WESTERN GAS PARTNERS, LP The following discussion analyzes our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements, wherein WES Operating is fully consolidated, and which are included under Part I, Item 1 of this quarterly report, and the historical consolidated financial statements, and the notes thereto, which are included under Part II, Item 8 of the 2019 Form 10-K as filed with theSEC onFebruary 27, 2020 . 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;
•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;
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•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;
•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 and the
•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 2019 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
During the first and second quarters of 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 recent commodity-price declines and
oversupplied commodities markets. These market dynamics have an adverse impact
on producers that provide throughput into our systems and we have experienced
decreased throughput at many of our locations, which may adversely affect our
results of operations and cash flows.
Additionally, many of our employees have been and may continue to be subject to
pandemic-related work-from-home requirements, which requires 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 during the
ongoing work-from-home precautionary phase of the pandemic. 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. See
Risk Factors under Part II, Item 1A of this Form 10-Q for additional information
on these and other risks.
WES continues to monitor the COVID-19 situation closely and as state and federal
governments issue additional guidance, we will update our own policy responses
to ensure the safety and health of our workforce and communities. The federal
government has provided guidance to states on how to safely return personnel to
the workplace, which we are following as our workforce returns to WES locations.
All WES facilities, including field locations, have been conducting enhanced
routine cleaning and disinfecting of common areas and frequently touched
surfaces using CDC- and EPA -approved products. Our return-to-work protocols
include daily required application-based health self-assessments that must be
completed prior to accessing WES work locations.
We currently own or have investments in assets located in the Rocky Mountains
(Colorado , Utah , and Wyoming ), North-central Pennsylvania , Texas , and New
Mexico . We are 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. As of June 30, 2020 , 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 2
Treating facilities 38 3 - 3
Natural-gas processing plants/trains 26 3 - 5
NGLs pipelines 2 - - 4
Natural-gas pipelines 5 - - 1
Crude-oil pipelines 3 1 - 3
(1)Includes the DBM water systems.
Significant financial and operational events during the six months ended
•Our second-quarter 2020 distribution is unchanged from the first-quarter 2020
per-unit distribution of
•We commenced operations of Latham Train II at the
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•In January 2020 , WES Operating completed an offering of $3.2 billion in
aggregate principal amount of Fixed-Rate Senior Notes and $300.0 million in
aggregate principal amount of Floating-Rate Senior Notes. Net proceeds from
these offerings were used to repay and terminate the Term loan facility, repay
outstanding amounts under the RCF, and for general partnership purposes. See
Liquidity and Capital Resources within this Item 2 for additional information.
•During the first six months of 2020, WES Operating purchased and retired
•Natural-gas throughput attributable to WES totaled 4,413 MMcf/d and 4,439 MMcf/d for the three and six months endedJune 30, 2020 , respectively, representing a 3% and 5% increase, respectively, compared to the same periods in 2019. •Crude-oil and NGLs throughput attributable to WES totaled 711 MBbls/d and 736 MBbls/d for the three and six months endedJune 30, 2020 , respectively, representing a 19% and 23% increase, respectively, compared to the same periods in 2019. •Produced-water throughput attributable to WES totaled 758 MBbls/d and 730 MBbls/d for the three and six months endedJune 30, 2020 , respectively, representing a 50% and 44% increase, respectively, compared to the same periods in 2019. •Operating income (loss) was$373.8 million for the three months endedJune 30, 2020 , representing a 21% increase compared to the same period in 2019. Operating income (loss) was$158.9 million for the six months endedJune 30, 2020 , which includes goodwill and long-lived asset impairments of$596.8 million during the first quarter, representing a 75% decrease compared to the same period in 2019. •Adjusted gross margin for natural-gas assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$1.13 per Mcf and$1.15 per Mcf for the three and six months endedJune 30, 2020 , respectively, representing a 7% and 6% increase, respectively, compared to the same periods in 2019. •Adjusted gross margin for crude-oil and NGLs assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$2.56 per Bbl for the three months endedJune 30, 2020 , representing a 2% increase compared to the same period in 2019. Adjusted gross margin for crude-oil and NGLs assets averaged$2.49 per Bbl for the six months endedJune 30, 2020 , remaining flat compared to the same period in 2019. •Adjusted gross margin for produced-water assets (as defined under the caption Key Performance Metrics within this Item 2) averaged$0.97 per Bbl for the three and six months endedJune 30, 2020 , representing a 4% and 1% decrease, respectively, compared to the same periods in 2019. 44
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Table of Contents The following tables provide additional information on throughput for the periods presented below:
Three Months Ended June 30,
Inc/ Inc/ Inc/
2020 2019 (Dec) 2020 2019 (Dec) 2020 2019 (Dec)
Natural gas Crude oil & NGLs Produced water
(MMcf/d) (MBbls/d) (MBbls/d)
Delaware Basin 1,309 1,179 11 % 202 141 43 % 773 515 50 %
DJ Basin 1,329 1,266 5 % 113 112 1 % - - - %
Equity investments 458 402 14 % 367 311 18 % - - - %
Other 1,479 1,607 (8) % 44 49 (10) % - - - %
Total throughput 4,575 4,454 3 % 726 613 18 % 773 515 50 %
Six Months Ended June 30,
Inc/ Inc/ Inc/
2020 2019 (Dec) 2020 2019 (Dec) 2020 2019 (Dec)
Natural gas Crude oil & NGLs Produced water
(MMcf/d) (MBbls/d) (MBbls/d)
Delaware Basin 1,349 1,178 15 % 197 143 38 % 745 516 44 %
DJ Basin 1,368 1,262 8 % 120 107 12 % - - - %
Equity investments 451 390 16 % 391 308 27 % - - - %
Other 1,435 1,585 (9) % 43 53 (19) % - - - %
Total throughput 4,603 4,415 4 % 751 611 23 % 745 516 44 %
Commodity purchase and sale agreements. Effective April 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, the Partnership no longer recognizes service revenues
and/or product sales revenues and the equivalent cost of product expense for the
marketing services performed by AESC. Period-over-period variances for the three
and six months ended June 30, 2020 , include the following impacts related to
this change (i) decreases of $47.1 million and $56.2 million , respectively, in
Service revenues - fee based, (ii) a decrease of $17.5 million and an increase
of $4.7 million , respectively, in Product sales, and (iii) decreases of $64.6
million and $51.5 million , respectively, 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.
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December 2019 Agreements. On December 31, 2019 , (i) WES and certain of its
subsidiaries, including WES Operating and WES Operating GP, entered into the
below-described agreements with Occidental and/or certain of its subsidiaries,
including Anadarko , and (ii) WES Operating also entered into the below-described
amendments to its debt agreements (collectively, the "December 2019
Agreements").
•Exchange Agreement. WGRI, the general partner, and WES entered into a
partnership interests exchange agreement (the "Exchange Agreement"), pursuant to
which WES canceled the non-economic general partner interest in WES and
simultaneously issued a 2.0% general partner interest to the general partner in
exchange for which WGRI transferred 9,060,641 WES common units to WES, which
immediately canceled such units on receipt.
•Services, Secondment, and Employee Transfer Agreement. Occidental, Anadarko ,
and WES Operating GP entered into an amended and restated Services, Secondment,
and Employee Transfer Agreement (the "Services Agreement"), pursuant to which
Occidental, Anadarko , and their subsidiaries (i) seconded certain personnel
employed by Occidental to WES Operating GP, in exchange for which WES Operating
GP pays a monthly secondment and shared services fee to Occidental equivalent to
the direct cost of the seconded employees until their transfer to WES and (ii)
agreed to continue to provide certain administrative and operational services to
WES for up to a two-year transition period. In January 2020 , pursuant to the
Services Agreement, Occidental made a one-time cash contribution of $20.0
million to WES Operating for anticipated transition costs required to establish
stand-alone human resources and information technology functions. The Services
Agreement also includes provisions governing the transfer of certain employees
to WES and the assumption by WES of liabilities relating to those employees at
the time of their transfer. In late March 2020 , seconded employees' employment
was transferred to WES.
•RCF amendment. WES Operating entered into an amendment to its RCF to, among
other things, (i) effective on February 14, 2020 , exercise the final one-year
extension option to extend the maturity date of the RCF to February 14, 2025 ,
for the extending lenders, and (ii) modify the change of control definition to
provide, among other things, that, subject to certain conditions, if the limited
partners of WES elect to remove the general partner as the general partner of
WES in accordance with the terms of the partnership agreement, then such removal
will not constitute a change of control under the RCF.
•Term loan facility amendment. WES Operating entered into an amendment to its
Term loan facility to, among other things, modify the change of control
definition to provide, among other things, that, subject to certain conditions,
if the limited partners of WES elect to remove the general partner as the
general partner of WES in accordance with the terms of the partnership
agreement, then such removal will not constitute a change of control under the
Term loan facility. See Note 11-Debt and Interest Expense in the Notes to
Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for
further information.
•Termination of debt-indemnification agreements. WES Operating GP and certain
wholly owned subsidiaries of Occidental mutually terminated the
debt-indemnification agreements related to certain indebtedness incurred by WES
Operating.
•Termination of omnibus agreements. WES and WES Operating entered into agreements with Occidental to terminate the WES and WES Operating omnibus agreements. See Note 6-Related-Party Transactions in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for further information.
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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. Read Risk Factors
under Part II, Item 1A of this Form 10-Q for additional information.
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 recently ranged from a high of $63.27 per barrel in January
2020 to a low below $20.00 per barrel in April 2020 . While the extent and
duration of the recent commodity-price declines cannot be predicted, potential
impacts to our business include the following:
•With continued excess supply, domestic oil-storage capacity may reach
operational limits, causing downstream-storage constraints and potential
production curtailments that could adversely impact revenues generated from our
midstream gathering and processing contracts. As available storage nears
capacity, our customers may shut-in field production due to their inability to
access downstream-takeaway alternatives or challenged wellhead economics.
•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, 2020 , it is reasonably possible that prolonged low commodity prices, further commodity-price declines, and changes to producers' drilling plans in response to lower prices 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. See Risk Factor, "The global outbreak of COVID-19 is likely to have an adverse impact on our operations and financial results." under Part II, Item 1A of this Form 10-Q for additional information. Effects of credit-rating downgrade. Our costs of borrowing and ability to access the capital markets are affected by market conditions and the credit ratings assigned to WES Operating's debt by the major credit rating agencies. InMarch 2020 , Fitch Ratings ("Fitch") and Standard and Poor's ("S&P") downgraded WES Operating's long-term debt from "BBB-" to "BB+," with negative watches assigned to each of these revised ratings. InMay 2020 , Fitch downgraded WES Operating's long-term debt to "BB" and inJune 2020 , Moody's Investors Service ("Moody's") downgraded WES Operating's long-term debt from "Ba1" to "Ba2." As a result of these downgrades, WES Operating's credit rating is below investment grade for all three major credit rating agencies, which results in the following: 47 -------------------------------------------------------------------------------- Table of Contents •WES Operating's annualized borrowing costs will increase by$35.0 million for the Fixed-Rate Senior Notes and Floating-Rate Senior Notes issued inJanuary 2020 that provide for increased interest rates following downgrade events. •Beginning in the second quarter of 2020, the interest rate on outstanding RCF borrowings increased by 0.20% and the RCF facility-fee rate increased by 0.05%, from 0.20% to 0.25%. •We may be obligated to provide financial assurance of our performance under certain contractual arrangements requiring us to post collateral in the form of letters of credit or cash. AtJune 30, 2020 , we had$5.0 million in letters of credit or cash-provided assurance of our performance outstanding under contractual arrangements with credit-risk-related contingent features. Additional downgrades to WES Operating's credit ratings will further impact its borrowing costs negatively, and may adversely affect WES Operating's ability to issue public debt and effectively execute aspects of our business strategy. Per-unit distribution reduction and revised capital guidance. OnApril 20, 2020 , we announced the below-described per-unit distribution and cost reductions. These cash-preservation measures are intended to enhance our liquidity for the duration of the COVID-19 macroeconomic disruption and the weakened commodity-price environment; however, the duration and severity of this pandemic and concomitant economic downturn remains uncertain. There can be no assurance that these announced actions will provide sufficient liquidity for the required duration, and additional actions, including additional per-unit distribution reductions, may be necessary to manage through the current environment. •A quarterly cash distribution of$0.31100 per unit for the first quarter of 2020, which represents a 50% reduction to the distribution paid for the previous quarter. •For the year endedDecember 31, 2020 , capital expenditures are expected to be$450.0 million to$550.0 million , representing a 45% reduction to prior guidance. This reduction results from deferred producer activity in all basins and the elimination of associated capital expenditures, other than those expenditures that are necessary to support proper maintenance and long-term asset integrity.
•We expect to achieve other cost reductions of approximately
OnJuly 16, 2020 , we announced that our per-unit distribution for the second quarter of 2020 is unchanged from the first-quarter 2020$0.31100 per-unit distribution. OnAugust 10, 2020 , we announced a further downward revision to our estimated full-year 2020 capital expenditures, which currently are expected to be$400.0 million to$450.0 million , representing a$75.0 million reduction to theApril 2020 guidance midpoint of$500.0 million . BASIS OF PRESENTATION FOR ACQUIRED ASSETS AND RESULTS OF OPERATIONS AMA acquisition. InFebruary 2019 , WES Operating acquired AMA fromAnadarko . See Note 1-Description of Business and Basis of Presentation and 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. Red Bluff Express acquisition. InJanuary 2019 , we acquired a 30% interest in Red Bluff Express, which owns a third-party-operated natural-gas pipeline connecting processing plants in Reeves and Loving Counties,Texas , to the WAHA hub inPecos County, Texas . We acquired our 30% interest from a third party via an initial net investment of$92.5 million , which represented a 30% share of costs incurred up to the date of acquisition. The initial investment was funded with cash on hand and the interest in Red Bluff Express is accounted for under the equity method of accounting. 48 -------------------------------------------------------------------------------- Table of Contents Presentation of the Partnership's assets. Our assets include assets owned and ownership interests accounted for by us under the equity method of accounting, through our 98% partnership interest in WES Operating as ofJune 30, 2020 (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. RESULTS OF OPERATIONS
OPERATING RESULTS
The following tables and discussion present a summary of our results of
operations:
Three Months Ended Six Months Ended
June 30, June 30,
thousands 2020 2019 2020 2019
Total revenues and other (1) $ 671,755 $
685,054
54,415 63,598 115,762 121,590
Total operating expenses (1) 349,561 437,531 1,400,084 847,888
Gain (loss) on divestiture and other, net (2,843) (1,061) (2,883) (1,651)
Operating income (loss) 373,766 310,060 158,863 628,988
Interest income - Anadarko note receivable 4,225 4,225 8,450 8,450
Interest expense (94,654) (79,472) (183,240) (145,348)
Gain (loss) on early extinguishment of debt 1,395 - 8,740 -
Other income (expense), net 1,653 (58,477) (108) (93,683)
Income (loss) before income taxes 286,385 176,336 (7,295) 398,407
Income tax expense (benefit) 5,044 1,278 764 11,370
Net income (loss) 281,341 175,058 (8,059) 387,037
Net income (loss) attributable to
noncontrolling interests 8,304 5,464 (24,569) 98,783
Net income (loss) attributable to Western
Midstream Partners, LP (2) $ 273,037 $ 169,594 $ 16,510 $ 288,254
Key performance metrics (3)
Adjusted gross margin $ 686,957 $ 596,476 $ 1,388,272 $ 1,184,170
Adjusted EBITDA 514,441 432,920 1,028,028 861,250
Free cash flow 208,623 (6,353) 423,210 (78,175)
(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.
For purposes of the following discussion, any increases or decreases "for
the three months ended June 30, 2020 " refer to the comparison of the three
months ended June 30, 2020 , to the three months ended June 30, 2019 ; any
increases or decreases "for the six months ended June 30, 2020 " refer to the
comparison of the six months ended June 30, 2020 , to the six months ended June
30, 2019 ; and any increases or decreases "for the three and six months ended
June 30, 2020 " refer to the comparison of these 2020 periods to the
corresponding three- and six-month periods ended June 30, 2019 .
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Throughput
Three Months Ended Six Months Ended
June 30, June 30,
Inc/ Inc/
2020 2019 (Dec) 2020 2019 (Dec)
Throughput for natural-gas assets (MMcf/d)
Gathering, treating, and transportation 554 528 5 % 547 527 4 %
Processing 3,563 3,524 1 % 3,605 3,498 3 %
Equity investments (1) 458 402 14 % 451 390 16 %
Total throughput 4,575 4,454 3 % 4,603 4,415 4 %
Throughput attributable to noncontrolling
interests (2) 162 178 (9) % 164 177 (7) %
Total throughput attributable to WES for
natural-gas assets 4,413 4,276 3 % 4,439 4,238 5 %
Throughput for crude-oil and NGLs assets
(MBbls/d)
Gathering, treating, and transportation 359 302 19 % 360 303 19 %
Equity investments (3) 367 311 18 % 391 308 27 %
Total throughput 726 613 18 % 751 611 23 %
Throughput attributable to noncontrolling
interests (2) 15 13 15 % 15 13 15 %
Total throughput attributable to WES for
crude-oil and NGLs assets 711 600 19 % 736 598 23 %
Throughput for produced-water assets
(MBbls/d)
Gathering and disposal 773 515 50 % 745 516 44 %
Throughput attributable to noncontrolling
interests (2) 15 10 50 % 15 10 50 %
Total throughput attributable to WES for
produced-water assets 758 505 50 % 730 506 44 %
(1)Represents the 14.81% share of average Fort Union throughput, 22% share of
average Rendezvous throughput, 50% share of average Mi Vida and Ranch Westex
throughput, and 30% share of average Red Bluff Express throughput.
(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.
(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 average Panola and Cactus II throughput.
Natural-gas assets
Gathering, treating, and transportation throughput increased by 26 MMcf/d and 20 MMcf/d for the three and six months endedJune 30, 2020 , respectively, primarily due to increased production in areas around the Marcellus Interest systems, partially offset by production declines in areas around the Bison facility andSpringfield gas-gathering system. Processing throughput increased by 39 MMcf/d and 107 MMcf/d for the three and six months endedJune 30, 2020 , respectively, primarily due to (i) increased production in areas around theWest Texas andDJ Basin complexes, (ii) the start-up of Latham Train II at theDJ Basin complex during the first quarter of 2020, and (iii) the start-up of Mentone Train II at theWest Texas complex inMarch 2019 . These increases were offset partially by (i) lower throughput at the Chipeta complex due to production declines in the area and a third-party contract that terminated during the fourth quarter of 2019, (ii) third-party volumes being diverted away from the Granger straddle plant beginning in the fourth quarter of 2019, and (iii) lower throughput at the Red Desert complex due to production declines in the area. 50 -------------------------------------------------------------------------------- Table of Contents Equity-investment throughput increased by 56 MMcf/d and 61 MMcf/d for the three and six months endedJune 30, 2020 , respectively, primarily due to increased volumes on Red Bluff Express resulting from increased production in the area, partially offset by decreased volumes at the Mi Vida plant due to a decrease in third-party processed volumes.
Crude-oil and NGLs assets
Gathering, treating, and transportation throughput increased by 57 MBbls/d for the three and six months endedJune 30, 2020 , primarily due to (i) increased throughput at the DBM oil system with the commencement of Loving ROTF Train III operations during the first quarter of 2020 and increased production, and (ii) increased throughput into theDJ Basin oil system. Equity-investment throughput increased by 56 MBbls/d and 83 MBbls/d for the three and six months endedJune 30, 2020 , respectively, primarily due to (i) the acquisition of our interest in Cactus II inJune 2018 , which began delivering crude oil during the third quarter of 2019, (ii) increased volumes on FRP resulting from a pipeline expansion project completed during the second quarter of 2020, and (iii) increased volumes on the Saddlehorn pipeline resulting from incentive tariffs and additional committed volumes beginning in the third quarter of 2019. These increases were offset partially by decreased volumes on the Whitethorn pipeline. Produced-water assets Gathering and disposal throughput increased by 258 MBbls/d and 229 MBbls/d for the three and six months endedJune 30, 2020 , respectively, due to increased throughput at the DBM water systems resulting from additional (i) producer activity, (ii) water-disposal facilities, and (iii) offload connections that increased capacity of the systems. Service Revenues Three Months Ended Six Months Ended June 30, June 30, Inc/ Inc/ thousands except percentages 2020 2019
(Dec) 2020 2019 (Dec)
Service revenues - fee based $ 642,628 $ 593,544 8 % $ 1,344,024 $ 1,173,518 15 %
Service revenues - product based 7,000 16,675 (58) % 22,921 36,054 (36) %
Total service revenues $ 649,628 $ 610,219 6 % $ 1,366,945 $ 1,209,572 13 %
Service revenues - fee based
Service revenues - fee based increased by$49.1 million and$170.5 million for the three and six months endedJune 30, 2020 , respectively, primarily due to increases of (i)$29.1 million and$70.2 million , respectively, at theWest Texas complex and$19.5 million and$55.9 million , respectively, at theDJ Basin complex from increased throughput, (ii)$22.7 million and$45.6 million , respectively, at the DBM oil system from increased throughput and the effect of the straight-line treatment of lease revenue under the new operating and maintenance agreement with Occidental effectiveDecember 31, 2019 , (iii)$22.1 million and$41.2 million , respectively, at the DBM water systems from increased throughput and a higher average fee resulting from a cost-of-service rate redetermination that occurred during the first quarter of 2020, and (iv)$5.4 million and$15.9 million , respectively, at theDJ Basin oil system from increased throughput and higher average fees resulting from an annual cost-of-service rate adjustment that occurred during the fourth quarter of 2019. These increases were offset partially by decreases of$47.1 million and$56.2 million , respectively, 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).
Service revenues - product based
Service revenues - product based decreased by$9.7 million and$13.1 million for the three and six months endedJune 30, 2020 , respectively, primarily due to decreased volumes and pricing across several systems. 51 --------------------------------------------------------------------------------
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Product Sales
Three Months Ended Six Months Ended
June 30, June 30,
thousands except percentages and Inc/ Inc/
per-unit amounts 2020 2019 (Dec) 2020 2019 (Dec)
Natural-gas sales $ 6,184 $ 8,227 (25) % $ 16,723 $ 35,551 (53) %
NGLs sales 15,552 66,242 (77) % 61,662 111,051 (44) %
Total Product sales $ 21,736 $ 74,469 (71) % $ 78,385 $ 146,602 (47) %
Per-unit gross average sales
price:
Natural gas (per Mcf) $ 1.12 $ 1.13 (1) % $ 1.22 $ 1.77 (31) %
NGLs (per Bbl) 7.87 20.92 (62) % 11.76 23.09 (49) %
Natural-gas sales
Natural-gas sales decreased by $18.8 million for the six months ended June 30,
2020 , primarily due to decreases of (i) $5.5 million and $2.8 million at the DJ
Basin complex and MGR assets, respectively, attributable to decreases in average
prices, (ii) $5.3 million at the Hilight system resulting from an accrual
reversal in the first quarter of 2019 related to the Kitty Draw gathering-system
shutdown (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), and (iii) $2.6 million resulting from a change in accounting for the
marketing contracts with AESC effective April 1, 2020 (see Executive
Summary-Commodity purchase and sale agreements within this Item 2).
NGLs sales
NGLs sales decreased by$50.7 million and$49.4 million for the three and six months endedJune 30, 2020 , respectively, primarily due to decreases of (i)$15.1 million and$24.6 million , respectively, at theWest Texas complex attributable to a decrease in average prices, partially offset by increased volumes, (ii)$6.2 million and$13.1 million , respectively, at theDJ Basin complex attributable to a decrease in average prices, and (iii)$2.6 million and$6.1 million , respectively, at the Chipeta complex,$3.9 million and$4.9 million , respectively, at the Brasada complex, and$2.2 million and$4.0 million , respectively, at the MGR assets resulting from decreases in average prices and volumes sold. The above decreases also were impacted by a$17.8 million decrease and a$7.3 million increase, respectively, resulting from a change in accounting for the marketing contracts with AESC effectiveApril 1, 2020 (see Executive Summary-Commodity purchase and sale agreements within this Item 2).
Equity Income, Net - Related Parties
Three Months Ended Six Months Ended
June 30, June 30,
Inc/ Inc/
thousands except percentages 2020 2019 (Dec) 2020 2019 (Dec)
Equity income, net - related parties
(14) %$ 115,762 $ 121,590 (5) % Equity income, net - related parties decreased by$9.2 million and$5.8 million for the three and six months endedJune 30, 2020 , respectively, primarily due to a decrease in equity income fromWhitethorn LLC related to commercial activities, partially offset by increases related to the acquisition of our interest in Cactus II inJune 2018 , which began delivering crude oil during the third quarter of 2019. In addition, the decrease for the six months endedJune 30, 2020 , was offset partially by increased volumes on FRP resulting from a pipeline expansion project completed during the second quarter of 2020. 52 -------------------------------------------------------------------------------- Table of Contents Cost of Product and Operation and Maintenance Expenses Three Months Ended Six Months Ended June 30, June 30, Inc/ Inc/ thousands except percentages 2020 2019 (Dec) 2020 2019 (Dec) NGLs purchases$ 8,992 $ 95,856 (91) %$ 92,781 $ 175,675 (47) % Residue purchases 11,941 17,980 (34) % 33,160 51,620 (36) % Other (2,331) 9,041 (126) % (4,069) 9,645 (142) % Cost of product 18,602 122,877 (85) % 121,872 236,940 (49) % Operation and maintenance 145,186 148,431 (2) % 304,377 291,260 5 % Total Cost of product and Operation and maintenance expenses$ 163,788 $ 271,308 (40) %$ 426,249 $ 528,200 (19) % NGLs purchases NGLs purchases decreased by$86.9 million for the three months endedJune 30, 2020 , primarily due to decreases of (i)$58.8 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), (ii)$14.8 million at theWest Texas complex attributable to an average-price decrease partially offset by a purchased-volume increase, (iii)$3.6 million and$2.6 million at the Brasada and Chipeta complexes, respectively, due to average-price and purchased-volume decreases, and (iv)$2.4 million at theDJ Basin complex attributable to an average-price decrease. NGLs purchases decreased by$82.9 million for the six months endedJune 30, 2020 , primarily due to decreases of (i)$43.4 million resulting from a change in accounting for the marketing contracts with AESC effectiveApril 1, 2020 (see Executive Summary-Commodity purchase and sale agreements within this Item 2), (ii)$22.3 million at theWest Texas complex due to an average-price decrease, (iii)$4.7 million at both the Brasada and Chipeta complexes attributable to average-price and purchased-volume decreases, and (iv)$2.9 million at theDJ Basin complex attributable to an average-price decrease.
Residue purchases
Residue purchases decreased by$6.0 million for the three months endedJune 30, 2020 , primarily due to decreases of (i)$5.8 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), (ii)$1.8 million at theDJ Basin complex attributable to average-price and purchased-volume decreases, and (iii)$1.5 million at the MGR assets attributable to an average-price decrease. These amounts were offset partially by an increase of$3.7 million at theWest Texas complex attributable to an average-price increase. Residue purchases decreased by$18.5 million for the six months endedJune 30, 2020 , primarily due to decreases of (i)$8.1 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) and (ii)$5.4 million and$3.8 million at theDJ Basin complex and MGR assets, respectively, attributable to an average-price decrease.
Other items
Other items decreased by$11.4 million and$13.7 million for the three and six months endedJune 30, 2020 , respectively, primarily due to decreases of (i)$8.4 million and$10.6 million , respectively, at theWest Texas complex due to changes in imbalance positions and (ii)$3.0 million and$4.4 million , respectively, at theDJ Basin complex due to decreases in transportation costs. 53 -------------------------------------------------------------------------------- Table of Contents Operation and maintenance expense Operation and maintenance expense increased by$13.1 million for the six months endedJune 30, 2020 , primarily due to increases of (i)$11.5 million and$3.7 million at theDJ Basin andWest Texas complexes, respectively, primarily resulting from increased utilities and maintenance expense and (ii)$9.5 million at the DBM water systems primarily attributable to higher surface-use fees and throughput, contract labor and consulting services, and maintenance and utilities expense. These increases were offset partially by decreases of (i)$7.1 million in overhead expense primarily related to fleet management, equipment rentals, and other miscellaneous field expenses, and (ii)$4.6 million at theSpringfield system primarily due to decreases in maintenance and salary expense. Other Operating Expenses Three Months Ended Six Months Ended June 30, June 30, Inc/ Inc/ thousands except percentages 2020 2019
(Dec) 2020 2019 (Dec)
General and administrative $ 36,423 $ 30,027 21 % $ 76,888 $ 52,871 45 %
Property and other taxes 19,395 14,282 36 % 37,871 30,567 24 %
Depreciation and amortization 119,805 121,117 (1) % 252,124 235,063 7 %
Long-lived asset impairments 10,150 797 NM 165,935 1,187 NM
Goodwill impairment - - - % 441,017 - NM
Total other operating expenses $ 185,773 $ 166,223 12 % $ 973,835 $ 319,688 NM
NM-Not meaningful
General and administrative expenses
General and administrative expenses increased by$6.4 million and$24.0 million for the three and six months endedJune 30, 2020 , respectively, primarily due to certain increases relating to the Services Agreement, including (i)$1.6 million and$16.6 million , respectively, in personnel costs primarily resulting from WES securing its own dedicated workforce as ofDecember 31, 2019 , and (ii)$3.6 million and$8.4 million , respectively, of additional expense primarily related to services provided by Occidental to WES for information technology services. See Executive Summary-December 2019 Agreements within this Item 2.
Property and other taxes
Property and other taxes increased by$5.1 million and$7.3 million for the three and six months endedJune 30, 2020 , respectively, primarily due to ad valorem tax increases at (i) theWest Texas complex due to general expansion, including the completion of Mentone Train II inMarch 2019 and (ii) at theDJ Basin complex due to general expansion, including the completion ofLatham Train I inNovember 2019 .
Depreciation and amortization expense
Depreciation and amortization expense decreased by$1.3 million for the three months endedJune 30, 2020 , primarily due to a decrease of$7.5 million at theDJ Basin complex as a result of a change in estimate for asset retirement obligations. The decrease was offset partially by increases of (i)$4.4 million at theWest Texas complex and DBM oil system, resulting from capital projects being placed into service, and (ii)$2.0 million of amortization expense related to finance leases. Depreciation and amortization expense increased by$17.1 million for the six months endedJune 30, 2020 , primarily due to increases of (i)$6.1 million at theWest Texas complex and$4.8 million at the DBM oil system and DBM water systems, all primarily resulting from capital projects being placed into service, and (ii)$4.2 million of amortization expense related to finance leases. For further information regarding capital projects, see Liquidity andCapital Resources-Capital expenditures within this Item 2. 54 -------------------------------------------------------------------------------- Table of Contents Long-lived asset impairment expense Long-lived asset impairment expense for the three months endedJune 30, 2020 , was primarily due to (i) impairments of$5.1 million at theDJ Basin andWest Texas complexes due to cancellation of projects and (ii) a$5.1 million impairment for an asset located inWyoming , which was impaired to estimated fair value. Long-lived asset 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. For further information on long-lived asset impairment expense for the six months endedJune 30, 2020 , see Note 8-Property, Plant, and Equipment in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. Goodwill impairment expense 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 on goodwill impairment expense, see Note 9-Goodwill in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
Interest Income - Anadarko Note Receivable and Interest Expense
Three Months Ended Six Months Ended
June 30, June 30,
Inc/ Inc/
thousands except percentages 2020 2019
(Dec) 2020 2019 (Dec)
Interest income - Anadarko note
receivable $ 4,225 $ 4,225 - % $ 8,450 $ 8,450 - %
Third parties
Long-term and short-term debt $ (89,650) $ (82,624) 9 % $ (179,419) $ (149,720) 20 %
Finance lease liabilities (388) - NM (793) - NM
Amortization of debt issuance costs
and commitment fees (3,462) (3,170) 9 % (6,589) (6,322) 4 %
Capitalized interest (1,154) 6,342 (118) % 3,604 12,547 (71) %
Related parties
APCWH Note Payable - - - % - (1,833) (100) %
Finance lease liabilities - (20) (100) % (43) (20) 115 %
Interest expense $ (94,654) $ (79,472) 19 % $ (183,240) $ (145,348) 26 %
Interest expense increased by $15.2 million and $37.9 million for the three and
six months ended June 30, 2020 , respectively, primarily due to (i) $35.6 million
and $66.7 million , respectively, of interest incurred on the 3.100% Senior Notes
due 2025, 4.050% Senior Notes due 2030, 5.250% Senior Notes due 2050, and
Floating-Rate Senior Notes due 2023 that were issued in January 2020 and (ii)
decreases of $7.5 million and $8.9 million , respectively, in capitalized
interest. These increases were offset partially by decreases of (i) $20.3
million and $28.8 million , respectively, that occurred as a result of the
repayment and termination of the Term loan facility in January 2020 and (ii)
$6.6 million and $6.3 million , respectively, due to lower outstanding borrowings
under the RCF in 2020. See Liquidity and Capital Resources-Debt and credit
facilities within this Item 2.
55
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Other Income (Expense), Net
Three Months Ended Six Months Ended
June 30, June 30,
Inc/ Inc/
thousands except percentages 2020 2019 (Dec) 2020 2019 (Dec)
Other income (expense), net $ 1,653 $ (58,477) 103 % $ (108) $ (93,683) 100 %
Other income (expense), net increased by $60.1 million and $93.6 million for the
three and six months ended June 30, 2020 , respectively, primarily due to
non-cash losses of $59.0 million and $94.6 million on interest-rate swaps
incurred during the three and six months ended June 30, 2019 , respectively. All
outstanding interest-rate swap agreements were settled in December 2019 (see
Note 11-Debt and Interest Expense in the Notes to Consolidated Financial
Statements under Part I, Item 1 of this Form 10-Q).
Income Tax Expense (Benefit)
Three Months Ended Six Months Ended
June 30, June 30,
Inc/ Inc/
thousands except percentages 2020 2019 (Dec) 2020 2019 (Dec)
Income (loss) before income
taxes $ 286,385 $ 176,336 62 % $ (7,295) $ 398,407 (102) %
Income tax expense (benefit) 5,044 1,278 NM 764 11,370 (93) %
Effective tax rate 2 % 1 % NM 3 %
We are not a taxable entity for U.S. federal income tax purposes; therefore, our
federal statutory rate is zero percent. However, income apportionable to Texas
is subject to Texas margin tax. For the six months ended June 30, 2019 , the
variance from the federal statutory rate primarily was due to federal and state
taxes on pre-acquisition income attributable to assets previously acquired from
Anadarko , and our share of applicable Texas margin tax. For all other periods
presented, the variance from the federal statutory rate was primarily due to our
Texas margin tax liability.
Income attributable to the AMA assets prior to and including February 2019 was
subject to federal and state income tax. Income earned on the AMA assets for
periods subsequent to February 2019 was subject only to Texas margin tax on
income apportionable to Texas .
56
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KEY PERFORMANCE METRICS
Three Months Ended Six Months Ended
June 30, June 30,
thousands except percentages and Inc/ Inc/
per-unit amounts 2020 2019 (Dec) 2020 2019 (Dec)
Adjusted gross margin for
natural-gas assets $ 454,476 $ 412,494 10 % $ 925,842 $ 824,922 12 %
Adjusted gross margin for
crude-oil and NGLs assets 165,767 137,716 20 % 333,595 269,086 24 %
Adjusted gross margin for
produced-water assets 66,714 46,266 44 % 128,835 90,162 43 %
Adjusted gross margin (1) 686,957 596,476 15 % 1,388,272 1,184,170 17 %
Per-Mcf Adjusted gross margin for
natural-gas assets (2) 1.13 1.06 7 % 1.15 1.08 6 %
Per-Bbl Adjusted gross margin for
crude-oil and NGLs assets (3) 2.56 2.52 2 % 2.49 2.49 - %
Per-Bbl Adjusted gross margin for
produced-water assets (4) 0.97 1.01 (4) % 0.97 0.98 (1) %
Adjusted EBITDA (1) 514,441 432,920 19 % 1,028,028 861,250 19 %
Free cash flow (1) 208,623 (6,353) NM 423,210 (78,175) NM
(1)For a reconciliation of Adjusted gross margin, Adjusted EBITDA, and Free cash
flow to the most directly comparable financial measure calculated and presented
in accordance with GAAP, see the below descriptions.
(2)Average for period. Calculated as Adjusted gross margin for natural-gas
assets, divided by total throughput (MMcf/d) attributable to WES for natural-gas
assets.
(3)Average for period. Calculated as Adjusted gross margin for crude-oil and
NGLs assets, divided by total throughput (MBbls/d) attributable to WES for
crude-oil and NGLs assets.
(4)Average for period. Calculated as Adjusted gross margin for produced-water
assets, divided by total throughput (MBbls/d) attributable to WES for
produced-water assets.
Adjusted gross margin. We define Adjusted gross margin attributable to Western
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 interests 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. To facilitate investor and industry analyst comparisons
between us and our peers, we also disclose per-Mcf Adjusted gross margin for
natural-gas assets, per-Bbl Adjusted gross margin for crude-oil and NGLs assets,
and per-Bbl Adjusted gross margin for produced-water assets.
Adjusted gross margin increased by $90.5 million and $204.1 million for the
three and six months ended June 30, 2020 , respectively, primarily due to (i)
increased throughput at the West Texas and DJ Basin complexes, (ii) increased
throughput and the effect of the straight-line treatment of lease revenue under
the new operating and maintenance agreement with Occidental effective December
31, 2019 , at the DBM oil system, (iii) increased throughput and higher average
fees at the DBM water systems and DJ Basin oil system, and (iv) increased
volumes on FRP resulting from a pipeline expansion project completed during the
second quarter of 2020. These increases were offset partially by (i) a decrease
in distributions from Whitethorn LLC related to commercial activities and (ii) a
decrease at the Hilight system resulting from lower throughput and an accrual
reversal in the first quarter of 2019 related to the Kitty Draw gathering-system
shutdown (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).
Per-Mcf Adjusted gross margin for natural-gas assets increased by $0.07 for the
three and six months ended June 30, 2020 , primarily due to increased throughput
at the West Texas complex, which has a higher-than-average per-Mcf margin as
compared to our other natural-gas assets.
57
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Per-Bbl Adjusted gross margin for crude-oil and NGLs assets increased by $0.04
and was flat for the three and six months ended June 30, 2020 , respectively,
primarily due to (i) increased throughput and higher average gathering and
processing fees at the DJ Basin oil system, (ii) increased throughput and the
effect of the straight-line treatment of lease revenue under the new operating
and maintenance agreement with Occidental effective December 31, 2019 , at the
DBM oil system, and (iii) increased volumes on FRP resulting from a pipeline
expansion project completed during the second quarter of 2020. These increases
were partially offset by a decrease in distributions from Whitethorn LLC related
to commercial activities.
Per-Bbl Adjusted gross margin for produced-water assets decreased by $0.04 and
$0.01 for the three and six months ended June 30, 2020 , respectively, primarily
due to increased throughput on volumes with lower-than-average per-Bbl margin.
Adjusted EBITDA. We define Adjusted EBITDA attributable to Western 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 interests 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$81.5 million for the three months endedJune 30, 2020 , primarily due to (i) a$104.1 million decrease in cost of product (net of lower of cost or market inventory adjustments) and (ii) a$3.2 million decrease in operation and maintenance expenses. These amounts were offset partially by (i) a$13.3 million decrease in total revenues and other, (ii) a$5.1 million increase in property taxes, and (iii) a$5.1 million increase in general and administrative expenses excluding non-cash equity-based compensation expense. Adjusted EBITDA increased by$166.8 million for the six months endedJune 30, 2020 , primarily due to (i) a$115.1 million decrease in cost of product (net of lower of cost or market inventory adjustments), (ii) an$89.1 million increase in total revenues and other, and (iii) a$5.0 million increase in distributions from equity investments. These amounts were offset partially by (i) a$19.2 million increase in general and administrative expenses excluding non-cash equity-based compensation expense, (ii) a$13.1 million increase in operation and maintenance expenses, and (iii) a$7.3 million increase in property taxes. The above-described decreases 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 (see Executive Summary-Commodity purchase and sale agreements within this Item 2). 58 -------------------------------------------------------------------------------- Table of Contents Free cash flow. We define "Free cash flow" as net cash provided by operating activities less total capital expenditures and contributions to equity investments, plus distributions from equity investments in excess of cumulative earnings. Management considers Free cash flow an appropriate metric for assessing capital discipline, cost efficiency, and balance-sheet strength. Although Free cash flow is the metric used to assess WES's ability to make distributions to unitholders, this measure should not be viewed as indicative of the actual amount of cash that is available for distributions or planned for distributions for a given period. Instead, Free cash flow should be considered indicative of the amount of cash that is available for distributions, debt repayments, and other general partnership purposes. Free cash flow increased by$215.0 million and$501.4 million for the three and six months endedJune 30, 2020 , respectively, primarily due to (i) decreases of$178.0 million and$391.4 million , respectively, in capital expenditures, (ii) decreases of$35.7 million and$61.3 million , respectively, in contributions to equity investments, and (iii) increases of$2.2 million and$52.5 million , respectively, in net cash provided by operating activities. These amounts were offset by decreases of$1.0 million and$3.7 million , respectively, in distributions from equity investments in excess of cumulative earnings. See Capital Expenditures and Historical Cash Flow within this Item 2 for further information. 59 -------------------------------------------------------------------------------- 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 operating income (loss). Net income (loss) and net cash provided by operating activities are the GAAP measures used by us that are most directly comparable to Adjusted EBITDA. The GAAP measure used by us that is most directly comparable to Free cash flow is net cash provided by operating activities. Our non-GAAP financial measures of Adjusted gross margin, Adjusted EBITDA, and Free cash flow should not be considered as alternatives to the GAAP measures of operating income (loss), net income (loss), net cash provided by operating activities, or any other measure of financial performance presented in accordance with GAAP. Adjusted gross margin, Adjusted EBITDA, and Free cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect operating income (loss), net income (loss), and net cash provided by operating activities. Adjusted gross margin, Adjusted EBITDA, and Free cash flow should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Our definitions of Adjusted gross margin, Adjusted EBITDA, and Free cash flow may not be comparable to similarly titled measures of other companies in our industry, thereby diminishing their utility as comparative measures. Management compensates for the limitations of Adjusted gross margin, Adjusted EBITDA, and Free cash flow as analytical tools by reviewing the comparable GAAP measures, understanding the differences between Adjusted gross margin, Adjusted EBITDA, and Free cash flow compared to (as applicable) operating income (loss), net income (loss), and net cash provided by operating activities, and incorporating this knowledge into its decision-making processes. We believe that investors benefit from having access to the same financial measures that our management considers in evaluating our operating results. The following tables present (a) a reconciliation of the GAAP financial measure of operating income (loss) to the non-GAAP financial measure of Adjusted gross margin, (b) 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 (c) 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 June 30, June 30, thousands 2020 2019 2020 2019 Reconciliation of Operating income (loss) to Adjusted gross margin Operating income (loss)$ 373,766
71,576 70,522 137,496 132,535
Operation and maintenance 145,186 148,431 304,377 291,260
General and administrative 36,423 30,027 76,888 52,871
Property and other taxes 19,395 14,282 37,871 30,567
Depreciation and amortization 119,805 121,117 252,124 235,063
Impairments (1) 10,150 797 606,952 1,187
Less:
Gain (loss) on divestiture and other, net (2,843) (1,061) (2,883) (1,651) Equity income, net - related parties 54,415 63,598 115,762 121,590
Reimbursed electricity-related charges recorded as revenues
21,605 20,189 40,828 36,778
Adjusted gross margin attributable to noncontrolling interests (2)
16,167 16,034 32,592 31,584
Adjusted gross margin $ 686,957 $ 454,476
137,716 333,595 269,086
Adjusted gross margin for produced-water assets 66,714 46,266 128,835 90,162
(1)Includes goodwill impairment for the six months ended June 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.
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Three Months Ended Six Months Ended
June 30, June 30,
thousands 2020 2019 2020 2019
Reconciliation of Net income (loss) to Adjusted
EBITDA
Net income (loss) $ 281,341
71,576 70,522 137,496 132,535
Non-cash equity-based compensation expense 5,677 4,343 10,911 6,141
Interest expense 94,654 79,472 183,240 145,348
Income tax expense 5,044 1,278 5,044 11,370
Depreciation and amortization 119,805 121,117 252,124 235,063
Impairments (1) 10,150 797 606,952 1,187
Other expense (2,098) 58,639 1,950 93,852
Less:
Gain (loss) on divestiture and other, net (2,843) (1,061) (2,883) (1,651)
Gain (loss) on early extinguishment of debt 1,395 - 8,740 -
Equity income, net - related parties 54,415 63,598 115,762 121,590
Interest income - Anadarko note receivable 4,225 4,225 8,450 8,450
Other income 1,652 - 1,652 -
Income tax benefit - - 4,280 -
Adjusted EBITDA attributable to noncontrolling
interests (2) 12,864 11,544 25,629 22,894
Adjusted EBITDA $ 514,441 $ 432,920 $ 1,028,028 $ 861,250
Reconciliation of Net cash provided by operating
activities to Adjusted EBITDA
Net cash provided by operating activities $ 345,688
90,429 75,247 174,790 136,898
Uncontributed cash-based compensation awards - 1,218 - 648
Accretion and amortization of long-term
obligations, net (2,197) (1,337) (4,297) (2,848)
Current income tax expense (benefit) 2,077 458 (35) 6,485
Other (income) expense, net (3) (2,173) (470) (412) (902)
Cash paid to settle interest-rate swaps 12,763 - 12,763 -
Distributions from equity investments in excess of cumulative earnings - related parties
8,288 9,260 13,340 17,052
Changes in assets and liabilities:
Accounts receivable, net 207,838 6,818 200,136 (2,668)
Accounts and imbalance payables and accrued
liabilities, net (101,247) 25,669 (72,323) 81,198
Other items, net (34,161) (15,857) (9,304) (38,250)
Adjusted EBITDA attributable to noncontrolling
interests (2) (12,864) (11,544) (25,629) (22,894)
Adjusted EBITDA $ 514,441 $ 738,999 $ 686,531 Net cash used in investing activities (355,001) (2,865,168) Net cash provided by (used in) financing activities (424,222) 2,182,290 (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. (3)Excludes non-cash losses on interest-rate swaps of$59.0 million and$94.6 million for the three and six months endedJune 30, 2019 , respectively. See Note 11-Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. 61
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Three Months Ended Six Months Ended
June 30, June 30,
thousands 2020 2019 2020 2019
Reconciliation of Net cash provided by operating
activities to Free cash flow
Net cash provided by operating activities $ 345,688 $
343,458
140,249 318,281 313,065 704,425
Contributions to equity investments 5,104 40,790 16,064 77,333
Add:
Distributions from equity investments in excess of cumulative earnings 8,288 9,260 13,340 17,052 Free cash flow$ 208,623 $
(6,353)
$ 738,999 $ 686,531 Net cash used in investing activities (355,001) (2,865,168) Net cash provided by (used in) financing activities (424,222) 2,182,290 LIQUIDITY AND CAPITAL RESOURCES Our primary cash uses include capital expenditures, debt service, customary operating expenses, quarterly distributions, and distributions to our noncontrolling interest owners. Our sources of liquidity as ofJune 30, 2020 , included cash and cash equivalents, cash flows generated from operations, interest income on ourAnadarko note receivable, available borrowing capacity under the RCF, and potential issuances of additional equity or debt securities. We believe that cash flows generated from these sources will be sufficient to satisfy our short-term working capital requirements and long-term capital-expenditure requirements. The amount of future distributions to unitholders will depend on our results of operations, financial condition, capital requirements, and other factors, and will be determined by the Board of Directors on a quarterly basis. We may rely on external financing sources, including equity and debt issuances, to fund capital expenditures and future acquisitions. However, we also may use operating cash flows to fund capital expenditures or acquisitions, which could result in borrowings under the RCF to pay distributions or to fund other short-term working capital requirements. Our partnership agreement requires that we distribute all of our available cash (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 completely 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. We have made cash distributions to our unitholders each quarter since our IPO in 2012. The Board of Directors declared a cash distribution to unitholders for the second quarter of 2020 of$0.31100 per unit, or$140.9 million in the aggregate. The cash distribution is payable onAugust 13, 2020 , to our unitholders of record at the close of business onJuly 31, 2020 . See Outlook within this Item 2. 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. 62 -------------------------------------------------------------------------------- Table of Contents Working capital. As ofJune 30, 2020 , we had a$331.9 million working capital deficit, which we define as the amount by which current liabilities exceed current assets. 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 capital activities. Our working capital deficit was primarily due to the 5.375% Senior Notes due 2021 being classified as short-term debt on the consolidated balance sheet as ofJune 30, 2020 . As ofJune 30, 2020 , there was$1.9 billion available for borrowing under the RCF. See Note 10-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. 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 2020 2019 Acquisitions $ -$ 2,100,804 Capital expenditures (1) 313,065 704,425 Capital incurred (1) 215,172 570,886
(1)For the six months ended
Acquisitions during 2019 included AMA and the 30% interest in Red Bluff Express. See Note 3-Acquisitions and Divestitures in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. Capital expenditures decreased by$391.4 million for the six months endedJune 30, 2020 , primarily due to decreases of (i)$182.1 million at theDJ Basin complex primarily related to the completion of Latham Trains I and II that commenced operations inNovember 2019 andFebruary 2020 , respectively, (ii)$100.7 million at theWest Texas complex primarily related to the completion of Mentone Train II that commenced operations inMarch 2019 , (iii)$51.8 million at the DBM oil system primarily related to the completion of the Loving ROTF Train III that commenced operations inJanuary 2020 , and (iv)$31.7 million at the DBM water systems primarily related to reduced construction of additional water-disposal facilities. 63 -------------------------------------------------------------------------------- Table of Contents Historical cash flow. The following table and discussion present a summary of our net cash flows provided by (used in) operating activities, investing activities, and financing activities: Six Months Ended June 30, thousands 2020 2019 Net cash provided by (used in): Operating activities$ 738,999 $ 686,531 Investing activities (355,001) (2,865,168) Financing activities (424,222) 2,182,290
Net increase (decrease) in cash and cash equivalents
Operating Activities. Net cash provided by operating activities increased for the six months endedJune 30, 2020 , primarily due to higher cash operating income and increased distributions from equity investments, offset partially by (i) higher interest expense, (ii) cash paid to settle interest-rate swaps, and (iii) the impact of changes in assets and liabilities, including the timing of$141.8 million of related-party cash receipts included in theJune 30, 2020 , Accounts receivable, net balance we received byJuly 3, 2020 . Refer to Operating Results within this Item 2 for a discussion of our results of operations as compared to the prior periods.
Investing Activities. Net cash used in investing activities for the 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 materials and supplies inventory purchases;
•$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.
Net cash used in investing activities for the six months ended
•$2.0 billion of cash paid for the acquisition of AMA;
•$704.4 million of capital expenditures, primarily related to construction and expansion at the DBM oil and DBM water systems and theWest Texas andDJ Basin complexes;
•$92.5 million of cash paid for the acquisition of our interest in Red Bluff Express;
•$77.3 million of capital contributions paid to Cactus II, the TEFR Interests,Whitethorn LLC , Red Bluff Express, and White Cliffs for construction activities; and
•$17.1 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
•$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;
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•$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 owners 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, including the funding of capital expenditures; 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.
Net cash provided by financing activities for the six months ended
•$2.0 billion of borrowings under the Term loan facility, net of issuance costs, which were used to fund the acquisition of AMA and to repay the APCWH Note Payable;
•$700.0 million of borrowings under the RCF, which were used for general partnership purposes, including the funding of capital expenditures;
•$456.9 million of net contributions from
•$11.0 million of borrowings under the APCWH Note Payable, which were used to fund the construction of the DBM water systems;
•$7.4 million of capital contributions from
•$439.6 million of repayments of the total outstanding balance under the APCWH Note Payable;
•$408.2 million of distributions paid to WES unitholders;
•$106.7 million of distributions paid to the noncontrolling interest owners of WES Operating;
•$28.0 million of repayments of the total outstanding balance under the WGP RCF,
which matured in
•$3.8 million of distributions paid to the noncontrolling interest owner of Chipeta.
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Debt and credit facilities. As of June 30, 2020 , the carrying value of
outstanding debt was $8.0 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. In
•Fixed-Rate 3.100% Senior Notes due 2025, 4.050% Senior Notes due 2030, and 5.250% Senior Notes due 2050, offered to the public at prices of 99.962%, 99.900%, and 99.442%, respectively, of the face amount. Including the effects of the issuance and underwriting discounts, the effective interest rates of the Senior Notes due 2025, 2030, and 2050, are 3.287%, 4.168%, and 5.362%, respectively. Interest is paid on each such series semi-annually onFebruary 1 andAugust 1 of each year, beginningAugust 1, 2020 ; and •Floating-Rate Senior Notes due 2023. As ofJune 30, 2020 , the interest rate on the Floating-Rate Senior Notes was 2.66%. Interest is paid quarterly in arrears onJanuary 13 ,April 13 ,July 13 , andOctober 13 of each year. Interest is determined at a benchmark rate (which is initially a three-month LIBOR rate) on the interest determination date plus 0.85%. Net proceeds from the Fixed-Rate Senior Notes and Floating-Rate Senior Notes were used to repay the$3.0 billion in outstanding borrowings under the Term loan facility and outstanding amounts under the RCF, and for general partnership purposes. The interest payable on each of the Fixed-Rate Senior Notes and Floating-Rate Senior Notes is subject to adjustment from time to time if the credit rating assigned to such notes declines below certain specified levels or if credit-rating downgrades are subsequently followed by credit-rating upgrades. As a result of credit-rating downgrades received from Fitch, S&P, and Moody's, annualized borrowing costs will increase by$35.0 million . See Outlook within this Item 2. During the first quarter of 2020, WES Operating purchased and retired$61.4 million of the 5.375% Senior Notes due 2021 and$38.6 million of the 4.000% Senior Notes due 2022 via open-market repurchases. During the second quarter of 2020, WES Operating purchased and retired (i) an additional$7.5 million of the 5.375% Senior Notes due 2021 and$47.0 million of the 4.000% Senior Notes due 2022, and (ii)$10.0 million of the Floating-Rate Senior Notes, each via open-market repurchases. For the three and six months endedJune 30, 2020 , gains of$1.4 million and$11.0 million , respectively, were recognized for the early retirement of these notes. As ofJune 30, 2020 , the 5.375% Senior Notes due 2021 was classified as short-term debt on the consolidated balance sheet. AtJune 30, 2020 , 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. WGP RCF. The WGP RCF, which previously was available to purchase WES Operating common units and for general partnership purposes, matured inMarch 2019 and the$28.0 million of outstanding borrowings were repaid. Revolving credit facility. InDecember 2019 , WES Operating entered into an amendment to the RCF, which is expandable to a maximum of$2.5 billion , to, among other things, exercise the final one-year extension option to extend the maturity date of the RCF fromFebruary 2024 toFebruary 2025 , for each extending lender. The maturity date with respect to each non-extending lender, whose commitments represent$100.0 million out of$2.0 billion of total commitments from all lenders, remainsFebruary 2024 . 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 for more information. As ofJune 30, 2020 , there were$75.0 million of outstanding borrowings and$5.0 million of outstanding letters of credit, resulting in$1.9 billion of available borrowing capacity under the RCF. AtJune 30, 2020 , the interest rate on any outstanding RCF borrowings was 1.66% and the facility-fee rate was 0.25%. AtJune 30, 2020 , WES Operating was in compliance with all covenants under the RCF. As a result of credit-rating downgrades received from Fitch and S&P, beginning in the second quarter of 2020, the interest rate on our outstanding RCF borrowings increased by 0.20% and the RCF facility-fee rate increased by 0.05%, from 0.20% to 0.25%. See Outlook within this Item 2. 66 -------------------------------------------------------------------------------- Table of Contents 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 Earnings Before Interest, Taxes, Depreciation, and Amortization 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. See Outlook within this Item 2. Term loan facility. InDecember 2018 , WES Operating entered into the Term loan facility, the proceeds from which were used to fund substantially all of the cash portion of the consideration under the Merger Agreement and the payment of related transaction costs (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). InJanuary 2020 , WES Operating repaid the outstanding borrowings with proceeds from the issuance of the Fixed-Rate Senior Notes and Floating-Rate Senior Notes and terminated the Term loan facility. During the first quarter of 2020, a loss of$2.3 million was recognized for the early termination of the Term loan facility. See Note 11-Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for additional information. Finance lease liabilities. WES subleased equipment from Occidental via finance leases throughApril 2020 . During the first quarter of 2020, WES entered into finance leases with third parties for equipment and vehicles extending through 2029, with future lease payments of$41.3 million as ofJune 30, 2020 . APCWH Note Payable. InJune 2017 , in connection with funding the construction of the APC water systems that were acquired as part of the AMA acquisition, APCWH entered into an eight-year note payable agreement withAnadarko . This note payable had a maximum borrowing limit of$500.0 million , including accrued interest. The APCWH Note Payable was repaid at Merger completion. 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 for additional information. Interest-rate swaps. InDecember 2018 andMarch 2019 , WES Operating entered into interest-rate swap agreements with an aggregate notional principal amount of$750.0 million and$375.0 million , respectively, to manage interest-rate risk associated with anticipated debt issuances. In November andDecember 2019 , WES Operating entered into additional interest-rate swap agreements with an aggregate notional principal amount of$1,125.0 million , effectively offsetting the swap agreements entered into inDecember 2018 andMarch 2019 . InDecember 2019 , all outstanding interest-rate swap agreements were settled. As part of the settlement, WES Operating made cash payments of$107.7 million and recorded an accrued liability of$25.6 million to be paid quarterly in 2020. For the six months endedJune 30, 2020 , WES Operating made cash payments of$12.8 million . These cash payments were classified as cash flows from operating activities in the consolidated statements of cash flows. 67 -------------------------------------------------------------------------------- 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. We also depend on Occidental to remit payments to us for the value of volumes of residue gas, NGLs, crude oil, and condensate that it markets on our behalf under our Marketing Transition Services Agreement. 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 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. Additionally, we are exposed to credit risk on ourAnadarko note receivable. 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; commodity purchase and sale agreements;Anadarko's note payable to WES Operating; the contribution agreements; or theDecember 2019 Agreements (see Executive Summary-December 2019 Agreements within this Item 2).
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) attributable to WES to net income (loss)
attributable to WES Operating. The differences between net income (loss)
attributable to WES and net income (loss) attributable to WES Operating are
reconciled as follows:
Three Months Ended Six Months Ended
June 30, June 30,
thousands 2020 2019 2020 2019
Net income (loss) attributable to WES $ 273,037 $ 169,594 $ 16,510 $ 288,254
Limited partner interests in WES Operating not
held by WES (1) 5,598 3,497 390 94,962
General and administrative expenses (2) 1,181 1,926 2,588 4,210
Other income (expense), net (2) (5) (4) (63)
Interest expense - - - 245
Net income (loss) attributable to WES Operating
(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 as ofJune 30, 2020 and 2019. Immediately prior to the Merger closing, the WES Operating IDRs and the general partner units were converted into a non-economic general partner interest in WES Operating and WES Operating common units, and at Merger completion, all WES Operating common units held by the public and subsidiaries ofAnadarko (other than common units held by WES, WES Operating GP, and 6.4 million common units held by a subsidiary ofAnadarko ) were converted into WES common units. 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. (2)Represents general and administrative expenses incurred by WES separate from, and in addition to, those incurred by WES Operating. 68 -------------------------------------------------------------------------------- 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 2020 2019 WES net cash provided by operating activities $
738,999
General and administrative expenses (1) 2,588 4,210 Non-cash equity-based compensation expense (3,244) (611) Changes in working capital 2,574 355 Other income (expense), net (4) (63) Interest expense - 245 Debt related amortization and other items, net - (21) WES Operating net cash provided by operating activities $
740,913
WES net cash provided by (used in) financing activities$ (424,222) $ 2,182,290 Distributions to WES unitholders (2) 422,679 408,234 Distributions to WES from WES Operating (3) (425,042) (439,963) Increase (decrease) in outstanding checks (4) -
Registration expenses related to the issuance of WES common units
- 855
WGP RCF repayments - 28,000
WES Operating net cash provided by (used in) financing activities
(1)Represents general and administrative expenses incurred by WES separate from, and in addition to, those incurred by WES Operating. (2)Represents distributions to WES common unitholders paid under WES's partnership agreement. See Note 4-Partnership Distributions and Note 5-Equity and Partners' Capital in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. (3)Difference attributable to elimination in consolidation of WES Operating's distributions on partnership interests owned by WES. See Note 4-Partnership Distributions and Note 5-Equity and Partners' Capital in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. Noncontrolling interest. WES Operating's noncontrolling interest consists of the 25% third-party interest in Chipeta (see Note 1-Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for further information). WES Operating distributions. WES Operating distributes all of its available cash (as defined in its partnership agreement) to WES Operating unitholders of record on the applicable record date within 45 days following each quarter's end. For the quarters endedMarch 31, 2019 ,June 30, 2019 ,September 30, 2019 , andDecember 31, 2019 , WES Operating distributed$283.3 million ,$288.1 million ,$289.7 million , and$290.3 million , respectively, to its limited partners. For the quarter endedMarch 31, 2020 , WES Operating distributed$143.4 million to its limited partners. For the quarter endedJune 30, 2020 , WES Operating will distribute$143.4 million to its limited partners. See Note 5-Equity and Partners' Capital in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. 69
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CONTRACTUAL OBLIGATIONS
Our contractual obligations include, among other things, a revolving credit
facility, other third-party long-term debt, capital obligations related to
expansion projects, and various operating and finance leases. Refer to
Note 11-Debt and Interest Expense and Note 12-Commitments and Contingencies in
the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form
10-Q for an update to contractual obligations as of June 30, 2020 .
OFF-BALANCE-SHEET ARRANGEMENTS
We do not have any off-balance-sheet arrangements other than short-term
operating leases and standby letters of credit. We have entered into short-term
operating leases for vehicles and equipment with third parties as lessor. For
information on standby letters of credit, see Note 11-Debt and Interest Expense
in the Notes to Consolidated Financial Statements under Part I, Item 1 of this
Form 10-Q.
RECENT ACCOUNTING DEVELOPMENTS
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.
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