chipeta Processing LLC (“Chipeta”) held by a third-party member is reflected within noncontrolling interest in the consolidated financial statements.

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.

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 2017 Form 10-K, as filed with the SEC on February 16, 2018. Management believes that the disclosures made are adequate to make the information not misleading.

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WESTERN GAS PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Presentation of Partnership assets. The term “Partnership assets” includes both the assets owned and the interests accounted for under the equity method by the Partnership as of March 31, 2018 (see Note 8). Because Anadarko controls the Partnership through its 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.

For those periods requiring recast, the consolidated financial statements for periods prior to the Partnership’s acquisition of the Partnership assets from Anadarko are 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 (loss) 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.

Use of estimates. 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.

Insurance recoveries. In December 2015, there was an initial fire and secondary explosion at the processing facility within the Delaware Basin Midstream, LLC (“DBM”) complex. The majority of the damage from the incident was to the liquid handling facilities and the amine treating units at the inlet of the complex. During the three months ended March 31, 2017, a $5.7 million loss was recorded in Gain (loss) on divestiture and other, net in the consolidated statements of operations, related to a change in the Partnership’s estimate of the amount that would be recovered under the property insurance claim based on further discussions with insurers. During the three months ended March 31, 2017, the Partnership received $29.8 million in cash proceeds from insurers, including $5.8 million in proceeds from business interruption insurance claims and $24.0 million in proceeds from property insurance claims.

Recently adopted accounting standards. ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash requires an entity to explain the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents on the statement of cash flows and to provide a reconciliation of the totals in that statement to the related captions in the balance sheet when the cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet. The Partnership adopted this ASU using a retrospective approach on January 1, 2018, and the adoption did not impact the consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Revenue from contracts with customers (Topic 606). The Partnership adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”) on January 1, 2018, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. The cumulative effect adjustment that was recognized in the opening balance of equity and partners’ capital was a decrease of $44.4 million. The comparative historical financial information has not been adjusted and continues to be reported under Revenue Recognition (Topic 605) (“Topic 605”).

Effective January 1, 2018, the Partnership changed its accounting policy for revenue recognition as detailed below:

•

Fee-based gathering / processing. Under Topic 605, fee revenues were recognized based on the rate in effect for the month of service, even when certain fees were charged on an upfront or limited-term basis. In addition, deficiency fees were charged and recognized only when the customer did not meet the specified delivery minimums for the completed performance period. Under Topic 606, revenues continue to be recognized based on the rate in effect when the fee is either the same rate per unit over the contract term or when the fee escalates and the escalation factor approximates inflation. Under Topic 606, the Partnership recognizes revenue associated with upfront or limited-term fees over the expected period of customer benefit, which is generally the life of the related properties. In addition, deficiency fees are estimated and recognized during the performance period as the services are performed for the customer’s delivered volumes. Under Topic 606, differences between Service revenues – fee based recognized and amounts billed to customers are recognized as contract assets or contract liabilities, as appropriate. This results in a change in the timing of revenue and changes to net income as a result of the revenue contract’s consideration provisions.

•

Cost of service rate adjustments. Under Topic 605, revenue was recognized based on the amounts billed to customers each period. Under Topic 606, fixed minimum volume commitment demand fees and variable fees that are also billed on these minimum volumes are recognized as Service revenues – fee based on a consistent per-unit rate over the term of the contract. Annual adjustments are made to the cost of service rates charged to customers, and, as a result, a cumulative catch-up revenue adjustment related to the services already provided under the contract may be recorded in future periods, with revenues for the remaining term of the contract recognized on a consistent per-unit rate. Fees received on volumes in excess of the minimum volumes are recognized as Service revenues – fee based as service is provided to the customer based on the billing rate in effect for the performance period. This revenue recognition timing does not affect billings to customers, and differences between amounts billed and revenue recognized are recorded as contract assets or liabilities, as appropriate.

•

Aid in construction. Under Topic 605, aid in construction reimbursements were reflected as a reduction to property, plant and equipment upon receipt (and a reduction to capital expenditures). Under Topic 606, reimbursement of capital costs received from customers is reflected as a contract liability (deferred revenue) upon receipt. The contract liability is amortized to Service revenues – fee based over the expected period of customer benefit, which is generally the life of the related properties.

•

Percent-of-proceeds gathering / processing. Under Topic 605, the Partnership recognized cost of product expense when the product was purchased from a producer to whom it provides services, and the Partnership recognized revenue when the product was sold to Anadarko or a third party. Under Topic 606, in some instances, where all or a percentage of the proceeds from the sale must be returned to the producer, the net margin from the purchase and sale transactions is presented net within Service revenues – product based because the Partnership is acting as the producer’s agent in the product sale.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

•

Noncash consideration - keep-whole and percent-of-product agreements. Under Topic 605, the Partnership recognized revenues only upon the sale of the related products. Under Topic 606, the Partnership recognizes Service revenues – product based for the products received as noncash consideration in exchange for the services provided, with the keep-whole noncash consideration value based on the net value of the NGLs over the replacement residue gas cost. Under Topic 606, revenue from product sales is recognized, along with cost of product expense related to the sale, when the product is sold to Anadarko or a third party.

•

Wellhead purchase / sale incorporated into gathering / processing. Under Topic 605, the natural gas purchase cost was recognized as cost of product expense and any specified gathering or processing fees charged to the producer were recognized as revenues. Under Topic 606, the fees charged to the producer under this contract type are recognized as adjustments to the amount recognized in cost of product expense instead of revenues when such fees relate to services performed after control of the product transfers to the Partnership.

The following tables summarize the impact of adopting Topic 606 on the impacted line items within the consolidated statement of operations and the consolidated balance sheet. The differences between revenue as reported following Topic 606 and revenue as it would have been reported under Topic 605 are due to the changes described above.



	Three Months Ended March 31, 2018
thousands	As Reported		Without Adoption of Topic 606		Effect of Change Increase/(Decrease)
Revenues
Service revenues – fee based	$	338,419	$	342,338	$	(3,919	)
Service revenues – product based	22,593		—		22,593
Product sales	75,937		292,291		(216,354		)
Expenses
Cost of product	77,799		274,966		(197,167		)
Operation and maintenance	88,279		88,139		140
Depreciation and amortization	76,842		76,153		689
Income tax (benefit) expense	1,502		1,509		(7		)
Net income attributable to noncontrolling interest	2,985		2,498		487
Net income (loss) attributable to Western Gas Partners, LP	149,363		151,185		(1,822		)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



	March 31, 2018
thousands	As Reported		Without Adoption of Topic 606		Effect of Change Increase/(Decrease)
Assets
Other current assets	$	22,747	$	16,909	$	5,838
Net property, plant and equipment	6,063,547		5,977,144		86,403
Other assets	14,525		14,303		222
Liabilities
Accrued liabilities	78,798		74,090		4,708
Deferred income taxes	8,592		8,746		(154		)
Other liabilities	128,757		2,553		126,204
Equity and partners’ capital
Total equity and partners’ capital	3,874,848		3,913,143		(38,295		)

New accounting standards issued but not yet adopted. ASU 2016-02, Leases (Topic 842) requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset for all leases, including operating leases, with a term greater than 12 months on the balance sheet. This ASU modifies the definition of a lease and outlines the recognition, measurement, presentation, and disclosure of leasing arrangements by both lessees and lessors. The Partnership plans to make certain elections allowing the Partnership not to reassess contracts that commenced prior to adoption, to continue applying its current accounting policy for land easements and not to recognize ROU assets or lease liabilities for short-term leases. The Partnership continues to review contracts in its portfolio of leased assets to assess the impact of adopting this ASU, which is expected to primarily affect other assets and other long-term liabilities. To facilitate compliance with this ASU, the Partnership is implementing new accounting software and continuing to evaluate its systems, processes, and internal controls during 2018. The Partnership will adopt this ASU on January 1, 2019, using a modified retrospective approach for all comparative periods presented according to the ASU as it is currently written.

Revenue and cost of product. Upon adoption of the new revenue recognition standard on January 1, 2018 (discussed in Recently adopted accounting standards), the Partnership changed its accounting policy for revenue recognition as described below.

The Partnership provides gathering, processing, treating, transportation and disposal services pursuant to a variety of contracts. Under these arrangements, the Partnership receives fees and/or retains a percentage of products or a percentage of the proceeds from the sale of the customer’s products. These revenues are included in Service revenues and Product sales in the consolidated statements of operations. Payment is generally received from the customer in the month following the service or delivery of the product. Contracts with customers generally have initial terms ranging from 5 to 10 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Service revenues – fee based is recognized for fee-based contracts in the month of service based on the volumes delivered by the customer. Producers’ wells or production facilities are connected to the Partnership’s gathering systems for gathering, processing, treating, transportation and disposal of natural gas, NGLs, condensate, crude oil and produced water, as applicable. Revenues are valued based on the rate in effect for the month of service when the fee is either the same rate per unit over the contract term or when the fee escalates and the escalation factor approximates inflation. Deficiency fees charged to customers that do not meet their minimum delivery requirements are recognized as services are performed based on an estimate of the fees that will be billed upon completion of the performance period. Because of its significant upfront capital investment, the Partnership may charge additional service fees to customers for only a portion of the contract term (i.e., for the first year of a contract or until reaching a volume threshold), and these fees are recognized as revenue over the expected period of customer benefit, which is generally the life of the related properties.

The Partnership also receives Service revenues – fee based from contracts that have minimum volume commitment demand fees and fees that require periodic rate redeterminations based upon the related facility cost of service. These fees include fixed and variable consideration that are recognized on a consistent per-unit rate over the term of the contract. Annual adjustments are made to the cost of service rates charged to customers, and a cumulative catch-up revenue adjustment related to services already provided to the minimum volumes under the contract may be recorded in future periods, with revenues for the remaining term of the contract recognized on a consistent per-unit rate.

Service revenues – product based includes service revenues from percent-of-proceeds gathering and processing contracts that are recognized net of the cost of product for purchases from the Partnership’s customers since it is acting as the agent in the product sale. Keep-whole and percent-of-product agreements result in Service revenues – product based being recognized when the natural gas and/or NGLs are received from the customer as noncash consideration for the services provided. Noncash consideration for these services is valued at the time the services are provided. Revenue from product sales is also recognized, along with the cost of product expense related to the sale, when the product received as noncash consideration is sold to either Anadarko or a third party.

The Partnership also purchases natural gas volumes from producers at the wellhead or from a production facility, typically at an index price, and charges the producer fees associated with the downstream gathering and processing services. When the fees relate to services performed after control of the product has transferred to the Partnership, the fees are treated as a reduction of the purchase cost. Revenue from product sales is recognized, along with cost of product expense related to the sale, when the purchased product is sold to either Anadarko or a third party.

The Partnership receives aid in construction reimbursements for certain capital costs necessary to provide services to customers (i.e., connection costs, etc.) under certain service contracts. Aid in construction reimbursements are reflected as a contract liability upon receipt and amortized to Service revenues – fee based over the expected period of customer benefit, which is generally the life of the related properties.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

2. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following table summarizes the Partnership’s revenue from contracts with customers:



thousands	Three Months Ended March 31, 2018
Revenue from customers
Service revenues – fee based	$	338,419
Service revenues – product based	22,593
Product sales	77,180
Total revenue from customers	438,192
Revenue from other than customers
Net gains (losses) on commodity price swap agreements	(1,243		)
Other	219
Total revenues and other	$	437,168

Contract balances. Receivables from customers, which are included in Accounts receivable, net on the consolidated balance sheets were $252.3 million and $244.4 million as of March 31, 2018, and December 31, 2017, respectively.

Contract assets primarily relate to accrued deficiency fees the Partnership expects to charge customers once the related performance periods are completed. The following table summarizes the current period activity related to contract assets from contracts with customers:



thousands
Balance at December 31, 2017	$	—
Cumulative effect of adopting Topic 606	5,129
Amounts transferred to Accounts receivable, net from contract assets recognized in the adoption effect	(2,494		)
Additional estimated revenues recognized	3,425
Balance at March 31, 2018	$	6,060

Contract assets at March 31, 2018
Other current assets	$	5,838
Other assets	222
Total contract assets from contracts with customers	$	6,060

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

2. REVENUE FROM CONTRACTS WITH CUSTOMERS (CONTINUED)

Contract liabilities primarily relate to (i) fees that are charged to customers for only a portion of the contract term and must be recognized as revenues over the expected period of customer benefit, (ii) fixed and variable fees under cost of service contracts that are received from customers for which revenue recognition is deferred and (iii) aid in construction payments received from customers that must be recognized over the expected period of customer benefit. The following table summarizes the current period activity related to contract liabilities from contracts with customers:



thousands
Balance at December 31, 2017	$	—
Cumulative effect of adopting Topic 606	120,717
Cash received or receivable, excluding revenues recognized during the period	28,538
Revenues recognized during the period that were included in the adoption effect	(1,027		)
Balance at March 31, 2018	$	148,228

Contract liabilities at March 31, 2018
Accrued liabilities	$	22,024
Other liabilities	126,204
Total contract liabilities from contracts with customers	$	148,228

Transaction price allocated to remaining performance obligations. Revenues expected to be recognized from certain performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2018, are reflected in the following table. The Partnership applies the optional exemptions in Topic 606 and does not disclose consideration for remaining performance obligations with an original expected duration of one year or less or for variable consideration related to unsatisfied (or partially unsatisfied) performance obligations. Therefore, the following table represents only a small portion of expected future consolidated revenues from existing contracts as most future revenues from customers are dependent on future variable customer volumes and in some cases variable commodity prices for those volumes.



thousands
Remainder of 2018	$	267,905
2019	440,723
2020	496,050
2021	469,728
2022	460,992
Thereafter	1,697,687
Total	$	3,833,085

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

3. ACQUISITIONS AND DIVESTITURES

Property exchange. On March 17, 2017, the Partnership acquired an additional 50% interest in the Delaware Basin JV Gathering LLC (“DBJV”) system (the “Additional DBJV System Interest”) from a third party in exchange for (a) the Partnership’s 33.75% non-operated interest in two natural gas gathering systems located in northern Pennsylvania (the “Non-Operated Marcellus Interest”), commonly referred to as the Liberty and Rome systems, and (b) $155.0 million of cash consideration (collectively, the “Property Exchange”). The Partnership previously held a 50% interest in, and operated, the DBJV system.

The Property Exchange was reflected as a nonmonetary transaction whereby the acquired Additional DBJV System Interest was recorded at the fair value of the divested Non-Operated Marcellus Interest plus the $155.0 million of cash consideration. The Property Exchange resulted in a net gain of $125.7 million recorded as Gain (loss) on divestiture and other, net in the consolidated statements of operations. Results of operations attributable to the Property Exchange were included in the consolidated statements of operations beginning on the acquisition date in the first quarter of 2017.

DBJV acquisition - Deferred purchase price obligation - Anadarko. Prior to the Partnership’s agreement with Anadarko to settle its deferred purchase price obligation early, the consideration that would have been paid by the Partnership for the March 2015 acquisition of DBJV from Anadarko consisted of a cash payment to Anadarko due on March 31, 2020. In May 2017, the Partnership reached an agreement with Anadarko to settle this obligation with a cash payment to Anadarko of $37.3 million, which was equal to the estimated net present value of the obligation at March 31, 2017.

4. PARTNERSHIP DISTRIBUTIONS

The partnership agreement 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 Partnership’s general partner (the “Board of Directors”) 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
2017
March 31	$	0.875	$	188,753	May 2017
June 30	0.890		207,491		August 2017
September 30	0.905		212,038		November 2017
December 31	0.920		216,586		February 2018
2018
March 31 ⁽¹⁾	$	0.935	$	221,133	May 2018

⁽¹⁾

The Board of Directors declared a cash distribution to the Partnership’s unitholders for the first quarter of 2018 of $0.935 per unit, or $221.1 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 May 14, 2018, to unitholders of record at the close of business on May 2, 2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

4. PARTNERSHIP DISTRIBUTIONS (CONTINUED)

Available cash. The amount of available cash (as defined in the partnership agreement) generally is all cash on hand at the end of the quarter, plus, at the discretion of the general partner, working capital borrowings made subsequent to the end of such quarter, less the amount of cash reserves established by the Partnership’s general partner to provide for the proper conduct of the Partnership’s business, including reserves to fund future capital expenditures; to comply with applicable laws, debt instruments or other agreements; or to provide funds for distributions to its unitholders and to its general partner for any one or more of the next four quarters. Working capital borrowings generally include borrowings made under a credit facility or similar financing arrangement. Working capital borrowings may only be those that, at the time of such borrowings, were intended to be repaid within 12 months. In all cases, working capital borrowings are used solely for working capital purposes or to fund distributions to partners.

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 March 1, 2020 (unless earlier converted), and the Class C units are disregarded with respect to distributions of the Partnership’s available cash until they are converted into 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. See Note 5 for further discussion of the Class C units.

Series A Preferred unit distributions. As further described in Note 5, the Partnership issued Series A Preferred units representing limited partner interests in the Partnership to private investors in 2016. The Series A Preferred unitholders received quarterly distributions in cash equal to $0.68 per Series A Preferred unit, subject to certain adjustments. On March 1, 2017, 50% of the outstanding Series A Preferred units converted into common units on a one-for-one basis, and on May 2, 2017, all remaining Series A Preferred units converted into common units on a one-for-one basis. Such converted common units were entitled to distributions made to common unitholders with respect to the quarter during which the applicable conversion occurred and did not include a prorated Series A Preferred unit distribution. For the quarter ended March 31, 2017, the Series A Preferred unitholders received an aggregate cash distribution of $7.5 million (paid in May 2017).

General partner interest and incentive distribution rights. As of March 31, 2018, the general partner was entitled to 1.5% of all quarterly distributions that the Partnership makes prior to its liquidation and, as the holder of the incentive distribution rights (“IDRs”), was entitled to incentive distributions at the maximum distribution sharing percentage of 48.0% for all periods presented, after the minimum quarterly distribution and the target distribution levels had been achieved. The maximum distribution sharing percentage of 49.5% does not include any distributions that the general partner may receive on common units that it may acquire.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5. EQUITY AND PARTNERS’ CAPITAL

Equity offerings. In July 2017, the Partnership filed a registration statement with the SEC for the issuance of up to an aggregate of $500.0 million of common units pursuant to a new continuous offering program that has not yet been initiated.

Class C units. In November 2014, the Partnership issued 10,913,853 Class C units to APC Midstream Holdings, LLC (“AMH”), pursuant to a Unit Purchase Agreement with Anadarko and AMH. The Class C units were issued to partially fund the acquisition of DBM.

When issued, the Class C units were scheduled to convert into common units on a one-for-one basis on December 31, 2017. In February 2017, Anadarko elected to extend the conversion date of the Class C units to March 1, 2020. The Partnership can elect to convert the Class C units earlier or Anadarko can extend the conversion date again.

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 issuance, 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 is 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 as amortized. The beneficial conversion feature is amortized assuming the extended conversion date of March 1, 2020, using the effective yield method. The impact of the beneficial conversion feature amortization is included in the calculation of earnings per unit.

Series A Preferred units. In 2016, the Partnership issued 21,922,831 Series A Preferred units to private investors. The Series A Preferred units were issued at a discount to the then-current market price of the common units into which they were convertible, representing a beneficial conversion feature at issuance. The impact of the beneficial conversion feature amortization was included in the calculation of earnings per unit. For the three months ended March 31, 2017, the amortization for the beneficial conversion feature of the Series A Preferred units was $48.1 million.

Pursuant to an agreement between the Partnership and the holders of the Series A Preferred units, 50% of the Series A Preferred units converted into common units on a one-for-one basis on March 1, 2017, and all remaining Series A Preferred units converted into common units on a one-for-one basis on May 2, 2017. The Partnership has an effective registration statement with the SEC relating to the public resale of the common units issued upon conversion of the Series A Preferred units.

Partnership interests. The Partnership’s common units are listed on the New York Stock Exchange under the symbol “WES.”

The following table summarizes the Partnership’s units issued during the three months ended March 31, 2018:



	Common Units	Class C Units	General Partner Units	Total
Balance at December 31, 2017	152,602,105	13,243,883	2,583,068	168,429,056
PIK Class C units	—	261,394	—	261,394
Balance at March 31, 2018	152,602,105	13,505,277	2,583,068	168,690,450

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(UNAUDITED)

5. EQUITY AND PARTNERS’ CAPITAL (CONTINUED)

Holdings of Partnership equity. As of March 31, 2018, WGP held 50,132,046 common units, representing a 29.7% 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 1.5% general partner interest in the Partnership, and 100% of the IDRs. As of March 31, 2018, other subsidiaries of Anadarko collectively held 2,011,380 common units and 13,505,277 Class C units, representing an aggregate 9.2% limited partner interest in the Partnership. As of March 31, 2018, the public held 100,458,679 common units, representing the remaining 59.6% limited partner interest in the Partnership.

Net income (loss) per common unit. Net income (loss) 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 unitholders for purposes of calculating net income (loss) per common unit. Net income (loss) attributable to Western Gas Partners, LP earned on and subsequent to the date of acquisition of the Partnership assets is allocated as follows:

General partner. The general partner’s allocation is equal to cash distributions plus its portion of undistributed earnings or losses. Specifically, net income equal to the amount of available cash (as defined by the partnership agreement) is allocated to the general partner consistent with actual cash distributions and capital account allocations, including incentive distributions. Undistributed earnings (net income in excess of distributions) or undistributed losses (available cash in excess of net income) are then allocated to the general partner in accordance with its weighted-average ownership percentage during each period.

Series A Preferred unitholders. The Series A Preferred units were not considered a participating security as they only had distribution rights up to the specified per-unit quarterly distribution and had no rights to the Partnership’s undistributed earnings and losses. As such, the Series A Preferred unitholders’ allocation was equal to their cash distribution plus the amortization of the Series A Preferred units beneficial conversion feature (see Series A Preferred units above).

Common and Class C unitholders. The Class C units are considered a participating security because they participate in distributions with common units according to a predetermined formula (see Note 4). The common and Class C unitholders’ allocation is equal to their cash distributions plus their respective portions of undistributed earnings or losses. Specifically, net income equal to the amount of available cash (as defined by the partnership agreement) is allocated to the common and Class C unitholders consistent with actual cash distributions and capital account allocations. Undistributed earnings or undistributed losses are then allocated to the common and Class C unitholders in accordance with their respective weighted-average ownership percentages during each period. The common unitholder allocation also includes the impact of the amortization of the Series A Preferred units and Class C units beneficial conversion features. The Class C unitholder allocation is similarly impacted by the amortization of the Class C units beneficial conversion feature (see Class C units above).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5. EQUITY AND PARTNERS’ CAPITAL (CONTINUED)

Calculation of net income (loss) per unit. Basic net income (loss) per common unit is calculated by dividing the net income (loss) 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. Diluted net income (loss) per common unit is calculated by dividing the sum of (i) the net income (loss) attributable to common units adjusted for distributions on the Series A Preferred units and a reallocation of the common and Class C limited partners’ interest in net income (loss) assuming, prior to the actual conversion, conversion of the Series A Preferred units into common units, and (ii) the net income (loss) attributable 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 (i) the weighted-average number of outstanding Class C units and (ii) the weighted-average number of common units outstanding assuming, prior to the actual conversion, conversion of the Series A Preferred units.

The following table illustrates the Partnership’s calculation of net income (loss) per common unit:



	Three Months Ended March 31,
thousands except per-unit amounts	2018			2017
Net income (loss) attributable to Western Gas Partners, LP	$	149,363		$	101,889
Series A Preferred units interest in net (income) loss ⁽¹⁾	—			(28,174		)
General partner interest in net (income) loss	(83,439		)	(68,162		)
Common and Class C limited partners’ interest in net income (loss)	$	65,924		$	5,553
Net income (loss) allocable to common units ⁽¹⁾	$	58,323		$	1,714
Net income (loss) allocable to Class C units ⁽¹⁾	7,601			3,839
Common and Class C limited partners’ interest in net income (loss)	$	65,924		$	5,553
Net income (loss) per unit
Common units – basic and diluted ⁽²⁾	$	0.38		$	0.01
Weighted-average units outstanding
Common units – basic and diluted	152,602			134,448
Excluded due to anti-dilutive effect:
Class C units⁽²⁾	13,380			12,452
Series A Preferred units assuming conversion to common units ⁽²⁾	—			18,147


⁽¹⁾	Adjusted to reflect amortization of the beneficial conversion features.

⁽²⁾

The impact of Class C units would be anti-dilutive for all periods presented and the conversion of Series A Preferred units would be anti-dilutive for the three months ended March 31, 2017. On March 1, 2017, 50% of the outstanding Series A Preferred units converted into common units on a one-for-one basis, and on May 2, 2017, all remaining Series A Preferred units converted into common units on a one-for-one basis.

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WESTERN GAS PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. TRANSACTIONS WITH AFFILIATES

Affiliate transactions. Revenues from affiliates include amounts earned by the Partnership from services provided to Anadarko as well as from the sale of residue 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.

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.

Note receivable - 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 $316.2 million and $325.2 million at March 31, 2018, and December 31, 2017, respectively. The fair value of the note reflects consideration of credit risk and any premium or discount for the differential between the stated interest rate and quarter-end market interest rate, based on quoted market prices of similar debt instruments. Accordingly, the fair value of the note receivable from Anadarko is measured using Level 2 inputs.

Commodity price swap agreements. The Partnership has commodity price swap agreements with Anadarko to mitigate exposure to a majority of the commodity price risk inherent in its percent-of-proceeds, percent-of-product and keep-whole contracts. Notional volumes for each of the commodity price swap agreements are not specifically defined. Instead, the commodity price swap agreements apply to the actual volume of natural gas, condensate and NGLs purchased and sold. 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. The Partnership’s net gains (losses) on commodity price swap agreements were $(1.2) million and $(0.5) million for three months ended March 31, 2018 and 2017, respectively, and are reported in the consolidated statements of operations as affiliate Product sales in 2018 and as affiliate Product sales and Cost of product expense in 2017 (see Note 1).

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WESTERN GAS PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. TRANSACTIONS WITH AFFILIATES (CONTINUED)

Revenues or costs attributable to volumes sold and purchased during 2017 and 2018 for the DJ Basin complex and MGR assets are recognized in the consolidated statements of operations at the applicable market price in the tables below. The Partnership also records a capital contribution from Anadarko in the Partnership’s consolidated statement 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 market price in the tables below. For the three months ended March 31, 2018, the capital contribution from Anadarko was $14.3 million. The tables below summarize the swap prices compared to the forward market prices:



	DJ Basin Complex
per barrel except natural gas	2017 - 2018 Swap Prices		2017 Market Prices ⁽¹⁾		2018 Market Prices ⁽¹⁾
Ethane	$	18.41	$	5.09	$	5.41
Propane	47.08		18.85		28.72
Isobutane	62.09		26.83		32.92
Normal butane	54.62		26.20		32.71
Natural gasoline	72.88		41.84		48.04
Condensate	76.47		45.40		49.36
Natural gas (per MMBtu)	5.96		3.05		2.21



	MGR Assets
per barrel except natural gas	2017 - 2018 Swap Prices		2017 Market Prices ⁽¹⁾		2018 Market Prices ⁽¹⁾
Ethane	$	23.11	$	4.08	$	2.52
Propane	52.90		19.24		25.83
Isobutane	73.89		25.79		30.03
Normal butane	64.93		25.16		29.82
Natural gasoline	81.68		45.01		47.25
Condensate	81.68		53.55		56.76
Natural gas (per MMBtu)	4.87		3.05		2.21


⁽¹⁾	Represents the New York Mercantile Exchange forward strip price as of December 1, 2016, and December 20, 2017, for the 2017 Market Prices and 2018 Market Prices, respectively, adjusted for product specification, location, basis and, in the case of NGLs, transportation and fractionation costs.

Gathering and processing agreements. The Partnership has significant gathering and processing arrangements with affiliates of Anadarko on a majority of its systems. The Partnership’s natural gas gathering, treating and transportation throughput (excluding equity investment throughput) attributable to production owned or controlled by Anadarko was 36% and 32% for the three months ended March 31, 2018 and 2017, respectively. The Partnership’s natural gas processing throughput (excluding equity investment throughput) attributable to production owned or controlled by Anadarko was 36% and 49% for the three months ended March 31, 2018 and 2017, respectively. The Partnership’s crude oil, NGL and produced water gathering, treating, transportation and disposal throughput (excluding equity investment throughput) attributable to production owned or controlled by Anadarko was 63% and 54% for the three months ended March 31, 2018 and 2017, respectively.

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WESTERN GAS PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. TRANSACTIONS WITH AFFILIATES (CONTINUED)

Commodity purchase and sale agreements. The Partnership sells a significant amount of its natural gas, condensate and NGLs to Anadarko Energy Services Company (“AESC”), Anadarko’s marketing affiliate. 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 2017 Long-Term Incentive Plan, effective October 17, 2017. Awards granted prior to October 17, 2017, were awarded under the Western Gas Partners, LP 2008 Long-Term Incentive Plan. These awards are primarily granted 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 for each of the three months ended March 31, 2018 and 2017.

Anadarko Incentive Plan. General and administrative expenses included $2.1 million and $1.2 million for the three months ended March 31, 2018 and 2017, 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 Anadarko Petroleum Corporation 2012 Omnibus Incentive Compensation Plan (“Anadarko Incentive Plan”). Of this amount, $1.5 million is reflected as contributions to partners’ capital in the Partnership’s consolidated statement of equity and partners’ capital for the three months ended March 31, 2018.

Contributions in aid of construction costs from affiliates. On certain of the Partnership’s capital projects, Anadarko is obligated to reimburse the Partnership for all or a portion of project capital expenditures. The majority of such arrangements are associated with projects related to pipeline construction activities and production well tie-ins. For periods prior to January 1, 2018, the cash receipts resulting from such reimbursements were presented as “Contributions in aid of construction costs from affiliates” within the investing section of the consolidated statements of cash flows. As discussed in Recently adopted accounting standards in Note 1, upon adoption of Topic 606, affiliate reimbursements of capital costs are reflected as contract liabilities upon receipt, amortized to Service revenues – fee based over the expected period of customer benefit, and presented within the operating section of the consolidated statements of cash flows.

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WESTERN GAS PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. TRANSACTIONS WITH AFFILIATES (CONTINUED)

Summary of affiliate transactions. The following table summarizes material affiliate transactions:



	Three Months Ended March 31,
thousands	2018		2017
Revenues and other ⁽¹⁾	$	241,062	$	315,155
Equity income, net – affiliates ⁽¹⁾	20,424		19,461
Cost of product ⁽¹⁾	20,244		15,988
Operation and maintenance ⁽²⁾	20,248		17,089
General and administrative ⁽³⁾	11,614		9,535
Operating expenses	52,106		42,612
Interest income ⁽⁴⁾	4,225		4,225
Interest expense ⁽⁵⁾	—		71
Distributions to unitholders ⁽⁶⁾	124,164		103,123
Above-market component of swap agreements with Anadarko	14,282		12,297


⁽¹⁾	Represents amounts earned or incurred on and subsequent to the date of the acquisition of Partnership assets, as well as amounts earned or incurred by Anadarko on a historical basis related to the Partnership assets prior to the acquisition of such assets, 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 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 acquisition of 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 Anadarko Incentive Plan within this Note 6).


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


⁽⁵⁾	Includes amounts related to the Deferred purchase price obligation - Anadarko (see Note 3 and Note 10).


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

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 operations.

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WESTERN GAS PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

7. PROPERTY, PLANT AND EQUIPMENT

A summary of the historical cost of property, plant and equipment is as follows:



thousands	Estimated Useful Life	March 31, 2018		December 31, 2017
Land	n/a	$	4,449	$	4,450
Gathering systems and processing complexes	3 to 47 years	7,305,279		7,114,701
Pipelines and equipment	15 to 45 years	137,765		137,644
Assets under construction	n/a	794,012		577,914
Other	3 to 40 years	30,578		36,393
Total property, plant and equipment		8,272,083		7,871,102
Accumulated depreciation		2,208,536		2,140,211
Net property, plant and equipment		$	6,063,547	$	5,730,891

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.

Impairments. During the three months ended March 31, 2018, the Partnership recognized impairments of $0.1 million.

During the year ended December 31, 2017, the Partnership recognized impairments of $178.4 million, including an impairment of $158.8 million at the Granger complex, which was impaired to its estimated fair value of $48.5 million using the income approach and Level 3 fair value inputs, due to a reduced throughput fee as a result of a producer’s bankruptcy. The remaining $19.6 million of impairments was primarily related to (i) an $8.2 million impairment due to the cancellation of a plant project at the Hilight system, (ii) a $3.7 million impairment at the Granger straddle plant, which was impaired to its estimated salvage value of $0.6 million using the income approach and Level 3 fair value inputs, (iii) a $3.1 million impairment of the Fort Union equity investment, (iv) a $2.0 million impairment of an idle facility in northeast Wyoming, which was impaired to its estimated salvage value of $0.4 million using the market approach and Level 3 fair value inputs, and (v) the cancellation of a pipeline project in West Texas.

8. EQUITY INVESTMENTS

The following table presents the activity in the Partnership’s equity investments for the three months ended March 31, 2018:



thousands	Fort Union			White Cliffs			Rendezvous			Mont Belvieu JV			TEG			TEP			FRP			Total
Balance at December 31, 2017	$	7,030		$	44,945		$	42,528		$	110,299		$	15,879		$	178,975		$	166,555		$	566,211
Investment earnings (loss), net of amortization	144			2,673			225			7,090			1,066			4,417			4,809			20,424
Distributions	(144		)	(2,527		)	(710		)	(7,100		)	(1,127		)	(4,480		)	(4,853		)	(20,941		)
Distributions in excess of cumulative earnings ⁽¹⁾	(741		)	(1,228		)	(1,162		)	(1,325		)	(20		)	(2,168		)	(1,369		)	(8,013		)
Balance at March 31, 2018	$	6,289		$	43,863		$	40,881		$	108,964		$	15,798		$	176,744		$	165,142		$	557,681


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

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WESTERN GAS PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

9. COMPONENTS OF WORKING CAPITAL

A summary of accounts receivable, net is as follows:



thousands	March 31, 2018		December 31, 2017
Trade receivables, net	$	188,550	$	160,387
Other receivables, net	524		45
Total accounts receivable, net	$	189,074	$	160,432

A summary of other current assets is as follows:



thousands	March 31, 2018		December 31, 2017
Natural gas liquids inventory	$	9,275	$	10,788
Imbalance receivables	6,293		1,640
Prepaid insurance	1,341		2,388
Contract assets	5,838		—
Total other current assets	$	22,747	$	14,816

A summary of accrued liabilities is as follows:



thousands	March 31, 2018		December 31, 2017
Accrued interest expense	$	50,022	$	40,632
Short-term asset retirement obligations	1,339		2,304
Short-term remediation and reclamation obligations	833		833
Income taxes payable	2,666		2,495
Contract liabilities	22,024		—
Other	1,914		1,635
Total accrued liabilities	$	78,798	$	47,899

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WESTERN GAS PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10. DEBT AND INTEREST EXPENSE

At March 31, 2018, the Partnership’s debt consisted of 2.600% Senior Notes due 2018 (the “2018 Notes”), 5.375% Senior Notes due 2021 (the “2021 Notes”), 4.000% Senior Notes due 2022 (the “2022 Notes”), 3.950% Senior Notes due 2025 (the “2025 Notes”), 4.650% Senior Notes due 2026 (the “2026 Notes”), 4.500% Senior Notes due 2028 (the “2028 Notes”), 5.450% Senior Notes due 2044 (the “2044 Notes”) and 5.300% Senior Notes due 2048 (the “2048 Notes”).

The following table presents the Partnership’s outstanding debt:



	March 31, 2018						December 31, 2017
thousands	Principal		Carrying Value		Fair Value ⁽¹⁾		Principal		Carrying Value		Fair Value ⁽¹⁾
2018 Notes	$	350,000	$	349,810	$	349,542	$	350,000	$	349,684	$	350,631
2021 Notes	500,000		496,095		522,069		500,000		495,815		530,647
2022 Notes	670,000		668,906		670,857		670,000		668,849		684,043
2025 Notes	500,000		492,120		487,240		500,000		491,885		500,885
2026 Notes	500,000		495,360		508,551		500,000		495,245		520,144
2028 Notes	400,000		394,285		401,807		—		—		—
2044 Notes	600,000		593,262		605,816		600,000		593,234		637,827
2048 Notes	700,000		686,508		698,234		—		—		—
RCF	—		—		—		370,000		370,000		370,000
Total long-term debt	$	4,220,000	$	4,176,346	$	4,244,116	$	3,490,000	$	3,464,712	$	3,594,177


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

Debt activity. The following table presents the debt activity of the Partnership for the three months ended March 31, 2018:



thousands	Carrying Value
Balance at December 31, 2017	$	3,464,712
RCF borrowings	260,000
Issuance of 2028 Notes	400,000
Issuance of 2048 Notes	700,000
Repayments of RCF borrowings	(630,000		)
Other	(18,366		)
Balance at March 31, 2018	$	4,176,346

Senior Notes. The 2018 Notes, which are due in August 2018, were classified as long-term debt on the consolidated balance sheet at March 31, 2018, as the Partnership has the ability and intent to refinance these obligations using long-term debt.

The 2028 Notes and 2048 Notes issued in March 2018 were offered at prices to the public of 99.435% and 99.169%, respectively, of the face amount. Including the effects of the issuance and underwriting discounts, the effective interest rates of the 2028 Notes and 2048 Notes are 4.682% and 5.431%, respectively. Interest is paid on each such series semi-annually on March 1 and September 1 of each year, beginning September 1, 2018. A portion of the proceeds (net of underwriting discounts, original issue discounts and debt issuance costs) was used to repay amounts outstanding under the senior unsecured revolving credit facility (“RCF”) and for general partnership purposes, including to fund capital expenditures.

At March 31, 2018, the Partnership was in compliance with all covenants under the indentures governing its outstanding notes.

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WESTERN GAS PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10. DEBT AND INTEREST EXPENSE (CONTINUED)

Revolving credit facility. In February 2018, the Partnership entered into the five-year $1.5 billion RCF by amending and restating the $1.2 billion credit facility that was originally entered into in February 2014. The RCF is expandable to a maximum of $2.0 billion, matures in February 2023, with options to extend maturity by up to two additional one year increments, and bears interest at the London Interbank Offered Rate (“LIBOR”), plus applicable margins ranging from 1.00% to 1.50%, or an alternate base rate equal to the greatest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.50%, or (c) LIBOR plus 1.00%, in each case plus applicable margins currently ranging from zero to 0.50%, based upon the Partnership’s senior unsecured debt rating. The Partnership is required to pay a quarterly facility fee ranging from 0.125% to 0.250% of the commitment amount (whether used or unused), also based upon its senior unsecured debt rating.

As of March 31, 2018, the Partnership had no outstanding RCF borrowings and $4.6 million in outstanding letters of credit, resulting in $1,495.4 million available borrowing capacity under the RCF. As of March 31, 2018 and 2017, the interest rate on any outstanding RCF borrowings was 3.18% and 2.28%, respectively. The facility fee rate was 0.20% at March 31, 2018 and 2017. At March 31, 2018, 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 March 31,
thousands	2018			2017
Third parties
Long-term debt	$	(41,283	)	$	(34,619	)
Amortization of debt issuance costs and commitment fees	(2,054		)	(1,630		)
Capitalized interest	4,054			816
Total interest expense – third parties	(39,283		)	(35,433		)
Affiliates
Deferred purchase price obligation – Anadarko ⁽¹⁾	—			(71		)
Total interest expense – affiliates	—			(71		)
Interest expense	$	(39,283	)	$	(35,504	)


⁽¹⁾	See Note 3 for a discussion of the Deferred purchase price obligation - Anadarko.

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WESTERN GAS PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

11. COMMITMENTS AND CONTINGENCIES

Litigation and legal proceedings. In February 2017, DBJV, at the time a 50/50 joint venture between a third party and the Partnership, initiated an arbitration against SWEPI LP (“SWEPI”) for breach of a 2007 gas gathering agreement between it and DBJV (the “GGA”). Specifically, DBJV seeks to collect approximately $194.2 million in gathering fees under the GGA for the period January 1, 2016 to July 1, 2017. SWEPI disputes DBJV’s calculation of the cost of service based rate and filed a counterclaim for $14.9 million alleging overpayment of fees under the GGA for the years 2013 through 2015. The final arbitration hearing began April 30, 2018, and the Partnership expects to receive a decision by the end of the fourth quarter of 2018. Under the terms of the Property Exchange, the Partnership’s former joint venture partner in DBJV will owe 50% of any amounts to be paid, and have a right to 50% of any amounts received, by the Partnership as a result of this arbitration proceeding. Pursuant to an agreement between the parties, if the arbitrators determine that DBJV is owed an amount of money by SWEPI for underpaid gathering fees for the period from January 1, 2016 to July 1, 2017, that amount will be paid to DBJV over five years as a supplemental gathering fee under the currently effective gas gathering agreement between the parties. Any other amounts owed by either party will be paid in cash within ninety days of the conclusion of the arbitration. As part of the adoption of Topic 606 (see Note 1), during the first quarter of 2018, the Partnership recorded a $7.5 million contract liability and reduced total equity and partners’ capital related to the counterclaim for the years 2013 through 2015 under the GGA revenue contract. Any amounts awarded to DBJV under the arbitration would be recognized in the period the arbitration decision is received. The Partnership intends to vigorously prosecute its claims and vigorously defend the counterclaims asserted by SWEPI. Management does not believe the outcome of this proceeding will have a materially unfavorable effect on the Partnership’s financial condition, results of operations or cash flows.

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, the majority of which is expected to be paid in the next twelve months. These commitments relate primarily to construction and expansion projects at the DBJV system and the DJ Basin and DBM complexes.

Lease commitments. Anadarko, on behalf of the Partnership, has entered into lease arrangements for corporate offices, shared field offices and equipment supporting the Partnership’s operations, for which Anadarko charges the Partnership lease expense. The leases for the corporate offices and shared field offices extend through 2028 and 2033, respectively. Lease expense charged to the Partnership associated with these lease arrangements was $13.8 million and $8.6 million for the three months ended March 31, 2018 and 2017, respectively.

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

The following discussion analyzes our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements, which are included under Part I, Item 1 of this quarterly report, as well as our historical consolidated financial statements, and the notes thereto, which are included under Part II, Item 8 of our 2017 Form 10-K as filed with the SEC on February 16, 2018.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made in this Form 10-Q, and may from time to time make in other public filings, press releases and statements by management, forward-looking statements concerning our operations, economic performance and financial condition. These forward-looking statements include statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions or variations on such expressions. These statements discuss future expectations, contain projections of results of operations or financial condition or include other “forward-looking” information.

Although we and our general partner believe that the expectations reflected in such forward-looking statements are reasonable, neither we nor our general partner can give any assurance that such expectations will prove to have been correct. These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following:


•	our ability to pay distributions to our unitholders;


•	our and Anadarko’s assumptions about the energy market;


•	future throughput (including Anadarko production) that is gathered or processed by or transported through our assets;


•	our operating results;


•	competitive conditions;


•	technology;


•	the availability of capital resources to fund acquisitions, capital expenditures and other contractual obligations, and our ability to access those resources from Anadarko or through the debt or equity capital markets;


•	the supply of, demand for, and price of, oil, natural gas, NGLs and related products or services;


•	our ability to mitigate exposure to the commodity price risks inherent in our percent-of-proceeds, percent-of-product and keep-whole contracts through the extension of our commodity price swap agreements with Anadarko, or otherwise;


•	weather and natural disasters;


•	inflation;


•	the availability of goods and services;


•	general economic conditions, internationally, domestically or in the jurisdictions in which we are doing business;


•	federal, state and local laws, including those that limit Anadarko and other producers’ hydraulic fracturing or other oil and natural gas operations;

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•	environmental liabilities;


•	legislative or regulatory changes, including changes affecting our status as a partnership for federal income tax purposes;


•	changes in the financial or operational condition of Anadarko;


•	the creditworthiness of Anadarko or our other counterparties, including financial institutions, operating partners, and other parties;


•	changes in Anadarko’s capital program, strategy or desired areas of focus;


•	our commitments to capital projects;


•	our ability to use the RCF;


•	our ability to repay debt;


•	conflicts of interest among us, our general partner, WGP and its general partner, and affiliates, including Anadarko;


•	our ability to maintain and/or obtain rights to operate our assets on land owned by third parties;


•	our ability to acquire assets on acceptable terms from Anadarko or third parties, and Anadarko’s ability to generate an inventory of assets suitable for acquisition;


•	non-payment or non-performance of Anadarko or other significant customers, including under our gathering, processing, transportation and disposal agreements and our $260.0 million note receivable from Anadarko;


•	the timing, amount and terms of future issuances of equity and debt securities;

•

the outcome of pending and future regulatory, legislative, or other proceedings or investigations, including the investigation by the National Transportation Safety Board related to Anadarko’s operations in Colorado, and continued or additional disruptions in operations that may occur as Anadarko and we comply with regulatory orders or other state or local changes in laws or regulations in Colorado; and


•	other factors discussed below, in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” included in our 2017 Form 10-K, and in our quarterly reports on Form 10-Q, and in our other public filings and press releases.

The risk factors and other factors noted throughout or incorporated by reference in this Form 10-Q could cause actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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EXECUTIVE SUMMARY

We are a growth-oriented Delaware MLP formed by Anadarko to acquire, own, develop and operate midstream assets. We currently own or have investments in assets located in the Rocky Mountains (Colorado, Utah and Wyoming), North-central Pennsylvania, Texas and New Mexico. We are engaged in the business of gathering, compressing, treating, processing and transporting natural gas; gathering, stabilizing and transporting condensate, NGLs and crude oil; and gathering and disposing of produced water. In addition, in our capacity as a processor of natural gas, we also buy and sell natural gas, NGLs and condensate on behalf of ourselves and as agent for our customers under certain of our contracts. We provide these midstream services for Anadarko, as well as for third-party producers and customers. As of March 31, 2018, our assets and investments consisted of the following:



	Owned and Operated	Operated Interests	Non-Operated Interests	Equity Interests
Gathering systems ⁽¹⁾	12	3	3	2
Treating facilities	19	3	—	3
Natural gas processing plants/trains	20	4	—	2
NGL pipelines	2	—	—	3
Natural gas pipelines	5	—	—	—
Oil pipelines	—	1	—	1


⁽¹⁾	Includes the DBM water systems.

Significant financial and operational events during the three months ended March 31, 2018, included the following:

•

In March 2018, we completed an offering of $400.0 million aggregate principal amount of 2028 Notes and $700.0 million aggregate principal amount of 2048 Notes. A portion of the net proceeds was used to repay amounts outstanding under the RCF and for general partnership purposes, including to fund capital expenditures. See Liquidity and Capital Resources within this Item 2 for additional information.


•	In February 2018, we entered into the five-year $1.5 billion (expandable to $2.0 billion) RCF by amending and restating the $1.2 billion credit facility originally entered into in February 2014. See Liquidity and Capital Resources within this Item 2 for additional information.


•	We raised our distribution to $0.935 per unit for the first quarter of 2018, representing a 2% increase over the distribution for the fourth quarter of 2017 and a 7% increase over the distribution for the first quarter of 2017.


•	Throughput attributable to Western Gas Partners, LP for natural gas assets totaled 3,627 MMcf/d for the three months ended March 31, 2018, representing an 8% decrease compared to the three months ended March 31, 2017.


•	Throughput for crude oil, NGL and produced water assets totaled 258 MBbls/d for the three months ended March 31, 2018, representing a 53% increase compared to the three months ended March 31, 2017.


•	Operating income (loss) was $188.1 million for the three months ended March 31, 2018, representing a 36% increase compared to the three months ended March 31, 2017.


•	Adjusted gross margin for natural gas assets (as defined under the caption Key Performance Metrics within this Item 2) averaged $1.00 per Mcf for the three months ended March 31, 2018, representing an 18% increase compared to the three months ended March 31, 2017.


•	Adjusted gross margin for crude oil, NGL and produced water assets (as defined under the caption Key Performance Metrics within this Item 2) averaged $1.84 per Bbl for the three months ended March 31, 2018, representing a 7% decrease compared to the three months ended March 31, 2017.

Table of Contents

Significant Item Affecting Comparability. On January 1, 2018, we adopted Revenue from Contracts with Customers (Topic 606) (“Topic 606”). The comparative historical financial information has not been adjusted and continues to be reported under Revenue Recognition (Topic 605). The following table summarizes the impact of adopting Topic 606 on the consolidated statement of operations:



	Three Months Ended March 31, 2018
thousands	As Reported		Without Adoption of Topic 606		Effect of Change Increase/(Decrease)
Revenues
Service revenues – fee based	$	338,419	$	342,338	$	(3,919	)
Service revenues – product based	22,593		—		22,593
Product sales	75,937		292,291		(216,354		)
Expenses
Cost of product	77,799		274,966		(197,167		)
Operation and maintenance	88,279		88,139		140
Depreciation and amortization	76,842		76,153		689
Income tax (benefit) expense	1,502		1,509		(7		)

For more information on the adoption of Topic 606, see Note 1—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

ACQUISITIONS AND DIVESTITURES

Property exchange. On March 17, 2017, we acquired the Additional DBJV System Interest from a third party in exchange for the Non-Operated Marcellus Interest and $155.0 million of cash consideration. We previously held a 50% interest in, and operated, the DBJV system. The Property Exchange resulted in a net gain of $125.7 million recorded as Gain (loss) on divestiture and other, net in the consolidated statements of operations. See Note 3—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Presentation of Partnership assets. The term “Partnership assets” includes both the assets owned and the interests accounted for under the equity method by us as of March 31, 2018 (see Note 8—Equity Investments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q). Because Anadarko controls us through its control of WGP, which owns the entire interest in our general partner, 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 we acquired from Anadarko were initially recorded at Anadarko’s historic carrying value, which did not correlate to the total acquisition price paid by us. Further, after an acquisition of Partnership assets from Anadarko, we may be required to recast our financial statements to include the activities of such Partnership assets from the date of common control.

For those periods requiring recast, the consolidated financial statements for periods prior to our 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 we had owned the Partnership assets during the periods reported. For ease of reference, we refer to the historical financial results of the Partnership assets prior to our acquisitions from Anadarko as being “our” historical financial results.

EQUITY OFFERINGS

Series A Preferred units. In 2016, we issued 21,922,831 Series A Preferred units to private investors. Pursuant to an agreement between us and the holders of the Series A Preferred units, 50% of the Series A Preferred units converted into common units on a one-for-one basis on March 1, 2017, and all remaining Series A Preferred units converted into common units on a one-for-one basis on May 2, 2017. See Note 5—Equity and Partners’ Capital in the Notes to Consolidated Financial Statements under Part&