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 ofSeptember 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;
•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
September 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 25 3 - 3
NGLs pipelines 2 - - 5
Natural-gas pipelines 6 - - 1
Crude-oil pipelines 3 1 - 4
_________________________________________________________________________________________
(1)Includes the DBM water systems.
Significant financial and operational events during the nine months ended
•WES Operating redeemed the
•We repurchased 17,982,357 common units, which includes 10,000,000 common units
repurchased from Occidental, for an aggregate purchase price of
•Our third-quarter 2022 per-unit distribution is unchanged from the
second-quarter 2022 per-unit distribution of
•InSeptember 2022 , we acquired the remaining 50% interest in Ranch Westex from a third party for$41.0 million (see Acquisitions and Divestitures within this Item 2). •Natural-gas throughput attributable to WES totaled 4,274 MMcf/d and 4,201 MMcf/d for the three and nine months endedSeptember 30, 2022 , respectively, representing no change compared to the three months endedJune 30, 2022 , and a 2% increase compared to the nine months endedSeptember 30, 2021 , respectively. •Crude-oil and NGLs throughput attributable to WES totaled 715 MBbls/d and 686 MBbls/d for the three and nine months endedSeptember 30, 2022 , respectively, representing a 7% increase and a 6% increase compared to the three months endedJune 30, 2022 , and nine months endedSeptember 30, 2021 , respectively. •Produced-water throughput attributable to WES totaled 877 MBbls/d and 831 MBbls/d for the three and nine months endedSeptember 30, 2022 , respectively, representing a 2% increase and a 23% increase compared to the three months endedJune 30, 2022 , and nine months endedSeptember 30, 2021 , respectively. •Gross margin was$573.9 million and$1,713.6 million for the three and nine months endedSeptember 30, 2022 , respectively, representing a 3% decrease and a 14% increase compared to the three months endedJune 30, 2022 , and nine months endedSeptember 30, 2021 , respectively. See Key Performance Metrics within this Item 2. 38
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Table of Contents •Adjusted gross margin for natural-gas assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$1.33 per Mcf and$1.34 per Mcf for the three and nine months endedSeptember 30, 2022 , respectively, representing a 2% decrease and an 8% increase compared to the three months endedJune 30, 2022 , and nine months endedSeptember 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$2.33 per Bbl and$2.44 per Bbl for the three and nine months endedSeptember 30, 2022 , respectively, representing a 9% decrease and a 1% decrease compared to the three months endedJune 30, 2022 , and nine months endedSeptember 30, 2021 , respectively. •Adjusted gross margin for produced-water assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$0.94 per Bbl for the three and nine months endedSeptember 30, 2022 , representing a 4% increase and a 1% increase compared to the three months endedJune 30, 2022 , and nine months endedSeptember 30, 2021 , respectively. The following table provides additional information on throughput for the periods presented below: Three Months Ended Nine Months Ended Inc/ Inc/ September 30, 2022 June 30, 2022 (Dec) September 30, 2022 September 30, 2021 (Dec) Throughput for natural-gas assets (MMcf/d) Delaware Basin 1,536 1,493 3 % 1,452 1,217 19 % DJ Basin 1,326 1,336 (1) % 1,328 1,375 (3) % Equity investments 473 516 (8) % 490 447 10 % Other 1,100 1,082 2 % 1,088 1,248 (13) % Total throughput for natural-gas assets 4,435 4,427 - % 4,358 4,287 2 %
Throughput for crude-oil and NGLs assets (MBbls/d)
199 198 1 % 196 177 11 %
DJ Basin 81 83 (2) % 84 89 (6) %
Equity investments 411 360 14 % 382 358 7 %
Other 39 39 - % 38 34 12 %
Total throughput for crude-oil
and NGLs assets 730 680 7 % 700 658 6 %
Throughput for produced-water assets (MBbls/d)
Delaware Basin 895 882 1 % 848 687 23 %
Total throughput for
produced-water assets 895 882 1 % 848 687 23 %
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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 nine months ended September 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 inflation has raised our
costs for labor, materials, fuel, and services, which has increased our
operating costs and capital expenditures. Increases in inflationary pressure
could 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, resulting in increased
interest expense on RCF borrowings and the Floating-Rate Senior Notes. Any
future increases in interest rates likely will result in additional increases 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.
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ACQUISITIONS AND DIVESTITURES
Ranch Westex . In September 2022 , we acquired the remaining 50% interest in Ranch
Westex from a third party for $41.0 million . Subsequent to the acquisition, (i)
we are the sole owner and operator of the asset, (ii) Ranch Westex is no longer
accounted for under the equity method of accounting, and (iii) it will be
included as part of the operations of the West Texas complex.
Cactus II. In November 2022 , we sold our 15.00% interest in Cactus II to two
third parties for $264.8 million , which includes a $1.8 million pro-rata
distribution through closing. Total proceeds are expected to be received during
the fourth quarter of 2022.
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.
RESULTS OF OPERATIONS
OPERATING RESULTS
The following tables and discussion present a summary of our results of
operations:
Three Months Ended Nine Months Ended
September 30, September 30, September 30,
thousands 2022 June 30, 2022 2022 2021
Total revenues and other (1) $ 837,568 $
876,419
41,317 48,464 139,388 159,337
Total operating expenses (1) 521,763 526,345 1,451,558 1,307,010
Gain (loss) on divestiture and other, net (104) (1,150) (884) 278
Operating income (loss) 357,018 397,388 1,159,230 1,010,550
Interest expense (83,106) (80,772) (249,333) (287,040)
Gain (loss) on early extinguishment of
debt - 91 91 (24,944)
Other income (expense), net 56 (45) 117 (1,013)
Income (loss) before income taxes 273,968 316,662 910,105 697,553
Income tax expense (benefit) 387 1,491 3,683 4,403
Net income (loss) 273,581 315,171 906,422 693,150
Net income (loss) attributable to
noncontrolling interests 7,836 8,854 25,643 20,375
Net income (loss) attributable to Western
Midstream Partners, LP (2) $ 265,745 $
306,317
_________________________________________________________________________________________
(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 endedSeptember 30, 2022 " refer to the comparison of the three months endedSeptember 30, 2022 , to the three months endedJune 30, 2022 ; and any increases or decreases "for the nine months endedSeptember 30, 2022 " refer to the comparison of the nine months endedSeptember 30, 2022 , to the nine months endedSeptember 30, 2021 . 41
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Throughput
Three Months Ended Nine Months Ended
Inc/ Inc/
September 30, 2022 June 30, 2022 (Dec) September 30, 2022 September 30, 2021 (Dec)
Throughput for natural-gas assets (MMcf/d)
Gathering, treating, and
transportation 418 410 2 % 411 477 (14) %
Processing 3,544 3,501 1 % 3,457 3,363 3 %
Equity investments (1) 473 516 (8) % 490 447 10 %
Total throughput 4,435 4,427 - % 4,358 4,287 2 %
Throughput attributable to
noncontrolling interests (2) 161 157 3 % 157 155 1 %
Total throughput attributable to WES
for natural-gas assets 4,274 4,270 - % 4,201 4,132 2 %
Throughput for crude-oil and NGLs assets (MBbls/d) Gathering, treating, and transportation
319 320 - % 318 300 6 %
Equity investments (3) 411 360 14 % 382 358 7 %
Total throughput 730 680 7 % 700 658 6 %
Throughput attributable to
noncontrolling interests (2) 15 14 7 % 14 13 8 %
Total throughput attributable to WES
for crude-oil and NGLs assets 715 666 7 % 686 645 6 %
Throughput for produced-water assets (MBbls/d)
Gathering and disposal 895 882 1 % 848 687 23 %
Throughput attributable to
noncontrolling interests (2) 18 18 - % 17 14 21 %
Total throughput attributable to WES
for produced-water assets 877 864 2 % 831 673 23 %
_________________________________________________________________________________________
(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 increased by 8 MMcf/d for the three months endedSeptember 30, 2022 , primarily due to higher volumes at the MIGC system, partially offset by production declines in areas around the Marcellus Interest andSpringfield gas-gathering systems. Gathering, treating, and transportation throughput decreased by 66 MMcf/d for the nine months endedSeptember 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 systems. Processing throughput increased by 43 MMcf/d for the three months endedSeptember 30, 2022 , primarily due to higher volumes at theWest Texas and Chipeta complexes due to increased production in the area. These increases were offset partially by lower volumes at the Brasada complex due to downstream issues causing volumes to be diverted away from the plant in the third quarter of 2022. Processing throughput increased by 94 MMcf/d for the nine months endedSeptember 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 (i) lower volumes due to production declines in areas around theDJ Basin and Granger complexes and (ii) lower volumes at the Brasada complex due to downstream issues causing volumes to be diverted away from the plant in the third quarter of 2022. 42
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Table of Contents Equity-investment throughput decreased by 43 MMcf/d for the three months endedSeptember 30, 2022 , primarily due to (i) decreased volumes at the Ranch Westex plant, which we acquired in the third quarter of 2022 and is included as part of theWest Texas complex subsequent to the acquisition (see Acquisitions and Divestitures within this Item 2), and (ii) decreased volumes onRed Bluff Express. Equity-investment throughput increased by 43 MMcf/d for the nine months endedSeptember 30, 2022 , primarily due to increased volumes on Red Bluff Express and at the Mi Vida plant due to increased production in the area and 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, which we acquired in the third quarter of 2022 and is included as part of theWest Texas complex subsequent to the acquisition (see Acquisitions and Divestitures within this Item 2), 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 18 MBbls/d for the nine months endedSeptember 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 increased by 51 MBbls/d for the three months endedSeptember 30, 2022 , primarily due to increased volumes on the Whitethorn and Cactus II pipelines. Equity-investment throughput increased by 24 MBbls/d for the nine months endedSeptember 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 13 MBbls/d for the three months endedSeptember 30, 2022 , due to new third-party connections brought online at the end of the second quarter of 2022. Gathering and disposal throughput increased by 161 MBbls/d for the nine months endedSeptember 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. 43
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Service Revenues
Three Months Ended Nine Months Ended
September 30, June 30, 2022 Inc/ September 30, September 30, Inc/
thousands except percentages 2022 (Dec) 2022 2021 (Dec)
Service revenues - fee based $ 666,555 $ 655,952 2 % $ 1,954,105 $ 1,841,742 6 %
Service revenues - product based 91,356 70,498 30 % 202,721 88,267 130 %
Total service revenues $ 757,911 $ 726,450 4 % $ 2,156,826 $ 1,930,009 12 %
Service revenues - fee based
Service revenues - fee based increased by $10.6 million for the three months
ended September 30, 2022 , primarily due to increases of (i) $5.7 million at the
West Texas complex attributable to increased throughput and (ii) $4.8 million at
the DBM water systems due to increased deficiency fees and contract mix.
Service revenues - fee based increased by $112.4 million for the nine months
ended September 30, 2022 , primarily due to increases of (i) $63.3 million at the
West 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 effective January 1,
2022 , and (ii) $47.4 million and $40.6 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 decreases of (i) $22.9 million at
the DJ Basin complex due to decreased throughput, partially offset by increased
deficiency fees, and (ii) $18.9 million due to revenue recorded in the third
quarter of 2021 that was previously constrained.
Service revenues - product based
Service revenues - product based increased by$20.9 million for the three months endedSeptember 30, 2022 , primarily due to an increase of$22.9 million at theWest Texas complex due to increased electricity-related rates billed to customers and contract mix, partially offset by a decrease of$1.5 million at the Chipeta complex due to pricing fluctuations. Service revenues - product based increased by$114.5 million for the nine months endedSeptember 30, 2022 , primarily due to increases of (i)$68.7 million and$33.2 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)$4.2 million and$3.5 million at the DBM water systems and MGR assets, respectively, due to increases in pricing and volumes. 44
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Product Sales
Three Months Ended Nine Months Ended
thousands except percentages September 30, June 30, Inc/ September 30, September 30, Inc/
and per-unit amounts 2022 2022 (Dec) 2022 2021 (Dec)
Natural-gas sales $ 35,112 $ 47,292 (26) % $ 101,475 $ 67,765 50 %
NGLs sales 44,318 102,444 (57) % 213,280 159,594 34 %
Total Product sales $ 79,430 $ 149,736 (47) % $ 314,755 $ 227,359 38 %
Per-unit gross average sales
price:
Natural gas (per Mcf) $ 7.18 $ 7.02 2 % $ 6.28 $ 4.20 50 %
NGLs (per Bbl) 40.11 46.57 (14) % 44.43 30.81 44 %
Natural-gas sales
Natural-gas sales decreased by $12.2 million for the three months ended
September 30, 2022 , primarily due to a decrease of $12.6 million at the West
Texas complex attributable to a third-quarter 2022 contract modification where
we are no longer the principal in the transaction (with an offsetting decrease
in cost of product), partially offset by increased volumes sold.
Natural-gas sales increased by $33.7 million for the nine months ended September
30, 2022 , primarily due to increases of (i) $48.8 million at the West Texas
complex attributable to increased average prices and volumes sold, partially
offset by a third-quarter 2022 contract modification as noted above, and (ii)
$6.4 million at the MGR assets due to increased average prices. These increases
were offset partially by a decrease of $18.5 million at the DJ Basin complex due
to decreased volumes sold, partially offset by an increase in average prices.
NGLs sales
NGLs sales decreased by$58.1 million for the three months endedSeptember 30, 2022 , primarily due to a decrease of$56.7 million at theWest Texas complex due to decreased average prices and volumes sold. NGLs sales increased by$53.7 million for the nine months endedSeptember 30, 2022 , primarily due to increases of (i)$15.9 million at the Chipeta complex,$15.8 million at theWest Texas complex, and$4.3 million at the DBM water systems attributable to increased average prices and volumes sold, and (ii)$9.3 million and$4.4 million at theDJ Basin and Granger 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 Nine Months Ended
September 30 ,
Inc/
2022 June 30, 2022 (Dec) 2022 2021 (Dec)
Equity income, net - related
parties $ 41,317 $ 48,464 (15) % $ 139,388 $ 159,337 (13) %
Equity income, net - related parties decreased by $7.1 million for the three
months ended September 30, 2022 , primarily due to decreases of (i) $2.6 million
at Whitethorn LLC related to commercial activities, (ii) $2.1 million at Ranch
Westex , which we acquired in the third quarter of 2022 and is included as part
of the West Texas complex subsequent to the acquisition (see Acquisitions and
Divestitures within this Item 2), and (iii) $1.8 million at Mi Vida related to
increased operating expenses.
Equity income, net - related parties decreased by $19.9 million for the nine
months ended September 30, 2022 , primarily due to decreases of (i) $10.7 million
at Saddlehorn due to decreases in revenues along with increases in operating
expenses, (ii) $9.1 million at Whitethorn LLC due to decreases in volumes
resulting in lower revenues, (iii) $5.9 million at Ranch Westex, which we
acquired in the third quarter of 2022 and is included as part of the West Texas
complex subsequent to the acquisition (see Acquisitions and Divestitures within
this Item 2), and (iv) $3.4 million each at Cactus II and Mont Belvieu JV due to
increases in operating expenses. These decreases were offset partially by an
increase of $10.6 million at FRP and TEP due to increased volumes resulting in
higher revenues.
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Cost of Product and Operation and Maintenance Expenses
Three Months Ended Nine Months Ended
September 30 ,
Inc/
2022 June 30, 2022 (Dec) 2022 2021 (Dec)
Residue purchases $ 42,799 $ 65,168 (34) % $ 142,959 $ 108,238 32 %
NGLs purchases 89,960 102,650 (12) % 263,014 124,653 111 %
Other (25,926) (19,262) 35 % (77,736) 17,354 NM
Cost of product 106,833 148,556 (28) % 328,237 250,245 31 %
Operation and maintenance 190,514 168,153 13 % 487,643 434,198 12 %
Total Cost of product and
Operation and maintenance
expenses $ 297,347 $ 316,709 (6) % $ 815,880 $ 684,443 19 %
_________________________________________________________________________________________
NM-Not meaningful
Residue purchases
Residue purchases decreased by$22.4 million for the three months endedSeptember 30, 2022 , primarily due to a decrease of$27.9 million at theWest Texas complex attributable to a third-quarter 2022 contract modification where we are no longer the principal in the transaction (with an offsetting decrease in product sales). This decrease was offset partially by increases of (i)$2.6 million at theDJ Basin complex attributable to a change in contract mix, as well as increased average prices, and (ii)$1.7 million at the Chipeta complex due to increased volumes purchased and average prices. Residue purchases increased by$34.7 million for the nine months endedSeptember 30, 2022 , primarily due to increases of (i)$21.9 million at theWest Texas complex attributable to increased volumes purchased and average prices, as well as changes in contract mix during 2022, (ii)$9.0 million at the Chipeta complex due to increased volumes purchased and average prices, (iii)$6.2 million at the MGR assets primarily due to increased average prices, and (iv)$3.3 million at the Granger complex attributable to increased average prices. These increases were offset partially by a decrease of$4.9 million at theDJ Basin complex primarily due to a change in contract mix during the second quarter of 2022.
NGLs purchases
NGLs purchases decreased by$12.7 million for the three months endedSeptember 30, 2022 , primarily due to decreases of (i)$5.8 million at theWest Texas complex attributable to lower volumes purchased and average prices, (ii)$2.4 million at the Brasada complex due to decreased volumes purchased, and (iii)$2.0 million at the Chipeta complex due to decreased average prices. NGLs purchases increased by$138.4 million for the nine months endedSeptember 30, 2022 , primarily due to increases of (i)$80.1 million at theWest Texas complex due to increased volumes purchased and average prices, as well as a change in contract mix during the second quarter of 2022, (ii)$49.5 million at theDJ Basin complex attributable to increased average prices and a change in contract mix during the second quarter of 2022, (iii)$4.2 million at the DBM water systems due to increased average prices, and (iv)$3.6 million at the Chipeta complex due to increased volumes purchased and average prices.
Other items
Other items decreased by$6.7 million for the three months endedSeptember 30, 2022 , primarily due to a decrease of$11.3 million at theWest Texas complex attributable to changes in imbalance positions, partially offset by an increase of$6.2 million at theDJ Basin complex due to changes in imbalance positions. Other items decreased by$95.1 million for the nine months endedSeptember 30, 2022 , primarily due to decreases of$53.1 million and$47.0 million at theWest Texas andDJ Basin complexes, respectively, attributable to changes in imbalance positions. These decreases were offset partially by an increase of$5.7 million at the MGR assets attributable to changes in imbalance positions. 46
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Table of Contents Operation and maintenance expense Operation and maintenance expense increased by$22.4 million for the three months endedSeptember 30, 2022 , primarily due to increases of (i)$10.1 million attributable to higher utility expense, (ii)$8.0 million in mechanical-integrity costs, (iii)$2.2 million due to higher field-area costs, (iv)$2.0 million in higher chemicals and treating services, and (v)$1.7 million due to higher maintenance and repair expense. These increases were offset partially by a decrease of$2.4 million due to lower regulatory and environmental expense. Operation and maintenance expense increased by$53.4 million for the nine months endedSeptember 30, 2022 , primarily due to increases of (i)$13.0 million in higher chemicals and treating services, (ii)$11.5 million due to higher maintenance and repair expense, (iii)$8.2 million attributable to higher utility expense, (iv)$6.9 million in higher salaries and wages costs, (v)$6.7 million due to higher land-related costs, (vi)$6.5 million in mechanical-integrity costs, (vii)$5.4 million due to higher regulatory and environmental expense, (viii)$3.5 million in water-disposal costs, and (ix)$3.1 million in higher equipment rental costs. These increases were offset partially by decreases of$9.2 million attributable to lower contract labor and consulting expense and$6.0 million due to lower field-area costs. Other Operating Expenses Three Months Ended Nine Months EndedSeptember 30 ,
Inc/
2022 June 30, 2022 (Dec) 2022 2021 (Dec)
General and administrative $ 48,185 $ 47,848 1 % $ 144,635 $ 139,973 3 %
Property and other taxes 19,390 22,662 (14) % 60,494 45,992 32 %
Depreciation and amortization 156,837 139,036 13 % 430,455 407,404 6 %
Long-lived asset and other
impairments 4 90 (96) % 94 29,198 (100) %
Total other operating expenses
7 %$ 635,678 $ 622,567 2 %
General and administrative expenses
General and administrative expenses increased by
Property and other taxes
Property and other taxes decreased by$3.3 million for the three months endedSeptember 30, 2022 , primarily due to lower property values received across multiple tax jurisdictions, partially offset by an increase in the ad valorem property values for theDJ Basin complex. Property and other taxes increased by$14.5 million for the nine months endedSeptember 30, 2022 , primarily due to increases in the state assessed portion of ad valorem property values resulting in increases for theDJ Basin complex.
Depreciation and amortization expense
Depreciation and amortization expense increased by$17.8 million for the three months endedSeptember 30, 2022 , primarily due to an acceleration of depreciation expense for revised service life assumptions of an asset in theDJ Basin complex. Depreciation and amortization expense increased by$23.1 million for the nine months endedSeptember 30, 2022 , primarily due to (i)$15.2 million in theDJ Basin complex due to an acceleration of depreciation expense for revised service life assumptions, (ii)$4.9 million resulting from capital projects being placed into service, (iii)$4.1 million of increased expense at the Hilight system, and (iv)$3.3 million at a transportation asset inSouthwest Wyoming primarily as a result of a change in estimate for asset retirement obligations. These increases were offset partially by a decrease in depreciation of$6.3 million at the MGR assets. 47
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Table of Contents Long-lived asset and other impairment expense Long-lived asset and other impairment expense for the nine months endedSeptember 30, 2021 , was primarily due to (i) an$11.8 million other-than-temporary impairment of our investment in Ranch Westex and (ii)$14.1 million of impairments at theDJ Basin complex due to cancellation of projects. For further information on Long-lived asset and other impairment expense, see Note 8-Property, Plant, and Equipment in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. Interest Expense Three Months Ended Nine Months Ended September 30, Inc/ September 30, September 30, Inc/ thousands except percentages 2022 June 30, 2022 (Dec) 2022 2021 (Dec)
Long-term and short-term debt
4 %$ (243,559) $ (279,122) (13) % Finance lease liabilities (23) (31) (26) % (96) (808) (88) % Commitment fees and amortization of debt-related costs (3,049) (3,068) (1) % (9,149) (9,664) (5) % Capitalized interest 1,520 904 68 % 3,471 2,554 36 % Interest expense$ (83,106) $ (80,772) 3 %$ (249,333) $ (287,040) (13) % Interest expense Interest expense increased by$2.3 million for the three months endedSeptember 30, 2022 , primarily due to higher outstanding borrowings under the RCF during the third quarter of 2022. Interest expense decreased by$37.7 million for the nine months endedSeptember 30, 2022 , primarily due to decreases of (i)$16.2 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)$11.6 million due to credit-rating related interest rate changes and a lower outstanding balance on the 3.100% Senior Notes due 2025, (iii)$11.4 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)$2.7 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. These decreases were offset partially by an increase of$6.8 million due to higher outstanding borrowings under the RCF during 2022. See Liquidity and Capital Resources-Debt and credit facilities within this Item 2. Income Tax Expense (Benefit) Three Months Ended Nine Months Ended September 30, Inc/ Inc/ thousands except percentages 2022 June 30, 2022 (Dec) September 30, 2022 September 30, 2021 (Dec) Income (loss) before income taxes$ 273,968 $ 316,662 (13) % $ 910,105 $ 697,553 30 % Income tax expense (benefit) 387 1,491 (74) % 3,683 4,403 (16) % Effective tax rate - % - % - % 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. 48
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KEY PERFORMANCE METRICS
Three Months Ended Nine Months Ended
thousands except percentages and September 30, Inc/ September 30, September 30, Inc/
per-unit amounts 2022 June 30, 2022 (Dec) 2022 2021 (Dec)
Adjusted gross margin for
natural-gas assets $ 521,117 $ 528,983 (1) % $ 1,539,009 $ 1,394,506 10 %
Adjusted gross margin for
crude-oil and NGLs assets 153,225 155,686 (2) % 457,158 432,401 6 %
Adjusted gross margin for
produced-water assets 75,723 71,002 7 % 214,319 170,360 26 %
Adjusted gross margin 750,065 755,671 (1) % 2,210,486 1,997,267 11 %
Per-Mcf Adjusted gross margin
for natural-gas assets (1) 1.33 1.36 (2) % 1.34 1.24 8 %
Per-Bbl Adjusted gross margin
for crude-oil and NGLs assets
(2) 2.33 2.57 (9) % 2.44 2.46 (1) %
Per-Bbl Adjusted gross margin
for produced-water assets (3) 0.94 0.90 4 % 0.94 0.93 1 %
Adjusted EBITDA 524,824 548,318 (4) % 1,612,192 1,465,816 10 %
Free cash flow 330,412 372,107 (11) % 902,861 911,629 (1) %
_________________________________________________________________________________________
(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 decreased by$5.6 million for the three months endedSeptember 30, 2022 , primarily due to (i) lower NGLs prices, partially offset by an increase in NGLs volumes at theDJ Basin complex and (ii) a decrease in distributions fromMi Vida and Cactus II. These decreases were offset partially by (i) increased throughput and the impact of utilities costs, partially offset by lower NGLs volumes and prices at theWest Texas complex, and (ii) increased throughput, contract mix, and increased deficiency fee revenues at the DBM water systems. Adjusted gross margin increased by$213.2 million for the nine months endedSeptember 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 fee revenues at the DBM oil and DBM water systems. These increases were offset partially by (i) revenue recorded in the third quarter of 2021 that was previously constrained and (ii) a decrease in distributions fromWhitethorn LLC . 49
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Table of Contents Per-Mcf Adjusted gross margin for natural-gas assets decreased by$0.03 for the three months endedSeptember 30, 2022 , primarily due to (i) a decrease in distributions fromMi Vida , (ii) lower NGLs prices, partially offset by an increase in NGLs volumes at theDJ Basin complex, and (iii) lower NGLs volumes and prices at theWest Texas complex, partially offset by the impact of utilities costs. Per-Mcf Adjusted gross margin for natural-gas assets increased by$0.10 for the nine months endedSeptember 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 decreased by$0.24 for the three months endedSeptember 30, 2022 , primarily due to increased throughput and decreased distributions from the Whitethorn and Cactus II pipelines, which have a lower-than-average per-Bbl margin as compared to our other crude-oil and NGLs assets, partially offset by an increase in distributions from Saddlehorn. Per-Bbl Adjusted gross margin for crude-oil and NGLs assets decreased by$0.02 for the nine months endedSeptember 30, 2022 , primarily due to (i) revenue recorded in the third quarter of 2021 that was previously constrained, (ii) a decrease in distributions fromSaddlehorn and Whitethorn LLC , and (iii) increased throughput on FRP, which has a lower-than-average per-Bbl margin as compared to our other crude-oil and NGLs assets. These decreases were offset partially by increased throughput and increased deficiency fee revenues at the DBM oil system, which has a higher-than-average per-Bbl margin as compared to our other crude-oil and NGLs assets. Per-Bbl Adjusted gross margin for produced-water assets increased by$0.04 for the three months endedSeptember 30, 2022 , primarily due to contract mix and an increase in deficiency fee revenues. Per-Bbl Adjusted gross margin for produced-water assets increased by$0.01 for the nine months endedSeptember 30, 2022 , primarily due to deficiency fee revenues 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 decreased by$23.5 million for the three months endedSeptember 30, 2022 , primarily due to (i) a$38.9 million decrease in total revenues and other, (ii) a$22.4 million increase in operation and maintenance expenses, and (iii) a$7.1 million decrease in distributions from equity investments. These amounts were offset partially by (i) a$41.8 million decrease in cost of product (net of lower of cost or market inventory adjustments) and (ii) a$3.3 million decrease in property taxes. Adjusted EBITDA increased by$146.4 million for the nine months endedSeptember 30, 2022 , primarily due to a$314.3 million increase in total revenues and other. This amount was offset partially by (i) a$77.7 million increase in cost of product (net of lower of cost or market inventory adjustments), (ii) a$53.4 million increase in operation and maintenance expenses, (iii) a$14.5 million increase in property taxes, (iv) a$14.1 million decrease in distributions from equity investments, and (v) a$4.3 million increase in general and administrative expenses excluding non-cash equity-based compensation expense. 50
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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 decreased by$41.7 million for the three months endedSeptember 30, 2022 , primarily due to a$42.8 million increase in capital expenditures, partially offset by a$1.8 million increase in net cash provided by operating activities. Free cash flow decreased by$8.8 million for the nine months endedSeptember 30, 2022 , primarily due to (i) a$121.7 million increase in capital expenditures and (ii) a$5.2 million increase in contributions to equity investments. These amounts were offset partially by (i) a$107.2 million increase in net cash provided by operating activities and (ii) an$11.0 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. 51
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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 Nine Months Ended
September 30, September 30, September 30,
thousands 2022 June 30, 2022 2022 2021
Reconciliation of Gross margin to Adjusted gross margin
Total revenues and other $ 837,568 $ 876,419 $ 2,472,284 $ 2,157,945
Less:
Cost of product 106,833 148,556 328,237 250,245
Depreciation and amortization 156,837 139,036 430,455 407,404
Gross margin 573,898 588,827 1,713,592 1,500,296
Add:
Distributions from equity investments 58,957 66,016 180,768 194,847 Depreciation and amortization 156,837 139,036 430,455 407,404
Less:
Reimbursed electricity-related charges recorded as revenues 20,741 19,042 58,187 54,622 Adjusted gross margin attributable to noncontrolling interests (1) 18,886 19,166 56,142 50,658 Adjusted gross margin$ 750,065
$ 521,117
153,225 155,686 457,158 432,401
Adjusted gross margin for produced-water assets 75,723 71,002 214,319 170,360
_________________________________________________________________________________________
(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 Nine Months Ended
September 30, September 30, September 30,
thousands 2022 June 30, 2022 2022 2021Reconciliation of Net income (loss) to Adjusted EBITDA Net income (loss)
$ 273,581 $
315,171
58,957 66,016 180,768 194,847
Non-cash equity-based compensation expense 6,464 7,038 21,245 20,834
Interest expense 83,106 80,772 249,333 287,040
Income tax expense 387 1,491 3,683 4,403
Depreciation and amortization 156,837 139,036 430,455 407,404
Impairments 4 90 94 29,198
Other expense 165 181 346 1,252
Less:
Gain (loss) on divestiture and other, net (104) (1,150) (884) 278
Gain (loss) on early extinguishment of debt - 91 91 (24,944)
Equity income, net - related parties 41,317 48,464 139,388 159,337
Other income 58 - 164 193
Adjusted EBITDA attributable to
noncontrolling interests (1) 13,406 14,072 41,395 37,448
Adjusted EBITDA $ 524,824 $
548,318
466,981
83,106 80,772 249,333 287,040
Accretion and amortization of long-term
obligations, net (1,773) (1,804) (5,359) (5,873)
Current income tax expense (benefit) 550 703 1,926 2,128
Other (income) expense, net (56) 45 (117) 1,013
Distributions from equity investments in
excess of cumulative earnings - related
parties 15,651 15,482 41,058 30,075
Changes in assets and liabilities:
Accounts receivable, net (66,875) 114,696 212,955 130,773
Accounts and imbalance payables and accrued
liabilities, net 17,840 (97,201) (65,069) (56,495)
Other items, net 21,019 (17,284) 6,653 9,609
Adjusted EBITDA attributable to
noncontrolling interests (1) (13,406) (14,072) (41,395) (37,448)
Adjusted EBITDA $ 524,824 $
548,318
466,981
(185,305) (99,330) (356,252) (187,287)
Net cash provided by (used in) financing
activities (221,804) (518,466) (898,861) (1,262,767)
_________________________________________________________________________________________
(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 Nine Months Ended
September 30, September 30, September 30,
thousands 2022 June 30, 2022 2022 2021
Reconciliation of Net cash provided by operating activities to Free cash flow
Net cash provided by operating activities
466,981
150,148 107,386 341,505 219,757
Contributions to equity investments -
related parties 3,859 2,970 8,899 3,683
Add:
Distributions from equity investments in excess of cumulative earnings - related parties 15,651 15,482 41,058 30,075 Free cash flow$ 330,412 $
372,107
466,981
(185,305) (99,330) (356,252) (187,287)
Net cash provided by (used in) financing
activities (221,804) (518,466) (898,861) (1,262,767)
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LIQUIDITY AND CAPITAL RESOURCES
Our primary cash uses include equity and debt service, operating expenses, and
capital expenditures. Our sources of liquidity as of September 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 third quarter of 2022 of
$0.50000 per unit, or $197.1 million in the aggregate. The cash distribution is
payable on November 14, 2022 , to our unitholders of record at the close of
business on October 31, 2022 .
In February 2022 , we announced a buyback program of up to $1.0 billion of our
common units through December 31, 2024 . In November 2022 , the Board authorized
an increase in the $1.0 billion Purchase Price Program to $1.25 billion . 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 nine months ended September 30, 2022 , we repurchased
17,982,357 common units, which includes 10,000,000 common units repurchased from
Occidental, for an aggregate purchase price of $447.1 million . The units were
canceled immediately upon receipt. As of September 30, 2022 , we had an
authorized amount of $552.9 million remaining under the 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 September 30, 2022 , we had a $150.4 million working capital
surplus, which we define as the amount by which current assets exceed current
liabilities. As of September 30, 2022 , there was $1.4 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:
Nine Months Ended
September 30,
thousands 2022 2021
Acquisitions $ 41,018 $ -
Capital expenditures (1) 341,505 219,757
Capital incurred (1) 377,650 224,080
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(1)For the nine months ended
Acquisitions for the nine months endedSeptember 30, 2022 , include the acquisition of the remaining 50% interest in Ranch Westex (see Acquisitions and Divestitures within this Item 2). Capital expenditures increased by$121.7 million for the nine months endedSeptember 30, 2022 , primarily due to increases of (i)$107.7 million at theWest Texas complex primarily attributable to facility expansion, including ongoing construction of Mentone Train III, and pipeline projects, and (ii)$13.1 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 a decrease of$7.3 million at theDJ Basin oil system primarily related to a decrease in pipeline projects. Historical cash flow. The following table and discussion present a summary of our net cash flows provided by (used in) operating, investing, and financing activities: Nine Months Ended September 30, thousands 2022 2021 Net cash provided by (used in): Operating activities$ 1,212,207 $ 1,104,994 Investing activities (356,252) (187,287) Financing activities (898,861) (1,262,767)
Net increase (decrease) in cash and cash equivalents
Operating activities. Net cash provided by operating activities increased for the nine months endedSeptember 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 nine months
ended
•$341.5 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;
•$41.0 million of cash paid for the acquisition of the remaining 50% interest in Ranch Westex (see Acquisitions and Divestitures within this Item 2);
•$8.9 million of capital contributions primarily paid to Red Bluff Express;
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•$7.0 million of increases to materials and supplies inventory; and
•$41.1 million of distributions received from equity investments in excess of cumulative earnings.
Net cash used in investing activities for the nine months ended
•$219.8 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;
•$3.7 million of capital contributions primarily paid to Cactus II;
•$30.1 million of distributions received from equity investments in excess of cumulative earnings; and
•$8.0 million related to the sale of the Bison treating facility.
Financing activities. Net cash used in financing activities for the nine months
ended
•$765.0 million of repayments of outstanding borrowings under the RCF;
•$538.7 million of distributions paid to WES unitholders;
•$502.2 million to redeem the total principal amount outstanding of WES Operating's 4.000% Senior Notes due 2022;
•$447.1 million of unit repurchases;
•$20.2 million of distributions paid to the noncontrolling interest owner of WES Operating;
•$5.0 million of distributions paid to the noncontrolling interest owner of Chipeta;
•$1,390.0 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
•$1.5 million of increases in outstanding checks.
Net cash used in financing activities for the nine months ended
•$521.9 million to purchase and retire portions of certain of WES Operating's senior notes via a tender offer;
•$431.1 million to redeem the total principal amount outstanding of WES Operating's 5.375% Senior Notes due 2021;
•$398.9 million of distributions paid to WES unitholders;
•$180.0 million of repayments of outstanding borrowings under the RCF;
•$104.4 million of unit repurchases;
•$11.8 million of decreases in outstanding checks due mostly to ad valorem tax payments made at the end of 2020;
•$9.9 million of distributions paid to the noncontrolling interest owner of WES Operating;
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Table of Contents •$5.3 million of finance lease payments;
•$2.7 million of distributions paid to the noncontrolling interest owner of Chipeta;
•$400.0 million of borrowings under the RCF, which were used for general partnership purposes and to purchase and retire portions of certain of WES Operating's senior notes via a tender offer; and
•$6.7 million of contributions from related parties.
Debt and credit facilities. As ofSeptember 30, 2022 , the carrying value of outstanding debt was$7.0 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, atSeptember 30, 2022 . The interest rate on the Floating-Rate Senior Notes was 3.56% atSeptember 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 ofSeptember 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. As ofSeptember 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 ofSeptember 30, 2022 , there were$625.0 million of outstanding borrowings and$5.1 million of outstanding letters of credit, resulting in$1.4 billion of available borrowing capacity under the RCF. As ofSeptember 30, 2022 , the interest rate on any outstanding RCF borrowings was 4.65% and the facility-fee rate was 0.25%. As ofSeptember 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. 58
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Table of Contents Offload commitments. During the nine months endedSeptember 30, 2022 , we entered into offload agreements with third parties providing firm-processing capacity through 2025. As ofSeptember 30, 2022 , we have future minimum payments under offload agreements totaling$4.2 million for the remainder of 2022 and a total of$27.4 million in years thereafter. 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 Nine Months Ended
September 30, September 30, September 30,
thousands 2022 June 30, 2022 2022 2021
Net income (loss) attributable to WES $ 265,745 $ 306,317 $ 880,779 $ 672,775
Limited partner interests in WES Operating
not held by WES (1) 5,432 6,267 18,016 13,779
General and administrative expenses (2) 402 621 1,764 2,206
Other income (expense), net (11) (4) (18) (9)
Income taxes - - - 3
Net income (loss) attributable to WES
Operating $ 271,568 $
313,201
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(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:
Nine Months Ended
September 30,
thousands 2022 2021
WES net cash provided by operating activities $ 1,212,207 $ 1,104,994
General and administrative expenses (1) 1,764 2,206
Non-cash equity-based compensation expense (423) 7,040
Changes in working capital (9,101) (10,045)
Other income (expense), net (18) (9)
Income taxes - 3
WES Operating net cash provided by operating activities $
1,204,429
WES net cash provided by (used in) financing activities$ (898,861) $ (1,262,767) Distributions to WES unitholders (2) 538,690 398,896 Distributions to WES from WES Operating (3) (988,395) (486,621) Increase (decrease) in outstanding checks 103 58 Unit repurchases 447,075 104,366 Other 7,942 3,492
WES Operating net cash provided by (used in) financing activities
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(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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