EXHIBIT 99.3
Item 8. Financial Statements and Supplementary Data
WESTERN GAS EQUITY PARTNERS, LP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WESTERN GAS EQUITY PARTNERS, LP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Unitholders
Western Gas Equity Holdings, LLC (as general partner of Western Gas Equity Partners, LP):
We have audited the accompanying consolidated balance sheets of Western Gas Equity Partners, LP (the Partnership) and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, equity and partners’ capital, and cash flows for each of the years in the three year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western Gas Equity Partners, LP and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Houston, Texas
June 10, 2016
2
WESTERN GAS EQUITY PARTNERS, LP
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||
| thousands except per-unit amounts | 2015 (1) | 2014 (1) | 2013 (1) | |||||||||
| Revenues and other – affiliates | ||||||||||||
| Gathering, processing and transportation | $ | 772,361 | $ | 615,907 | $ | 449,272 | ||||||
| Natural gas, natural gas liquids and drip condensate sales | 447,106 | 582,989 | 502,219 | |||||||||
| Other | 1,172 | 5,078 | 6,421 | |||||||||
| Total revenues and other – affiliates | 1,220,639 | 1,203,974 | 957,912 | |||||||||
| Revenues and other – third parties | ||||||||||||
| Gathering, processing and transportation | 356,477 | 278,127 | 191,813 | |||||||||
| Natural gas, natural gas liquids and drip condensate sales | 170,843 | 42,916 | 46,289 | |||||||||
| Other | 4,113 | 8,360 | 4,046 | |||||||||
| Total revenues and other – third parties | 531,433 | 329,403 | 242,148 | |||||||||
| Total revenues and other | 1,752,072 | 1,533,377 | 1,200,060 | |||||||||
Equity income, net (2) | 71,251 | 57,836 | 22,948 | |||||||||
| Operating expenses | ||||||||||||
Cost of product (3) | 528,369 | 458,379 | 377,626 | |||||||||
Operation and maintenance (3) | 331,972 | 293,710 | 235,971 | |||||||||
General and administrative (3) | 44,428 | 41,777 | 38,478 | |||||||||
| Property and other taxes | 33,327 | 28,923 | 26,243 | |||||||||
| Depreciation and amortization | 272,611 | 211,809 | 172,863 | |||||||||
| Impairments | 515,458 | 5,125 | 49,920 | |||||||||
| Total operating expenses | 1,726,165 | 1,039,723 | 901,101 | |||||||||
Gain (loss) on divestiture and other, net (4) | 57,024 | (9 | ) | — | ||||||||
| Operating income (loss) | 154,182 | 551,481 | 321,907 | |||||||||
| Interest income – affiliates | 16,900 | 16,900 | 16,900 | |||||||||
Interest expense (5) | (113,874 | ) | (76,769 | ) | (51,797 | ) | ||||||
| Other income (expense), net | (578 | ) | 938 | 1,935 | ||||||||
| Income (loss) before income taxes | 56,630 | 492,550 | 288,945 | |||||||||
| Income tax (benefit) expense | 45,532 | 39,061 | 4,266 | |||||||||
| Net income (loss) | 11,098 | 453,489 | 284,679 | |||||||||
| Net income (loss) attributable to noncontrolling interests | (154,409 | ) | 165,468 | 122,173 | ||||||||
| Net income (loss) attributable to Western Gas Equity Partners, LP | $ | 165,507 | $ | 288,021 | $ | 162,506 | ||||||
| Limited partners’ interest in net income (loss): | ||||||||||||
| Net income (loss) attributable to Western Gas Equity Partners, LP | $ | 165,507 | $ | 288,021 | $ | 162,506 | ||||||
| Results attributable to the pre-IPO period | — | — | (49 | ) | ||||||||
| Pre-acquisition net (income) loss allocated to Anadarko | (79,386 | ) | (65,154 | ) | (6,929 | ) | ||||||
Limited partners’ interest in net income (loss) (6) | 86,121 | 222,867 | 155,528 | |||||||||
| Net income (loss) per common unit – basic and diluted | $ | 0.39 | $ | 1.02 | $ | 0.71 | ||||||
| Weighted-average common units outstanding – basic and diluted | 218,913 | 218,910 | 218,896 | |||||||||
(1) | Financial information for the year ended December 31, 2015, has been recast to include the financial position and results attributable to the Springfield system, and the financial information for the years ended December 31, 2014 and 2013, has been recast to include the financial position and results attributable to the Springfield and DBJV systems. See Note 1 and Note 2. |
(2) | Income earned from equity investments is classified as affiliate. See Note 1. |
(3) | Cost of product includes product purchases from Anadarko (as defined in Note 1) of $167.4 million, $127.9 million and $136.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. Operation and maintenance includes charges from Anadarko of $77.1 million, $71.4 million and $67.3 million for the years ended December 31, 2015, 2014 and 2013, respectively. General and administrative includes charges from Anadarko of $34.7 million, $32.1 million and $29.2 million for the years ended December 31, 2015, 2014 and 2013, respectively. See Note 5. |
(4) | Includes losses related to an incident at the DBM complex for the year ended December 31, 2015. See Note 1. |
(5) | Includes affiliate (as defined in Note 1) interest expense of $14.4 million for the year ended December 31, 2015, and zero for each of the years ended December 31, 2014 and 2013. See Note 2 and Note 12. |
(6) | Represents net income (loss) earned on and subsequent to the date of acquisition of WES assets (as defined in Note 1). See Note 4. |
See accompanying Notes to Consolidated Financial Statements.
3
WESTERN GAS EQUITY PARTNERS, LP
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| thousands except number of units | 2015 (1) | 2014 (1) | ||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 99,694 | $ | 67,213 | ||||
Accounts receivable, net (2) | 193,113 | 122,543 | ||||||
Other current assets (3) | 8,557 | 10,827 | ||||||
| Total current assets | 301,364 | 200,583 | ||||||
| Note receivable – Anadarko | 260,000 | 260,000 | ||||||
| Property, plant and equipment | ||||||||
| Cost | 6,556,778 | 6,248,577 | ||||||
| Less accumulated depreciation | 1,697,999 | 1,110,722 | ||||||
| Net property, plant and equipment | 4,858,779 | 5,137,855 | ||||||
| Goodwill | 419,186 | 418,587 | ||||||
| Other intangible assets | 832,127 | 884,857 | ||||||
| Equity investments | 618,887 | 634,492 | ||||||
| Other assets | 29,707 | 28,289 | ||||||
| Total assets | $ | 7,320,050 | $ | 7,564,663 | ||||
| LIABILITIES, EQUITY AND PARTNERS’ CAPITAL | ||||||||
| Current liabilities | ||||||||
Accounts and imbalance payables (4) | $ | 98,661 | $ | 89,916 | ||||
| Accrued ad valorem taxes | 17,808 | 15,043 | ||||||
| Accrued liabilities | 119,096 | 177,195 | ||||||
| WGP working capital facility – Anadarko | — | 1,150 | ||||||
| Total current liabilities | 235,565 | 283,304 | ||||||
| Long-term debt | 2,707,357 | 2,422,954 | ||||||
| Deferred income taxes | 139,704 | 169,915 | ||||||
| Asset retirement obligations and other | 128,652 | 120,544 | ||||||
Deferred purchase price obligation – Anadarko (5) | 188,674 | — | ||||||
| Total long-term liabilities | 3,164,387 | 2,713,413 | ||||||
| Total liabilities | 3,399,952 | 2,996,717 | ||||||
| Equity and partners’ capital | ||||||||
| Common units (218,919,380 and 218,909,977 units issued and outstanding at December 31, 2015 and 2014, respectively) | 1,060,842 | 1,260,195 | ||||||
| Net investment by Anadarko | 430,598 | 556,596 | ||||||
| Total partners’ capital | 1,491,440 | 1,816,791 | ||||||
| Noncontrolling interests | 2,428,658 | 2,751,155 | ||||||
| Total equity and partners’ capital | 3,920,098 | 4,567,946 | ||||||
| Total liabilities, equity and partners’ capital | $ | 7,320,050 | $ | 7,564,663 | ||||
(1) | Financial information as of December 31, 2015, has been recast to include the financial position and results attributable to the Springfield system, and the financial information as of December 31, 2014, has been recast to include the financial position and results attributable to the Springfield and DBJV systems. See Note 1 and Note 2. |
(2) | Accounts receivable, net includes amounts receivable from affiliates (as defined in Note 1) of $42.5 million and $64.5 million as of December 31, 2015 and 2014, respectively. Accounts receivable, net as of December 31, 2015, also includes an insurance claim receivable related to an incident at the DBM complex. See Note 1. |
(3) | Other current assets includes imbalance receivables from affiliates of zero and $0.2 million as of December 31, 2015 and 2014, respectively. |
(4) | Accounts and imbalance payables includes amounts payable to affiliates of zero and $0.1 million as of December 31, 2015 and 2014, respectively. |
(5) | See Note 2. |
See accompanying Notes to Consolidated Financial Statements.
4
WESTERN GAS EQUITY PARTNERS, LP
CONSOLIDATED STATEMENTS OF EQUITY AND PARTNERS’ CAPITAL
| Partners’ Capital | ||||||||||||||||
| thousands | Net Investment by Anadarko | Common Units | Noncontrolling Interests | Total | ||||||||||||
Balance at December 31, 2012 (1) | $ | 784,876 | $ | 912,376 | $ | 1,168,043 | $ | 2,865,295 | ||||||||
| Net income (loss) | 6,978 | 155,528 | 122,173 | 284,679 | ||||||||||||
WES equity transactions, net (2) | — | 187,016 | 537,795 | 724,811 | ||||||||||||
| Contributions received from Chipeta noncontrolling interest owner | — | — | 2,247 | 2,247 | ||||||||||||
| Distributions to Chipeta noncontrolling interest owner | — | — | (13,127 | ) | (13,127 | ) | ||||||||||
| Distributions to noncontrolling interest owners of WES | — | — | (130,706 | ) | (130,706 | ) | ||||||||||
| Distributions to WGP unitholders | — | (137,000 | ) | — | (137,000 | ) | ||||||||||
| Acquisitions from affiliates | (255,635 | ) | (209,865 | ) | — | (465,500 | ) | |||||||||
Contributions of equity-based compensation to WES by Anadarko (3) | — | 2,846 | 86 | 2,932 | ||||||||||||
Net pre-acquisition contributions from (distributions to) Anadarko (4) | 259,982 | — | — | 259,982 | ||||||||||||
| Net distributions to Anadarko of other assets | — | (5,855 | ) | — | (5,855 | ) | ||||||||||
| Elimination of net deferred tax liabilities | 46,530 | — | — | 46,530 | ||||||||||||
| Other | — | 36 | 345 | 381 | ||||||||||||
Balance at December 31, 2013 (1) | $ | 842,731 | $ | 905,082 | $ | 1,686,856 | $ | 3,434,669 | ||||||||
| Net income (loss) | 65,154 | 222,867 | 165,468 | 453,489 | ||||||||||||
WES equity transactions, net (2) | — | 351,510 | 339,907 | 691,417 | ||||||||||||
| WES Class C unit issuance | — | — | 750,000 | 750,000 | ||||||||||||
| Distributions to Chipeta noncontrolling interest owner | — | — | (15,149 | ) | (15,149 | ) | ||||||||||
| Distributions to noncontrolling interest owners of WES | — | — | (176,344 | ) | (176,344 | ) | ||||||||||
| Distributions to WGP unitholders | — | (228,481 | ) | — | (228,481 | ) | ||||||||||
| Acquisitions from affiliates | (372,784 | ) | 16,534 | — | (356,250 | ) | ||||||||||
Contributions of equity-based compensation to WES by Anadarko (3) | — | 3,041 | — | 3,041 | ||||||||||||
Net pre-acquisition contributions from (distributions to) Anadarko (4) | (16,692 | ) | — | — | (16,692 | ) | ||||||||||
| Net distributions to Anadarko of other assets | — | (10,706 | ) | — | (10,706 | ) | ||||||||||
| Elimination of net deferred tax liabilities | 38,160 | — | — | 38,160 | ||||||||||||
| Other | 27 | 348 | 417 | 792 | ||||||||||||
Balance at December 31, 2014 (1) | $ | 556,596 | $ | 1,260,195 | $ | 2,751,155 | $ | 4,567,946 | ||||||||
| Net income (loss) | 79,386 | 86,121 | (154,409 | ) | 11,098 | |||||||||||
Above-market component of swap extensions with Anadarko (5) | — | 18,449 | — | 18,449 | ||||||||||||
WES equity transactions, net (2) | — | (19,687 | ) | 77,040 | 57,353 | |||||||||||
| Distributions to Chipeta noncontrolling interest owner | — | — | (12,187 | ) | (12,187 | ) | ||||||||||
| Distributions to noncontrolling interest owners of WES | — | — | (233,178 | ) | (233,178 | ) | ||||||||||
| Distributions to WGP unitholders | — | (306,477 | ) | — | (306,477 | ) | ||||||||||
| Acquisitions from affiliates | (197,562 | ) | 23,286 | — | (174,276 | ) | ||||||||||
Contributions of equity-based compensation to WES by Anadarko (3) | — | 3,471 | — | 3,471 | ||||||||||||
| Net pre-acquisition contributions from (distributions to) Anadarko | (49,801 | ) | — | — | (49,801 | ) | ||||||||||
| Net distributions to Anadarko of other assets | — | (4,632 | ) | — | (4,632 | ) | ||||||||||
| Elimination of net deferred tax liabilities | 41,844 | — | — | 41,844 | ||||||||||||
| Other | 135 | 116 | 237 | 488 | ||||||||||||
Balance at December 31, 2015 (1) | $ | 430,598 | $ | 1,060,842 | $ | 2,428,658 | $ | 3,920,098 | ||||||||
(1) | Financial information as of December 31, 2015, has been recast to include the financial position and results attributable to the Springfield system, and the financial information as of December 31, 2014, 2013 and 2012, has been recast to include the financial position and results attributable to the Springfield and DBJV systems. See Note 1 and Note 2. |
(2) | Includes the impact of WES’s (as defined in Note 1) public equity offerings as described in Note 4. The $(19.7) million, $351.5 million and $187.0 million increase (decrease) to partners’ capital, together with net income (loss) attributable to Western Gas Equity Partners, LP, totaled $145.8 million, $639.5 million and $349.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. |
(3) | Associated with the Anadarko Incentive Plans as defined and described in Note 1 and Note 5. |
(4) | Includes deferred taxes on capitalized interest of $0.3 million and $5.5 million associated with the acquisition of the TEFR Interests (as defined and described in Note 1) for the years ended December 31, 2014 and 2013, respectively. |
(5) | See Note 5. |
See accompanying Notes to Consolidated Financial Statements.
5
WESTERN GAS EQUITY PARTNERS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| thousands | 2015 (1) | 2014 (1) | 2013 (1) | |||||||||
| Cash flows from operating activities | ||||||||||||
| Net income (loss) | $ | 11,098 | $ | 453,489 | $ | 284,679 | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 272,611 | 211,809 | 172,863 | |||||||||
| Impairments | 515,458 | 5,125 | 49,920 | |||||||||
| Non-cash equity-based compensation expense | 4,445 | 4,105 | 3,822 | |||||||||
| Deferred income taxes | 11,346 | 38,682 | 66,246 | |||||||||
| Accretion and amortization of long-term obligations, net | 17,698 | 2,736 | 2,449 | |||||||||
Equity income, net (2) | (71,251 | ) | (57,836 | ) | (22,948 | ) | ||||||
Distributions from equity investment earnings (2) | 82,054 | 62,967 | 17,698 | |||||||||
(Gain) loss on divestiture and other, net (3) | (57,024 | ) | 9 | — | ||||||||
| Lower of cost or market inventory adjustments | 443 | — | — | |||||||||
| Changes in assets and liabilities: | ||||||||||||
| (Increase) decrease in accounts receivable, net | (4,428 | ) | 1,504 | (9,059 | ) | |||||||
| Increase (decrease) in accounts and imbalance payables and accrued liabilities, net | 1,006 | (35,926 | ) | 35,067 | ||||||||
| Change in other items, net | (647 | ) | 3,998 | (2,824 | ) | |||||||
| Net cash provided by operating activities | 782,809 | 690,662 | 597,913 | |||||||||
| Cash flows from investing activities | ||||||||||||
| Capital expenditures | (637,964 | ) | (805,005 | ) | (852,388 | ) | ||||||
| Contributions in aid of construction costs from affiliates | 461 | 183 | 617 | |||||||||
| Acquisitions from affiliates | (10,903 | ) | (379,193 | ) | (476,711 | ) | ||||||
| Acquisitions from third parties | (3,514 | ) | (1,523,327 | ) | (240,274 | ) | ||||||
| Investments in equity affiliates | (11,442 | ) | (64,278 | ) | (294,693 | ) | ||||||
Distributions from equity investments in excess of cumulative earnings (2) | 16,244 | 18,055 | 4,438 | |||||||||
| Proceeds from the sale of assets to affiliates | 925 | 402 | 85 | |||||||||
| Proceeds from the sale of assets to third parties | 145,916 | 12,988 | 14 | |||||||||
| Net cash used in investing activities | (500,277 | ) | (2,740,175 | ) | (1,858,912 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Borrowings, net of debt issuance costs | 889,606 | 1,648,028 | 957,503 | |||||||||
| Repayments of debt | (611,150 | ) | (650,000 | ) | (710,000 | ) | ||||||
| Increase (decrease) in outstanding checks | (2,666 | ) | 765 | (5,543 | ) | |||||||
| Expenses from the issuance of WGP common units | — | — | (2,367 | ) | ||||||||
| Proceeds from the issuance of WES common units, net of offering expenses | 57,353 | 691,178 | 725,050 | |||||||||
| Proceeds from the issuance of WES Class C units | — | 750,000 | — | |||||||||
Distributions to WGP unitholders (4) | (306,477 | ) | (228,481 | ) | (137,000 | ) | ||||||
| Contributions from Chipeta noncontrolling interest owner | — | — | 2,247 | |||||||||
| Distributions to Chipeta noncontrolling interest owner | (12,187 | ) | (15,149 | ) | (13,127 | ) | ||||||
| Distributions to noncontrolling interest owners of WES | (233,178 | ) | (176,344 | ) | (130,706 | ) | ||||||
| Net contributions from Anadarko | (49,801 | ) | (16,392 | ) | 265,471 | |||||||
Above-market component of swap extensions with Anadarko (4) | 18,449 | — | — | |||||||||
| Net cash provided by (used in) financing activities | (250,051 | ) | 2,003,605 | 951,528 | ||||||||
| Net increase (decrease) in cash and cash equivalents | 32,481 | (45,908 | ) | (309,471 | ) | |||||||
| Cash and cash equivalents at beginning of period | 67,213 | 113,121 | 422,592 | |||||||||
| Cash and cash equivalents at end of period | $ | 99,694 | $ | 67,213 | $ | 113,121 | ||||||
| Supplemental disclosures | ||||||||||||
| Acquisition of DBJV from Anadarko | $ | 174,276 | $ | — | $ | — | ||||||
| Net distributions to (contributions from) Anadarko of other assets | 4,632 | 10,706 | 5,855 | |||||||||
| Interest paid, net of capitalized interest | 94,720 | 67,648 | 47,098 | |||||||||
| Taxes paid (reimbursements received) | — | (90 | ) | 552 | ||||||||
Capital lease asset transfer (5) | — | 4,833 | — | |||||||||
(1) | Financial information for the year ended December 31, 2015, has been recast to include the financial position and results attributable to the Springfield system, and the financial information for the years ended December 31, 2014 and 2013, has been recast to include the financial position and results attributable to the Springfield and DBJV systems. See Note 1 and Note 2. |
(2) | Income earned on, distributions from and contributions to equity investments are classified as affiliate. See Note 1. |
(3) | Includes losses related to an incident at the DBM complex for the year ended December 31, 2015. See Note 1. |
(4) | See Note 5. |
(5) | For the year ended December 31, 2014, represents transfers of $4.6 million from other long-term assets associated with the capital lease component of a processing agreement. See Note 7. |
See accompanying Notes to Consolidated Financial Statements.
6
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General. Western Gas Equity Partners, LP is a Delaware master limited partnership formed in September 2012 to own three types of partnership interests in Western Gas Partners, LP. Western Gas Equity Partners, LP was formed by converting WGR Holdings, LLC into a limited partnership and changing its name. Western Gas Partners, LP (together with its subsidiaries, “WES”) is a Delaware master limited partnership formed by Anadarko Petroleum Corporation in 2007 to acquire, own, develop and operate midstream energy assets.
For purposes of these consolidated financial statements, “WGP” refers to Western Gas Equity Partners, LP in its individual capacity or to Western Gas Equity Partners, LP and its subsidiaries, including Western Gas Holdings, LLC and WES, as the context requires. “WES GP” refers to Western Gas Holdings, LLC, individually as the general partner of WES, and excludes WES. WGP’s general partner, Western Gas Equity Holdings, LLC (“WGP GP”), is a wholly owned subsidiary of Anadarko Petroleum Corporation. “Anadarko” refers to Anadarko Petroleum Corporation and its subsidiaries, excluding WGP and WGP GP, and “affiliates” refers to subsidiaries of Anadarko, excluding WGP, and includes equity interests in Fort Union Gas Gathering, LLC (“Fort Union”), White Cliffs Pipeline, LLC (“White Cliffs”), Rendezvous Gas Services, LLC (“Rendezvous”), Enterprise EF78 LLC (the “Mont Belvieu JV”), Texas Express Pipeline LLC (“TEP”), Texas Express Gathering LLC (“TEG”) and Front Range Pipeline LLC (“FRP”). The interests in TEP, TEG and FRP are referred to collectively as the “TEFR Interests.” “Equity investment throughput” refers to WES’s 14.81% share of average Fort Union throughput and 22% share of average Rendezvous throughput, but excludes throughput measured in barrels, consisting of WES’s 10% share of average White Cliffs throughput, 25% share of average Mont Belvieu JV throughput, 20% share of average TEP and TEG throughput and 33.33% share of average FRP throughput. The “DJ Basin complex” refers to the Platte Valley system, Wattenberg system and Lancaster plant, all of which were combined into a single complex in the first quarter of 2014. The “MGR assets” include the Red Desert complex, the Granger straddle plant and the 22% interest in Rendezvous.
The three types of partnership interests in WES owned by WGP are as follows: (i) the general partner interest in WES, held through WES GP, (ii) 100% of the incentive distribution rights (“IDRs”) in WES, which entitle WGP to receive increasing percentages, up to the maximum level of 48.0%, of any incremental cash distributed by WES as certain target distribution levels are reached in any quarter and (iii) a significant limited partner interest in WES. WES GP owns all of the general partner interest in WES, which constitutes substantially all of its business, which primarily is to manage the affairs and operations of WES. Refer to Note 4 for a discussion of WGP’s holdings of WES equity.
WGP completed its initial public offering (“IPO”) in December 2012, and its common units are listed on the New York Stock Exchange (“NYSE”) under the symbol “WGP.”
WES is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, NGLs and crude oil for Anadarko, as well as for third-party producers and customers. As of December 31, 2015, WES’s assets, including the Springfield system, and investments accounted for under the equity method (see Basis of presentation and Presentation of WES assets below) consisted of the following:
Owned and Operated | Operated Interests | Non-Operated Interests | Equity Interests | |||||||||
| Gathering systems | 12 | 4 | 5 | 2 | ||||||||
| Treating facilities | 12 | 7 | — | 3 | ||||||||
Natural gas processing plants/trains (1) | 18 | 5 | — | 2 | ||||||||
| NGL pipelines | 2 | — | — | 3 | ||||||||
| Natural gas pipelines | 4 | — | — | — | ||||||||
| Oil pipelines | — | 1 | — | 1 | ||||||||
(1) | On December 3, 2015, an incident occurred at the DBM complex. See Note 7. |
7
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
These assets and investments are located in the Rocky Mountains (Colorado, Utah and Wyoming), the Mid-Continent (Kansas and Oklahoma), North-central Pennsylvania and Texas. In June 2015, WES completed the construction and commenced operations of Lancaster Train II, a processing plant located within the DJ Basin complex. In addition, WES is constructing Trains IV and V, both processing plants, at the DBM complex (see Note 2), with operations expected to commence during the first half (Train IV) and second half (Train V) of 2016. WES has also made progress payments towards the construction of another cryogenic unit at the DBM complex (Train VI), with an expected in-service date of mid-2017.
Basis of presentation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). 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.
The consolidated financial statements include the accounts of WGP and entities in which it holds a controlling financial interest, including WES and WES GP. All significant intercompany transactions have been eliminated. Investments in non-controlled entities over which WES, or WGP through its investment in WES, exercises significant influence are accounted for under the equity method. WGP proportionately consolidates WES’s share of the assets, liabilities, revenues and expenses attributable to the following systems: (i) 33.75% interests attributable to the Non-Operated Marcellus Interest systems and Anadarko-Operated Marcellus Interest systems, (ii) 50% interests attributable to the Newcastle system and the DBJV system (see Note 2) and (iii) 50.1% interest attributable to the Springfield system (as defined in Note 2) in the accompanying consolidated financial statements.
The consolidated financial results of WES are included in WGP’s consolidated financial statements due to WGP’s 100% ownership interest in WES GP and WES GP’s control of WES. Throughout these notes to consolidated financial statements, and to the extent material, any differences between the consolidated financial results of WGP and WES are discussed separately. WGP has no independent operations or material assets other than its partnership interests in WES. WGP’s consolidated financial statements differ from those of WES primarily as a result of (i) the presentation of noncontrolling interest ownership (attributable to the limited partner interests in WES held by the public and other subsidiaries of Anadarko), (ii) the elimination of WES GP’s investment in WES with WES GP’s underlying capital account, (iii) the general and administrative expenses incurred by WGP, which are separate from, and in addition to, those incurred by WES, and (iv) the inclusion of the impact of WGP equity balances and WGP distributions.
Adjustments to previously issued financial statements. WGP’s consolidated statements of income reflect adjustments for the following amounts, which previously reduced Operation and maintenance expense, to revenues related to Gathering, processing and transportation: (i) $25.0 million for the year ended December 31, 2015 (all of which relates to the six months ended June 30, 2015) and (ii) $39.3 million and $20.5 million for the years ended December 31, 2014 and 2013, respectively. Management determined that the third-party producer reimbursements received for electricity purchased by WES are more appropriately classified as revenues, instead of a reduction to Operation and maintenance expense. This correction of an error has no impact to Net income (loss), cash flows, or any non-GAAP metric WES uses to evaluate its operations and is not considered material to the results of operations for the years ended December 31, 2015, 2014 and 2013. WGP has revised its previously reported 2013, 2014 and 2015 consolidated financial statements, and unaudited interim periods therein as applicable, to reflect the reclassification.
Noncontrolling interests. WGP’s noncontrolling interests in the consolidated financial statements consist of the following for all periods presented: (i) the 25% interest in Chipeta Processing LLC (“Chipeta”) held by a third-party member, (ii) the publicly held limited partner interests in WES, (iii) the 757,619 WES common units issued by WES to other subsidiaries of Anadarko as part of the consideration paid for the acquisitions of the Non-Operated Marcellus Interest and the TEFR Interests, (iv) the WES Class C units issued by WES to a subsidiary of Anadarko as part of the funding for the acquisition of DBM. See Note 3 and Note 4.
When WES issues equity, the carrying amount of the noncontrolling interest reported by WGP is adjusted to reflect the noncontrolling ownership interest in WES. The resulting impact of such noncontrolling interest adjustment on WGP’s interest in WES is reflected as an adjustment to WGP’s partners’ capital.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Presentation of WES assets. The term “WES assets” refers to the assets indirectly owned, including the Springfield system (as defined in Note 2), and interests accounted for under the equity method (see Note 9) by WGP through its partnership interests in WES as of December 31, 2015. Because WGP owns the entire interest in and controls WES GP, and WGP GP is owned and controlled by Anadarko, each of WES’s acquisitions of WES assets from Anadarko has been considered a transfer of net assets between entities under common control. As such, WES assets acquired from Anadarko were initially recorded at Anadarko’s historic carrying value, which did not correlate to the total acquisition price paid by WES. Further, after an acquisition of WES assets from Anadarko, WES and WGP (by virtue of its consolidation of WES) may be required to recast their financial statements to include the activities of such WES assets from the date of common control. See Note 2.
For those periods requiring recast, the consolidated financial statements for periods prior to the acquisition of WES 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 WES had owned the WES assets during the periods reported. Net income (loss) attributable to the WES assets acquired from Anadarko for periods prior to WES’s acquisition of the WES 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 under the particular circumstances. 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.
Fair value. The fair-value-measurement standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard characterizes inputs used in determining fair value according to a hierarchy that prioritizes those inputs based upon the degree to which they are observable. The three levels of the fair value hierarchy are as follows:
Level 1 – Inputs represent unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).
Level 3 – Inputs that are not observable from objective sources, such as management’s internally developed assumptions used in pricing an asset or liability (for example, an estimate of future cash flows used in management’s internally developed present value of future cash flows model that underlies the fair value measurement).
Nonfinancial assets and liabilities initially measured at fair value include certain assets and liabilities acquired in a third-party business combination, assets and liabilities exchanged in non-monetary transactions, long-lived assets (asset groups), goodwill and other intangibles, initial recognition of asset retirement obligations, and initial recognition of environmental obligations assumed in a third-party acquisition. Impairment analyses for long-lived assets, goodwill and other intangibles, and the initial recognition of asset retirement obligations and environmental obligations use Level 3 inputs. When a fair value measurement is required and there is not a market-observable price for the asset or liability or a market-observable price for a similar asset or liability, the cost, income, or market valuation approach is used, depending on the quality of information available to support management’s assumptions.
The fair value of debt reflects any premium or discount for the difference between the stated interest rate and the quarter-end market interest rate, and is based on quoted market prices for identical instruments, if available, or based on valuations of similar debt instruments. See Note 12.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable reported on the consolidated balance sheets approximate fair value due to the short-term nature of these items.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash equivalents. All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.
Bad-debt reserve. Revenues are primarily from Anadarko, for which no credit limit is maintained. Exposure to bad debts is analyzed on a customer-by-customer basis for its third-party accounts receivable and may establish credit limits for significant third-party customers. As of December 31, 2015 and 2014, bad-debt reserve was immaterial.
Imbalances. The consolidated balance sheets include imbalance receivables and payables resulting from differences in volumes received into WES’s systems and volumes delivered by WES to customers’ pipelines. Volumes owed to or by WES that are subject to monthly cash settlement are valued according to the terms of the contract as of the balance sheet dates and reflect market index prices. Other volumes owed to or by WES are valued at the weighted-average cost as of the balance sheet dates and are settled in-kind. As of December 31, 2015, imbalance receivables and payables were $2.1 million and $1.6 million, respectively. As of December 31, 2014, imbalance receivables and payables were $0.4 million and $0.7 million, respectively. Net changes in imbalance payables and receivables are reported in cost of product.
Inventory. The cost of NGLs inventories is determined by the weighted-average cost method on a location-by-location basis. Inventory is stated at the lower of weighted-average cost or market value and is reported in other current assets in the consolidated balance sheets. See Note 10.
Property, plant and equipment. Property, plant and equipment are generally stated at the lower of historical cost less accumulated depreciation or fair value, if impaired. Because acquisitions of assets from Anadarko are transfers of net assets between entities under common control, the assets acquired from Anadarko are initially recorded at Anadarko’s historic carrying value. The difference between the carrying value of net assets acquired from Anadarko and the consideration paid is recorded as an adjustment to partners’ capital.
Assets acquired in a business combination or non-monetary exchange with a third party are initially recorded at fair value. All construction-related direct labor and material costs are capitalized. The cost of renewals and betterments that extend the useful life of property, plant and equipment is also capitalized. The cost of repairs, replacements and major maintenance projects that do not extend the useful life or increase the expected output of property, plant and equipment is expensed as incurred.
Involuntary conversions result from the loss of an asset because of some unforeseen event (e.g., destruction due to fire). Some of these events are insurable and result in property damage insurance recovery. Amounts that are received from insurance carriers are net of any deductibles related to the covered event. A receivable is recorded from insurance to the extent a loss is recognized from an involuntary conversion event and the likelihood of recovering such loss is deemed probable. To the extent that any insurance claim receivables are later judged not probable of recovery (e.g., due to new information), such amounts are expensed. A gain on involuntary conversion is recognized when the amount received from insurance exceeds the net book value of the retired asset(s). In addition, gains related to insurance recoveries are not recognized until all contingencies related to such proceeds have been resolved, that is, a non-refundable cash payment is received from the insurance carrier or there is a binding settlement agreement with the carrier that clearly states that a non-refundable payment will be made. To the extent that an asset is rebuilt, the associated expenditures are capitalized, as appropriate, in the consolidated balance sheets and presented as capital expenditures in the consolidated statements of cash flows. With respect to business interruption insurance claims, income is recognized only when non-refundable cash proceeds are received from insurers, which are presented in the consolidated statements of income as a component of Operating income (loss). In December 2015, there was an initial fire and secondary explosion at the DBM complex. See Note 7. For the year ended December 31, 2015, $20.3 million of losses have been recorded in Gain (loss) on divestiture and other, net in the consolidated statements of income, related to this involuntary conversion event based on the difference between the net book value of the affected assets and the insurance claim receivable of $48.5 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation is computed using the straight-line method based on estimated useful lives and salvage values of assets. However, subsequent events could cause a change in estimates, thereby impacting future depreciation amounts. Uncertainties that may impact these estimates include, but are not limited to, changes in laws and regulations relating to environmental matters, including air and water quality, restoration and abandonment requirements, economic conditions, and supply and demand in the area.
Management evaluates the ability to recover the carrying amount of its long-lived assets to determine whether its long-lived assets have been impaired. Impairments exist when the carrying amount of an asset exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. When alternative courses of action to recover the carrying amount of a long-lived asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the long-lived asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset’s carrying amount over its estimated fair value, such that the asset’s carrying amount is adjusted to its estimated fair value with an offsetting charge to impairment expense. Refer to Note 7 for a description of impairments recorded during the years ended December 31, 2015, 2014 and 2013.
Capitalized interest. Interest is capitalized as part of the historical cost of constructing assets for significant projects that are in progress. Capitalized interest is determined by multiplying WES’s weighted-average borrowing cost on debt by the average amount of qualifying costs incurred. Once the construction of an asset subject to interest capitalization is completed and the asset is placed in service, the associated capitalized interest is expensed through depreciation or impairment, together with other capitalized costs related to that asset.
Goodwill. Goodwill is recorded when the purchase price of a business acquired exceeds the fair market value of the tangible and separately measurable intangible net assets. Refer to Note 8 for a discussion of goodwill. Goodwill is evaluated for impairment annually, as of October 1, or more often as facts and circumstances warrant. WES has allocated goodwill on its two reporting units: (i) gathering and processing and (ii) transportation. An initial qualitative assessment is performed prior to proceeding to the comparison of the fair value of each reporting unit to which goodwill has been assigned, to the carrying amount of net assets, including goodwill, of each reporting unit. If concluded, based on qualitative factors, that it is more likely than not that the fair value of the reporting unit exceeds its carrying amount, then goodwill is not impaired, and estimating the fair value of the reporting unit is not necessary. If the carrying amount of the reporting unit exceeds its fair value, based on a hypothetical purchase price allocation, goodwill is written down to its implied fair value through a charge to operating expense. The carrying value of goodwill after such an impairment would represent a Level 3 fair value measurement.
Other intangible assets. WES assesses intangible assets, as described in Note 8, for impairment together with related underlying long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Property, plant and equipment within this Note 1 for further discussion of management’s process to evaluate potential impairment of long-lived assets.
Asset retirement obligations. Management recognizes a liability based on the estimated costs of retiring tangible long-lived assets. The liability is recognized at fair value, measured using discounted expected future cash outflows for the asset retirement obligation when the obligation originates, which generally is when an asset is acquired or constructed. The carrying amount of the associated asset is increased commensurate with the liability recognized. Over time, the discounted liability is adjusted to its expected settlement value through accretion expense, which is reported within depreciation and amortization in the consolidated statements of income. Subsequent to the initial recognition, the liability is also adjusted for any changes in the expected value of the retirement obligation (with a corresponding adjustment to property, plant and equipment) until the obligation is settled. Revisions in estimated asset retirement obligations may result from changes in estimated inflation rates, discount rates, asset retirement costs and the estimated timing of settling asset retirement obligations. See Note 11.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Environmental expenditures. WES expenses environmental obligations related to conditions caused by past operations that do not generate current or future revenues. Environmental obligations related to operations that generate current or future revenues are expensed or capitalized, as appropriate. Liabilities are recorded when the necessity for environmental remediation or other potential environmental liabilities becomes probable and the costs can be reasonably estimated. Accruals for estimated losses from environmental remediation obligations are recognized no later than at the time of the completion of the remediation feasibility study. These accruals are adjusted as additional information becomes available or as circumstances change. Costs of future expenditures for environmental-remediation obligations are not discounted to their present value. See Note 13.
Segments. Because WGP reflects its ownership interest in WES on a consolidated basis, and has no independent operations or material assets outside those of WES, WGP’s segment analysis and presentation is the same as that of WES. WES’s operations are organized into a single operating segment, the assets of which gather, process, compress, treat and transport Anadarko and third-party natural gas, condensate, NGLs and crude oil in the United States.
Revenues and cost of product. Under its fee-based gathering, treating and processing arrangements, WES is paid a fixed fee based on the volume and thermal content of natural gas and recognizes revenues for its services in the month such services are performed. Producers’ wells are connected to WES’s gathering systems for delivery of natural gas to WES’s processing or treating plants, where the natural gas is processed to extract NGLs and condensate or treated in order to satisfy pipeline specifications. In some areas, where no processing is required, the producers’ gas is gathered and delivered to pipelines for market delivery. Under cost-of-service gathering agreements, fees are earned for gathering and compression services based on rates calculated in a cost-of-service model and reviewed periodically over the life of the agreements. Under percent-of-proceeds contracts, revenue is recognized when the natural gas, NGLs or condensate is sold. The percentage of the product sale ultimately paid to the producer is recorded as a related cost of product expense.
WES purchases natural gas volumes at the wellhead for gathering and processing. As a result, WES has volumes of NGLs and condensate to sell and volumes of residue to either sell, to use for system fuel or to satisfy keep-whole obligations. In addition, depending upon specific contract terms, condensate and NGLs recovered during gathering and processing are either returned to the producer or retained and sold. Under keep-whole contracts, when condensate or NGLs are retained and sold, producers are kept whole for the condensate or NGL volumes through the receipt of a thermally equivalent volume of residue. The keep-whole contract conveys an economic benefit to WES when the combined value of the individual NGLs is greater in the form of liquids than as a component of the natural gas stream; however, WES is adversely impacted when the value of the NGLs is lower than the value of the natural gas stream including the liquids. WES has commodity price swap agreements with Anadarko to mitigate exposure to a majority of the commodity price uncertainty that would otherwise be present as a result of the purchase and sale of natural gas, condensate or NGLs. See Note 5. Revenue is recognized from the sale of condensate and NGLs upon transfer of title, and related purchases are recorded as cost of product.
WES earns transportation revenues through firm contracts that obligate each of its customers to pay a monthly reservation or demand charge regardless of the pipeline capacity used by that customer. An additional commodity usage fee is charged to the customer based on the actual volume of natural gas transported. Transportation revenues are also generated from interruptible contracts pursuant to which a fee is charged to the customer based on volumes transported through the pipeline. Revenues for transportation of natural gas and NGLs are recognized over the period of firm transportation contracts or, in the case of usage fees and interruptible contracts, when the volumes are received into the pipeline. From time to time, certain revenues may be subject to refund pending the outcome of rate matters before the Federal Energy Regulatory Commission (the “FERC”), and refund reserve liabilities are established where appropriate.
Proceeds from the sale of residue, NGLs and condensate are reported as revenues from natural gas, natural gas liquids and condensate sales in the consolidated statements of income. Revenues attributable to the fixed-fee component of gathering and processing contracts as well as demand charges and commodity usage fees on transportation contracts are reported as revenues from gathering, processing and transportation in the consolidated statements of income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equity-based compensation. Concurrently with WGP’s IPO, WGP GP adopted the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan (the “WGP LTIP”). The WGP LTIP permits the issuance of up to 3,000,000 WGP common units, of which 2,955,746 units remained available for future issuance as of December 31, 2015. Upon vesting of each phantom unit, the holder will receive common units of WGP or, at the discretion of WGP GP’s Board of Directors, cash in an amount equal to the market value of common units of WGP on the vesting date. Equity-based compensation expense attributable to grants made under the WGP LTIP impacts cash flows from operating activities only to the extent cash payments are made to a participant in lieu of issuance of WGP common units to the participant. Stock-based compensation expense attributable to awards granted under the WGP LTIP is amortized over the vesting periods applicable to the awards.
The Western Gas Partners, LP 2008 Long-Term Incentive Plan (the “WES LTIP”) was adopted by WES GP concurrently with WES’s IPO and permits the issuance of up to 2,250,000 WES common units, of which 2,128,015 units remained available for future issuance as of December 31, 2015. Upon vesting of each phantom unit award, the holder will receive common units of WES or, at the discretion of WES GP’s Board of Directors, cash in an amount equal to the market value of common units of WES on the vesting date. Equity-based compensation expense attributable to grants made under the WES LTIP impact cash flows from operating activities only to the extent cash payments are made to a participant in lieu of issuance of common units to the participant. Stock-based compensation expense attributable to awards granted under the WES LTIP is amortized over the vesting periods applicable to the awards.
Additionally, general and administrative expenses include equity-based compensation costs allocated by Anadarko for grants made pursuant to the Anadarko Petroleum Corporation 2008 and 2012 Omnibus Incentive Compensation Plans (Anadarko’s plans are referred to collectively as the “Anadarko Incentive Plans”) for all periods presented. Grants made under equity-based compensation plans result in equity-based compensation expense, which is determined by reference to the fair value of equity compensation. For equity-based awards ultimately settled through the issuance of units or stock, the fair value is measured as of the date of the relevant equity grant. Equity-based compensation granted under the Anadarko Incentive Plans does not impact cash flows from operating activities since the offset to compensation expense is recorded as a contribution to partners’ capital in the consolidated financial statements at the time of contribution, when the expense is realized.
WES income taxes. WES generally is not subject to federal income tax or state income tax other than Texas margin tax on the portion of its income that is apportionable to Texas. Deferred state income taxes are recorded on temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. WES routinely assesses the realizability of its deferred tax assets. If WES concludes that it is more likely than not that some of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. Federal and state current and deferred income tax expense was recorded on WES assets prior to WES’s acquisition of these assets from Anadarko.
For periods beginning on and subsequent to WES’s acquisition of the WES assets, WES makes payments to Anadarko pursuant to the tax sharing agreement entered into between Anadarko and WES for its estimated share of taxes from all forms of taxation, excluding taxes imposed by the United States, that are included in any combined or consolidated returns filed by Anadarko. The aggregate difference in the basis of WES’s assets for financial and tax reporting purposes cannot be readily determined as WES does not have access to information about each partner’s tax attributes in WES.
The accounting standards for uncertain tax positions defines the criteria an individual tax position must satisfy for any part of the benefit of that position to be recognized in the financial statements. WES had no material uncertain tax positions at December 31, 2015 or 2014.
With respect to assets acquired from Anadarko, WES recorded Anadarko’s historic deferred income taxes for the periods prior to WES’s ownership of the assets. For periods subsequent to WES’s acquisition, WES is not subject to tax except for the Texas margin tax and, accordingly, does not record deferred federal income taxes related to the assets acquired from Anadarko.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
WGP income taxes. Prior to its September 2012 conversion from a limited liability company to a limited partnership, WGP was WGR Holdings, LLC, a single-member Delaware limited liability company treated as a division of Anadarko and disregarded for U.S. federal income tax purposes. As such, WGR Holdings, LLC was included in Anadarko’s consolidated income tax return for federal and state income tax purposes. In addition to WES’s historic Texas margin tax expense and liabilities, the accompanying consolidated financial statements of WGP include income tax expense and liabilities incurred by WGR Holdings, LLC, computed on a separate-return basis.
Deferred federal and state income taxes included in the accompanying consolidated financial statements are attributable to temporary differences between the financial statement carrying amount and tax basis of WGP’s investment in WES. WGP’s accounting policy is to “look through” its investment in WES for purposes of calculating deferred income tax asset and liability balances attributable to WGP’s interests in WES. The application of such accounting policy resulted in no deferred income taxes being recognized for the book and tax basis difference in goodwill, which is non-deductible for tax purposes for all periods presented. WGP had no material uncertain tax positions at December 31, 2015 or 2014.
Net income (loss) per common unit. Earnings per unit is calculated by dividing the limited partners’ interest in net income (loss) by the weighted-average number of common units outstanding. Net income (loss) per common unit is calculated assuming that cash distributions are equal to the net income (loss) attributable to WGP. Net income equal to the amount of available cash (as defined in WGP’s partnership agreement) is allocated to the common unitholders consistent with actual cash distributions. See Note 4.
Contributions in aid of construction costs from affiliates. On certain of WES’s capital projects, Anadarko is obligated to reimburse WES 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. These cash receipts are presented as “Contributions in aid of construction costs from affiliates” within the investing section of the consolidated statements of cash flows. See Note 5.
Recently issued accounting standards. The Financial Accounting Standards Board recently issued the following Accounting Standards Updates (“ASUs”):
ASU 2015-17, Income Taxes (Topic - 740)—Balance Sheet Classification of Deferred Taxes. This ASU requires all deferred tax assets and liabilities, including any related valuation allowance, to be presented in the balance sheet as noncurrent. The early adoption of this ASU using a retrospective approach had no material impact on WGP’s consolidated financial statements. See Note 6.
ASU 2015-06, Earnings Per Share (Topic - 260)—Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. This ASU contains guidance that addresses the historical earnings per unit presentation for master limited partnerships that apply the two-class method of calculating earnings per unit. When a general partner transfers or “drops down” net assets to a master limited partnership, the transaction is accounted for as a transaction between entities under common control, and the statements of operations are adjusted retrospectively to reflect the transaction. This ASU specifies that the historical earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner, and the previously reported earnings per unit of the limited partners should not change as a result of the dropdown transaction. The ASU also requires additional disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method. This ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective approach, with early adoption permitted. While WGP believes it is currently in compliance with this ASU, it continues to evaluate the impact of the adoption of this ASU on its consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30)—Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30)—Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. These ASUs require capitalized debt issuance costs, except for those related to revolving credit facilities, to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, rather than as an asset. WGP adopted these ASUs on January 1, 2016, using a retrospective approach. The adoption will result in a reclassification that will reduce Other assets and Long-term debt by $16.7 million on WGP’s consolidated balance sheet at December 31, 2015, when included in future filings.
ASU 2015-02, Consolidation—Amendments to the Consolidation Analysis. This ASU amends existing requirements applicable to reporting entities that are required to evaluate consolidation of a legal entity under the variable interest entity (“VIE”) or voting interest entity models. The provisions will affect how limited partnerships and similar entities are assessed for consolidation, including an additional requirement that a limited partnership will be a VIE unless the limited partners have either substantive kick-out or participating rights over the general partner. This ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective or modified retrospective approach, with early adoption permitted. WGP has evaluated the impact of the adoption of this ASU on its consolidated financial statements and determined that WES meets the criteria for a variable interest entity for which WGP is the primary beneficiary for accounting purposes. The adoption of this ASU will not have a material impact on WGP’s consolidated financial statements; however, WGP will be subject to the VIE disclosure requirements in 2016.
ASU 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. WGP is required to adopt the new standard in the first quarter of 2018 using one of two retrospective application methods. WGP is continuing to evaluate the provisions of this ASU, and has not determined the impact this standard may have on its consolidated financial statements and related disclosures or decided upon the method of adoption.
2. ACQUISITIONS AND DIVESTITURES
In May 2008, concurrently with the closing of WES’s IPO, Anadarko contributed to WES the assets and liabilities of Anadarko Gathering Company LLC, Pinnacle Gas Treating LLC, and MIGC LLC. In December 2008, WES completed the acquisition of the Powder River assets from Anadarko, which included (i) the Hilight system, (ii) a 50% interest in the Newcastle system and (iii) a 14.81% membership interest in Fort Union. In July 2009, WES closed on the acquisition of a 51% membership interest in Chipeta from Anadarko. WES closed the acquisitions of Anadarko’s Granger and Wattenberg assets in January 2010 and August 2010, respectively. In September 2010, WES acquired a 10% interest in White Cliffs. WES closed the acquisition of the Platte Valley assets from a third party in February 2011 and the acquisition of the Bison assets from Anadarko in July 2011. In January 2012, WES acquired the MGR assets from Anadarko and in August 2012 Anadarko’s additional Chipeta interest of 24%, bringing WES’s total membership interest in Chipeta to 75%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
The following table presents the acquisitions completed by WES during the years ended December 31, 2015, 2014 and 2013, and identifies the funding sources for such acquisitions:
| thousands except unit and percent amounts | Acquisition Date | Percentage Acquired | Deferred Purchase Price Obligation - Anadarko | Borrowings | Cash On Hand | WES Common Units Issued to Anadarko | WES Class C Units Issued to Anadarko | ||||||||||||||||
Non-Operated Marcellus Interest (1) | 03/01/2013 | 33.75 | % | $ | — | $ | 250,000 | $ | 215,500 | 449,129 | — | ||||||||||||
Anadarko-Operated Marcellus Interest (2) | 03/08/2013 | 33.75 | % | — | 133,500 | — | — | — | |||||||||||||||
Mont Belvieu JV (3) | 06/05/2013 | 25 | % | — | — | 78,129 | — | — | |||||||||||||||
OTTCO (4) | 09/03/2013 | 100 | % | — | 27,500 | — | — | — | |||||||||||||||
TEFR Interests (5) | 03/03/2014 | Various (5) | — | 350,000 | 6,250 | 308,490 | — | ||||||||||||||||
DBM (6) | 11/25/2014 | 100 | % | — | 475,000 | 298,327 | — | 10,913,853 | |||||||||||||||
DBJV system (7) | 03/02/2015 | 50 | % | 174,276 | — | — | — | — | |||||||||||||||
(1) | WES acquired Anadarko’s 33.75% interest (non-operated) (the “Non-Operated Marcellus Interest”) in the Liberty and Rome gas gathering systems (the “Non-Operated Marcellus Interest systems”), serving production from the Marcellus shale in North-central Pennsylvania. In connection with the issuance of WES common units, WES GP purchased 9,166 general partner units for consideration of $0.5 million. |
(2) | WES acquired a 33.75% interest (the “Anadarko-Operated Marcellus Interest”) in each of the Larry’s Creek, Seely and Warrensville gas gathering systems (the “Anadarko-Operated Marcellus Interest systems”), which are operated by Anadarko and serve production from the Marcellus shale in North-central Pennsylvania, from a third party. During the third quarter of 2013, WES recorded a $1.1 million decrease in the assets acquired and liabilities assumed in the acquisition, representing the final purchase price allocation. |
(3) | WES acquired a 25% interest in the Mont Belvieu JV, an entity formed to design, construct, and own two fractionation trains located in Mont Belvieu, Texas, from a third party. The interest acquired is accounted for under the equity method of accounting. |
(4) | WES acquired Overland Trail Transmission, LLC (“OTTCO”), a Delaware limited liability company, from a third party. OTTCO owns and operates an intrastate pipeline that connects WES’s Red Desert and Granger complexes in southwestern Wyoming. |
(5) | WES acquired a 20% interest in each of TEG and TEP and a 33.33% interest in FRP from Anadarko. These assets gather and transport NGLs primarily from the Anadarko and Denver-Julesburg (“DJ”) Basins. The interests in these entities are accounted for under the equity method of accounting. In connection with the issuance of WES common units, WES issued 6,296 general partner units to WES GP in exchange for WES GP’s proportionate capital contribution of $0.4 million. |
(6) | WES acquired Nuevo Midstream, LLC (“Nuevo”) from a third party. Following the acquisition, WES changed the name of Nuevo to Delaware Basin Midstream, LLC (“DBM”). The assets acquired include cryogenic processing plants, a gas gathering system, and related facilities and equipment, which are collectively referred to as the “DBM complex” and serve production from Reeves, Loving and Culberson Counties, Texas and Eddy and Lea Counties, New Mexico. See DBM acquisition below for further information, including the final allocation of the purchase price. |
(7) | WES acquired Anadarko’s interest in Delaware Basin JV Gathering LLC (“DBJV”), which owns a 50% interest in a gathering system and related facilities (the “DBJV system”). The DBJV system is located in the Delaware Basin in Loving, Ward, Winkler and Reeves Counties, Texas. WES will make a cash payment on March 31, 2020, to Anadarko as consideration for the acquisition of DBJV. WES currently estimates the future payment will be $282.8 million, the net present value of which was $174.3 million as of the acquisition date. See DBJV acquisition—Deferred purchase price obligation - Anadarko below. |
Springfield acquisition. WES acquired Springfield Pipeline LLC (“Springfield”) from Anadarko for $750.0 million, consisting of $712.5 million in cash and the issuance of 1,253,761 of WES common units. Springfield owns a 50.1% interest in an oil gathering system and a gas gathering system, such interest being referred to in this report as the “Springfield system.” The Springfield oil and gas gathering systems are located in Dimmit, La Salle, Maverick and Webb Counties in South Texas. The acquisition closed on March 14, 2016. See Note 14.
DBJV and Springfield acquisitions. Because the acquisitions of DBJV and Springfield were transfers of net assets between entities under common control, WGP’s historical financial statements previously filed with the SEC have been recast in this Form 8-K to include the results attributable to the DBJV and Springfield systems as if WES owned DBJV and Springfield for all periods presented. The consolidated financial statements for periods prior to WES’s acquisition of DBJV and Springfield 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 WES had owned DBJV and Springfield during the periods reported.
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WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
The following table presents the impact of the DBJV and Springfield systems on revenues and other, equity income, net and net income (loss) as presented in WGP’s historical consolidated statements of income:
| Year Ended December 31, 2015 | ||||||||||||||||||||
| thousands | WGP Historical | DBJV System (1) | Springfield | Springfield Eliminations | Combined | |||||||||||||||
| Revenues and other | $ | 1,561,372 | $ | — | $ | 190,766 | $ | (66 | ) | $ | 1,752,072 | |||||||||
| Equity income, net | 71,251 | — | — | — | 71,251 | |||||||||||||||
| Net income (loss) | (66,546 | ) | — | 77,644 | — | 11,098 | ||||||||||||||
| Year Ended December 31, 2014 | ||||||||||||||||||||
| thousands | WGP Historical (2) | DBJV System | Springfield | Springfield Eliminations | Combined | |||||||||||||||
| Revenues and other | $ | 1,320,756 | $ | 62,112 | $ | 150,576 | $ | (67 | ) | $ | 1,533,377 | |||||||||
| Equity income, net | 57,836 | — | — | — | 57,836 | |||||||||||||||
| Net income (loss) | 387,379 | 17,309 | 48,801 | — | 453,489 | |||||||||||||||
| Year Ended December 31, 2013 | ||||||||||||||||||||
| thousands | WGP Historical (2) | DBJV System | Springfield | Springfield Eliminations | Combined | |||||||||||||||
| Revenues and other | $ | 1,052,937 | $ | 32,545 | $ | 114,647 | $ | (69 | ) | $ | 1,200,060 | |||||||||
| Equity income, net | 22,948 | — | — | — | 22,948 | |||||||||||||||
| Net income (loss) | 281,878 | 4,096 | (1,295 | ) | — | 284,679 | ||||||||||||||
(1) | The financial results for the DBJV system for the year ended December 31, 2015 are reflected in the WGP’s historical financial statements as filed in the WGP’s 2015 Form 10-K with the SEC on February 25, 2016. |
(2) | See Adjustments to previously issued financial statements in Note 1. |
Deferred purchase price obligation - Anadarko. The consideration to be paid by WES for the acquisition of DBJV consists of a cash payment to Anadarko due on March 31, 2020. The cash payment will be equal to (a) eight multiplied by the average of WES’s share in the Net Earnings (see definition below) of the DBJV system for the calendar years 2018 and 2019, less (b) WES’s share of all capital expenditures incurred for the DBJV system between March 1, 2015, and February 29, 2020. Net Earnings is defined as all revenues less cost of product, operating expenses and property taxes, in each case attributable to the DBJV system on an accrual basis. As of the acquisition date, the estimated future payment obligation (based on management’s estimate of WES’s share of forecasted Net Earnings and capital expenditures for the DBJV system) was $282.8 million, which had a net present value of $174.3 million, using a discount rate of 10%. As of December 31, 2015, the net present value of this obligation was $188.7 million and has been recorded on the consolidated balance sheet under Deferred purchase price obligation - Anadarko. Accretion expense for the year ended December 31, 2015 was $14.4 million and zero for each of the years ended December 31, 2014 and 2013, and has been recorded as a charge to interest expense. Any subsequent changes to the estimated future payment obligation, if applicable, will be calculated using a discounted cash flow model with a 10% discount rate. Such changes will be recorded as adjustments within Common units on the consolidated balance sheets and consolidated statements of equity and partners’ capital, with accretion adjustments (financing-related) as a result of these changes recorded within interest expense on the consolidated statements of income in the period of the change.
DBM acquisition. The DBM acquisition has been accounted for under the acquisition method of accounting. The assets acquired and liabilities assumed in the DBM acquisition were recorded in the consolidated balance sheet at their estimated fair values as of the acquisition date. Results of operations attributable to the DBM acquisition were included in the consolidated statement of income beginning on the acquisition date in the fourth quarter of 2014.
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WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
The following is the final allocation of the purchase price as of December 31, 2015, including $3.5 million of post-closing purchase price adjustments, to the assets acquired and liabilities assumed in the DBM acquisition as of the acquisition date:
| thousands | ||||
| Current assets | $ | 60,888 | ||
| Property, plant and equipment | 467,171 | |||
| Goodwill | 284,749 | |||
| Other intangible assets | 811,048 | |||
| Accounts payables | (18,621 | ) | ||
| Accrued liabilities | (37,360 | ) | ||
| Deferred income taxes | (1,342 | ) | ||
| Asset retirement obligations and other | (9,060 | ) | ||
| Total purchase price | $ | 1,557,473 | ||
The purchase price allocation is based on an assessment of the fair value of the assets acquired and liabilities assumed in the DBM acquisition using inputs that are not observable in the market and thus represent Level 3 inputs. The fair values of the processing plants, gathering system, and related facilities and equipment are based on market and cost approaches. The fair value of the intangible assets was determined using an income approach. Deferred taxes represent the tax effects of differences in the tax basis and acquisition-date fair value of the assets acquired and liabilities assumed.
The following table presents pro forma condensed financial information as if the DBM acquisition had occurred on January 1, 2013:
| Year Ended December 31, | ||||||||
| thousands except per-unit amounts | 2014 | 2013 | ||||||
| Revenues and other | $ | 1,656,644 | $ | 1,277,327 | ||||
| Net income (loss) | 395,351 | 238,618 | ||||||
| Net income (loss) attributable to Western Gas Equity Partners, LP | 229,883 | 132,785 | ||||||
| Net income (loss) per common unit – basic and diluted | 0.75 | 0.57 | ||||||
The unaudited pro forma information is presented for illustration purposes only and is not necessarily indicative of the operating results that would have occurred had the DBM acquisition been completed at the assumed date, nor is it necessarily indicative of future operating results of the combined entity. The unaudited pro forma information in the table above includes $12.5 million of revenues and other and $10.4 million of operating expenses, excluding depreciation and amortization and impairments, attributable to the DBM complex that are included in the consolidated statement of income for the year ended December 31, 2014. The pro forma adjustments reflect pre-acquisition results of the DBM acquisition including (a) revenues and expenses; (b) depreciation and amortization based on the purchase price allocated to property, plant and equipment and estimated useful lives; (c) amortization of intangible assets (customer contracts assumed in the acquisition); and (d) interest on borrowings under WES’s senior unsecured revolving credit facility (“WES RCF”) to finance the DBM acquisition. The pro forma adjustments include estimates and assumptions based on currently available information. Management believes the estimates and assumptions are reasonable, and the relative effects of the transaction are properly reflected. The unaudited pro forma information does not reflect any cost savings or other synergies anticipated as a result of the DBM acquisition, nor any future acquisition related expenses.
Gain on divestiture - Dew and Pinnacle systems. During the third quarter of 2015, the Dew and Pinnacle systems in East Texas were sold to a third party for net proceeds of $145.6 million, after closing adjustments, resulting in a net gain on sale of $77.3 million recorded as Gain (loss) on divestiture and other, net in the consolidated statements of income. WES also allocated $5.1 million in goodwill to this divestiture.
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WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PARTNERSHIP DISTRIBUTIONS
WGP partnership distributions. WGP’s partnership agreement requires WGP to distribute all of its available cash (as defined in its partnership agreement) to WGP unitholders of record on the applicable record date within 55 days of the end of each quarter. The Board of Directors of WGP GP declared the following cash distributions to WGP unitholders for the periods presented:
thousands except per-unit amounts Quarters Ended | Total Quarterly Distribution per Unit | Total Quarterly Cash Distribution | Date of Distribution | ||||||||
| 2013 | |||||||||||
| March 31 | $ | 0.17875 | $ | 39,128 | May 2013 | ||||||
| June 30 | 0.19750 | 43,232 | August 2013 | ||||||||
| September 30 | 0.21375 | 46,789 | November 2013 | ||||||||
| December 31 | 0.23125 | 50,620 | February 2014 | ||||||||
| 2014 | |||||||||||
| March 31 | $ | 0.25000 | $ | 54,726 | May 2014 | ||||||
| June 30 | 0.27125 | 59,378 | August 2014 | ||||||||
| September 30 | 0.29125 | 63,756 | November 2014 | ||||||||
| December 31 | 0.31250 | 68,409 | February 2015 | ||||||||
| 2015 | |||||||||||
| March 31 | $ | 0.34250 | $ | 74,977 | May 2015 | ||||||
| June 30 | 0.36375 | 79,630 | August 2015 | ||||||||
| September 30 | 0.38125 | 83,461 | November 2015 | ||||||||
December 31 (1) | 0.40375 | 88,389 | February 2016 | ||||||||
(1) | On January 21, 2016, the Board of Directors of WGP GP declared a cash distribution to WGP unitholders of $0.40375 per unit, or $88.4 million in aggregate. The cash distribution was paid on February 22, 2016, to WGP unitholders of record at the close of business on February 1, 2016. |
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WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PARTNERSHIP DISTRIBUTIONS (CONTINUED)
WES partnership distributions. WES’s partnership agreement requires WES to distribute all of its available cash (as defined in WES’s partnership agreement) to WES unitholders of record on the applicable record date within 45 days of the end of each quarter. The Board of Directors of WES GP declared the following cash distributions to WES’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 | ||||||||
| 2013 | |||||||||||
| March 31 | $ | 0.540 | $ | 70,143 | May 2013 | ||||||
| June 30 | 0.560 | 79,315 | August 2013 | ||||||||
| September 30 | 0.580 | 83,986 | November 2013 | ||||||||
| December 31 | 0.600 | 92,609 | February 2014 | ||||||||
| 2014 | |||||||||||
| March 31 | $ | 0.625 | $ | 98,749 | May 2014 | ||||||
| June 30 | 0.650 | 105,655 | August 2014 | ||||||||
| September 30 | 0.675 | 111,608 | November 2014 | ||||||||
| December 31 | 0.700 | 126,044 | February 2015 | ||||||||
| 2015 | |||||||||||
| March 31 | $ | 0.725 | $ | 133,203 | May 2015 | ||||||
| June 30 | 0.750 | 139,736 | August 2015 | ||||||||
| September 30 | 0.775 | 146,160 | November 2015 | ||||||||
December 31 (1) | 0.800 | 152,588 | February 2016 | ||||||||
(1) | On January 21, 2016, the Board of Directors of WES GP declared a cash distribution to WES unitholders of $0.800 per unit, or $152.6 million in aggregate, including incentive distributions, but excluding distributions on WES Class C units (see WES Class C unit distributions below). The cash distribution was paid on February 11, 2016, to WES unitholders of record at the close of business on February 1, 2016. |
WES’s available cash. The amount of available cash (as defined in WES’s partnership agreement) generally is all cash on hand at the end of the quarter, plus, at the discretion of WES GP, working capital borrowings made subsequent to the end of such quarter, less the amount of cash reserves established by WES GP to provide for the proper conduct of WES’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 WES unitholders, and to WES GP 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. It is intended that working capital borrowings, at the time of such borrowings, be repaid within 12 months. In all cases, working capital borrowings are used solely for working capital purposes or to fund distributions to partners.
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WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PARTNERSHIP DISTRIBUTIONS (CONTINUED)
WES Class C unit distributions. WES’s Class C units receive quarterly distributions at a rate equivalent to WES’s common units. The distributions are paid in the form of additional Class C units (“PIK Class C units”) until the scheduled conversion date on December 31, 2017 (unless earlier converted), and the Class C units are disregarded with respect to WES’s distribution of WES’s available cash until they are converted to common units. The number of additional PIK Class C units to be issued in connection with a distribution payable on the Class C units is determined by dividing the corresponding distribution attributable to the Class C units by the volume-weighted-average price of WES’s common units for the ten days immediately preceding the payment date for the WES common unit distribution, less a 6% discount. WES records the PIK Class C unit distributions at fair value at the time of issuance. This Level 2 fair value measurement uses WES’s unit price as a significant input in the determination of the fair value.
WES issued the following PIK Class C units to APC Midstream Holdings, LLC (“AMH”), the holder of the Class C units, for the periods presented:
thousands except unit amounts For the Quarters Ended | PIK Class C Units | Implied Fair Value | Date of Distribution | ||||||
| 2014 | |||||||||
December 31 (1) | 45,711 | $ | 3,072 | February 2015 | |||||
| 2015 | |||||||||
| March 31 | 118,230 | $ | 8,101 | May 2015 | |||||
| June 30 | 153,020 | 8,721 | August 2015 | ||||||
| September 30 | 181,048 | 9,724 | November 2015 | ||||||
| December 31 | 323,584 | 10,070 | February 2016 | ||||||
(1) | Prorated for the 37-day period the Class C units were outstanding during the fourth quarter of 2014. |
WES’s general partner interest and incentive distribution rights. As of December 31, 2015, WES GP was entitled to 1.8% of all quarterly distributions that WES makes prior to its liquidation and, as the holder of the 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 49.8% does not include any distributions that WES GP may receive on common units that it may acquire.
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WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EQUITY AND PARTNERS’ CAPITAL
Holdings of WGP equity. WGP’s common units are listed on the NYSE under the symbol “WGP.” As of December 31, 2015, Anadarko held 191,087,365 of WGP’s common units, representing an 87.3% limited partner interest in WGP, and, through its ownership of WGP GP, Anadarko indirectly held the entire non-economic general partner interest in WGP. The public held 27,832,015 WGP common units, representing a 12.7% limited partner interest in WGP.
In June 2015, Anadarko sold 2,300,000 of its WGP common units to the public through an underwritten offering, including 300,000 common units pursuant to the full exercise of the underwriters’ over-allotment option. WGP did not receive any proceeds from, or incur any expense in, the public offering.
In July 2014, Anadarko sold 5,750,000 of its WGP common units to the public through an underwritten offering, including 750,000 common units pursuant to the full exercise of the underwriters’ over-allotment option. WGP did not receive any proceeds from, or incur any expense in, the public offering.
Tangible equity units. In June 2015, Anadarko completed the public issuance of 9,200,000, 7.50% tangible equity units (“TEUs”), including 1,200,000 TEUs pursuant to the full exercise of the underwriters’ over-allotment option, at a price to the public of $50.00 per TEU. Each TEU that Anadarko issued consists of (1) a prepaid equity purchase contract for WGP common units owned by Anadarko (subject to Anadarko’s right to elect to deliver shares of its common stock in lieu of such WGP common units) and (2) a senior amortizing note due June 7, 2018. WGP did not receive any proceeds from, or incur any expense in, the public offering. See Note 10—Tangible Equity Units in the Notes to Consolidated Financial Statements under Part II, Item 8 of Anadarko’s Form 8-K for the year ended December 31, 2015 (which is not, and shall not be deemed to be, incorporated by reference herein), for a full discussion of the TEUs.
Net income (loss) per common unit. For WGP, earnings per unit is calculated by dividing the limited partners’ interest in net income (loss) by the weighted-average number of common units outstanding. Net income (loss) per common unit is calculated assuming that cash distributions are equal to the net income attributable to WGP. Net income (loss) attributable to the WES assets (as defined in Note 1) acquired from Anadarko for periods prior to WES’s acquisition of the WES assets is not allocated to the limited partners when calculating net income (loss) per common unit. Net income equal to the amount of available cash (as defined by WGP’s partnership agreement) is allocated to WGP common unitholders consistent with actual cash distributions.
Holdings of WES equity. As of December 31, 2015, WGP held 49,296,205 WES common units, representing a 34.6% limited partner interest in WES, and, through its ownership of WES GP, WGP indirectly held 2,583,068 general partner units, representing a 1.8% general partner interest in WES, and 100% of WES’s IDRs. As of December 31, 2015, other subsidiaries of Anadarko held 757,619 WES common units and 11,411,862 Class C units, representing an aggregate 8.5% limited partner interest in WES, and the public held 78,523,141 WES common units, representing a 55.1% limited partner interest in WES, which are both reflected as noncontrolling interests within the consolidated financial statements of WGP (see Note 1 and Note 2).
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WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EQUITY AND PARTNERS’ CAPITAL (CONTINUED)
WES equity offerings. WES completed the following public offerings of its common units during 2015, 2014 and 2013, including through its Continuous Offering Programs (“COP”):
| thousands except unit and per-unit amounts | WES Common Units Issued | WES GP Units Issued (1) | Price Per Unit | Underwriting Discount and Other Offering Expenses | Net Proceeds to WES | |||||||||||||
| 2013 | ||||||||||||||||||
May 2013 equity offering (2) | 7,015,000 | 143,163 | $ | 61.18 | $ | 13,203 | $ | 424,733 | ||||||||||
December 2013 equity offering (3) | 4,800,000 | 97,959 | 61.51 | 9,447 | 291,827 | |||||||||||||
$125.0 million COP (4) | 685,735 | 13,996 | 60.84 | 965 | 41,603 | |||||||||||||
| 2014 | ||||||||||||||||||
$125.0 million COP (5) | 1,133,384 | 23,132 | $ | 73.48 | $ | 1,738 | $ | 83,245 | ||||||||||
November 2014 equity offering (6) | 8,620,153 | 153,061 | 70.85 | 18,615 | 602,967 | |||||||||||||
| 2015 | ||||||||||||||||||
$500.0 million COP (7) | 873,525 | — | $ | 66.61 | $ | 805 | $ | 57,385 | ||||||||||
(1) | Represents general partner units of WES issued to WES GP in exchange for WES GP’s proportionate capital contribution. |
(2) | Includes the issuance of 915,000 WES common units pursuant to the full exercise of the underwriters’ over-allotment option. |
(3) | Includes the issuance of 300,000 WES common units on January 3, 2014, pursuant to the partial exercise of the underwriters’ over-allotment option. Net proceeds from this partial exercise (including WES GP’s proportionate capital contribution) were $18.1 million. |
(4) | Represents common and general partner units of WES issued during the year ended December 31, 2013, pursuant to WES’s registration statement filed with the SEC in August 2012 authorizing the issuance of up to an aggregate of $125.0 million of WES common units (the “$125.0 million COP”). Gross proceeds generated (including WES GP’s proportionate capital contributions) during the year ended December 31, 2013, were $42.6 million. The price per unit in the table above represents an average price for all issuances under the $125.0 million COP during the year ended December 31, 2013. |
(5) | Represents common and general partner units of WES issued during the year ended December 31, 2014, under the $125.0 million COP. Gross proceeds generated (including WES GP’s proportionate capital contributions) during the year ended December 31, 2014, were $85.0 million. The price per unit in the table above represents an average price for all issuances under the $125.0 million COP during the year ended December 31, 2014. As of December 31, 2014, WES had used all the capacity to issue common units under this registration statement. |
(6) | Includes the issuance of 1,120,153 WES common units pursuant to the partial exercise of the underwriters’ over-allotment option, the net proceeds from which were $77.0 million. Beginning with this partial exercise, WES GP elected not to make a corresponding capital contribution to maintain its 2.0% interest in WES. |
(7) | Represents common units of WES issued during the year ended December 31, 2015, pursuant to WES’s registration statement filed with the SEC in August 2014 authorizing the issuance of up to an aggregate of $500.0 million of WES common units (the “$500.0 million COP”). Gross proceeds generated during the three months and year ended December 31, 2015, were zero and $58.2 million, respectively. Commissions paid during the three months and year ended December 31, 2015, were zero and $0.6 million, respectively. The price per unit in the table above represents an average price for all issuances under the $500.0 million COP during the year ended December 31, 2015. |
WES Class C units. In connection with the closing of the DBM acquisition in November 2014, WES issued 10,913,853 Class C units to AMH at a price of $68.72 per unit, generating proceeds of $750.0 million, pursuant to the Unit Purchase Agreement (“UPA”) with Anadarko and AMH. All outstanding Class C units will convert into common units on a one-for-one basis on December 31, 2017, unless WES elects to convert such units earlier or Anadarko extends the conversion date. The Class C units were issued to partially fund WES’s acquisition of DBM, and the UPA contains an optional redemption feature that provides WES the ability to redeem up to $150.0 million of the Class C units within 10 days of the receipt of cash proceeds from an entity that is not an affiliate of WES or AMH, if these cash proceeds were in relation to (i) the assets of DBM, (ii) the equity interests in DBM or (iii) the equity interests in a subsidiary of WES that owns a majority of the outstanding equity interests in DBM. As of December 31, 2015, no such proceeds had been received, and no WES Class C units had been redeemed.
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WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EQUITY AND PARTNERS’ CAPITAL (CONTINUED)
WES common, Class C and general partner units. The following table summarizes WES’s common, Class C and general partner units issued during the years ended December 31, 2015 and 2014:
WES Common Units | WES Class C Units | WES General Partner Units | Total | |||||||||
| Balance at December 31, 2013 | 117,322,812 | — | 2,394,345 | 119,717,157 | ||||||||
| December 2013 equity offering | 300,000 | — | 6,122 | 306,122 | ||||||||
| WES LTIP award vestings | 10,291 | — | 112 | 10,403 | ||||||||
| TEFR Interests acquisition | 308,490 | — | 6,296 | 314,786 | ||||||||
| $125.0 million COP | 1,133,384 | — | 23,132 | 1,156,516 | ||||||||
| November 2014 equity offering | 8,620,153 | — | 153,061 | 8,773,214 | ||||||||
| Class C unit issuance | — | 10,913,853 | — | 10,913,853 | ||||||||
| Balance at December 31, 2014 | 127,695,130 | 10,913,853 | 2,583,068 | 141,192,051 | ||||||||
| PIK Class C units | — | 498,009 | — | 498,009 | ||||||||
| WES LTIP award vestings | 8,310 | — | — | 8,310 | ||||||||
| $500.0 million COP | 873,525 | — | — | 873,525 | ||||||||
| Balance at December 31, 2015 | 128,576,965 | 11,411,862 | 2,583,068 | 142,571,895 | ||||||||
5. TRANSACTIONS WITH AFFILIATES
Affiliate transactions. Revenues from affiliates include amounts earned by WES from services provided to Anadarko as well as from the sale of residue, drip condensate and NGLs to Anadarko. In addition, WES 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 WES assets, whether in providing services to affiliates or to third parties, including field labor, measurement and analysis, and other disbursements. A portion of general and administrative expenses is paid by Anadarko, which results in affiliate transactions pursuant to the reimbursement provisions of the omnibus agreements of WES and WGP. Affiliate expenses do not bear a direct relationship to affiliate revenues, and third-party expenses do not bear a direct relationship to third-party revenues. See Note 2 for further information related to contributions of assets to WES by Anadarko.
Cash management. Anadarko operates a cash management system whereby excess cash from most of its subsidiaries’ separate bank accounts is generally swept to centralized accounts. Prior to the acquisition of WES assets, third-party sales and purchases related to such assets were received or paid in cash by Anadarko within its centralized cash management system. The outstanding affiliate balances were entirely settled through an adjustment to net investment by Anadarko in connection with the acquisition of WES assets. Subsequent to the acquisition of WES assets from Anadarko, transactions related to such assets are cash-settled directly with third parties and with Anadarko affiliates. Chipeta cash settles its transactions directly with third parties and Anadarko, as well as with the other subsidiaries of WES.
Note receivable - Anadarko and Deferred purchase price obligation - Anadarko. Concurrently with the closing of WES’s May 2008 IPO, WES loaned $260.0 million to Anadarko in exchange for a 30-year note bearing interest at a fixed annual rate of 6.50%, payable quarterly. The fair value of the note receivable from Anadarko was $252.3 million and $317.8 million at December 31, 2015 and 2014, respectively. The fair value of the note reflects consideration of credit risk and any premium or discount for the differential between the stated interest rate and quarter-end market interest rate, based on quoted market prices of similar debt instruments. Accordingly, the fair value of the note receivable from Anadarko is measured using Level 2 inputs.
The consideration to be paid by WES to Anadarko for the March 2015 acquisition of DBJV consists of a cash payment due on March 31, 2020. See Note 2 and Note 12.
24
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. TRANSACTIONS WITH AFFILIATES (CONTINUED)
WGP working capital facility. On November 1, 2012, WGP entered into a $30.0 million working capital facility (the “WGP WCF”) with Anadarko as the lender. The WGP WCF is available exclusively to fund WGP’s working capital borrowings. Borrowings under the WGP WCF will mature on November 1, 2017, and bear interest at London Interbank Offered Rate (“LIBOR”) plus 1.50%. See Note 12.
Commodity price swap agreements. WES has commodity price swap agreements with Anadarko to mitigate exposure to a majority of the commodity price volatility that would otherwise be present as a result of the purchase and sale of natural gas, condensate or NGLs. Notional volumes for each of the commodity price swap agreements are not specifically defined. Instead, the commodity price swap agreements apply to the actual volume of natural gas, condensate and NGLs purchased and sold. On December 31, 2014, WES’s commodity price swap agreements for the Hilight and Newcastle systems and the Granger complex (excluding the Granger straddle plant) expired without renewal. The outstanding commodity price swap agreements for the Hugoton system, MGR assets and DJ Basin complex expire in December 2016. The commodity price swap agreements do not satisfy the definition of a derivative financial instrument and, therefore, are not required to be measured at fair value.
Below is a summary of the fixed price ranges on all of WES’s outstanding commodity price swap agreements as of December 31, 2015:
| per barrel except natural gas | 2016 | ||||||
| Ethane | $ | 18.41 | − | 23.11 | |||
| Propane | 47.08 | − | 52.90 | ||||
| Isobutane | 62.09 | − | 73.89 | ||||
| Normal butane | 54.62 | − | 64.93 | ||||
| Natural gasoline | 72.88 | − | 81.68 | ||||
| Condensate | 76.47 | − | 81.68 | ||||
| Natural gas (per MMBtu) | 4.87 | − | 5.96 | ||||
The following table summarizes gains and losses upon settlement of commodity price swap agreements recognized in the consolidated statements of income:
| Year Ended December 31, | ||||||||||||
| thousands | 2015 | 2014 | 2013 | |||||||||
Gains (losses) on commodity price swap agreements related to sales: (1) | ||||||||||||
| Natural gas sales | $ | 45,978 | $ | 9,494 | $ | 21,382 | ||||||
| Natural gas liquids sales | 145,258 | 113,866 | 102,076 | |||||||||
| Total | 191,236 | 123,360 | 123,458 | |||||||||
Losses on commodity price swap agreements related to purchases (2) | (124,944 | ) | (68,492 | ) | (85,294 | ) | ||||||
| Net gains (losses) on commodity price swap agreements | $ | 66,292 | $ | 54,868 | $ | 38,164 | ||||||
(1) | Reported in affiliate natural gas, natural gas liquids and drip condensate sales in the consolidated statements of income in the period in which the related sale is recorded. |
(2) | Reported in cost of product in the consolidated statements of income in the period in which the related purchase is recorded. |
25
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. TRANSACTIONS WITH AFFILIATES (CONTINUED)
DJ Basin complex and Hugoton system swap extensions. On June 25, 2015, WES extended its commodity price swap agreements with Anadarko for the DJ Basin complex from July 1, 2015, through December 31, 2015, and for the Hugoton system from October 1, 2015, through December 31, 2015. The table below summarizes the swap prices for the extension period compared to the forward market prices as of the agreement date, June 25, 2015.
| DJ Basin Complex | Hugoton System | |||||||||||||||
| per barrel except natural gas | 2015 Swap Prices | Market Prices (1) | 2015 Swap Prices | Market Prices (1) | ||||||||||||
| Ethane | $ | 18.41 | $ | 1.96 | — | — | ||||||||||
| Propane | 47.08 | 13.10 | — | — | ||||||||||||
| Isobutane | 62.09 | 19.75 | — | — | ||||||||||||
| Normal butane | 54.62 | 18.99 | — | — | ||||||||||||
| Natural gasoline | 72.88 | 52.59 | — | — | ||||||||||||
| Condensate | 76.47 | 52.59 | $ | 78.61 | $ | 32.56 | ||||||||||
| Natural gas (per MMBtu) | 5.96 | 2.75 | 5.50 | 2.74 | ||||||||||||
(1) | Represents the New York Mercantile Exchange (“NYMEX”) forward strip price as of June 25, 2015, adjusted for product specification, location, basis and, in the case of NGLs, transportation and fractionation costs. |
On December 8, 2015, the commodity price swap agreements with Anadarko for the DJ Basin complex and Hugoton system were further extended from January 1, 2016, through December 31, 2016. The table below summarizes the swap prices for the extension period compared to the forward market prices as of the agreement date, December 8, 2015.
| DJ Basin Complex | Hugoton System | |||||||||||||||
| per barrel except natural gas | 2016 Swap Prices | Market Prices (1) | 2016 Swap Prices | Market Prices (1) | ||||||||||||
| Ethane | $ | 18.41 | $ | 0.60 | — | — | ||||||||||
| Propane | 47.08 | 10.98 | — | — | ||||||||||||
| Isobutane | 62.09 | 17.23 | — | — | ||||||||||||
| Normal butane | 54.62 | 16.86 | — | — | ||||||||||||
| Natural gasoline | 72.88 | 26.15 | — | — | ||||||||||||
| Condensate | 76.47 | 34.65 | $ | 78.61 | $ | 18.81 | ||||||||||
| Natural gas (per MMBtu) | 5.96 | 2.11 | 5.50 | 2.12 | ||||||||||||
(1) | Represents the NYMEX forward strip price as of December 8, 2015, adjusted for product specification, location, basis and, in the case of NGLs, transportation and fractionation costs. |
Revenues or costs attributable to volumes settled during the respective extension period, at the applicable market price in the above tables, will be recognized in the consolidated statements of income. WES will also record a capital contribution from Anadarko in its consolidated statement of equity and partners’ capital for the amount by which the swap price exceeds the applicable market price in the above tables. For the year ended December 31, 2015, the capital contribution from Anadarko was $18.4 million.
Gas gathering and processing agreements. WES has significant gas gathering and processing arrangements with affiliates of Anadarko on a majority of its systems. WES’s gathering, treating and transportation throughput (excluding equity investment throughput) attributable to natural gas production owned or controlled by Anadarko was 53%, 56% and 60% for the years ended December 31, 2015, 2014 and 2013, respectively. WES’s processing throughput (excluding equity investment throughput) attributable to natural gas production owned or controlled by Anadarko was 51%, 57% and 59% for the years ended December 31, 2015, 2014 and 2013, respectively. WES’s gathering, treating and transportation throughput (excluding equity investment throughput) attributable to crude/NGL production owned or controlled by Anadarko was 100% for each of the years ended December 31, 2015, 2014 and 2013.
26
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. TRANSACTIONS WITH AFFILIATES (CONTINUED)
Purchase and sale agreements. WES sells a significant amount of its natural gas, condensate and NGLs to Anadarko Energy Services Company (“AESC”), Anadarko’s marketing affiliate. In addition, WES purchases natural gas, condensate and NGLs from AESC pursuant to purchase agreements. WES’s purchase and sale agreements with AESC are generally one-year contracts, subject to annual renewal.
Omnibus agreements. Pursuant to the omnibus agreements discussed below, Anadarko performs centralized corporate functions for WGP and WES such as legal; accounting; treasury; cash management; investor relations; insurance administration and claims processing; risk management; health, safety and environmental; information technology; human resources; credit; payroll; internal audit; tax; marketing; and midstream administration. Anadarko, in accordance with WES’s partnership agreement and its omnibus agreement with Anadarko and WES GP that governs its relationship regarding certain reimbursement and indemnification matters (the “WES omnibus agreement”), determines, in its reasonable discretion, amounts to be reimbursed by WES in exchange for services provided under the WES omnibus agreement. See Summary of affiliate transactions below.
WGP omnibus agreement. In connection with WGP’s IPO in December 2012, WGP entered into an omnibus agreement with WGP GP and Anadarko that governs the following: (i) WGP’s obligation to reimburse Anadarko for expenses incurred or payments made on WGP’s behalf in conjunction with Anadarko’s provision of general and administrative services to WGP, including public company expenses and general and administrative expenses; (ii) WGP’s obligation to pay Anadarko, in quarterly installments, an administrative services fee of $250,000 per year (subject to an annual increase as described in the agreement); and (iii) WGP’s obligation to reimburse Anadarko for all insurance coverage expenses it incurs or payments it makes on WGP’s behalf.
The following table summarizes the amounts WGP reimbursed to Anadarko, separate from, and in addition to, those reimbursed by WES:
| Year Ended December 31, | ||||||||||||
| thousands | 2015 | 2014 | 2013 | |||||||||
| General and administrative expenses | $ | 256 | $ | 254 | $ | 271 | ||||||
| Public company expenses | 1,997 | 1,986 | 2,391 | |||||||||
| Total reimbursement | $ | 2,253 | $ | 2,240 | $ | 2,662 | ||||||
WES omnibus agreement. In connection with WES’s IPO in 2008, WES entered into the WES omnibus agreement with Anadarko and WES GP, which governs its relationship regarding certain reimbursement and indemnification matters.
The following table summarizes the amounts WES reimbursed to Anadarko:
| Year Ended December 31, | ||||||||||||
| thousands | 2015 | 2014 | 2013 | |||||||||
| General and administrative expenses | $ | 22,896 | $ | 20,249 | $ | 16,882 | ||||||
| Public company expenses | 8,950 | 8,006 | 7,152 | |||||||||
| Total reimbursement | $ | 31,846 | $ | 28,255 | $ | 24,034 | ||||||
27
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. TRANSACTIONS WITH AFFILIATES (CONTINUED)
Services and secondment agreement. Pursuant to the services and secondment agreement, specified employees of Anadarko are seconded to provide operating, routine maintenance and other services with respect to the assets owned and operated by WES under the direction, supervision and control of WES GP. Pursuant to the services and secondment agreement, WES reimburses Anadarko for services provided by the seconded employees. The initial term of the services and secondment agreement extends through May 2018 and the term will automatically extend for additional twelve-month periods unless either party provides 180 days written notice of termination before the applicable twelve-month period expires. The consolidated financial statements include costs allocated by Anadarko for expenses incurred under the services and secondment agreement for periods including and subsequent to WES’s acquisition of the WES assets.
WGP tax sharing agreement. Prior to WGP’s conversion from WGR Holdings, LLC to a limited partnership in September 2012, WGP was a single-member limited liability company, required to reflect its income tax expense liability on a separate-return basis. Upon the completion of WGP’s IPO in December 2012, WGP became a partnership for U.S. federal and state income tax purposes and is therefore not subject to U.S. federal and state income taxes, except for Texas margin tax on the portion of WGP’s income apportionable to Texas. See Note 6.
In connection with WGP’s IPO in December 2012, WGP entered into a tax sharing agreement with Anadarko, pursuant to which WGP reimburses Anadarko for its estimated share of taxes from all forms of taxation, excluding taxes imposed by the United States, borne by Anadarko on WGP’s behalf as a result of WGP’s results being included in a combined or consolidated tax return filed by Anadarko with respect to periods including and subsequent to the closing date of the IPO. Anadarko may use its tax attributes to cause its combined or consolidated group, of which WGP may be a member for this purpose, to owe no tax. Nevertheless, WGP will be required to reimburse Anadarko for the estimated share of taxes that WGP would have owed had the attributes not been available or used for WGP’s benefit, regardless of whether Anadarko pays taxes for the period.
WES tax sharing agreement. Concurrently with WES’s IPO in 2008, WES entered into a tax sharing agreement, pursuant to which WES reimburses Anadarko for its estimated share of applicable state taxes. These taxes include income taxes attributable to WES’s income which are directly borne by Anadarko through its filing of a combined or consolidated tax return with respect to periods beginning on and subsequent to the acquisition of the WES assets from Anadarko. Anadarko may use its own tax attributes to reduce or eliminate the tax liability of its combined or consolidated group, which may include WES as a member. However, under this circumstance, WES nevertheless is required to reimburse Anadarko for the allocable share of taxes that would have been owed had tax attributes not been available to Anadarko.
WES long-term debt and WES RCF indemnification agreements. WES’s long-term debt is recourse to WES GP. In turn, WES GP has been indemnified by wholly owned subsidiaries of Anadarko for any claims made against WES GP under the indentures governing WES’s long-term debt or the WES RCF. See Note 12.
28
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. TRANSACTIONS WITH AFFILIATES (CONTINUED)
Allocation of costs. For periods prior to WES’s acquisition of the WES assets, the consolidated financial statements include costs allocated by Anadarko in the form of a management services fee, which approximated the general and administrative costs incurred by Anadarko attributable to the WES assets. This management services fee was allocated to WES based on its proportionate share of Anadarko’s assets and revenues or other contractual arrangements. Management believes these allocation methodologies are reasonable.
The employees supporting WES’s operations are employees of Anadarko. Anadarko allocates costs to WES for its share of personnel costs, including costs associated with equity-based compensation plans, non-contributory defined pension and postretirement plans, defined contribution savings plan pursuant to the WES omnibus agreement and services and secondment agreement. In general, WES’s reimbursement to Anadarko under the WES omnibus agreement or services and secondment agreement is either (i) on an actual basis for direct expenses Anadarko and WES GP incur on behalf of WES, or (ii) based on an allocation of salaries and related employee benefits between WES, WES GP and Anadarko based on estimates of time spent on each entity’s business and affairs. Most general and administrative expenses charged to WES by Anadarko are attributed to WES on an actual basis, and do not include any mark-up or subsidy component. With respect to allocated costs, management believes the allocation method employed by Anadarko is reasonable. Although it is not practicable to determine what the amount of these direct and allocated costs would be if WES were to directly obtain these services, management believes that aggregate costs charged to WES by Anadarko are reasonable.
WGP LTIP and Anadarko Incentive Plans. WGP GP awards phantom units under the WGP LTIP to its independent directors and executive officers. The phantom units awarded to the independent directors vest one year from the grant date, while awards granted to executive officers are subject to graded vesting over a three-year service period.
The following table summarizes WGP LTIP award activity for WGP GP independent directors and executive officers for the years ended December 31, 2015, 2014 and 2013:
| 2015 | 2014 | 2013 | |||||||||||||||||||
| Weighted-Average Grant-Date Fair Value | Units | Weighted-Average Grant-Date Fair Value | Units | Weighted-Average Grant-Date Fair Value | Units | ||||||||||||||||
| Phantom units outstanding at beginning of year | $ | 43.10 | 22,236 | $ | 39.19 | 36,238 | $ | — | — | ||||||||||||
| Vested | 44.44 | (13,317 | ) | 37.32 | (18,400 | ) | — | — | |||||||||||||
| Granted | 62.21 | 3,618 | 51.19 | 4,398 | 39.19 | 36,238 | |||||||||||||||
| Phantom units outstanding at end of year | 47.20 | 12,537 | 43.10 | 22,236 | 39.19 | 36,238 | |||||||||||||||
WGP LTIP and Anadarko Incentive Plans Compensation Expense. Compensation expense under the WGP LTIP is recognized over the vesting period and was $0.2 million for each of the years ended December 31, 2015 and 2014, and $0.3 million for the year ended December 31, 2013. As of December 31, 2015, there was $0.1 million of unrecognized compensation expense attributable to the outstanding independent director awards under the WGP LTIP, which will be realized by WGP and is expected to be recognized in 0.4 years.
For the years ended December 31, 2015, 2014 and 2013, general and administrative expenses included $3.9 million, $3.5 million and $3.0 million, respectively, of equity-based compensation expense, allocated to WES by Anadarko, for awards granted to the executive officers of WES GP and other employees under the WGP LTIP and Anadarko Incentive Plans. Of these amounts, $3.6 million, $3.2 million and $2.9 million for the years ended December 31, 2015, 2014 and 2013, respectively, are reflected as contributions to partners’ capital in the consolidated statements of equity and partners’ capital. As of December 31, 2015, $7.3 million of estimated unrecognized compensation expense attributable to the WGP LTIP and the Anadarko Incentive Plans will be allocated to WES over a weighted-average period of 2.0 years.
29
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. TRANSACTIONS WITH AFFILIATES (CONTINUED)
WES LTIP. WES GP awards phantom units under the WES LTIP primarily to its independent directors, but also from time to time to its executive officers and Anadarko employees performing services for WES. 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.
The following table summarizes WES LTIP award activity for the years ended December 31, 2015, 2014 and 2013:
| 2015 | 2014 | 2013 | |||||||||||||||||||
| Weighted-Average Grant-Date Fair Value | Units | Weighted-Average Grant-Date Fair Value | Units | Weighted-Average Grant-Date Fair Value | Units | ||||||||||||||||
| Phantom units outstanding at beginning of year | $ | 60.74 | 9,522 | $ | 49.47 | 16,844 | $ | 41.77 | 25,619 | ||||||||||||
| Vested | 60.69 | (9,257 | ) | 49.55 | (13,122 | ) | 41.28 | (14,695 | ) | ||||||||||||
| Granted | 69.10 | 5,212 | 68.14 | 5,800 | 62.49 | 5,920 | |||||||||||||||
| Phantom units outstanding at end of year | 68.78 | 5,477 | 60.74 | 9,522 | 49.47 | 16,844 | |||||||||||||||
WES LTIP Compensation Expense. Compensation expense is recognized over the vesting period and was $0.5 million for the year ended December 31, 2015, and $0.6 million for each of the years ended December 31, 2014 and 2013. As of December 31, 2015, there was $0.1 million of unrecognized compensation expense attributable to the outstanding awards under the WES LTIP, all of which will be realized by WES, and which is expected to be recognized over a weighted-average period of 0.4 years.
Equipment purchases and sales. The following table summarizes WES’s purchases from and sales to Anadarko of pipe and equipment:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | |||||||||||||||||||
| thousands | Purchases | Sales | ||||||||||||||||||||||
| Cash consideration | $ | 10,903 | $ | 22,943 | $ | 11,211 | $ | 925 | $ | 402 | $ | 85 | ||||||||||||
| Net carrying value | 6,318 | 12,210 | 5,309 | 972 | 375 | 38 | ||||||||||||||||||
| Partners’ capital adjustment | $ | 4,585 | $ | 10,733 | $ | 5,902 | $ | (47 | ) | $ | 27 | $ | 47 | |||||||||||
Contributions in aid of construction costs from affiliates. In 2013, a subsidiary of Anadarko entered into an aid in construction agreement with WES, whereby WES constructed five receipt-point facilities at its Brasada complex that serve the Anadarko subsidiary. Such subsidiary reimbursed WES for costs associated with construction of the receipt points. These reimbursements are presented within the investing section of the consolidated statements of cash flows as “Contributions in aid of construction costs from affiliates.”
30
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. TRANSACTIONS WITH AFFILIATES (CONTINUED)
Summary of affiliate transactions. The following table summarizes affiliate transactions, which include revenue from affiliates, reimbursement of operating expenses and purchases of natural gas:
| Year ended December 31, | ||||||||||||
| thousands | 2015 | 2014 | 2013 | |||||||||
Revenues and other (1) | $ | 1,220,639 | $ | 1,203,974 | $ | 957,912 | ||||||
Equity income, net (1) | 71,251 | 57,836 | 22,948 | |||||||||
Cost of product (1) | 167,354 | 127,930 | 136,696 | |||||||||
Operation and maintenance (2) | 77,061 | 71,386 | 67,308 | |||||||||
General and administrative (3) | 34,703 | 32,055 | 29,249 | |||||||||
| Operating expenses | 279,118 | 231,371 | 233,253 | |||||||||
Interest income (4) | 16,900 | 16,900 | 16,900 | |||||||||
Interest expense (5) | 14,400 | 3 | — | |||||||||
Distributions to WGP unitholders (6) | 269,029 | 204,615 | 124,633 | |||||||||
Distributions to WES unitholders (7) | 2,235 | 1,747 | 755 | |||||||||
| Above-market component of swap extensions with Anadarko | 18,449 | — | — | |||||||||
(1) | Represents amounts earned or incurred on and subsequent to the date of acquisition of WES assets, as well as amounts earned or incurred by Anadarko on a historical basis related to WES assets prior to the acquisition of such assets by WES, recognized under gathering, treating or processing agreements, and purchase and sale agreements. |
(2) | Represents expenses incurred on and subsequent to the date of the acquisition of WES assets, as well as expenses incurred by Anadarko on a historical basis related to WES assets prior to the acquisition of such assets by WES. |
(3) | Represents general and administrative expense incurred on and subsequent to the date of WES’s acquisition of WES assets, as well as a management services fee for reimbursement of expenses incurred by Anadarko for periods prior to the acquisition of WES assets by WES. These amounts include equity-based compensation expense allocated to WES and WGP by Anadarko (see WES LTIP and WGP LTIP and Anadarko Incentive Plans within this Note 5) and amounts charged by Anadarko under the WGP omnibus agreement. |
(4) | Represents interest income recognized on the note receivable from Anadarko. |
(5) | For the year ended December 31, 2015, includes WES’s accretion expense recognized on the Deferred purchase price obligation - Anadarko for the acquisition of DBJV (see Note 2 and Note 12) and for the years ended December 31, 2015 and 2014, includes interest expense recognized on the WGP WCF (see Note 12). |
(6) | Represents distributions paid under WGP’s partnership agreement (see Note 3 and Note 4). |
(7) | Represents distributions paid to other subsidiaries of Anadarko under WES’s partnership agreement (see Note 3 and Note 4). |
Concentration of credit risk. Anadarko was the only customer from whom revenues exceeded 10% of consolidated revenues for all periods presented in the consolidated statements of income.
31
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
The components of income tax expense (benefit) are as follows:
| Year Ended December 31, | ||||||||||||
| thousands | 2015 | 2014 | 2013 | |||||||||
| Current income tax expense (benefit) | ||||||||||||
| Federal income tax expense (benefit) | $ | 32,422 | $ | (114 | ) | $ | (62,149 | ) | ||||
| State income tax expense (benefit) | 1,764 | 493 | 169 | |||||||||
| Total current income tax expense (benefit) | 34,186 | 379 | (61,980 | ) | ||||||||
| Deferred income tax expense (benefit) | ||||||||||||
| Federal income tax expense (benefit) | 10,251 | 35,361 | 66,390 | |||||||||
| State income tax expense (benefit) | 1,095 | 3,321 | (144 | ) | ||||||||
| Total deferred income tax expense (benefit) | 11,346 | 38,682 | 66,246 | |||||||||
| Total income tax expense (benefit) | $ | 45,532 | $ | 39,061 | $ | 4,266 | ||||||
Total income taxes differed from the amounts computed by applying the statutory income tax rate to income (loss) before income taxes. The sources of these differences are as follows:
| Year Ended December 31, | ||||||||||||
| thousands except percentages | 2015 | 2014 | 2013 | |||||||||
| Income (loss) before income taxes | $ | 56,630 | $ | 492,550 | $ | 288,945 | ||||||
| Statutory tax rate | — | % | — | % | — | % | ||||||
| Tax computed at statutory rate | $ | — | $ | — | $ | — | ||||||
| Adjustments resulting from: | ||||||||||||
| Federal taxes on income attributable to Anadarko’s investment in WES | 42,823 | 35,716 | 4,776 | |||||||||
| State taxes on income attributable to Anadarko’s investment in WES (net of federal benefit) | 298 | 864 | 849 | |||||||||
Texas margin tax expense (benefit) (1) | 2,411 | 2,481 | (1,359 | ) | ||||||||
| Income tax expense (benefit) | $ | 45,532 | $ | 39,061 | $ | 4,266 | ||||||
| Effective tax rate | 80 | % | 8 | % | 1 | % | ||||||
(1) | Includes a reduction of $2.2 million in deferred state income taxes. Texas House Bill 32, signed into law in June 2015, reduced the Texas margin tax rates by 0.25%. The law became effective January 1, 2016. WGP is required to include the impact of the law change on its deferred state income taxes in the period enacted. |
The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are as follows:
| December 31, | ||||||||
| thousands | 2015 | 2014 | ||||||
| Depreciable property | $ | (138,159 | ) | $ | (168,998 | ) | ||
| Credit carryforwards | 512 | 526 | ||||||
| Other intangible assets | (2,070 | ) | (1,450 | ) | ||||
| Other | 13 | 7 | ||||||
| Net long-term deferred income tax liabilities | $ | (139,704 | ) | $ | (169,915 | ) | ||
Credit carryforwards, which are available for use on future income tax returns, consist of $0.5 million of state income tax credits that expire in 2026.
32
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PROPERTY, PLANT AND EQUIPMENT
A summary of the historical cost of property, plant and equipment is as follows:
| December 31, | ||||||||||
| thousands | Estimated Useful Life | 2015 | 2014 | |||||||
| Land | n/a | $ | 3,744 | $ | 3,437 | |||||
| Gathering systems | 3 to 47 years | 6,061,004 | 5,559,369 | |||||||
| Pipelines and equipment | 15 to 45 years | 136,290 | 151,107 | |||||||
| Assets under construction | n/a | 329,887 | 512,269 | |||||||
| Other | 3 to 40 years | 25,853 | 22,395 | |||||||
| Total property, plant and equipment | 6,556,778 | 6,248,577 | ||||||||
| Accumulated depreciation | 1,697,999 | 1,110,722 | ||||||||
| Net property, plant and equipment | $ | 4,858,779 | $ | 5,137,855 | ||||||
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.
On December 3, 2015, there was an initial fire and secondary explosion at the processing facility within the 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. Train II sustained the most damage of the processing trains but is expected to be returned to service by the end of 2016. Train III experienced minimal damage and is expected to be able to accept limited deliveries of gas in April 2016, and return to full service by the end of the second quarter of 2016, along with new liquid handling and amine treating facilities. WES recognized a gross loss resulting from this damage of $68.8 million. See Note 1.
Also during 2015, WES recognized impairments of $515.5 million, primarily due to impairments of $280.2 million at the Red Desert complex and $220.9 million at the Hilight system. Using the income approach and Level 3 fair value inputs, the Red Desert complex was impaired to its estimated salvage value of $6.3 million and the Hilight system was impaired to its estimated fair value of $28.8 million. These impairments were triggered by a reduction in estimated future cash flows caused by the low commodity price environment and resulting reduced producer drilling activity and related throughput. Also during this period, WES recognized impairments of $14.4 million, primarily due to (i) the abandonment of compressors at the MIGC system and (ii) the cancellation of projects at the Non-Operated Marcellus Interest systems, the DBJV system and the Brasada, Red Desert and DJ Basin complexes. Prolonged low or further declines in commodity prices and changes to producers’ drilling plans in response to lower prices could result in additional impairments in future periods.
During 2014, WES recognized impairments of $5.1 million, primarily related to a non-operational plant in the Powder River Basin that was impaired to its estimated salvage value of $2.4 million, using the income approach and Level 3 fair value inputs, the cancellation of various capital projects by the third-party operator of the Non-Operated Marcellus Interest systems and a compressor no longer in service at the Hilight system.
During 2013, WES recognized a $49.9 million impairment, primarily due to an impairment of $48.7 million at the Springfield system related to a gathering system that was impaired to its estimated fair value of $14.4 million prior to the disposition of such gathering system by Springfield in 2014, using the income approach and Level 3 fair value inputs. This impairment was triggered by a reduction in estimated future cash flows caused by downward reserve revisions by producers based on lease expirations and the decision to suspend a drilling program in the area. Also during this period, WES recognized impairments related to the cancellation of various capital projects by the third-party operator of the Non-Operated Marcellus Interest systems.
At December 31, 2013, other long-term assets includes $4.6 million of unguaranteed residual value related to the capital lease component of a processing agreement assumed in connection with the acquisition of the Granger straddle plant as a part of the MGR acquisition in January 2012. This agreement, in which WES was the lessor, was replaced effective April 1, 2014, with a gas conditioning agreement that does not satisfy criteria required for lease classification. As such, during the second quarter of 2014, the $4.6 million capital lease asset was reclassified from other long-term assets to property, plant and equipment and commenced depreciation.
33
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. GOODWILL AND INTANGIBLES
Goodwill. Goodwill is recorded when the purchase price of a business acquired exceeds the fair market value of the tangible and separately measurable intangible net assets. In addition, goodwill represents the allocated portion of Anadarko’s midstream goodwill attributed to the assets WGP, through its consolidation of WES, has acquired from Anadarko. The carrying value of Anadarko’s midstream goodwill represents the excess of the purchase price paid to a third-party entity over the estimated fair value of the identifiable assets acquired and liabilities assumed by Anadarko. Accordingly, WES’s allocated goodwill balance does not represent, and in some cases is significantly different from, the difference between the consideration WES paid for its acquisitions from Anadarko and the fair value of such net assets on their respective acquisition dates.
Goodwill is evaluated for impairment annually (see Note 1). Estimating the fair value of the reporting units was not necessary based on the qualitative evaluation as of October 1, 2015, and no goodwill impairment has been recognized in these consolidated financial statements. Procedures were also performed in the fourth quarter of 2015 to review any changes in circumstances subsequent to the annual test, including changes in commodity prices. These procedures also indicated no impairment.
Other intangible assets. The intangible asset balance in the consolidated balance sheets includes the fair value, net of amortization, of (i) contracts assumed by WES in connection with the Platte Valley acquisition in February 2011, which are being amortized on a straight-line basis over 50 years, (ii) interconnect agreements at Chipeta entered into in November 2012, which are being amortized on a straight-line basis over 10 years, and (iii) contracts assumed by WES in connection with the DBM acquisition in November 2014, which are being amortized on a straight-line basis over 30 years.
WES assesses intangible assets for impairment together with related underlying long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Property, plant and equipment in Note 1 for further discussion of management’s process to evaluate potential impairment of long-lived assets. No intangible asset impairment has been recognized in these consolidated financial statements.
The following table presents the gross carrying amount and accumulated amortization of other intangible assets:
| December 31, | ||||||||
| thousands | 2015 | 2014 | ||||||
| Gross carrying amount | $ | 868,035 | $ | 892,555 | ||||
| Accumulated amortization | (35,908 | ) | (7,698 | ) | ||||
| Other intangible assets | $ | 832,127 | $ | 884,857 | ||||
Amortization expense for intangible assets was $28.2 million, $4.3 million and $1.4 million for the years ended December 31, 2015, 2014 and 2013, respectively. An estimated $28.4 million of intangible asset amortization will be recorded for each of the next five years.
34
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EQUITY INVESTMENTS
The following table presents the activity of WES’s equity investments for the years ended December 31, 2015 and 2014:
| Equity Investments | |||||||||||||||||||||||||||||||
| thousands | Fort Union (1) | White Cliffs (2) | Rendezvous (3) | Mont Belvieu JV (4) | TEG (5) | TEP (6) | FRP (7) | Total | |||||||||||||||||||||||
| Balance at December 31, 2013 | $ | 25,172 | $ | 35,039 | $ | 60,928 | $ | 122,480 | $ | 16,649 | $ | 197,731 | $ | 135,401 | $ | 593,400 | |||||||||||||||
| Investment earnings (loss), net of amortization | 6,344 | 11,912 | 1,729 | 29,029 | 650 | 6,108 | 2,064 | 57,836 | |||||||||||||||||||||||
| Contributions | — | 10,456 | — | 3,957 | 352 | 6,623 | 42,033 | 63,421 | |||||||||||||||||||||||
| Capitalized interest | — | — | — | — | — | — | 857 | 857 | |||||||||||||||||||||||
| Distributions | (5,583 | ) | (11,330 | ) | (3,669 | ) | (34,129 | ) | (523 | ) | (5,622 | ) | (2,111 | ) | (62,967 | ) | |||||||||||||||
Distributions in excess of cumulative earnings (8) | — | (1,762 | ) | (2,652 | ) | — | (338 | ) | (6,047 | ) | (7,256 | ) | (18,055 | ) | |||||||||||||||||
| Balance at December 31, 2014 | $ | 25,933 | $ | 44,315 | $ | 56,336 | $ | 121,337 | $ | 16,790 | $ | 198,793 | $ | 170,988 | $ | 634,492 | |||||||||||||||
| Investment earnings (loss), net of amortization | (3,200 | ) | 14,770 | 2,292 | 23,570 | 586 | 16,088 | 17,145 | 71,251 | ||||||||||||||||||||||
| Contributions | — | 8,512 | — | (432 | ) | — | 1,880 | 1,482 | 11,442 | ||||||||||||||||||||||
| Distributions | (5,611 | ) | (14,188 | ) | (4,233 | ) | (24,248 | ) | (803 | ) | (16,340 | ) | (16,631 | ) | (82,054 | ) | |||||||||||||||
Distributions in excess of cumulative earnings (8) | — | (2,970 | ) | (3,482 | ) | (3,138 | ) | (290 | ) | (5,618 | ) | (746 | ) | (16,244 | ) | ||||||||||||||||
| Balance at December 31, 2015 | $ | 17,122 | $ | 50,439 | $ | 50,913 | $ | 117,089 | $ | 16,283 | $ | 194,803 | $ | 172,238 | $ | 618,887 | |||||||||||||||
(1) | WES has a 14.81% interest in Fort Union, a joint venture that owns a gathering pipeline and treating facilities in the Powder River Basin. Anadarko is the construction manager and physical operator of the Fort Union facilities. Certain business decisions, including, but not limited to, decisions with respect to significant expenditures or contractual commitments, annual budgets, material financings, dispositions of assets or amending the owners’ firm gathering agreements, require 65% or unanimous approval of the owners. |
(2) | WES has a 10% interest in White Cliffs, a limited liability company that owns a crude oil pipeline that originates in Platteville, Colorado and terminates in Cushing, Oklahoma. The third-party majority owner is the manager of the White Cliffs operations. Certain business decisions, including, but not limited to, approval of annual budgets and decisions with respect to significant expenditures, contractual commitments, acquisitions, material financings, dispositions of assets or admitting new members, require more than 75% approval of the members. |
(3) | WES has a 22% interest in Rendezvous, a limited liability company that operates gas gathering facilities in Southwestern Wyoming. Certain business decisions, including, but not limited to, decisions with respect to significant expenditures or contractual commitments, annual budgets, material financings, dispositions of assets or amending the members’ gas servicing agreements, require unanimous approval of the members. |
(4) | WES has a 25% interest in the Mont Belvieu JV, an entity formed to design, construct, and own two fractionation trains located in Mont Belvieu, Texas. A third party is the operator of the Mont Belvieu JV fractionation trains. Certain business decisions, including, but not limited to, decisions with respect to the execution of contracts, settlements, disposition of assets, or the creation, appointment, or removal of officer positions require 50% or unanimous approval of the owners. |
(5) | WES has a 20% interest in TEG, an entity that consists of two NGL gathering systems that link natural gas processing plants to TEP. Enbridge Midcoast Energy, LP (“Enbridge”) is the operator of the two gathering systems. Certain business decisions, including, but not limited to, decisions with respect to the execution of contracts, settlements, disposition of assets, or the delegation, creation, appointment, or removal of officer positions require more than 50% approval of the members. |
(6) | WES has a 20% interest in TEP, which consists of an NGL pipeline that originates in Skellytown, Texas and extends to Mont Belvieu, Texas. Enterprise Products Operating LLC (“Enterprise”) is the operator of TEP. Certain business decisions, including, but not limited to, decisions with respect to the execution of contracts, settlements, disposition of assets, or the creation, appointment, or removal of officer positions require more than 50% approval of the members. |
(7) | WES has a 33.33% interest in the FRP, an NGL pipeline that extends from Weld County, Colorado to Skellytown, Texas. Enterprise is the operator of FRP. Certain business decisions, including, but not limited to, decisions with respect to the execution of contracts, settlements, disposition of assets, or the creation, appointment, or removal of officer positions require more than 50% approval of the members. |
(8) | Distributions in excess of cumulative earnings, classified as investing cash flows in the consolidated statements of cash flows, is calculated on an individual investment basis. |
35
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EQUITY INVESTMENTS (CONTINUED)
During the year ended December 31, 2015, an impairment loss was recognized by the managing partner of Fort Union. WES’s 14.81% share of the impairment loss was $9.5 million recorded in Equity income, net in the consolidated statements of income.
The investment balance at December 31, 2015, includes $40.1 million for the purchase price allocated to the investment in Rendezvous in excess of the historic cost basis of Western Gas Resources, Inc. (“WGRI”), the entity that previously owned the interest in Rendezvous, which Anadarko acquired in August 2006. This excess balance is attributable to the difference between the fair value and book value of such gathering and treating facilities (at the time WGRI was acquired by Anadarko) and is being amortized over the remaining estimated useful life of those facilities.
The investment balance in White Cliffs at December 31, 2015, is $8.1 million less than WES’s underlying equity in White Cliffs’ net assets, primarily due to WES recording the acquisition of its initial 0.4% interest in White Cliffs at Anadarko’s historic carrying value. This difference is being amortized to equity income, net over the remaining estimated useful life of the White Cliffs pipeline.
Management evaluates its equity investments for impairment whenever events or changes in circumstances indicate that the carrying value of such investments may have experienced a decline in value that is other than temporary. When evidence of loss in value has occurred, management compares the estimated fair value of the investment to the carrying value of the investment to determine whether the investment has been impaired. Management assesses the fair value of equity investments using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third-party comparable sales and discounted cash flow models. If the estimated fair value is less than the carrying value, the excess of the carrying value over the estimated fair value is recognized as an impairment loss.
The following tables present the summarized combined financial information for WES’s equity investments (amounts represent 100% of investee financial information):
| Year Ended December 31, | ||||||||||||
| thousands | 2015 | 2014 | 2013 | |||||||||
| Consolidated Statements of Income | ||||||||||||
| Revenues | $ | 668,797 | $ | 548,629 | $ | 261,705 | ||||||
| Operating income | 381,616 | 336,188 | 171,496 | |||||||||
| Net income | 381,161 | 333,705 | 170,175 | |||||||||
| December 31, | ||||||||
| thousands | 2015 | 2014 | ||||||
| Consolidated Balance Sheets | ||||||||
| Current assets | $ | 156,180 | $ | 141,781 | ||||
| Property, plant and equipment, net | 2,736,553 | 2,814,336 | ||||||
| Other assets | 43,713 | 48,799 | ||||||
| Total assets | $ | 2,936,446 | $ | 3,004,916 | ||||
| Current liabilities | 78,116 | 95,102 | ||||||
| Non-current liabilities | 9,072 | 22,615 | ||||||
| Equity | 2,849,258 | 2,887,199 | ||||||
| Total liabilities and equity | $ | 2,936,446 | $ | 3,004,916 | ||||
36
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMPONENTS OF WORKING CAPITAL
A summary of accounts receivable, net is as follows:
| December 31, | ||||||||
| thousands | 2015 | 2014 | ||||||
| Trade receivables, net | $ | 143,341 | $ | 118,946 | ||||
| Other receivables, net | 49,772 | 3,597 | ||||||
| Total accounts receivable, net | $ | 193,113 | $ | 122,543 | ||||
A summary of other current assets is as follows:
| December 31, | ||||||||
| thousands | 2015 | 2014 | ||||||
| Natural gas liquids inventory | $ | 2,403 | $ | 5,316 | ||||
| Imbalance receivables | 2,122 | 415 | ||||||
| Prepaid insurance | 2,998 | 3,217 | ||||||
| Other | 1,034 | 1,879 | ||||||
| Total other current assets | $ | 8,557 | $ | 10,827 | ||||
A summary of accrued liabilities is as follows:
| December 31, | ||||||||
| thousands | 2015 | 2014 | ||||||
| Accrued capital expenditures | $ | 61,454 | $ | 132,911 | ||||
| Accrued plant purchases | 16,425 | 14,023 | ||||||
| Accrued interest expense | 26,194 | 24,741 | ||||||
| Short-term asset retirement obligations | 3,677 | 1,497 | ||||||
| Short-term remediation and reclamation obligations | 1,136 | 475 | ||||||
| Income taxes payable | 770 | 207 | ||||||
| Other | 9,440 | 3,341 | ||||||
| Total accrued liabilities | $ | 119,096 | $ | 177,195 | ||||
37
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ASSET RETIREMENT OBLIGATIONS
The following table provides a summary of changes in asset retirement obligations:
| Year Ended December 31, | ||||||||
| thousands | 2015 | 2014 | ||||||
| Carrying amount of asset retirement obligations at beginning of year | $ | 119,855 | $ | 82,563 | ||||
| Liabilities incurred | 9,490 | 14,469 | ||||||
| Liabilities settled | (7,905 | ) | (4,941 | ) | ||||
| Accretion expense | 6,381 | 5,122 | ||||||
| Revisions in estimated liabilities | 2,810 | 22,642 | ||||||
| Carrying amount of asset retirement obligations at end of year | $ | 130,631 | $ | 119,855 | ||||
The liabilities incurred for the year ended December 31, 2015, represented additions in asset retirement obligations primarily due to capital expansions at the DJ Basin, Granger and Brasada complexes and the Hilight and Non-Operated Marcellus Interest systems. Revisions in estimated liabilities for the year ended December 31, 2015, are related to (i) changes in expected timing of settlement primarily at the DBM and DJ Basin complexes and Hugoton and DBJV systems, and (ii) changes in property lives primarily at the Granger, Brasada and Red Desert complexes and the Hilight and Non-Operated Marcellus Interest systems.
The liabilities incurred for the year ended December 31, 2014, increased primarily due to the acquisition of DBM in the fourth quarter of 2014 and continued capital expansion at the DJ Basin complex. Revisions in estimated liabilities for the year ended December 31, 2014, are related to changes in property lives and changes in the expected timing of settlement, primarily at the DJ Basin complex, Granger complex, Hugoton and Hilight systems, MIGC, OTTCO, Brasada complex and Non-Operated Marcellus Interest systems; as well as changes in cost estimates associated with the abandonment of pipe and equipment skids, and compressors at the Springfield system.
12. DEBT AND INTEREST EXPENSE
At December 31, 2015, WES’s debt consisted of 5.375% Senior Notes due 2021 (the “2021 Notes”), 4.000% Senior Notes due 2022 (the “2022 Notes”), 2.600% Senior Notes due 2018 (the “2018 Notes”), 5.450% Senior Notes due 2044 (the “2044 Notes”), 3.950% Senior Notes due 2025 (the “2025 Notes”), and borrowings on the WES RCF.
The following table presents WES and WGP’s outstanding debt as of December 31, 2015 and 2014:
| December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
| thousands | Principal | Carrying Value | Fair Value (1) | Principal | Carrying Value | Fair Value (1) | ||||||||||||||||||
| WGP working capital facility - Anadarko | $ | — | $ | — | $ | — | $ | 1,150 | $ | 1,150 | $ | 1,150 | ||||||||||||
| Long-term debt | ||||||||||||||||||||||||
| 2021 Notes | $ | 500,000 | $ | 496,285 | $ | 513,645 | $ | 500,000 | $ | 495,714 | $ | 549,530 | ||||||||||||
| 2022 Notes | 670,000 | 672,572 | 595,744 | 670,000 | 672,930 | 681,942 | ||||||||||||||||||
| 2018 Notes | 350,000 | 350,348 | 339,293 | 350,000 | 350,474 | 352,162 | ||||||||||||||||||
| 2044 Notes | 400,000 | 393,923 | 321,499 | 400,000 | 393,836 | 417,619 | ||||||||||||||||||
| 2025 Notes | 500,000 | 494,229 | 422,285 | — | — | — | ||||||||||||||||||
| WES RCF | 300,000 | 300,000 | 300,000 | 510,000 | 510,000 | 510,000 | ||||||||||||||||||
| Total long-term debt | $ | 2,720,000 | $ | 2,707,357 | $ | 2,492,466 | $ | 2,430,000 | $ | 2,422,954 | $ | 2,511,253 | ||||||||||||
(1) | Fair value is measured using the market approach and Level 2 inputs. |
38
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. DEBT AND INTEREST EXPENSE (CONTINUED)
Debt activity. The following table presents WES and WGP’s debt activity for the years ended December 31, 2015 and 2014:
| thousands | Carrying Value | |||
| Balance at December 31, 2013 | $ | 1,418,169 | ||
| WES RCF borrowings | 1,160,000 | |||
| Issuance of 2044 Notes | 400,000 | |||
| Issuance of 2018 Notes | 100,000 | |||
| Repayments of WES RCF borrowings | (650,000 | ) | ||
| WGP WCF borrowings | 1,150 | |||
| Other | (5,215 | ) | ||
| Balance at December 31, 2014 | $ | 2,424,104 | ||
| WES RCF borrowings | 400,000 | |||
| Issuance of 2025 Notes | 500,000 | |||
| Repayments of WES RCF borrowings | (610,000 | ) | ||
| Repayment of WGP WCF borrowings | (1,150 | ) | ||
| Other | (5,597 | ) | ||
| Balance at December 31, 2015 | $ | 2,707,357 | ||
WES Senior Notes. The 2025 Notes issued in June 2015 were offered at a price to the public of 98.789% of the face amount. Including the effects of the issuance and underwriting discounts, the effective interest rate of the 2025 Notes is 4.205%. Interest is paid semi-annually on June 1 and December 1 of each year. Proceeds (net of underwriting discount of $3.3 million, original issue discount and debt issuance costs) were used to repay a portion of the amount outstanding under the WES RCF.
The 2044 Notes issued in March 2014 were offered at a price to the public of 98.443% of the face amount. Including the effects of the issuance and underwriting discounts, the effective interest rate of the 2044 Notes is 5.633%. Interest is paid semi-annually on April 1 and October 1 of each year. Proceeds (net of underwriting discount of $3.5 million, original issue discount and debt issuance costs) were used to repay amounts then outstanding under the WES RCF and for general partnership purposes.
The 2018 Notes issued in March 2014 were offered at a price to the public of 100.857% of the face amount. Including the effects of the issuance premium for the March 2014 offering, the issuance discount for the August 2013 offering of 2018 Notes and underwriting discounts, the effective interest rate of the 2018 Notes is 2.743%. Interest is paid semi-annually on February 15 and August 15 of each year. Proceeds (net of underwriting discount of $0.6 million, original issue premium and debt issuance costs) were used to repay amounts then outstanding under the WES RCF and for general partnership purposes.
At December 31, 2015, WES was in compliance with all covenants under the indentures governing its outstanding notes.
39
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. DEBT AND INTEREST EXPENSE (CONTINUED)
WES RCF. The $1.2 billion WES RCF, which is expandable to a maximum of $1.5 billion, matures in February 2019 and bears interest at LIBOR, plus applicable margins ranging from 0.975% to 1.45%, or an alternate base rate equal to the greatest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.5%, or (c) LIBOR plus 1%, in each case plus applicable margins currently ranging from zero to 0.45%, based upon WES’s senior unsecured debt rating. The interest rate on the WES RCF was 1.73% and 1.47% at December 31, 2015 and 2014, respectively. WES is required to pay a quarterly facility fee currently ranging from 0.15% to 0.30% of the commitment amount (whether used or unused), based upon its senior unsecured debt rating. The facility fee rate was 0.20% at December 31, 2015 and 2014.
As of December 31, 2015, WES had $300.0 million of outstanding borrowings, $6.4 million in outstanding letters of credit and $893.6 million available for borrowing under the WES RCF. At December 31, 2015, WES was in compliance with all covenants under the WES RCF.
The 2021 Notes, 2022 Notes, 2018 Notes, 2044 Notes, 2025 Notes and obligations under the WES RCF are recourse to WES GP. WES GP is indemnified by a wholly owned subsidiary of Anadarko, WGRI, against any claims made against WES GP under the 2022 Notes, 2021 Notes, and/or the WES RCF.
In connection with the acquisitions of the Non-Operated Marcellus Interest, the Anadarko-Operated Marcellus Interest and the TEFR Interests, WES GP and other wholly owned subsidiaries of Anadarko entered into indemnification agreements, whereby such subsidiaries agreed to indemnify WES GP for any recourse liability it may have for WES RCF borrowings, or other debt financing, attributable to the acquisitions of the Non-Operated Marcellus Interest, the Anadarko-Operated Marcellus Interest and the TEFR Interests. These indemnification agreements apply to the 2044 Notes, 2018 Notes and/or WES RCF borrowings outstanding related to the aforementioned acquisitions.
WES GP, the other indemnifying subsidiaries of Anadarko and WGRI also amended and restated the indemnity agreements between them to (i) conform language among all the indemnification agreements and (ii) reduce the amount for which WGRI would indemnify WES GP by an amount equal to any amounts payable to WES GP under the indemnification agreements related to the acquisitions of the Non-Operated Marcellus Interest, the Anadarko-Operated Marcellus Interest and the TEFR Interests.
WGP working capital facility. On November 1, 2012, WGP entered into the WGP WCF, a $30.0 million working capital facility with Anadarko as the lender. The facility is available exclusively to fund WGP’s working capital borrowings. Borrowings under the facility will mature on November 1, 2017, and bear interest at LIBOR plus 1.50%. The interest rate was 1.93% and 1.67% at December 31, 2015 and 2014, respectively.
WGP is required to reduce all borrowings under the WGP WCF to zero for a period of at least 15 consecutive days during the twelve-month period commencing on November 1 of each year. As of December 31, 2015, WGP had no outstanding borrowings and $30.0 million available for borrowing under the WGP WCF. At December 31, 2015, WGP was in compliance with all covenants under the WGP WCF.
40
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. DEBT AND INTEREST EXPENSE (CONTINUED)
Interest expense. The following table summarizes the amounts included in interest expense:
| Year Ended December 31, | ||||||||||||
| thousands | 2015 | 2014 | 2013 | |||||||||
| Third parties | ||||||||||||
| Long-term debt | $ | 102,058 | $ | 81,495 | $ | 59,293 | ||||||
| Amortization of debt issuance costs and commitment fees | 5,734 | 5,103 | 4,449 | |||||||||
| Capitalized interest | (8,318 | ) | (9,832 | ) | (11,945 | ) | ||||||
| Total interest expense – third parties | 99,474 | 76,766 | 51,797 | |||||||||
| Affiliates | ||||||||||||
| WGP WCF | 2 | 3 | — | |||||||||
Deferred purchase price obligation – Anadarko (1) | 14,398 | — | — | |||||||||
| Total interest expense – affiliates | 14,400 | 3 | — | |||||||||
| Interest expense | $ | 113,874 | $ | 76,769 | $ | 51,797 | ||||||
(1) | See Note 2 for a discussion of the accretion and net present value of the Deferred purchase price obligation - Anadarko. |
13. COMMITMENTS AND CONTINGENCIES
Environmental obligations. WGP, through its partnership interest in WES, is subject to various environmental-remediation obligations arising from federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. As of December 31, 2015 and 2014, the consolidated balance sheets included $2.6 million and $2.0 million, respectively, of liabilities for remediation and reclamation obligations. The current portion of these amounts is included in Accrued liabilities and the long-term portion of these amounts is included in Asset retirement obligations and other. The recorded obligations do not include any anticipated insurance recoveries. The majority of payments related to these obligations are expected to be made over the next five years. Management regularly monitors the remediation and reclamation process and the liabilities recorded and believes its environmental obligations are adequate to fund remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not differ materially from recorded amounts nor materially affect the overall results of operations, cash flows or financial condition of WGP. There can be no assurance, however, that current regulatory requirements will not change, or past non-compliance with environmental issues will not be discovered. See Note 10 and Note 11.
Litigation and legal proceedings. In March 2011, DCP Midstream, LP (“DCP”) filed a lawsuit against Anadarko and others, including a subsidiary of WES, Kerr-McGee Gathering, LLC, in Weld County District Court (the “Court”) in Colorado, alleging that Anadarko diverted gas from DCP’s gathering and processing facilities in breach of certain dedication agreements. In addition to various claims against Anadarko, DCP is claiming unjust enrichment and other damages against Kerr-McGee Gathering, LLC, the entity that holds the Wattenberg assets (located within the DJ Basin complex). Anadarko countersued DCP asserting that DCP has not properly allocated values and charges to Anadarko for the gas that DCP gathers and/or processes, and seeks a judgment that DCP has no valid gathering or processing rights to much of the gas production it is claiming, in addition to other claims. In January 2016, the parties entered into a settlement of these matters and the lawsuit was dismissed in February 2016 with no cash impact to WES.
41
WESTERN GAS EQUITY PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition, from time to time, WGP, through its partnership interests in WES, 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 financial condition, results of operations or cash flows of WGP.
Other commitments. WES has short-term payment obligations, or commitments, related to its capital spending programs, as well as those of its unconsolidated affiliates. As of December 31, 2015, WES had unconditional payment obligations for services to be rendered or products to be delivered in connection with its capital projects of $45.0 million, the majority of which is expected to be paid in the next twelve months. These commitments relate primarily to the construction of Trains IV and V at the DBM complex, progress payments made towards the construction of Train VI, also at the DBM complex, and expansion projects at the DBJV system and the DJ Basin complex.
Lease commitments. Anadarko, on WES’s behalf, has entered into lease agreements for corporate offices, shared field offices and a warehouse supporting WES’s operations, for which Anadarko charges WES rent. The leases for the corporate offices and shared field offices extend through 2017 and 2018, respectively, and the lease for the warehouse extends through February 2017.
Rent expense associated with the office, warehouse and equipment leases was $34.1 million, $25.9 million and $22.3 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The amounts in the table below represent existing contractual operating lease obligations as of December 31, 2015, that may be assigned or otherwise charged to WES pursuant to the reimbursement provisions of the WES omnibus agreement:
| thousands | Operating Leases | ||
| 2016 | $ | 9,076 | |
| 2017 | 7,756 | ||
| 2018 | 733 | ||
| 2019 | 624 | ||
| 2020 | 122 | ||
| Thereafter | — | ||
| Total | $ | 18,311 | |
14. SUBSEQUENT EVENTS
On March 14, 2016, WES acquired Anadarko’s 100% interest in Springfield (see Note 2). WES financed the acquisition of Springfield through the issuance of $449.0 million in aggregate amount of 8.5% perpetual convertible preferred units to private investors at a price of $32.00 per unit, the issuance of 1,253,761 and 835,841 of WES common units at a price of $29.91 per common unit to Anadarko and WGP, respectively, and the borrowing of $247.5 million on the WES RCF. The convertible preferred units issuance included an over-allotment feature that resulted in the issuance of an additional $252.6 million in aggregate amount of such convertible preferred units in April 2016, the net proceeds from which were used to pay down WES RCF borrowings. Total net proceeds from the issuance of the convertible preferred units, including the units issued in connection with the over-allotment option, were $687.5 million. Additionally, the convertible preferred units will pay a distribution of $2.72 per year and, subject to certain limitations and adjustments, become convertible into WES common units on a one-for-one basis on the second anniversary of the issuance of such convertible preferred units. WGP funded its WES unit purchase by drawing on a secured revolving credit facility that closed on the closing date of the Springfield acquisition.
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WESTERN GAS EQUITY PARTNERS, LP
SUPPLEMENTAL QUARTERLY INFORMATION
(UNAUDITED)
The following table presents a summary of operating results by quarter for the years ended December 31, 2015 and 2014. Operating results reflect the operations of the WES assets (as defined in Note 1—Summary of Significant Accounting Policies) from the dates of common control, unless otherwise noted. See Note 1—Summary of Significant Accounting Policies and Note 2—Acquisitions and Divestitures.
| thousands except per-unit amounts | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||
| 2015 | |||||||||||||||
| Total revenues and other | $ | 437,006 | $ | 465,993 | $ | 432,515 | $ | 416,558 | |||||||
| Equity income, net | 18,220 | 18,941 | 21,976 | 12,114 | |||||||||||
| Gain (loss) on divestiture and other, net | (6 | ) | — | 77,254 | (20,224 | ) | |||||||||
Operating income (loss) (1) | (123,168 | ) | 169,912 | 225,679 | (118,241 | ) | |||||||||
Net income (loss) (1) | (154,095 | ) | 134,367 | 185,583 | (154,757 | ) | |||||||||
Net income (loss) attributable to Western Gas Equity Partners, LP (1) | (16,372 | ) | 87,651 | 109,219 | (14,991 | ) | |||||||||
Net income (loss) per common unit – basic and diluted (1) (2) | (0.19 | ) | 0.31 | 0.41 | (0.14 | ) | |||||||||
| 2014 | |||||||||||||||
| Total revenues and other | $ | 334,197 | $ | 393,273 | $ | 399,126 | $ | 406,781 | |||||||
| Equity income, net | 9,251 | 13,008 | 19,063 | 16,514 | |||||||||||
| Operating income (loss) | 120,549 | 137,518 | 153,811 | 139,603 | |||||||||||
| Net income (loss) | 103,868 | 112,582 | 125,791 | 111,248 | |||||||||||
| Net income (loss) attributable to Western Gas Equity Partners, LP | 63,234 | 70,090 | 79,960 | 74,737 | |||||||||||
Net income (loss) per common unit – basic and diluted (2) | 0.23 | 0.25 | 0.27 | 0.26 | |||||||||||
(1) | Includes impairments at the Red Desert complex in the first and fourth quarters of 2015 and at the Hilight system in the fourth quarter of 2015. See Note 7—Property, Plant and Equipment. |
(2) | Represents net income (loss) earned on and subsequent to the acquisition of the WES assets (as defined in Note 1—Summary of Significant Accounting Policies). |
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