Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 2022 Form 10-K as filed with the SEC on February 22, 2023.
The Partnership’s assets include assets owned and ownership interests accounted for by us under the equity method of accounting, through our 98.0% partnership interest in WES Operating, as of March 31, 2023 (see Note 6—Equity Investments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q). We also own and control the entire non-economic general partner interest in WES Operating GP, and our general partner is owned by Occidental.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made in this Form 10-Q, and may make in other public filings, press releases, and statements by management, forward-looking statements concerning our operations, economic performance, and financial condition. These forward-looking statements include statements preceded by, followed by, or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should,” or similar expressions or variations on such expressions. These statements discuss future expectations, contain projections of results of operations or financial condition, or include other “forward-looking” information.
Although we and our general partner believe that the expectations reflected in our forward-looking statements are reasonable, neither we nor our general partner can provide any assurance that such expectations will prove correct. These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from expectations include, but are not limited to, the following:
•our ability to pay distributions to our unitholders;
•our assumptions about the energy market;
•future throughput (including Occidental production) that is gathered or processed by, or transported through, our assets;
•our operating results;
•competitive conditions;
•technology;
•the availability of capital resources to fund acquisitions, capital expenditures, and other contractual obligations, and our ability to access financing through the debt or equity capital markets;
•the supply of, demand for, and price of oil, natural gas, NGLs, and related products or services;
•commodity-price risks inherent in percent-of-proceeds, percent-of-product, keep-whole, and fixed-recovery processing 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;
•legislative or regulatory changes, including changes affecting our status as a partnership for federal income tax purposes;
•changes in the financial or operational condition of Occidental;
•the creditworthiness of Occidental or our other counterparties, including financial institutions, operating partners, and other parties;
•changes in Occidental’s capital program, corporate strategy, or other desired areas of focus;
•our commitments to capital projects;
•our ability to access liquidity under the RCF;
•our ability to repay debt;
•the resolution of litigation or other disputes;
•conflicts of interest among us and our general partner and its related parties, including Occidental, with respect to, among other things, the allocation of capital and operational and administrative costs and our future business opportunities;
•our ability to maintain and/or obtain rights to operate our assets on land owned by third parties;
•our ability to acquire assets on acceptable terms from third parties;
•non-payment or non-performance of significant customers, including under gathering, processing, transportation, and disposal agreements;
•the timing, amount, and terms of future issuances of equity and debt securities;
•the outcome of pending and future regulatory, legislative, or other proceedings or investigations, and continued or additional disruptions in operations that may occur as we and our customers comply with any regulatory orders or other state or local changes in laws or regulations;
•cyber attacks or security breaches; 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 2022 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.
EXECUTIVE SUMMARY
We are a midstream energy company organized as a publicly traded partnership, engaged in the business of gathering, compressing, treating, processing, and transporting natural gas; gathering, stabilizing, and transporting condensate, NGLs, and crude oil; and gathering and disposing of produced water. In our capacity as a natural-gas processor, we also buy and sell natural gas, NGLs, and condensate on behalf of ourselves and as an agent for our customers under certain contracts. To provide superior midstream service, we focus on ensuring the reliability and performance of our systems, creating sustainable cost efficiencies, enhancing our safety culture, and protecting the environment. We own or have investments in assets located in Texas, New Mexico, the Rocky Mountains (Colorado, Utah, and Wyoming), and North-central Pennsylvania. As of March 31, 2023, our assets and investments consisted of the following:
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| | Wholly Owned and Operated | | Operated Interests | | Non-Operated Interests | | Equity Interests |
Gathering systems (1) | | 17 | | | 2 | | | 3 | | | 1 | |
Treating facilities | | 37 | | | 3 | | | — | | | — | |
Natural-gas processing plants/trains | | 25 | | | 3 | | | — | | | 3 | |
NGLs pipelines | | 2 | | | — | | | — | | | 5 | |
Natural-gas pipelines | | 6 | | | — | | | — | | | 1 | |
Crude-oil pipelines | | 3 | | | 1 | | | — | | | 3 | |
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(1)Includes the DBM water systems.
Significant financial and operational events during the three months ended March 31, 2023, included the following:
•WES Operating redeemed the $213.1 million total principal amount outstanding of the Floating-Rate Senior Notes due 2023 at par value with cash on hand.
•We repurchased 285,688 common units for an aggregate purchase price of $7.1 million.
•Our regular first-quarter 2023 per-unit distribution is unchanged from the fourth-quarter 2022 per-unit distribution of $0.500.
•In April 2023, the Board approved an Enhanced Distribution of $0.356 per unit, or $140.1 million, related to our 2022 performance. This Enhanced Distribution is payable, along with our regular first-quarter 2023 distribution, on May 15, 2023, to our unitholders of record at the close of business on May 1, 2023.
•Natural-gas throughput attributable to WES totaled 4,107 MMcf/d for the three months ended March 31, 2023, representing a 3% decrease and a 1% increase compared to the three months ended December 31, 2022, and March 31, 2022, respectively.
•Crude-oil and NGLs throughput attributable to WES totaled 611 MBbls/d for the three months ended March 31, 2023, representing a 6% decrease and a 9% decrease compared to the three months ended December 31, 2022, and March 31, 2022, respectively.
•Produced-water throughput attributable to WES totaled 957 MBbls/d for the three months ended March 31, 2023, representing a 12% increase and a 27% increase compared to the three months ended December 31, 2022, and March 31, 2022, respectively.
•Gross margin was $537.9 million for the three months ended March 31, 2023, representing a 1% increase and a 2% decrease compared to the three months ended December 31, 2022, and March 31, 2022, respectively. See Reconciliation of Non-GAAP Financial Measures within this Item 2.
•Adjusted gross margin for natural-gas assets (as defined under the caption Reconciliation of Non-GAAP Financial Measures within this Item 2) averaged $1.30 per Mcf for the three months ended March 31, 2023, representing a 2% increase and a 3% decrease compared to the three months ended December 31, 2022, and March 31, 2022, respectively.
•Adjusted gross margin for crude-oil and NGLs assets (as defined under the caption Reconciliation of Non-GAAP Financial Measures within this Item 2) averaged $2.65 per Bbl for the three months ended March 31, 2023, representing a 5% increase and a 9% increase compared to the three months ended December 31, 2022, and March 31, 2022, respectively.
•Adjusted gross margin for produced-water assets (as defined under the caption Reconciliation of Non-GAAP Financial Measures within this Item 2) averaged $0.81 per Bbl for the three months ended March 31, 2023, representing a 12% decrease and a 19% decrease compared to the three months ended December 31, 2022, and March 31, 2022, respectively.
The following table provides additional information on throughput for the periods presented below:
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| | Three Months Ended | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | Inc/ (Dec) | | | | March 31, 2022 | | Inc/ (Dec) | | | | |
Throughput for natural-gas assets (MMcf/d) |
Delaware Basin | | 1,569 | | | 1,524 | | | 3 | % | | | | 1,326 | | | 18 | % | | | | |
DJ Basin | | 1,306 | | | 1,343 | | | (3) | % | | | | 1,321 | | | (1) | % | | | | |
Equity investments | | 423 | | | 463 | | | (9) | % | | | | 479 | | | (12) | % | | | | |
Other | | 948 | | | 1,055 | | | (10) | % | | | | 1,084 | | | (13) | % | | | | |
Total throughput for natural-gas assets | | 4,246 | | | 4,385 | | | (3) | % | | | | 4,210 | | | 1 | % | | | | |
Throughput for crude-oil and NGLs assets (MBbls/d) |
Delaware Basin | | 205 | | | 203 | | | 1 | % | | | | 192 | | | 7 | % | | | | |
DJ Basin | | 69 | | | 77 | | | (10) | % | | | | 88 | | | (22) | % | | | | |
Equity investments | | 314 | | | 347 | | | (10) | % | | | | 374 | | | (16) | % | | | | |
Other | | 35 | | | 35 | | | — | % | | | | 35 | | | — | % | | | | |
Total throughput for crude-oil and NGLs assets | | 623 | | | 662 | | | (6) | % | | | | 689 | | | (10) | % | | | | |
Throughput for produced-water assets (MBbls/d) |
Delaware Basin | | 977 | | | 868 | | | 13 | % | | | | 766 | | | 28 | % | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total throughput for produced-water assets | | 977 | | | 868 | | | 13 | % | | | | 766 | | | 28 | % | | | | |
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OUTLOOK
We expect our business to be affected by the below-described key trends and uncertainties. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove incorrect, our actual results may vary materially from expected results.
Impact of crude-oil, natural-gas, and NGLs prices. Crude-oil, natural-gas, and NGLs prices can fluctuate significantly, and have done so over time. Commodity-price fluctuations affect the level of our customers’ activities and our customers’ allocations of capital within their own asset portfolios. During 2020, oil and natural-gas prices were negatively impacted by the worldwide macroeconomic downturn that followed the global outbreak of COVID-19. In 2021, prices began to increase and in the first quarter of 2022, commodity prices increased significantly in connection with the war in Ukraine. For example, the New York Mercantile Exchange (“NYMEX”) West Texas Intermediate crude-oil daily settlement prices during 2022 ranged from a high of $123.70 per barrel in March 2022 to a low of $71.02 per barrel in December 2022, and prices during the three months ended March 31, 2023, ranged from a high of $81.62 per barrel in January 2023 to a low of $66.74 per barrel in March 2023. The extent and duration of the recent commodity-price volatility cannot be predicted.
To the extent producers continue with development plans in our areas of operation, we intend to continue connecting new wells or production facilities to our systems to maintain or increase 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, any capacity constraints, and the availability of downstream-takeaway alternatives. In some cases, we take ownership of volumes at the tailgate of our plants based on certain contractual arrangements with our producer customers, which introduces additional commodity-price exposure. Additionally, we intend to continue evaluating 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.
Impact of inflation and supply-chain disruptions. Although inflation in the United States has been relatively low in recent years, the U.S. economy currently is experiencing significant inflation relative to historical precedent, from, among other things, supply-chain disruptions caused by, or governmental stimulus or fiscal policies adopted in response to, the COVID-19 crisis and in connection with the war in Ukraine. More specifically, the bottlenecks and disruptions from the lingering effects of the COVID-19 crisis have caused difficulties within the U.S. and global supply chains, creating logistical delays along with labor shortages. Continued inflation has raised our costs for labor, materials, fuel, and services, which has increased our operating costs and capital expenditures. Increases in inflationary pressure could materially and negatively impact our financial results. To the extent permitted by regulations and escalation provisions in certain of our existing agreements, we have the ability to recover a portion of increased costs in the form of higher fees.
Impact of interest rates. Overall, short- and long-term interest rates increased during 2022, and have continued to increase during 2023, resulting in increased interest expense on RCF borrowings. Any future increases in interest rates likely will result in additional increases in financing costs. Additionally, as with other yield-oriented securities, our unit price could be impacted by our implied distribution yield relative to market interest rates. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest-rate environment could have an adverse impact on our unit price and our ability to issue additional equity, or increase the cost of issuing equity, to make acquisitions, to reduce debt, or for other purposes. However, we expect our cost of capital to remain competitive, as our competitors face similar interest-rate dynamics.
ACQUISITIONS AND DIVESTITURES
Cactus II. In November 2022, we sold our 15.00% interest in Cactus II to two third parties for $264.8 million, which includes a $1.8 million pro-rata distribution through closing. Total proceeds were received during the fourth quarter of 2022, resulting in a net gain on sale of $109.9 million that was recorded as Gain (loss) on divestiture and other, net in the consolidated statements of operations.
Ranch Westex. In September 2022, we acquired the remaining 50% interest in Ranch Westex from a third party for $40.1 million. Subsequent to the acquisition, (i) we are the sole owner and operator of the asset, (ii) Ranch Westex is no longer accounted for under the equity method of accounting, and (iii) the Ranch Westex processing plant is included as part of the operations of the West Texas complex.
RESULTS OF OPERATIONS
OPERATING RESULTS
The following tables and discussion present a summary of our results of operations:
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| | Three Months Ended |
| | | | | |
| | | | | | | |
thousands | | March 31, 2023 | | December 31, 2022 | | | | March 31, 2022 | | |
Total revenues and other (1) | | $ | 733,982 | | | $ | 779,437 | | | | | $ | 758,297 | | | |
Equity income, net – related parties | | 39,021 | | | 44,095 | | | | | 49,607 | | | |
Total operating expenses (1) | | 480,673 | | | 499,434 | | | | | 403,450 | | | |
Gain (loss) on divestiture and other, net | | (2,118) | | | 104,560 | | | | | 370 | | | |
Operating income (loss) | | 290,212 | | | 428,658 | | | | | 404,824 | | | |
| | | | | | | | | | |
Interest expense | | (81,670) | | | (84,606) | | | | | (85,455) | | | |
| | | | | | | | | | |
Other income (expense), net | | 1,215 | | | 1,486 | | | | | 106 | | | |
Income (loss) before income taxes | | 209,757 | | | 345,538 | | | | | 319,475 | | | |
Income tax expense (benefit) | | 1,416 | | | 504 | | | | | 1,805 | | | |
Net income (loss) | | 208,341 | | | 345,034 | | | | | 317,670 | | | |
Net income (loss) attributable to noncontrolling interests | | 4,696 | | | 8,710 | | | | | 8,953 | | | |
Net income (loss) attributable to Western Midstream Partners, LP (2) | | $ | 203,645 | | | $ | 336,324 | | | | | $ | 308,717 | | | |
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(1)Total revenues and other includes amounts earned from services provided to related parties and from the sale of natural gas, condensate, and NGLs to related parties. Total operating expenses includes amounts charged by related parties for services received. See Note 5—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.
For purposes of the following discussion, any increases or decreases refer to the comparison of the three months ended March 31, 2023, to the three months ended December 31, 2022, or to the three months ended March 31, 2022, as applicable.
Throughput
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| | Three Months Ended |
| | | | | | | | | | |
| | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | Inc/ (Dec) | | | | March 31, 2022 | | Inc/ (Dec) | | | | |
Throughput for natural-gas assets (MMcf/d) |
Gathering, treating, and transportation | | 369 | | | 402 | | | (8) | % | | | | 406 | | | (9) | % | | | | |
Processing | | 3,454 | | | 3,520 | | | (2) | % | | | | 3,325 | | | 4 | % | | | | |
Equity investments (1) | | 423 | | | 463 | | | (9) | % | | | | 479 | | | (12) | % | | | | |
Total throughput | | 4,246 | | | 4,385 | | | (3) | % | | | | 4,210 | | | 1 | % | | | | |
Throughput attributable to noncontrolling interests (2) | | 139 | | | 154 | | | (10) | % | | | | 152 | | | (9) | % | | | | |
Total throughput attributable to WES for natural-gas assets | | 4,107 | | | 4,231 | | | (3) | % | | | | 4,058 | | | 1 | % | | | | |
Throughput for crude-oil and NGLs assets (MBbls/d) |
Gathering, treating, and transportation | | 309 | | | 315 | | | (2) | % | | | | 315 | | | (2) | % | | | | |
Equity investments (1) | | 314 | | | 347 | | | (10) | % | | | | 374 | | | (16) | % | | | | |
Total throughput | | 623 | | | 662 | | | (6) | % | | | | 689 | | | (10) | % | | | | |
Throughput attributable to noncontrolling interests (2) | | 12 | | | 13 | | | (8) | % | | | | 14 | | | (14) | % | | | | |
Total throughput attributable to WES for crude-oil and NGLs assets | | 611 | | | 649 | | | (6) | % | | | | 675 | | | (9) | % | | | | |
Throughput for produced-water assets (MBbls/d) |
Gathering and disposal | | 977 | | | 868 | | | 13 | % | | | | 766 | | | 28 | % | | | | |
Throughput attributable to noncontrolling interests (2) | | 20 | | | 17 | | | 18 | % | | | | 15 | | | 33 | % | | | | |
Total throughput attributable to WES for produced-water assets | | 957 | | | 851 | | | 12 | % | | | | 751 | | | 27 | % | | | | |
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(1)Represents our share of average throughput for investments accounted for under the equity method of accounting.
(2)For all periods presented, includes (i) the 2.0% limited partner interest in WES Operating owned by an Occidental subsidiary and (ii) for natural-gas assets, the 25% third-party interest in Chipeta, which collectively represent WES’s noncontrolling interests.
Natural-gas assets
Total throughput attributable to WES for natural-gas assets decreased by 124 MMcf/d compared to the three months ended December 31, 2022, primarily due to (i) lower volumes at Chipeta due to volumes being diverted away from the plant for part of December 2022 through February 2023, (ii) lower volumes due to production declines in areas around the DJ Basin complex and the Marcellus Interest systems, (iii) lower volumes due to production declines and extended winter weather conditions during the first quarter of 2023 in areas around the Granger and Red Desert complexes, and (iv) lower volumes at Mi Vida and on Red Bluff Express. These decreases were offset partially by higher volumes at the West Texas complex due to increased production in the area.
Total throughput attributable to WES for natural-gas assets increased by 49 MMcf/d compared to the three months ended March 31, 2022, primarily due to higher volumes at the West Texas complex due to increased production in the area. This increase was offset partially by (i) decreased volumes at the Ranch Westex plant, which we acquired in the third quarter of 2022 and is included as part of the West Texas complex subsequent to the acquisition, (ii) lower volumes at Chipeta due to volumes being diverted away from the plant for part of December 2022 through February 2023, (iii) lower volumes due to production declines and extended winter weather conditions during the first quarter of 2023 in areas around the Granger and Red Desert complexes, (iv) lower volumes due to production declines in the area around the Marcellus Interest systems, and (v) lower volumes at Mi Vida.
Crude-oil and NGLs assets
Total throughput attributable to WES for crude-oil and NGLs assets decreased by 38 MBbls/d compared to the three months ended December 31, 2022, primarily due to (i) lower volumes on the Cactus II pipeline, which was sold in the fourth quarter of 2022, and (ii) decreased volumes on FRP and at the DJ Basin oil system resulting from production declines in the area.
Total throughput attributable to WES for crude-oil and NGLs assets decreased by 64 MBbls/d compared to the three months ended March 31, 2022, primarily due to (i) lower volumes on the Cactus II pipeline, which was sold in the fourth quarter of 2022, and (ii) lower volumes at the DJ Basin oil system resulting from production declines in the area. These decreases were offset partially by (i) higher volumes at the DBM oil system resulting from increased production in the area and (ii) increased volumes on the Whitethorn pipeline.
Produced-water assets
Total throughput attributable to WES for produced-water assets increased by 106 MBbls/d and 206 MBbls/d compared to the three months ended December 31, 2022, and March 31, 2022, respectively, due to higher production and new third-party connections brought online during the first quarter of 2023 and the second half of 2022.
Service Revenues
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| | Three Months Ended |
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| | | | | | | | | | |
thousands except percentages | | March 31, 2023 | | December 31, 2022 | | Inc/ (Dec) | | | | March 31, 2022 | | Inc/ (Dec) | | | | |
Service revenues – fee based | | $ | 647,867 | | | $ | 647,948 | | | — | % | | | | $ | 631,598 | | | 3 | % | | | | |
Service revenues – product based | | 46,810 | | | 46,971 | | | — | % | | | | 40,867 | | | 15 | % | | | | |
Total service revenues | | $ | 694,677 | | | $ | 694,919 | | | — | % | | | | $ | 672,465 | | | 3 | % | | | | |
Service revenues – fee based
Service revenues – fee based decreased by $0.1 million compared to the three months ended December 31, 2022, primarily due to decreases of (i) $20.2 million at the Springfield system due to an annual cost-of-service rate adjustment that increased revenue during the fourth quarter of 2022, (ii) $2.2 million at the DBM water systems due to decreased deficiency fees and a lower average fee resulting from a cost-of-service rate redetermination effective January 1, 2023, partially offset by increased throughput, and (iii) $1.7 million at the DBM oil system due to a lower average fee resulting from a cost-of-service rate redetermination effective January 1, 2023, and decreased deficiency fees. These decreases were partially offset by increases of (i) $16.4 million at the DJ Basin oil system due to an annual cost-of-service rate adjustment that decreased revenue during the fourth quarter of 2022, partially offset by decreased throughput, and (ii) $10.0 million at the West Texas complex due to increased throughput.
Service revenues – fee based increased by $16.3 million compared to the three months ended March 31, 2022, primarily due to increases of (i) $28.6 million and $3.1 million at the West Texas complex and DBM oil system, respectively, as a result of increased throughput and (ii) $2.1 million at the DBM water systems due to increased throughput, partially offset by decreased deficiency fees and a lower average fee resulting from a cost-of-service rate redetermination effective January 1, 2023. These increases were partially offset by decreases of (i) $5.2 million at the Chipeta complex due to decreased deficiency fees, (ii) $3.3 million at the DJ Basin complex due to decreased throughput, partially offset by increased deficiency fees, (iii) $3.0 million at the DJ Basin oil system due to decreased throughput, (iv) $2.8 million at the Springfield system primarily due to decreased demand-fee revenue, and (v) $1.9 million at the Marcellus Interest systems due to decreased throughput.
Service revenues – product based
Service revenues – product based increased by $5.9 million compared to the three months ended March 31, 2022, primarily due to increases of (i) $10.3 million at the West Texas complex due to increased volumes and changes in contract mix, and (ii) $4.8 million at the DJ Basin complex due to changes in contract mix. These increases were partially offset by decreases of (i) $2.8 million at the Chipeta complex as a result of lower volumes, (ii) $2.5 million at the Granger complex due to decreased average prices, (iii) $1.9 million at the Red Desert complex due to decreased throughput and average prices, and (iv) $1.8 million at the Hilight system due to decreased average prices.
Product Sales
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| | Three Months Ended |
| | | | | | | | | | |
| | | | | | | | | | |
thousands except percentages and per-unit amounts | | March 31, 2023 | | December 31, 2022 | | Inc/ (Dec) | | | | March 31, 2022 | | Inc/ (Dec) | | | | |
Natural-gas sales | | $ | 2,775 | | | $ | 27,712 | | | (90) | % | | | | $ | 19,071 | | | (85) | % | | | | |
NGLs sales | | 36,250 | | | 56,556 | | | (36) | % | | | | 66,518 | | | (46) | % | | | | |
Total Product sales | | $ | 39,025 | | | $ | 84,268 | | | (54) | % | | | | $ | 85,589 | | | (54) | % | | | | |
Per-unit gross average sales price: | | | | | | | | | | | | | | | | |
Natural gas (per Mcf) | | $ | 1.75 | | | $ | 3.78 | | | (54) | % | | | | $ | 4.38 | | | (60) | % | | | | |
NGLs (per Bbl) | | 28.78 | | | 29.21 | | | (1) | % | | | | 46.48 | | | (38) | % | | | | |
Natural-gas sales
Natural-gas sales decreased by $24.9 million compared to the three months ended December 31, 2022, primarily due to decreases of (i) $8.2 million and $3.7 million at the DJ Basin and Red Desert complexes, respectively, due to decreases in volumes sold and average prices, (ii) $7.9 million at the West Texas complex due to decreased average prices, and (iii) $4.1 million at the Chipeta complex due to decreased volumes sold.
Natural-gas sales decreased by $16.3 million compared to the three months ended March 31, 2022, primarily due to decreases of (i) $13.2 million at the West Texas complex due to decreased average prices, partially offset by increased volumes sold, and (ii) $2.5 million and $2.0 million at the DJ Basin and Red Desert complexes, respectively, due to decreases in volumes sold and average prices.
NGLs sales
NGLs sales decreased by $20.3 million compared to the three months ended December 31, 2022, primarily due to decreases of (i) $12.1 million and $1.4 million at the DJ Basin and Granger complexes, respectively, due to a decrease in volumes sold, partially offset by an increase in average prices, (ii) $4.1 million at the West Texas complex due to a decrease in average prices, partially offset by an increase in volumes sold, and (iii) $2.0 million at the Chipeta complex due to lower volumes sold.
NGLs sales decreased by $30.3 million compared to the three months ended March 31, 2022, primarily due to decreases of (i) $14.0 million at the West Texas complex due to a decrease in average prices, partially offset by an increase in volumes sold, (ii) $9.7 million, $4.1 million, and $1.4 million at the Chipeta complex, Granger complex, and Hilight system, respectively, as a result of decreases in average prices and volumes sold, and (iii) $3.5 million at the Brasada complex due to a contract expiration in the third quarter of 2022. These decreases were partially offset by an increase of $4.6 million at the DJ Basin complex due to an increase in volumes sold partially offset by a decrease in average prices.
Equity Income, Net – Related Parties
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | | | | | | | | | |
| | | | | | | | | | |
thousands except percentages | | March 31, 2023 | | December 31, 2022 | | Inc/ (Dec) | | | | March 31, 2022 | | Inc/ (Dec) | | | | |
Equity income, net – related parties | | $ | 39,021 | | | $ | 44,095 | | | (12) | % | | | | $ | 49,607 | | | (21) | % | | | | |
Equity income, net – related parties decreased by $5.1 million compared to the three months ended December 31, 2022, primarily due to decreases of (i) $2.1 million at TEP due to decreased revenue coupled with increased ad valorem taxes, (ii) $1.8 million at FRP due to decreased revenue, and (iii) $1.6 million at Mi Vida due to decreased revenue and increases in certain expenses. These decreases were partially offset by an increase of $2.2 million at White Cliffs due to a goodwill impairment recorded in the fourth quarter of 2022.
Equity income, net – related parties decreased by $10.6 million compared to the three months ended March 31, 2022, primarily due to decreases of (i) $3.9 million at Ranch Westex, which we acquired in the third quarter of 2022 and is included as part of the West Texas complex subsequent to the acquisition (see Acquisitions and Divestitures within this Item 2), (ii) $3.6 million at Cactus II due to the divestiture of our interest in the fourth quarter of 2022 (see Acquisitions and Divestitures within this Item 2), (iii) 2.7 million at Mi Vida due to increases in certain expenses, and (iv) $1.0 million at the Mont Belvieu JV due to decreases in revenue.
Cost of Product and Operation and Maintenance Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | | | | | | | | | |
| | | | | | | | | | |
thousands except percentages | | March 31, 2023 | | December 31, 2022 | | Inc/ (Dec) | | | | March 31, 2022 | | Inc/ (Dec) | | | | |
Residue purchases | | $ | 15,638 | | | $ | 30,145 | | | (48) | % | | | | $ | 34,992 | | | (55) | % | | | | |
NGLs purchases | | 51,829 | | | 57,725 | | | (10) | % | | | | 70,404 | | | (26) | % | | | | |
Other | | (16,008) | | | 4,793 | | | NM | | | | (32,548) | | | 51 | % | | | | |
Cost of product | | 51,459 | | | 92,663 | | | (44) | % | | | | 72,848 | | | (29) | % | | | | |
Operation and maintenance | | 174,239 | | | 166,923 | | | 4 | % | | | | 128,976 | | | 35 | % | | | | |
Total Cost of product and Operation and maintenance expenses | | $ | 225,698 | | | $ | 259,586 | | | (13) | % | | | | $ | 201,824 | | | 12 | % | | | | |
_________________________________________________________________________________________
NM—Not meaningful
Residue purchases
Residue purchases decreased by $14.5 million compared to the three months ended December 31, 2022, primarily due to decreases of (i) $7.4 million at the West Texas complex primarily due to lower average prices and (ii) $6.1 million at the Chipeta complex primarily due to decreased volumes purchased.
Residue purchases decreased by $19.4 million compared to the three months ended March 31, 2022, primarily due to decreases of (i) $11.9 million at the West Texas complex attributable to changes in contract mix during 2022 and lower average prices, (ii) $5.2 million at the Chipeta complex due to decreased volumes purchased and lower average prices, and (iii) $3.8 million at the DJ Basin complex primarily due to a change in contract mix during the second quarter of 2022. These decreases were offset partially by an increase of $3.3 million at the Granger complex primarily due to an increase in average prices.
NGLs purchases
NGLs purchases decreased by $5.9 million compared to the three months ended December 31, 2022, primarily due to a decrease of $5.1 million at the West Texas complex due to lower average prices.
NGLs purchases decreased by $18.6 million compared to the three months ended March 31, 2022, primarily due to decreases of (i) $9.0 million at the West Texas complex primarily due to lower average prices, partially offset by increased volumes purchased, (ii) $3.5 million at the Brasada complex due to a contract expiration in the third quarter of 2022, (iii) $3.3 million at the Chipeta complex due to decreased volumes purchased, and (iv) $3.0 million at the Granger complex due to lower average prices.
Other items
Other items decreased by $20.8 million compared to the three months ended December 31, 2022, primarily due to a decrease of $19.2 million at the DJ Basin complex attributable to changes in imbalance positions.
Other items increased by $16.5 million compared to the three months ended March 31, 2022, primarily due to increases of $9.7 million at the DJ Basin complex attributable to changes in imbalance positions and $8.7 million at the West Texas complex primarily due to increased offload fees and changes in imbalance positions.
Operation and maintenance expense
Operation and maintenance expense increased by $7.3 million compared to the three months ended December 31, 2022, primarily due to increases of (i) $4.5 million for maintenance and repair expense, (ii) $4.3 million in regulatory and environmental expense, and (iii) $2.6 million for salaries and wages costs. These increases were offset partially by decreases of $2.5 million for mechanical-integrity costs and $2.3 million in utility expense.
Operation and maintenance expense increased by $45.3 million compared to the three months ended March 31, 2022, primarily due to increases of (i) $13.5 million for maintenance and repair expense, (ii) $6.4 million in regulatory and environmental expense, (iii) $5.7 million in utility expense, (iv) $5.6 million for salaries and wages costs, (v) $2.7 million for mechanical-integrity costs, (vi) $2.7 million in contract labor and consulting expense, (vii) $2.7 million in land-related costs, and (viii) $2.4 million in water-disposal costs.
Other Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | | | | | | | | | |
| | | | | | | | | | |
thousands except percentages | | March 31, 2023 | | December 31, 2022 | | Inc/ (Dec) | | | | March 31, 2022 | | Inc/ (Dec) | | | | |
General and administrative | | $ | 51,117 | | | $ | 49,382 | | | 4 | % | | | | $ | 48,602 | | | 5 | % | | | | |
Property and other taxes | | 6,831 | | | 18,065 | | | (62) | % | | | | 18,442 | | | (63) | % | | | | |
Depreciation and amortization | | 144,626 | | | 151,910 | | | (5) | % | | | | 134,582 | | | 7 | % | | | | |
Long-lived asset and other impairments | | 52,401 | | | 20,491 | | | 156 | % | | | | — | | | 100 | % | | | | |
| | | | | | | | | | | | | | | | |
Total other operating expenses | | $ | 254,975 | | | $ | 239,848 | | | 6 | % | | | | $ | 201,626 | | | 26 | % | | | | |
General and administrative expenses
General and administrative expenses increased by $1.7 million compared to the three months ended December 31, 2022, primarily due to an increase of $4.3 million in personnel costs, partially offset by a decrease of $2.5 million in contract and consulting costs, primarily related to information technology services and fees incurred in 2022.
General and administrative expenses increased by $2.5 million compared to the three months ended March 31, 2022, primarily due to an increase of $2.3 million in personnel costs.
Property and other taxes
Property and other taxes decreased by $11.2 million and $11.6 million compared to the three months ended December 31, 2022, and March 31, 2022, respectively, primarily due to decreases in the ad valorem property tax accrual related to the finalization of 2022 assessments at the DJ Basin complex.
Depreciation and amortization expense
Depreciation and amortization expense decreased by $7.3 million compared to the three months ended December 31, 2022, primarily due to decreases of (i) $5.4 million and $3.6 million at the MGR assets and Hilight system, respectively, as a result of a change in estimate for asset retirement obligations during the fourth quarter of 2022 and (ii) $2.5 million at the West Texas complex as a result of accretion adjustments to our asset retirement obligation during the first quarter of 2023. These decreases were partially offset by an increase of $5.3 million at the DJ Basin complex due to acceleration of depreciation expense.
Depreciation and amortization expense increased by $10.0 million compared to the three months ended March 31, 2022, primarily due to increases of (i) $4.5 million and $2.4 million at the DJ Basin complex and MGR assets, respectively, due to acceleration of depreciation expense as well as accretion adjustments to our asset retirement obligation during the first quarter of 2023 and (ii) $1.3 million at the Hilight system as a result of a change in estimate for asset retirement obligations during the first quarter of 2023.
Long-lived asset and other impairment expense
Long-lived asset and other impairment expense for the three months ended March 31, 2023, was primarily due to a $52.1 million impairment for assets located in the Rockies.
Long-lived asset and other impairment expense for the three months ended December 31, 2022, was primarily due to a $19.9 million other-than-temporary impairment of our investment in White Cliffs.
For further information on Long-lived asset and other impairment expense, see Note 7—Property, Plant, and Equipment in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | | | | | |
| | | | | | | | | | |
thousands except percentages | | March 31, 2023 | | December 31, 2022 | | Inc/ (Dec) | | | | March 31, 2022 | | Inc/ (Dec) | | | | |
Long-term and short-term debt | | $ | (81,151) | | | $ | (83,390) | | | (3) | % | | | | $ | (83,428) | | | (3) | % | | | | |
Finance lease liabilities | | (163) | | | (318) | | | (49) | % | | | | (42) | | | NM | | | | |
Commitment fees and amortization of debt-related costs | | (2,881) | | | (3,063) | | | (6) | % | | | | (3,032) | | | (5) | % | | | | |
Capitalized interest | | 2,525 | | | 2,165 | | | 17 | % | | | | 1,047 | | | 141 | % | | | | |
| | | | | | | | | | | | | | | | |
Interest expense | | $ | (81,670) | | | $ | (84,606) | | | (3) | % | | | | $ | (85,455) | | | (4) | % | | | | |
Interest expense
Interest expense decreased by $2.9 million compared to the three months ended December 31, 2022, primarily due to the redemption of the total principal amount outstanding on the Floating-Rate Senior Notes due 2023 during the first quarter of 2023.
Interest expense decreased by $3.8 million compared to the three months ended March 31, 2022, primarily due to decreases of (i) $5.1 million due to the redemption of the total principal amount outstanding of the 4.000% Senior Notes due 2022 during the second quarter of 2022, (ii) $3.6 million due to credit-rating related interest rate changes on the 3.100% Senior Notes due 2025, 4.050% Senior Notes due 2030, and 5.250% Senior Notes due 2050, and (iii) $1.5 million due to higher capitalized interest. These decreases were offset partially by an increase of $7.0 million due to higher outstanding borrowings and average interest rates under the RCF during the first quarter of 2023.
See Liquidity and Capital Resources—Debt and credit facilities within this Item 2.
Income Tax Expense (Benefit)
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.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
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 interest owners’ proportionate share of revenues and cost of product. We believe Adjusted gross margin is an important performance measure of our operations’ profitability and performance as compared to other companies in the midstream industry. Cost of product expenses include (i) costs associated with the purchase of natural gas and NGLs pursuant to our percent-of-proceeds, percent-of-product, and keep-whole contracts, (ii) costs associated with the valuation of gas and NGLs imbalances, and (iii) costs associated with our obligations under certain contracts to redeliver a volume of natural gas to shippers, which is thermally equivalent to condensate retained by us and sold to third parties. The electricity-related expenses included in our Adjusted gross margin definition relate to pass-through expenses that are reimbursed by certain customers (recorded as revenue with an offset recorded as Operation and maintenance expense).
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 interest owners’ proportionate share of revenues and expenses. We believe the presentation of Adjusted EBITDA provides information useful to investors in assessing our financial condition and results of operations and that Adjusted EBITDA is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures, and make distributions. Adjusted EBITDA is a supplemental financial measure that management and external users of our consolidated financial statements, such as industry analysts, investors, commercial banks, and rating agencies, use, among other measures, to assess the following:
•our operating performance as compared to other publicly traded partnerships in the midstream industry, without regard to financing methods, capital structure, or historical cost basis;
•the ability of our assets to generate cash flow to make distributions; and
•the viability of acquisitions and capital expenditures and the returns on investment of various investment opportunities.
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.
Adjusted gross margin, Adjusted EBITDA, and Free cash flow are not defined in GAAP. The GAAP measure that is most directly comparable to Adjusted gross margin is gross margin. Net income (loss) and net cash provided by operating activities are the GAAP measures that are most directly comparable to Adjusted EBITDA. The GAAP measure that is most directly comparable to Free cash flow is net cash provided by operating activities. Our non-GAAP financial measures of Adjusted gross margin, Adjusted EBITDA, and Free cash flow should not be considered as alternatives to the GAAP measures of gross margin, net income (loss), net cash provided by operating activities, or any other measure of financial performance presented in accordance with GAAP. Adjusted gross margin, Adjusted EBITDA, and Free cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect gross margin, net income (loss), and net cash provided by operating activities. Adjusted gross margin, Adjusted EBITDA, and Free cash flow should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Our definitions of Adjusted gross margin, Adjusted EBITDA, and Free cash flow may not be comparable to similarly titled measures of other companies in our industry, thereby diminishing their utility as comparative measures.
Management compensates for the limitations of Adjusted gross margin, Adjusted EBITDA, and Free cash flow as analytical tools by reviewing the comparable GAAP measures, understanding the differences between Adjusted gross margin, Adjusted EBITDA, and Free cash flow compared to (as applicable) gross margin, net income (loss), and net cash provided by operating activities, and incorporating this knowledge into its decision-making processes. We believe that investors benefit from having access to the same financial measures that our management considers in evaluating our operating results.
The following tables present (i) a reconciliation of the GAAP financial measure of gross margin to the non-GAAP financial measure of Adjusted gross margin, (ii) a reconciliation of the GAAP financial measures of net income (loss) and net cash provided by operating activities to the non-GAAP financial measure of Adjusted EBITDA, and (iii) a reconciliation of the GAAP financial measure of net cash provided by operating activities to the non-GAAP financial measure of Free cash flow:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | | | | | |
| | | | | | | | |
thousands | | March 31, 2023 | | December 31, 2022 | | | | March 31, 2022 | | |
Reconciliation of Gross margin to Adjusted gross margin | | |
Total revenues and other | | $ | 733,982 | | | $ | 779,437 | | | | | $ | 758,297 | | | |
Less: | | | | | | | | | | |
Cost of product | | 51,459 | | | 92,663 | | | | | 72,848 | | | |
Depreciation and amortization | | 144,626 | | | 151,910 | | | | | 134,582 | | | |
Gross margin | | 537,897 | | | 534,864 | | | | | 550,867 | | | |
Add: | | | | | | | | | | |
Distributions from equity investments | | 51,975 | | | 69,282 | | | | | 55,795 | | | |
Depreciation and amortization | | 144,626 | | | 151,910 | | | | | 134,582 | | | |
Less: | | | | | | | | | | |
Reimbursed electricity-related charges recorded as revenues | | 23,569 | | | 23,577 | | | | | 18,404 | | | |
Adjusted gross margin attributable to noncontrolling interests (1) | | 15,774 | | | 17,490 | | | | | 18,090 | | | |
Adjusted gross margin | | $ | 695,155 | | | $ | 714,989 | | | | | $ | 704,750 | | | |
_________________________________________________________________________________________
(1)For all periods presented, includes (i) the 25% third-party interest in Chipeta and (ii) the 2.0% limited partner interest in WES Operating owned by an Occidental subsidiary, which collectively represent WES’s noncontrolling interests.
To facilitate investor and industry analysis, 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.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | | | | | |
| | | | | | | | |
thousands except per-unit amounts | | March 31, 2023 | | December 31, 2022 | | | | March 31, 2022 | | |
Gross margin | | | | | | | | | | |
Gross margin for natural-gas assets (1) | | $ | 393,673 | | | $ | 403,043 | | | | | $ | 409,384 | | | |
Gross margin for crude-oil and NGLs assets (1) | | 89,281 | | | 75,690 | | | | | 88,816 | | | |
Gross margin for produced-water assets (1) | | 59,549 | | | 61,189 | | | | | 57,686 | | | |
Per-Mcf Gross margin for natural-gas assets (2) | | 1.03 | | | 1.00 | | | | | 1.08 | | | |
Per-Bbl Gross margin for crude-oil and NGLs assets (2) | | 1.59 | | | 1.24 | | | | | 1.43 | | | |
Per-Bbl Gross margin for produced-water assets (2) | | 0.68 | | | 0.77 | | | | | 0.84 | | | |
Adjusted gross margin | | | | | | | | | | |
Adjusted gross margin for natural-gas assets | | $ | 480,009 | | | $ | 492,591 | | | | | $ | 488,909 | | | |
Adjusted gross margin for crude-oil and NGLs assets | | 145,577 | | | 150,611 | | | | | 148,247 | | | |
Adjusted gross margin for produced-water assets | | 69,569 | | | 71,787 | | | | | 67,594 | | | |
Per-Mcf Adjusted gross margin for natural-gas assets (3) | | 1.30 | | | 1.27 | | | | | 1.34 | | | |
Per-Bbl Adjusted gross margin for crude-oil and NGLs assets (3) | | 2.65 | | | 2.53 | | | | | 2.44 | | | |
Per-Bbl Adjusted gross margin for produced-water assets (3) | | 0.81 | | | 0.92 | | | | | 1.00 | | | |
_________________________________________________________________________________________
(1)Excludes corporate-level depreciation and amortization.
(2)Average for period. Calculated as Gross margin for natural-gas assets, crude-oil and NGLs assets, or produced-water assets, divided by the respective total throughput (MMcf or MBbls) for natural-gas assets, crude-oil and NGLs assets, or produced-water assets.
(3)Average for period. Calculated as Adjusted Gross margin for natural-gas assets, crude-oil and NGLs assets, or produced-water assets, divided by the respective total throughput (MMcf or MBbls) attributable to WES for natural-gas assets, crude-oil and NGLs assets, or produced-water assets.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | | | | | |
| | | | | | | | |
thousands | | March 31, 2023 | | December 31, 2022 | | | | March 31, 2022 | | |
Reconciliation of Net income (loss) to Adjusted EBITDA |
Net income (loss) | | $ | 208,341 | | | $ | 345,034 | | | | | $ | 317,670 | | | |
Add: | | | | | | | | | | |
Distributions from equity investments | | 51,975 | | | 69,282 | | | | | 55,795 | | | |
Non-cash equity-based compensation expense | | 7,199 | | | 6,538 | | | | | 7,743 | | | |
Interest expense | | 81,670 | | | 84,606 | | | | | 85,455 | | | |
Income tax expense | | 1,416 | | | 504 | | | | | 1,805 | | | |
Depreciation and amortization | | 144,626 | | | 151,910 | | | | | 134,582 | | | |
Impairments | | 52,401 | | | 20,491 | | | | | — | | | |
Other expense | | 200 | | | 209 | | | | | — | | | |
Less: | | | | | | | | | | |
Gain (loss) on divestiture and other, net | | (2,118) | | | 104,560 | | | | | 370 | | | |
| | | | | | | | | | |
Equity income, net – related parties | | 39,021 | | | 44,095 | | | | | 49,607 | | | |
| | | | | | | | | | |
Other income | | 1,215 | | | 1,484 | | | | | 106 | | | |
| | | | | | | | | | |
Adjusted EBITDA attributable to noncontrolling interests (1) | | 11,015 | | | 12,654 | | | | | 13,917 | | | |
Adjusted EBITDA | | $ | 498,695 | | | $ | 515,781 | | | | | $ | 539,050 | | | |
Reconciliation of Net cash provided by operating activities to Adjusted EBITDA |
Net cash provided by operating activities | | $ | 302,424 | | | $ | 489,219 | | | | | $ | 276,458 | | | |
Interest (income) expense, net | | 81,670 | | | 84,606 | | | | | 85,455 | | | |
Accretion and amortization of long-term obligations, net | | (1,692) | | | (1,783) | | | | | (1,782) | | | |
Current income tax expense (benefit) | | 492 | | | 262 | | | | | 673 | | | |
Other (income) expense, net | | (1,215) | | | (1,486) | | | | | (106) | | | |
| | | | | | | | | | |
Distributions from equity investments in excess of cumulative earnings – related parties | | 12,366 | | | 22,839 | | | | | 9,925 | | | |
Changes in assets and liabilities: | | | | | | | | | | |
Accounts receivable, net | | 4,037 | | | (96,659) | | | | | 165,134 | | | |
Accounts and imbalance payables and accrued liabilities, net | | 136,460 | | | 72,881 | | | | | 14,292 | | | |
Other items, net | | (24,832) | | | (41,444) | | | | | 2,918 | | | |
Adjusted EBITDA attributable to noncontrolling interests (1) | | (11,015) | | | (12,654) | | | | | (13,917) | | | |
Adjusted EBITDA | | $ | 498,695 | | | $ | 515,781 | | | | | $ | 539,050 | | | |
Cash flow information |
Net cash provided by operating activities | | $ | 302,424 | | | $ | 489,219 | | | | | $ | 276,458 | | | |
Net cash used in investing activities | | (179,178) | | | 138,015 | | | | | (71,617) | | | |
Net cash provided by (used in) financing activities | | (297,257) | | | (499,671) | | | | | (158,591) | | | |
_________________________________________________________________________________________
(1)For all periods presented, includes (i) the 25% third-party interest in Chipeta and (ii) the 2.0% limited partner interest in WES Operating owned by an Occidental subsidiary, which collectively represent WES’s noncontrolling interests.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | | | | | | | |
| | | | | | | | |
thousands | | March 31, 2023 | | December 31, 2022 | | | | March 31, 2022 | | |
Reconciliation of Net cash provided by operating activities to Free cash flow |
Net cash provided by operating activities | | $ | 302,424 | | | $ | 489,219 | | | | | $ | 276,458 | | | |
Less: | | | | | | | | | | |
Capital expenditures | | 173,088 | | | 145,723 | | | | | 83,971 | | | |
Contributions to equity investments – related parties | | 110 | | | 733 | | | | | 2,070 | | | |
Add: | | | | | | | | | | |
Distributions from equity investments in excess of cumulative earnings – related parties | | 12,366 | | | 22,839 | | | | | 9,925 | | | |
Free cash flow | | $ | 141,592 | | | $ | 365,602 | | | | | $ | 200,342 | | | |
Cash flow information | | | | | | | | | | |
Net cash provided by operating activities | | $ | 302,424 | | | $ | 489,219 | | | | | $ | 276,458 | | | |
Net cash used in investing activities | | (179,178) | | | 138,015 | | | | | (71,617) | | | |
Net cash provided by (used in) financing activities | | (297,257) | | | (499,671) | | | | | (158,591) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Gross margin. Refer to Operating Results within this Item 2 for a discussion of the components of Gross margin as compared to the prior periods, including Service Revenues, Product Sales, Cost of Product (Residue purchases, NGLs purchases, and Other items), and Other Operating Expenses (Depreciation and amortization expense).
Gross margin increased by $3.0 million compared to the three months ended December 31, 2022, due to (i) a $41.2 million decrease in cost of product and (ii) a $7.3 million decrease in depreciation and amortization. These amounts were offset partially by a $45.5 million decrease in total revenues and other.
Gross margin decreased by $13.0 million compared to the three months ended March 31, 2022, due to (i) a $24.3 million decrease in total revenues and other and (ii) a $10.0 million increase in depreciation and amortization. These amounts were offset partially by a $21.4 million decrease in cost of product.
Net income (loss). Refer to Operating Results within this Item 2 for a discussion of the primary components of Net income (loss) as compared to the prior periods.
Net income (loss) decreased by $136.7 million compared to the three months ended December 31, 2022, primarily due to (i) a $106.7 million decrease in gain (loss) on divestiture and other, net, and (ii) a $45.5 million decrease in total revenues and other. These amounts were offset partially by an $18.8 million decrease in total operating expenses.
Net income (loss) decreased by $109.3 million compared to the three months ended March 31, 2022, primarily due to (i) a $77.2 million increase in total operating expenses and (ii) a $24.3 million decrease in total revenues and other.
Net cash provided by operating activities. Refer to Historical cash flow within this Item 2 for a discussion of the primary components of Net cash provided by operating activities as compared to the prior periods.
KEY PERFORMANCE METRICS
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| | Three Months Ended |
| | | | | | | | | |
| | | | | | | | | |
thousands except percentages and per-unit amounts | | March 31, 2023 | | December 31, 2022 | | Inc/ (Dec) | | | | March 31, 2022 | | Inc/ (Dec) | | | | |
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| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted gross margin | | $ | 695,155 | | | $ | 714,989 | | | (3) | % | | | | $ | 704,750 | | | (1) | % | | | | |
Per-Mcf Adjusted gross margin for natural-gas assets (1) | | 1.30 | | | 1.27 | | | 2 | % | | | | 1.34 | | | (3) | % | | | | |
Per-Bbl Adjusted gross margin for crude-oil and NGLs assets (1) | | 2.65 | | | 2.53 | | | 5 | % | | | | 2.44 | | | 9 | % | | | | |
Per-Bbl Adjusted gross margin for produced-water assets (1) | | 0.81 | | | 0.92 | | | (12) | % | | | | 1.00 | | | (19) | % | | | | |
Adjusted EBITDA | | 498,695 | | | 515,781 | | | (3) | % | | | | 539,050 | | | (7) | % | | | | |
Free cash flow | | 141,592 | | | 365,602 | | | (61) | % | | | | 200,342 | | | (29) | % | | | | |
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(1)Average for period. Calculated as Adjusted gross margin for natural-gas assets, crude-oil and NGLs assets, or produced-water assets, divided by the respective total throughput (MMcf or MBbls) attributable to WES for natural-gas assets, crude-oil and NGLs assets, or produced-water assets.
Adjusted gross margin. Adjusted gross margin decreased by $19.8 million compared to the three months ended December 31, 2022, primarily due to (i) an annual cost-of-service rate adjustment that increased revenue during the fourth quarter of 2022 at the Springfield system, (ii) a decrease in distributions from Cactus II, which was sold in the fourth quarter of 2022, (iii) decreased throughput at the Chipeta and Granger complexes, and (iv) a decrease in distributions from Mont Belvieu JV and Whitethorn LLC. These decreases were partially offset by (i) an annual cost-of-service rate adjustment that decreased revenue during the fourth quarter of 2022 at the DJ Basin oil system, partially offset by decreased throughput, and (ii) increased throughput at the West Texas complex.
Adjusted gross margin decreased by $9.6 million compared to the three months ended March 31, 2022, primarily due to (i) decreased throughput at the DJ Basin and Granger complexes, (ii) decreased deficiency fees and throughput at the Chipeta complex, and (iii) a decrease in distributions from Cactus II, which was sold in the fourth quarter of 2022. These decreases were partially offset by increased throughput at the West Texas complex.
Per-Mcf Adjusted gross margin for natural-gas assets increased by $0.03 compared to the three months ended December 31, 2022, 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, partially offset by an annual cost-of-service rate adjustment that increased revenue during the fourth quarter of 2022 at the Springfield system.
Per-Mcf Adjusted gross margin for natural-gas assets decreased by $0.04 compared to the three months ended March 31, 2022, primarily due to contract mix and lower commodity prices, partially offset by increased throughput at the West Texas complex.
Per-Bbl Adjusted gross margin for crude-oil and NGLs assets increased by $0.12 compared to the three months ended December 31, 2022, primarily due to an annual cost-of-service rate adjustment that decreased revenue during the fourth quarter of 2022 at the DJ Basin oil system. This increase was offset partially by (i) a decrease in distributions from Cactus II, which was sold in the fourth quarter of 2022, and (ii) a decrease in distributions from Whitethorn LLC.
Per-Bbl Adjusted gross margin for crude-oil and NGLs assets increased by $0.21 compared to the three months ended March 31, 2022, primarily due to decreases in throughput and distributions from Cactus II, which was sold in the fourth quarter of 2022, and had lower-than-average per-Bbl margin as compared to our other crude-oil and NGLs assets.
Per-Bbl Adjusted gross margin for produced-water assets decreased by $0.11 and $0.19 compared to the three months ended December 31, 2022, and March 31, 2022, respectively, primarily due to a lower average fee resulting from a cost-of-service rate redetermination effective January 1, 2023, and lower deficiency fee revenues.
Adjusted EBITDA. Adjusted EBITDA decreased by $17.1 million compared to the three months ended December 31, 2022, primarily due to (i) a $45.5 million decrease in total revenues and other, (ii) a $17.3 million decrease in distributions from equity investments, and (iii) a $7.3 million increase in operation and maintenance expenses. These amounts were offset partially by (i) a $41.2 million decrease in cost of product (net of lower of cost or market inventory adjustments) and (ii) an $11.2 million decrease in property and other taxes.
Adjusted EBITDA decreased by $40.4 million compared to the three months ended March 31, 2022, primarily due to (i) a $45.3 million increase in operation and maintenance expenses and (ii) a $24.3 million decrease in total revenues and other. These amounts were offset partially by (i) a $21.6 million decrease in cost of product (net of lower of cost or market inventory adjustments) and (ii) an $11.6 million decrease in property and other taxes.
Free cash flow. Free cash flow decreased by $224.0 million compared to the three months ended December 31, 2022, primarily due to (i) a decrease of $186.8 million in net cash provided by operating activities, (ii) an increase of $27.4 million in capital expenditures, and (iii) a decrease of $10.5 million in distributions from equity investments in excess of cumulative earnings.
Free cash flow decreased by $58.8 million compared to the three months ended March 31, 2022, primarily due to an increase of $89.1 million in capital expenditures, offset partially by an increase of $26.0 million in net cash provided by operating activities.
See Capital Expenditures and Historical Cash Flow within this Item 2 for further information.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash uses include equity and debt service, operating expenses, and capital expenditures. Our sources of liquidity as of March 31, 2023, included cash and cash equivalents, cash flows generated from operations, available borrowing capacity under the RCF, and potential issuances of additional equity or debt securities. We believe that cash flows generated from these sources will be sufficient to satisfy our short-term working capital requirements and long-term capital-expenditure and debt-service requirements.
The amount of future distributions to unitholders will be determined by the Board on a quarterly basis. Under our partnership agreement, we distribute all of our available cash (beyond proper reserves as defined in our partnership agreement) within 55 days following each quarter’s end. Our cash flow and resulting ability to make cash distributions are dependent on our ability to generate cash flow from operations. Generally, our available cash is our cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and cash on hand resulting from working capital borrowings made after the end of the quarter. The general partner establishes cash reserves to provide for the proper conduct of our business, including (i) to fund future capital expenditures, (ii) to comply with applicable laws, debt instruments, or other agreements, or (iii) to provide funds for unitholder distributions for any one or more of the next four quarters. The Board declared a cash distribution of $0.500 per unit for the first quarter of 2023, and an Enhanced Distribution of $0.356 per unit (discussed below), for an aggregate of $0.856 per unit, or $337.0 million, which is payable on May 15, 2023, to our unitholders of record at the close of business on May 1, 2023.
To facilitate the distribution of available cash, during 2022 we adopted a financial policy that provided for an additional distribution (“Enhanced Distribution”) to be paid in conjunction with the regular first-quarter distribution of the following year (beginning in 2023), in a target amount equal to Free cash flow generated in the prior year after subtracting Free cash flow used for the prior year’s debt repayments, regular-quarter distributions, and unit repurchases. This Enhanced Distribution is subject to Board discretion, the establishment of cash reserves for the proper conduct of our business and is also contingent on the attainment of prior year-end net leverage thresholds (the ratio of our total principal debt outstanding less total cash on hand as of the end of such period, as compared to our trailing-twelve-months Adjusted EBITDA), after taking the Enhanced Distribution for such prior year into effect. Free cash flow and Adjusted EBITDA are defined under the caption Reconciliation of Non-GAAP Financial Measures within this Item 2. In April 2023, the Board approved an Enhanced Distribution of $0.356 per unit, or $140.1 million, related to our 2022 performance.
In 2022, we announced a common-unit buyback program of up to $1.25 billion through December 31, 2024. The common units may be purchased from time to time in the open market at prevailing market prices or in privately negotiated transactions. The timing and amount of purchases under the program will be determined based on ongoing assessments of capital needs, our financial performance, the market price of our common units, and other factors, including organic growth and acquisition opportunities and general market conditions. The program does not obligate us to purchase any specific dollar amount or number of units and may be suspended or discontinued at any time. During the three months ended March 31, 2023, we repurchased 285,688 common units for an aggregate purchase price of $7.1 million. The units were canceled immediately upon receipt. As of March 31, 2023, we had an authorized amount of $755.3 million remaining under the program.
Management continuously monitors our leverage position and other financial projections to manage the capital structure according to long-term objectives. We may, from time to time, seek to retire, rearrange, or amend some or all of our outstanding debt or financing 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 and the amounts involved may be material. Our ability to generate cash flows is subject to a number of factors, some of which are beyond our control. Read Risk Factors under Part II, Item 1A of this Form 10-Q.
Working capital. Working capital is an indication of liquidity and potential needs for short-term funding. Working capital requirements are driven by changes in accounts receivable and accounts payable and other factors such as credit extended to, and the timing of collections from, our customers, and the level and timing of our spending for acquisitions, maintenance, and other capital activities. As of March 31, 2023, we had a $154.0 million working capital surplus, which we define as the amount by which current assets exceed current liabilities. As of March 31, 2023, there was $1.5 billion available for borrowing under the RCF due to $495.0 million of outstanding borrowings, which were repaid in April 2023. See Note 8—Selected Components of Working Capital and Note 9—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 include maintenance capital expenditures, which include those expenditures required to maintain existing operating capacity and service capability of our assets, and expansion capital expenditures, which include expenditures to construct new midstream infrastructure and expenditures incurred to reduce costs, increase revenues, or increase system throughput or capacity from current levels.
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. Capital expenditures as presented in the consolidated statements of cash flows and capital incurred were as follows:
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| | Three Months Ended March 31, |
| | |
thousands | | 2023 | | 2022 | | |
| | | | | | |
Capital expenditures (1) | | $ | 173,088 | | | $ | 83,971 | | | |
Capital incurred (1) | | 181,803 | | | 85,553 | | | |
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(1)For the three months ended March 31, 2023 and 2022, included $2.5 million and $1.0 million, respectively, of capitalized interest.
Capital expenditures increased by $89.1 million for the three months ended March 31, 2023, primarily due to increases of (i) $44.3 million at the West Texas complex, primarily attributable to facility expansion, including ongoing construction of Mentone Train III, and pipeline projects, (ii) $34.6 million at the DBM water systems due to construction of additional water-disposal wells and facilities and pipeline projects, and (iii) $4.4 million at the DBM oil system, primarily related to an increase in pipeline, oil treating, and oil pumping projects.
Historical cash flow. The following table and discussion present a summary of our net cash flows provided by (used in) operating, investing, and financing activities:
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| | Three Months Ended March 31, | | |
| | |
thousands | | 2023 | | 2022 | | |
Net cash provided by (used in): | | | | | | |
Operating activities | | $ | 302,424 | | | $ | 276,458 | | | |
Investing activities | | (179,178) | | | (71,617) | | | |
Financing activities | | (297,257) | | | (158,591) | | | |
Net increase (decrease) in cash and cash equivalents | | $ | (174,011) | | | $ | 46,250 | | | |
Operating activities. Net cash provided by operating activities increased for the three months ended March 31, 2023, primarily due to (i) the impact of changes in assets and liabilities and (ii) lower interest expense. These increases were partially offset by (i) lower cash operating income and (ii) lower distributions from equity investments. 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 three months ended March 31, 2023, primarily included the following:
•$173.1 million of capital expenditures, primarily related to construction, expansion, and asset-integrity projects at the West Texas complex, DBM water systems, DBM oil system, and DJ Basin complex;
•$18.3 million of increases to materials and supplies inventory; and
•$12.4 million of distributions received from equity investments in excess of cumulative earnings.
Net cash used in investing activities for the three months ended March 31, 2022, primarily included the following:
•$84.0 million of capital expenditures, primarily related to construction, expansion, and asset-integrity projects at the West Texas complex, DBM water systems, DJ Basin complex, and DBM oil system;
•$9.9 million of distributions received from equity investments in excess of cumulative earnings; and
•$4.1 million of decreases to materials and supplies inventory.
Financing activities. Net cash used in financing activities for the three months ended March 31, 2023, primarily included the following:
•$213.1 million to redeem the total principal amount outstanding on the Floating-Rate Senior Notes due 2023 at par value;
•$203.1 million of distributions paid to WES unitholders and noncontrolling interest owners;
•$100.0 million of repayments of outstanding borrowings under the RCF;
•$7.1 million of unit repurchases; and
•$220.0 million of borrowings under the RCF, which were used for general partnership purposes.
Net cash used in financing activities for the three months ended March 31, 2022, primarily included the following:
•$139.5 million of distributions paid to WES unitholders and noncontrolling interest owners; and
•$5.1 million of unit repurchases.
Debt and credit facilities. As of March 31, 2023, the carrying value of outstanding debt was $6.7 billion, we have no borrowings due within the next year, and have $1.5 billion of available borrowing capacity under WES Operating’s $2.0 billion RCF. In April 2023, we (i) completed the public offering of $750.0 million in aggregate principal amount of 6.150% Senior Notes due 2033, (ii) repaid all outstanding borrowings under the RCF with proceeds from the senior note offering, and (iii) entered into an amendment to our RCF to, among other things, extend the maturity date to April 2028 and provide for a maximum borrowing capacity up to $2.0 billion through the maturity date.
For additional information on our senior notes and the RCF, see Note 9—Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
Offload commitments. During the year ended December 31, 2022, we entered into offload agreements with third parties providing firm-processing capacity through 2025. As of March 31, 2023, we have future minimum payments under offload agreements totaling $12.4 million for the remainder of 2023 and a total of $10.5 million in years thereafter.
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- or NGLs-imbalance agreements. We examine and monitor the creditworthiness of customers and may establish credit limits for customers. We are subject to the risk of non-payment or late payment by producers for gathering, processing, transportation, and disposal fees. Additionally, we continue to evaluate counterparty credit risk and, in certain circumstances, are exercising our rights to request adequate assurance.
We expect our exposure to the concentrated risk of non-payment or non-performance to continue for as long as our commercial relationships with Occidental generate a significant portion of our revenues. While Occidental is our contracting counterparty, gathering and processing arrangements with affiliates of Occidental on most of our systems include not just Occidental-produced volumes, but also, in some instances, the volumes of other working-interest owners of Occidental who rely on our facilities and infrastructure to bring their volumes to market. See Note 5—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.
ITEMS AFFECTING THE COMPARABILITY OF FINANCIAL RESULTS WITH WES OPERATING
Our consolidated financial statements include the consolidated financial results of WES Operating. Our results of operations do not differ materially from the results of operations and cash flows of WES Operating, which are reconciled below.
Reconciliation of net income (loss). The differences between net income (loss) attributable to WES and WES Operating are reconciled as follows:
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| | Three Months Ended |
| | | | | | |
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thousands | | March 31, 2023 | | December 31, 2022 | | | | March 31, 2022 | | |
Net income (loss) attributable to WES | | $ | 203,645 | | | $ | 336,324 | | | | | $ | 308,717 | | | |
Limited partner interest in WES Operating not held by WES (1) | | 4,161 | | | 6,883 | | | | | 6,317 | | | |
General and administrative expenses (2) | | 232 | | | 892 | | | | | 741 | | | |
Other income (expense), net | | (25) | | | (27) | | | | | (3) | | | |
| | | | | | | | | | |
Income taxes | | — | | | 7 | | | | | — | | | |
Net income (loss) attributable to WES Operating | | $ | 208,013 | | | $ | 344,079 | | | | | $ | 315,772 | | | |
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(1)Represents the portion of net income (loss) allocated to the limited partner interest in WES Operating not held by WES. A subsidiary of Occidental held a 2.0% limited partner interest in WES Operating for all periods presented.
(2)Represents general and administrative expenses incurred by WES separate from, and in addition to, those incurred by WES Operating.
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:
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| | |
| | Three Months Ended March 31, | | |
thousands | | 2023 | | 2022 | | |
WES net cash provided by operating activities | | $ | 302,424 | | | $ | 276,458 | | | |
General and administrative expenses (1) | | 232 | | | 741 | | | |
Non-cash equity-based compensation expense | | (141) | | | (131) | | | |
Changes in working capital | | (11,522) | | | (6,948) | | | |
Other income (expense), net | | (25) | | | (3) | | | |
| | | | | | |
| | | | | | |
WES Operating net cash provided by operating activities | | $ | 290,968 | | | $ | 270,117 | | | |
| | | | | | |
WES net cash provided by (used in) financing activities | | $ | (297,257) | | | $ | (158,591) | | | |
Distributions to WES unitholders (2) | | 196,569 | | | 134,749 | | | |
Distributions to WES from WES Operating (3) | | (209,242) | | | (137,412) | | | |
Increase (decrease) in outstanding checks | | (42) | | | 135 | | | |
Unit repurchases | | 7,061 | | | 5,149 | | | |
Other | | 11,950 | | | 6,085 | | | |
WES Operating net cash provided by (used in) financing activities | | $ | (290,961) | | | $ | (149,885) | | | |
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(1)Represents general and administrative expenses incurred by WES separate from, and in addition to, those incurred by WES Operating.
(2)Represents distributions to WES common unitholders paid under WES’s partnership agreement. See Note 3—Partnership Distributions and Note 4—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 3—Partnership Distributions and Note 4—Equity and Partners’ Capital in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
Noncontrolling interest. WES Operating’s noncontrolling interest consists of the 25% third-party interest in Chipeta. See Note 1—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
WES Operating distributions. WES Operating distributes all of its available cash on a quarterly basis to WES Operating unitholders in proportion to their share of limited partner interests in WES Operating. See Note 3—Partnership Distributions in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in accordance with GAAP requires management to make informed judgments and estimates that affect the amounts of assets and liabilities as of the date of the financial statements and the amounts of revenues and expenses recognized during the periods reported. There have been no significant changes to our critical accounting estimates from those disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2022.