Western Midstream(WES) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION (UNAUDITED) This section presents unaudited consolidated financial statements and management's analysis for Western Midstream Partners, LP Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Western Midstream Partners, LP (WES) and Western Midstream Operating, LP (WES Operating) for the three and nine months ended September 30, 2021, and 2020, along with detailed notes explaining the business, accounting policies, and specific financial line items Western Midstream Partners, LP (WES) Financials WES reported increased net income and EPS for both the three and nine months ended September 30, 2021, compared to the prior year. Total assets slightly decreased, while total equity and partners' capital increased. Operating cash flow saw a minor decrease, but investing activities showed a significantly reduced cash outflow Consolidated Statements of Operations (WES): | Metric | 3 Months Ended Sep 30, 2021 (thousands) | 3 Months Ended Sep 30, 2020 (thousands) | Change (%) | | :--------------------------------- | :-------------------------------------- | :-------------------------------------- | :--------- | | Total revenues and other | $763,840 | $679,044 | 12.5% | | Net income (loss) attributable to WES | $255,725 | $246,611 | 3.7% | | Net income (loss) per common unit – basic | $0.61 | $0.55 | 10.9% | | Metric | 9 Months Ended Sep 30, 2021 (thousands) | 9 Months Ended Sep 30, 2020 (thousands) | Change (%) | | :--------------------------------- | :-------------------------------------- | :-------------------------------------- | :--------- | | Total revenues and other | $2,157,945 | $2,125,112 | 1.5% | | Net income (loss) attributable to WES | $672,775 | $263,121 | 155.7% | | Net income (loss) per common unit – basic | $1.60 | $0.58 | 175.9% | Consolidated Balance Sheets (WES): | Metric | Sep 30, 2021 (thousands) | Dec 31, 2020 (thousands) | Change (%) | | :-------------------------- | :----------------------- | :----------------------- | :--------- | | Total assets | $11,419,378 | $11,830,027 | (3.5%) | | Total liabilities | $8,322,932 | $8,934,815 | (6.9%) | | Total equity and partners' capital | $3,096,446 | $2,895,212 | 6.9% | Consolidated Statements of Cash Flows (WES) (9 Months Ended Sep 30): | Metric | 2021 (thousands) | 2020 (thousands) | Change (%) | | :--------------------------------- | :--------------- | :--------------- | :--------- | | Net cash provided by operating activities | $1,104,994 | $1,131,893 | (2.4%) | | Net cash used in investing activities | $(187,287) | $(426,670) | (56.1%) | | Net cash provided by (used in) financing activities | $(1,262,767) | $(667,140) | 89.3% | | Net increase (decrease) in cash and cash equivalents | $(345,060) | $38,083 | NM | Western Midstream Operating, LP (WES Operating) Financials WES Operating, a consolidated subsidiary of WES, also reported increased net income for the three and nine months ended September 30, 2021. Its balance sheet showed a slight decrease in total assets and liabilities, with an increase in total equity. Operating cash flow decreased slightly, while cash used in financing activities significantly increased Consolidated Statements of Operations (WES Operating): | Metric | 3 Months Ended Sep 30, 2021 (thousands) | 3 Months Ended Sep 30, 2020 (thousands) | Change (%) | | :--------------------------------- | :-------------------------------------- | :-------------------------------------- | :--------- | | Total revenues and other | $763,840 | $679,044 | 12.5% | | Net income (loss) attributable to WES Operating | $260,658 | $251,740 | 3.5% | | Metric | 9 Months Ended Sep 30, 2021 (thousands) | 9 Months Ended Sep 30, 2020 (thousands) | Change (%) | | :--------------------------------- | :-------------------------------------- | :-------------------------------------- | :--------- | | Total revenues and other | $2,157,945 | $2,125,112 | 1.5% | | Net income (loss) attributable to WES Operating | $688,754 | $271,224 | 153.9% | Consolidated Balance Sheets (WES Operating): | Metric | Sep 30, 2021 (thousands) | Dec 31, 2020 (thousands) | Change (%) | | :-------------------------- | :----------------------- | :----------------------- | :--------- | | Total assets | $11,410,090 | $11,756,293 | (2.9%) | | Total liabilities | $8,318,731 | $8,895,542 | (6.5%) | | Total equity and partners' capital | $3,091,359 | $2,860,751 | 8.1% | Consolidated Statements of Cash Flows (WES Operating) (9 Months Ended Sep 30): | Metric | 2021 (thousands) | 2020 (thousands) | Change (%) | | :--------------------------------- | :--------------- | :--------------- | :--------- | | Net cash provided by operating activities | $1,104,189 | $1,133,972 | (2.6%) | | Net cash used in investing activities | $(187,287) | $(426,670) | (56.1%) | | Net cash provided by (used in) financing activities | $(1,242,576) | $(668,822) | 85.8% | | Net increase (decrease) in cash and cash equivalents | $(325,674) | $38,480 | NM | Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's business, accounting policies, and specific financial line items, including revenue recognition, acquisitions, partnership distributions, equity and partners' capital, related-party transactions, equity investments, property, plant, and equipment, goodwill, working capital, debt, and commitments and contingencies Note 1. Description of Business and Basis of Presentation Western Midstream Partners, LP (WES) is a Delaware master limited partnership engaged in gathering, compressing, treating, processing, and transporting natural gas, NGLs, and crude oil, and disposing of produced water. WES owns a 98.0% limited partner interest in WES Operating, LP, and its general partner is a wholly owned subsidiary of Occidental Petroleum Corporation. The financial statements are prepared in accordance with GAAP, consolidating entities where WES holds a controlling interest - The Partnership's general partner, Western Midstream Holdings, LLC, is a wholly owned subsidiary of Occidental Petroleum Corporation. Occidental refers to Occidental Petroleum Corporation and its subsidiaries, excluding the general partner[60] - The Partnership is engaged in gathering, compressing, treating, processing, and transporting natural gas; gathering, stabilizing, and transporting condensate, NGLs, and crude oil; and gathering and disposing of produced water[61] Partnership's Assets and Investments (as of Sep 30, 2021): | Asset Type | Wholly Owned and Operated | Operated Interests | Non Operated Interests | Equity Interests | | :-------------------------------- | :------------------------ | :----------------- | :------------------- | :--------------- | | Gathering systems | 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 | - The Partnership's noncontrolling interests consist of the 25% third-party interest in Chipeta and the 2.0% Occidental subsidiary-owned limited partner interest in WES Operating[69] Note 2. Revenue from Contracts with Customers Revenue from contracts with customers includes fee-based services, product-based services, and product sales. A cumulative catch-up revenue adjustment of $18.9 million was recorded in Q3 2021 for fee-based service revenues due to updated estimates on cost-of-service agreements. The Partnership also discloses transaction prices allocated to remaining performance obligations, totaling $6.85 billion for future periods Revenue from Contracts with Customers (thousands): | Revenue Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Service revenues – fee based | $605,967 | $582,725 | $1,707,987 | $1,806,097 | | Service revenues – product based | $28,812 | $12,316 | $88,267 | $35,237 | | Product sales | $84,298 | $30,106 | $227,359 | $108,491 | | Total revenue from customers | $719,077 | $625,147 | $2,023,613 | $1,949,825 | - A cumulative catch-up revenue adjustment of $18.9 million was recorded to Service revenues – fee based during the three months ended September 30, 2021, due to no longer constraining revenue under certain cost-of-service agreements[74] Transaction Price Allocated to Remaining Performance Obligations (thousands): | Period | Amount | | :------------- | :--------- | | Remainder of 2021 | $211,353 | | 2022 | $1,057,409 | | 2023 | $1,002,351 | | 2024 | $973,300 | | 2025 | $890,903 | | Thereafter | $2,719,380 | | Total | $6,854,696 | Note 3. Acquisitions and Divestitures In October 2020, the Partnership sold its 14.81% interest in Fort Union Gas Gathering, LLC, and in Q2 2021, sold the Bison treating facility, generating a combined net gain of $26.4 million - In October 2020, the Partnership sold its 14.81% interest in Fort Union Gas Gathering, LLC, for $27.0 million, resulting in a net gain of $21.0 million[81] - During the second quarter of 2021, the Bison treating facility was sold for total proceeds of $8.0 million, resulting in a net gain on sale of $5.4 million[82] Note 4. Partnership Distributions The Partnership declared a cash distribution of $0.32300 per unit for Q3 2021, totaling $134.9 million. WES Operating also made quarterly cash distributions to its limited partners, including a $91.8 million distribution in Q3 2021, which WES used for common unit repurchases Partnership Distributions to Unitholders: | Quarter Ended | Per-unit Distribution | | :------------ | :-------------------- | | Sep 30, 2020 | $0.31100 | | Dec 31, 2020 | $0.31100 | | Mar 31, 2021 | $0.31500 | | Jun 30, 2021 | $0.31900 | | Sep 30, 2021 | $0.32300 | - The Board of Directors declared a cash distribution to the Partnership's unitholders for the third quarter of 2021 of $0.32300 per unit, or $134.9 million in aggregate[84] - During the quarter ended September 30, 2021, WES Operating made a distribution of $91.8 million to the Partnership and WGRAH, with the Partnership using its portion to repurchase common units[86] Note 5. Equity and Partners' Capital As of September 30, 2021, Occidental held a 48.5% limited partner interest and a 2.2% general partner interest in WES, while the public held 49.3%. WES repurchased 5,586,419 common units for $104.4 million during the nine months ended September 30, 2021, under its $250.0 million buyback program, with $113.1 million remaining - As of September 30, 2021, Occidental held 48.5% limited partner interest and 2.2% general partner interest in the Partnership, while the public held 49.3% limited partner interest[87] - During the nine months ended September 30, 2021, the Partnership repurchased 5,586,419 common units for an aggregate purchase price of $104.4 million under its $250.0 million Purchase Program. As of September 30, 2021, $113.1 million remained authorized under the program[90] Reconciliation of Basic and Diluted Net Income (Loss) Per Common Unit (WES): | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Limited partners' interest in net income (loss) (thousands) | $250,198 | $241,479 | $658,291 | $257,659 | | Weighted-average common units outstanding – basic (thousands) | 411,909 | 438,857 | 412,690 | 442,255 | | Net income (loss) per common unit – basic | $0.61 | $0.55 | $1.60 | $0.58 | Note 6. Related-Party Transactions Occidental is a significant related party, impacting WES's revenues, expenses, and balance sheet. Related-party revenues primarily stem from services and product sales to Occidental, while expenses include shared services and equity-based compensation. Throughput attributable to Occidental remains substantial across natural gas, crude oil/NGLs, and produced water. A dispute with Occidental regarding cost-of-service rates for the DJ Basin oil-gathering system is ongoing Summary of Related-Party Transactions (WES Consolidated Statements of Operations, thousands): | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues and other | $431,681 | $455,641 | $1,225,375 | $1,411,468 | | Equity income, net – related parties | $48,506 | $61,026 | $159,337 | $176,788 | | Total operating expenses | $22,689 | $10,393 | $91,505 | $161,469 | Throughput Attributable to Occidental (excluding equity-investment throughput): | Asset Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Natural-gas throughput | 38% | 41% | 36% | 42% | | Crude-oil and NGLs throughput | 88% | 87% | 89% | 88% | | Produced-water throughput | 89% | 87% | 87% | 88% | - The Partnership is involved in a dispute with Occidental regarding the calculation of cost-of-service rates under an oil-gathering contract related to the DJ Basin oil-gathering system, which could negatively impact financial results if resolved adversely[104] Note 7. Equity Investments The Partnership holds various equity investments, with a total balance of $1.18 billion as of September 30, 2021. During the nine months ended September 30, 2021, an $11.8 million other-than-temporary impairment loss was recognized for the investment in Ranch Westex due to reduced estimated future cash flows Equity Investments Financial Impact (9 Months Ended Sep 30, 2021, thousands): | Metric | Amount | | :--------------------------------- | :------- | | Balance at December 31, 2020 | $1,224,813 | | Other-than-temporary impairment expense | $(11,805) | | Equity income, net | $159,337 | | Contributions | $3,683 | | Distributions | $(164,772) | | Distributions in excess of cumulative earnings | $(30,075) | | Balance at September 30, 2021 | $1,181,181 | - An $11.8 million other-than-temporary impairment loss was recognized for the investment in Ranch Westex during the nine months ended September 30, 2021, due to a reduction in estimated future cash flows from lower forecasted producer throughput[121] Note 8. Property, Plant, and Equipment Net property, plant, and equipment decreased to $8.52 billion as of September 30, 2021. Impairments of $29.2 million were recognized during the nine months ended September 30, 2021, primarily due to project cancellations at the DJ Basin complex and the impairment of Ranch Westex investment. This is a significant reduction from $200.6 million in impairments in the prior year, which included large write-downs for Wyoming and Utah assets Property, Plant, and Equipment (thousands): | Metric | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Total property, plant, and equipment | $12,732,926 | $12,641,745 | | Less accumulated depreciation | $4,208,845 | $3,931,800 | | Net property, plant, and equipment | $8,524,081 | $8,709,945 | - During the nine months ended September 30, 2021, the Partnership recognized impairments of $29.2 million, primarily from $14.1 million at the DJ Basin complex due to project cancellations and an $11.8 million impairment of the Ranch Westex investment[124] - For the nine months ended September 30, 2020, impairments totaled $200.6 million, primarily due to $150.2 million for assets in Wyoming and Utah, and $29.4 million for the Ranch Westex investment[125] Note 9. Goodwill Goodwill is allocated to gathering and processing and transportation reporting units. An interim goodwill impairment test in Q1 2020, triggered by COVID-19 and oil market disruption, resulted in a $441.0 million impairment for the gathering and processing unit, reducing its carrying value to zero. No further impairment has been indicated since - Goodwill is allocated to two reporting units: gathering and processing, and transportation[128] - A goodwill impairment of $441.0 million was recognized during the first quarter of 2020 for the gathering and processing reporting unit, reducing its carrying value to zero. This was triggered by significant unit-price declines due to COVID-19 and oil-market disruption[130] Note 10. Selected Components of Working Capital Accounts receivable, net, increased for both WES and WES Operating from December 31, 2020, to September 30, 2021. Other current assets also increased, driven by NGLs inventory and contract assets. Accrued liabilities decreased for both entities, primarily due to lower accrued interest expense Accounts Receivable, Net (thousands): | Entity | Sep 30, 2021 | Dec 31, 2020 | | :------------- | :----------- | :----------- | | The Partnership | $583,652 | $452,880 | | WES Operating | $583,652 | $407,549 | Other Current Assets (thousands): | Entity | Sep 30, 2021 | Dec 31, 2020 | | :------------- | :----------- | :----------- | | The Partnership | $73,196 | $45,262 | | WES Operating | $70,907 | $43,244 | Key drivers for increase include NGLs inventory and contract assets Accrued Liabilities (thousands): | Entity | Sep 30, 2021 | Dec 31, 2020 | | :------------- | :----------- | :----------- | | The Partnership | $190,628 | $269,947 | | WES Operating | $145,241 | $230,833 | Primary decrease due to lower accrued interest expense Note 11. Debt and Interest Expense WES Operating's total outstanding debt was $7.1 billion as of September 30, 2021. The company purchased and retired $500.0 million of senior notes via a tender offer in Q3 2021, incurring $24.7 million in losses on early extinguishment. The 4.000% Senior Notes due 2022 were reclassified as short-term debt. The $2.0 billion RCF had $1.8 billion available capacity, with $220.0 million outstanding borrowings. Interest expense decreased QoQ but increased YoY for the nine-month period Outstanding Debt (WES Operating, thousands): | Debt Type | Sep 30, 2021 Carrying Value | Dec 31, 2020 Carrying Value | | :-------------------------- | :-------------------------- | :-------------------------- | | Short-term debt | $726,429 | $438,870 | | Long-term debt | $6,399,874 | $7,415,832 | | Total Outstanding Debt | $7,126,303 | $7,854,702 | - During Q3 2021, WES Operating purchased and retired $500.0 million of senior notes via a tender offer, resulting in losses of $24.7 million on early extinguishment[137] - As of September 30, 2021, the $2.0 billion RCF had $220.0 million outstanding borrowings and $1.8 billion of available borrowing capacity. The 4.000% Senior Notes due 2022 were classified as short-term debt[138][140] Interest Expense (thousands): | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total interest expense | $(93,257) | $(95,571) | $(287,040) | $(278,811) | Note 12. Commitments and Contingencies The Partnership has environmental remediation liabilities of $12.0 million as of September 30, 2021, with most payments expected within five years. No material adverse legal proceedings are anticipated, though the company is involved in various ordinary course legal matters and has payment obligations for debt, capital spending, and leases - Environmental remediation and reclamation obligations totaled $12.0 million as of September 30, 2021, with the majority of payments expected over the next five years[144] - Management is not aware of any legal proceedings for which the final disposition could have a material adverse effect on the Partnership's financial condition, results of operations, or cash flows[145] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational performance, highlighting key trends, significant events, and future outlook. It includes detailed analysis of operating results, key performance metrics, liquidity, capital resources, and factors affecting comparability with WES Operating Cautionary Note Regarding Forward-Looking Statements The report contains forward-looking statements that involve risks and uncertainties. Important factors that could cause actual results to differ materially include the ability to pay distributions, energy market assumptions, future throughput, operating results, competitive conditions, capital availability, commodity-price risks, weather, inflation, general economic conditions, regulatory changes, and the financial condition of Occidental - Forward-looking statements involve risks and uncertainties, including the ability to pay distributions, assumptions about the energy market, future throughput, operating results, competitive conditions, technology, capital resources, commodity-price risks, weather, inflation, general economic conditions, environmental liabilities, legislative or regulatory changes, changes in Occidental's financial or operational condition, and the impact of COVID-19[150][152] Executive Summary Western Midstream Partners, LP is a midstream energy company focused on reliability, cost efficiency, safety, and environmental protection. Key financial and operational highlights for the nine months ended September 30, 2021, include debt redemptions, unit repurchases, increased distributions, and mixed throughput trends across natural gas, crude oil/NGLs, and produced water assets. Weather events (Winter Storm Uri, Colorado blizzard) negatively impacted net income and Adjusted EBITDA by approximately $30 million - WES Operating redeemed $500.0 million of senior notes via a tender offer and repurchased 5,586,419 common units for $104.4 million during the nine months ended September 30, 2021[155] - The third-quarter 2021 per-unit distribution increased to $0.32300 from $0.31900 in the second quarter[155] Throughput Attributable to WES (MMcf/d or MBbls/d): | Asset Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | QoQ Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Natural-gas throughput | 4,081 | 4,265 | (4%) | 4,132 | 4,377 | (6%) | | Crude-oil and NGLs throughput | 641 | 687 | (7%) | 645 | 723 | (11%) | | Produced-water throughput | 735 | 688 | 7% | 673 | 711 | (5%) | - Winter storm Uri and a Colorado blizzard in Q1 2021 reduced net income and Adjusted EBITDA by approximately $30 million due to lower volumes, commodity-price impacts, and higher operating expenses[157] Outlook The business outlook is subject to crude-oil, natural-gas, and NGLs price fluctuations, which affect customer activity and capital allocation. While commodity prices have rebounded, potential impacts include increased credit risk for customers (including Occidental), restrictions on RCF access due to leverage covenants, and future long-lived asset impairments if prices decline again - Commodity-price fluctuations affect customer activity and capital allocation. Potential impacts include increased credit risk for customers, restricted access to the RCF due to leverage covenants, and future long-lived asset impairments[164][168] Acquisitions and Divestitures In October 2020, the Partnership sold its 14.81% interest in Fort Union. In Q2 2021, the Bison treating facility was sold for $8.0 million, resulting in a net gain of $5.4 million - The Partnership sold its 14.81% interest in Fort Union in October 2020[167] - The Bison treating facility was sold in Q2 2021 for $8.0 million, generating a net gain of $5.4 million[168] Results of Operations Operating results are discussed on a sequential-quarter basis (Q3 2021 vs. Q2 2021) and year-to-date basis (9M 2021 vs. 9M 2020). Total revenues and other increased sequentially and year-over-year. Operating income increased significantly both sequentially and year-over-year, driven by higher revenues and lower impairments. Net income attributable to WES also showed strong growth Summary of Results of Operations (WES, thousands): | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | QoQ Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :--------------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Total revenues and other | $763,840 | $719,131 | 6.2% | $2,157,945 | $2,125,112 | 1.5% | | Operating income (loss) | $383,266 | $334,948 | 14.4% | $1,010,550 | $505,959 | 99.7% | | Net income (loss) attributable to WES | $255,725 | $231,259 | 10.6% | $672,775 | $263,121 | 155.7% | Operating Results Natural-gas throughput decreased sequentially and year-over-year, primarily due to decreased volumes at the Bison treating facility (sold in Q2 2021) and production declines in certain areas, partially offset by increased production in others. Crude-oil and NGLs throughput also decreased. Produced-water throughput increased sequentially but decreased year-over-year - Natural-gas gathering, treating, and transportation throughput decreased by 29% QoQ and 13% YoY, primarily due to the sale of the Bison treating facility and production declines in Marcellus Interest and Springfield systems[173][174] - Natural-gas processing throughput decreased by 17 MMcf/d QoQ due to DJ Basin declines, partially offset by West Texas increases. It decreased by 174 MMcf/d YoY due to lower production at West Texas, the idle Granger straddle plant, and lower volumes at the Granger complex, partially offset by DJ Basin increases[175][176] - Crude-oil and NGLs gathering, treating, and transportation throughput decreased by 3% QoQ and 13% YoY, mainly due to production declines in the DJ Basin and DBM oil systems[179][180] - Produced-water gathering and disposal throughput increased by 7% QoQ due to higher production at DBM water systems, but decreased by 5% YoY due to lower production and the impact of winter storm Uri[183] Service Revenues Total service revenues increased by 5% sequentially but decreased by 4% year-over-year. Fee-based service revenues increased sequentially due to a $18.9 million cumulative catch-up adjustment and increased throughput at the West Texas complex. Year-over-year, fee-based revenues decreased due to changes in marketing contracts, decreased throughput across several systems, and lower lease revenue Service Revenues (thousands): | Revenue Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | QoQ Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Service revenues – fee based | $650,482 | $618,985 | 5% | $1,841,742 | $1,980,546 | (7%) | | Service revenues – product based | $28,812 | $27,803 | 4% | $88,267 | $35,237 | 150% | | Total service revenues | $679,294 | $646,788 | 5% | $1,930,009 | $2,015,783 | (4%) | - Service revenues – fee based increased by $31.5 million QoQ, primarily due to a $18.9 million cumulative catch-up revenue adjustment and $14.2 million from increased throughput at the West Texas complex[186] - Service revenues – fee based decreased by $138.8 million YoY, mainly due to a $45.9 million change in accounting for marketing contracts with AESC, decreased throughput at DBM oil and water systems, DJ Basin, Bison treating facility, and West Texas complex[187] Product Sales Total product sales increased by 17% sequentially and 110% year-over-year. Natural-gas sales saw significant increases due to higher average prices and volumes, particularly at the West Texas complex. NGLs sales decreased sequentially due to contract mix changes but increased substantially year-over-year, driven by higher average prices at West Texas and Chipeta complexes Product Sales (thousands): | Product Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | QoQ Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Natural-gas sales | $32,151 | $14,195 | 126% | $67,765 | $23,934 | 183% | | NGLs sales | $52,147 | $58,061 | (10%) | $159,594 | $84,557 | 89% | | Total Product sales | $84,298 | $72,256 | 17% | $227,359 | $108,491 | 110% | Per-Unit Gross Average Sales Price: | Product Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | QoQ Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Natural gas (per Mcf) | $4.10 | $2.65 | 55% | $4.20 | $1.32 | NM | | NGLs (per Bbl) | $36.96 | $27.16 | 36% | $30.81 | $12.25 | 152% | Equity Income, Net – Related Parties Equity income, net – related parties decreased by 17% sequentially and 10% year-over-year. The sequential decrease was mainly due to lower income from Cactus II and Mont Belvieu JV, impacted by electricity credits in Q2 2021. The year-over-year decrease was driven by lower volumes and commercial activities at Whitethorn LLC, Cactus II, and White Cliffs, partially offset by increases from Saddlehorn and Red Bluff Express Equity Income, Net – Related Parties (thousands): | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | QoQ Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Equity income, net – related parties | $48,506 | $58,666 | (17%) | $159,337 | $176,788 | (10%) | - The QoQ decrease of $10.2 million was primarily due to decreases of $5.9 million at Cactus II and $4.1 million at Mont Belvieu JV, related to electricity credits received in Q2 2021[196] - The YoY decrease of $17.5 million was primarily due to decreases of $24.1 million at Whitethorn LLC and $4.8 million at Cactus II, partially offset by increases at Saddlehorn and Red Bluff Express[197] Cost of Product and Operation and Maintenance Expenses Total Cost of product and Operation and maintenance expenses decreased sequentially but increased year-over-year. Residue purchases and NGLs purchases both increased sequentially and year-over-year, driven by higher average prices. Operation and maintenance expense decreased sequentially due to reduced utilities and maintenance at West Texas and DJ Basin, and slightly decreased year-over-year due to reduced salaries and maintenance, partially offset by increased field-related expenses at DBM oil system Cost of Product and Operation and Maintenance Expenses (thousands): | Expense Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | QoQ Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Cost of product | $83,232 | $78,044 | 7% | $250,245 | $153,611 | 63% | | Operation and maintenance | $140,838 | $153,028 | (8%) | $434,198 | $436,670 | (1%) | | Total | $224,070 | $231,072 | (3%) | $684,443 | $590,281 | 16% | - Residue purchases increased by $9.1 million QoQ and $69.0 million YoY, primarily due to increases in average prices and volumes purchased at the West Texas complex and MGR assets[199][200] - Operation and maintenance expense decreased by $12.2 million QoQ due to reduced utilities and maintenance at West Texas and DJ Basin. It decreased by $2.5 million YoY, primarily due to reduced salaries and maintenance at West Texas and DJ Basin, offset by increased field-related expenses at the DBM oil system[205][206] Other Operating Expenses Total other operating expenses decreased sequentially and significantly year-over-year. General and administrative expenses increased due to higher personnel and consulting costs. Property and other taxes decreased due to favorable tax payment differences. Depreciation and amortization increased year-over-year due to asset retirement obligation changes and capital projects. Long-lived asset and goodwill impairments were significantly lower year-over-year, with a $441.0 million goodwill impairment in Q1 2020 not recurring Other Operating Expenses (thousands): | Expense Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | QoQ Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | General and administrative | $50,409 | $44,448 | 13% | $139,973 | $118,466 | 18% | | Property and other taxes | $13,641 | $17,967 | (24%) | $45,992 | $57,263 | (20%) | | Depreciation and amortization | $139,002 | $137,849 | 1% | $407,404 | $384,688 | 6% | | Long-lived asset and other impairments | $1,594 | $12,738 | (87%) | $29,198 | $200,575 | (85%) | | Goodwill impairment | — | — | —% | — | $441,017 | (100%) | | Total | $204,646 | $213,002 | (4%) | $622,567 | $1,202,009 | (48%) | - General and administrative expenses increased by $6.0 million QoQ and $21.5 million YoY, primarily due to higher personnel costs (including bonus-related contributions and equity-based compensation) and increased contract and consulting costs[208][209] - Depreciation and amortization expense increased by $22.7 million YoY, mainly due to changes in asset retirement obligations, capitalized IT implementation costs, and capital projects at the DJ Basin and West Texas complexes[212] - Goodwill impairment expense was $0 for the nine months ended September 30, 2021, compared to $441.0 million in the prior year, which was recognized due to COVID-19 and oil-market disruption[216] Interest Income – Anadarko Note Receivable and Interest Expense Interest income from the Anadarko note receivable was zero for the nine months ended September 30, 2021, due to its exchange in September 2020. Interest expense decreased sequentially due to lower outstanding debt balances but increased year-over-year, primarily due to higher effective interest rates from credit-rating downgrades and decreased capitalized interest, partially offset by lower outstanding debt balances - Interest income from the Anadarko note receivable decreased by $11.7 million YoY, as the note was exchanged in September 2020[220] - Interest expense decreased by $2.0 million QoQ due to lower outstanding debt balances from senior note repurchases[221] - Interest expense increased by $8.2 million YoY, primarily due to $27.4 million from higher effective interest rates on senior notes and a $3.5 million decrease in capitalized interest, partially offset by $18.4 million from lower outstanding debt balances[222] Income Tax Expense (Benefit) Income tax expense increased sequentially and year-over-year, with an effective tax rate of 1% for both periods. As a publicly traded partnership, WES is not a taxable entity for U.S. federal income tax purposes, with its tax liability primarily driven by Texas margin tax Income Tax Expense (Benefit) (thousands): | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | QoQ Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Income tax expense (benefit) | $1,826 | $1,465 | 25% | $4,403 | $3,792 | 16% | | Effective tax rate | 1% | 1% | — | 1% | 2% | (50%) | - The Partnership is not a taxable entity for U.S. federal income tax purposes; its federal statutory rate is zero percent. Income apportionable to Texas is subject to Texas margin tax[223][224] Key Performance Metrics Key performance metrics, including Adjusted gross margin, Adjusted EBITDA, and Free cash flow, are presented and reconciled to GAAP measures. Adjusted gross margin increased sequentially but decreased year-over-year. Adjusted EBITDA increased sequentially but decreased year-over-year. Free cash flow decreased sequentially but increased significantly year-over-year, reflecting improved capital discipline Key Performance Metrics (thousands): | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | QoQ Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Adjusted gross margin | $705,407 | $677,236 | 4% | $1,997,267 | $2,069,801 | (4%) | | Adjusted EBITDA | $531,580 | $491,126 | 8% | $1,465,816 | $1,546,386 | (5%) | | Free cash flow | $320,031 | $379,776 | (16%) | $913,629 | $762,364 | 20% | Adjusted Gross Margin Adjusted gross margin increased sequentially by $28.2 million, driven by increased throughput at West Texas and DBM water systems, and a previously constrained revenue adjustment. It decreased year-over-year by $72.5 million due to decreased throughput, lower lease revenue, and reduced distributions from equity investments. Per-Mcf natural-gas margin increased both sequentially and year-over-year, while per-Bbl crude-oil/NGLs margin increased sequentially but decreased year-over-year - Adjusted gross margin increased by $28.2 million QoQ, primarily due to increased throughput at the West Texas complex and DBM water systems, and a revenue adjustment of previously constrained revenue[229] - Adjusted gross margin decreased by $72.5 million YoY, primarily due to decreased throughput and lower lease revenue at the DBM oil system, decreased distributions from Whitethorn LLC, and decreased throughput at DBM water systems and the Bison treating facility[230] Per-Unit Adjusted Gross Margin: | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | QoQ Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :--------------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Per-Mcf Adjusted gross margin for natural-gas assets | $1.31 | $1.21 | 8% | $1.24 | $1.15 | 8% | | Per-Bbl Adjusted gross margin for crude-oil and NGLs assets | $2.52 | $2.40 | 5% | $2.46 | $2.50 | (2%) | | Per-Bbl Adjusted gross margin for produced-water assets | $0.94 | $0.92 | 2% | $0.93 | $0.98 | (5%) | Adjusted EBITDA Adjusted EBITDA increased by $40.5 million sequentially, driven by higher total revenues and lower operating expenses. It decreased by $80.6 million year-over-year, primarily due to increased cost of product and general and administrative expenses, and decreased distributions from equity investments, partially offset by higher total revenues and lower property taxes - Adjusted EBITDA increased by $40.5 million QoQ, primarily due to a $44.7 million increase in total revenues and other, a $12.2 million decrease in operation and maintenance expenses, and a $4.3 million decrease in property taxes[238] - Adjusted EBITDA decreased by $80.6 million YoY, primarily due to a $96.8 million increase in cost of product, a $17.2 million increase in general and administrative expenses, and a $14.7 million decrease in distributions from equity investments[239] Free Cash Flow Free cash flow decreased by $59.7 million sequentially due to lower net cash from operating activities. However, it increased significantly by $151.3 million year-over-year, driven by a substantial decrease in capital expenditures and contributions to equity investments, along with increased distributions from equity investments in excess of cumulative earnings - Free cash flow decreased by $59.7 million QoQ, primarily due to a $60.8 million decrease in net cash provided by operating activities[241] - Free cash flow increased by $151.3 million YoY, primarily due to a $154.5 million decrease in capital expenditures, a $15.3 million decrease in contributions to equity investments, and an $8.3 million increase in distributions from equity investments in excess of cumulative earnings[242] Reconciliation of Non-GAAP Financial Measures This section provides detailed reconciliations of non-GAAP financial measures (Adjusted gross margin, Adjusted EBITDA, and Free cash flow) to their most directly comparable GAAP measures (gross margin, net income (loss), and net cash provided by operating activities). Management uses these non-GAAP measures to assess operating performance, debt service ability, capital funding, and distribution capacity, while acknowledging their limitations - Adjusted gross margin, Adjusted EBITDA, and Free cash flow are non-GAAP measures used by management and external users to assess financial condition and results of operations, capital discipline, cost efficiency, and balance-sheet strength[226][237][240] - These non-GAAP measures should not be considered as alternatives to GAAP measures and have limitations as analytical tools, as they exclude certain items that affect GAAP financial performance[244] Liquidity and Capital Resources The Partnership's primary cash uses include distributions, debt service, operating expenses, and capital expenditures, funded by cash, operations, RCF capacity, and potential equity/debt issuances. A working capital deficit of $550.6 million exists due to short-term debt classifications. Capital expenditures decreased significantly year-over-year, reflecting reduced spending on facility expansion and pipeline projects. Total outstanding debt was $7.1 billion, with $1.8 billion available under the RCF. Credit risk remains a concern due to reliance on Occidental - Primary cash uses include quarterly distributions, debt service, customary operating expenses, and capital expenditures. Sources of liquidity include cash, cash flows from operations, available borrowing capacity under the RCF, and potential issuances of additional equity or debt securities[251] - As of September 30, 2021, the Partnership had a $550.6 million working capital deficit, primarily due to the classification of $502.1 million of 4.000% Senior Notes due 2022 and $220.0 million of RCF borrowings as short-term debt[255] - Capital expenditures decreased by $154.5 million for the nine months ended September 30, 2021, primarily due to reduced spending on facility expansion and pipeline projects at the West Texas complex, DJ Basin complex, DBM oil system, and DBM water systems[257] - As of September 30, 2021, total outstanding debt was $7.1 billion, with $1.8 billion of available borrowing capacity under the $2.0 billion RCF[263][269] - The Partnership bears credit risk from non-payment or non-performance by counterparties, including Occidental, its largest customer, which could adversely impact cash distributions[272][274] Working Capital As of September 30, 2021, the Partnership had a $550.6 million working capital deficit, primarily due to the classification of $502.1 million of 4.000% Senior Notes due 2022 and $220.0 million of RCF outstanding borrowings as short-term debt. Despite this, $1.8 billion was available under the RCF - As of September 30, 2021, the Partnership had a $550.6 million working capital deficit, primarily due to the classification of $502.1 million of 4.000% Senior Notes due 2022 and $220.0 million of outstanding RCF borrowings as short-term debt[255] - As of September 30, 2021, $1.8 billion was available for borrowing under the RCF[255] Capital Expenditures Capital expenditures decreased by $154.5 million for the nine months ended September 30, 2021, compared to the prior year. This reduction was primarily driven by decreases in facility expansion and pipeline projects across the West Texas complex, DJ Basin complex, DBM oil system, and DBM water systems Capital Expenditures (thousands): | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | | Capital expenditures | $217,757 | $372,262 | | Capital incurred | $251,315 | $224,080 | - Capital expenditures decreased by $154.5 million YoY, primarily due to reduced spending on facility expansion and pipeline projects at the West Texas complex ($66.8 million decrease), DJ Basin complex ($41.0 million decrease), DBM oil system ($19.5 million decrease), and DBM water systems ($11.0 million decrease)[257] Historical Cash Flow Net cash provided by operating activities decreased slightly year-over-year. Net cash used in investing activities significantly decreased, reflecting lower capital expenditures. Net cash used in financing activities substantially increased, driven by debt repayments and unit repurchases, resulting in a net decrease in cash and cash equivalents Net Cash Flows (9 Months Ended Sep 30, thousands): | Activity | 2021 | 2020 | | :--------------- | :---------- | :---------- | | Operating activities | $1,104,994 | $1,131,893 | | Investing activities | $(187,287) | $(426,670) | | Financing activities | $(1,262,767) | $(667,140) | | Net increase (decrease) in cash and cash equivalents | $(345,060) | $38,083 | - Net cash used in financing activities for 9M 2021 included $521.9 million for senior note repurchases, $431.1 million for 5.375% Senior Notes redemption, $398.9 million for unitholder distributions, and $104.4 million for unit repurchases[260][261] Debt and Credit Facilities As of September 30, 2021, WES Operating's outstanding debt was $7.1 billion. The company purchased and retired $500.0 million of senior notes in Q3 2021 and redeemed $431.1 million of 5.375% Senior Notes due 2021 in Q1 2021. The 4.000% Senior Notes due 2022 were reclassified as short-term debt. The RCF had $1.8 billion available capacity, and WES Operating was in compliance with all debt covenants - As of September 30, 2021, the carrying value of outstanding debt was $7.1 billion[263] - WES Operating purchased and retired $500.0 million of senior notes via a tender offer in Q3 2021, incurring $24.7 million in losses. It also redeemed $431.1 million of 5.375% Senior Notes due 2021 in Q1 2021[265] - The 4.000% Senior Notes due 2022 were classified as short-term debt. The RCF had $220.0 million outstanding borrowings and $1.8 billion available capacity, with WES Operating in compliance with all covenants[266][269][270] - An S&P upgrade from 'BB' to 'BB+' in August 2021 is expected to decrease annualized borrowing costs by $7.9 million[264] Credit Risk The Partnership faces credit risk from non-payment or non-performance by counterparties, particularly Occidental, its largest customer. This risk is concentrated due to significant revenue derived from Occidental and its affiliates. An ongoing dispute with Occidental over cost-of-service rates in the DJ Basin oil system highlights this risk, as an adverse resolution could negatively impact financial results - The Partnership bears credit risk from non-payment or non-performance by counterparties, including Occidental, its largest customer[272][296] - A dispute with Occidental regarding the calculation of cost-of-service rates under a gathering contract for the DJ Basin oil system could negatively impact financial condition and results of operations if resolved adversely[297] - The ability to make cash distributions may be adversely impacted if Occidental is unable to perform under its various agreements with the Partnership[274] Items Affecting the Comparability of Financial Results with WES Operating The financial results of WES and WES Operating are largely comparable, with primary differences stemming from noncontrolling interest ownership, general and administrative expenses incurred separately by WES, and intercompany transactions that eliminate upon consolidation. Reconciliations are provided for net income and net cash flows Reconciliation of Net Income (Loss) (thousands): | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Jun 30, 2021 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) attributable to WES | $255,725 | $231,259 | $672,775 | $263,121 | | Limited partner interests in WES Operating not held by WES | $5,214 | $4,754 | $13,779 | $5,426 | | General and administrative expenses | $(280) | $1,600 | $2,206 | $2,683 | | Net income (loss) attributable to WES Operating | $260,658 | $237,611 | $688,754 | $271,224 | Reconciliation of Net Cash Provided by (Used in) Operating and Financing Activities (9 Months Ended Sep 30, thousands): | Metric | 2021 | 2020 | | :--------------------------------- | :---------- | :---------- | | WES net cash provided by operating activities | $1,104,994 | $1,131,893 | | WES Operating net cash provided by operating activities | $1,104,189 | $1,133,972 | | WES net cash provided by (used in) financing activities | $(1,262,767) | $(667,140) | | WES Operating net cash provided by (used in) financing activities | $(1,242,576) | $(668,822) | Critical Accounting Estimates There have been no significant changes to the critical accounting estimates from those disclosed in the annual report on Form 10-K for the fiscal year ended December 31, 2020. These estimates involve informed judgments and assumptions that affect reported financial amounts - No significant changes to critical accounting estimates from those disclosed in the 2020 Form 10-K[280] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Partnership faces commodity-price risk, particularly from percent-of-proceeds and keep-whole agreements, though 92% of natural-gas volume and 100% of crude-oil/produced-water throughput are fee-based. A 10% change in commodity prices is not expected to materially impact operating income, financial condition, or cash flows, excluding imbalances. Interest-rate risk exists due to variable-rate debt, but a 10% change in benchmark rates is not expected to materially impact interest expense on outstanding borrowings - For the nine months ended September 30, 2021, 92% of wellhead natural-gas volume and 100% of crude-oil and produced-water throughput were serviced under fee-based contracts[283] - A 10% increase or decrease in commodity prices would not have a material impact on operating income (loss), financial condition, or cash flows for the next twelve months, excluding the effect of imbalances[283] - The Partnership has interest-rate risk from $220.0 million of RCF borrowings and Floating-Rate Senior Notes, which bear interest at rates based on LIBOR. A 10% change in the applicable benchmark interest rate would not materially impact interest expense on outstanding borrowings[285]