Western Midstream(US:WES)2022-02-23 21:20PART I Business and Properties WES is a midstream energy MLP providing gathering, processing, and transportation services, with a significant dependency on Occidental Petroleum Corporation - WES is a Delaware master limited partnership 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 water5961 Asset and Investment Overview as of December 31, 2021 | Asset Type | Wholly Owned and Operated | Operated Interests | Non-Operated Interests | Equity Interests | | :--- | :--- | :--- | :--- | :--- | | Gathering systems | 17 | 2 | 3 | 1 | | Treating facilities | 37 | 3 | — | — | | Natural-gas processing plants/trains | 24 | 3 | — | 5 | | NGLs pipelines | 2 | — | — | 5 | | Natural-gas pipelines | 5 | — | — | 1 | | Crude-oil pipelines | 3 | 1 | — | 4 | - For the year ended December 31, 2021, 57% of total revenues were attributable to production owned or controlled by Occidental. Occidental also held a 49.7% interest in WES's outstanding common units as of year-end7978 - The company's business strategy focuses on capitalizing on organic growth, controlling costs, optimizing cash return to stakeholders, and managing commodity-price exposure through fee-based contracts7273 Properties WES's properties are concentrated in Texas/New Mexico and the Rocky Mountains, featuring complexes for gathering, processing, and water disposal, plus key transportation pipeline equity interests Gathering, Processing, Treating, and Disposal Assets Overview (Texas & New Mexico) | Location | Asset | Type | Plants | Capacity (MMcf/d) | Capacity (MBbls/d) | Pipeline Miles | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | West Texas / New Mexico | West Texas complex | Gathering, Processing, & Treating | 14 | 1,370 | 53 | 1,818 | | West Texas | DBM oil system | Gathering & Treating | 16 | — | 292 | 646 | | West Texas | DBM water systems | Gathering & Disposal | — | — | 1,300 | 804 | | South Texas | Springfield system | Gathering and Treating | 3 | — | 75 | 857 | Gathering, Processing, Treating, and Disposal Assets Overview (Rocky Mountains) | Location | Asset | Type | Plants | Capacity (MMcf/d) | Capacity (MBbls/d) | Pipeline Miles | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Colorado | DJ Basin complex | Gathering, Processing, & Treating | 16 | 1,730 | 54 | 2,526 | | Colorado | DJ Basin oil system | Gathering & Treating | 6 | — | 155 | 454 | | Utah | Chipeta | Processing | 3 | 790 | — | 2 | | Wyoming | Granger complex | Gathering & Processing | 4 | 520 | — | 788 | Key Transportation Assets | Asset | Type | Ownership Interest | Pipeline Miles | | :--- | :--- | :--- | :--- | | Saddlehorn | Oil | 20.00% | 604 | | FRP | NGLs | 33.33% | 447 | | TEP | NGLs | 20.00% | 594 | | Whitethorn LLC | Oil | 20.00% | 418 | | Cactus II | Oil | 15.00% | 454 | | Red Bluff Express | Gas | 30.00% | 123 | Regulation and Environmental Matters WES operations are subject to extensive federal and state regulations, including pipeline safety, environmental compliance, and climate change rules, posing risks of increased costs and operational delays - Pipelines are regulated by the Pipeline and Hazardous Materials Safety Administration (PHMSA) under the NGPSA and HLPSA, which govern design, construction, operation, and integrity management157 - Recent PHMSA rules, known as the "Mega Rule," have imposed stricter requirements, including material strength verification for older pipelines and expanded safety rules for gas gathering lines, potentially increasing costs158 - The company faces significant environmental regulation under laws like the Clean Air Act and Clean Water Act. Key areas of focus include EPA efforts to reduce methane and GHG emissions from the oil and gas sector, which could require installation of new emission controls and increase compliance costs175181 - State regulators in areas like Colorado, Oklahoma, and Texas are imposing additional requirements on produced-water disposal wells due to concerns about induced seismic activity, which could restrict operations183 Risk Factors WES faces significant risks including high dependence on Occidental, commodity price volatility, regulatory changes, credit rating downgrades, and cybersecurity threats - WES is highly dependent on Occidental, which accounted for 57% of total revenues in 2021. A material reduction in Occidental's production or a shift in its strategic focus away from WES's operating areas would significantly decrease revenues199 - Sustained low commodity prices for natural gas, NGLs, or oil could reduce exploration and production activity, leading to lower throughput on WES systems and adversely affecting business results209 - Regulatory changes, such as Colorado's Senate Bill 19-181, could increase costs and limit oil and gas operations, reducing demand for midstream services in the state223 - The company's debt level may limit its ability to fund acquisitions and other business opportunities. WES Operating's credit ratings were downgraded below investment grade by Fitch, S&P, and Moody's in 2020, which increased financing costs207228 - The business faces security threats, including increasingly sophisticated cyber-attacks that could disrupt critical systems, lead to unauthorized data release, and have a material adverse effect on operations234235 Legal Proceedings WES is involved in legal proceedings, including an EPA enforcement action, a revenue allocation dispute with Enterprise Products, and a recently settled bankruptcy-related dispute - A subsidiary, Kerr-McGee Gathering LLC, is facing an enforcement action from the EPA and the State of Colorado for alleged non-compliance with leak detection and repair requirements at its Fort Lupton facility291 - A dispute with Sanchez Energy Corporation regarding the rejection of midstream agreements related to the Springfield system during its bankruptcy was resolved through a comprehensive settlement in December 2021292 - The company has filed a lawsuit against Enterprise Products Operating seeking a declaratory judgment regarding proper revenue allocation for fractionation trains at the Mont Belvieu complex293 PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities WES common units trade on the NYSE; the company completed a $250 million unit repurchase program in 2021 and has equity compensation plans - The company's common units are listed on the New York Stock Exchange (NYSE) under the trading symbol "WES"299 Issuer Purchases of Equity Securities (Q4 2021) | Period | Total number of units purchased | Average price paid per unit | Approximate dollar value of units that may yet be purchased under the plans or programs | | :--- | :--- | :--- | :--- | | October 1-31, 2021 | 143,033 | $20.99 | $110,098,000 | | November 1-30, 2021 | 417,493 | $20.70 | $101,456,000 | | December 1-31, 2021 | 5,060,924 | $20.05 | $— | | Total | 5,621,450 | $20.12 | $— | - As of December 31, 2021, the entire $250.0 million authorized under the November 2020 Purchase Program had been fulfilled302 Management's Discussion and Analysis of Financial Condition and Results of Operations WES saw decreased throughput in 2021, a 4% gross margin decline, but focused on debt reduction and unit buybacks, with results impacted by Winter Storm Uri - Significant financial events in 2021 included redeeming $431.1 million of 5.375% Senior Notes, purchasing and retiring $500.0 million of other senior notes via tender offer, and repurchasing over 11.2 million common units for a total of $217.4 million312 Throughput by Asset Type (Year-over-Year) | Throughput Type | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Natural-gas assets (MMcf/d) | 4,303 | 4,433 | (3)% | | Crude-oil and NGLs assets (MBbls/d) | 672 | 712 | (6)% | | Produced-water assets (MBbls/d) | 717 | 712 | 1% | - Winter storm Uri in February 2021 and a blizzard in Colorado in March 2021 adversely affected volumes and increased operating expenses, with an estimated negative impact of approximately $30 million to net income and Adjusted EBITDA for the year331 - The company recognized long-lived asset and other impairments of $30.5 million in 2021, a significant decrease from the $203.9 million in 2020. A goodwill impairment of $441.0 million was recognized in 2020332 Results of Operations WES reported $916.3 million net income in 2021, up from $527.0 million in 2020, driven by reduced impairment charges, despite slight decreases in natural gas and crude oil/NGLs throughput Consolidated Statements of Operations Summary (in thousands) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total revenues and other | $2,877,155 | $2,772,592 | $2,746,174 | | Total operating expenses | $1,745,573 | $2,129,063 | $1,750,943 | | Operating income (loss) | $1,336,271 | $878,913 | $1,231,343 | | Net income (loss) | $943,999 | $516,852 | $807,700 | | Net income (loss) attributable to WES, LP | $916,292 | $527,012 | $697,241 | - Natural gas processing throughput decreased by 71 MMcf/d in 2021, mainly due to lower production at the West Texas complex and the idling of the Granger straddle plant, partially offset by higher volumes in the DJ Basin complex346 - Service revenues - fee based decreased by $121.5 million in 2021, primarily due to a change in accounting for marketing contracts with AESC, decreased throughput at the DBM and DJ Basin oil systems, and the sale of the Bison facility358 - Cost of product increased by 71% to $322.3 million in 2021 from $188.1 million in 2020, driven by significantly higher residue and NGLs purchase prices370 - General and administrative expenses rose 26% to $195.5 million in 2021, primarily due to increased personnel costs and contract/consulting costs related to information technology services as WES transitions to a standalone entity380381 Key Performance Metrics Adjusted EBITDA decreased 4% to $1.95 billion in 2021, while Free Cash Flow rose 21% to $1.49 billion, with mixed per-unit adjusted gross margins across asset types Key Performance Metrics (2021 vs. 2020) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Adjusted gross margin (thousands) | $2,667,516 | $2,718,205 | (2)% | | Per-Mcf Adjusted gross margin for natural-gas assets | $1.24 | $1.16 | 7% | | Per-Bbl Adjusted gross margin for crude-oil and NGLs assets | $2.28 | $2.54 | (10)% | | Per-Bbl Adjusted gross margin for produced-water assets | $0.93 | $0.98 | (5)% | | Adjusted EBITDA (thousands) | $1,946,690 | $2,030,366 | (4)% | | Free cash flow (thousands) | $1,490,128 | $1,226,588 | 21% | - Adjusted gross margin is a non-GAAP measure defined as total revenues and other (less certain reimbursements), less cost of product, plus distributions from equity investments, excluding noncontrolling interests' share403 - Adjusted EBITDA is a non-GAAP measure defined as net income plus items like interest expense, taxes, D&A, impairments, and non-cash compensation, adjusted for equity investment income/distributions and noncontrolling interests412 - Free cash flow is a non-GAAP measure defined as net cash from operating activities less total capital expenditures and contributions to equity investments, plus distributions from equity investments in excess of cumulative earnings417 Liquidity and Capital Resources WES maintained strong liquidity with $2.0 billion RCF availability, completed a $250 million unit buyback, and projected $375-475 million in 2022 capital expenditures, with $6.9 billion total debt - Primary sources of liquidity include cash from operations, available capacity under the $2.0 billion RCF, and potential debt or equity issuances. As of Dec 31, 2021, there was $2.0 billion available under the RCF439462 - In February 2022, a new buyback program of up to $1.0 billion of common units through December 31, 2024 was announced442 Capital Expenditures (Cash Basis, in thousands) | Year | Capital Expenditures | | :--- | :--- | | 2021 | $313,674 | | 2020 | $423,602 | | 2019 | $1,189,254 | - For 2022, total capital expenditures are estimated to be between $375.0 million and $475.0 million on an accrual basis443 Historical Cash Flow Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Operating activities | $1,766,852 | $1,637,418 | $1,324,100 | | Investing activities | ($257,538) | ($448,254) | ($3,387,853) | | Financing activities | ($1,752,237) | ($844,204) | $2,071,573 | - As of December 31, 2021, the carrying value of outstanding debt was $6.9 billion. The company was in compliance with all debt covenants457464 Financial Statements WES reported $944.0 million net income in 2021, driven by lower impairments, with total assets at $11.27 billion and strong $1.77 billion cash flow from operations Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total current assets | $684,764 | $943,064 | | Net property, plant, and equipment | $8,512,907 | $8,709,945 | | Total assets | $11,273,079 | $11,830,027 | | Total current liabilities | $1,140,197 | $960,935 | | Long-term debt | $6,400,616 | $7,415,832 | | Total liabilities | $8,177,319 | $8,934,815 | | Total equity and partners' capital | $3,095,760 | $2,895,212 | Consolidated Statements of Cash Flows Highlights (in thousands) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,766,852 | $1,637,418 | | Net cash used in investing activities | ($257,538) | ($448,254) | | Net cash provided by (used in) financing activities | ($1,752,237) | ($844,204) | Controls and Procedures Management concluded WES's disclosure controls and procedures were effective as of December 31, 2021, with no material changes in internal control during Q4 2021 - Management concluded that WES's and WES Operating's disclosure controls and procedures were effective as of December 31, 2021730 - There were no changes in internal control over financial reporting during the quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls732 PART III Directors, Executive Officers, and Corporate Governance WES is managed by its general partner's eight-member board, including independent directors, with key committees overseeing audit, special conflicts, ESG, and compensation matters - The general partner's Board has eight members, three of whom (Kenneth F. Owen, David J. Schulte, and Lisa A. Stewart) are independent under NYSE and Exchange Act standards738 - The Board has four standing committees: Audit, Special, ESG, and Compensation. The Audit Committee is comprised of three independent directors and oversees financial statement integrity and compliance762763 - The Special Committee, also comprised of three independent directors, reviews matters that may involve conflicts of interest, particularly with Occidental, to ensure they are fair and reasonable to the partnership766 Executive Compensation WES executive compensation aligns with unitholder interests, with 87% of CEO pay at-risk, and a 168% payout for the 2021 cash bonus based on strong performance - A majority of NEO targeted annual direct compensation is at-risk: 87% for the CEO and an average of 75% for other NEOs787 2021 Annual Cash Incentive Performance Metrics & Weighting | Performance Metric | Relative Weighting | | :--- | :--- | | Controllable Cash Costs | 25% | | System Availability | 15% | | Discretionary Growth Capital Spend | 15% | | Leverage Ratio | 15% | | Free cash flow | 15% | | Safety & ESG | 15% | - After adjusting for certain unplanned items like winter storm Uri, the Board approved a payout of 168% of target under the 2021 WES Cash Bonus Program in recognition of exceptional financial and operational performance816 - In February 2021, the Board approved executive equity ownership guidelines requiring the CEO to hold 6x base salary in equity and other senior VPs to hold 3-4x base salary830831 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Occidental Petroleum Corporation is the largest beneficial owner with 49.6% of WES common units, while directors and executive officers collectively own less than 1% - As of February 17, 2022, Occidental Petroleum Corporation beneficially owned 200,281,578 common units, representing a 49.6% stake883 - All directors and executive officers as a group beneficially owned 353,350 common units, which is less than 1% of the total outstanding883 - ALPS Advisors, Inc. reported beneficial ownership of 24,330,966 common units, representing a 6.04% stake as of December 31, 2021887 Certain Relationships and Related Transactions, and Director Independence WES has extensive related-party transactions with Occidental, generating $1.63 billion in 2021 revenues, with conflicts of interest managed by the Special Committee - As of February 17, 2022, Occidental held a 48.5% limited partner interest and a 2.2% general partner interest in WES891 Summary of Transactions with Occidental (in thousands) | Transaction Type | 2021 | 2020 | | :--- | :--- | :--- | | Total revenues and other | $1,632,358 | $1,820,612 | | Total operating expenses | $86,223 | $182,712 | - The partnership agreement contains provisions to manage conflicts of interest with the general partner (Occidental). Resolutions can be deemed fair and reasonable if approved by the Special Committee, by a majority of unaffiliated unitholders, or if on terms no less favorable than those from unrelated third parties918919 Principal Accounting Fees and Services KPMG LLP is the independent auditor, with 2021 audit fees of $2.1 million for WES Operating and $0.4 million for WES, all pre-approved by the Audit Committee Audit Fees (in thousands) | Entity | 2021 | 2020 | | :--- | :--- | :--- | | WES | $400 | $250 | | WES Operating | $2,100 | $2,240 | - The Audit Committee has a Pre-Approval Policy for all services performed by the independent auditor, KPMG LLP, and all 2021 services were approved under this policy923 PART IV Exhibits, Financial Statement Schedules This section lists all Form 10-K exhibits, including organizational documents, material contracts, and certifications, with financial statement schedules omitted as not applicable - Financial statements are included in Part II, Item 8. Financial statement schedules have been omitted as they are not required or applicable927928 - The exhibit index lists key documents such as the Second Amended and Restated Agreement of Limited Partnership, various supplemental indentures for senior notes, the Amended and Restated Services Agreement with Occidental, and various executive compensation plans929930931