WESTERN MIDSTREAM PARTNERS, LP The following discussion analyzes our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements, wherein WES Operating is fully consolidated, and which are included under Part I, Item 1 of this quarterly report, and the historical consolidated financial statements, and the notes thereto, which are included under Part II, Item 8 of the 2021 Form 10-K as filed with theSEC onFebruary 23, 2022 . The Partnership's assets include assets owned and ownership interests accounted for by us under the equity method of accounting, through our 98.0% partnership interest in WES Operating, as ofJune 30, 2022 (see Note 7-Equity Investments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q). We also own and control the entire non-economic general partner interest in WES Operating GP, and our general partner is owned by Occidental. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS We have made in this Form 10-Q, and may make in other public filings, press releases, and statements by management, forward-looking statements concerning our operations, economic performance, and financial condition. These forward-looking statements include statements preceded by, followed by, or that otherwise include the words "believes," "expects," "anticipates," "intends," "estimates," "projects," "target," "goal," "plans," "objective," "should," or similar expressions or variations on such expressions. These statements discuss future expectations, contain projections of results of operations or financial condition, or include other "forward-looking" information. Although we and our general partner believe that the expectations reflected in our forward-looking statements are reasonable, neither we nor our general partner can provide any assurance that such expectations will prove correct. These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from expectations include, but are not limited to, the following:
•our ability to pay distributions to our unitholders;
•our assumptions about the energy market;
•future throughput (including Occidental production) that is gathered or processed by, or transported through, our assets;
•our operating results; •competitive conditions; •technology;
•the availability of capital resources to fund acquisitions, capital expenditures, and other contractual obligations, and our ability to access financing through the debt or equity capital markets;
•the supply of, demand for, and price of oil, natural gas, NGLs, and related products or services;
•commodity-price risks inherent in percent-of-proceeds, percent-of-product, keep-whole, and fixed-recovery processing contracts;
•weather and natural disasters;
•inflation;
•the availability of goods and services;
•general economic conditions, internationally, domestically, or in the jurisdictions in which we are doing business;
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•federal, state, and local laws and state-approved voter ballot initiatives, including those laws or ballot initiatives that limit producers' hydraulic-fracturing activities or other oil and natural-gas development or operations;
•environmental liabilities;
•legislative or regulatory changes, including changes affecting our status as a partnership for federal income tax purposes;
•changes in the financial or operational condition of Occidental;
•the creditworthiness of Occidental or our other counterparties, including financial institutions, operating partners, and other parties;
•changes in Occidental's capital program, corporate strategy, or other desired areas of focus;
•our commitments to capital projects;
•our ability to access liquidity under the RCF;
•our ability to repay debt;
•the resolution of litigation or other disputes;
•conflicts of interest among us and our general partner and its related parties, including Occidental, with respect to, among other things, the allocation of capital and operational and administrative costs and our future business opportunities;
•our ability to maintain and/or obtain rights to operate our assets on land owned by third parties;
•our ability to acquire assets on acceptable terms from third parties;
•non-payment or non-performance of significant customers, including under gathering, processing, transportation, and disposal agreements;
•the timing, amount, and terms of future issuances of equity and debt securities;
•the outcome of pending and future regulatory, legislative, or other proceedings or investigations, and continued or additional disruptions in operations that may occur as we and our customers comply with any regulatory orders or other state or local changes in laws or regulations;
•the economic uncertainty from the worldwide outbreak of the coronavirus ("COVID-19");
•cyber attacks or security breaches; and
•other factors discussed below, in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates" included in the 2021 Form 10-K, in our quarterly reports on Form 10-Q, and in our other public filings and press releases.
Risk factors and other factors noted throughout or incorporated by reference in this Form 10-Q could cause actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
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EXECUTIVE SUMMARY
We are a midstream energy company organized as a publicly traded partnership,
engaged in the business of gathering, compressing, treating, processing, and
transporting natural gas; gathering, stabilizing, and transporting condensate,
NGLs, and crude oil; and gathering and disposing of produced water. In our
capacity as a natural-gas processor, we also buy and sell natural gas, NGLs, and
condensate on behalf of ourselves and as an agent for our customers under
certain contracts. To provide superior midstream service, we focus on ensuring
the reliability and performance of our systems, creating sustainable cost
efficiencies, enhancing our safety culture, and protecting the environment. We
own or have investments in assets located in Texas , New Mexico , the Rocky
Mountains (Colorado , Utah , and Wyoming ), and North-central Pennsylvania . As of
June 30, 2022 , our assets and investments consisted of the following:
Wholly
Owned and Operated Non-Operated Equity
Operated Interests Interests Interests
Gathering systems (1) 17 2 3 1
Treating facilities 37 3 - -
Natural-gas processing plants/trains 24 3 - 5
NGLs pipelines 2 - - 5
Natural-gas pipelines 5 - - 1
Crude-oil pipelines 3 1 - 4
_________________________________________________________________________________________
(1)Includes the DBM water systems.
Significant financial and operational events during the six months ended
•WES Operating redeemed the
•We repurchased 3,314,562 common units on the open market for an aggregate
purchase price of
•Our second-quarter 2022 per-unit distribution is unchanged from the
first-quarter 2022 per-unit distribution of
•Natural-gas throughput attributable to WES totaled 4,270 MMcf/d and 4,165 MMcf/d for the three and six months endedJune 30, 2022 , respectively, representing a 5% increase compared to the three months endedMarch 31, 2022 , and no change compared to the six months endedJune 30, 2021 , respectively. •Crude-oil and NGLs throughput attributable to WES totaled 666 MBbls/d and 670 MBbls/d for the three and six months endedJune 30, 2022 , respectively, representing a 1% decrease and a 4% increase compared to the three months endedMarch 31, 2022 , and six months endedJune 30, 2021 , respectively.
•Produced-water throughput attributable to WES totaled 864 MBbls/d and 808
MBbls/d for the three and six months ended
•Gross margin was$588.8 million and$1,139.7 million for the three and six months endedJune 30, 2022 , respectively, representing a 7% increase and a 19% increase compared to the three months endedMarch 31, 2022 , and six months endedJune 30, 2021 , respectively. See Key Performance Metrics within this Item 2. 35
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•Adjusted gross margin for natural-gas assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$1.36 per Mcf and$1.35 per Mcf for the three and six months endedJune 30, 2022 , respectively, representing a 1% increase and a 13% increase compared to the three months endedMarch 31, 2022 , and six months endedJune 30, 2021 , respectively. •Adjusted gross margin for crude-oil and NGLs assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$2.57 per Bbl and$2.50 per Bbl for the three and six months endedJune 30, 2022 , respectively, representing a 5% increase and a 3% increase compared to the three months endedMarch 31, 2022 , and six months endedJune 30, 2021 , respectively. •Adjusted gross margin for produced-water assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$0.90 per Bbl and$0.95 per Bbl for the three and six months endedJune 30, 2022 , respectively, representing a 10% decrease and a 3% increase compared to the three months endedMarch 31, 2022 , and six months endedJune 30, 2021 , respectively. The following table provides additional information on throughput for the periods presented below: Three Months Ended Six Months Ended March 31, Inc/ Inc/ June 30, 2022 2022 (Dec) June 30, 2022 June 30, 2021 (Dec) Throughput for natural-gas assets (MMcf/d) Delaware Basin 1,493 1,326 13 % 1,410 1,189 19 % DJ Basin 1,336 1,321 1 % 1,329 1,379 (4) % Equity investments 516 479 8 % 498 448 11 % Other 1,082 1,084 - % 1,082 1,296 (17) % Total throughput for natural-gas assets 4,427 4,210 5 % 4,319 4,312 - % Throughput for crude-oil and NGLs assets (MBbls/d) Delaware Basin 198 192 3 % 195 173 13 % DJ Basin 83 88 (6) % 85 90 (6) % Equity investments 360 374 (4) % 367 361 2 % Other 39 35 11 % 37 34 9 % Total throughput for crude-oil and NGLs assets 680 689 (1) % 684 658 4 % Throughput for produced-water assets (MBbls/d) Delaware Basin 882 766 15 % 824 655 26 % Total throughput for produced-water assets 882 766 15 % 824 655 26 % 36
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OUTLOOK
We expect our business to continue to be affected by the below-described key
trends and uncertainties. Our expectations are based on assumptions made by us
and information currently available to us. To the extent our underlying
assumptions about, or interpretations of, available information prove incorrect,
our actual results may vary materially from expected results.
Impact of crude-oil, natural-gas, and NGLs prices. Crude-oil, natural-gas, and
NGLs prices can fluctuate significantly, and have done so over time.
Commodity-price fluctuations affect the level of our customers' activities and
our customers' allocations of capital within their own asset portfolios. During
2020, oil and natural-gas prices were negatively impacted by the worldwide
macroeconomic downturn that followed the global outbreak of COVID-19. In 2021,
prices began to increase and in the first quarter of 2022, commodity prices
increased significantly in connection with the war in Ukraine . For example,
NYMEX West Texas Intermediate crude-oil daily settlement prices during 2021
ranged from a low of $47.62 per barrel in January 2021 to a high of $84.65 per
barrel in October 2021 , and prices during the six months ended June 30, 2022 ,
ranged from a low of $76.08 per barrel in January 2022 to a high of $123.70 per
barrel in March 2022 . The extent and duration of the recent commodity-price
volatility cannot be predicted.
To the extent producers continue with development plans in our areas of
operation, we intend to continue to connect new wells or production facilities
to our systems to maintain or increase throughput on our systems and mitigate
the impact of production declines. However, our success in connecting additional
wells or production facilities is dependent on the activity levels of our
customers, any capacity constraints, and the availability of downstream-takeaway
alternatives. In some cases, we take ownership of volumes at the tailgate of our
plants based on certain contractual arrangements with our producer customers,
which introduces additional commodity-price exposure. Additionally, we intend to
continue to evaluate the crude-oil, NGLs, and natural-gas price environments and
adjust our capital spending plans to reflect our customers' anticipated activity
levels, while maintaining appropriate liquidity and financial flexibility.
Impact of inflation and supply-chain disruptions. Although inflation in the
United States has been relatively low in recent years, the U.S. economy
currently is experiencing significant inflation relative to historical
precedent, from, among other things, supply-chain disruptions caused by, or
governmental stimulus or fiscal policies adopted in response to, the COVID-19
crisis and in connection with the war in Ukraine . More specifically, the
bottlenecks and disruptions from the lingering effects of the COVID-19 crisis
have caused difficulties within the U.S. and global supply chains, creating
logistical delays along with labor shortages. Continued increases in inflation
will raise our costs for labor, materials, fuel, and services, which will
increase our operating costs and capital expenditures materially and negatively
impact our financial results. To the extent permitted by regulations and
escalation provisions in certain of our existing agreements, we have the ability
to recover a portion of increased costs in the form of higher fees.
Impact of interest rates. Overall, short- and long-term interest rates increased
during 2021 and have continued to increase during 2022. Any future increases in
interest rates likely will result in an increase in financing costs.
Additionally, as with other yield-oriented securities, our unit price could be
impacted by our implied distribution yield relative to market interest rates.
Therefore, changes in interest rates, either positive or negative, may affect
the yield requirements of investors who invest in our units, and a rising
interest-rate environment could have an adverse impact on our unit price and our
ability to issue additional equity, or increase the cost of issuing equity, to
make acquisitions, to reduce debt, or for other purposes. However, we expect our
cost of capital to remain competitive, as our competitors face similar
interest-rate dynamics.
ACQUISITIONS AND DIVESTITURES
Bison facility. In October 2020 , we entered into an option agreement to sell the
Bison treating facility, located in Northeast Wyoming , to a third party. During
the second quarter of 2021, the third party exercised its option to purchase the
Bison treating facility and the sale closed. See Note 3-Acquisitions and
Divestitures in the Notes to Consolidated Financial Statements under Part I,
Item 1 of this Form 10-Q for further information.
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RESULTS OF OPERATIONS
OPERATING RESULTS
The following tables and discussion present a summary of our results of
operations:
Three Months Ended Six Months Ended
March 31,
thousands June 30, 2022 2022 June 30, 2022 June 30, 2021
Total revenues and other (1) $ 876,419 $
758,297
48,464 49,607 98,071 110,831
Total operating expenses (1) 526,345 403,450 929,795 878,294
Gain (loss) on divestiture and other, net (1,150) 370 (780) 642
Operating income (loss) 397,388 404,824 802,212 627,284
Interest expense (80,772) (85,455) (166,227) (193,783)
Gain (loss) on early extinguishment of
debt 91 - 91 (289)
Other income (expense), net (45) 106 61 (1,123)
Income (loss) before income taxes 316,662 319,475 636,137 432,089
Income tax expense (benefit) 1,491 1,805 3,296 2,577
Net income (loss) 315,171 317,670 632,841 429,512
Net income (loss) attributable to
noncontrolling interests 8,854 8,953 17,807 12,462
Net income (loss) attributable to Western
Midstream Partners, LP (2) $ 306,317 $
308,717
_________________________________________________________________________________________
(1)Total revenues and other includes amounts earned from services provided to related parties and from the sale of natural gas, condensate, and NGLs to related parties. Total operating expenses includes amounts charged by related parties for services received. See Note 6-Related-Party Transactions in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. (2)For reconciliations to comparable consolidated results of WES Operating, see Items Affecting the Comparability of Financial Results with WES Operating within this Item 2. For purposes of the following discussion, any increases or decreases "for the three months endedJune 30, 2022 " refer to the comparison of the three months endedJune 30, 2022 , to the three months endedMarch 31, 2022 ; and any increases or decreases "for the six months endedJune 30, 2022 " refer to the comparison of the six months endedJune 30, 2022 , to the six months endedJune 30, 2021 . 38
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Throughput
Three Months Ended Six Months Ended
March 31, Inc/ Inc/
June 30, 2022 2022 (Dec) June 30, 2022 June 30, 2021 (Dec)
Throughput for natural-gas assets (MMcf/d)
Gathering, treating, and
transportation 410 406 1 % 408 527 (23) %
Processing 3,501 3,325 5 % 3,413 3,337 2 %
Equity investments (1) 516 479 8 % 498 448 11 %
Total throughput 4,427 4,210 5 % 4,319 4,312 - %
Throughput attributable to
noncontrolling interests (2) 157 152 3 % 154 155 (1) %
Total throughput attributable to WES
for natural-gas assets 4,270 4,058 5 % 4,165 4,157 - %
Throughput for crude-oil and NGLs assets (MBbls/d)
Gathering, treating, and
transportation 320 315 2 % 317 297 7 %
Equity investments (3) 360 374 (4) % 367 361 2 %
Total throughput 680 689 (1) % 684 658 4 %
Throughput attributable to
noncontrolling interests (2) 14 14 - % 14 13 8 %
Total throughput attributable to WES
for crude-oil and NGLs assets 666 675 (1) % 670 645 4 %
Throughput for produced-water assets (MBbls/d)
Gathering and disposal 882 766 15 % 824 655 26 %
Throughput attributable to
noncontrolling interests (2) 18 15 20 % 16 13 23 %
Total throughput attributable to WES
for produced-water assets 864 751 15 % 808 642 26 %
_________________________________________________________________________________________
(1)Represents the 22% share of average Rendezvous throughput, 50% share of
average
(2)For all periods presented, includes (i) the 2.0% Occidental subsidiary-owned limited partner interest in WES Operating and (ii) for natural-gas assets, the 25% third-party interest in Chipeta, which collectively represent WES's noncontrolling interests. (3)Represents the 10% share of average White Cliffs throughput; 25% share of average Mont Belvieu JV throughput; 20% share of average TEG, TEP, Whitethorn, and Saddlehorn throughput; 33.33% share of average FRP throughput; and 15% share of averagePanola and Cactus II throughput.
Natural-gas assets
Gathering, treating, and transportation throughput decreased by 119 MMcf/d for the six months endedJune 30, 2022 , primarily due to (i) decreased volumes at the Bison treating facility, which was sold to a third party during the second quarter of 2021, and (ii) production declines in areas around the Marcellus Interest andSpringfield gas-gathering systems. Processing throughput increased by 176 MMcf/d for the three months endedJune 30, 2022 , primarily due to (i) higher volumes at theWest Texas complex due to increased production in the area and the impacts of inclement weather in the first quarter of 2022 and (ii) higher volumes at theDJ Basin complex due to a third-party contract amendment effective inMarch 2022 . Processing throughput increased by 76 MMcf/d for the six months endedJune 30, 2022 , primarily due to higher volumes at theWest Texas complex due to increased production in the area and the impact of winter storm Uri during the first quarter of 2021. This increase was offset partially by lower volumes at theDJ Basin , Granger, and Brasada complexes due to production declines in the areas. 39
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Equity-investment throughput increased by 37 MMcf/d for the three months endedJune 30, 2022 , primarily due to increased volumes on Red Bluff Express, partially offset by decreased volumes at the Ranch Westex plant. Equity-investment throughput increased by 50 MMcf/d for the six months endedJune 30, 2022 , primarily due to increased volumes on Red Bluff Express and at the Mi Vida plant resulting from the impact of winter storm Uri during the first quarter of 2021. These increases were offset partially by (i) decreased volumes at the Ranch Westex plant and (ii) decreased volumes at the Rendezvous system due to production declines in the area.
Crude-oil and NGLs assets
Gathering, treating, and transportation throughput increased by 20 MBbls/d for the six months endedJune 30, 2022 , primarily due to higher volumes at the DBM oil system resulting from increased production in the area and the impact of winter storm Uri during the first quarter of 2021. Equity-investment throughput decreased by 14 MBbls/d for the three months endedJune 30, 2022 , primarily due to decreased volumes on the Whitethorn and Cactus II pipelines, partially offset by increased volumes on FRP. Equity-investment throughput increased by 6 MBbls/d for the six months endedJune 30, 2022 , primarily due to increased volumes on FRP resulting from increased pipeline commitments, partially offset by decreased volumes on the Whitethorn pipeline. Produced-water assets Gathering and disposal throughput increased by 116 MBbls/d for the three months endedJune 30, 2022 , due to (i) new third-party connections brought online at the end of the first quarter and during the second quarter of 2022, (ii) higher production, and (iii) the impacts of inclement weather in the first quarter of 2022. Gathering and disposal throughput increased by 169 MBbls/d for the six months endedJune 30, 2022 , due to (i) higher production, (ii) new third-party connections brought online during the fourth quarter of 2021 and in 2022, and (iii) the impact of winter storm Uri during the first quarter of 2021. 40
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Service Revenues
Three Months Ended Six Months Ended
March 31, Inc/ Inc/
thousands except percentages June 30, 2022 2022 (Dec) June 30, 2022 June 30, 2021 (Dec)
Service revenues - fee based$ 655,952 $ 631,598 4 %$ 1,287,550 $ 1,191,260 8 % Service revenues - product based 70,498 40,867 73 % 111,365 59,455 87 % Total service revenues$ 726,450 $ 672,465 8 %$ 1,398,915 $ 1,250,715 12 % Service revenues - fee based Service revenues - fee based increased by$24.4 million for the three months endedJune 30, 2022 , primarily due to increases of (i)$19.7 million and$3.2 million at theWest Texas complex and DBM oil system, respectively, attributable to increased throughput and (ii)$3.0 million at the DBM water systems due to increased throughput, partially offset by a decrease in deficiency fees. Service revenues - fee based increased by$96.3 million for the six months endedJune 30, 2022 , primarily due to increases of (i)$46.9 million at theWest Texas complex due to increased throughput, including the impact of winter storm Uri during the first quarter of 2021, partially offset by a lower average fee resulting from a cost-of-service rate redetermination effectiveJanuary 1, 2022 , and (ii)$30.4 million and$29.8 million at the DBM oil and DBM water systems, respectively, due to increased throughput, including the impact of winter storm Uri during the first quarter of 2021, and increased deficiency fees. These increases were offset partially by a decrease of$11.1 million at theDJ Basin complex due to decreased throughput, partially offset by increased deficiency fees.
Service revenues - product based
Service revenues - product based increased by$29.6 million for the three months endedJune 30, 2022 , primarily due to increases of (i)$19.1 million at theWest Texas complex due to increased prices, change in contract mix, and increased electricity-related rates billed to customers, and (ii)$10.2 million at theDJ Basin complex due to change in contract mix. Service revenues - product based increased by$51.9 million for the six months endedJune 30, 2022 , primarily due to increases of (i)$21.2 million and$19.4 million at theWest Texas andDJ Basin complexes, respectively, attributable to increased prices and changes in contract mix during the second quarter of 2022, and (ii)$3.4 million at the Chipeta complex,$2.8 million at the DBM water systems,$2.6 million at the MGR assets, and$2.3 million at the Granger complex due to increased prices. 41
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Product Sales
Three Months Ended Six Months Ended
thousands except percentages March 31, Inc/ Inc/
and per-unit amounts June 30, 2022 2022 (Dec) June 30, 2022 June 30, 2021 (Dec)
Natural-gas sales $ 47,292 $ 19,071 148 % $ 66,363 $ 35,614 86 %
NGLs sales 102,444 66,518 54 % 168,962 107,447 57 %
Total Product sales $ 149,736 $ 85,589 75 % $ 235,325 $ 143,061 64 %
Per-unit gross average sales
price:
Natural gas (per Mcf) $ 7.02 $ 4.38 60 % $ 5.76 $ 4.26 35 %
NGLs (per Bbl) 46.57 46.48 - % 46.53 27.73 68 %
Natural-gas sales
Natural-gas sales increased by $28.2 million for the three months ended June 30,
2022 , primarily due to increases of $25.8 million and $4.1 million at the West
Texas complex and MGR assets, respectively, attributable to increased average
prices and volumes sold.
Natural-gas sales increased by $30.7 million for the six months ended June 30,
2022 , primarily due to an increase of $36.6 million at the West Texas complex
attributable to increased average prices and volumes sold. This increase was
partially offset by a decrease of $6.5 million at the DJ Basin complex due to
decreased volumes sold, partially offset by an increase in average prices.
NGLs sales
NGLs sales increased by$35.9 million for the three months endedJune 30, 2022 , primarily due to an increase of$40.7 million at theWest Texas complex due to increased average prices and volumes sold. NGLs sales increased by$61.5 million for the six months endedJune 30, 2022 , primarily due to increases of (i)$31.7 million at theWest Texas complex,$13.3 million at the Chipeta complex,$2.8 million at the DBM water systems, and$2.8 million at the MGR assets attributable to increased average prices and volumes sold, and (ii)$4.4 million and$3.2 million at the Granger andDJ Basin complexes, respectively, due to an increase in average prices, partially offset by a decrease in volumes sold.
Equity Income, Net - Related Parties
Three Months Ended Six Months Ended
March 31, Inc/ Inc/
thousands except percentages June 30, 2022 2022 (Dec) June 30, 2022 June 30, 2021 (Dec)
Equity income, net - related parties$ 48,464 $ 49,607 (2) %$ 98,071 $ 110,831 (12) % Equity income, net - related parties decreased by$12.8 million for the six months endedJune 30, 2022 , primarily due to (i) decreases of$6.7 million and$6.0 million at Saddlehorn and Cactus II, respectively, and (ii)$4.5 million atWhitethorn LLC due to decreases in revenues and volumes. These decreases were offset partially by an increase of$8.7 million at Mi Vida, FRP, and TEP due to higher volumes. 42
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Cost of Product and Operation and Maintenance Expenses
Three Months Ended Six Months Ended
March 31, Inc/ Inc/
thousands except percentages June 30, 2022 2022 (Dec) June 30, 2022 June 30, 2021 (Dec)
Residue purchases $ 65,168 $ 34,992 86 % $ 100,160 $ 77,682 29 %
NGLs purchases 102,650 70,404 46 % 173,054 73,219 136 %
Other (19,262) (32,548) (41) % (51,810) 16,112 NM
Cost of product 148,556 72,848 104 % 221,404 167,013 33 %
Operation and maintenance 168,153 128,976 30 % 297,129 293,360 1 %
Total Cost of product and
Operation and maintenance
expenses $ 316,709 $ 201,824 57 % $ 518,533 $ 460,373 13 %
_________________________________________________________________________________________
NM-Not meaningful
Residue purchases
Residue purchases increased by$30.2 million for the three months endedJune 30, 2022 , primarily due to increases of (i)$25.6 million at theWest Texas complex attributable to increased volumes purchased and average prices, as well as a change in contract mix, and (ii)$2.6 million at the MGR assets attributable to increased volumes purchased and average prices. Residue purchases increased by$22.5 million for the six months endedJune 30, 2022 , primarily due to increases of (i)$17.1 million at theWest Texas complex attributable to increased volumes purchased and average prices, as well as a change in contract mix during the second quarter of 2022, and (ii)$5.8 million at theDJ Basin complex attributable to increased volumes purchased and average prices. NGLs purchases NGLs purchases increased by$32.2 million for the three months endedJune 30, 2022 , primarily due to increases of (i)$23.1 million at theWest Texas complex attributable to increased volumes purchased and average prices, as well as a change in contract mix, and (ii)$10.1 million at theDJ Basin complex due to a change in contract mix. NGLs purchases increased by$99.8 million for the six months endedJune 30, 2022 , primarily due to increases of (i)$52.9 million at theWest Texas complex attributable to increased volumes purchased and average prices, as well as a change in contract mix during the second quarter of 2022, and (ii)$34.3 million at theDJ Basin complex attributable to increased average prices and a change in contract mix during the second quarter of 2022, and (iii)$5.7 million at the Chipeta complex attributable to increased average prices.
Other items
Other items increased by$13.3 million for the three months endedJune 30, 2022 , primarily due to an increase of$20.8 million at theWest Texas complex attributable to changes in imbalance positions, partially offset by a decrease of$7.9 million at theDJ Basin complex attributable to changes in imbalance positions. Other items decreased by$67.9 million for the six months endedJune 30, 2022 , primarily due to decreases of$40.8 million and$31.6 million at theWest Texas andDJ Basin complexes, respectively, attributable to changes in imbalance positions. The decreases were offset partially by an increase of$3.8 million at the MGR assets attributable to changes in imbalance positions.
Operation and maintenance expense
Operation and maintenance expense increased by
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Operation and maintenance expense increased by$3.8 million for the six months endedJune 30, 2022 , primarily due to increases of (i)$8.0 million due to an increase in chemicals and treating services, (ii)$6.1 million attributable to land related costs, and (iii)$4.1 million due to higher maintenance and repair expense. These increases were offset partially by decreases of (i)$9.1 million attributable to lower contract labor and consulting expense, (ii)$7.6 million attributable to lower utilities expense, and (iii)$5.0 million attributable to lower field area costs. Other Operating Expenses Three Months Ended Six Months Ended March 31, Inc/ Inc/ thousands except percentages June 30, 2022 2022 (Dec) June 30, 2022 June 30, 2021 (Dec) General and administrative$ 47,848 $ 48,602 (2) %$ 96,450 $ 89,564 8 % Property and other taxes 22,662 18,442 23 % 41,104 32,351 27 % Depreciation and amortization 139,036 134,582 3 % 273,618 268,402 2 % Long-lived asset and other impairments 90 - 100 % 90 27,604 (100) %
Total other operating expenses
4 %$ 411,262 $ 417,921 (2) %
General and administrative expenses
General and administrative expenses increased by$6.9 million for the six months endedJune 30, 2022 , primarily due to an increase of$7.9 million in personnel costs, including increased bonus-related expenses and other miscellaneous employee expenses.
Property and other taxes
Property and other taxes increased by$4.2 million for the three months endedJune 30, 2022 , primarily due to expected valuation increases at theDJ Basin complex. Property and other taxes increased by$8.8 million for the six months endedJune 30, 2022 , primarily due to ad valorem tax increases and expected valuation increases at theDJ Basin complex.
Depreciation and amortization expense
Depreciation and amortization expense increased by$4.5 million for the three months endedJune 30, 2022 , primarily due to increases of$2.3 million and$1.9 million at the Hilight system and MGR assets. Depreciation and amortization expense increased by$5.2 million for the six months endedJune 30, 2022 , primarily due to (i) an increase of$3.3 million at a transportation asset inSouthwest Wyoming primarily as a result of a change in estimate for asset retirement obligations and (ii) an increase of$2.3 million resulting from capital projects being placed into service. These increases were offset partially by a net decrease in depreciation of$2.2 million at the Hilight system and MGR assets.
Long-lived asset and other impairment expense
Long-lived asset and other impairment expense for the six months endedJune 30, 2021 , was primarily due to (i) an$11.6 million other-than-temporary impairment of our investment in Ranch Westex and (ii)$14.0 million of impairments at theDJ Basin complex due to cancellation of projects. For further information on Long-lived asset and other impairment expense, see Note 8-Property, Plant, and Equipment in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. 44
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Interest Expense
Three Months Ended Six Months Ended
March 31, Inc/ Inc/
thousands except percentages June 30, 2022 2022 (Dec) June 30, 2022 June 30, 2021 (Dec)
Long-term and short-term debt
(6) %$ (162,005) $ (188,209) (14) % Finance lease liabilities (31) (42) (26) % (73) (590) (88) % Commitment fees and amortization of debt-related costs (3,068) (3,032) 1 % (6,100) (6,517) (6) % Capitalized interest 904 1,047 (14) % 1,951 1,533 27 % Interest expense$ (80,772) $ (85,455)
(5) %$ (166,227) $ (193,783) (14) % Interest expense Interest expense decreased by$4.7 million for the three months endedJune 30, 2022 , primarily due to the redemption of the total principal amount outstanding of the 4.000% Senior Notes due 2022 during the second quarter of 2022. Interest expense decreased by$27.6 million for the six months endedJune 30, 2022 , primarily due to decreases of (i)$10.7 million primarily due to the redemption of the total principal amount outstanding of the 4.000% Senior Notes due 2022 and 5.375% Senior Notes due 2021 during the second quarter of 2022 and first quarter of 2021, respectively, (ii)$8.1 million due to credit-rating related interest rate changes and a lower outstanding balance on the 3.100% Senior Notes due 2025, (iii)$6.4 million due to credit-rating related interest rate changes on the 4.050% Senior Notes due 2030 and 5.250% Senior Notes due 2050, and (iv)$2.1 million due to a lower outstanding balance on the 3.950% Senior Notes due 2025, a portion of which was repaid during the third quarter of 2021. See Liquidity and Capital Resources-Debt and credit facilities within this Item 2. Income Tax Expense (Benefit) Three Months Ended Six Months Ended March 31, Inc/ Inc/ thousands except percentages June 30, 2022 2022 (Dec) June 30, 2022 June 30, 2021 (Dec) Income (loss) before income taxes$ 316,662 $ 319,475 (1) % $ 636,137 $ 432,089 47 % Income tax expense (benefit) 1,491 1,805 (17) % 3,296 2,577 28 % Effective tax rate - % 1 % 1 % 1 % We are not a taxable entity forU.S. federal income tax purposes; therefore, our federal statutory rate is zero percent. However, income apportionable toTexas is subject toTexas margin tax. For all periods presented, the variance from the federal statutory rate was primarily due to ourTexas margin tax liability. 45
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KEY PERFORMANCE METRICS
Three Months Ended Six Months Ended
thousands except percentages and March 31, Inc/ Inc/
per-unit amounts June 30, 2022 2022 (Dec) June 30, 2022 June 30, 2021 (Dec)
Adjusted gross margin for
natural-gas assets $ 528,983 $ 488,909 8 % $ 1,017,892 $ 901,798 13 %
Adjusted gross margin for
crude-oil and NGLs assets 155,686 148,247 5 % 303,933 283,462 7 %
Adjusted gross margin for
produced-water assets 71,002 67,594 5 % 138,596 106,600 30 %
Adjusted gross margin 755,671 704,750 7 % 1,460,421 1,291,860 13 %
Per-Mcf Adjusted gross margin
for natural-gas assets (1) 1.36 1.34 1 % 1.35 1.20 13 %
Per-Bbl Adjusted gross margin
for crude-oil and NGLs assets
(2) 2.57 2.44 5 % 2.50 2.43 3 %
Per-Bbl Adjusted gross margin
for produced-water assets (3) 0.90 1.00 (10) % 0.95 0.92 3 %
Adjusted EBITDA 548,318 539,050 2 % 1,087,368 934,236 16 %
Free cash flow 372,107 200,342 86 % 572,449 591,598 (3) %
_________________________________________________________________________________________
(1)Average for period. Calculated as Adjusted gross margin for natural-gas assets, divided by total throughput (MMcf/d) attributable to WES for natural-gas assets.
(2)Average for period. Calculated as Adjusted gross margin for crude-oil and NGLs assets, divided by total throughput (MBbls/d) attributable to WES for crude-oil and NGLs assets.
(3)Average for period. Calculated as Adjusted gross margin for produced-water assets, divided by total throughput (MBbls/d) attributable to WES for produced-water assets.
Adjusted gross margin. We define Adjusted gross margin attributable toWestern Midstream Partners, LP ("Adjusted gross margin") as total revenues and other (less reimbursements for electricity-related expenses recorded as revenue), less cost of product, plus distributions from equity investments, and excluding the noncontrolling interest owners' proportionate share of revenues and cost of product. We believe Adjusted gross margin is an important performance measure of our operations' profitability and performance as compared to other companies in the midstream industry. Cost of product expenses include (i) costs associated with the purchase of natural gas and NGLs pursuant to our percent-of-proceeds, percent-of-product, and keep-whole contracts, (ii) costs associated with the valuation of gas and NGLs imbalances, and (iii) costs associated with our obligations under certain contracts to redeliver a volume of natural gas to shippers, which is thermally equivalent to condensate retained by us and sold to third parties. The electricity-related expenses included in our Adjusted gross margin definition relate to pass-through expenses that are reimbursed by certain customers (recorded as revenue with an offset recorded as Operation and maintenance expense). To facilitate investor and industry analyst comparisons between us and our peers, we also disclose per-Mcf Adjusted gross margin for natural-gas assets, per-Bbl Adjusted gross margin for crude-oil and NGLs assets, and per-Bbl Adjusted gross margin for produced-water assets. Adjusted gross margin increased by$50.9 million for the three months endedJune 30, 2022 , primarily due to (i) strong plant performance and contract mix leading to increased product recoveries, coupled with high commodity prices and increased throughput at theWest Texas complex, (ii) increased throughput at theDJ Basin complex and DBM oil system, (iii) increased distributions from equity investments, and (iv) increased throughput, partially offset by a decrease in deficiency fees, at the DBM water systems. Adjusted gross margin increased by$168.6 million for the six months endedJune 30, 2022 , primarily due to (i) strong plant performance and contract mix leading to increased product recoveries, coupled with higher commodity prices and increased throughput at theWest Texas complex, partially offset by a lower average fee resulting from a cost-of-service rate redetermination effectiveJanuary 1, 2022 , and (ii) increased throughput and deficiency fees at the DBM water systems and DBM oil system. These increases were offset partially by a decrease in distributions fromWhitethorn LLC . 46
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Per-Mcf Adjusted gross margin for natural-gas assets increased by$0.02 for the three months endedJune 30, 2022 , primarily due to strong plant performance and contract mix leading to increased product recoveries, coupled with high commodity prices and increased throughput at theWest Texas complex, which has a higher-than-average per-Mcf margin as compared to our other natural-gas assets. Per-Mcf Adjusted gross margin for natural-gas assets increased by$0.15 for the six months endedJune 30, 2022 , primarily due to strong plant performance and contract mix leading to increased product recoveries, coupled with higher commodity prices and increased throughput at theWest Texas complex, which has a higher-than-average per-Mcf margin as compared to our other natural-gas assets. Per-Bbl Adjusted gross margin for crude-oil and NGLs assets increased by$0.13 for the three months endedJune 30, 2022 , primarily due to (i) decreased throughput and increased distributions from the Whitethorn and Cactus II pipelines and (ii) increased throughput at the DBM oil system, which has a higher-than-average per-Bbl margin as compared to our other crude-oil and NGLs assets. These increases were offset partially by (i) increased throughput on FRP, which has a lower-than-average per-Bbl margin as compared to our other crude-oil and NGLs assets and (ii) a decrease in distributions fromMont Belvieu JV. Per-Bbl Adjusted gross margin for crude-oil and NGLs assets increased by$0.07 for the six months endedJune 30, 2022 , primarily due to increased throughput and increased deficiency fees at the DBM oil system, which has a higher-than-average per-Bbl margin as compared to our other crude-oil and NGLs assets. This increase was offset partially by (i) increased throughput on FRP, which has a lower-than-average per-Bbl margin as compared to our other crude-oil and NGLs assets and (ii) a decrease in distributions from Saddlehorn. Per-Bbl Adjusted gross margin for produced-water assets decreased by$0.10 for the three months endedJune 30, 2022 , primarily due to a decrease in deficiency fees and contract mix. Per-Bbl Adjusted gross margin for produced-water assets increased by$0.03 for the six months endedJune 30, 2022 , primarily due to deficiency fees recorded in 2022. Adjusted EBITDA. We define Adjusted EBITDA attributable toWestern Midstream Partners, LP ("Adjusted EBITDA") as net income (loss), plus (i) distributions from equity investments, (ii) non-cash equity-based compensation expense, (iii) interest expense, (iv) income tax expense, (v) depreciation and amortization, (vi) impairments, and (vii) other expense (including lower of cost or market inventory adjustments recorded in cost of product), less (i) gain (loss) on divestiture and other, net, (ii) gain (loss) on early extinguishment of debt, (iii) income from equity investments, (iv) interest income, (v) income tax benefit, (vi) other income, and (vii) the noncontrolling interest owners' proportionate share of revenues and expenses. We believe the presentation of Adjusted EBITDA provides information useful to investors in assessing our financial condition and results of operations and that Adjusted EBITDA is a widely accepted financial indicator of a company's ability to incur and service debt, fund capital expenditures, and make distributions. Adjusted EBITDA is a supplemental financial measure that management and external users of our consolidated financial statements, such as industry analysts, investors, commercial banks, and rating agencies, use, among other measures, to assess the following: •our operating performance as compared to other publicly traded partnerships in the midstream industry, without regard to financing methods, capital structure, or historical cost basis;
•the ability of our assets to generate cash flow to make distributions; and
•the viability of acquisitions and capital expenditures and the returns on investment of various investment opportunities.
Adjusted EBITDA increased by$9.3 million for the three months endedJune 30, 2022 , primarily due to a$118.1 million increase in total revenues and other and a$10.2 million increase in distributions from equity investments. These amounts were offset partially by (i) a$75.6 million increase in cost of product (net of lower of cost or market inventory adjustments), (ii) a$39.2 million increase in operation and maintenance expenses, and (iii) a$4.2 million increase in property taxes. Adjusted EBITDA increased by$153.1 million for the six months endedJune 30, 2022 , primarily due to a$240.6 million increase in total revenues and other. This amount was offset partially by (i) a$54.3 million increase in cost of product (net of lower of cost or market inventory adjustments), (ii) a$10.3 million decrease in distributions from equity investments, (iii) an$8.8 million increase in property taxes, and (iv) a$6.0 million increase in general and administrative expenses excluding non-cash equity-based compensation expense. 47
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Free cash flow. We define "Free cash flow" as net cash provided by operating activities less total capital expenditures and contributions to equity investments, plus distributions from equity investments in excess of cumulative earnings. Management considers Free cash flow an appropriate metric for assessing capital discipline, cost efficiency, and balance-sheet strength. Although Free cash flow is the metric used to assess WES's ability to make distributions to unitholders, this measure should not be viewed as indicative of the actual amount of cash that is available for distributions or planned for distributions for a given period. Instead, Free cash flow should be considered indicative of the amount of cash that is available for distributions, debt repayments, and other general partnership purposes. Free cash flow increased by$171.8 million for the three months endedJune 30, 2022 , primarily due to (i) an increase of$190.5 million in net cash provided by operating activities related to working capital fluctuations and timing, and (ii) a$5.6 million increase in distributions from equity investments in excess of cumulative earnings. These amounts were offset partially by an increase of$23.4 million in capital expenditures. Free cash flow decreased by$19.1 million for the six months endedJune 30, 2022 , primarily due to an increase of$51.4 million in capital expenditures, partially offset by (i) an increase of$29.8 million in net cash provided by operating activities and (ii) a$4.0 million increase in distributions from equity investments in excess of cumulative earnings. See Capital Expenditures and Historical Cash Flow within this Item 2 for further information. 48
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Reconciliation of non-GAAP financial measures. Adjusted gross margin, Adjusted
EBITDA, and Free cash flow are not defined in GAAP. The GAAP measure that is
most directly comparable to Adjusted gross margin is gross margin. Net income
(loss) and net cash provided by operating activities are the GAAP measures that
are most directly comparable to Adjusted EBITDA. The GAAP measure that is most
directly comparable to Free cash flow is net cash provided by operating
activities. Our non-GAAP financial measures of Adjusted gross margin, Adjusted
EBITDA, and Free cash flow should not be considered as alternatives to the GAAP
measures of gross margin, net income (loss), net cash provided by operating
activities, or any other measure of financial performance presented in
accordance with GAAP. Adjusted gross margin, Adjusted EBITDA, and Free cash flow
have important limitations as analytical tools because they exclude some, but
not all, items that affect gross margin, net income (loss), and net cash
provided by operating activities. Adjusted gross margin, Adjusted EBITDA, and
Free cash flow should not be considered in isolation or as a substitute for
analysis of our results as reported under GAAP. Our definitions of Adjusted
gross margin, Adjusted EBITDA, and Free cash flow may not be comparable to
similarly titled measures of other companies in our industry, thereby
diminishing their utility as comparative measures.
Management compensates for the limitations of Adjusted gross margin, Adjusted
EBITDA, and Free cash flow as analytical tools by reviewing the comparable GAAP
measures, understanding the differences between Adjusted gross margin, Adjusted
EBITDA, and Free cash flow compared to (as applicable) gross margin, net income
(loss), and net cash provided by operating activities, and incorporating this
knowledge into its decision-making processes. We believe that investors benefit
from having access to the same financial measures that our management considers
in evaluating our operating results.
The following tables present (i) a reconciliation of the GAAP financial measure
of gross margin to the non-GAAP financial measure of Adjusted gross margin, (ii)
a reconciliation of the GAAP financial measures of net income (loss) and net
cash provided by operating activities to the non-GAAP financial measure of
Adjusted EBITDA, and (iii) a reconciliation of the GAAP financial measure of net
cash provided by operating activities to the non-GAAP financial measure of Free
cash flow:
Three Months Ended Six Months Ended
March 31,
thousands June 30, 2022 2022 June 30, 2022 June 30, 2021
Reconciliation of Gross margin to Adjusted gross margin
Total revenues and other $ 876,419 $ 758,297 $ 1,634,716 $ 1,394,105
Less:
Cost of product 148,556 72,848 221,404 167,013
Depreciation and amortization 139,036 134,582 273,618 268,402
Gross margin 588,827 550,867 1,139,694 958,690
Add:
Distributions from equity investments 66,016 55,795 121,811 132,136 Depreciation and amortization 139,036 134,582 273,618 268,402
Less:
Reimbursed electricity-related charges recorded as revenues 19,042 18,404 37,446 34,897 Adjusted gross margin attributable to noncontrolling interests (1) 19,166 18,090 37,256 32,471 Adjusted gross margin$ 755,671
$ 528,983
155,686 148,247 303,933 283,462
Adjusted gross margin for produced-water assets 71,002 67,594 138,596 106,600
_________________________________________________________________________________________
(1)For all periods presented, includes (i) the 25% third-party interest in Chipeta and (ii) the 2.0% Occidental subsidiary-owned limited partner interest in WES Operating, which collectively represent WES's noncontrolling interests.
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Three Months Ended Six Months Ended
March 31,
thousands June 30, 2022 2022 June 30, 2022 June 30, 2021Reconciliation of Net income (loss) to Adjusted EBITDA Net income (loss)
$ 315,171
66,016 55,795 121,811 132,136
Non-cash equity-based compensation expense 7,038 7,743 14,781 13,855
Interest expense 80,772 85,455 166,227 193,783
Income tax expense 1,491 1,805 3,296 2,577
Depreciation and amortization 139,036 134,582 273,618 268,402
Impairments 90 - 90 27,604
Other expense 181 - 181 1,248
Less:
Gain (loss) on divestiture and other, net (1,150) 370 (780) 642
Gain (loss) on early extinguishment of debt 91 - 91 (289)
Equity income, net - related parties 48,464 49,607 98,071 110,831
Other income - 106 106 84
Adjusted EBITDA attributable to
noncontrolling interests (1) 14,072 13,917 27,989 23,613
Adjusted EBITDA $ 548,318
80,772 85,455 166,227 193,783
Accretion and amortization of long-term
obligations, net (1,804) (1,782) (3,586) (4,002)
Current income tax expense (benefit) 703 673 1,376 1,304
Other (income) expense, net 45 (106) (61) 1,123
Distributions from equity investments in
excess of cumulative earnings - related
parties 15,482 9,925 25,407 21,373
Changes in assets and liabilities:
Accounts receivable, net 114,696 165,134 279,830 69,164
Accounts and imbalance payables and accrued
liabilities, net (97,201) 14,292 (82,909) (39,291)
Other items, net (17,284) 2,918 (14,366) 734
Adjusted EBITDA attributable to
noncontrolling interests (1) (14,072) (13,917) (27,989) (23,613)
Adjusted EBITDA $ 548,318
(99,330) (71,617) (170,947) (106,404)
Net cash provided by (used in) financing
activities (518,466) (158,591) (677,057) (746,606)
_________________________________________________________________________________________
(1)For all periods presented, includes (i) the 25% third-party interest in Chipeta and (ii) the 2.0% Occidental subsidiary-owned limited partner interest in WES Operating, which collectively represent WES's noncontrolling interests.
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Three Months Ended Six Months Ended
March 31,
thousands June 30, 2022 2022 June 30, 2022 June 30, 2021
Reconciliation of Net cash provided by operating activities to Free cash flow
Net cash provided by operating activities $ 466,981 $ 276,458 $ 743,439 $ 713,661
Less:
Capital expenditures 107,386 83,971 191,357 139,928
Contributions to equity investments -
related parties 2,970 2,070 5,040 3,508
Add:
Distributions from equity investments in excess of cumulative earnings - related parties 15,482 9,925 25,407 21,373 Free cash flow$ 372,107
(99,330) (71,617) (170,947) (106,404)
Net cash provided by (used in) financing
activities (518,466) (158,591) (677,057) (746,606)
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LIQUIDITY AND CAPITAL RESOURCES
Our primary cash uses include equity and debt service, customary operating
expenses, and capital expenditures. Our sources of liquidity as of June 30,
2022 , included cash and cash equivalents, cash flows generated from operations,
available borrowing capacity under the RCF, and potential issuances of
additional equity or debt securities. We believe that cash flows generated from
these sources will be sufficient to satisfy our short-term working capital
requirements and long-term capital-expenditure and debt-service requirements.
The amount of future distributions to unitholders will depend on our results of
operations, financial condition, capital requirements, and other factors, and
will be determined by the Board on a quarterly basis. We may rely on external
financing sources, including equity and debt issuances, to fund capital
expenditures and future acquisitions. However, we also may use operating cash
flows to fund capital expenditures or acquisitions, which could result in
borrowings under the RCF to fund equity or other short-term working capital
requirements.
Under our partnership agreement, we distribute all of our available cash (beyond
proper reserves as defined in our partnership agreement) within 55 days
following each quarter's end. Our cash flow and resulting ability to make cash
distributions are dependent on our ability to generate cash flow from
operations. Generally, our available cash is our cash on hand at the end of a
quarter after the payment of our expenses and the establishment of cash reserves
and cash on hand resulting from working capital borrowings made after the end of
the quarter. The general partner establishes cash reserves to provide for the
proper conduct of our business, including (i) to fund future capital
expenditures, (ii) to comply with applicable laws, debt instruments, or other
agreements, or (iii) to provide funds for unitholder distributions for any one
or more of the next four quarters. We have made cash distributions to our
unitholders each quarter since our initial public offering in 2012. The Board
declared a cash distribution to unitholders for the second quarter of 2022 of
$0.50000 per unit, or $197.7 million in the aggregate. The cash distribution is
payable on August 12, 2022 , to our unitholders of record at the close of
business on August 1, 2022 .
In February 2022 , we announced a buyback program of up to $1.0 billion of our
common units through December 31, 2024 . The common units may be purchased from
time to time in the open market at prevailing market prices or in privately
negotiated transactions. The timing and amount of purchases under the program
will be determined based on ongoing assessments of capital needs, our financial
performance, the market price of our common units, and other factors, including
organic growth and acquisition opportunities and general market conditions. The
program does not obligate us to purchase any specific dollar amount or number of
units and may be suspended or discontinued at any time. During the six months
ended June 30, 2022 , we repurchased 3,314,562 common units on the open market
for an aggregate purchase price of $79.2 million . From July 1, 2022 , through
July 29, 2022 , we repurchased 13,800,805 common units, which includes 10,000,000
common units repurchased from Occidental, for an aggregate purchase price of
$346.1 million . The units were canceled immediately upon receipt. Inclusive of
the unit repurchases through July 29, 2022 , we had an authorized amount of
$574.6 million remaining under the $1.0 billion Purchase Program.
Management continuously monitors our leverage position and coordinates our
capital expenditures and equity requirements with expected cash inflows and
projected debt-service requirements. We will continue to evaluate funding
alternatives, including additional borrowings and the issuance of debt or equity
securities, to secure funds as needed or to refinance maturing debt balances
with longer-term debt issuances. Our ability to generate cash flows is subject
to a number of factors, some of which are beyond our control. Read Risk Factors
under Part II, Item 1A of this Form 10-Q.
Working capital. Working capital is an indication of liquidity and potential
needs for short-term funding. Working capital requirements are driven by changes
in accounts receivable and accounts payable and other factors such as credit
extended to, and the timing of collections from, our customers, and the level
and timing of our spending for acquisitions, maintenance, and other capital
activities. As of June 30, 2022 , we had a $108.8 million working capital
surplus, which we define as the amount by which current assets exceed current
liabilities. As of June 30, 2022 , there was $1.7 billion available for borrowing
under the RCF. See Note 9-Selected Components of Working Capital and
Note 10-Debt and Interest Expense in the Notes to Consolidated Financial
Statements under Part I, Item 1 of this Form 10-Q.
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Capital expenditures. Our business is capital intensive, requiring significant
investment to maintain and improve existing facilities or to develop new
midstream infrastructure. Capital expenditures include maintenance capital
expenditures, which include those expenditures required to maintain existing
operating capacity and service capability of our assets, and expansion capital
expenditures, which include expenditures to construct new midstream
infrastructure and expenditures incurred to reduce costs, increase revenues, or
increase system throughput or capacity from current levels.
Capital expenditures in the consolidated statements of cash flows reflect
capital expenditures on a cash basis, when payments are made. Capital incurred
is presented on an accrual basis. Acquisitions and capital expenditures as
presented in the consolidated statements of cash flows and capital incurred were
as follows:
Six Months Ended
June 30,
thousands 2022 2021
Capital expenditures (1) $ 191,357 $ 139,928
Capital incurred (1) 207,996 142,758
_________________________________________________________________________________________
(1)For the six months ended
Capital expenditures increased by$51.4 million for the six months endedJune 30, 2022 , primarily due to increases of (i)$63.2 million at theWest Texas complex primarily attributable to facility expansion and pipeline projects and (ii)$8.4 million at the DBM oil system primarily related to an increase in pipeline, well connection, oil treating, and oil pumping projects. These increases were offset partially by decreases of (i)$8.4 million at the DBM water systems primarily due to reduced construction of additional water-disposal facilities and well connection projects and (ii)$4.4 million at theDJ Basin oil system primarily related to a decrease in pipeline projects. Historical cash flow. The following table and discussion present a summary of our net cash flows provided by (used in) operating, investing, and financing activities: Six Months Ended June 30, thousands 2022 2021 Net cash provided by (used in): Operating activities$ 743,439 $ 713,661 Investing activities (170,947) (106,404) Financing activities (677,057) (746,606)
Net increase (decrease) in cash and cash equivalents
Operating activities. Net cash provided by operating activities increased for the six months endedJune 30, 2022 , primarily due to (i) higher cash operating income and (ii) lower interest expense. These increases were partially offset by (i) the impact of changes in assets and liabilities and (ii) lower distributions from equity investments. Refer to Operating Results within this Item 2 for a discussion of our results of operations as compared to the prior periods.
Investing activities. Net cash used in investing activities for the six months
ended
•$191.4 million of capital expenditures, primarily related to construction, expansion, and asset-integrity projects at theWest Texas complex, DBM water systems,DJ Basin complex, and DBM oil system;
•$5.0 million of capital contributions primarily paid to Red Bluff Express; and
•$25.4 million of distributions received from equity investments in excess of cumulative earnings.
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Net cash used in investing activities for the six months ended
•$139.9 million of capital expenditures, primarily related to construction, expansion, and asset-integrity projects at theWest Texas complex, DBM water systems,DJ Basin complex, and DBM oil system;
•$3.5 million of capital contributions primarily paid to Cactus II;
•$21.4 million of distributions received from equity investments in excess of cumulative earnings;
•$8.0 million related to the sale of the Bison treating facility; and
•$7.7 million of decreases to materials and supplies inventory.
Financing activities. Net cash used in financing activities for the six months
ended
•$883.5 million to redeem the total principal amount outstanding of WES Operating's 4.000% Senior Notes due 2022 and repay borrowings under the RCF;
•$340.9 million of distributions paid to WES unitholders;
•$79.2 million of unit repurchases;
•$8.8 million of distributions paid to the noncontrolling interest owner of WES Operating;
•$3.2 million of distributions paid to the noncontrolling interest owner of Chipeta;
•$634.0 million of borrowings under the RCF, which were used for general partnership purposes and to redeem portions of certain of WES Operating's senior notes; and
•$13.0 million of increases in outstanding checks.
Net cash used in financing activities for the six months ended
•$531.1 million to redeem the total principal amount outstanding of WES Operating's 5.375% Senior Notes due 2021 and repay borrowings under the RCF;
•$264.2 million of distributions paid to WES unitholders;
•$29.1 million of decreases in outstanding checks due mostly to ad valorem tax payments made at the end of 2020;
•$16.2 million of unit repurchases;
•$5.3 million of distributions paid to the noncontrolling interest owner of WES Operating;
•$3.6 million of finance lease payments;
•$1.5 million of distributions paid to the noncontrolling interest owner of Chipeta;
•$100.0 million of borrowings under the RCF, which were used for general partnership purposes; and
•$4.5 million of contributions from related parties.
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Debt and credit facilities. As ofJune 30, 2022 , the carrying value of outstanding debt was$6.7 billion . See Note 10-Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. WES Operating Senior Notes. Inmid-January 2020 , WES Operating issued the Fixed-Rate 3.100% Senior Notes due 2025, 4.050% Senior Notes due 2030, and 5.250% Senior Notes due 2050 and the Floating-Rate Senior Notes due 2023. Including the effects of the issuance prices, underwriting discounts, and interest-rate adjustments, the effective interest rates of the Senior Notes due 2025, 2030, and 2050, were 3.790%, 4.671%, and 5.869%, respectively, atJune 30, 2022 . The interest rate on the Floating-Rate Senior Notes was 2.12% atJune 30, 2022 . The effective interest rate of these notes is subject to adjustment from time to time due to a change in credit rating. InJanuary 2022 , Standard and Poor's ("S&P") upgraded WES Operating's long-term debt from "BB+" to "BBB-." As a result of this upgrade, annualized borrowing costs decreased by$7.9 million . During the second quarter of 2022, WES Operating (i) redeemed the total principal amount outstanding of the 4.000% Senior Notes due 2022 at par value and (ii) purchased and retired$1.4 million of the 3.100% Senior Notes due 2025 via open-market repurchases. As ofJune 30, 2022 , the Floating-Rate Senior Notes were classified as long-term debt on the consolidated balance sheet as WES Operating has the ability and intent to refinance these obligations using long-term debt. AtJune 30, 2022 , WES Operating was in compliance with all covenants under the relevant governing indentures. We may, from time to time, seek to retire, rearrange, or amend some or all of our outstanding debt or debt agreements through cash purchases, exchanges, open-market repurchases, privately negotiated transactions, tender offers, or otherwise. Such transactions, if any, will depend on prevailing market conditions, our liquidity position and requirements, contractual restrictions, and other factors. The amounts involved may be material. Revolving credit facility. InJune 2022 , WES Operating entered into an amendment to its$2.0 billion RCF, which is expandable to a maximum of$2.5 billion , to, among other things, (i) extend the maturity date applicable to the loans and commitments of certain lenders totaling$1.6 billion toFebruary 2026 , (ii) provide for the ability of WES Operating to extend the maturity date by one year on up to two additional occasions, (iii) provide that loans under the RCF with a fixed interest rate for a specified period bear interest based on SOFR instead of LIBOR, and (iv) include an additional level of pricing if WES Operating's senior unsecured debt rating is less than or equal to BB/Ba2/BB (S&P / Moody's Investors Service / Fitch Ratings). The non-extending lender's commitments mature inFebruary 2025 and represent$400.0 million out of$2.0 billion of total commitments from all lenders. As ofJune 30, 2022 , there were$255.0 million of outstanding borrowings and$5.2 million of outstanding letters of credit, resulting in$1.7 billion of available borrowing capacity under the RCF. As ofJune 30, 2022 , the interest rate on any outstanding RCF borrowings was 3.12% and the facility-fee rate was 0.25%. AtJune 30, 2022 , WES Operating was in compliance with all covenants under the RCF. The RCF contains certain covenants that limit, among other things, WES Operating's ability, and that of certain of its subsidiaries, to incur additional indebtedness, grant certain liens, merge, consolidate, or allow any material change in the character of its business, enter into certain related-party transactions and use proceeds other than for partnership purposes. The RCF also contains various customary covenants, certain events of default, and a maximum consolidated leverage ratio as of the end of each fiscal quarter (which is defined as the ratio of consolidated indebtedness as of the last day of a fiscal quarter to Consolidated EBITDA for the most-recent four-consecutive fiscal quarters ending on such day) of 5.0 to 1.0, or a consolidated leverage ratio of 5.5 to 1.0 with respect to quarters ending in the 270-day period immediately following certain acquisitions. As a result of certain covenants contained in the RCF, our capacity to borrow under the RCF may be limited. Offload commitments. During the six months endedJune 30, 2022 , we entered into offload agreements with third parties providing firm-processing capacity through 2025. As ofJune 30, 2022 , we have future minimum payments under offload agreements totaling$6.3 million for the remainder of 2022 and a total of$29.3 million in years thereafter. 55
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Credit risk. We bear credit risk through exposure to non-payment or non-performance by our counterparties, including Occidental, financial institutions, customers, and other parties. Generally, non-payment or non-performance results from a customer's inability to satisfy payables to us for services rendered, minimum-volume-commitment deficiency payments owed, or volumes owed pursuant to gas- or NGLs-imbalance agreements. We examine and monitor the creditworthiness of customers and may establish credit limits for customers. We are subject to the risk of non-payment or late payment by producers for gathering, processing, transportation, and disposal fees. Additionally, we continue to evaluate counterparty credit risk and, in certain circumstances, are exercising our rights to request adequate assurance. We expect our exposure to the concentrated risk of non-payment or non-performance to continue for as long as our commercial relationships with Occidental generate a significant portion of our revenues. While Occidental is our contracting counterparty, gathering and processing arrangements with affiliates of Occidental on most of our systems include not just Occidental-produced volumes, but also, in some instances, the volumes of other working-interest owners of Occidental who rely on our facilities and infrastructure to bring their volumes to market. See Note 6-Related-Party Transactions in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. Our ability to make cash distributions to our unitholders may be adversely impacted if Occidental becomes unable to perform under the terms of gathering, processing, transportation, and disposal agreements; the contribution agreements; or the Services Agreement.
ITEMS AFFECTING THE COMPARABILITY OF FINANCIAL RESULTS WITH WES OPERATING
Our consolidated financial statements include the consolidated financial results of WES Operating. Our results of operations do not differ materially from the results of operations and cash flows of WES Operating, which are reconciled below.
Reconciliation of net income (loss). The differences between net income (loss) attributable to WES and WES Operating are reconciled as follows:
Three Months Ended Six Months Ended
March 31,
thousands June 30, 2022 2022 June 30, 2022 June 30, 2021
Net income (loss) attributable to WES $ 306,317
6,267 6,317 12,584 8,565
General and administrative expenses (2) 621 741 1,362 2,486
Other income (expense), net (4) (3) (7) (5)
Net income (loss) attributable to WES
Operating $ 313,201 _________________________________________________________________________________________
(1)Represents the portion of net income (loss) allocated to the limited partner interests in WES Operating not held by WES. A subsidiary of Occidental held a 2.0% limited partner interest in WES Operating for all periods presented.
(2)Represents general and administrative expenses incurred by WES separate from, and in addition to, those incurred by WES Operating.
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Reconciliation of net cash provided by (used in) operating and financing activities. The differences between net cash provided by (used in) operating and financing activities for WES and WES Operating are reconciled as follows:
Six Months Ended
June 30,
thousands 2022 2021
WES net cash provided by operating activities $ 743,439 $ 713,661
General and administrative expenses (1) 1,362 2,486
Non-cash equity-based compensation expense (276) 7,169
Changes in working capital (7,835) (9,336)
Other income (expense), net (7) (5)
WES Operating net cash provided by operating activities $
736,683
WES net cash provided by (used in) financing activities$ (677,057) $ (746,606) Distributions to WES unitholders (2) 340,946 264,234 Distributions to WES from WES Operating (3) (431,653) (259,208) Increase (decrease) in outstanding checks 104 (8) Unit repurchases 79,217 16,241 Other 7,007 -
WES Operating net cash provided by (used in) financing activities
_________________________________________________________________________________________
(1)Represents general and administrative expenses incurred by WES separate from, and in addition to, those incurred by WES Operating.
(2)Represents distributions to WES common unitholders paid under WES's partnership agreement. See Note 4-Partnership Distributions and Note 5-Equity and Partners' Capital in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
(3)Difference attributable to elimination in consolidation of WES Operating's distributions on partnership interests owned by WES. See Note 4-Partnership Distributions and Note 5-Equity and Partners' Capital in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
Noncontrolling interest. WES Operating's noncontrolling interest consists of the
25% third-party interest in Chipeta. See Note 1-Description of Business and
Basis of Presentation in the Notes to Consolidated Financial Statements under
Part I, Item 1 of this Form 10-Q.
WES Operating distributions. WES Operating distributes all of its available cash
on a quarterly basis to WES Operating unitholders in proportion to their share
of limited partner interests in WES Operating. See Note 4-Partnership
Distributions in the Notes to Consolidated Financial Statements under Part I,
Item 1 of this Form 10-Q.
CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in accordance with GAAP
requires management to make informed judgments and estimates that affect the
amounts of assets and liabilities as of the date of the financial statements and
the amounts of revenues and expenses recognized during the periods reported.
There have been no significant changes to our critical accounting estimates from
those disclosed in our annual report on Form 10-K for the fiscal year ended
December 31, 2021 .
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