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 2020 Form 10-K as filed with theSEC onFebruary 26, 2021 . 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 ofMarch 31, 2021 (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, and keep-whole 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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Table of Contents •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 impact from disruptions caused by winter storm Uri or the recent blizzard
in the state of
•conflicts of interest among us, 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"); 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 2020 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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Table of Contents
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. 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 March 31, 2021 , 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 39 3 - -
Natural-gas processing plants/trains 25 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 three months ended
•WES Operating redeemed the total principal amount outstanding of the 5.375% Senior Notes due 2021 at par value, pursuant to the optional redemption terms in WES Operating's indenture.
•We repurchased 1,115,808 common units for an aggregate purchase price of
•Our first-quarter 2021 per-unit distribution of
•Natural-gas throughput attributable to WES totaled 4,045 MMcf/d for the three months endedMarch 31, 2021 , representing a 2% increase and 9% decrease compared to the three months endedDecember 31, 2020 , andMarch 31, 2020 , respectively. •Crude-oil and NGLs throughput attributable to WES totaled 604 MBbls/d for the three months endedMarch 31, 2021 , representing a 2% decrease and 21% decrease compared to the three months endedDecember 31, 2020 , andMarch 31, 2020 , respectively.
•Produced-water throughput attributable to WES totaled 595 MBbls/d for the three
months ended
•Operating income (loss) was$292.3 million for the three months endedMarch 31, 2021 , compared to$373.0 million and$(214.9) million for the three months endedDecember 31, 2020 , andMarch 31, 2020 , respectively. The three months endedMarch 31, 2020 , included goodwill and long-lived asset impairments of$596.8 million . •Adjusted gross margin for natural-gas assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$1.19 per Mcf for the three months endedMarch 31, 2021 , representing no change and a 3% increase compared to the three months endedDecember 31, 2020 , andMarch 31, 2020 , respectively. 37
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Table of Contents •Adjusted gross margin for crude-oil and NGLs assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$2.45 per Bbl for the three months endedMarch 31, 2021 , representing a 9% decrease and 1% increase compared to the three months endedDecember 31, 2020 , andMarch 31, 2020 , respectively. •Adjusted gross margin for produced-water assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$0.92 per Bbl for the three months endedMarch 31, 2021 , representing a 6% decrease and 5% decrease compared to the three months endedDecember 31, 2020 , andMarch 31, 2020 , respectively. The following table provides additional information on throughput for the periods presented below: Three Months Ended Inc/ Inc/ March 31, 2021 December 31, 2020 (Dec) March 31, 2020 (Dec)(1) Throughput for natural-gas assets (MMcf/d) Delaware Basin 1,133 1,196 (5) % 1,389 (18) % DJ Basin 1,344 1,197 12 % 1,407 (4) % Equity investments 439 429 2 % 444 (1) % Other 1,279 1,298 (1) % 1,392 (8) % Total throughput for natural-gas assets 4,195 4,120 2 % 4,632 (9) % Throughput for crude-oil and NGLs assets (MBbls/d) Delaware Basin 162 178 (9) % 192 (16) % DJ Basin 82 78 5 % 128 (36) % Equity investments 337 339 (1) % 418 (19) % Other 35 36 (3) % 41 (15) % Total throughput for crude-oil and NGLs assets 616 631 (2) % 779 (21) % Throughput for produced-water assets (MBbls/d) Delaware Basin 607 670 (9) % 717
(15) %
Total throughput for produced-water assets 607 670 (9) % 717 (15) %
_________________________________________________________________________________________
(1)Increases or decreases refer to the comparison of the three months ended
Weather-related impacts. InFebruary 2021 , theU.S. experienced winter storm Uri, bringing extreme cold temperatures, ice, and snow to the centralU.S. , includingTexas , and inMarch 2021 ,Colorado experienced a historic blizzard. Winter storm Uri adversely affected our volumes for approximately ten days and the blizzard inColorado likewise disrupted our assets in that state. We estimate the impact of these weather events to have reduced net income and Adjusted EBITDA (as defined under the caption Key Performance Metrics within this Item 2) for the quarter endedMarch 31, 2021 , by approximately$30 million due to lower volumes, the impact of commodity-prices, and higher operating expenses related to utilities. The estimated impact of the adverse winter weather on our operations and financial results may change and those changes may be material. Any additional inclement weather in the future, or other adverse conditions, including resolution of litigation and other legal disputes and the COVID-19 pandemic and resulting mitigation factors, may have an adverse impact on our operations and financial results. 38
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Table of Contents COVID-19. During 2020, the global outbreak of COVID-19 caused a sharp decline in the worldwide demand for oil, natural gas, and NGLs, which contributed significantly to commodity-price declines and oversupplied commodities markets. These market dynamics have had an adverse impact on producers that provide throughput into our systems, and we have experienced decreased throughput at many of our locations. Additionally, many of our employees have been and may continue to be subject to pandemic-related work-from-home requirements, which require us to take additional actions to ensure that the number of personnel accessing our network remotely does not lead to excessive cyber-security risk levels. Similarly, we are working continually to ensure operational changes that we have made to promote the health and safety of our personnel during this pandemic do not unduly disrupt intracompany communications and key business processes. We consider our risk-mitigation efforts adequate; however, the ultimate impact of the ongoing pandemic is unpredictable, with direct and indirect impacts to our business. WES continues to monitor the COVID-19 situation closely, and as state and federal governments issue additional guidance, we will update our own policies in response to ensure the safety and health of our workforce and communities. The federal government has provided guidance to states on how to safely return personnel to the workplace, which we are following as our workforce returns to WES locations. All WES facilities, including field locations, have been conducting enhanced routine cleaning and disinfecting of common areas and frequently touched surfaces using CDC- and EPA-approved products. Our return-to-work protocols include daily required application-based health self-assessments that must be completed prior to accessing WES work locations. Commodity purchase and sale agreements. EffectiveApril 1, 2020 , changes to marketing-contract terms with AESC terminated AESC's prior status as an agent of the Partnership for third-party sales and established AESC as a customer of the Partnership. Accordingly, we no longer recognize service revenues and/or product sales revenues and the equivalent cost of product expense for the marketing services performed by AESC. Year-over-year variances for the three months endedMarch 31, 2021 , include the following impacts related to this change (i) decrease of$45.9 million in Service revenues - fee based, (ii) decrease of$20.4 million in Product sales, and (iii) decrease of$66.3 million in Cost of product expense. These changes had no impact to Operating income (loss), Net income (loss), the balance sheets, cash flows, or any non-GAAP metric used to evaluate our operations (see Key Performance Metrics within this Item 2). See Note 6-Related-Party Transactions in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. 39
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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
the first quarter of 2020, oil and natural-gas prices decreased significantly,
driven by the expectation of increased supply and sharp declines in demand
resulting from the worldwide macroeconomic downturn that followed the global
outbreak of COVID-19. For example, NYMEX West Texas Intermediate crude-oil daily
settlement prices ranged from a high of $63.27 per barrel in January 2020 to a
low below $20.00 per barrel in April 2020 , with prices rebounding to $59.16 per
barrel at March 31, 2021 . While the extent and duration of the recent
commodity-price volatility cannot be predicted, potential impacts to our
business include the following:
•We have exposure to increased credit risk to the extent any of our customers, including Occidental, is in financial distress. See Liquidity and Capital Resources-Credit risk within this Item 2 for additional information.
•An extended period of diminished earnings may restrict our ability to fully access our RCF, which contains various customary covenants, certain events of default, and a maximum consolidated leverage ratio based on Adjusted EBITDA (as defined in the covenant) related to the trailing twelve-month period. Further, any future waivers or amendments to the RCF also may trigger pricing increases for available credit. See Liquidity and Capital Resources-Debt and credit facilities within this Item 2 for additional information. •As ofMarch 31, 2021 , it is reasonably possible that future commodity-price declines, prolonged depression of commodity prices, changes to producers' drilling plans in response to lower prices, and potential producer bankruptcies could result in future long-lived asset impairments. To the extent producers continue with development plans in our areas of operation, we will continue to connect new wells or production facilities to our systems to maintain 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. Additionally, we will 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. ACQUISITIONS AND DIVESTITURESFort Union and Bison facilities. InOctober 2020 , we (i) sold our 14.81% interest inFort Union , which was accounted for under the equity method of accounting, and (ii) entered into an option agreement to sell the Bison treating facility, located inNortheast Wyoming , to a third party, initially exercisable during the first quarter of 2021 and subsequently extended toMay 9, 2021 . During the second quarter of 2021, the third party exercised its option to purchase the Bison treating facility and it satisfied the held-for-sale criteria. The sale is expected to close in the second quarter of 2021. 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. 40
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Table of Contents
RESULTS OF OPERATIONS
OPERATING RESULTS
In November 2020 , the SEC issued a final rule to modernize and simplify
Management's Discussion and Analysis and certain financial disclosure
requirements in SEC Regulation S-K. As permitted by this final rule, the
analysis herein reflects the optional approach to discuss results of operations
on a sequential-quarter basis, which we believe will provide information that is
most useful to investors in assessing our quarterly results of operations going
forward. Also as required by the final rule, we have included the comparison of
the current quarter to the prior-year quarter for this filing only, and will
cease to provide this comparison in future filings.
For purposes of the following discussion, any increases or decreases refer to
the comparison of the three months ended March 31, 2021 , to the three months
ended December 31, 2020 , or to the three months ended March 31, 2020 , as
applicable.
The following tables and discussion present a summary of our results of
operations:
Three Months Ended
December 31,
thousands March 31, 2021 2020 March 31, 2020
Total revenues and other (1) $ 674,974 $ 647,480 $ 774,313
Equity income, net - related parties 52,165 49,962 61,347
Total operating expenses (1) 434,220 336,773 1,050,523
Gain (loss) on divestiture and other, net (583) 12,285 (40)
Operating income (loss) 292,336 372,954 (214,903)
Interest income - Anadarko note receivable - - 4,225
Interest expense (98,493) (101,247) (88,586)
Gain (loss) on early extinguishment of debt (289) 862 7,345
Other income (expense), net (1,207) 413 (1,761)
Income (loss) before income taxes 192,347 272,982 (293,680)
Income tax expense (benefit) 1,112 2,206 (4,280)
Net income (loss) 191,235 270,776 (289,400)
Net income (loss) attributable to noncontrolling
interests 5,444 6,885 (32,873)
Net income (loss) attributable to Western Midstream
Partners, LP (2) $ 185,791 $ 263,891 $ (256,527)
Key performance metrics (3)
Adjusted gross margin $ 614,624 $ 648,404 $ 701,315
Adjusted EBITDA 443,110 483,980 513,587
Free cash flow 213,822 464,735 214,587
_________________________________________________________________________________________
(1)Total revenues and other includes amounts earned from services provided to
related parties and from the sale of residue gas and NGLs to related parties.
Total operating expenses includes amounts charged by related parties for
services and reimbursements of amounts paid by related parties to third parties
on our behalf. 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.
(3)Adjusted gross margin, Adjusted EBITDA, and Free cash flow are defined under
the caption Key Performance Metrics within this Item 2. For reconciliations of
these non-GAAP financial measures to their most directly comparable financial
measures calculated and presented in accordance with GAAP, see Key Performance
Metrics-Reconciliation of non-GAAP financial measures within this Item 2.
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Throughput
Three Months Ended
Inc/ Inc/
March 31, 2021 December 31, 2020 (Dec) March 31, 2020 (Dec)(1)
Throughput for natural-gas assets (MMcf/d)
Gathering, treating, and transportation 519 521 - % 539 (4) %
Processing 3,237 3,170 2 % 3,649 (11) %
Equity investments (2) 439 429 2 % 444 (1) %
Total throughput 4,195 4,120 2 % 4,632 (9) %
Throughput attributable to
noncontrolling interests (3) 150 149 1 % 166 (10) %
Total throughput attributable to WES
for natural-gas assets 4,045 3,971 2 % 4,466 (9) %
Throughput for crude-oil and NGLs assets (MBbls/d) Gathering, treating, and transportation
279 292 (4) % 361 (23) %
Equity investments (4) 337 339 (1) % 418 (19) %
Total throughput 616 631 (2) % 779 (21) %
Throughput attributable to
noncontrolling interests (3) 12 12 - % 16 (25) %
Total throughput attributable to WES
for crude-oil and NGLs assets 604 619 (2) % 763 (21) %
Throughput for produced-water assets (MBbls/d)
Gathering and disposal 607 670 (9) % 717 (15) %
Throughput attributable to
noncontrolling interests (3) 12 13 (8) % 14 (14) %
Total throughput attributable to WES
for produced-water assets 595 657 (9) % 703 (15) %
_________________________________________________________________________________________
(1)Increases or decreases refer to the comparison of the three months endedMarch 31, 2021 , to the three months endedMarch 31, 2020 . (2)Represents the 14.81% share of averageFort Union throughput (until divested inOctober 2020 ), 22% share of average Rendezvous throughput, 50% share of averageMi Vida and Ranch Westex throughput, and 30% share of averageRed Bluff Express throughput. (3)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. (4)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 2 MMcf/d and 20 MMcf/d compared to the three months endedDecember 31, 2020 , andMarch 31, 2020 , respectively, primarily due to (i) production declines and the impact of winter storm Uri at theSpringfield gas-gathering system and (ii) lower throughput at the Bison facility due to production declines in the area. These decreases were offset partially by increased production in areas around the Marcellus Interest systems. Processing throughput increased by 67 MMcf/d compared to the three months endedDecember 31, 2020 , primarily due to an additional third-party connection to Latham Train II at theDJ Basin complex beginningJanuary 1, 2021 , partially offset by lower production and the impact of winter storm Uri at theWest Texas complex. 42
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Table of Contents Processing throughput decreased by 412 MMcf/d compared to the three months endedMarch 31, 2020 , primarily due to (i) lower production and the impact of winter storm Uri at theWest Texas complex, (ii) lower throughput at theDJ Basin complex due to production declines in the area, partially offset by an additional third-party connection to Latham Train II beginningJanuary 1, 2021 , and (iii) lower throughput at the Chipeta and Granger complexes due to production declines in the area. Equity-investment throughput increased by 10 MMcf/d compared to the three months endedDecember 31, 2020 , primarily due to increased volumes on Red Bluff Express resulting from increased pipeline commitments, partially offset by decreased volumes at theFort Union system, which was sold to a third party during the fourth quarter of 2020. Equity-investment throughput decreased by 5 MMcf/d compared to the three months endedMarch 31, 2020 , primarily due to (i) decreased volumes at theFort Union system, which was sold to a third party during the fourth quarter of 2020 and (ii) decreased volumes at the Rendezvous system due to production declines in the area. These decreases were offset partially by increased volumes on Red Bluff Express resulting from increased pipeline commitments.
Crude-oil and NGLs assets
Gathering, treating, and transportation throughput decreased by 13 MBbls/d compared to the three months endedDecember 31, 2020 , primarily due to decreased throughput at the DBM oil system resulting from lower production and the impact of winter storm Uri. Gathering, treating, and transportation throughput decreased by 82 MBbls/d compared to the three months endedMarch 31, 2020 , primarily due to (i) lower throughput at theDJ Basin oil system due to production declines in the area and (ii) lower throughput at the DBM oil system resulting from lower production and the impact of winter storm Uri. Equity-investment throughput decreased by 2 MBbls/d compared to the three months endedDecember 31, 2020 , primarily due to decreased volumes on the Whitethorn pipeline, partially offset by increased volumes on Cactus II and the Saddlehorn pipeline. Equity-investment throughput decreased by 81 MBbls/d compared to the three months endedMarch 31, 2020 , primarily due to decreased volumes on the Whitethorn pipeline and Cactus II.
Produced-water assets
Gathering and disposal throughput decreased by 63 MBbls/d and 110 MBbls/d
compared to the three months ended
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Service Revenues
Three Months Ended
December 31, Inc/ Inc/
thousands except percentages March 31, 2021 2020 (Dec) March 31, 2020 (Dec)(1)
Service revenues - fee based $ 572,275 $ 603,777 (5) % $ 701,396 (18) %
Service revenues - product based 31,652 13,132 141 % 15,921 99 %
Total service revenues $ 603,927 $ 616,909 (2) % $ 717,317 (16) %
_________________________________________________________________________________________
(1)Increases or decreases refer to the comparison of the three months ended
Service revenues - fee based
Service revenues - fee based decreased by$31.5 million compared to the three months endedDecember 31, 2020 , primarily due to (i)$10.2 million at the DBM water systems from decreased throughput, including the impact of winter storm Uri, and a lower average fee resulting from a cost-of-service rate redetermination effectiveJanuary 1, 2021 , (ii)$8.9 million at theSpringfield system due to annual cost-of-service rate adjustments that increased revenue in the fourth quarter of 2020, (iii)$6.7 million at the DBM oil system and$4.9 million at theWest Texas complex from decreased throughput, including the impact of winter storm Uri, and (iv)$5.5 million at theDJ Basin complex from a lower average gathering fee, partially offset by increased throughput. These decreases were offset partially by an increase of$8.2 million at theDJ Basin oil system due to an annual cost-of-service rate adjustment made during the fourth quarter of 2020 and increased throughput. Service revenues - fee based decreased by$129.1 million compared to the three months endedMarch 31, 2020 , primarily due to (i)$45.9 million , resulting from a change in accounting for the marketing contracts with AESC effectiveApril 1, 2020 (see Executive Summary-Commodity purchase and sale agreements within this Item 2), (ii)$22.7 million at theDJ Basin complex from a lower average gathering fee and decreased throughput, (iii)$20.9 million at theWest Texas complex from decreased throughput, including the impact of winter storm Uri, (iv)$16.8 million at the DBM oil system from decreased throughput, including the impact of winter storm Uri, and the effect of the straight-line treatment of lease revenue under the operating and maintenance agreement with Occidental, and (v)$13.1 million at the DBM water systems from decreased throughput, including the impact of winter storm Uri, and a lower average fee resulting from a cost-of-service rate redetermination effectiveJanuary 1, 2021 .
Service revenues - product based
Service revenues - product based increased by$18.5 million and$15.7 million compared to the three months endedDecember 31, 2020 , andMarch 31, 2020 , respectively, primarily due to (i)$8.6 million and$4.2 million , respectively, at theWest Texas complex due to an increase in electricity-related rates billed to customers during winter storm Uri, (ii)$3.6 million and$3.6 million , respectively, at the Hilight system due to increased prices, (iii)$3.3 million and$4.0 million , respectively, at theDJ Basin complex due to increased third-party volumes, and (iv) increased pricing across several systems. 44
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Product Sales
Three Months Ended
thousands except percentages and December 31, Inc/ March 31, Inc/
per-unit amounts March 31, 2021 2020 (Dec) 2020 (Dec)(1)
Natural-gas sales $ 21,419 $ 6,593 NM $ 10,539 103 %
NGLs sales 49,386 23,475 110 % 46,110 7 %
Total Product sales $ 70,805 $ 30,068 135 % $ 56,649 25 %
Per-unit gross average sales price:
Natural gas (per Mcf) $ 5.98 $ 1.86 NM $ 1.30 NM
NGLs (per Bbl) 55.25 16.29 NM 15.45 NM
_________________________________________________________________________________________
NM-Not meaningful
(1)Increases or decreases refer to the comparison of the three months ended
Natural-gas sales
Natural-gas sales increased by$14.8 million compared to the three months endedDecember 31, 2020 , primarily due to increases of$15.4 million at theWest Texas complex and$3.7 million at the MGR assets attributable to increases in average prices. These increases were offset partially by a decrease of$4.9 million at theDJ Basin complex attributable to a decrease in volumes, partially offset by increased average prices. Natural-gas sales increased by$10.9 million compared to the three months endedMarch 31, 2020 , primarily due to increases of (i)$16.3 million at theWest Texas complex attributable to an increase in average prices, partially offset by decreased volumes sold, (ii)$4.4 million at the MGR assets attributable to an increase in average prices, and (iii)$1.4 million resulting from a change in accounting for the marketing contracts with AESC effectiveApril 1, 2020 (see Executive Summary-Commodity purchase and sale agreements within this Item 2). These increases were offset partially by a decrease of$10.5 million at theDJ Basin complex attributable to a decrease in volumes, partially offset by increased average prices.
NGLs sales
NGLs sales increased by$25.9 million compared to the three months endedDecember 31, 2020 , primarily due to increases of (i)$17.6 million at theWest Texas Complex attributable to an increase in average prices, partially offset by decreased volumes sold, (ii)$2.5 million at the Chipeta complex attributable to an increase in average prices, and (iii)$2.4 million at theDJ Basin complex attributable to an increase in average prices and volumes sold. NGLs sales increased by$3.3 million compared to the three months endedMarch 31, 2020 , primarily due to increases of (i)$19.1 million at theWest Texas complex attributable to an increase in average prices, partially offset by decreased volumes sold and (ii)$3.6 million at the Chipeta complex and$2.6 million at the Granger complex attributable to increases in average prices. These increases were offset partially by a decrease of$21.8 million resulting from a change in accounting for the marketing contracts with AESC effectiveApril 1, 2020 (see Executive Summary-Commodity purchase and sale agreements within this Item 2).
Equity Income, Net - Related Parties
Three Months Ended
December 31, Inc/ March 31, Inc/
thousands except percentages March 31, 2021 2020 (Dec) 2020 (Dec)(1)
Equity income, net - related parties
4 % $ 61,347 (15) %
_________________________________________________________________________________________
(1)Increases or decreases refer to the comparison of the three months ended
Equity income, net - related parties decreased by$9.2 million compared to the three months endedMarch 31, 2020 , primarily due to a decrease in equity income fromWhitethorn LLC related to commercial activities and lower volumes. In addition, decreased equity income from lower volumes at White Cliffs, Cactus II, and FRP were mostly offset by increased equity income from higher volumes at Red Bluff Express and Saddlehorn. 45
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Cost of Product and Operation and Maintenance Expenses
Three Months Ended
December 31, Inc/ Inc/
thousands except percentages March 31, 2021 2020 (Dec) March 31, 2020 (Dec)(1)
NGLs purchases $ 30,919 $ 20,155 53 % $ 83,789 (63) %
Residue purchases 57,904 21,195 173 % 21,219 173 %
Other 146 (6,873) 102 % (1,738) 108 %
Cost of product 88,969 34,477 158 % 103,270 (14) %
Operation and maintenance 140,332 144,204 (3) % 159,191 (12) %
Total Cost of product and Operation
and maintenance expenses $ 229,301 $ 178,681 28 % $ 262,461 (13) %
_________________________________________________________________________________________
(1)Increases or decreases refer to the comparison of the three months ended
NGLs purchases
NGLs purchases increased by$10.8 million compared to the three months endedDecember 31, 2020 , primarily due to increases of (i)$3.3 million at theDJ Basin complex attributable to average-price and purchased-volume increases, (ii)$2.4 million at theWest Texas complex attributable to average-price increases, and (iii) average-price increases across several other systems. NGLs purchases decreased by$52.9 million compared to the three months endedMarch 31, 2020 , primarily due to a decrease of$60.0 million resulting from a change in accounting for the marketing contracts with AESC effectiveApril 1, 2020 (see Executive Summary-Commodity purchase and sale agreements within this Item 2), partially offset by an increase of$5.2 million at theDJ Basin complex attributable to average-price increases, partially offset by purchased-volume decreases. Residue purchases Residue purchases increased by$36.7 million compared to the three months endedDecember 31, 2020 , primarily due to increases of (i)$24.5 million at theWest Texas complex attributable to purchased-volume increases and an average-price increase due to the impact of winter storm Uri, (ii)$3.8 million at the Hilight system attributable to average-price increases due to weather-related impacts, and (iii)$3.3 million at theDJ Basin complex attributable to average-price increases, partially offset by purchased-volume decreases. Residue purchases increased by$36.7 million compared to the three months endedMarch 31, 2020 , primarily due to increases of (i)$26.8 million at theWest Texas complex attributable to average-price increases due to the impact of winter storm Uri, partially offset by purchased-volume decreases, (ii)$4.1 million at the Hilight system attributable to average-price increases due to weather-related impacts, (iii)$3.2 million at the MGR assets attributable to average-price increases, and (iv)$3.1 million at the Chipeta complex due to average-price increases. These increases were partially offset by a decrease of$5.6 million resulting from a change in accounting for the marketing contracts with AESC effectiveApril 1, 2020 (see Executive Summary-Commodity purchase and sale agreements within this Item 2).
Other items
Other items increased by$7.0 million and$1.9 million compared to the three months endedDecember 31, 2020 , andMarch 31, 2020 , respectively, primarily due to increases of$12.3 million and$12.7 million , respectively, at theWest Texas complex primarily attributable to changes in imbalance positions, partially offset by decreases of$6.1 million and$11.2 million , respectively, at theDJ Basin complex due to changes in imbalance positions. 46
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Table of Contents Operation and maintenance expense Operation and maintenance expense decreased by$3.9 million compared to the three months endedDecember 31, 2020 , due to combined decreases of$8.2 million primarily related to$2.9 million and$2.7 million at theSpringfield system andDJ Basin complex, respectively, due to reduced field-related expenses, partially offset by increased salaries and wages and surface maintenance and plant repairs expense. These decreases were offset partially by an increase of$5.4 million at theWest Texas complex as a result of increased utilities expense due to the impact of winter storm Uri, partially offset by a decrease in other field-related expenses. Operation and maintenance expense decreased by$18.9 million compared to the three months endedMarch 31, 2020 , primarily as a result of focused cost-savings initiatives related to the stand-up of WES as an independent organization, resulting in decreases of (i)$11.4 million at theWest Texas complex primarily attributable to reduced field-related expenses, partially offset by increased utilities due to the impact of winter storm Uri, and (ii)$9.5 million at theDJ Basin complex primarily due to reduced field-related expenses, partially offset by increased utilities. Other Operating Expenses Three Months Ended December 31, Inc/ Inc/ thousands except percentages March 31, 2021 2020 (Dec) March 31, 2020 (Dec)(1) General and administrative$ 45,116 $ 37,303 21 %$ 40,465 11 % Property and other taxes 14,384 11,077 30 % 18,476 (22) % Depreciation and amortization 130,553 106,398 23 % 132,319 (1) % Long-lived asset and other impairments 14,866 3,314 NM 155,785 (90) % Goodwill impairment - - NM 441,017 (100) % Total other operating expenses$ 204,919 $ 158,092 30 %$ 788,062 (74) %
_________________________________________________________________________________________
(1)Increases or decreases refer to the comparison of the three months ended
General and administrative expenses
General and administrative expenses increased by$7.8 million compared to the three months endedDecember 31, 2020 , primarily due to an increase of$6.9 million in personnel costs primarily related to customary fluctuations in employee vacation accruals and increased bonus-related contributions under our employee savings plan. General and administrative expenses increased by$4.7 million compared to the three months endedMarch 31, 2020 , primarily due to (i) a$4.5 million increase in corporate expenses and professional fees and (ii) a$1.9 million increase related to information technology services and fees. These increases were offset partially by a decrease of$2.3 million in personnel costs primarily due to WES securing its own dedicated workforce as ofDecember 2019 and the related transition activities.
Property and other taxes
Property and other taxes increased by$3.3 million compared to the three months endedDecember 31, 2020 , due to ad valorem tax increases of$4.6 million at theWest Texas complex primarily due to capital projects being placed into service. This increase was offset partially by ad valorem tax decreases of$2.5 million at theDJ Basin complex primarily attributable to favorable differences between actual and estimated tax payments related to the 2020 fiscal year. Property and other taxes decreased by$4.1 million compared to the three months endedMarch 31, 2020 , primarily due to ad valorem tax decreases at theDJ Basin complex,DJ Basin oil system, andWest Texas complex due to favorable differences between actual and estimated tax payments related to the 2020 fiscal year. 47
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Table of Contents Depreciation and amortization expense
Depreciation and amortization expense increased by
Long-lived asset and other impairment expense
Long-lived asset and other impairment expense for the three months endedMarch 31, 2021 , was primarily due to$13.5 million of impairments at theDJ Basin complex due to cancellation of projects. Long-lived asset and other impairment expense for the three months endedDecember 31, 2020 , was primarily due to an impairment at the DBM oil system primarily due to cancellation of projects. Long-lived asset and other impairment expense for the three months endedMarch 31, 2020 , was primarily due to (i)$145.1 million of impairments for assets located inWyoming andUtah and (ii) impairments at theDJ Basin complex. 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.
During the three months endedMarch 31, 2020 , an interim goodwill impairment test was performed due to significant unit-price declines triggered by the combined impacts from the global outbreak of COVID-19 and the oil-market disruption. As a result of the interim impairment test, a goodwill impairment of$441.0 million was recognized for the gathering and processing reporting unit. For additional information, see Note 9-Goodwill in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
Interest Income - Anadarko Note Receivable and Interest Expense
Three Months Ended
December 31, Inc/ Inc/
thousands except percentages March 31, 2021 2020 (Dec) March 31, 2020 (Dec)(1)
Interest income - Anadarko note
receivable $ - $ - - % $ 4,225 (100) %
Third parties
Long-term and short-term debt $ (95,722) $ (96,195) - % $ (89,769) 7 %
Finance lease liabilities (298) (348) (14) % (405) (26) %
Amortization of debt issuance costs
and commitment fees (3,338) (3,449) (3) % (3,127) 7 %
Capitalized interest 865 (1,292) 167 % 4,758 (82) %
Related parties
Finance lease liabilities - 37 100 % (43) (100) %
Interest expense $ (98,493) $ (101,247) (3) % $ (88,586) 11 %
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(1)Increases or decreases refer to the comparison of the three months ended
Interest income
Interest income -Anadarko note receivable decreased by$4.2 million compared to the three months endedMarch 31, 2020 , due to the exchange of theAnadarko note receivable under the Unit Redemption Agreement inSeptember 2020 . See Note 6-Related-Party Transactions in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. 48
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Table of Contents Interest expense Interest expense decreased by$2.8 million compared to the three months endedDecember 31, 2020 , primarily due to (i)$2.0 million of lower interest incurred on the 5.375% Senior Notes due 2021 that were called onMarch 1, 2021 and (ii) an increase of$2.2 million in capitalized interest due to a change in the mix of active projects. These decreases to interest expense were offset partially by increases of$1.4 million due to higher effective interest rates resulting from credit-rating downgrades on the 3.100% Senior Notes due 2025, 4.050% Senior Notes due 2030, 5.250% Senior Notes due 2050, and Floating-Rate Senior Notes due 2023. Interest expense increased by$9.9 million compared to the three months endedMarch 31, 2020 , primarily due to (i)$13.8 million of additional interest incurred from higher effective interest rates resulting from credit-rating downgrades and a full quarter of expense on the 3.100% Senior Notes due 2025, 4.050% Senior Notes due 2030, and 5.250% Senior Notes due 2050 and (ii) a decrease of$3.9 million in capitalized interest due to decreased capital expenditures. These increases were offset partially by decreases of (i)$4.2 million due to lower outstanding balances on the 5.375% Senior Notes due 2021 that were called onMarch 1, 2021 , 4.000% Senior Notes due 2022, and Floating-Rate Senior Notes due 2023 and (ii)$3.6 million due to lower outstanding borrowings under the RCF in 2021. See Liquidity and Capital Resources-Debt and credit facilities within this Item 2. Income Tax Expense (Benefit) Three Months Ended Inc/ Inc/ thousands except percentages March 31, 2021 December 31, 2020 (Dec) March 31, 2020 (Dec)(1) Income (loss) before income taxes$ 192,347 $ 272,982 (30) % $ (293,680) 165 % Income tax expense (benefit) 1,112 2,206 (50) % (4,280) 126 % Effective tax rate 1 % 1 % 1 %
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(1)Increases or decreases refer to the comparison of the three months ended
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 primarily was due to ourTexas margin tax liability. 49
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Table of Contents
KEY PERFORMANCE METRICS
Three Months Ended
thousands except percentages and December 31, Inc/ Inc/
per-unit amounts March 31, 2021 2020 (Dec) March 31, 2020 (Dec)(1)
Adjusted gross margin for natural-gas
assets $ 432,389 $ 436,294 (1) % $ 471,366 (8) %
Adjusted gross margin for crude-oil
and NGLs assets 133,145 152,909 (13) % 167,828 (21) %
Adjusted gross margin for
produced-water assets 49,090 59,201 (17) % 62,121 (21) %
Adjusted gross margin 614,624 648,404 (5) % 701,315 (12) %
Per-Mcf Adjusted gross margin for
natural-gas assets (2) 1.19 1.19 - % 1.16 3 %
Per-Bbl Adjusted gross margin for
crude-oil and NGLs assets (3) 2.45 2.69 (9) % 2.42 1 %
Per-Bbl Adjusted gross margin for
produced-water assets (4) 0.92 0.98 (6) % 0.97 (5) %
Adjusted EBITDA 443,110 483,980 (8) % 513,587 (14) %
Free cash flow 213,822 464,735 (54) % 214,587 - %
_________________________________________________________________________________________
(1)Increases or decreases refer to the comparison of the three months endedMarch 31, 2021 , to the three months endedMarch 31, 2020 . (2)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. (3)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. (4)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 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. 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$33.8 million compared to the three months endedDecember 31, 2020 , primarily due to (i) decreased throughput and a lower average fee resulting from a cost-of-service rate redetermination effectiveJanuary 1, 2021 , at the DBM water systems, (ii) a decrease in distributions fromWhitethorn LLC and Cactus II, (iii) an annual cost-of-service rate adjustment at theSpringfield system that increased revenues in the fourth quarter of 2020, and (iv) decreased throughput at the DBM oil system. These decreases were partially offset by an increase at theDJ Basin oil system due to an annual cost-of-service rate adjustment made during the fourth quarter of 2020. Adjusted gross margin decreased by$86.7 million compared to the three months endedMarch 31, 2020 , primarily due to (i) decreased throughput at theWest Texas complex andDJ Basin oil system, (ii) a lower average gathering fee and decreased throughput at theDJ Basin complex, (iii) decreased throughput and the effect of the straight-line treatment of lease revenue under the operating and maintenance agreement with Occidental at the DBM oil system, and (iv) decreased throughput and a lower average fee resulting from a cost-of-service rate redetermination effectiveJanuary 1, 2021 at the DBM water systems. Per-Mcf Adjusted gross margin for natural-gas assets increased by$0.03 compared to the three months endedMarch 31, 2020 , primarily due to a higher cost-of-service rate effectiveJanuary 1, 2021 , at theWest Texas complex, partially offset by decreased throughput at theDJ Basin complex, which has a higher-than-average per-Mcf margin as compared to our other natural-gas assets. 50
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Table of Contents Per-Bbl Adjusted gross margin for crude-oil and NGLs assets decreased by$0.24 compared to the three months endedDecember 31, 2020 , primarily due to (i) an annual cost-of-service rate adjustment at theSpringfield system that increased revenues in the fourth quarter of 2020 and (ii) a decrease in distributions from Cactus II. These decreases were partially offset by an annual cost-of-service rate adjustment made during the fourth quarter of 2020 and increased throughput at theDJ Basin oil system. Per-Bbl Adjusted gross margin for crude-oil and NGLs assets increased by$0.03 compared to the three months endedMarch 31, 2020 , primarily due to a higher cost-of-service rate effectiveJanuary 1, 2021 , at theDJ Basin oil system, partially offset by (i) decreased throughput and the effect of the straight-line treatment of lease revenue under the operating and maintenance agreement with Occidental at the DBM oil system, which has a higher-than-average per-Bbl margin as compared to our other crude-oil and NGLs assets and (ii) a decrease in distributions from Cactus II. Per-Bbl Adjusted gross margin for produced-water assets decreased by$0.06 and$0.05 compared to the three months endedDecember 31, 2020 , andMarch 31, 2020 , respectively, primarily due to a lower average fee resulting from a cost-of-service rate redetermination effectiveJanuary 1, 2021 . 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$40.9 million compared to the three months endedDecember 31, 2020 , primarily due to (i) a$54.5 million increase in cost of product (net of lower of cost or market inventory adjustments), (ii) an$8.0 million decrease in distributions from equity investments, (iii)$7.0 million increase in general and administrative expenses excluding non-cash equity-based compensation expense, and (iv)$3.3 million increase in property taxes. These amounts were offset partially by (i) a$27.5 million increase in total revenues and other and (ii) a$3.9 million decrease in operation and maintenance expenses. Adjusted EBITDA decreased by$70.5 million compared to the three months endedMarch 31, 2020 , primarily due to (i) a$99.3 million decrease in total revenues and other, (ii) a$4.7 million decrease in distributions from equity investments, and (iii) a$3.2 million increase in general and administrative expenses excluding non-cash equity-based compensation expense. These amounts were offset partially by (i) an$18.9 million decrease in operation and maintenance expenses, (ii) a$14.1 million decrease in cost of product (net of lower of cost or market inventory adjustments), and (iii) a$4.1 million decrease in property taxes. The above-described variances in cost of product and total revenues and other include the impacts resulting from a change in accounting for the marketing contracts with AESC effectiveApril 1, 2020 , which had no net impact on Adjusted EBITDA (see Executive Summary-Commodity purchase and sale agreements within this Item 2). 51
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Table of Contents 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$250.9 million compared to the three months endedDecember 31, 2020 , primarily due to (i) a decrease of$244.0 million in net cash provided by operating activities and (ii) an increase of$9.0 million in capital expenditures. Free cash flow decreased by$0.8 million compared to the three months endedMarch 31, 2020 , primarily due to a decrease of$131.8 million in net cash provided by operating activities, partially offset by (i) a decrease of$113.0 million in capital expenditures, (ii) a decrease of$10.9 million in contributions to equity investments, and (iii) a$7.1 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. 52
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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 used by us
that is most directly comparable to Adjusted gross margin is operating income
(loss). Net income (loss) and net cash provided by operating activities are the
GAAP measures used by us that are most directly comparable to Adjusted EBITDA.
The GAAP measure used by us 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 operating income (loss), 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
operating income (loss), 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) operating income (loss),
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 operating income (loss) 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
December 31,
thousands March 31, 2021 2020 March 31, 2020Reconciliation of Operating income (loss) to Adjusted gross margin Operating income (loss)
$ 292,336 $ 372,954 $ (214,903)
Add:
Distributions from equity investments 61,189 69,231 65,920 Operation and maintenance 140,332 144,204 159,191 General and administrative 45,116 37,303 40,465 Property and other taxes 14,384 11,077 18,476 Depreciation and amortization 130,553 106,398 132,319 Impairments (1) 14,866 3,314 596,802
Less:
Gain (loss) on divestiture and other, net (583) 12,285 (40) Equity income, net - related parties 52,165 49,962 61,347
Reimbursed electricity-related charges recorded as revenues
17,312 18,161 19,223
Adjusted gross margin attributable to noncontrolling interests (2)
15,258 15,669 16,425
Adjusted gross margin $ 614,624 $ 648,404 $ 701,315
Adjusted gross margin for natural-gas assets $ 432,389 $ 436,294 $ 471,366
Adjusted gross margin for crude-oil and NGLs assets 133,145 152,909 167,828
Adjusted gross margin for produced-water assets 49,090 59,201 62,121
_________________________________________________________________________________________
(1)Includes goodwill impairment for the three months endedMarch 31, 2020 . See Note 9-Goodwill in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. (2)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. 53
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Three Months Ended
December 31,
thousands March 31, 2021 2020 March 31, 2020Reconciliation of Net income (loss) to Adjusted EBITDA Net income (loss)
$ 191,235 $ 270,776 $ (289,400)
Add:
Distributions from equity investments 61,189 69,231 65,920 Non-cash equity-based compensation expense 6,734 5,935 5,234 Interest expense 98,493 101,247 88,586 Income tax expense 1,112 2,206 - Depreciation and amortization 130,553 106,398 132,319 Impairments (1) 14,866 3,314 596,802 Other expense 1,218 - 4,048 Less: Gain (loss) on divestiture and other, net (583) 12,285 (40) Gain (loss) on early extinguishment of debt (289) 862 7,345 Equity income, net - related parties 52,165 49,962 61,347 Interest income - Anadarko note receivable - - 4,225 Other income - 412 - Income tax benefit - - 4,280 Adjusted EBITDA attributable to noncontrolling interests (2) 10,997 11,606 12,765 Adjusted EBITDA$ 443,110 $ 483,980 $ 513,587
Reconciliation of Net cash provided by operating activities to Adjusted EBITDA Net cash provided by operating activities
$ 261,550 $ 505,525 $ 393,311 Interest (income) expense, net 98,493 101,247 84,361 Accretion and amortization of long-term obligations, net (2,088) (2,172) (2,100) Current income tax expense (benefit) 555 1,303 (2,112) Other (income) expense, net 1,207 (413) 1,761 Cash paid to settle interest-rate swaps - 6,440 -
Distributions from equity investments in excess of cumulative earnings - related parties
12,141 10,410 5,052
Changes in assets and liabilities:
Accounts receivable, net 30,182 1,350 (7,702)
Accounts and imbalance payables and accrued
liabilities, net 16,467 (106,623) 28,924
Other items, net 35,600 (21,481) 24,857
Adjusted EBITDA attributable to noncontrolling
interests (2) (10,997) (11,606) (12,765)
Adjusted EBITDA $ 443,110 $ 483,980 $ 513,587
Cash flow information
Net cash provided by operating activities $ 261,550 $ 393,311
Net cash used in investing activities (46,472) (178,724)
Net cash provided by (used in) financing activities (603,624) (162,267)
_________________________________________________________________________________________
(1)Includes goodwill impairment for the three months endedMarch 31, 2020 . See Note 9-Goodwill in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. (2)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. 54
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Three Months Ended
December 31,
thousands March 31, 2021 2020 March 31, 2020Reconciliation of Net cash provided by operating activities to Free cash flow Net cash provided by operating activities
$ 261,550 $ 505,525 $ 393,311
Less:
Capital expenditures 59,783 50,829 172,816 Contributions to equity investments - related parties 86 371 10,960
Add:
Distributions from equity investments in excess of cumulative earnings - related parties
12,141 10,410 5,052
Free cash flow $ 213,822 $ 464,735 $ 214,587
Cash flow information
Net cash provided by operating activities $ 261,550 $ 393,311
Net cash used in investing activities (46,472) (178,724)
Net cash provided by (used in) financing activities (603,624) (162,267)
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LIQUIDITY AND CAPITAL RESOURCES
Our primary cash uses include quarterly distributions, debt service, capital
expenditures, customary operating expenses, and distributions to our
noncontrolling interest owners. Our sources of liquidity as of March 31, 2021 ,
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 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 of Directors 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 pay distributions or to fund 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) reserves 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 of
Directors declared a cash distribution to unitholders for the first quarter of
2021 of $0.31500 per unit, or $133.0 million in the aggregate. The cash
distribution is payable on May 14, 2021 , to our unitholders of record at the
close of business on April 30, 2021 .
In November 2020 , we announced a buyback program of up to $250.0 million of our
common units through December 31, 2021 . 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 the 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 quarter ended
March 31, 2021 , we repurchased 1,115,808 common units on the open market for an
aggregate purchase price of $16.2 million . We canceled the units immediately
upon receipt. As of March 31, 2021 , we had an authorized amount of $201.2
million remaining under the Purchase Program.
Management continuously monitors our leverage position and coordinates our
capital expenditures and quarterly distributions 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. As of March 31, 2021 , we had a $120.9 million working capital
surplus, which we define as the amount by which current assets exceed current
liabilities. 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 March 31, 2021 , there was $2.0 billion available for borrowing
under the RCF. See Note 10-Selected Components of Working Capital and
Note 11-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 includes maintenance capital
expenditures, which include those expenditures required to maintain existing
operating capacity and service capability of our assets, such as to replace
system components and equipment that have been subject to significant use over
time, become obsolete, or reached the end of their useful lives, to remain in
compliance with regulatory or legal requirements, or to complete additional well
connections to maintain existing system throughput and related cash flows; and
expansion capital expenditures, which include expenditures to construct new
midstream infrastructure and expenditures incurred to extend the useful lives of
our assets, reduce costs, increase revenues, or increase system throughput or
capacity from current levels, including well connections that increase existing
system throughput.
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:
Three Months Ended
March 31,
thousands 2021 2020
Acquisitions (1) $ 2,000 $ -
Capital expenditures (2) 59,783 172,816
Capital incurred (2) 59,565 151,714
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(1)See Note 6-Related-Party Transactions for information regarding equipment purchases from related parties. (2)For the three months endedMarch 31, 2021 and 2020, included$0.9 million and$4.8 million , respectively, of capitalized interest. Capital expenditures decreased by$113.0 million for the three months endedMarch 31, 2021 , primarily due to decreases of (i)$56.2 million at theWest Texas complex primarily attributable to decreases in pipeline and well connection projects, (ii)$21.4 million at theDJ Basin complex primarily related to the completion of Latham Train II that commenced operations in the first quarter of 2020 and decreases in pipeline, well connection, and compression projects, (iii)$18.2 million at the DBM water systems primarily due to reduced construction of additional water-disposal facilities and gathering projects, and (iv)$16.5 million at the DBM oil system primarily related to the completion of the Loving ROTF Trains III and IV that commenced operations during the first and third quarters of 2020, respectively, and decreases in pipeline and well connection projects. 57
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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:
Three Months Ended
March 31,
thousands 2021 2020
Net cash provided by (used in):
Operating activities $ 261,550 $ 393,311
Investing activities (46,472) (178,724)
Financing activities (603,624) (162,267)
Net increase (decrease) in cash and cash equivalents
Operating activities. Net cash provided by operating activities decreased for the three months endedMarch 31, 2021 , primarily due to (i) lower cash operating income, (ii) the impact of changes in assets and liabilities, (iii) lower distributions from equity investments, (iv) higher interest expense, and (v) lower interest income. Refer to Operating Results within this Item 2 for a discussion of our results of operations as compared to the prior period.
Investing activities. Net cash used in investing activities for the three months
ended
•$59.8 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;
•$2.0 million of acquisitions from related parties;
•$12.1 million of distributions received from equity investments in excess of cumulative earnings; and
•$3.3 million of decreases to materials and supplies inventory.
Net cash used in investing activities for the three months ended
•$172.8 million of capital expenditures, primarily related to construction and expansion at theWest Texas andDJ Basin complexes, DBM water systems, and DBM oil system;
•$11.0 million of capital contributions primarily paid to Cactus II and FRP for construction activities; and
•$5.1 million of distributions received from equity investments in excess of cumulative earnings.
Financing activities. Net cash used in financing activities for the three 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;
•$131.3 million of distributions paid to WES unitholders;
•$22.0 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;
•$2.6 million of distributions paid to the noncontrolling interest owners of WES Operating;
•$1.8 million of finance lease payments;
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Table of Contents •$0.3 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
•$1.6 million of contributions from related parties.
Net cash provided by financing activities for the three months ended
•$3.0 billion of repayments of outstanding borrowings under the Term loan facility;
•$380.0 million of repayments of outstanding borrowings under the RCF;
•$281.8 million of distributions paid to WES unitholders;
•$90.1 million to purchase and retire portions of WES Operating's 5.375% Senior Notes due 2021 and 4.000% Senior Notes due 2022 via open-market repurchases;
•$5.8 million of distributions paid to the noncontrolling interest owners of WES Operating;
•$3.5 billion of net proceeds from the Fixed-Rate Senior Notes and Floating-Rate Senior Notes issued inJanuary 2020 , which were used to repay the$3.0 billion outstanding borrowings under the Term loan facility, repay outstanding amounts under the RCF, and for general partnership purposes;
•$125.0 million of borrowings under the RCF, which were used for general partnership purposes; and
•$20.0 million of a one-time cash contribution from Occidental received inJanuary 2020 , pursuant to the Services Agreement, for anticipated transition costs required to establish stand-alone human resources and information technology functions. 59
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Table of Contents Debt and credit facilities. As ofMarch 31, 2021 , the carrying value of outstanding debt was$7.4 billion . See Note 11-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 4.542%, 5.424%, and 6.629%, respectively, atMarch 31, 2021 . The interest rate on the Floating-Rate Senior Notes was 2.33% atMarch 31, 2021 . The effective interest rate of these notes is subject to adjustment from time to time due to a change in credit rating. During the first quarter of 2021, WES Operating redeemed the total principal amount outstanding of the 5.375% Senior Notes due 2021 at par value, pursuant to the optional redemption terms in WES Operating's indenture. AtMarch 31, 2021 , 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. WES Operating's$2.0 billion senior unsecured revolving credit facility is expandable to a maximum of$2.5 billion , and matures inFebruary 2025 for each extending lender. The non-extending lender's commitments mature inFebruary 2024 and represent$100.0 million out of$2.0 billion of total commitments from all lenders. As ofMarch 31, 2021 , there were no outstanding borrowings and$5.1 million of outstanding letters of credit, resulting in$2.0 billion of available borrowing capacity under the RCF. AtMarch 31, 2021 , the interest rate on any outstanding RCF borrowings was 1.61% and the facility-fee rate was 0.25%. AtMarch 31, 2021 , 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. Finance lease liabilities. During the first quarter of 2020, WES entered into finance leases with third parties for equipment and vehicles extending through 2029. As ofMarch 31, 2021 , we have future finance-lease payments of$6.3 million for the remainder of 2021 and a total of$28.2 million in years thereafter. 60
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Table of Contents 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-imbalance agreements. We examine and monitor the creditworthiness of customers and may establish credit limits for customers. A substantial portion of our throughput is sourced from producers, including Occidental, that recently received credit-rating downgrades. 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. We also are party to agreements with Occidental under which Occidental is required to indemnify us for certain environmental claims, losses arising from rights-of-way claims, failures to obtain required consents or governmental permits, and income taxes with respect to the assets previously acquired fromAnadarko . 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
December 31,
thousands March 31, 2021 2020 March 31, 2020
Net income (loss) attributable to WES $ 185,791 $ 263,891 $ (256,527) Limited partner interests in WES Operating not held by WES (1)
3,811 5,404 (5,208)
General and administrative expenses (2) 886 869 1,407
Other income (expense), net (3) (11) (2)
Net income (loss) attributable to WES Operating $ 190,485 $ 270,153 $ (260,330) _________________________________________________________________________________________
(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:
Three Months Ended
March 31,
thousands 2021 2020
WES net cash provided by operating activities $
261,550
General and administrative expenses (1) 886 1,407 Non-cash equity-based compensation expense 7,302 (1,129) Changes in working capital (8,067) 763 Other income (expense), net (3) (2) WES Operating net cash provided by operating activities $
261,668
WES net cash provided by (used in) financing activities$ (603,624) $ (162,267) Distributions to WES unitholders (2) 131,265 281,786 Distributions to WES from WES Operating (3) (124,919) (284,507) Increase (decrease) in outstanding checks (192) - Unit repurchases 16,241 -
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
(beyond proper reserves as defined in its partnership agreement) to WES
Operating unitholders of record on the applicable record date within 45 days
following each quarter's end. See Note 4-Partnership Distributions in the Notes
to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
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