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 ofJune 30, 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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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 inTexas ,New Mexico , theRocky Mountains (Colorado ,Utah , andWyoming ), and North-centralPennsylvania . As ofJune 30, 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 36 3 - - Natural-gas processing plants/trains 24 3 - 5 NGLs pipelines 2 - - 5 Natural-gas pipelines 5 - - 1 Crude-oil pipelines 3 1 - 4
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(1)Includes the DBM water systems.
Significant financial and operational events during the six 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 second-quarter 2021 per-unit distribution of $0.31900 increased
•Natural-gas throughput attributable to WES totaled 4,265 MMcf/d and 4,157 MMcf/d for the three and six months endedJune 30, 2021 , respectively, representing a 5% increase and 6% decrease compared to the three months endedMarch 31, 2021 , and six months endedJune 30, 2020 , respectively. •Crude-oil and NGLs throughput attributable to WES totaled 687 MBbls/d and 645 MBbls/d for the three and six months endedJune 30, 2021 , respectively, representing a 14% increase and 13% decrease compared to the three months endedMarch 31, 2021 , and six months endedJune 30, 2020 , respectively. •Produced-water throughput attributable to WES totaled 688 MBbls/d and 642 MBbls/d for the three and six months endedJune 30, 2021 , respectively, representing a 16% increase and 12% decrease compared to the three months endedMarch 31, 2021 , and six months endedJune 30, 2020 , respectively. •Gross margin was$503.2 million and$958.7 million for the three and six months endedJune 30, 2021 , respectively, representing a 10% increase and 11% decrease compared to the three months endedMarch 31, 2021 , and six months endedJune 30, 2020 , respectively. See Key Performance Metrics within this Item 2. 37
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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$1.21 per Mcf and$1.20 per Mcf for the three and six months endedJune 30, 2021 , respectively, representing a 2% increase and 4% increase compared to the three months endedMarch 31, 2021 , and six months endedJune 30, 2020 , respectively. •Adjusted gross margin for crude-oil and NGLs assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$2.40 per Bbl and$2.43 per Bbl for the three and six months endedJune 30, 2021 , respectively, representing a 2% decrease compared to the three months endedMarch 31, 2021 , and six months endedJune 30, 2020 . •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 and six months endedJune 30, 2021 , representing no change and a 5% decrease compared to the three months endedMarch 31, 2021 , and six months endedJune 30, 2020 , respectively. The following table provides additional information on throughput for the periods presented below: Three Months Ended Six Months Ended Inc/ Inc/ June 30, 2021 March 31, 2021 (Dec) June 30, 2021 June 30, 2020 (Dec) Throughput for natural-gas assets (MMcf/d) Delaware Basin 1,244 1,133 10 % 1,189 1,349 (12) % DJ Basin 1,413 1,344 5 % 1,379 1,368 1 % Equity investments 457 439 4 % 448 451 (1) % Other 1,310 1,279 2 % 1,296 1,435 (10) % Total throughput for natural-gas assets 4,424 4,195 5 % 4,312 4,603 (6) % Throughput for crude-oil and NGLs assets (MBbls/d) Delaware Basin 184 162 14 % 173 197 (12) % DJ Basin 98 82 20 % 90 120 (25) % Equity investments 386 337 15 % 361 395 (9) % Other 33 35 (6) % 34 43 (21) % Total throughput for crude-oil and NGLs assets 701 616 14 % 658 755 (13) % Throughput for produced-water assets (MBbls/d) Delaware Basin 702 607 16 % 655 745
(12) %
Total throughput for produced-water assets 702 607 16 % 655 745 (12) % 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 six months endedJune 30, 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- andEPA -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 six months endedJune 30, 2021 , include the following impacts related to this change (i) decrease of$45.9 million in Service revenues - fee based, (ii) decrease of$21.2 million in Product sales, and (iii) decrease of$67.1 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 inJanuary 2020 to a low below$20.00 per barrel inApril 2020 . Although commodity prices have rebounded to pre-pandemic levels, the extent and duration of the recent commodity-price volatility cannot be predicted, and 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 ofJune 30, 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. During the second quarter of 2021, the third party exercised its option to purchase the Bison treating facility and the sale closed. We received total proceeds of$8.0 million ,$7.0 million in the fourth quarter of 2020 and$1.0 million when the sale closed in the second quarter of 2021, resulting in a net gain on sale of$5.4 million that was recorded as Gain (loss) on divestiture and other, net in the consolidated statements of operations. See Note 3-Acquisitions and Divestitures in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for further information. 40
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Table of Contents RESULTS OF OPERATIONS OPERATING RESULTS InNovember 2020 , theSEC issued a final rule to modernize and simplify Management's Discussion and Analysis and certain financial disclosure requirements in SEC Regulation S-K. As permitted by this final rule, the analysis herein reflects the optional approach to discuss results of operations on a sequential-quarter basis, which we believe will provide information that is most useful to investors in assessing our quarterly results of operations going forward. In addition, as required by the final rule, we have continued to include a comparison of the current year-to-date period to the prior year-to-date period. For purposes of the following discussion, any increases or decreases "for the three months endedJune 30, 2021 " refer to the comparison of the three months endedJune 30, 2021 , to the three months endedMarch 31, 2021 ; and any increases or decreases "for the six months endedJune 30, 2021 " refer to the comparison of the six months endedJune 30, 2021 , to the six months endedJune 30, 2020 . The following tables and discussion present a summary of our results of operations: Three Months Ended Six Months Ended thousands June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 Total revenues and other (1)$ 719,131
58,666 52,165 110,831 115,762 Total operating expenses (1) 444,074 434,220 878,294 1,400,084 Gain (loss) on divestiture and other, net 1,225 (583) 642 (2,883) Operating income (loss) 334,948 292,336 627,284 158,863 Interest income - Anadarko note receivable - - - 8,450 Interest expense (95,290) (98,493) (193,783) (183,240) Gain (loss) on early extinguishment of debt - (289) (289) 8,740 Other income (expense), net 84 (1,207) (1,123) (108) Income (loss) before income taxes 239,742 192,347 432,089 (7,295) Income tax expense (benefit) 1,465 1,112 2,577 764 Net income (loss) 238,277 191,235 429,512 (8,059) Net income (loss) attributable to noncontrolling interests 7,018 5,444 12,462 (24,569) Net income (loss) attributable to Western Midstream Partners, LP (2)$ 231,259 $ 185,791 $ 417,050 $ 16,510 Key performance metrics (3) Adjusted gross margin$ 677,236 $ 614,624 $ 1,291,860 $ 1,388,272 Adjusted EBITDA 491,126 443,110 934,236 1,028,028 Free cash flow 379,776 213,822 593,598 423,210
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(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. 41
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Table of Contents Throughput Three Months Ended Six Months Ended Inc/ Inc/ June 30, 2021 March 31, 2021 (Dec) June 30, 2021 June 30, 2020 (Dec) Throughput for natural-gas assets (MMcf/d) Gathering, treating, and transportation 534 519 3 % 527 547 (4) % Processing 3,433 3,237 6 % 3,337 3,605 (7) % Equity investments (1) 457 439 4 % 448 451 (1) % Total throughput 4,424 4,195 5 % 4,312 4,603 (6) % Throughput attributable to noncontrolling interests (2) 159 150 6 % 155 164 (5) % Total throughput attributable to WES for natural-gas assets 4,265 4,045 5 % 4,157 4,439 (6) %
Throughput for crude-oil and NGLs assets (MBbls/d) Gathering, treating, and transportation
315 279 13 % 297 360 (18) % Equity investments (3) 386 337 15 % 361 395 (9) % Total throughput 701 616 14 % 658 755 (13) % Throughput attributable to noncontrolling interests (2) 14 12 17 % 13 15 (13) % Total throughput attributable to WES for crude-oil and NGLs assets 687 604 14 % 645 740 (13) % Throughput for produced-water assets (MBbls/d) Gathering and disposal 702 607 16 % 655 745 (12) % Throughput attributable to noncontrolling interests (2) 14 12 17 % 13 15 (13) % Total throughput attributable to WES for produced-water assets 688 595 16 % 642 730 (12) %
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(1)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. (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 15 MMcf/d for the three months endedJune 30, 2021 , primarily due to increased production in areas around the Marcellus Interest systems. Gathering, treating, and transportation throughput decreased by 20 MMcf/d for the six months endedJune 30, 2021 , 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 treating 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 196 MMcf/d for the three months endedJune 30, 2021 , primarily due to (i) increased production and recovery from the impact of winter storm Uri during the first quarter of 2021 at theWest Texas complex, (ii) increased production in areas around theDJ Basin complex, and (iii) higher throughput at the Chipeta complex. Processing throughput decreased by 268 MMcf/d for the six months endedJune 30, 2021 , primarily due to (i) lower production and the impact of winter storm Uri at theWest Texas complex, (ii) the Granger straddle plant being held idle beginning in the third quarter of 2020, and (iii) lower throughput at the Chipeta and Granger complexes due to production declines in the area. 42
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Table of Contents Equity-investment throughput increased by 18 MMcf/d for the three months endedJune 30, 2021 , primarily due to increased volumes at the Mi Vida plant and on Red Bluff Express. Equity-investment throughput decreased by 3 MMcf/d for the six months endedJune 30, 2021 , primarily due to (i) decreased volumes at the Rendezvous system due to production declines in the area and (ii) decreased volumes at theFort Union system, which was sold to a third party during the fourth quarter of 2020. 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 increased by 36 MBbls/d for the three months endedJune 30, 2021 , primarily due to (i) increased production and recovery from the impact of winter storm Uri during the first quarter of 2021 at the DBM oil system and (ii) increased production in areas around theDJ Basin oil system. Gathering, treating, and transportation throughput decreased by 63 MBbls/d for the six months endedJune 30, 2021 , 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 increased by 49 MBbls/d for the three months endedJune 30, 2021 , primarily due to increased volumes on the Whitethorn and Saddlehorn pipelines, TEP, FRP, and Mont Belvieu JV. Equity-investment throughput decreased by 34 MBbls/d for the six months endedJune 30, 2021 , primarily due to decreased volumes on the Whitethorn pipeline, partially offset by increased volumes on the Saddlehorn pipeline.
Produced-water assets
Gathering and disposal throughput increased by 95 MBbls/d for the three months endedJune 30, 2021 , due to increased throughput at the DBM water systems resulting from higher production and recovery from the impact of winter storm Uri during the first quarter of 2021. Gathering and disposal throughput decreased by 90 MBbls/d for the six months endedJune 30, 2021 , due to decreased throughput at the DBM water systems resulting from lower production and the impact of winter storm Uri. 43
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Table of Contents Service Revenues Three Months Ended Six Months Ended Inc/ Inc/ thousands except percentages June 30, 2021 March 31, 2021 (Dec) June 30, 2021 June 30, 2020 (Dec) Service revenues - fee based$ 618,985 $ 572,275 8 %$ 1,191,260 $ 1,344,024 (11) % Service revenues - product based 27,803 31,652 (12) % 59,455 22,921 159 % Total service revenues$ 646,788 $ 603,927 7 %$ 1,250,715 $ 1,366,945 (9) % Service revenues - fee based Service revenues - fee based increased by$46.7 million for the three months endedJune 30, 2021 , primarily due to increases of (i)$16.8 million at theWest Texas complex,$8.4 million at the DBM water systems, and$4.3 million at the DBM oil system resulting from increased throughput, including recovery from the impact of winter storm Uri in the first quarter of 2021, and (ii)$14.1 million at theDJ Basin complex from increased throughput. Service revenues - fee based decreased by$152.8 million for the six months endedJune 30, 2021 , primarily due to decreases of (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)$28.7 million at the DBM oil system due to decreased throughput, including the impact of winter storm Uri, and lower lease revenue under the operating and maintenance agreement with Occidental, (iii)$24.5 million at the DBM water systems resulting 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 , (iv)$20.8 million at theWest Texas complex from decreased throughput, including the impact of winter storm Uri, (v)$20.7 million at theDJ Basin complex due to decreased throughput on certain fee-based contracts, and (vi)$7.1 million at the Bison treating facility due to decreased throughput and the expiration of a minimum-volume commitment contract in the fourth quarter of 2020.
Service revenues - product based
Service revenues - product based decreased by$3.8 million for the three months endedJune 30, 2021 , primarily due to a decrease of$3.2 million at the Hilight system attributable to increased prices in the first quarter of 2021 due to the impact of winter storms in the area. Service revenues - product based increased by$36.5 million for the six months endedJune 30, 2021 , primarily due to increases of (i)$13.3 million at theWest Texas complex due to an increase in electricity-related rates billed to customers during winter storm Uri, (ii)$9.2 million at theDJ Basin complex due to increased third-party volumes, and (iii)$4.8 million at the Hilight system and$3.9 million at the Granger complex due to increased prices. 44
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Table of Contents Product Sales Three Months Ended Six Months Ended thousands except percentages March 31, Inc/ Inc/ and per-unit amounts June 30, 2021 2021 (Dec) June 30, 2021 June 30, 2020 (Dec) Natural-gas sales$ 14,195 $ 21,419 (34) %$ 35,614 $ 16,723 113 % NGLs sales 58,061 49,386 18 % 107,447 61,662 74 % Total Product sales$ 72,256 $ 70,805 2 %$ 143,061 $ 78,385 83 % Per-unit gross average sales price: Natural gas (per Mcf) $ 2.65$ 5.98 (56) % $ 4.26 $ 1.22 NM NGLs (per Bbl) 27.16 28.42 (4) % 27.73 11.76 136 %
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NM-Not meaningful
Natural-gas sales
Natural-gas sales decreased by$7.2 million for the three months endedJune 30, 2021 , primarily due to decreases of (i)$13.4 million at theWest Texas complex attributable to a decrease in average prices and (ii)$3.8 million at the MGR assets attributable to a decrease in average prices and volumes sold. These decreases were offset partially by an increase of$9.0 million at theDJ Basin complex attributable to an increase in volumes, partially offset by decreased average prices. Natural-gas sales increased by$18.9 million for the six months endedJune 30, 2021 , primarily due to increases of (i)$22.4 million at theWest Texas complex and$5.1 million at the MGR assets attributable to increases in average prices and (ii)$1.8 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). These increases were offset partially by a decrease of$11.1 million at theDJ Basin complex attributable to a decrease in volumes sold, partially offset by increased average prices.
NGLs sales
NGLs sales increased by$8.7 million for the three months endedJune 30, 2021 , primarily due to an increase of$8.0 million at theWest Texas complex attributable to an increase in volumes sold, partially offset by a decrease in average prices. NGLs sales increased by$45.8 million for the six months endedJune 30, 2021 , primarily due to increases of (i)$47.8 million at theWest Texas complex attributable to an increase in average prices, partially offset by decreased volumes sold, (ii)$9.4 million at the Chipeta complex and$5.7 million at the Granger complex attributable to increases in average prices, and (iii)$4.9 million at theDJ Basin complex attributable to an increase in average prices and volumes sold. These increases were offset partially by a decrease of$23.0 million resulting from a change in accounting for the marketing contracts with AESC effectiveApril 1, 2020 (see Executive Summary-Commodity purchase and sale agreements within this Item 2).
Equity Income, Net - Related Parties
Three Months Ended Six Months Ended March 31, Inc/ Inc/ thousands except percentages June 30, 2021 2021 (Dec) June 30, 2021 June 30, 2020
(Dec)
Equity income, net - related parties$ 58,666 $ 52,165 12 %$ 110,831 $ 115,762 (4) % Equity income, net - related parties increased by$6.5 million for the three months endedJune 30, 2021 , primarily due to (i) an increase in equity income at Mont Belvieu JV from higher volumes and a load-reduction electricity credit received related to winter storm Uri and (ii) higher volumes at FRP. Equity income, net - related parties decreased by$4.9 million for the six months endedJune 30, 2021 , primarily due to (i) a decrease in equity income fromWhitethorn LLC related to commercial activities and lower volumes and (ii) lower volumes at White Cliffs. These decreases were offset partially by an increase in equity income from higher volumes at Saddlehorn andRed Bluff Express. 45
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Cost of Product and Operation and Maintenance Expenses
Three Months Ended Six Months Ended Inc/ Inc/ thousands except percentages June 30, 2021 March 31, 2021 (Dec) June 30, 2021 June 30, 2020 (Dec) NGLs purchases$ 42,305 $ 30,919 37 %$ 73,224 $ 92,781 (21) % Residue purchases 23,019 57,904 (60) % 80,923 33,160 144 % Other 12,720 146 NM 12,866 (4,069) NM Cost of product 78,044 88,969 (12) % 167,013 121,872 37 % Operation and maintenance 153,028 140,332 9 % 293,360 304,377 (4) % Total Cost of product and Operation and maintenance expenses$ 231,072 $ 229,301 1 %$ 460,373 $ 426,249 8 % NGLs purchases NGLs purchases increased by$11.4 million for the three months endedJune 30, 2021 , primarily due to an increase of$8.2 million at theWest Texas complex attributable to purchased-volume increases, partially offset by an average-price decrease. NGLs purchases decreased by$19.6 million for the six months endedJune 30, 2021 , primarily due to a decrease of$61.1 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 increases of$18.4 million at theWest Texas complex,$12.9 million at theDJ Basin complex,$4.8 million at the Chipeta complex, and$3.5 million at the Granger complex attributable to average-price increases.
Residue purchases
Residue purchases decreased by$34.9 million for the three months endedJune 30, 2021 , primarily due to decreases of$19.3 million at theWest Texas complex,$4.1 million at theDJ Basin complex,$3.7 million at the Hilight system,$2.4 million at the MGR assets, and$2.3 million at the Granger complex attributable to average-price decreases. Residue purchases increased by$47.8 million for the six months endedJune 30, 2021 , primarily due to increases of$35.4 million at theWest Texas complex,$4.9 million at the Chipeta complex,$4.6 million at the Hilight system, and$4.0 million at the MGR assets attributable to average-price increases. These increases were offset partially by a decrease of$5.2 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$12.6 million for the three months endedJune 30, 2021 , primarily due to increases of (i)$9.8 million at theDJ Basin complex and (ii)$3.6 million at theWest Texas complex, primarily attributable to changes in imbalance positions. Other items increased by$16.9 million for the six months endedJune 30, 2021 , primarily due to an increase of$28.8 million at theWest Texas complex, primarily attributable to changes in imbalance positions, partially offset by a decrease of$11.9 million 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 increased by$12.7 million for the three months endedJune 30, 2021 , primarily due to an increase of$9.1 million at theDJ Basin complex due to an environmental liability of$4.1 million recorded in the second quarter of 2021, as well as increased surface maintenance and plant repairs, and field-related expenses. Operation and maintenance expense decreased by$11.0 million for the six months endedJune 30, 2021 , primarily due to decreases of (i)$10.7 million at theWest Texas complex, primarily attributable to reduced salaries and wages, surface maintenance and plant repairs, and safety expense, partially offset by increased utilities expense primarily resulting from the impact of winter storm Uri and (ii)$6.7 million at the DBM water systems attributable to lower disposal fees resulting from reduced volumes and lower surface-use fees, partially offset by increased utilities expense and surface maintenance and plant repairs, including the impact of winter storm Uri. These decreases were offset partially by an increase of$5.3 million at the DBM oil system, primarily attributable to increases in field-related expenses and utilities expense primarily resulting from the impact of winter storm Uri. Other Operating Expenses Three Months Ended Six Months Ended Inc/ Inc/ thousands except percentages June 30, 2021 March 31, 2021 (Dec) June 30, 2021 June 30, 2020
(Dec)
General and administrative$ 44,448 $ 45,116 (1) %$ 89,564 $ 76,888 16 % Property and other taxes 17,967 14,384 25 % 32,351 37,871 (15) % Depreciation and amortization 137,849 130,553 6 % 268,402 252,124 6 % Long-lived asset and other impairments 12,738 14,866 (14) % 27,604 165,935 (83) % Goodwill impairment - - NM - 441,017
NM
Total other operating expenses$ 213,002 $ 204,919 4 %$ 417,921 $ 973,835 (57) %
General and administrative expenses
General and administrative expenses increased by$12.7 million for the six months endedJune 30, 2021 , primarily due to (i) a$6.3 million increase in personnel costs primarily related to increased bonus-related contributions under our employee savings plan, (ii) a$5.3 million increase in contract and consulting costs primarily related to information technology services and fees, and (iii) a$3.7 million increase in corporate expenses and professional fees.
Property and other taxes
Property and other taxes increased by$3.6 million for the three months endedJune 30, 2021 , due to ad valorem tax increases at theDJ Basin complex andDJ Basin oil system, primarily due to favorable differences between actual and estimated tax payments related to the 2020 fiscal year recognized in the first quarter of 2021. Property and other taxes decreased by$5.5 million for the six months endedJune 30, 2021 , primarily due to ad valorem tax decreases at theWest Texas andDJ Basin complexes, andDJ Basin oil system 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$7.3 million for the three months endedJune 30, 2021 , primarily due to increases of (i)$3.2 million at a transportation asset inSouthwest Wyoming , primarily as a result of downward asset retirement obligation revisions made in the first quarter of 2021 and (ii)$2.3 million at the MGR assets and Hilight system due to an acceleration of depreciation expense. Depreciation and amortization expense increased by$16.3 million for the six months endedJune 30, 2021 , primarily due to increases of (i)$13.1 million at theDJ Basin complex, primarily as a result of a change in estimate for asset retirement obligations for theThird Creek gathering system in the comparative prior period, (ii)$5.6 million at theWest Texas complex resulting from capital projects being placed into service, and (iii)$4.5 million related to depreciation for capitalized information technology implementation costs related to the stand-up of WES as an independent organization. These increases were offset partially by decreases of (i)$8.4 million due to the sale of the Bison treating facility and (ii)$3.3 million at a transportation asset inSouthwest Wyoming , primarily as a result of downward asset retirement obligation revisions made in the first quarter of 2021.
Long-lived asset and other impairment expense
Long-lived asset and other impairment expense for the three months endedJune 30, 2021 , was primarily due to an$11.6 million other-than-temporary impairment of our investment in Ranch Westex. 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 six months endedJune 30, 2020 , was primarily due to (i)$149.4 million of impairments for assets located inWyoming andUtah and (ii) impairments at theDJ Basin complex due to cancellation of projects and impairments of rights-of-way. 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. 48
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Table of Contents Interest Income - Anadarko Note Receivable and Interest Expense Three Months Ended Six Months Ended Inc/ Inc/ thousands except percentages June 30, 2021 March 31, 2021 (Dec) June 30, 2021 June 30, 2020 (Dec) Interest income -Anadarko note receivable $ - $ - - % $ -$ 8,450 (100) %
Third parties
Long-term and short-term debt
(3) %$ (188,209) $ (179,419) 5 % Finance lease liabilities (292) (298) (2) % (590) (793) (26) % Amortization of debt issuance costs and commitment fees (3,179) (3,338) (5) % (6,517) (6,589) (1) % Capitalized interest 668 865 23 % 1,533 3,604 (57) % Related parties Finance lease liabilities - - - % - (43) (100) % Interest expense$ (95,290) $ (98,493) (3) %$ (193,783) $ (183,240) 6 % Interest income Interest income -Anadarko note receivable decreased by$8.5 million for the six months endedJune 30, 2021 , 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.
Interest expense
Interest expense decreased by$3.2 million for the three months endedJune 30, 2021 , primarily due to lower interest incurred on the 5.375% Senior Notes due 2021 that were called onMarch 1, 2021 . Interest expense increased by$10.5 million for the six months endedJune 30, 2021 , primarily due to (i)$23.8 million of additional interest incurred from higher effective interest rates resulting from credit-rating downgrades 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$2.1 million in capitalized interest due to decreased capital expenditures. These increases were offset partially by decreases of (i)$11.0 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)$4.1 million due to lower outstanding borrowings under the RCF in 2021. See Liquidity and Capital Resources-Debt and credit facilities within this Item 2. 49
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Table of Contents Income Tax Expense (Benefit) Three Months Ended Six Months Ended Inc/ Inc/ thousands except percentages June 30, 2021 March 31, 2021 (Dec) June 30, 2021 June 30, 2020 (Dec) Income (loss) before income taxes$ 239,742 $ 192,347 25 %$ 432,089 $ (7,295) NM Income tax expense (benefit) 1,465 1,112 32 % 2,577 764 NM Effective tax rate 1 % 1 % 1 % NM 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.
KEY PERFORMANCE METRICS
Three Months Ended Six Months Ended thousands except percentages and Inc/ Inc/ per-unit amounts June 30, 2021 March 31, 2021 (Dec) June 30, 2021 June 30, 2020 (Dec) Adjusted gross margin for natural-gas assets$ 469,409 $ 432,389 9 %$ 901,798 $ 925,842 (3) % Adjusted gross margin for crude-oil and NGLs assets 150,317 133,145 13 % 283,462 333,595 (15) % Adjusted gross margin for produced-water assets 57,510 49,090 17 % 106,600 128,835 (17) % Adjusted gross margin 677,236 614,624 10 % 1,291,860 1,388,272 (7) % Per-Mcf Adjusted gross margin for natural-gas assets (1) 1.21 1.19 2 % 1.20 1.15 4 % Per-Bbl Adjusted gross margin for crude-oil and NGLs assets (2) 2.40 2.45 (2) % 2.43 2.48 (2) % Per-Bbl Adjusted gross margin for produced-water assets (3) 0.92 0.92 - % 0.92 0.97 (5) % Adjusted EBITDA 491,126 443,110 11 % 934,236 1,028,028 (9) % Free cash flow 379,776 213,822 78 % 593,598 423,210 40 %
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(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. 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. 50
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Table of Contents Adjusted gross margin increased by$62.6 million for the three months endedJune 30, 2021 , primarily due to (i) increased throughput at theWest Texas andDJ Basin complexes and the DBM water, DBM oil, andDJ Basin oil systems and (ii) an increase in distributions from Mont Belvieu JV. Adjusted gross margin decreased by$96.4 million for the six months endedJune 30, 2021 , primarily due to (i) decreased throughput and lower lease revenue under the operating and maintenance agreement with Occidental at the DBM oil system, (ii) decreased throughput and a lower average fee resulting from a cost-of-service rate redetermination effectiveJanuary 1, 2021 , at the DBM water systems, (iii) decreased throughput at theWest Texas complex, (iv) decreased throughput on certain fee-based contracts at theDJ Basin complex, and (v) a decrease in distributions fromWhitethorn LLC . Per-Mcf Adjusted gross margin for natural-gas assets increased by$0.02 for the three months endedJune 30, 2021 , primarily due to increased throughput at theDJ Basin complex, which has a higher-than-average per-Mcf margin as compared to our other natural-gas assets. Per-Mcf Adjusted gross margin for natural-gas assets increased by$0.05 for the six months endedJune 30, 2021 , primarily due to a higher cost-of-service rate effectiveJanuary 1, 2021 , at theWest Texas complex, partially offset by decreased throughput on certain fee-based contracts at theDJ Basin 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$0.05 for the three months endedJune 30, 2021 , primarily due to (i) increased volumes on the Whitethorn pipeline, which has a lower-than-average per-Bbl margin as compared to our other crude-oil and NGLs assets and (ii) a decrease in distributions from White Cliffs and FRP. These decreases were offset partially by an increase in distributions from Mont Belvieu JV. Per-Bbl Adjusted gross margin for crude-oil and NGLs assets decreased by$0.05 for the six months endedJune 30, 2021 , primarily due to decreased throughput and lower 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, partially offset by a higher cost-of-service rate effectiveJanuary 1, 2021 , at theDJ Basin oil system. Per-Bbl Adjusted gross margin for produced-water assets decreased by$0.05 for the six months endedJune 30, 2021 , 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 increased by$48.0 million for the three months endedJune 30, 2021 , primarily due to (i) a$44.2 million increase in total revenues and other, (ii) a$10.9 million decrease in cost of product (net of lower of cost or market inventory adjustments), and (iii) a$9.8 million increase in distributions from equity investments. These amounts were offset partially by (i) a$12.7 million increase in operation and maintenance expenses and (ii) a$3.6 million increase in property taxes. 51
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Table of Contents Adjusted EBITDA decreased by$93.8 million for the six months endedJune 30, 2021 , primarily due to (i) a$52.0 million decrease in total revenues and other, (ii) a$45.3 million increase in cost of product (net of lower of cost or market inventory adjustments), (iii) a$9.7 million increase in general and administrative expenses excluding non-cash equity-based compensation expense, and (iv) a$5.4 million decrease in distributions from equity investments. These amounts were offset partially by (i) an$11.0 million decrease in operation and maintenance expenses and (ii) a$5.5 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). Free cash flow. We define "Free cash flow" as net cash provided by operating activities less total capital expenditures and contributions to equity investments, plus distributions from equity investments in excess of cumulative earnings. Management considers Free cash flow an appropriate metric for assessing capital discipline, cost efficiency, and balance-sheet strength. Although Free cash flow is the metric used to assess WES's ability to make distributions to unitholders, this measure should not be viewed as indicative of the actual amount of cash that is available for distributions or planned for distributions for a given period. Instead, Free cash flow should be considered indicative of the amount of cash that is available for distributions, debt repayments, and other general partnership purposes. Free cash flow increased by$166.0 million for the three months endedJune 30, 2021 , primarily due to an increase of$190.6 million in net cash provided by operating activities, partially offset by (i) an increase of$18.4 million in capital expenditures and (ii) an increase of$3.3 million in contributions to equity investments. Free cash flow increased by$170.4 million for the six months endedJune 30, 2021 , primarily due to (i) a decrease of$175.1 million in capital expenditures, (ii) a decrease of$12.6 million in contributions to equity investments, and (iii) an$8.0 million increase in distributions from equity investments in excess of cumulative earnings. These amounts were offset partially by a decrease of$25.3 million in net cash provided by operating activities. See Capital Expenditures and Historical Cash Flow within this Item 2 for further information. 52
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Table of Contents 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 gross margin. 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 gross margin, net income (loss), net cash provided by operating activities, or any other measure of financial performance presented in accordance with GAAP. Adjusted gross margin, Adjusted EBITDA, and Free cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect gross margin, net income (loss), and net cash provided by operating activities. Adjusted gross margin, Adjusted EBITDA, and Free cash flow should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Our definitions of Adjusted gross margin, Adjusted EBITDA, and Free cash flow may not be comparable to similarly titled measures of other companies in our industry, thereby diminishing their utility as comparative measures. Management compensates for the limitations of Adjusted gross margin, Adjusted EBITDA, and Free cash flow as analytical tools by reviewing the comparable GAAP measures, understanding the differences between Adjusted gross margin, Adjusted EBITDA, and Free cash flow compared to (as applicable) gross margin, net income (loss), and net cash provided by operating activities, and incorporating this knowledge into its decision-making processes. We believe that investors benefit from having access to the same financial measures that our management considers in evaluating our operating results. The following tables present (i) a reconciliation of the GAAP financial measure of gross margin to the non-GAAP financial measure of Adjusted gross margin, (ii) a reconciliation of the GAAP financial measures of net income (loss) and net cash provided by operating activities to the non-GAAP financial measure of Adjusted EBITDA, and (iii) a reconciliation of the GAAP financial measure of net cash provided by operating activities to the non-GAAP financial measure of Free cash flow: Three Months Ended Six Months Ended thousands June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 Reconciliation of Gross margin to Adjusted gross margin Total revenues and other$ 719,131 $ 674,974 $ 1,394,105 $ 1,446,068 Less: Cost of product 78,044 88,969 167,013 121,872 Depreciation and amortization 137,849 130,553 268,402 252,124 Gross margin 503,238 455,452 958,690 1,072,072
Add:
Distributions from equity investments 70,947 61,189 132,136 137,496 Depreciation and amortization 137,849 130,553 268,402 252,124
Less:
Reimbursed electricity-related charges recorded as revenues
17,585 17,312 34,897 40,828 Adjusted gross margin attributable to noncontrolling interests (1) 17,213 15,258 32,471 32,592 Adjusted gross margin$ 677,236
$ 469,409
150,317 133,145 283,462 333,595 Adjusted gross margin for produced-water assets 57,510 49,090 106,600 128,835
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(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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Table of Contents Three Months Ended Six Months Ended thousands June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020
Reconciliation of Net income (loss) to Adjusted EBITDA Net income (loss)
$ 238,277
70,947 61,189 132,136 137,496 Non-cash equity-based compensation expense 7,121 6,734 13,855 10,911 Interest expense 95,290 98,493 193,783 183,240 Income tax expense 1,465 1,112 2,577 5,044 Depreciation and amortization 137,849 130,553 268,402 252,124 Impairments (1) 12,738 14,866 27,604 606,952 Other expense 30 1,218 1,248 1,950 Less: Gain (loss) on divestiture and other, net 1,225 (583) 642 (2,883) Gain (loss) on early extinguishment of debt - (289) (289) 8,740 Equity income, net - related parties 58,666 52,165 110,831 115,762 Interest income - Anadarko note receivable - - - 8,450 Other income 84 - 84 1,652 Income tax benefit - - - 4,280 Adjusted EBITDA attributable to noncontrolling interests (2) 12,616 10,997 23,613 25,629 Adjusted EBITDA$ 491,126
$ 452,111
95,290 98,493 193,783 174,790 Accretion and amortization of long-term obligations, net (1,914) (2,088) (4,002) (4,297) Current income tax expense (benefit) 749 555 1,304 (35) Other (income) expense, net (84) 1,207 1,123 (412) Cash paid to settle interest-rate swaps - - - 12,763 Distributions from equity investments in excess of cumulative earnings - related parties 9,232 12,141 21,373 13,340 Changes in assets and liabilities: Accounts receivable, net 38,982 30,182 69,164 200,136 Accounts and imbalance payables and accrued liabilities, net (55,758) 16,467 (39,291) (72,323) Other items, net (34,866) 35,600 734 (9,304) Adjusted EBITDA attributable to noncontrolling interests (2) (12,616) (10,997) (23,613) (25,629) Adjusted EBITDA$ 491,126
$ 452,111
(59,932) (46,472) (106,404) (355,001) Net cash provided by (used in) financing activities (142,982) (603,624) (746,606) (424,222)
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(1)Includes goodwill impairment for the six months endedJune 30, 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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Table of Contents Three Months Ended Six Months Ended thousands June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020
Reconciliation of Net cash provided by operating activities to Free cash flow Net cash provided by operating activities
$ 452,111
78,145 59,783 137,928 313,065 Contributions to equity investments - related parties 3,422 86 3,508 16,064
Add:
Distributions from equity investments in excess of cumulative earnings - related parties 9,232 12,141 21,373 13,340 Free cash flow$ 379,776
$ 452,111
(59,932) (46,472) (106,404) (355,001) Net cash provided by (used in) financing activities (142,982) (603,624) (746,606) (424,222) 55
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Table of Contents
LIQUIDITY AND CAPITAL RESOURCES Our primary cash uses include quarterly distributions, debt service, capital expenditures, and customary operating expenses. Our sources of liquidity as ofJune 30, 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 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 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 second quarter of 2021 of $0.31900 per unit, or$134.7 million in the aggregate. The cash distribution is payable onAugust 13, 2021 , to our unitholders of record at the close of business onJuly 30, 2021 . InNovember 2020 , we announced a buyback program of up to$250.0 million of our common units throughDecember 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 six months endedJune 30, 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 ofJune 30, 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. 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 ofJune 30, 2021 , we had a$240.4 million working capital deficit, which we define as the amount by which current liabilities exceed current assets. Our working capital deficit was primarily due to the 4.000% Senior Notes due 2022 of$580.7 million being classified as short-term debt on the consolidated balance sheet as ofJune 30, 2021 . As ofJune 30, 2021 , there was$2.0 billion available for borrowing under the RCF. See Note 10-Selected Components of Working Capital and Note 11-Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. 56
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Table of Contents Capital expenditures. Our business is capital intensive, requiring significant investment to maintain and improve existing facilities or to develop new midstream infrastructure. Capital expenditures includes maintenance capital expenditures, which include those expenditures required to maintain existing operating capacity and service capability of our assets, such as to replace system components and equipment that have been subject to significant use over time, become obsolete, or reached the end of their useful lives, to remain in compliance with regulatory or legal requirements, or to complete additional well connections to maintain existing system throughput and related cash flows; and expansion capital expenditures, which include expenditures to construct new midstream infrastructure and expenditures incurred to extend the useful lives of our assets, reduce costs, increase revenues, or increase system throughput or capacity from current levels, including well connections that increase existing system throughput. Capital expenditures in the consolidated statements of cash flows reflect capital expenditures on a cash basis, when payments are made. Capital incurred is presented on an accrual basis. Acquisitions and capital expenditures as presented in the consolidated statements of cash flows and capital incurred were as follows: Six Months Ended June 30, thousands 2021 2020 Acquisitions (1)$ 2,000 $ - Capital expenditures (2) 137,928 313,065 Capital incurred (2) 142,758 215,172
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(1)For information regarding equipment purchases from related parties, 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 the six months ended
Capital expenditures decreased by$175.1 million for the six months endedJune 30, 2021 , primarily due to decreases of (i)$79.7 million at theWest Texas complex primarily attributable to decreases in facility expansion and pipeline projects, (ii)$48.4 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)$26.0 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, and (iv)$15.9 million at the DBM water systems primarily due to reduced construction of additional water-disposal facilities and gathering projects. 57
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Table of Contents Historical cash flow. The following table and discussion present a summary of our net cash flows provided by (used in) operating, investing, and financing activities: Six Months Ended June 30, thousands 2021 2020 Net cash provided by (used in): Operating activities$ 713,661 $ 738,999 Investing activities (106,404) (355,001) Financing activities (746,606) (424,222)
Net increase (decrease) in cash and cash equivalents
Operating activities. Net cash provided by operating activities decreased for the six months endedJune 30, 2021 , primarily due to (i) lower cash operating income, (ii) lower distributions from equity investments, (iii) higher interest expense, and (iv) lower interest income. These decreases were offset partially by (i) the impact of changes in assets and liabilities and (ii) cash paid during the six months endedJune 30, 2020 , to settle interest-rate swaps. 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 six months
ended
•$137.9 million of capital expenditures, primarily related to construction, expansion, and asset-integrity projects at theWest Texas complex, DBM water systems,DJ Basin complex, and DBM oil system;
•$3.5 million of capital contributions primarily paid to Cactus II;
•$2.0 million of acquisitions from related parties;
•$21.4 million of distributions received from equity investments in excess of cumulative earnings;
•$8.0 million related to the sale of the Bison treating facility; and
•$7.7 million of decreases to materials and supplies inventory.
Net cash used in investing activities for the six months ended
•$313.1 million of capital expenditures, primarily related to construction and expansion at theWest Texas andDJ Basin complexes, DBM water systems, and DBM oil system;
•$39.2 million of increases to materials and supplies inventory;
•$16.1 million of capital contributions primarily paid to Cactus II and FRP for construction activities; and
•$13.3 million of distributions received from equity investments in excess of cumulative earnings.
Financing activities. Net cash used in financing activities for the six months
ended
•$531.1 million to redeem the total principal amount outstanding of WES Operating's 5.375% Senior Notes due 2021 and repay borrowings under the RCF;
•$264.2 million of distributions paid to WES unitholders;
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Table of Contents •$29.1 million of decreases in outstanding checks due mostly to ad valorem tax payments made at the end of 2020;
•$16.2 million of unit repurchases;
•$5.3 million of distributions paid to the noncontrolling interest owner of WES Operating;
•$3.6 million of finance lease payments;
•$1.5 million of distributions paid to the noncontrolling interest owner of Chipeta;
•$100.0 million of borrowings under the RCF, which were used for general partnership purposes; and
•$4.5 million of contributions from related parties.
Net cash provided by financing activities for the six months ended
•$3.0 billion of repayments of outstanding borrowings under the Term loan facility;
•$430.0 million of repayments of outstanding borrowings under the RCF;
•$422.7 million of distributions paid to WES unitholders;
•$153.1 million to purchase and retire portions of WES Operating's 5.375% Senior Notes due 2021, 4.000% Senior Notes due 2022, and Floating-Rate Senior Notes via open-market repurchases;
•$10.3 million of finance lease payments;
•$8.7 million of distributions paid to the noncontrolling interest owner of WES Operating;
•$2.8 million of distributions paid to the noncontrolling interest owner of Chipeta;
•$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 ofJune 30, 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, atJune 30, 2021 . The interest rate on the Floating-Rate Senior Notes was 2.29% atJune 30, 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. As ofJune 30, 2021 , the 4.000% Senior Notes due 2022 were classified as short-term debt on the consolidated balance sheet due to management's intent to retire the notes within the next twelve months. AtJune 30, 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 ofJune 30, 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. AtJune 30, 2021 , the interest rate on any outstanding RCF borrowings was 1.60% and the facility-fee rate was 0.25%. AtJune 30, 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 ofJune 30, 2021 , we have future lease payments of$4.4 million for the remainder of 2021 and a total of$28.7 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 Six Months Ended thousands June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 Net income (loss) attributable to WES$ 231,259
4,754 3,811 8,565 390 General and administrative expenses (2) 1,600 886 2,486 2,588 Other income (expense), net (2) (3) (5) (4) Net income (loss) attributable to WES Operating$ 237,611
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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. 61
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Table of Contents Reconciliation of net cash provided by (used in) operating and financing activities. The differences between net cash provided by (used in) operating and financing activities for WES and WES Operating are reconciled as follows: Six Months Ended June 30, thousands 2021 2020 WES net cash provided by operating activities $
713,661
General and administrative expenses (1) 2,486 2,588 Non-cash equity-based compensation expense 7,169 (3,244) Changes in working capital (9,336) 2,574 Other income (expense), net (5) (4) WES Operating net cash provided by operating activities $
713,975
WES net cash provided by (used in) financing activities$ (746,606) $ (424,222) Distributions to WES unitholders (2) 264,234 422,679 Distributions to WES from WES Operating (3) (259,208) (425,042) Increase (decrease) in outstanding checks (8) (4) Unit repurchases 16,241 -
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 endedDecember 31, 2020 . 62
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