Item 1A. Risk Factors
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made in this Form 10-K, and may from time to time 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;
•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;
•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; and
•other factors discussed below and elsewhere in this Item 1A, under the caption Critical Accounting Estimates included under Part II, Item 7 of this Form 10-K, and in our other public filings and press releases.
Risk factors and other factors noted throughout this Form 10-K 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.
Common units are inherently different from capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in similar businesses. We urge you to carefully consider the following risk factors together with all of the other information included in this Form 10-K in evaluating an investment in our common units.
If any of the following risks were to occur, our business, financial condition, or results of operations could be materially and adversely affected. In such a case, the common units’ trading price could decline, and you could lose part or all of your investment.
RISKS INHERENT IN OUR BUSINESS
We are dependent on Occidental for over 50% of revenues related to the natural gas, crude oil, NGLs, and produced water that we gather, treat, process, transport, and/or dispose. A material reduction in Occidental’s production that is gathered, treated, processed, or transported by our assets would result in a material decline in our revenues and cash available for distribution.
We rely on Occidental for over 50% of revenues related to the natural gas, crude oil, NGLs, and produced water that we gather, treat, process, transport, and/or dispose. For the year ended December 31, 2020, 66% of Total revenues and other, 41% of our throughput for natural-gas assets (excluding equity-investment throughput), 88% of our throughput for crude-oil and NGLs assets (excluding equity-investment throughput), and 87% of our throughput for produced-water assets were attributable to production owned or controlled by Occidental. Occidental may decrease its production in the areas serviced by us and is under no contractual obligation to maintain its production volumes dedicated to us pursuant to the terms of our applicable gathering agreements. The loss of a significant portion of production volumes supplied by Occidental would result in a material decline in our revenues and our cash available for distribution. In addition, Occidental may determine that drilling activity in areas other than our areas of operation is strategically more attractive. A shift in Occidental’s focus away from our areas of operation could result in reduced throughput on our systems and a material decline in our revenues and cash available for distribution.
Because we are dependent on Occidental as our largest customer and the owner of our general partner, any development that materially and adversely affects Occidental’s operations, financial condition, or market reputation could have a material and adverse impact on us. Material adverse changes at Occidental could restrict our access to capital, make it more expensive to access the capital markets, or increase the costs of our borrowings.
We are dependent on Occidental as our largest customer and the owner of our general partner, and we expect to derive significant revenue from Occidental for the foreseeable future. As a result, any event, whether in our area of operations or otherwise, that adversely affects Occidental’s production, financial condition, leverage, market reputation, liquidity, results of operations, or cash flows may adversely affect our revenues and cash available for distribution. Accordingly, we are indirectly subject to the business risks of Occidental, including, but not limited to, the volatility of oil and natural-gas prices, the availability of capital on favorable terms to fund Occidental’s exploration and development activities, the political and economic uncertainties associated with Occidental’s foreign operations, transportation-capacity constraints, and shareholder activism.
Further, we are subject to the risk of non-payment or non-performance by Occidental, including with respect to our gathering and transportation agreements. We cannot predict the extent to which Occidental’s business would be impacted if conditions in the energy industry were to deteriorate further, nor can we estimate the impact such conditions would have on Occidental’s ability to perform under our gathering and transportation agreements. Accordingly, any material non-payment or non-performance by Occidental could reduce our ability to make distributions to our unitholders.
Any material limitations to our ability to access capital as a result of adverse changes at Occidental could limit our ability to obtain future financing on favorable terms, or at all, or could result in increased financing costs in the future. Similarly, material adverse changes at Occidental could impact our unit price adversely, thereby limiting our ability to raise capital through equity issuances or debt financing, or adversely affect our ability to engage in or expand or pursue our business activities, and also prevent us from engaging in certain transactions that might otherwise be considered beneficial to us.
See Occidental’s Exchange Act reports filed with the Securities and Exchange Commission (which are not, and shall not be deemed to be, incorporated by reference herein), for a full discussion of the risks associated with Occidental’s business.
Occidental’s ownership of our general partner may result in conflicts of interest.
Following the closing of the Occidental Merger, Occidental owns our general partner. Occidental’s ownership of our general partner may result in conflicts of interest. The directors and officers of our general partner and its affiliates have duties to manage our general partner in a manner that is beneficial to Occidental. At the same time, our general partner has duties to manage us in a manner that is beneficial to our unitholders. Therefore, our general partner’s duties to us may conflict with the duties of its officers and directors to Occidental. As a result of these conflicts of interest, our general partner may favor the interests of Occidental or its owners or affiliates over the interest of our unitholders.
Our future prospects depend on Occidental’s growth strategy, midstream operational philosophy, and drilling program, including the level of drilling and completion activity by Occidental on acreage dedicated to us. Additional conflicts also may arise in the future associated with future business opportunities that are pursued by Occidental and us. For example, Occidental is not prohibited from owning assets or engaging in businesses that directly or indirectly compete with us.
On December 31, 2019, we entered into a set of agreements that will facilitate our ability to operate more independently from Occidental. Our separation from Occidental entails risks and uncertainties that may have a material adverse effect on our business, financial condition, results of operations, or cash available for distribution to our unitholders.
The difficulties of creating a stand-alone structure include, among other things, implementing operational and administrative technology systems, maintaining effective internal controls, replicating a regulatory compliance infrastructure, and hiring, training and retaining qualified personnel, the loss of which could reduce our competitiveness and prospects for future success. Attention to such organizational activities could also divert management’s attention from our existing business.
If any of these risks or other unanticipated liabilities or costs were to materialize, then desired benefits from our efforts to become independent from Occidental may not materialize. Such difficulties may have a material adverse effect on our business, financial condition, results of operations, or cash available for distribution to our unitholders.
Any future credit-rating downgrade could negatively impact our cost of and ability to access capital.
Our costs of borrowing and ability to access the capital markets are affected by market conditions and the credit rating assigned to WES Operating’s debt by the major credit rating agencies. As of December 31, 2020, WES Operating’s long-term debt was rated “BB” by Standard and Poor’s (“S&P”), “BB” by Fitch Ratings, and “Ba2” by Moody’s Investors Service (“Moody’s”). In 2020, WES Operating’s credit ratings were downgraded below investment grade by Fitch, S&P, and Moody’s. As a result of these downgrades, financing costs under the RCF increased. Additionally, WES Operating currently has $3.4 billion of outstanding senior notes that provide for increased interest rates following downgrade events. For example, the 2020 downgrades to WES Operating’s credit ratings resulted in a $43.0 million increase to WES Operating’s annualized borrowing costs attributable to the aforementioned senior notes. Additional downgrades to WES Operating’s credit ratings will further increase its borrowing costs.
Any future downgrades in WES Operating’s credit ratings could adversely affect WES Operating’s ability to issue debt in the public debt markets and negatively impact our cost of capital, future interest costs, and ability to effectively execute aspects of our business strategy. Future credit-rating downgrades also could trigger obligations to provide financial assurance of our performance under certain contractual arrangements. We may be required to post collateral in the form of letters of credit or cash as financial assurance of our performance under certain contractual arrangements, such as pipeline transportation contracts and NGLs and gas-sales contracts. At December 31, 2020, there were $5.1 million in letters of credit or cash-provided assurance of our performance under contractual arrangements with credit-risk-related contingent features.
Sustained low natural-gas, NGLs, or oil prices could adversely affect our business.
Sustained low natural-gas, NGLs, or oil prices impact natural-gas and oil exploration and production activity levels and can result in a decline in the production of hydrocarbons over the medium to long term, resulting in reduced throughput on our systems. Such declines also potentially affect the ability of our vendors, suppliers, and customers to continue operations. As a result, sustained lower natural-gas and crude-oil prices could have a material adverse effect on our business, results of operations, financial condition, and our ability to pay cash distributions to our unitholders.
In general terms, the prices of natural gas, oil, condensate, NGLs, and other hydrocarbon products fluctuate in response to changes in supply and demand, market uncertainty, and a variety of additional factors that are beyond our control. For example, market prices for natural gas have declined substantially from the highs achieved in 2008 and have remained depressed for several years. More recently, the COVID-19 pandemic and resulting mitigation measures also are having an adverse impact on global economic conditions, and are contributing to a significant decline in demand for oil, NGLs, and natural gas, resulting in lower commodity prices that will negatively impact our and our customers’ financial outlooks and activity levels.
Because of the natural decline in production from existing wells, our success depends on our ability to compete for new sources of oil and natural-gas throughput, which is dependent on certain factors beyond our control. Any decrease in the volumes that we gather, process, treat, and transport could affect our business and operating results adversely.
The volumes that support our business are dependent on, among other things, the level of production from natural-gas and oil wells connected to our gathering systems and processing and treating facilities. This production will naturally decline over time. As a result, our cash flows associated with production from these wells also will decline over time. To maintain or increase throughput levels on our systems, we must obtain new sources of oil and natural-gas throughput. The primary factors affecting our ability to obtain sources of oil and natural-gas throughput include (i) the level of successful drilling activity near our systems, (ii) our ability to compete for volumes from successful new wells to the extent such wells are not dedicated to our systems, and (iii) our ability to capture volumes currently gathered or processed by third parties. Our industry is highly competitive, and we compete with similar companies in our areas of operation. In addition, our customers, including Occidental, may develop their own midstream systems in lieu of using ours.
While Occidental has dedicated production from certain of its properties to us, we have no control over the level of drilling activity in our areas of operation, the amount of reserves associated with wells connected to our systems, or the rate at which production declines. We also have no control over producers or their drilling or production decisions, which are affected by, among other things, the availability and cost of capital, prevailing and projected commodity prices, demand for hydrocarbons, levels of reserves, geological considerations, governmental regulations, the availability of drilling rigs, and other production and development costs. Sustained reductions in exploration or production activity in our areas of operation would lead to reduced utilization of our gathering, processing, and treating assets.
Because of these factors, producers (including Occidental) may be deterred from developing known oil and natural-gas reserves existing in areas served by our assets. Moreover, Occidental may not develop the acreage it has dedicated to us. If competition or reductions in drilling activity result in our inability to maintain the current levels of throughput on our systems, it could reduce our revenue and impair our ability to make cash distributions to our unitholders.
The global outbreak of COVID-19 may have an adverse impact on our operations and financial results.
The global outbreak of COVID-19 poses significant risks to our business and to the markets in which we operate. Many of our facilities require our field personnel to be on location to ensure safe and efficient operations. If a significant percentage of our workforce is unable to work, due to illness or travel or other COVID-19-related restrictions, we may experience significant operational disruptions or inefficiencies and a heightened risk of safety and environmental incidents. Any such developments could materially and adversely affect our earnings, cash flows, and ability to make cash distributions to our unitholders.
Additionally, many of our employees have been and may in the future be subject to pandemic-related work-from-home requirements, which stress the capabilities of our information technology systems, including those relating to system security; disrupt normal channels of intracompany communications and key business processes; and heighten the risk of cyber-security threats and operational, health, or safety-related incidents at our facilities. For these reasons, limited working arrangements and other related restrictions may impact our operations and management effectiveness and may introduce, or increase the likelihood of, material risks to our business, operations, productivity, and results of operations.
The amount of cash we have available for distribution to holders of our common units depends primarily on our cash flows rather than on our profitability, and we may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to pay distributions at previously announced levels to holders of our common units, or at all, even during periods in which we record net income.
The amount of cash we have available for distribution primarily depends on our cash flows and not solely on profitability as determined by GAAP, which will be affected by non-cash items. As a result, we may make cash distributions for periods in which we record losses for financial accounting purposes and may not make cash distributions for periods in which we record net earnings for financial accounting purposes.
To pay the announced fourth-quarter 2020 distribution of $0.31100 per unit per quarter, or $1.24400 per unit per year, we require per-quarter available cash of $131.3 million, or $525.1 million per year, based on the number of common units outstanding at February 1, 2021. We may not have sufficient available cash from operating surplus each quarter to enable us to pay distributions at currently announced levels. The amount of cash we can distribute on our units principally depends on the amount of cash we generate from our operations, which will fluctuate from quarter to quarter.
During 2020, we significantly reduced the quarterly cash distribution on our common units and also took measures to reduce full-year 2020 capital expenditures. These cash-preservation measures are intended to enhance our
financial strength 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 be adequate to preserve our financial health for the required duration and additional actions, including additional per-unit distribution reductions, may be necessary to manage through the current environment. Furthermore, any cash we preserve from delaying or abandoning capital projects will necessarily delay or eliminate future returns we hoped to generate from previously planned projects, which may meaningfully impact our ability to generate long-term revenue and cash-flow growth. Also, our decision to preserve cash by reducing our quarterly distribution to common unitholders may diminish the long-term value of our units and limit our ability, or increase the cost of, accessing future equity capital necessary to fund our business or to preserve our balance sheet.
We are exposed to the credit risk of third-party customers, and any material non-payment or non-performance by these parties, including with respect to our gathering, processing, transportation, and disposal agreements, could reduce our ability to make distributions to our unitholders.
On some of our systems, we rely on third-party customers for substantially all of our revenues related to those assets. The loss of a portion or all of these customers’ contracted volumes, as a result of competition, creditworthiness, inability to negotiate extensions, replacements of contracts, or otherwise, could reduce our ability to make cash distributions to our unitholders. Further, to the extent any of our third-party customers is in financial distress or enters bankruptcy proceedings, the related customer contracts may be renegotiated at lower rates or altogether rejected. For example, on April 29, 2020, we received notice that Sanchez is attempting to reject a number of midstream and downstream agreements with commercial counterparties, including Sanchez’s Springfield gathering agreements and agreements obligating Sanchez to deliver the gas volumes gathered by the Springfield system to our Brasada processing plant. If the attempted rejection is successful, our South Texas assets could be impaired and our earnings, cash flows from operations, and ability to make cash distributions to our unitholders could be materially and adversely impacted.
Implementation of Colorado Senate Bill 19-181 may increase costs and limit oil and natural-gas exploration and production operations in the state, which could have a material adverse effect on our customers in Colorado and significantly reduce demand for our services in the state.
On April 16, 2019, Senate Bill 19-181 was signed into law in Colorado. The new legislation reforms oversight of oil and natural-gas exploration and production activities in the state. The mission of the Colorado Oil and Gas Conservation Commission (“COGCC”) has changed from fostering energy development in the state to regulating the industry in a manner that is protective of public health and safety and the environment. The new legislation also authorizes Colorado cities and counties to assume an increased role in regulating oil and natural-gas operations within their jurisdictions in a manner that may be more stringent than state-level rules, and a few local governments have passed temporary moratoria on new oil and natural-gas projects until local governments have passed their own rules implementing the new law. The composition of the COGCC commissioners also has been changed under the new law, with the COGCC adding a commissioner with public health expertise. On November 23, 2020, the COGCC finalized sweeping new rules to align the commission’s new mission set forth in Senate Bill 19-181. Some of the changes include doubling setbacks to a minimum of 2,000 feet for schools or childcare centers, enacting a prohibition on routine flaring or venting, and increased protections for wildlife. The COGCC also approved measures to address cumulative impacts by developing a new program with the Colorado Department of Public Health and Environment, and the complete overhaul of the existing permitting procedures to create a unified permitting process. The new rules went into effect on January 15, 2021. Implementation of this new law and the COGCC’s new rules could limit operations as a result of delays by the state in issuing new drilling permits, and result in increased operational costs, which could have a material adverse effect on our customers in Colorado, which in turn could reduce statewide demand for our midstream services significantly.
Changes in laws or regulations regarding hydraulic fracturing could result in increased costs, operating restrictions, or delays in the completion of oil and natural-gas wells, which could decrease the need for our gathering and processing services.
While we do not conduct hydraulic fracturing, our oil and natural-gas exploration and production customers do conduct such activities. Hydraulic fracturing is an essential and common practice used by many of our customers to stimulate production of natural gas and oil from dense subsurface rock formations such as shales. Hydraulic fracturing is typically regulated by state oil and natural-gas commissions, but several federal agencies, including the EPA and the BLM, also have asserted regulatory authority over, proposed or promulgated regulations governing, and conducted investigations relating to certain aspects of the hydraulic-fracturing process.
At the state level, some states have adopted, and others are considering adopting, legal requirements that could impose more stringent disclosure, permitting, or well-construction requirements on hydraulic-fracturing operations, and states could elect to prohibit high-volume hydraulic fracturing altogether, following the approach taken by the State of New York. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place, and manner of drilling activities in general or hydraulic-fracturing activities in particular. If new or more-stringent federal, state, or local legal restrictions, prohibitions or regulations, or ballot initiatives relating to the hydraulic-fracturing process are adopted in areas where our oil and natural-gas exploration and production customers operate, those customers could incur potentially significant added costs to comply with such requirements and experience delays or curtailment in the pursuit of exploration, development, or production activities, which could reduce demand for our gathering and processing services. Moreover, increased regulation of the hydraulic-fracturing process also could lead to greater opposition to, and litigation over, oil and natural-gas production activities using hydraulic-fracturing techniques. Any one or more of these developments could have a material adverse effect on our business, financial condition, and results of operations.
Adoption of new or more stringent legal standards relating to induced seismic activity associated with produced-water disposal could affect our operations.
We dispose of produced water generated from oil and natural-gas production operations. The legal requirements related to the disposal of produced water into a non-producing geologic formation by means of underground injection wells are subject to change based on concerns of the public or governmental authorities, including concerns relating to recent seismic events near injection wells used for the disposal of produced water. In response to such concerns, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced-water disposal wells or are otherwise investigating the existence of a relationship between seismicity and the use of such wells. These developments could result in additional regulation and restrictions on our use of injection wells to dispose of produced water, including a possible shut down of wells, which could have a material adverse effect on our business, financial condition, and results of operations.
Adverse developments in our geographic areas of operation could disproportionately impact our business, results of operations, financial condition, and ability to make cash distributions to our unitholders.
Our business and operations are concentrated in a limited number of producing areas. Due to our limited geographic diversification, adverse operational developments, regulatory or legislative changes, or other events in an area in which we have significant operations could have a greater impact on our business, results of operations, financial condition, and ability to make cash distributions to our unitholders than if our operations were more diversified.
Our indebtedness may limit our ability to capitalize on acquisitions and other business opportunities or our flexibility to obtain financing.
The operating and financial restrictions and covenants in the indentures governing our publicly traded notes, (collectively, the “Notes”) or the RCF, and any future financing arrangements could restrict our ability to finance future operations or capital needs or to expand or pursue business activities associated with our subsidiaries and equity investments. See Part II, Item 7 of this Form 10-K for a further discussion of the terms of the RCF and Notes.
Furthermore, our indebtedness and related debt-service costs could impair our ability to obtain additional financing, reduce funds available for operations and business opportunities, make us more vulnerable to competitive pressures or market downturns, and limit our financial and operational flexibility.
Our ability to service our debt will depend on, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory, and other factors, some of which are beyond our control. If our operating results are not sufficient to service indebtedness in the future, we will be forced to take actions such as reducing distributions; reducing or delaying our business activities, acquisitions, investments, or capital expenditures; selling assets; or seeking additional equity capital. We may not be able to execute any of these actions on satisfactory terms or at all.
We may not be able to obtain funding on acceptable terms or at all. This may hinder or prevent us from meeting our future capital needs.
Global financial markets and economic conditions have been, and continue to be, volatile, especially for companies involved in the oil and gas industry. The repricing of credit risk and the recent relatively weak industry conditions have made, and will likely continue to make, it difficult for some entities to obtain funding. In addition, as a result of concerns about the stability and solvency of some of our counterparties, the cost of obtaining financing from
the credit markets generally has increased as many lenders and institutional investors have increased required rates of return, enacted tighter lending standards, refused to provide funding on terms similar to the borrower’s current debt, and reduced, or in some cases, ceased to provide funding to borrowers. Further, we may be unable to obtain adequate funding under the RCF if our lending counterparties become unable to meet their funding obligations. Due to these factors, we cannot be certain that funding will be available if needed and to the extent required on acceptable terms. If funding is not available when needed, or is available only on unfavorable terms, we may be unable to execute our business plans, complete acquisitions or otherwise take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our financial condition, results of operations, cash flows, and ability to make cash distributions to our unitholders.
Our failure to maintain an adequate system of internal control over financial reporting could adversely affect our ability to accurately report our results.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. A material weakness is a deficiency, or a combination of deficiencies, in our internal controls that result in a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Effective internal control is necessary for us to provide reliable financial reports and deter and detect any material fraud. If we cannot provide reliable financial reports or prevent material fraud, our reputation and operating results will be harmed. Our efforts to develop and maintain our system of internal controls and to remediate material weaknesses in our controls may not be successful, and we may be unable to maintain adequate control over our financial processes and reporting in the future, including future compliance with the obligations under Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to develop or maintain effective controls, or difficulties encountered in their implementation or other effective improvement of our internal controls, could harm our operating results. Ineffective internal control also could cause investors to lose confidence in our reported financial information.
Our business could be negatively affected by security threats, including cyber-threats, and other disruptions.
We face various security threats, including cyber-threats to the security of our facilities and infrastructure, attempts to gain unauthorized access to sensitive information or to render data or systems unusable, and terrorist acts. Additionally, destructive forms of protests by activists and other disruptions, including acts of sabotage or eco-terrorism, against oil and natural-gas-related activities could potentially result in damage or injury to persons, property, or the environment, or lead to extended interruptions of our or our customers’ operations. Our implementation of procedures and controls to monitor and mitigate security threats and to increase security for our facilities, infrastructure, and information may result in increased costs. There can be no assurance that such procedures and controls will be sufficient to prevent security breaches from occurring.
Cyber-attacks, in particular, are becoming more sophisticated and include malicious software intended to gain unauthorized access to data and systems, electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data. For example, the gathering, processing, treating, and transportation of natural gas from our gathering systems, processing facilities, and pipelines are dependent on communications among our facilities and with third-party systems that may be delivering natural gas into or receiving natural gas and other products from our facilities. Disruption of those communications, whether caused by cyber-attacks or otherwise, may disrupt our ability to deliver natural gas and control these assets.
There is no assurance that we will not suffer material losses from future cyber-attacks, and as such threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate or remediate any cyber vulnerabilities. Any terrorist or cyber-attack against, or other disruption of, our assets or computer systems could have a material adverse effect on our business, results of operations, financial condition, and our ability to make cash distributions to our unitholders.
We typically do not obtain independent evaluations of hydrocarbon reserves connected to our systems. Therefore, in the future, throughput on our systems could be less than we anticipate.
We typically do not obtain independent evaluations of hydrocarbon reserves connected to our systems. Accordingly, we do not have independent estimates of total reserves connected to our systems or the anticipated life of such reserves. If the total reserves or estimated life of the reserves connected to our systems are less than we anticipate, or the timeline for the development of reserves is greater than we anticipate, and we are unable to secure additional sources of oil and natural gas, there could be a material adverse effect on our business, results of operations, financial condition, and our ability to make cash distributions to our unitholders.
Our results of operations could be adversely affected by asset impairments.
If commodity prices remain depressed or decline further, and producer activity reduces accordingly, we may be required to write down the value of our midstream properties if the estimated future cash flows from these properties fall below their respective net book values. Because we are a related party of Occidental, the assets we previously acquired from Anadarko were recorded at Anadarko’s carrying value prior to the transaction. Accordingly, we may be at an increased risk for impairments because the initial book values of a substantial portion of our assets do not have a direct relationship with, and in some cases could be significantly higher than, the consideration paid to acquire such assets. See the discussion of material impairments in Note 9-Property, Plant, and Equipment in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
If third-party pipelines or other facilities interconnected to our gathering, transportation, treating, or processing systems become partially or fully unavailable, or if the volumes we gather or transport do not meet the quality requirements of such pipelines or facilities, our revenues and cash available for distribution could be adversely affected.
Our gathering, transportation, treating, and processing systems are connected to other pipelines or facilities, the majority of which are owned by third parties. The continuing operation of such third-party pipelines or facilities is not within our control. If any of these pipelines or facilities becomes unable to transport, treat, store, or process crude oil, natural gas, or NGLs, or if the volumes we gather or transport do not meet the quality requirements of such pipelines or facilities, our revenues and cash available for distribution could be adversely affected. For example, during the market disruptions caused by the outbreak of COVID-19, there were concerns that domestic oil-storage capacity could reach operational limits. If such an event had occurred, our customers might have shut-in field production due to limited downstream-takeaway alternatives or resulting wellhead economics. If production is shut-in for these or for other reasons, affected producers may become insolvent or seek to avoid their contractual obligations with us, in which case, our earnings, cash flows from operations, and ability to make cash distributions to our unitholders could be materially and adversely impacted.
A change in the jurisdictional characterization of some of our assets by federal, state, or local regulatory agencies or a change in policy by those agencies could result in increased regulation of our assets, which could cause our revenues to decline and operating expenses to increase.
We believe that our gas-gathering systems meet the traditional tests FERC has used to determine if a pipeline is a gas-gathering pipeline and is, therefore, not subject to FERC jurisdiction. FERC, however, has not made any determinations with respect to the jurisdictional status of any of these gas-gathering systems. The distinction between FERC-regulated transmission services and federally unregulated gathering services has been the subject of ongoing litigation and, over time, FERC policy concerning which activities it regulates and which activities are excluded from its regulation has changed. State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements and complaint-based rate regulation. In recent years, FERC has regulated the gas-gathering activities of interstate pipeline transmission companies more lightly, which has resulted in a number of such companies transferring gathering facilities to unregulated affiliates. As a result of these activities, natural-gas gathering may begin to receive greater regulatory scrutiny at the state and federal levels.
FERC makes jurisdictional determinations for natural-gas gathering and liquids lines on a case-by-case basis. The classification and regulation of our pipelines are subject to change based on future determinations by FERC, the courts, or Congress. A change in the jurisdictional characterization of some of our assets by federal, state, or local regulatory agencies or a change in policy by those agencies could result in increased regulation of our assets, which could cause our revenues to decline and operating expenses to increase. For additional information, read Regulation of Operations-Natural-Gas Gathering Pipeline Regulation under Items 1 and 2 of this Form 10-K.
Adoption of new or more stringent climate-change or other air-emissions legislation or regulations restricting emissions of GHGs or other air pollutants could negatively impact us, our producer customers, or downstream customers by increasing operating costs and reducing volumetric throughput on our systems due to reduced demand for the gathering, processing, compressing, treating, and transporting services we provide.
The threat of climate change continues to attract considerable attention in the United States and foreign countries. Numerous proposals have been made and could continue to be made at the international, national, regional, and state levels of government to monitor and limit emissions of GHGs, as well as to restrict or eliminate such future emissions. Further, new legislation, policies, or regulations may inhibit development plans of our producer customers, which could result in lower volumes transported across our assets. Changes to climate-change or other air-emissions
laws and regulations, or reinterpretations of enforcement or other guidance with respect thereto, that govern the areas in which we operate may impact our operations negatively by increasing our compliance costs and the compliance costs of our customers. In addition, in response to concerns related to climate change, companies in the fossil fuel sector may be exposed to increasing financial risks. Financial institutions, including investment advisors and certain sovereign wealth, pension and endowment funds, may elect in the future to shift some or all of their investment into non-fossil fuel related sectors. A material reduction in capital available to the energy industry could make it more difficult to secure funding for exploration, development, production, and transportation activities, which could result in decreased demand for our services, or difficulty in securing capital for new construction projects. For additional information read, “Environmental Matters” under Items 1 and 2 of this Form 10-K.
Federal and state legislative and regulatory initiatives relating to pipeline safety and integrity management that require the performance of ongoing assessments and implementation of preventive measures, the use of new or more-stringent safety controls or result in more-stringent enforcement of applicable legal requirements could subject us to increased capital costs, operational delays, and costs of operation.
Legislation adopted in recent years has resulted in more-stringent mandates for pipeline safety and has charged PHMSA with developing and adopting regulations that impose increased pipeline-safety requirements on pipeline operators. For instance, pursuant to its authority under federal law, PHMSA has promulgated regulations requiring pipeline operators to develop and implement integrity-management programs for certain gas and hazardous liquid pipelines that, in the event of a pipeline leak or rupture, could affect HCAs, which are areas where a release could have the most significant adverse consequences, including high-population areas, certain drinking water sources, and unusually sensitive ecological areas. These regulations require the operators of covered pipelines to, among other things, perform ongoing assessments of pipeline integrity and implement preventive and mitigating actions. The imposition of new pipeline safety or integrity management requirements pursuant to existing federal laws or any issuance or reinterpretation of guidance by PHMSA or any state agencies with respect thereto could require us to install new or modified safety controls, pursue additional capital projects, or conduct maintenance programs on an accelerated basis, any or all of which could result in our incurring increased capital expenditures and operating costs that could have a material adverse effect on our results of operations or financial position. For additional information regarding PHMSA regulations, read Regulation of Operations-Natural-Gas Gathering Pipeline Regulation under Items 1 and 2 of this Form 10-K.
Additionally, while states are largely preempted by federal law from regulating pipeline safety for interstate lines, most are certified by PHMSA to assume responsibility for enforcing federal intrastate pipeline regulations and inspection of intrastate pipelines. In practice, because states can adopt stricter standards for intrastate pipelines than those imposed by the federal government for interstate lines, states vary considerably in their authority and capacity to address pipeline safety. Moreover, PHMSA and one or more state regulators, including the Texas Railroad Commission, have expanded the scope of their regulatory inspections in recent years to include certain in-plant equipment and pipelines found within NGLs fractionation facilities and associated storage facilities, to assess compliance with hazardous liquids pipeline safety requirements. To the extent that PHMSA and/or state regulatory agencies are successful in asserting their jurisdiction in this manner, midstream operators of NGLs fractionation facilities and associated storage facilities may be required to make operational changes or modifications at their facilities to meet standards beyond current OSHA and EPA requirements, where such changes or modifications may result in additional capital costs, possible operational delays, and increased costs of operation that, in some instances, may be significant.
Some portions of our pipeline systems have been in service for several decades, and we have a limited ownership history with respect to certain of our assets. There could be unknown events or conditions, or increased maintenance or repair expenses, and downtime associated with our pipelines that could have a material adverse effect on our business and results of operations.
Some portions of the pipeline systems that we operate were in service for many decades, prior to our purchase of these systems. Consequently, there may be historical occurrences or latent issues regarding our pipeline systems that our executive management may be unaware of and that may have a material adverse effect on our business and results of operations. The age and condition of our pipeline systems also could result in increased maintenance or repair expenditures, and any downtime associated with increased maintenance and repair activities could materially reduce our revenue. Any significant increase in maintenance and repair expenditures or loss of revenue due to the age or condition of our pipeline systems could adversely affect our business and results of operations.
We are subject to stringent and comprehensive environmental laws and regulations that may expose us to significant costs and liabilities.
Our operations are subject to stringent and comprehensive federal, tribal, state, and local environmental laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These environmental laws and regulations may impose numerous obligations that are applicable to our operations, including: (i) the acquisition of permits to conduct regulated activities; (ii) restrictions on the types, quantities, and concentrations of materials that can be released into the environment; (iii) limitations on the generation, management, and disposal of wastes; (iv) limitations or prohibitions of construction and operating activities in environmentally sensitive areas such as wetlands, urban areas, wilderness regions, and other protected areas; (v) requiring capital expenditures to limit or prevent releases of materials from our pipelines and facilities; and (vi) imposition of substantial restoration and remedial liabilities and obligations with respect to abandonment of facilities and for pollution resulting from our operations or existing at our owned or operated facilities. Numerous governmental authorities, such as the EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly remedial or corrective actions. Failure to comply with these laws, regulations, and permits or any newly adopted legal requirements may result in the assessment of sanctions, including administrative, civil, and criminal penalties, the imposition of investigatory, remedial or corrective action obligations, the incurrence of capital expenditures, the occurrence of delays or cancellations in the permitting, development or expansion of projects, and the issuance of injunctions limiting or preventing some or all of our operations in particular areas.
We may incur significant environmental costs and liabilities in connection with our operations due to our handling of natural gas, crude oil, NGLs, and other petroleum products, because of pollutants from our operations emitted into ambient air or discharged or released into surface water or groundwater, and as a result of historical industry operations and waste-disposal practices. For example, an accidental release as a result of our operations could subject us to substantial liabilities arising from environmental cleanup and restoration costs, claims made by owners of the properties through which our gathering or transportation systems pass, neighboring landowners, and other third parties for personal injury, natural-resource and property damages, and fines or penalties for related violations of environmental laws or regulations. Joint and several strict liabilities may be incurred, without regard to fault, under certain of these environmental laws and regulations. In addition, stricter laws, regulations, or enforcement policies could increase our operational or compliance costs and the costs of any restoration or remedial actions that may become necessary, which could have a material adverse effect on our results of operations or financial condition. The adoption of any laws, regulations, or other legally enforceable mandates could increase our oil and natural-gas exploration and production customers’ operating and compliance costs and reduce the rate of production of oil or natural gas by operators with whom we have a business relationship, which could have a material adverse effect on our results of operations and cash flows.
Our construction of new assets may not result in revenue increases and is subject to regulatory, environmental, political, legal, and economic risks, which could adversely affect our results of operations and financial condition.
One of the ways we intend to grow our business is through the construction of new midstream assets. The construction of additions or modifications to our existing systems and the construction of new midstream assets involve numerous regulatory, environmental, political, and legal uncertainties that are beyond our control. These uncertainties also could affect downstream assets, which we do not own or control, but which are critical to certain of our growth projects. Delays in the completion of new downstream assets, or the unavailability of existing downstream assets, due to environmental, regulatory, or political considerations, could have an adverse impact on the completion or utilization of our growth projects. In addition, construction activities could be subject to state, county, and local ordinances that restrict the time, place, or manner in which those activities may be conducted. If we undertake these projects, they may not be completed on schedule, at the budgeted cost, or at all. In addition, our revenues may not increase immediately upon the expenditure of funds on a particular project. Moreover, we could construct facilities to capture anticipated future growth in production in a region in which such growth does not materialize.
We have partial ownership interests in several joint-venture legal entities that we do not operate or control. As a result, among other things, we may be unable to control the amount of cash we receive or retain from the operation of these entities, and we could be required to contribute significant cash to fund our share of joint-venture operations, which could affect our ability to distribute cash to our unitholders adversely.
Our inability, or limited ability, to control the operations and/or management of joint-venture legal entities in which we have a partial ownership interest may result in our receiving or retaining less cash than we expect. We also may be unable, or limited in our ability, to cause any such entity to effect significant transactions such as large expenditures or contractual commitments, the construction or acquisition of assets, or the borrowing of money.
In addition, for the equity investments in which we have a minority ownership interest, we are unable to control ongoing operational decisions, including the incurrence of capital expenditures or additional indebtedness that we may be required to fund. Further, the other owners of our equity investments may establish reserves for working capital, capital projects, environmental matters, and legal proceedings, that would similarly reduce the amount of cash available for distribution. Any of the above could impact our ability to make cash distributions to our unitholders adversely.
Further, in connection with the acquisition of our membership interest in Chipeta, we became party to the Chipeta LLC agreement. Among other things, the Chipeta LLC agreement provides that to the extent available, Chipeta will distribute available cash, as defined in the Chipeta LLC agreement, to its members quarterly in accordance with those members’ membership interests. Accordingly, we are required to distribute a portion of Chipeta’s cash balances, which are included in the cash balances in our consolidated balance sheets, to the other Chipeta member.
We do not own all of the land on which our pipelines and facilities are located, which could result in disruptions to our operations.
We do not own all of the land on which our pipelines and facilities have been constructed, and we therefore are, subject to the possibility of more onerous terms and/or increased costs to retain necessary land use if we do not have valid rights-of-way or if such rights-of-way lapse or terminate. Any loss of rights with respect to our real property, through our inability to renew existing rights-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations, financial position, and ability to make cash distributions to our unitholders.
Our business involves many hazards and operational risks, some of which may not be fully covered by insurance. If a significant accident or event occurs for which we are not fully insured, our operations and financial results could be adversely affected.
Our operations are subject to all of the risks and hazards inherent in gathering, processing, compressing, treating, and transporting natural gas, crude oil, NGLs, and produced water, including (i) damage to our assets and surrounding properties by natural disasters or acts of terrorism; (ii) inadvertent damage from construction, farm, and utility equipment; (iii) leaks or losses of hydrocarbons or produced water; (iv) fires and explosions; and (v) other hazards that could also result in personal injury, loss of life, pollution, property or natural resource damages, and/or curtailment or suspension of operations.
These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental or natural-resource damage. These risks also may result in curtailment or suspension of our operations. A natural disaster or other hazard affecting the areas in which we operate could have a material adverse effect on our operations. We are not fully insured against all risks that may occur in our business. In addition, although we are insured for environmental pollution resulting from environmental accidents that occur on a sudden and accidental basis, we may not be insured against all environmental accidents that might occur, some of which may result in toxic tort claims. If a significant accident or event occurs for which we are not fully insured, it could adversely affect our operations and financial condition. Furthermore, we may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies may substantially increase. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. Additionally, we may be unable to recover from prior owners of our assets, pursuant to certain indemnification rights, for potential environmental liabilities.
We are subject to increased scrutiny from institutional investors with respect to our governance structure and the social cost of our industry, which may adversely impact our ability to raise capital from such investors.
In recent years, certain institutional investors, including public pension funds, have placed increased importance on the implications and social cost of environmental, social, and governance (“ESG”) matters. ESG initiatives generally seek to divert investment capital from companies involved in certain industries or with disfavored governance structures. The energy industry as a whole has received the attention of such activists, as have companies with our partnership governance model.
Investors’ increased focus and activism related to ESG and similar matters may constrain our ability to raise capital. Any material limitations on our ability to access capital as a result of such scrutiny could limit our ability to
obtain future financing on favorable terms, or at all, or could result in increased financing costs in the future. Similarly, such activism could negatively impact our unit price, limiting our ability to raise capital through equity issuances or debt financing, or could negatively affect our ability to engage in, expand or pursue our or its business activities, and could also prevent us from engaging in certain transactions that might otherwise be considered beneficial to us.
RISKS INHERENT IN AN INVESTMENT IN US
A reduction in Occidental’s ownership interest in us may reduce its incentive to support our operations.
As discussed in WES and WES Operating’s Relationship with Occidental Petroleum Corporation in Part I, Items 1 and 2 of this Form 10-K, we believe that one of our principal strengths is our affiliation with Occidental and that Occidental, through its significant economic interest in us, will continue to pursue projects that enhance the value of our business. To the extent Occidental’s net interest in us declines through the sale of its holdings or otherwise, Occidental may be less incentivized to support the continued growth of our business. Accordingly, a decrease in Occidental’s net holdings in us could have a material adverse effect on our business, results of operations, financial position, and ability to grow or make cash distributions to our unitholders.
Our general partner’s liability regarding our obligations is limited.
Our general partner has included provisions in its and our contractual arrangements that limit its liability so that the counterparties to such arrangements have recourse only against our assets and not against our general partner or its assets. Our general partner may, therefore, cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner’s duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.
Our partnership agreement limits our general partner’s fiduciary duties to holders of our common units and restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
Our partnership agreement contains provisions that modify and reduce the fiduciary standards to which our general partner otherwise would be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, or otherwise free of fiduciary duties to us and our unitholders. This entitles our general partner only to consider the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates, or our limited partners. By purchasing a common unit, a common unitholder agrees to become bound by the provisions in the partnership agreement, including the above-described provisions.
Furthermore, our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement:
•provides that whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith, and will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;
•provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as such decisions are made in good faith, meaning that it believed that the decision was in the best interest of the Partnership;
•provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners or their assignees resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and
•provides that, in the absence of bad faith, our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our unitholders if a transaction with an affiliate or the resolution of a conflict of interest is approved in accordance with, or otherwise meets the standards set forth in, our partnership agreement.
The general partner interest in us may be transferred to a third party without unitholder consent.
Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, Occidental, the owner of our general partner, may transfer its ownership interest in our general partner to a third party, also without unitholder consent. Our new general partner or the new owner of our general partner would then be in a position to replace the Board of Directors and officers of our general partner and to control the decisions taken by the Board of Directors and officers.
We may issue additional units without unitholder approval, which would dilute existing ownership interests.
Our partnership agreement does not limit the number of additional limited partner interests that we may issue at any time without the approval of our unitholders. The issuance by us of additional common units or other equity securities of equal or senior rank will dilute our existing unitholders’ ownership interests and voting strength, and may reduce the market price for our common units and cash available for distribution or increase the ratio of taxable income to distributions.
The market price of our common units could be affected adversely by sales of substantial amounts of our common units in the public or private markets, including sales by Occidental or other large holders.
We had 413,839,863 common units outstanding as of December 31, 2020. Occidental currently holds 214,281,578 common units, representing 51.8% of our outstanding common units. Occidental’s shelf registration statement currently allows for the offer and sale of approximately 41.8 million common units, or 10.1% of our common units as of December 31, 2020, from time to time. Sales by Occidental or other large holders of a substantial number of our common units in the public markets, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities. In addition, under our partnership agreement, our general partner and its affiliates, including Occidental, have registration rights relating to the offer and sale of any units that they hold, subject to certain limitations.
Unitholders may have liability to repay distributions that were wrongfully distributed to them.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of an impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the impermissible distribution amount. Substituted limited partners are liable for the obligations of the assignor to make contributions to the partnership that were known to the substituted limited partner at the time it became a limited partner and for those obligations that were unknown if the liabilities could have been determined from the partnership agreement. Neither liabilities to partners on account of their partnership interest nor liabilities that are non-recourse to the partnership are counted for purposes of determining whether a distribution is permitted.
Unitholders’ liability may not be limited if a court finds that unitholder action constitutes control of our business.
A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. A unitholder could be liable for any and all of our obligations as if that unitholder were a general partner if a court or government agency were to determine that we were conducting business in a state, but had not complied with that particular state’s partnership statute, or such unitholder’s right to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement, or to take other actions under our partnership agreement constitute “control” of our business.
TAX RISKS TO COMMON UNITHOLDERS
Our taxation as a flow-through entity depends on our status as a partnership for U.S. federal income tax purposes, and our not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service (“IRS”) were to treat us as a corporation for federal income tax purposes or if we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to our unitholders could be reduced substantially.
The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for U.S. federal income tax purposes. Notwithstanding our status as a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as us to be treated as a corporation for federal income tax purposes unless it satisfies a “qualifying income” requirement and is not treated as an investment company. Based on our current operations, we believe that we satisfy the qualifying income requirement and are not treated as an investment company. Failing to meet the qualifying income requirement, being treated as an investment company, a change in our business activities, or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation.
If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the applicable corporate tax rate and likely would pay state income tax at varying rates. Distributions to our unitholders generally would be taxed as corporate distributions, and no income, gains, losses, deductions, or credits would flow through to our unitholders. If we are subject to corporate taxation, our cash available for distribution to our unitholders would be reduced substantially. Likewise, our treatment as a corporation would result in a material reduction in the anticipated cash flows and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.
At the state level, several states have been evaluating ways to subject partnerships to entity-level taxation through the imposition of state income or franchise taxes or other forms of taxation. For example, we are required to pay Texas margin tax on our gross income apportioned to Texas. Imposition of similar taxes on us in other jurisdictions in which we operate, or to which we may expand our operations, could reduce the cash available for distribution to our unitholders substantially.
The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial, or administrative changes and differing interpretations, possibly on a retroactive basis.
The current U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative, or judicial interpretation at any time. From time to time, members of Congress have proposed and considered substantive changes to the existing U.S. federal income tax laws that would affect publicly traded partnerships, including elimination of partnership tax treatment for publicly traded partnerships. Any modification to the U.S. federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to meet the exception for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes or increase the amount of taxes payable by unitholders in publicly traded partnerships. You are urged to consult with your own tax advisor with respect to the status of regulatory or administrative developments and proposals and their potential effect on your investment in our common units.
If the IRS were to contest the federal income tax positions we take, it may impact the market for our common units adversely, and the costs of any such contest would reduce the cash available for distribution to our unitholders.
We have not requested a ruling from the IRS with respect to the pricing of our related-party agreements with Occidental or our treatment as a partnership for U.S. federal income tax purposes. The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take, and a court may not agree with some or all of those positions. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. Moreover, the costs of any contest with the IRS will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.
If the IRS makes audit adjustments to our income tax returns for tax years beginning after December 31, 2017, it may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us, in which case our cash available for distribution to our unitholders might be substantially reduced.
Pursuant to the Bipartisan Budget Act of 2015, for tax years beginning after December 31, 2017, if the IRS makes audit adjustments to our income tax returns, it may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us. Generally, we expect to elect to have our unitholders take such audit adjustment into account in accordance with their interests in us during the tax year under audit, but there can be no assurance that such election will be made, or applicable, in all circumstances. If we are unable to have our unitholders take such audit adjustment into account in accordance with their interests in us during the tax year under audit, our current unitholders may bear some or all of the economic burden resulting from such audit adjustment, even if such unitholders did not own units in us during the tax year under audit. If, as a result of any such audit adjustment, we are required to make payments of taxes, penalties, and interest, our cash available for distribution to our unitholders might be substantially reduced.
Our unitholders are required to pay taxes on their share of our income even if they do not receive any cash distributions from us.
Our unitholders are required to pay any U.S. federal income taxes on their share of our taxable income irrespective of whether they receive cash distributions from us. Unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability attributable to their share of our taxable income.
Tax gain or loss on the disposition of our common units could be more or less than expected.
If a unitholder sells common units, the unitholder will recognize gain or loss equal to the difference between the amount realized and that unitholder’s tax basis in those common units. Because distributions in excess of a unitholder’s allocable share of our net taxable income result in a decrease in that unitholder’s tax basis in its common units, the amount, if any, of such prior excess distributions with respect to the units sold will, in effect, become taxable income to that unitholder, if that unitholder sells such units at a price greater than that unitholder’s tax basis in those units, even if the price received is less than their original cost. A substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items such as depreciation. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if they sell their units, unitholders may incur a tax liability in excess of the amount of cash they receive from the sale.
Tax-exempt entities and foreign persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as employee benefit plans, individual retirement accounts (or “IRAs”) and foreign persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to foreign persons will be reduced by withholding taxes at the highest applicable effective tax rate, and foreign persons will be required to file U.S. federal tax returns and pay tax on their share of our taxable income. Upon the sale, exchange or other disposition of a common unit by a foreign unitholder, the transferee is generally required to withhold 10% of the amount realized on such sale, exchange or other disposition if any portion of the gain on such sale, exchange, or other disposition would be treated as effectively connected with a U.S. trade or business. The U.S. Department of the Treasury and the IRS have recently issued final regulations providing guidance on the application of these rules for transfers of certain publicly traded partnership interests, including our common units. Under these regulations, the “amount realized” on a transfer of our common units will generally be the amount of gross proceeds paid to the broker effecting the applicable transfer on behalf of the transferor, and such broker will generally be responsible for the relevant withholding obligations. Distributions to foreign unitholders may also be subject to additional withholding under these rules to the extent a portion of a distribution is attributable to an amount in excess of our cumulative net income that has not previously been distributed. The U.S. Department of the Treasury and the IRS have provided that these rules will generally not apply to transfers of our common units occurring before January 1, 2022. Foreign unitholders should consult their tax advisor before investing in our common units.
We generally prorate our items of income, gain, loss, and deduction between transferors and transferees of our common units each month based on the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss, and deduction among our unitholders.
We generally prorate our items of income, gain, loss, and deduction between transferors and transferees of our common units each month based on the ownership of our common units on the first day of each month (the “Allocation
Date”), instead of on the basis of the date a particular common unit is transferred. Similarly, we generally allocate certain deductions for depreciation of capital additions, gain or loss realized on a sale or other disposition of our assets, and, in the discretion of the general partner, any other extraordinary item of income, gain, loss, or deduction based upon ownership on the Allocation Date. Treasury Regulations allow a similar monthly simplifying convention, but such regulations do not specifically authorize all aspects of our proration method. If the IRS were to challenge our proration method, we may be required to change the allocation of items of income, gain, loss, and deduction among our unitholders.
We have adopted certain valuation methodologies in determining a unitholder’s allocations of income, gain, loss, and deduction. The IRS may challenge these methodologies or the resulting allocations, which could affect the value of our common units adversely.
In determining items of income, gain, loss, and deduction allocable to our unitholders, we must routinely determine the fair market value of our assets. Although we may, from time to time, consult with professional appraisers regarding valuation matters, we make many fair market value estimates using a methodology based on the market value of our common units as a means to measure the fair market value of our assets. The IRS may challenge these valuation methods and the resulting allocations of income, gain, loss, and deduction.
A successful IRS challenge to these methods or allocations could diminish the amount of tax benefits available to our unitholders, affect the timing for recognition of these tax benefits or the amount of gain from any sale of common units, impact the value of our common units negatively, or result in audit adjustments to unitholders’ tax returns.
Our unitholders are subject to state and local taxes and return-filing requirements in jurisdictions where they do not live as a result of investing in our common units.
In addition to U.S. federal income taxes, our unitholders are subject to other taxes, including foreign, state, and local taxes; unincorporated business taxes; and estate, inheritance, or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if they do not live in any of those jurisdictions. Our unitholders likely will be required to file tax returns and pay taxes in some or all of these various jurisdictions, or be subject to penalties for failure to comply with those requirements.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 3.
Item 3. Legal Proceedings
On July 1, 2020, the U.S. Department of Justice, on behalf of the U.S. Environmental Protection Agency (the “EPA”), and the State of Colorado commenced an enforcement action in the United States District Court for the District of Colorado against Kerr-McGee Gathering LLC (“KMG”), a wholly owned subsidiary of WES, for alleged non-compliance with the leak detection and repair requirements of the federal Clean Air Act (“LDAR requirements”) at its Fort Lupton facility in the DJ Basin complex. KMG previously had been in negotiations with the EPA and the State of Colorado to resolve the alleged non-compliance at the Fort Lupton facility. Per the complaint, plaintiffs pray for injunctive relief, remedial action, and civil penalties. Management cannot reasonably estimate the outcome of this action at this time.
On August 12, 2019, Sanchez Energy Corporation and certain of its affiliated companies (collectively, “Sanchez”) filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. While Sanchez holds a working interest in the acreage dedicated to our Springfield system, Sanchez also was the upstream operator for substantially all of the natural gas, crude oil, and NGLs that the Springfield system gathers and that WES processes in the Eagle Ford Shale Play. On April 29, 2020, we received notice that Sanchez filed a motion to reject a number of midstream and downstream agreements with commercial counterparties, including Sanchez’s Springfield gathering agreements and agreements obligating Sanchez to deliver the gas volumes gathered by the Springfield system to our Brasada processing plant. We do not believe the Springfield gathering and related agreements are eligible for rejection as a matter of law, and we have filed an objection to the proposed rejection and an adversary proceeding for a declaratory judgment that such agreements may not be rejected.
On May 15, 2020, Gavilan Resources LLC (“Gavilan”), an entity that owns a 25% working interest in the acreage where the Springfield gathering system and Brasada processing plant are located, also filed for Chapter 11 bankruptcy protection. As a part of this bankruptcy, Mesquite Energy, Inc. (the successor to Sanchez) (“Mesquite”) purchased Gavilan’s assets at auction. Gavilan did not assume and assign its agreements with Springfield as part of its asset sale. Instead, the assets sold to Mesquite remain subject to any covenants, servitudes, or similar agreements that could be equitable servitudes or covenants running with the land, pending a further order of the bankruptcy court. As with the Sanchez agreements, we do not believe Gavilan’s agreements may be rejected or left behind and believe they should remain attached to the Gavilan assets.
We cannot make any assurances regarding the ultimate outcome of these Sanchez and Gavilan proceedings and their resulting impact on WES due to the uncertainties associated with the bankruptcy process.
On October 29, 2020, WGR, on behalf of itself and derivatively on behalf of Mont Belvieu JV, filed suit against Enterprise Products Operating, LLC (“Enterprise”) and Mont Belvieu JV (as a nominal defendant) in the District Court of Harris County, Texas. Our lawsuit seeks a declaratory judgment regarding proper revenue allocation as set forth in the Operating Agreement between Mont Belvieu JV (of which WGR is a 25% owner) and Enterprise (the “Operating Agreement”) related to fractionation trains at the Mont Belvieu complex in Chambers County, Texas. Specifically, the Operating Agreement sets forth a revenue allocation structure, whereby revenue would be allocated to the various fracs at the Mont Belvieu complex in sequential order, with Fracs VII and VIII (which are owned by Mont Belvieu JV) following Fracs I through VI, but preceding any “Later Frac Facilities.” Subsequent to the construction of Fracs VII and VIII, Enterprise built Fracs IX, X, and XI, which it wholly owns, and has signaled its intention to treat such subsequent fracs as outside the Mont Belvieu revenue allocation. We do not believe Enterprise’s attempt to bypass the agreed-to revenue allocation is proper under the parties’ agreements and now seek judicial determination. We currently sue only for declaratory judgment to avoid potential future damages. We cannot make any assurances regarding the ultimate outcome of this proceeding and its resulting impact on WGR or WES.
Except as discussed above, we are not a party to any legal, regulatory, or administrative proceedings other than proceedings arising in the ordinary course of business. Management believes that there are no such proceedings for which a final disposition could have a material adverse effect on results of operations, cash flows, or financial condition, or for which disclosure is otherwise required by Item 103 of Regulation S-K.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
MARKET INFORMATION
Our common units are listed on the NYSE under the symbol “WES.” As of February 22, 2021, there were 23 unitholders of record of our common units. This number does not include unitholders whose units are held in trust by other entities. The actual number of unitholders is greater than the number of holders of record. We also have 9,060,641 general partner units issued and outstanding; there is no established public trading market for any such general partner units. All general partner units are held by our general partner.
OTHER SECURITIES MATTERS
Unregistered sales of equity securities and use of proceeds. Under the Exchange Agreement, WES issued 9,060,641 general partner units to the general partner in 2019. See Note 1-Summary of Significant Accounting Policies and Basis of Presentation in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
Securities authorized for issuance under equity compensation plans. Our general partner has the authority to grant equity compensation awards under the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan (“WES LTIP”) and the Western Gas Partners, LP 2017 Long-Term Incentive Plan (assumed by us in connection with the Merger) to our independent directors, executive officers, and employees. The WES LTIP permits the issuance of up to 3,000,000 units, of which 2,823,967 units remained available for future issuance as of December 31, 2020. The Western Gas Partners, LP 2017 Long-Term Incentive Plan permits the issuance of up to 3,431,251 units, of which 3,431,251 units remained available for future issuance as of December 31, 2020. Read the information under Part III, Item 12 of this Form 10-K, which is incorporated by reference into this Item 5. See Note 15-Equity-Based Compensation in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
Purchases of equity securities by the issuer and affiliated persons. The following table sets forth information with respect to repurchases made by WES of its common units in the open market under the Purchase Program during the fourth quarter of 2020:
______________________________________________________________________________________
(1)In November 2020, WES announced the $250.0 million Purchase Program that will extend through December 31, 2021. See Note 5-Equity and Partners’ Capital in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for additional details.
SELECTED INFORMATION FROM OUR PARTNERSHIP AGREEMENT
Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.
Available cash. Under our partnership agreement, we distribute all of our available cash (beyond proper reserves as defined in our partnership agreement) to unitholders of record on the applicable record date within 55 days following each quarter’s end. The amount of available cash generally is all cash on hand at the end of the quarter, plus, at the discretion of the general partner, working capital borrowings made subsequent to the end of such quarter, less the amount of cash reserves established by the general partner to provide for the proper conduct of our business, including reserves to fund future capital expenditures; to comply with applicable laws, debt instruments, or other agreements; or to provide funds for unitholder distributions for any one or more of the next four quarters. Working capital borrowings generally include borrowings made under a credit facility or similar financing arrangement and are intended to be repaid or refinanced within 12 months. In all cases, working capital borrowings are used solely for working capital purposes or to fund unitholder distributions.
General partner interest. As of December 31, 2020, our general partner owned a 2.1% general partner interest in us, which entitles it to receive cash distributions. Our general partner may own our common units or other equity securities and would be entitled to receive cash distributions on any such interests.
Item 7.
Item 7. 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 II, Item 8 of this Form 10-K, and the information set forth in Risk Factors under Part I, Item 1A of this Form 10-K.
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 December 31, 2020 (see Note 7-Equity Investments in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K). We also own and control the entire non-economic general partner interest in WES Operating GP, and our general partner is owned by Occidental; therefore, prior asset acquisitions from Anadarko were classified as transfers of net assets between entities under common control. As such, subsequent to asset acquisitions from Anadarko, we were required to recast our financial statements to include the activities of acquired assets from the date of common control.
For reporting periods that required recast, the consolidated financial statements for periods prior to the acquisition of assets from Anadarko were prepared from Anadarko’s historical cost-basis accounts and may not be necessarily indicative of the actual results of operations that would have occurred if we had owned the assets during the periods reported. For ease of reference, we refer to the historical financial results of the Partnership’s assets prior to the acquisitions from Anadarko as being “our” historical financial results.
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. 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 December 31, 2020, our assets and investments consisted of the following:
_________________________________________________________________________________________
(1)Includes the DBM water systems.
Significant financial and operational events during the year ended December 31, 2020, included the following:
•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 7 for additional information.
•In November 2020, we announced a buyback program of up to $250.0 million of our common units through December 31, 2021. We repurchased 2,368,711 units for aggregate consideration of $32.5 million through December 31, 2020.
•In October 2020, we (i) sold our 14.81% interest in Fort Union, which was accounted for under the equity method of accounting, and (ii) entered into an option agreement to sell the Bison treating facility to a third party, exercisable during the first quarter of 2021.
•On September 11, 2020, WES and Occidental entered into a Unit Redemption Agreement, pursuant to which (i) WES Operating transferred and assigned its interest in the Anadarko note receivable to its limited partners on a pro-rata basis, transferring 98% of its interest in (and accrued interest owed under) the Anadarko note receivable to WES and the remaining 2% to WGRAH, a subsidiary of Occidental, (ii) WES subsequently assigned the 98% interest in (and accrued interest owed under) the Anadarko note receivable to Anadarko, which Anadarko canceled and retired immediately upon receipt, in exchange for which Occidental caused certain of its subsidiaries to transfer an aggregate of 27,855,398 common units of WES to WES, and (iii) WES canceled such common units immediately upon receipt.
•Our fourth-quarter 2020 distribution is unchanged from the first-, second-, and third-quarter 2020 per-unit distribution of $0.31100.
•During the year ended December 31, 2020, WES Operating purchased and retired $218.0 million of certain of its senior notes and Floating-Rate Senior Notes. See Liquidity and Capital Resources within this Item 7 for additional information.
•We commenced operations of Latham Train II at the DJ Basin complex (with capacity of 250 MMcf/d) during the first quarter of 2020 and Loving ROTF Trains III and IV at the DBM oil system (with capacity of 30 MBbls/d each) during the first and third quarters of 2020, respectively.
•Effective with the execution of the December 2019 agreements, WES began the transition to a stand-alone midstream business resulting in efficiencies between our commercial, engineering, and operations teams, enabling our organization to realize operating and capital savings. This effort has involved, among other things, a transition from Occidental’s Enterprise Resource Planning (“ERP”) system to a stand-alone ERP system, and the transition to a WES-dedicated workforce with its own compensation and benefits structure.
•Natural-gas throughput attributable to WES totaled 4,274 MMcf/d for the year ended December 31, 2020, representing a 1% increase compared to the year ended December 31, 2019.
•Crude-oil and NGLs throughput attributable to WES totaled 698 MBbls/d for the year ended December 31, 2020, representing a 7% increase compared to the year ended December 31, 2019.
•Produced-water throughput attributable to WES totaled 698 MBbls/d for the year ended December 31, 2020, representing a 28% increase compared to the year ended December 31, 2019.
•Operating income (loss) was $878.9 million for the year ended December 31, 2020 (included goodwill and long-lived asset impairments of $644.9 million), representing a 29% decrease compared to the year ended December 31, 2019.
•Adjusted gross margin for natural-gas assets (as defined under the caption How We Evaluate Our Operations within this Item 7) averaged $1.16 per Mcf for the year ended December 31, 2020, representing an 8% increase compared to the year ended December 31, 2019.
•Adjusted gross margin for crude-oil and NGLs assets (as defined under the caption How We Evaluate Our Operations within this Item 7) averaged $2.54 per Bbl for the year ended December 31, 2020, representing a 4% increase compared to the year ended December 31, 2019.
•Adjusted gross margin for produced-water assets (as defined under the caption How We Evaluate Our Operations within this Item 7) averaged $0.98 per Bbl for the year ended December 31, 2020, representing a 1% increase compared to the year ended December 31, 2019.
The following table provides additional information on throughput for the periods presented below:
During 2020, the global outbreak of COVID-19 caused a sharp decline in the worldwide demand for oil, natural gas, and NGLs, which contributed significantly to commodity-price declines and oversupplied commodities markets. These market dynamics have an adverse impact on producers that provide throughput into our systems, and we have experienced decreased throughput at many of our locations.
Additionally, many of our employees have been and may continue to be subject to pandemic-related work-from-home requirements, which 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. 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 I, Item 1A of this Form 10-K 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.
ITEMS AFFECTING THE COMPARABILITY OF OUR FINANCIAL RESULTS
Our historical results of operations and cash flows for the periods presented may not be comparable to future or historic results of operations or cash flows for the reasons described below. Refer to Operating Results within this Item 7 for a discussion of our results of operations as compared to the prior periods.
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, we no longer recognize service revenues and/or product sales revenues and the equivalent cost of product expense for the marketing services performed by AESC. Year-over-year variances for the year ended December 31, 2020, include the following impacts related to this change (i) decrease of $130.9 million in Service revenues - fee based, (ii) decrease of $29.7 million in Product sales, and (iii) decrease of $160.6 million in Cost of product expense. These changes had no impact to Operating income (loss), Net income (loss), the balance sheets, cash flows, or any non-GAAP metric used to evaluate our operations (see How We Evaluate Our Operations within this Item 7). See Note 6-Related-Party Transactions in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
Gathering and processing agreements. Certain of the gathering agreements for the West Texas complex, Springfield system, DJ Basin oil system, Marcellus Interest systems, and DBM oil and water systems allow for rate resets that target an agreed-upon rate of return over the life of the agreement. See Note 1-Summary of Significant Accounting Policies and Basis of Presentation in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
Acquisitions and divestitures. In February 2019, WES Operating acquired AMA from Anadarko. In January 2019, we acquired a 30% interest in Red Bluff Express. In June 2018, we acquired a 20% interest in Whitethorn LLC and a 15% interest in Cactus II.
In October 2020, we (i) sold our 14.81% interest in Fort Union, which was accounted for under the equity method of accounting, and (ii) entered into an option agreement to sell the Bison treating facility to a third party exercisable during the first quarter of 2021. In December 2018, the Newcastle system in Northeast Wyoming was sold to a third party. See Note 3-Acquisitions and Divestitures in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
Impairments. We recognized long-lived asset and other impairments of $203.9 million, $6.3 million, and $230.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. During the year ended December 31, 2020, we also recognized a goodwill impairment of $441.0 million, which reduced the carrying value of goodwill for the gathering and processing reporting unit to zero.
For a description of impairments recorded, see Note 9-Property, Plant, and Equipment, Note 7-Equity Investments, and Note 10-Goodwill and Other Intangibles in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
General and administrative expenses. On December 31, 2019, we entered into the December 2019 Agreements, which helped facilitate our ability to operate more independently from Occidental. As a result, during 2020, we began incurring costs to (i) implement technology systems to manage the operations and administration of our day-to-day business, (ii) secure our dedicated workforce, and (iii) operate as a stand-alone entity. See Note 1-Summary of Significant Accounting Policies and Basis of Presentation in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
Noncontrolling interests. For periods subsequent to Merger completion, our noncontrolling interests in the consolidated financial statements consist of (i) the 25% third-party interest in Chipeta and (ii) the 2.0% Occidental subsidiary-owned limited partner interest in WES Operating. For periods prior to Merger completion, our noncontrolling interests in the consolidated financial statements consisted of (i) the 25% third-party interest in Chipeta, (ii) the publicly held limited partner interests in WES Operating, (iii) the common units issued by WES Operating to subsidiaries of Anadarko as part of the consideration paid for prior acquisitions from Anadarko, and (iv) the Class C units issued by WES Operating to a subsidiary of Anadarko as part of the funding for the acquisition of DBM.
Commodity-price swap agreements. The consolidated statements of operations and consolidated statements of equity and partners’ capital included the impacts of commodity-price swap agreements for the years ended December 31, 2019 and 2018. See Note 6-Related-Party Transactions in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for further information regarding the commodity-price swap agreements with Anadarko that expired without renewal on December 31, 2018.
Income taxes. With respect to assets acquired from Anadarko, we recorded Anadarko’s historic current and deferred income taxes for the periods prior to our ownership of the assets. For periods subsequent to asset acquisitions from Anadarko, we are not subject to tax except for the Texas margin tax and, accordingly, do not record current and deferred federal income taxes related to such assets.
OUR OPERATIONS
Our results primarily are driven by the volumes of natural gas, NGLs, crude oil, and produced water we service through our systems. In our operations, we contract with customers to provide midstream services focused on natural gas, NGLs, crude oil, and produced water. We gather natural gas from individual wells or production facilities located near our gathering systems and the natural gas may be compressed and delivered to a processing plant, treating facility, or downstream pipeline, and ultimately to end users. We treat and process a significant portion of the natural gas that we gather so that it will satisfy required specifications for pipeline transportation. We gather crude oil from individual wells or production facilities located near our gathering systems, and in some cases, treat or stabilize the crude oil to satisfy required specifications for pipeline transportation. We also gather and dispose of produced water.
We operate in Texas, New Mexico, Colorado, Utah, Wyoming, and North-central Pennsylvania, with a substantial portion of our business concentrated in West Texas and the Rocky Mountains. For example, for the year ended December 31, 2020, our West Texas and DJ Basin assets provided (i) 46% and 38%, respectively, of Total revenues and other, (ii) 33% each of our throughput for natural-gas assets (excluding equity-investment throughput), (iii) 57% and 31%, respectively, of our throughput for crude-oil and NGLs assets (excluding equity-investment throughput), and (iv) all of our throughput for produced-water assets.
For the year ended December 31, 2020, 66% of Total revenues and other, 41% of our throughput for natural-gas assets (excluding equity-investment throughput), 88% of our throughput for crude-oil and NGLs assets (excluding equity-investment throughput), and 87% of our throughput for produced-water assets were attributable to production owned or controlled by Occidental. While Occidental is our contracting counterparty, these arrangements with Occidental 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. In addition, Occidental provides dedications and/or minimum-volume commitments under certain of our contracts.
For the year ended December 31, 2020, 93% of our wellhead natural-gas volume (excluding equity investments) and 100% of our crude-oil and produced-water throughput (excluding equity investments) were serviced under fee-based contracts under which fixed and variable fees are received based on the volume or thermal content of the natural gas and on the volume of NGLs, crude oil, and produced water we gather, process, treat, transport, or dispose. This type of contract provides us with a relatively stable revenue stream that is not subject to direct commodity-price risk, except to the extent that (i) we retain and sell drip condensate that is recovered during the gathering of natural gas from the wellhead or production facilities or (ii) actual recoveries differ from contractual recoveries under a limited number of processing agreements.
We also have indirect exposure to commodity-price risk in that the relatively volatile commodity-price environment has caused and may continue to cause current or potential customers to delay drilling or shut-in production in certain areas, which would reduce the volumes of hydrocarbons available to our systems. We also bear limited commodity-price risk through the settlement of imbalances. Read Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Commodity-price risk. Certain of our processing services are provided under percent-of-proceeds and keep-whole agreements. Under percent-of-proceeds agreements, we receive a specified percentage of the net proceeds from the sale of residue and/or NGLs. Under keep-whole agreements, we keep 100% of the NGLs produced, and the processed natural gas, or value of the natural gas, is returned to the producer, and because some of the gas is used and removed during processing, we compensate the producer for the amount of gas used and removed in processing by supplying additional gas or by paying an agreed-upon value for the gas used.
For the year ended December 31, 2020, 93% of our wellhead natural-gas volume (excluding equity investments) and 100% of our crude-oil and produced-water throughput (excluding equity investments) were serviced under fee-based contracts. A 10% increase or decrease in commodity prices would not have a material impact on our operating income (loss), financial condition, or cash flows for the next twelve months, excluding the effect of the below-described imbalances.
We bear a limited degree of commodity-price risk with respect to settlement of natural-gas imbalances that arise from differences in gas volumes received into our systems and gas volumes delivered by us to customers, and for instances where actual liquids recovery or fuel usage varies from contractually stipulated amounts. Natural-gas volumes owed to or by us that are subject to monthly cash settlement are valued according to the terms of the contract as of the balance sheet dates and generally reflect market-index prices. Other natural-gas volumes owed to or by us are valued at our weighted-average cost of natural gas as of the balance sheet dates and are settled in-kind. Our exposure to the impact of changes in commodity prices on outstanding imbalances depends on the settlement timing of the imbalances. See General Trends and Outlook under Part II, Item 7 and Risk Factors under Part I, Item 1A of this Form 10-K.
Interest-rate risk. The FOMC decreased its target range for the federal funds rate three times during 2019 and twice in 2020. Any future increases in the federal funds rate likely will result in an increase in short-term financing costs. As of December 31, 2020, we had (i) no outstanding borrowings under the RCF that bear interest at a rate based on LIBOR or an alternative base rate at WES Operating’s option, and (ii) the Floating-Rate Senior Notes that bear interest at a rate based on LIBOR. While a 10% change in the applicable benchmark interest rate would not materially impact interest expense on our outstanding borrowings, it would impact the fair value of the senior notes at December 31, 2020. See General Trends and Outlook under Part II, Item 7 and Risk Factors under Part I, Item 1A of this Form 10-K.
Additional variable-rate debt may be issued in the future, either under the RCF or other financing sources, including commercial bank borrowings or debt issuances.
Item 8.
Item 8. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WESTERN MIDSTREAM PARTNERS, LP
WESTERN MIDSTREAM OPERATING, LP
REPORT OF MANAGEMENT
Management of Western Midstream Partners, LP’s (the “Partnership”) general partner and Western Midstream Operating, LP’s (“WES Operating”) general partner prepared, and is responsible for, the consolidated financial statements and the other information appearing in this annual report. The consolidated financial statements present fairly the Partnership’s and WES Operating’s financial positions, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). In preparing the consolidated financial statements, the Partnership and WES Operating include amounts that are based on estimates and judgments that Management believes are reasonable under the circumstances. The Partnership’s and WES Operating’s consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm appointed by the Audit Committee of the Board of Directors. Management has made available to KPMG LLP all of the Partnership’s and WES Operating’s financial records and related data, and the minutes of the meetings of the Board of Directors.
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Partnership’s and WES Operating’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Partnership’s and WES Operating’s internal control over financial reporting as of December 31, 2020. This assessment was based on criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment using the COSO criteria, we concluded the Partnership’s and WES Operating’s internal control over financial reporting was effective as of December 31, 2020.
KPMG LLP, the Partnership’s independent registered public accounting firm, has issued an attestation report on the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2020.
WESTERN MIDSTREAM PARTNERS, LP
/s/ Michael P. Ure
Michael P. Ure
President, Chief Executive Officer and Chief Financial Officer
Western Midstream Holdings, LLC
(as general partner of Western Midstream Partners, LP)
WESTERN MIDSTREAM OPERATING, LP
/s/ Michael P. Ure
Michael P. Ure
President, Chief Executive Officer and Chief Financial Officer
Western Midstream Operating GP, LLC
(as general partner of Western Midstream Operating, LP)
February 26, 2021
WESTERN MIDSTREAM PARTNERS, LP
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
Western Midstream Holdings, LLC (as general partner of Western Midstream Partners, LP) and Unitholders
Western Midstream Partners, LP:
Opinion on Internal Control Over Financial Reporting
We have audited Western Midstream Partners, LP and subsidiaries’ (the Partnership) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Partnership as of December 31, 2020 and 2019, the related consolidated statements of operations, equity and partners’ capital, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
February 26, 2021
WESTERN MIDSTREAM PARTNERS, LP
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
Western Midstream Holdings, LLC (as general partner of Western Midstream Partners, LP) and Unitholders
Western Midstream Partners, LP:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Western Midstream Partners, LP and subsidiaries (the Partnership) as of December 31, 2020 and 2019, the related consolidated statements of operations, equity and partners’ capital, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Partnership’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2021 expressed an unqualified opinion on the effectiveness of the Partnership’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment assessment of long-lived assets
As discussed in Note 9 to the consolidated financial statements, the Partnership’s consolidated property, plant, and equipment balance was $8.7 billion as of December 31, 2020. During the year ended December 31, 2020, the Partnership recognized long-lived asset and other impairment charges of $203.9 million, a portion of which related
to impairment of a specific long-lived asset group located in Wyoming and Utah. On at least a quarterly basis, management reviews its asset groups for indicators of impairment that would indicate the carrying value of an asset group might not be recoverable. If an asset group displays an indicator of impairment, it is tested for recoverability by comparing the sum of the estimated future undiscounted cash flows attributable to the asset group to the carrying value of the asset group. An impairment loss is determined if the carrying value of the asset group is not recoverable and is measured as the excess of the carrying value over the asset group’s fair value.
We identified the evaluation of the impairment assessment for a specific long-lived asset group in Wyoming and Utah as a critical audit matter. Subjective auditor judgment was required to evaluate the Partnership’s estimate of the fair value of the asset group, specifically the assessment of the projected throughput and discount rate assumptions. Specialized skills and knowledge were required to evaluate the discount rate used in the valuation model.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Partnership’s long-lived asset impairment process. This included certain controls over the determination of the forecasted throughput and the discount rate. We compared historical forecasted volumes to actual volumetric results to assess the Partnership’s ability to forecast. We evaluated the forecasted throughput included in the valuation model by comparing it to external market and industry data related to producer drilling activity in the relevant basin. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the discount rate used in the valuation model by developing a range of independent estimates that was determined using publicly available market data for comparable entities, and comparing the discount rate selected by management to the range of independently developed estimates.
Goodwill impairment assessment for the gathering and processing reporting unit
As discussed in Note 10 to the consolidated financial statements, the Partnership recognized a goodwill impairment of $441.0 million related to the gathering and processing reporting unit during the first quarter of 2020. The Partnership conducts an impairment test annually on October 1 and when events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. An impairment charge will be recognized to the extent that the fair value of a reporting unit is less than its carrying value. The fair value of the reporting unit is estimated using both the market approach and the income approach. The market approach estimates fair value by applying a market multiple, determined by reference to market multiples for comparable publicly traded companies, to the expected earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of the gathering and processing reporting unit. The income approach is based on forecasted future cash flows that are discounted to present value using a discount rate that considers timing and risk of future cash flows.
We identified the evaluation of the goodwill impairment assessment for the gathering and processing reporting unit as a critical audit matter. A higher degree of subjective auditor judgment was required to evaluate the fair value of the gathering and processing reporting unit based on the market and income approaches. Specifically, subjective auditor judgment and specialized skills and knowledge were required to evaluate the Partnership’s estimate of EBITDA multiples for comparable publicly traded companies and the discount rate used in determining the fair value of the reporting unit.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Partnership’s goodwill impairment process. This included certain controls over the determination of the EBITDA multiples and discount rate used in the estimation of the fair value of the gathering and processing reporting unit. We involved valuation professionals with specialized skills and knowledge, who assisted in assessing the EBITDA multiples used by management in the valuation, including examining the guideline public companies used to determine the market multiples and rationale for selected multiples used by management in the valuation analysis. Further, the valuation professionals assisted in evaluating the discount rate used in the discounted cash flow model by developing a range of independent estimates that was determined using publicly available market data for comparable entities and comparing the discount rate selected by management to the range of independently developed estimates. We tested the reconciliation of the aggregate estimated fair value of the reporting units to the market capitalization of the Partnership.
Estimated constraint on variable consideration related to a certain gas-gathering revenue contract and oil-gathering revenue contract with a customer
As discussed in Notes 1 and 2 to the consolidated financial statements, certain of the Partnership’s midstream services agreements have minimum-volume commitment demand fees and fees that require periodic rate redeterminations based on the related midstream facility cost-of-service rate provisions. Annual adjustments are made to the cost-of-service rates charged to certain of its customers, and as a result, a cumulative catch-up revenue adjustment related to services already provided may be recorded. The Partnership assesses whether a significant reversal of the cumulative catch-up revenue adjustment is probable of occurring and if so, the variable consideration may be constrained up to the amount of the probable significant reversal.
We identified the assessment of the estimated constraint on variable consideration related to one gas-gathering contract and one oil-gathering revenue contract as a critical audit matter. A high degree of challenging auditor judgment was required to evaluate the probability of a significant reversal in the amount of variable consideration recognized due to the uncertainty related to ongoing legal proceedings and commercial negotiations with the counterparties to the contracts.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Partnership’s annual re-determination of the cost-of-service rate. This included certain controls over the determination of the constraint on the variable consideration expected to be received under the contracts. We evaluated responses received from external legal counsel to our audit inquiry on the progress of the Partnership’s legal proceedings with the counterparties to the contracts. We examined publicly available court filings to assess the development of the legal proceedings. We made inquiries of management and inspected information available regarding the status of negotiations with the counterparties and the resulting impact on the determination of the estimated constraint on variable consideration. We evaluated the accuracy of the data used by the Partnerships to calculate the variable consideration constraint.
/s/ KPMG LLP
We have served as the Partnership’s auditor since 2012.
Houston, Texas
February 26, 2021
WESTERN MIDSTREAM PARTNERS, LP
CONSOLIDATED STATEMENTS OF OPERATIONS
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(1)Total revenues and other includes related-party amounts of $1.8 billion, $1.6 billion, and $1.4 billion for the years ended December 31, 2020, 2019, and 2018, respectively. See Note 6.
(2)Total operating expenses includes related-party amounts of $182.7 million, $503.2 million, and $334.2 million for the years ended December 31, 2020, 2019, and 2018, respectively. See Note 6.
(3)Other income (expense), net includes losses associated with the interest-rate swap agreements for the years ended December 31, 2019 and 2018. See Note 13.
(4)See Note 5.
See accompanying Notes to Consolidated Financial Statements.
WESTERN MIDSTREAM PARTNERS, LP
CONSOLIDATED BALANCE SHEETS
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(1)Other assets includes $4.2 million and $4.5 million of NGLs line-fill inventory as of December 31, 2020 and 2019, respectively. Other assets also includes $71.9 million of materials and supplies inventory as of December 31, 2020. See Note 1.
(2)Total assets includes related-party amounts of $1.6 billion and $1.7 billion as of December 31, 2020 and 2019, respectively, which includes related-party Accounts receivable, net of $291.3 million and $113.3 million as of December 31, 2020 and 2019, respectively. See Note 6.
(3)Total liabilities includes related-party amounts of $164.7 million and $108.8 million as of December 31, 2020 and 2019, respectively. See Note 6.
(4)See Note 1.
See accompanying Notes to Consolidated Financial Statements.
WESTERN MIDSTREAM PARTNERS, LP
CONSOLIDATED STATEMENTS OF EQUITY AND PARTNERS’ CAPITAL
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(1)Includes the adoption of Revenue from Contracts with Customers (Topic 606) on January 1, 2018.
(2)See Note 6.
(3)For the years ended December 31, 2019 and 2018, the $755.2 million and $19.6 million decrease to partners’ capital, respectively, together with net income (loss) attributable to Western Midstream Partners, LP, totaled $(58.0) million and $532.0 million, respectively.
(4)See Note 1.
(5)See Note 5.
(6)The amounts allocated to common unitholders and noncontrolling interests represent a non-cash investing activity related to the assets and liabilities assumed in the AMA acquisition.
(7)See December 2019 Agreements-Services, Secondment, and Employee Transfer Agreement within Note 1.
See accompanying Notes to Consolidated Financial Statements.
WESTERN MIDSTREAM PARTNERS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(1)For the years ended December 31, 2019 and 2018, includes $11.0 million and $321.8 million of borrowings, respectively, under the APCWH Note Payable.
(2)For the year ended December 31, 2019, includes a $439.6 million repayment to settle the APCWH Note Payable. See Note 6.
(3)See Note 6.
(4)For the year ended December 31, 2020, includes related-party payments of $6.4 million.
See accompanying Notes to Consolidated Financial Statements.
WESTERN MIDSTREAM OPERATING, LP
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
Western Midstream Holdings, LLC (as general partner of Western Midstream Partners, LP):
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Western Midstream Operating, LP and subsidiaries (WES Operating) as of December 31, 2020 and 2019, the related consolidated statements of operations, equity and partners’ capital, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of WES Operating as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of WES Operating’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to WES Operating in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. WES Operating is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of WES Operating’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment assessment of long-lived assets
As discussed in Note 9 to the consolidated financial statements, WES Operating’s consolidated property, plant, and equipment balance was $8.7 billion as of December 31, 2020. During the year ended December 31, 2020, WES Operating recognized long-lived asset and other impairment charges of $203.9 million, a portion of which related to impairment of a specific long-lived asset group located in Wyoming and Utah. On at least a quarterly basis,
management reviews its asset groups for indicators of impairment that would indicate the carrying value of an asset group might not be recoverable. If an asset group displays an indicator of impairment, it is tested for recoverability by comparing the sum of the estimated future undiscounted cash flows attributable to the asset group to the carrying value of the asset group. An impairment loss is determined if the carrying value of the asset group is not recoverable and is measured as the excess of the carrying value over the asset group’s fair value.
We identified the evaluation of the impairment assessment for a specific long-lived asset group in Wyoming and Utah as a critical audit matter. Subjective auditor judgment was required to evaluate WES Operating’s estimate of the fair value of the asset group, specifically the assessment of the projected throughput and discount rate assumptions. Specialized skills and knowledge were required to evaluate the discount rate used in the valuation model.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over WES Operating’s long-lived asset impairment process. This included certain controls over the determination of the forecasted throughput and the discount rate. We compared historical forecasted volumes to actual volumetric results to assess WES Operating’s ability to forecast. We evaluated the forecasted throughput included in the valuation model by comparing it to external market and industry data related to producer drilling activity in the relevant basin. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the discount rate used in the valuation model by developing a range of independent estimates that was determined using publicly available market data for comparable entities, and comparing the discount rate selected by management to the range of independently developed estimates.
Goodwill impairment assessment for the gathering and processing reporting unit
As discussed in Note 10 to the consolidated financial statements, WES Operating recognized a goodwill impairment of $441.0 million related to the gathering and processing reporting unit during the first quarter of 2020. WES Operating conducts an impairment test annually on October 1 and when events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. An impairment charge will be recognized to the extent that the fair value of a reporting unit is less than its carrying value. The fair value of the reporting unit is estimated using both the market approach and the income approach. The market approach estimates fair value by applying a market multiple, determined by reference to market multiples for comparable publicly traded companies, to the expected earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of the gathering and processing reporting unit. The income approach is based on forecasted future cash flows that are discounted to present value using a discount rate that considers timing and risk of future cash flows.
We identified the evaluation of the goodwill impairment assessment for the gathering and processing reporting unit as a critical audit matter. A higher degree of subjective auditor judgment was required to evaluate the fair value of the gathering and processing reporting unit based on the market and income approaches. Specifically, subjective auditor judgment and specialized skills and knowledge were required to evaluate WES Operating’s estimate of EBITDA multiples for comparable publicly traded companies and the discount rate used in determining the fair value of the reporting unit.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over WES Operating’s goodwill impairment process. This included certain controls over the determination of the EBITDA multiples and discount rate used in the estimation of the fair value of the gathering and processing reporting unit. We involved valuation professionals with specialized skills and knowledge, who assisted in assessing the EBITDA multiples used by management in the valuation, including examining the guideline public companies used to determine the market multiples and rationale for selected multiples used by management in the valuation analysis. Further, the valuation professionals assisted in evaluating the discount rate used in the discounted cash flow model by developing a range of independent estimates that was determined using publicly available market data for comparable entities and comparing the discount rate selected by management to the range of independently developed estimates. We tested the reconciliation of the aggregate estimated fair value of the reporting units to the market capitalization of Western Midstream Partners, LP.
Estimated constraint on variable consideration related to a certain gas-gathering revenue contract and oil-gathering revenue contract with a customer
As discussed in Notes 1 and 2 to the consolidated financial statements, certain of WES Operating’s midstream services agreements have minimum-volume commitment demand fees and fees that require periodic rate redeterminations based on the related midstream facility cost-of-service rate provisions. Annual adjustments are made to the cost-of-service rates charged to certain of its customers, and as a result, a cumulative catch-up revenue adjustment related to services already provided may be recorded. WES Operating assesses whether a significant reversal of the cumulative catch-up revenue adjustment is probable of occurring and if so, the variable consideration may be constrained up to the amount of the probable significant reversal.
We identified the assessment of the estimated constraint on variable consideration related to one gas-gathering contract and one oil-gathering revenue contract as a critical audit matter. A high degree of challenging auditor judgment was required to evaluate the probability of a significant reversal in the amount of variable consideration recognized due to the uncertainty related to ongoing legal proceedings and commercial negotiations with the counterparties to the contracts.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over WES Operating’s annual re-determination of the cost-of-service rate. This included certain controls over the determination of the constraint on the variable consideration expected to be received under the contracts. We evaluated responses received from external legal counsel to our audit inquiry on the progress of WES Operating’s legal proceedings with the counterparties to the contracts. We examined publicly available court filings to assess the development of the legal proceedings. We made inquiries of management and inspected information available regarding the status of negotiations with the counterparties and the resulting impact on the determination of the estimated constraint on variable consideration. We evaluated the accuracy of the data used by WES Operating to calculate the variable consideration constraint.
/s/ KPMG LLP
We have served as WES Operating’s auditor since 2007.
Houston, Texas
February 26, 2021
WESTERN MIDSTREAM OPERATING, LP
CONSOLIDATED STATEMENTS OF OPERATIONS
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(1)Total revenues and other includes related-party amounts of $1.8 billion, $1.6 billion, and $1.4 billion for the years ended December 31, 2020, 2019, and 2018, respectively. See Note 6.
(2)Total operating expenses includes related-party amounts of $184.0 million, $501.4 million, and $333.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. See Note 6.
(3)Other income (expense), net includes losses associated with the interest-rate swap agreements for the years ended December 31, 2019 and 2018. See Note 13.
(4)See Note 5.
WESTERN MIDSTREAM OPERATING, LP
CONSOLIDATED BALANCE SHEETS
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(1)Other assets includes $4.2 million and $4.5 million of NGLs line-fill inventory as of December 31, 2020 and 2019, respectively. Other assets also includes $71.9 million of materials and supplies inventory as of December 31, 2020. See Note 1.
(2)Total assets includes related-party amounts of $1.5 billion and $1.7 billion as of December 31, 2020 and 2019, respectively, which includes related-party Accounts receivable, net of $246.1 million and $113.6 million as of December 31, 2020 and 2019, respectively. See Note 6.
(3)Total liabilities includes related-party amounts of $164.3 million and $108.8 million as of December 31, 2020 and 2019, respectively. See Note 6.
WESTERN MIDSTREAM OPERATING, LP
CONSOLIDATED STATEMENTS OF EQUITY AND PARTNERS’ CAPITAL
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(1)Includes the adoption of Revenue from Contracts with Customers (Topic 606) on January 1, 2018.
(2)See Note 6.
(3)See Note 1.
(4)The amount allocated to common unitholders represents a non-cash investing activity related to the assets and liabilities assumed in the AMA acquisition.
(5)See December 2019 Agreements-Services, Secondment, and Employee Transfer Agreement within Note 1.
WESTERN MIDSTREAM OPERATING, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(1)For the years ended December 31, 2019 and 2018, includes $11.0 million and $321.8 million of borrowings, respectively, under the APCWH Note Payable.
(2)For the year ended December 31, 2019, includes a $439.6 million repayment to settle the APCWH Note Payable. See Note 6.
(3)See Note 6.
(4)For the year ended December 31, 2020, includes related-party payments of $6.4 million.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
General. Western Midstream Partners, LP is a Delaware master limited partnership formed in September 2012. Western Midstream Operating, LP (together with its subsidiaries, “WES Operating”) is a Delaware limited partnership formed by Anadarko Petroleum Corporation in 2007 to acquire, own, develop, and operate midstream assets. Western Midstream Partners, LP owns, directly and indirectly, a 98.0% limited partner interest in WES Operating, and directly owns all of the outstanding equity interests of Western Midstream Operating GP, LLC, which holds the entire non-economic general partner interest in WES Operating. “Anadarko” refers to Anadarko Petroleum Corporation and its subsidiaries, excluding Western Midstream Holdings, LLC. Anadarko became a wholly owned subsidiary of Occidental Petroleum Corporation as a result of Occidental Petroleum Corporation’s acquisition by merger of Anadarko on August 8, 2019.
For purposes of these consolidated financial statements, the “Partnership” refers to Western Midstream Partners, LP in its individual capacity or to Western Midstream Partners, LP and its subsidiaries, including Western Midstream Operating GP, LLC and WES Operating, as the context requires. “WES Operating GP” refers to Western Midstream Operating GP, LLC, individually as the general partner of WES Operating. The Partnership’s general partner, Western Midstream Holdings, LLC (the “general partner”), is a wholly owned subsidiary of Occidental Petroleum Corporation. “Occidental” refers to Occidental Petroleum Corporation, as the context requires, and its subsidiaries, excluding the general partner. “Related parties” refers to Occidental (see Note 6) and the Partnership’s investments accounted for under the equity method of accounting (see Note 7).
The Partnership is engaged in the business of gathering, compressing, treating, processing, and transporting natural gas; gathering, stabilizing, and transporting condensate, natural-gas liquids (“NGLs”), and crude oil; and gathering and disposing of produced water. In its capacity as a natural-gas processor, the Partnership also buys and sells natural gas, NGLs, and condensate on behalf of itself and as an agent for its customers under certain contracts. As of December 31, 2020, the Partnership’s assets and investments consisted of the following:
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(1)Includes the DBM water systems.
These assets and investments are located in Texas, New Mexico, the Rocky Mountains (Colorado, Utah, and Wyoming), and North-central Pennsylvania. Latham Train II, a cryogenic train at the DJ Basin complex, commenced operations during the first quarter of 2020. Loving ROTF Trains III and IV, oil-stabilization trains at the DBM oil system, commenced operations during the first and third quarters of 2020, respectively.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
December 2019 Agreements. On December 31, 2019, (i) the Partnership 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 entered into the below-described amendments to its debt agreements (collectively, the “December 2019 Agreements”).
•Exchange Agreement. Western Gas Resources, Inc. (“WGRI”), the general partner, and the Partnership entered into a partnership interests exchange agreement (the “Exchange Agreement”), pursuant to which the Partnership canceled the non-economic general partner interest in the Partnership and simultaneously issued a 2.0% general partner interest to the general partner in exchange for which WGRI transferred 9,060,641 common units to the Partnership, 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 paid a monthly secondment and shared services fee to Occidental equivalent to the direct cost of the seconded employees until their transfer to the Partnership and (ii) agreed to continue to provide certain administrative and operational services to the Partnership 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 included provisions governing the transfer of certain employees to the Partnership and the assumption by the Partnership of liabilities relating to those employees at the time of their transfer. In late March 2020, seconded employees’ employment was transferred to the Partnership.
•RCF amendment. WES Operating entered into an amendment to its $2.0 billion senior unsecured revolving credit facility (“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 the Partnership elect to remove the general partner as the general partner of the Partnership in accordance with the terms of the partnership agreement, then such removal will not constitute a change of control under the RCF. See Note 13.
•Term loan facility amendment. WES Operating entered into an amendment to its $3.0 billion senior unsecured credit facility (“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 the Partnership elect to remove the general partner as the general partner of the Partnership 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 13.
•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. The Partnership and WES Operating entered into agreements with Occidental to terminate the WES and WES Operating omnibus agreements. See Note 6.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Merger transactions. On February 28, 2019, the Partnership, WES Operating, Anadarko, and certain of their affiliates completed the transactions contemplated by the Contribution Agreement and Agreement and Plan of Merger (the “Merger Agreement”), dated November 7, 2018, pursuant to which, among other things, (i) Clarity Merger Sub, LLC, a wholly owned subsidiary of the Partnership, merged with and into WES Operating, with WES Operating continuing as the surviving entity and as a subsidiary of the Partnership (the “Merger”), and (ii) WES Operating acquired the Anadarko Midstream Assets (“AMA”). See Note 3.
Basis of presentation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The consolidated financial statements include the accounts of the Partnership and entities in which it holds a controlling financial interest, including WES Operating and WES Operating GP. All significant intercompany transactions have been eliminated.
The following table outlines the ownership interests and the accounting method of consolidation used in the consolidated financial statements for entities not wholly owned:
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(1)The 25% third-party interest in Chipeta Processing LLC (“Chipeta”) is reflected within noncontrolling interests in the consolidated financial statements. See Noncontrolling interests below.
(2)The Partnership proportionately consolidates its associated share of the assets, liabilities, revenues, and expenses attributable to these assets.
(3)Investments in non-controlled entities over which the Partnership exercises significant influence are accounted for under the equity method of accounting. “Equity-investment throughput” refers to the Partnership’s share of average throughput for these investments.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The consolidated financial results of WES Operating are included in the Partnership’s consolidated financial statements. Throughout these notes to consolidated financial statements, and to the extent material, any differences between the consolidated financial results of the Partnership and WES Operating are discussed separately. The Partnership’s consolidated financial statements differ from those of WES Operating primarily as a result of (i) the presentation of noncontrolling interest ownership (see Noncontrolling interests below and Note 5), (ii) the elimination of WES Operating GP’s investment in WES Operating with WES Operating GP’s underlying capital account, (iii) the general and administrative expenses incurred by the Partnership, which are separate from, and in addition to, those incurred by WES Operating, (iv) the inclusion of the impact of Partnership equity balances and Partnership distributions, and (v) the senior secured revolving credit facility (“WGP RCF”) until its repayment in March 2019. See Note 13.
Presentation of the Partnership’s assets. The Partnership’s assets include assets owned and ownership interests accounted for by the Partnership under the equity method of accounting, through its 98.0% partnership interest in WES Operating as of December 31, 2020 (see Note 7). The Partnership also owns and controls the entire non-economic general partner interest in WES Operating GP, and the Partnership’s general partner is owned by Occidental; therefore, the Partnership’s prior asset acquisitions from Anadarko were classified as transfers of net assets between entities under common control. As such, assets acquired from Anadarko initially were recorded at Anadarko’s historic carrying value, which did not equate to the total acquisition price paid by the Partnership. Further, subsequent to asset acquisitions from Anadarko, the Partnership was required to recast its financial statements to include the activities of acquired assets from the date of common control.
For reporting periods that required recast, the consolidated financial statements for periods prior to the acquisition of assets from Anadarko were prepared from Anadarko’s historical cost-basis accounts and may not be necessarily indicative of the actual results of operations that would have occurred if the Partnership had owned the assets during the periods reported. Net income (loss) attributable to the assets acquired from Anadarko for periods prior to the Partnership’s acquisition of such assets was not allocated to the limited partners.
Use of estimates. In preparing financial statements in accordance with GAAP, management makes informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. Management evaluates its estimates and related assumptions regularly, using historical experience and other reasonable methods. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. Effects on the business, financial condition, and results of operations resulting from revisions to estimates are recognized when the facts that give rise to the revisions become known. The information included herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the consolidated financial statements, and certain prior-period amounts have been reclassified to conform to the current-year presentation.
Noncontrolling interests. For periods subsequent to Merger completion, the Partnership’s noncontrolling interests in the consolidated financial statements consist of (i) the 25% third-party interest in Chipeta and (ii) the 2.0% Occidental subsidiary-owned limited partner interest in WES Operating. For periods prior to Merger completion, the Partnership’s noncontrolling interests in the consolidated financial statements consisted of (i) the 25% third-party interest in Chipeta, (ii) the publicly held limited partner interests in WES Operating, (iii) the common units issued by WES Operating to subsidiaries of Anadarko as part of the consideration paid for prior-period acquisitions from Anadarko, and (iv) the Class C units issued by WES Operating to a subsidiary of Anadarko as part of the funding for the acquisition of Delaware Basin Midstream, LLC (“DBM”). For all periods presented, WES Operating’s noncontrolling interest in the consolidated financial statements consists of the 25% third-party interest in Chipeta. See Note 5.
When WES Operating issues equity, the carrying amount of the noncontrolling interest reported by the Partnership is adjusted to reflect the noncontrolling ownership interest in WES Operating. The resulting impact of such noncontrolling interest adjustment on the Partnership’s interest in WES Operating is reflected as an adjustment to the Partnership’s partners’ capital.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Fair value. The fair-value-measurement standard defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard characterizes inputs used in determining fair value according to a hierarchy that prioritizes those inputs based on the degree to which the inputs are observable. The three input levels of the fair-value hierarchy are as follows:
Level 1 - Inputs represent unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).
Level 3 - Inputs that are not observable from objective sources, such as management’s internally developed assumptions used in pricing an asset or liability (for example, an estimate of future cash flows used in management’s internally developed present value of future cash flows model that underlies the fair value measurement).
In determining fair value, management uses observable market data when available, or models that incorporate observable market data. When a fair value measurement is required and there is not a market-observable price for the asset or liability or a market-observable price for a similar asset or liability, the cost, income, or market approach is used, depending on the quality of information available to support management’s assumptions. The cost approach is based on management’s best estimate of the current asset replacement cost. The income approach uses management’s best assumptions regarding expectations of projected cash flows and discounts the expected cash flows using a commensurate risk-adjusted discount rate. Such evaluations involve significant judgment because results are based on expected future events or conditions, such as contractual rates, estimates of future throughput, capital and operating costs and the timing thereof, economic and regulatory climates, and other factors. The market approach uses management’s best assumptions regarding expectations of projected earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and an assumed multiple of that EBITDA that a willing buyer would pay to acquire an asset. Management’s estimates of future net cash flows and EBITDA are inherently imprecise because they reflect management’s expectation of future conditions that are often outside of management’s control. However, the assumptions used reflect a market participant’s view of long-term revenues, costs, and other factors, and are consistent with assumptions used in the Partnership’s business plans and investment decisions.
Management uses relevant observable inputs available for the valuation technique employed to estimate fair value. If a fair-value measurement reflects inputs at multiple levels within the hierarchy, the fair-value measurement is characterized based on the lowest level of input that is significant to the fair-value measurement. Non-financial assets and liabilities initially measured at fair value include certain assets and liabilities acquired in a third-party business combination, assets and liabilities exchanged in non-monetary transactions, goodwill and other intangibles, initial measurement of asset retirement obligations, and initial measurement of environmental obligations assumed in a third-party acquisition. Impairment analyses for long-lived assets, goodwill, equity investments, and the initial recognition of asset retirement obligations and environmental obligations use Level-3 inputs.
The fair value of debt reflects any premium or discount for the difference between the stated interest rate and the quarter-end market interest rate and is based on quoted market prices for identical instruments, if available, or based on valuations of similar debt instruments. See Note 13.
The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable reported on the consolidated balance sheets approximate fair value due to the short-term nature of these items.
Cash equivalents. All highly liquid investments with a maturity of three months or less when purchased are considered cash equivalents.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Credit losses. Accounts receivable represent contractual rights for services performed, with, on average, 30-day payment terms from the invoice date. Contract assets primarily relate to revenue accrued but not yet billed under cost-of-service contracts and accrued deficiency fees. Exposure to credit losses is analyzed within collective pools for all of our customers and, if necessary, individual customers may be analyzed separately if their credit quality becomes a concern. The Partnership monitors credit exposure to all customers to ensure exposures are within established credit limits.
As of December 31, 2020, there have been no negative indications regarding the collectability of significant receivables as it relates to impacts from the global outbreak of the coronavirus (“COVID-19”) and the oil-market disruption resulting from significantly lower global demand and corresponding oversupply of crude oil. The Partnership will continue to monitor the credit quality of its customer base and assess collectability of these assets as appropriate. The allowance for expected credit losses was immaterial at December 31, 2020 and 2019.
Imbalances. The consolidated balance sheets include imbalance receivables and payables resulting from differences in volumes received into the Partnership’s systems and volumes delivered by the Partnership to customers. Volumes owed to or by the Partnership that are subject to monthly cash settlement are valued according to the terms of the contract as of the balance sheet dates and reflect market index prices. Other volumes owed to or by the Partnership are valued at the Partnership’s weighted-average cost as of the balance sheet dates and are settled in-kind. As of December 31, 2020, imbalance receivables and payables were $13.0 million and $3.3 million, respectively. As of December 31, 2019, imbalance receivables and payables were $4.7 million and $2.7 million, respectively. Net changes in imbalance receivables and payables are reported in Cost of product in the consolidated statements of operations.
Inventory. The cost of NGLs inventory is determined by the weighted-average cost method on a location-by-location basis. Inventory is stated at the lower of weighted-average cost or net realizable value. NGLs inventory is reported in Other current assets and NGLs line-fill inventory is reported in Other assets on the consolidated balance sheets. Materials and supplies inventory is valued at weighted-average cost, reviewed periodically for obsolescence, and assessed for impairment together with any associated property, plant, and equipment and other intangible assets. Beginning with the second quarter of 2020, materials and supplies inventory, previously reported in Other current assets, is prospectively reported in Other assets on the consolidated balance sheets. See Note 11.
Property, plant, and equipment and other intangible assets. Property, plant, and equipment and other intangible assets are stated at historical cost less accumulated depreciation or amortization, or fair value if impaired. Because prior long-lived asset acquisitions from Anadarko were transfers of net assets between entities under common control, the assets acquired were initially recorded at Anadarko’s historic carrying value. The difference between the carrying value of net assets acquired from Anadarko and the consideration paid has been recorded as an adjustment to partners’ capital. Assets acquired in a business combination or non-monetary exchange with a third party are initially recorded at fair value.
All construction-related direct labor and material costs are capitalized. The cost of renewals and betterments that extend the useful life of property, plant, and equipment is also capitalized. The cost of repairs, replacements, and major maintenance projects that do not extend the useful life or increase the expected output of property, plant, and equipment is expensed as incurred.
Depreciation is computed using the straight-line method based on estimated useful lives and salvage values of assets. Subsequent events could cause a change in estimates of remaining useful lives or salvage value, thereby impacting future depreciation amounts. Uncertainties that may impact these estimates include, but are not limited to, changes in laws and regulations relating to environmental matters, including air and water quality, restoration and abandonment requirements, economic conditions, and supply and demand in the area.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Management assesses property, plant, and equipment together with any associated materials and supplies inventory and intangible assets, as described in Note 10, for impairment when events or changes in circumstances indicate their carrying values may not be recoverable. Impairments exist when the carrying value of a long-lived asset exceeds the total estimated undiscounted net cash flows from the future use and eventual disposition of the asset. When alternative courses of action for future use of a long-lived asset are under consideration, estimates of future undiscounted net cash flows incorporate the possible outcomes and probabilities of their occurrence. If an impairment exists, an impairment loss is measured as the excess of the asset’s carrying value over its estimated fair value, such that the asset’s carrying value is adjusted down to its estimated fair value with an offsetting charge to Long-lived asset and other impairments. Refer to Note 9 for a description of impairments recorded during the years ended December 31, 2020, 2019, and 2018.
Capitalized interest. Interest is capitalized as part of the historical cost of constructing assets that are in progress. Capitalized interest is determined by multiplying the Partnership’s weighted-average borrowing cost on debt by the average amount of assets under construction. Cumulative capitalized interest accrued during the year is expensed through depreciation or impairment.
Segments. The Partnership’s operations continue to be organized into a single operating segment, the assets of which gather, compress, treat, process, and transport natural gas; gather, stabilize, and transport condensate, NGLs, and crude oil; and gather and dispose of produced water in the United States.
Goodwill. Goodwill is recorded when the purchase price of a business acquired exceeds the fair market value of the tangible and separately measurable intangible net assets. In addition, goodwill represents the allocated historic carrying value of midstream goodwill attributed to the Partnership’s assets previously acquired from Anadarko. The Partnership had allocated goodwill on its two reporting units: (i) gathering and processing and (ii) transportation. Goodwill is evaluated for impairment at the reporting unit level annually, as of October 1, or more often as facts and circumstances warrant. An initial qualitative assessment is performed to determine the likelihood of whether goodwill is impaired. If management concludes, based on qualitative factors, that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then no goodwill impairment is recorded and further testing is not necessary. If an assessment of qualitative factors does not result in management’s determination that the fair value of the reporting unit more likely than not exceeds its carrying value, then a quantitative assessment must be performed. If the quantitative assessment indicates that the carrying value of the reporting unit, including goodwill, exceeds its fair value, a goodwill impairment is recorded for the amount by which the reporting unit’s carrying value exceeds its fair value through a charge to Goodwill impairment. The Partnership recognized a goodwill impairment of $441.0 million during the first quarter of 2020, which reduced the carrying value of goodwill to zero for the gathering and processing reporting unit. See Note 10.
Asset retirement obligations. When tangible long-lived assets are acquired or constructed, the initial estimated asset retirement obligation liability is recognized at fair value, measured using discounted expected future cash outflows of the settlement obligation, with an associated increase in property, plant, and equipment. Over time, the discounted liability is adjusted up to its expected settlement value through accretion expense, which is reported within Depreciation and amortization in the consolidated statements of operations. Estimated asset retirement costs typically extend many years into the future, and estimation requires significant judgment. Subsequent to the initial recognition, the liability is adjusted for any changes in the expected value of the retirement obligation (with a corresponding adjustment to property, plant, and equipment, or depreciation expense if the asset is fully depreciated) until the obligation is settled. Revisions in estimated asset retirement obligations may result from changes in estimated asset retirement costs, inflation rates, discount rates, and the estimated timing of settlement. See Note 12.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Environmental expenditures. The Partnership is subject to various environmental-remediation obligations arising from federal, state, and local laws and regulations. Losses associated with environmental obligations are accrued when the necessity for environmental remediation or other potential environmental liabilities becomes probable and the costs can be reasonably estimated, with the exception of environmental obligations acquired in a business combination, which are recorded at fair value at the time of acquisition. Accruals for estimated losses from environmental-remediation obligations are recognized no later than at the time of the completion of the remediation feasibility study or when the evaluation of response options is complete. These accruals are adjusted as additional information becomes available or as circumstances change. Costs of future expenditures for environmental-remediation obligations are not discounted to their present value. See Note 16.
Revenue and cost of product. The Partnership provides gathering, processing, treating, transportation, and disposal services pursuant to a variety of contracts. Under these arrangements, the Partnership receives fees and/or retains a percentage of products or a percentage of the proceeds from the sale of the customer’s products. These revenues are included in Service revenues and Product sales in the consolidated statements of operations. Payment is generally received from the customer in the month following the service or delivery of the product. Contracts with customers generally have initial terms ranging from 5 to 10 years.
Service revenues - fee based is recognized for fee-based contracts in the month of service based on the volumes delivered by the customer. Producers’ wells or production facilities are connected to the Partnership’s gathering systems for gathering, processing, treating, transportation, and disposal of natural gas, NGLs, condensate, crude oil, and produced water, as applicable. Revenues are valued based on the rate in effect for the month of service when the fee is either the same per-unit rate over the contract term or when the fee escalates and the escalation factor approximates inflation. Deficiency fees charged to customers that do not meet their minimum delivery requirements are recognized as services are performed based on an estimate of the fees that will be billed at the completion of the performance period. Because of its significant upfront capital investment, the Partnership may charge additional service fees to customers for only a portion of the contract term (i.e., for the first year of a contract or until reaching a volume threshold), and these fees are recognized as revenue over the expected period of customer benefit, which is generally the life of the related properties. Timing differences between amounts recognized in Service revenues - fee based and the amounts billed to customer are recognized as contract assets or contract liabilities, and are amortized over the related contract period. Prior to April 1, 2020, the Partnership also recognized revenue and cost of product expense from marketing services performed on behalf of its customers by Occidental. Effective April 1, 2020, changes to marketing-contract terms with Occidental terminated Occidental’s prior status as an agent of the Partnership for third-party sales and established Occidental as a customer of the Partnership. Accordingly, the Partnership no longer recognizes revenue and the equivalent cost of product expense for the marketing services performed by Occidental. See Note 6.
The Partnership also receives Service revenues - fee based from contracts that have minimum-volume commitment demand fees and fees that require periodic rate redeterminations based on the related facility cost of service. These fees include fixed and variable consideration that are recognized on a consistent per-unit rate over the term of the contract. Annual adjustments are made to the cost-of-service rates charged to customers, and a cumulative catch-up revenue adjustment related to services already provided to the minimum volumes under the contract may be recorded in future periods, with revenues for the remaining term of the contract recognized on a consistent per-unit rate based on the total expected variable consideration under the contract. The cost-of-service rates are calculated using a contractually specified rate of return and estimates including long-term assumptions for capital invested, receipt volumes, and operating and maintenance expenses. If the Partnership determines it is probable that a significant reversal in the cumulative catch-up revenue adjustment could occur, the variable consideration may be constrained up to the amount of the probable significant reversal.
Service revenues - product based includes service revenues from percent-of-proceeds gathering and processing contracts that are recognized net of the cost of product for purchases from the Partnership’s customers since it is acting as the agent in the product sale. Keep-whole and percent-of-product agreements result in Service revenues - product based being recognized when the natural gas and/or NGLs are received from the customer as non-cash consideration for the services provided. Non-cash consideration for these services is valued at the time the services are provided. Revenue is also recognized in Product sales, along with the cost of product expense related to the sale, when the product received as non-cash consideration is sold to either Occidental or a third party.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The Partnership also purchases natural-gas volumes from producers at the wellhead or from a production facility, typically at an index price, and charges the producer fees associated with the downstream gathering and processing services. When the fees relate to services performed after control of the product has transferred to the Partnership, the fees are treated as a reduction of the purchase cost. If the fees relate to services performed before control of the product has transferred to the Partnership, the fees are treated as Service revenues - fee based. Product sales revenue is recognized, along with cost of product expense related to the sale, when the purchased product is sold to either Occidental or a third party.
The Partnership receives aid-in-construction reimbursements for certain capital costs necessary to provide services to customers (i.e., connection costs, etc.) under certain service contracts. Aid-in-construction reimbursements are reflected as a contract liability when received and are amortized to Service revenues - fee based over the expected period of customer benefit, which is generally the life of the related properties.
Defined-contribution plan. Beginning in the first quarter of 2020, employees of the Partnership are eligible to participate in the Western Midstream Savings Plan, a defined-contribution benefit plan maintained by the Partnership. All regular employees may participate in the plan by making elective contributions that are matched by the Partnership, subject to certain limitations. The Partnership also makes other contributions based on plan guidelines. The Partnership recognized expense related to the plan of $12.5 million for the year ended December 31, 2020.
Partnership income taxes. Deferred federal and state income taxes included in the accompanying consolidated financial statements are attributable to temporary differences between the financial statement carrying amount and tax basis of the Partnership’s investment in WES Operating. The Partnership’s accounting policy is to “look through” its investment in WES Operating for purposes of calculating deferred income tax asset and liability balances attributable to the Partnership’s interests in WES Operating. The Partnership had no material uncertain tax positions at December 31, 2020 or 2019.
WES Operating income taxes. WES Operating generally is not subject to federal income tax or state income tax other than Texas margin tax on the portion of its income that is apportionable to Texas. Deferred state income taxes are recorded on temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. WES Operating routinely assesses the realizability of its deferred tax assets. If WES Operating concludes that it is more likely than not that some of the deferred tax assets will not be realized, the tax asset is reduced by recording a valuation allowance.
With respect to assets previously acquired from Anadarko, WES Operating recorded Anadarko’s historic federal and state current and deferred income taxes for the periods prior to the acquisition of such assets. For periods on and subsequent to the acquisition, WES Operating is not subject to tax except for the Texas margin tax and, accordingly, does not record deferred federal income taxes related to the acquired assets.
For periods beginning on and subsequent to the acquisition of assets from Anadarko, WES Operating made payments to Anadarko pursuant to the tax sharing agreement for its estimated share of taxes from all forms of taxation, excluding income taxes imposed by the United States, that are included in any combined or consolidated returns filed by Occidental. The aggregate difference in the basis of WES Operating’s assets for financial and tax reporting purposes cannot be readily determined as WES Operating does not have access to information about each partner’s tax attributes in WES Operating.
The accounting standards for uncertain tax positions defines the criteria an individual tax position must satisfy for any part of the benefit of that position to be recognized in the financial statements. WES Operating had no material uncertain tax positions at December 31, 2020 or 2019.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Partnership’s net income (loss) per common unit. Subsequent to entering into the Exchange Agreement, the Partnership applies the two-class method in determining net income (loss) per unit applicable to master limited partnerships having multiple classes of securities, including common units and general partner units. The two-class method allocates earnings pursuant to a formula that treats participating securities as having rights to earnings that otherwise would have been available to common unitholders. Under the two-class method, net income (loss) per unit is calculated as if all of the earnings for the period were distributed pursuant to the terms of the relevant contractual arrangement. The accounting guidance provides the methodology for the allocation of undistributed earnings to the general partner and limited partners and the circumstances in which such an allocation should be made. For the Partnership, earnings per unit is calculated based on the assumption that the Partnership distributes cash to its unitholders equal to the net income of the Partnership, notwithstanding the general partner’s ultimate discretion over the amount of cash to be distributed for the period, the existence of other legal or contractual limitations that would prevent distributions of all of the net income for the period, or any other economic or practical limitation on the ability to make a full distribution of the net income for the period. See Note 5.
WES Operating’s net income (loss) per common unit. For periods subsequent to the closing of the Merger, net income (loss) per common unit for WES Operating is not calculated because no publicly traded units remained outstanding. For periods prior to the closing of the Merger, WES Operating applied the two-class method in determining net income (loss) per unit applicable to master limited partnerships having multiple classes of securities, including common units, Class C units, general partner units, and IDRs. See Note 5.
Leases. The Partnership determines if an arrangement is a lease based on the rights and obligations conveyed at contract inception. Significant judgment is required when determining whether a customer obtains the right to direct the use of identified property or equipment.
When the Partnership is a lessee at the lease-commencement date, a lease is classified as either operating or finance, and right-of-use (“ROU”) assets and lease liabilities are recognized based on the present value of future lease payments over the lease term. As the rate implicit in the Partnership’s leases is generally not readily determinable, the Partnership discounts lease liabilities using the Partnership’s incremental borrowing rate at the commencement date. Non-lease components associated with leases that begin in 2019 or later are accounted for as part of the lease component, and prepaid lease payments are included as ROU assets. Options to extend or terminate a lease are included in the lease term when it is reasonably certain that the Partnership will exercise that option. Leases of 12 months or less are not recognized on the consolidated balance sheets. Lease cost is generally recognized on a straight-line basis over the lease term. For finance leases, interest expense is recognized over the lease term using the effective interest method. Variable lease payments are recognized when the obligation for those payments is incurred.
When the Partnership is a lessor at the lease-commencement date, a lease is classified as operating, sales-type, or direct financing. The underlying assets associated with these agreements are evaluated for future use beyond the lease term. For operating leases, lease income is generally recognized on a straight-line basis over the lease term. Variable lease payments are recognized when the obligation for those payments is performed. The Partnership does not have sales-type or direct financing leases.
Recently adopted accounting standards. Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326) significantly changes the accounting and disclosure requirements related to credit losses on financial assets. Under the new standard, entities are now required to estimate lifetime expected credit losses for trade receivables, loans, and other financial instruments as of the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts, resulting in earlier recognition of credit losses. There was no impact to the consolidated financial statements with the Partnership’s adoption of the standard on January 1, 2020. The Partnership has implemented the necessary changes to its processes and controls to support accounting and disclosure requirements under this ASU.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following table summarizes revenue from contracts with customers:
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(1)For the year ended December 31, 2020, includes fixed- and variable-lease revenue from an operating and maintenance agreement entered into with Occidental. See Operating lease within Note 6.
Certain of the Partnership’s midstream services contracts have minimum-volume commitment demand fees and fees that require periodic rate redeterminations based on the related facility cost-of-service rate provisions (see Note 1). During the year ended December 31, 2020, the Partnership constrained revenue under one of its gas-gathering and oil-gathering contracts due to uncertainty related to ongoing legal proceedings and commercial negotiations with the counterparties to the contracts. Future revenue reversals could occur to the extent the outcome of the legal proceedings and commercial negotiations differ from our current assumptions.
Contract balances. Receivables from customers, which are included in Accounts receivable, net on the consolidated balance sheets were $428.2 million and $362.6 million as of December 31, 2020 and 2019, respectively.
Contract assets primarily relate to revenue accrued but not yet billed under cost-of-service contracts with fixed and variable fees and accrued deficiency fees the Partnership expects to charge customers once the related performance periods are completed. The following table summarizes activity related to contract assets from contracts with customers:
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. REVENUE FROM CONTRACTS WITH CUSTOMERS
Contract liabilities primarily relate to (i) fees that are charged to customers for only a portion of the contract term and must be recognized as revenues over the expected period of customer benefit, (ii) fixed and variable fees under cost-of-service contracts that are received from customers for which revenue recognition is deferred, and (iii) aid-in-construction payments received from customers that must be recognized over the expected period of customer benefit. The following table summarizes activity related to contract liabilities from contracts with customers:
Transaction price allocated to remaining performance obligations. Revenues expected to be recognized from certain performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2020, are presented in the following table. The Partnership applies the optional exemptions in Revenue from Contracts with Customers (Topic 606) and does not disclose consideration for remaining performance obligations with an original expected duration of one year or less or for variable consideration related to unsatisfied (or partially unsatisfied) performance obligations. Therefore, the following table represents only a portion of expected future revenues from existing contracts as most future revenues from customers are dependent on future variable customer volumes and, in some cases, variable commodity prices for those volumes.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS AND DIVESTITURES
AMA acquisition. In February 2019, WES Operating acquired AMA from Anadarko, which is comprised of (i) the DJ Basin oil system and Wattenberg processing plant located in the DJ Basin; (ii) the DBM oil system, APC water systems, a 50% interest in Mi Vida, and a 50% interest in Ranch Westex, located in West Texas; (iii) the Wamsutter pipeline located in Wyoming; (iv) a 20% interest in Saddlehorn, a crude-oil and condensate pipeline that originates in Laramie County, Wyoming and terminates in Cushing, Oklahoma; and (v) a 15% interest in Panola, an NGLs pipeline that originates in Panola County, Texas, and terminates in Mont Belvieu, Texas. AMA was acquired in exchange for aggregate consideration of $2.0 billion of cash, less the outstanding amount payable pursuant to an intercompany note (the “APCWH Note Payable”) assumed by WES Operating in connection with the transfer, and 45,760,201 WES Operating common units. These WES Operating common units, less 6,375,284 WES Operating common units retained by WGR Asset Holding Company LLC (“WGRAH”), converted into the right to receive common units of the Partnership at Merger completion.
Red Bluff Express acquisition. In January 2019, the Partnership 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 in Pecos County, Texas. The Partnership acquired its 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. See Note 7.
Whitethorn LLC acquisition. In June 2018, the Partnership acquired a 20% interest in Whitethorn LLC, which owns a crude-oil and condensate pipeline that originates in Midland, Texas, and terminates in Sealy, Texas (the “Midland-to-Sealy pipeline”) and related storage facilities (collectively referred to as “Whitethorn”). A third party operates Whitethorn and oversees the related commercial activities. In connection with its investment in Whitethorn LLC, the Partnership shares proportionally in the commercial activities. The Partnership acquired its 20% interest via a $150.6 million net investment, which was funded with cash on hand and is accounted for under the equity method of accounting. See Note 7.
Cactus II acquisition. In June 2018, the Partnership acquired a 15% interest in Cactus II, which owns a crude-oil pipeline operated by a third party (the “Cactus II pipeline”) connecting West Texas to the Corpus Christi area. The Cactus II pipeline began delivering crude oil during the third quarter of 2019 and became fully operational in the first quarter of 2020. The Partnership acquired its 15% interest from a third party via an initial net investment of $12.1 million, which represented its share of costs incurred up to the date of acquisition. The initial investment was funded with cash on hand, and the interest in Cactus II is accounted for under the equity method of accounting. See Note 7.
Fort Union and Bison facilities. In October 2020, the Partnership (i) sold its 14.81% interest in Fort Union Gas Gathering, LLC (“Fort Union”), which was accounted for under the equity method of accounting, and (ii) entered into an option agreement to sell the Bison treating facility, located in Northeast Wyoming, to a third party, exercisable during the first quarter of 2021. The Partnership received combined proceeds of $27.0 million, resulting in a net gain on sale of $21.0 million related to the Fort Union interest that was recorded in the fourth quarter of 2020 as Gain (loss) on divestiture and other, net in the consolidated statements of operations. A gain related to the option agreement and potential sale of the Bison treating facility will be recognized in the first quarter of 2021 if the option is exercised or expires.
Newcastle system divestiture. In December 2018, the Newcastle system, located in Northeast Wyoming, was sold to a third party for $3.2 million, resulting in a net gain on sale of $0.6 million recorded as Gain (loss) on divestiture and other, net in the consolidated statements of operations. The Partnership previously held a 50% interest in, and operated, the Newcastle system.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PARTNERSHIP DISTRIBUTIONS
Partnership distributions. Under its partnership agreement, the Partnership distributes all of its available cash (beyond proper reserves as defined in its partnership agreement) to unitholders of record on the applicable record date within 55 days following each quarter’s end. The Board of Directors of the general partner (the “Board of Directors”) declared the following cash distributions to the Partnership’s unitholders for the periods presented:
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(1)The 2018 distributions were declared and paid prior to the closing of the Merger.
(2)The Board of Directors declared a cash distribution to the Partnership’s unitholders for the fourth quarter of 2020 of $0.31100 per unit, or $131.3 million in aggregate. The cash distribution was paid on February 12, 2021 to unitholders of record at the close of business on February 1, 2021, including the general partner units that were issued on December 31, 2019 (see Note 1).
Following the transactions contemplated by the Exchange Agreement, the general partner units are entitled to all quarterly distributions beginning with the cash distribution declared for the fourth quarter of 2019.
Available cash. The amount of available cash (beyond proper reserves as defined in our partnership agreement) generally is all cash on hand at the end of the quarter, plus, at the discretion of the general partner, working capital borrowings made subsequent to the end of such quarter, less the amount of cash reserves established by the general partner to provide for the proper conduct of the Partnership’s business, including reserves to fund future capital expenditures; to comply with applicable laws, debt instruments, or other agreements; or to provide funds for unitholder distributions for any one or more of the next four quarters. Working capital borrowings generally include borrowings made under a credit facility or similar financing arrangement and are intended to be repaid or refinanced within 12 months. In all cases, working capital borrowings are used solely for working capital purposes or to fund unitholder distributions.
WES Operating partnership distributions. Immediately prior to the closing of the Merger, the WES Operating incentive distribution rights (“IDRs”) and general partner units were converted into WES Operating common units and a non-economic general partner interest in WES Operating, and at Merger completion, all WES Operating common units held by the public and subsidiaries of Anadarko (other than common units held by the Partnership, WES Operating GP, and 6.4 million common units held by a subsidiary of Anadarko) were converted into common units of the Partnership. Beginning with the first quarter of 2019, WES Operating makes quarterly cash distributions to the Partnership and WGRAH, a subsidiary of Occidental, in proportion to their share of limited partner interests in WES Operating. See Note 5.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PARTNERSHIP DISTRIBUTIONS
WES Operating paid the following cash distributions to its limited partners for the periods presented:
Prior to the closing of the Merger, WES Operating paid the following cash distributions to WES Operating’s common and general partner unitholders for the periods presented:
WES Operating Class C unit distributions. Prior to the closing of the Merger, WES Operating’s Class C units received quarterly distributions at an equivalent rate to WES Operating’s publicly traded common units. The Class C unit distributions were paid-in-kind with additional Class C Units (“PIK Class C units”) and were disregarded with respect to WES Operating’s distributions of available cash. The number of PIK Class C units issued in connection with a distribution payable on the Class C units was determined by dividing the corresponding distribution attributable to the Class C units by the volume-weighted average price of WES Operating’s common units for the ten days immediately preceding the payment date of the common unit distribution, less a 6% discount. WES Operating recorded the PIK Class C unit distributions at fair value at the time of issuance. This Level-2 fair value measurement used WES Operating’s unit price as a significant input in the determination of the fair value. See Note 5 for further discussion of the Class C units.
In February 2019, immediately prior to the closing of the Merger, all outstanding Class C units converted into WES Operating common units on a one-for-one basis.
WES Operating’s general partner interest and incentive distribution rights. Prior to the closing of the Merger, WES Operating GP was entitled to 1.5% of all quarterly distributions that WES Operating made prior to its liquidation, and as the former holder of the IDRs, was entitled to incentive distributions at the maximum distribution-sharing percentage of 48.0%. Immediately prior to the closing of the Merger, the IDRs and the general partner units converted into WES Operating common units and a non-economic general partner interest in WES Operating.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. EQUITY AND PARTNERS’ CAPITAL
Holdings of Partnership equity. The Partnership’s common units are listed on the New York Stock Exchange under the ticker symbol “WES.” On September 11, 2020, the Partnership assigned its 98% interest in the 30-year $260.0 million note established in May 2008 between WES Operating and Anadarko (the “Anadarko note receivable”) to Anadarko, which Anadarko canceled and retired immediately upon receipt, in exchange for which Occidental caused certain of its subsidiaries to transfer an aggregate of 27,855,398 common units representing limited partner interests in the Partnership to the Partnership. The units were canceled by the Partnership immediately upon receipt. See Note 6.
As of December 31, 2020, Occidental held 214,281,578 common units, representing a 50.7% limited partner interest in the Partnership, and through its ownership of the general partner, Occidental indirectly held 9,060,641 general partner units, representing a 2.1% general partner interest in the Partnership (see Note 1). The public held 199,558,285 common units, representing a 47.2% limited partner interest in the Partnership.
Partnership equity repurchases. In November 2020, the Board of Directors authorized the Partnership to buy back up to $250.0 million of the Partnership’s common units through December 31, 2021 (the “Purchase Program”). The common units may be purchased from time to time in the open market at prevailing market prices or in privately negotiated transactions. As of December 31, 2020, the Partnership had repurchased 2,368,711 common units through open-market purchases for a total of $32.5 million. The units were canceled by the Partnership immediately upon receipt.
Holdings of WES Operating equity. As of December 31, 2020, (i) the Partnership, directly and indirectly through its ownership of WES Operating GP, owned a 98.0% limited partner interest and the entire non-economic general partner interest in WES Operating and (ii) Occidental, through its ownership of WGRAH, owned a 2.0% limited partner interest in WES Operating, which is reflected as a noncontrolling interest within the consolidated financial statements of the Partnership (see Note 1).
WES Operating Class C units. In November 2014, WES Operating issued 10,913,853 Class C units to APC Midstream Holdings, LLC (“AMH”), pursuant to a Unit Purchase Agreement with Anadarko and AMH. The Class C units were issued to partially fund the acquisition of DBM.
The Class C units were issued at a discount to the then-current market price of the common units into which they were convertible. This discount represented a beneficial conversion feature, and at issuance, was reflected as an increase to WES Operating common unitholders’ capital and a decrease to Class C unitholder capital to reflect the fair value of the Class C units at issuance. The beneficial conversion feature was considered a non-cash distribution that was recognized from the date of issuance through the date of conversion, resulting in an increase to Class C unitholder capital and a decrease to WES Operating common unitholders’ capital as amortized. The beneficial conversion feature was amortized assuming an extended conversion date of March 1, 2020, using the effective yield method. The impact of the beneficial conversion feature amortization was included in the calculation of earnings per unit (see WES Operating’s net income (loss) per common unit below).
All outstanding Class C units converted into WES Operating common units on a one-for-one basis immediately prior to the closing of the Merger (see Note 1).
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. EQUITY AND PARTNERS’ CAPITAL
Partnership’s net income (loss) per common unit. Following the transactions contemplated by the Exchange Agreement, the common and general partner unitholders’ allocation of net income (loss) attributable to the Partnership was equal to their cash distributions plus their respective allocations of undistributed earnings or losses using the two-class method. Specifically, net income equal to the amount of available cash (beyond proper reserves as defined by the partnership agreement) was allocated to the common and general partner unitholders consistent with actual cash distributions and capital account allocations. Undistributed earnings (net income in excess of distributions) or undistributed losses (available cash in excess of net income (loss)) were then allocated to the common and general partner unitholders in accordance with their weighted-average ownership percentage during each period.
The Partnership’s basic net income (loss) per common unit is calculated by dividing the limited partners’ interest in net income (loss) by the weighted-average number of common units outstanding during the period. Net income (loss) attributable to assets acquired from Anadarko for periods prior to the acquisition of such assets was not allocated to the limited partners when calculating net income (loss) per common unit.
WES Operating’s net income (loss) per common unit. For periods subsequent to the closing of the Merger, net income (loss) per common unit for WES Operating is not calculated because no publicly traded units remained outstanding.
For periods prior to the closing of the Merger, Net income (loss) attributable to Western Midstream Operating, LP earned on and subsequent to the date of acquisition of the Partnership’s assets was allocated in the below-described manner. Net income (loss) attributable to assets acquired from Anadarko for periods prior to the acquisition of such assets was not allocated to the unitholders for purposes of calculating net income (loss) per common unit.
WES Operating GP. The general partner’s allocation was equal to cash distributions plus its portion of undistributed earnings or losses. Specifically, net income equal to the amount of available cash (beyond proper reserves as defined by WES Operating’s partnership agreement) was allocated to the general partner consistent with actual cash distributions and capital account allocations, including incentive distributions. Undistributed earnings (net income in excess of distributions) or undistributed losses (available cash in excess of net income(loss)) were then allocated to the general partner in accordance with its weighted-average ownership percentage during each period.
WES Operating Common and Class C unitholders. The Class C units were considered a participating security because they participated in distributions with common units according to a predetermined formula (see Note 4). The common and Class C unitholders’ allocation was equal to their cash distributions plus their respective allocations of undistributed earnings or losses. Specifically, net income equal to the amount of available cash (beyond proper reserves as defined by the WES Operating partnership agreement) was allocated to the common and Class C unitholders consistent with actual cash distributions and capital account allocations. Undistributed earnings or undistributed losses were then allocated to the common and Class C unitholders in accordance with their respective weighted-average ownership percentages during each period. The common unitholder allocation also included the impact of the amortization of the Class C units beneficial conversion feature. Similarly, the Class C unitholder allocation was impacted by the amortization of the Class C units beneficial conversion feature (see WES Operating Class C units above).
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. EQUITY AND PARTNERS’ CAPITAL
Calculation of net income (loss) per unit. Basic net income (loss) per common unit was calculated by dividing the net income (loss) attributable to common unitholders by the weighted-average number of common units outstanding during the period. The common units issued in connection with acquisitions and equity offerings were included on a weighted-average basis for the periods these units were outstanding. Diluted net income (loss) per common unit was calculated by dividing the sum of (i) the net income (loss) attributable to common units adjusted for a reallocation of the common and Class C limited partners’ interest in net income (loss) and (ii) the net income (loss) attributable to the Class C units as a participating security, by the sum of the weighted-average number of common units outstanding plus the dilutive effect of the weighted-average number of outstanding Class C units.
The following table illustrates the calculation of WES Operating’s net income (loss) per common unit for the year ended December 31, 2018:
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(1)Adjusted to reflect amortization of the beneficial conversion feature.
(2)The impact of Class C units would be anti-dilutive for the period presented.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RELATED-PARTY TRANSACTIONS
Summary of related-party transactions. The following tables summarize material related-party transactions included in the Partnership’s consolidated financial statements:
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(1)See Note 7.
(2)Includes (i) amounts charged by Occidental pursuant to the shared services agreements (see Shared services agreements within this Note 6) and (ii) equity-based compensation expense allocated to the Partnership by Occidental, portions of which are not reimbursed to Occidental and are reflected as contributions to partners’ capital in the consolidated statements of equity and partners’ capital (see Incentive Plans within this Note 6).
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RELATED-PARTY TRANSACTIONS
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(1)Increase attributable to the timing of certain related-party cash receipts. The Partnership received $77.8 million of the December 31, 2020, Accounts receivable, net balance by January 11, 2021.
(2)See Note 7.
(3)Includes amounts related to finance leases (see Note 14).
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(1)Represents distributions paid to Occidental pursuant to the partnership agreement of the Partnership (see Note 4 and Note 5).
(2)Represents distributions paid to certain subsidiaries of Occidental pursuant to WES Operating’s partnership agreement (see Note 4 and Note 5).
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RELATED-PARTY TRANSACTIONS
The following tables summarize material related-party transactions for WES Operating (which are included in the Partnership’s consolidated financial statements) to the extent the amounts differ from the Partnership’s consolidated financial statements:
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(1)Includes (i) amounts charged by Occidental pursuant to the shared services agreements (see Shared services agreements within this Note 6) and (ii) equity-based compensation expense allocated to WES Operating by Occidental, portions of which are not reimbursed to Occidental and are reflected as contributions to partners’ capital in the consolidated statements of equity and partners’ capital (see Incentive Plans within this Note 6).
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(1)Represents distributions paid to the Partnership and certain subsidiaries of Occidental pursuant to WES Operating’s partnership agreement (see Note 4 and Note 5). For the year ended December 31, 2019, includes distributions to the Partnership and a subsidiary of Occidental related to the repayment of the WGP RCF (see Note 13).
Related-party revenues. Related-party revenues include (i) income from the Partnership’s investments accounted for under the equity method of accounting (see Note 7) and (ii) amounts earned by the Partnership from services provided to Occidental and from the sale of natural gas, condensate, and NGLs to Occidental.
Gathering and processing agreements. The Partnership has significant gathering and processing arrangements with affiliates of Occidental on most of its systems. While Occidental is the contracting counterparty of the Partnership, these arrangements with Occidental include not just Occidental-produced volumes, but also, in some instances, the volumes of other working-interest owners of Occidental who rely on the Partnership’s facilities and infrastructure to bring their volumes to market. Natural-gas throughput (excluding equity-investment throughput) attributable to production owned or controlled by Occidental was 41%, 38%, and 36% for the years ended December 31, 2020, 2019, and 2018, respectively. Crude-oil and NGLs throughput (excluding equity-investment throughput) attributable to production owned or controlled by Occidental was 88%, 84%, and 80% for the years ended December 31, 2020, 2019, and 2018, respectively. Produced-water throughput attributable to production owned or controlled by Occidental was 87%, 82%, and 91% for the years ended December 31, 2020, 2019, and 2018, respectively.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RELATED-PARTY TRANSACTIONS
In connection with the sale of its Eagle Ford assets in 2017, Anadarko remained the primary counterparty to the Partnership’s Brasada gas processing agreement and entered into an agency relationship with Sanchez Energy Corporation (“Sanchez”), now Mesquite Energy, Inc. (“Mesquite”) that allows Mesquite to process gas under such agreement. For this reason, Anadarko continues to be liable under the Brasada gas processing agreement through 2034 to the extent Mesquite does not perform. For all periods presented, Mesquite has performed Anadarko’s obligations under the Brasada gas processing agreement pursuant to its agency arrangement with Anadarko.
Further, in connection with the sale of its Uinta Basin assets in 2020, Kerr McGee Oil & Gas Onshore LP, a subsidiary of Occidental, retained the deficiency payment obligations under a gas processing agreement at the Chipeta plant. This contingent payment obligation extends through the earlier of October 1, 2022, or the termination of the processing agreement.
Commodity purchase and sale agreements. Through December 31, 2020, the Partnership sold a significant amount of its natural gas and NGLs to Anadarko Energy Services Company (“AESC”), Occidental’s marketing affiliate. Prior to April 1, 2020, AESC acted as an agent on behalf of either the Partnership or the Partnership’s customers for third-party sales. Where AESC sold natural gas and NGLs on the Partnership’s customers’ behalf, the Partnership recognized associated service revenues and cost of product expense for the marketing services performed by AESC. When product sales were on the Partnership’s behalf, the Partnership recognized product sales revenues based on Occidental’s sales price to the third party and recorded the associated cost of product expense associated with the marketing activities provided by AESC. 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. This change has no impact to Operating income (loss), Net income (loss), the balance sheets, cash flows, or any non-GAAP metric used to evaluate the Partnership’s operations (see Key Performance Metrics under Part II, Item 7 of this Form 10-K). In addition, the Partnership purchases natural gas from AESC pursuant to purchase agreements.
Marketing Transition Services Agreement. Effective December 31, 2019, certain subsidiaries of Anadarko entered into a transition services agreement (the “Marketing Transition Services Agreement”) to provide marketing-related services to certain of the Partnership’s subsidiaries through December 31, 2020, subject to the option to extend such services for an additional six-month period. The Marketing Transition Services Agreement was terminated on December 31, 2020. While the Partnership still has some marketing agreements with affiliates of Occidental, the Partnership began marketing and selling substantially all of its natural gas and NGLs directly to third parties beginning on January 1, 2021.
Operating lease. Effective December 31, 2019, an affiliate of Occidental and a wholly owned subsidiary of the Partnership, the lessor, entered into an operating and maintenance agreement pursuant to which Occidental provides operational and maintenance services with respect to a crude-oil gathering system and associated treating facilities owned by the Partnership through December 31, 2021. See Note 14.
Related-party expenses. Operation and maintenance expense includes amounts accrued for or paid to related parties for the operation of the Partnership’s assets and for services provided to related parties, including field labor, measurement and analysis, and other disbursements. A portion of general and administrative expense is paid by Occidental, which results in related-party transactions pursuant to the reimbursement provisions of the Partnership’s and WES Operating’s agreements with Occidental. Related-party expenses do not bear a direct relationship to related-party revenues, and third-party expenses do not bear a direct relationship to third-party revenues.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RELATED-PARTY TRANSACTIONS
Shared services agreements. General and administrative expense includes costs incurred pursuant to the agreements discussed below. Under these agreements, Occidental has performed certain centralized corporate functions for the Partnership and WES Operating.
•Services Agreement. Pursuant to the Services Agreement, which was amended and restated on December 31, 2019, specified employees of Occidental were seconded to WES Operating GP to provide, under the direction, supervision, and control of the general partner, (i) operating and routine maintenance service and (ii) corporate, administrative, and other services, with respect to the assets owned and operated by the Partnership. Occidental was reimbursed for the services provided by the seconded employees. 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. In late March 2020, seconded employees’ employment was transferred to the Partnership. Occidental continues to provide certain limited administrative and operational services to the Partnership, with most services expected to be fully transitioned to the Partnership by December 31, 2021. For additional information on the Services Agreement, see Note 1.
•WES omnibus agreement. Prior to December 31, 2019, the Partnership had an omnibus agreement with Occidental and the general partner (the “WES omnibus agreement”) that governed (i) the Partnership’s obligation to reimburse Occidental for expenses incurred or payments made on its behalf in connection with Occidental’s provision of general and administrative services provided to the Partnership, including certain public company expenses and general and administrative expenses, (ii) the Partnership’s obligation to pay Occidental, in quarterly installments, an administrative services fee of $250,000 per year, which was subject to an annual increase pursuant to the omnibus agreement, and (iii) the Partnership’s obligation to reimburse Occidental for all insurance coverage expenses it incurred or payments it made on the Partnership’s behalf. The WES omnibus agreement was terminated as part of the December 2019 Agreements (see Note 1).
•WES Operating omnibus agreement. Prior to December 31, 2019, WES Operating had a separate omnibus agreement with Occidental and WES Operating GP (the “WES Operating omnibus agreement”) that governed (i) Occidental’s obligation to indemnify WES Operating for certain liabilities and WES Operating’s obligation to indemnify Occidental for certain liabilities, (ii) WES Operating’s obligation to reimburse Occidental for expenses incurred or payments made on its behalf in conjunction with Occidental’s provision of general and administrative services provided to WES Operating, including salary and benefits of Occidental personnel, public company expenses, general and administrative expenses, and salaries and benefits of WES Operating’s executive management who were employees of Occidental, and (iii) WES Operating’s obligation to reimburse Occidental for all insurance coverage expenses it incurred or payments it made with respect to WES Operating’s assets. Occidental, in accordance with the partnership agreement and the WES Operating omnibus agreement, determined, in its reasonable discretion, amounts to be reimbursed by WES Operating in exchange for services provided under the WES Operating omnibus agreement. The WES Operating omnibus agreement was terminated as part of the December 2019 Agreements (see Note 1).
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RELATED-PARTY TRANSACTIONS
Incentive Plans. General and administrative expense includes equity-based compensation expense allocated to the Partnership by Occidental for awards granted to the executive officers of the general partner and to other employees prior to their employment with the Partnership under (i) the Anadarko Petroleum Corporation 2012 Omnibus Incentive Compensation Plan, as amended and restated, (ii) Occidental’s 2015 Long-Term Incentive Plan, and (iii) Occidental’s Phantom Share Unit Award Plan (collectively referred to as the “Incentive Plans”). Grants made under equity-based compensation plans result in equity-based compensation expense, which is determined by reference to the fair value of equity compensation. For equity-based awards ultimately settled through the issuance of units or stock, the fair value is measured as of the grant date. General and administrative expense includes costs related to the Incentive Plans of $14.6 million, $12.9 million, and $6.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. Portions of these amounts are reflected as contributions to partners’ capital in the consolidated statements of equity and partners’ capital. As of December 31, 2020, $12.5 million of estimated unrecognized compensation expense attributable to the Incentive Plans will be allocated to the Partnership over a weighted-average period of 0.7 years.
December 2019 Agreements. As discussed in more detail in Note 1, on December 31, 2019, the Partnership and certain of its subsidiaries, including WES Operating and WES Operating GP, entered into agreements with Occidental and/or certain of its subsidiaries, including Anadarko.
Merger transactions. As discussed in more detail in Note 1, on February 28, 2019, the Partnership, WES Operating, Anadarko, and certain of their affiliates completed the Merger and the other transactions contemplated in the Merger Agreement, which included the acquisition of AMA from Anadarko. See Note 3.
Anadarko note receivable. In May 2008, WES Operating loaned $260.0 million to Anadarko in exchange for a 30-year note that bore interest at a fixed annual rate of 6.50%, payable quarterly and classified as interest income in the consolidated statements of operations. On September 11, 2020, the Partnership and Occidental entered into a Unit Redemption Agreement, pursuant to which (i) WES Operating transferred and assigned its interest in the Anadarko note receivable to its limited partners on a pro-rata basis, transferring 98% of its interest (and accrued interest owed under) the Anadarko note receivable to the Partnership and the remaining 2% of its interest to WGRAH, a subsidiary of Occidental, (ii) the Partnership subsequently assigned the 98% interest in (and accrued interest owed under) the Anadarko note receivable to Anadarko, which Anadarko canceled and retired immediately upon receipt, in exchange for which Occidental caused certain of its subsidiaries to transfer an aggregate of 27,855,398 common units of the Partnership to the Partnership, and (iii) the Partnership canceled such common units immediately upon receipt.
Purchases from related parties. During the fourth quarter of 2020, a subsidiary of the Partnership entered into an agreement to purchase three electrical substations located in the DJ Basin from a subsidiary of Occidental for $2.0 million. This purchase was recorded as an Accrued capital expenditure as of December 31, 2020, and cash was paid in January of 2021. During 2019, the Partnership purchased $18.4 million of materials and supplies inventory from Occidental.
Related-party asset contributions. The following table summarizes related-party contributions of other assets to the Partnership:
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RELATED-PARTY TRANSACTIONS
APCWH Note Payable. In June 2017, APC Water Holdings 1, LLC (“APCWH”) entered into an eight-year note payable agreement with Anadarko, which was repaid in the first quarter of 2019 at the Merger completion date. See Note 13.
Commodity-price swap agreements. WES Operating previously entered into commodity-price swap agreements with Anadarko to mitigate exposure to the commodity-price risk inherent in WES Operating’s percent-of-proceeds, percent-of-product, and keep-whole natural-gas processing contracts. These commodity-price swap agreements expired without renewal on December 31, 2018.
Notional volumes for each product-based commodity-price swap agreement were not specifically defined. Instead, the commodity-price swap agreements applied to the actual volumes of natural gas, condensate, and NGLs purchased and sold. The commodity-price swap agreements did not satisfy the definition of a derivative financial instrument and, therefore did not require fair-value measurement. Net losses on commodity-price swap agreements were $0.7 million (due to settlement of 2018 activity in 2019) and $7.9 million for the years ended December 31, 2019 and 2018, respectively, reported in the consolidated statements of operations as related-party Product sales. A capital contribution from Anadarko related to the commodity-price swap agreements of $7.4 million and $51.6 million was recorded in the consolidated statements of equity and partners’ capital for the years ended December 31, 2019 and 2018, respectively.
Concentration of credit risk. Occidental was the only customer from which revenues exceeded 10% of consolidated revenues for all periods presented in the consolidated statements of operations.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EQUITY INVESTMENTS
The following tables present the financial statement impact of the Partnership’s equity investments for the years ended December 31, 2020 and 2019:
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(1)Includes capitalized interest of $3.6 million for the year ended December 31, 2019 related to the construction of the Cactus II pipeline.
(2)Distributions in excess of cumulative earnings, classified as investing cash flows in the consolidated statements of cash flows, are calculated on an individual-investment basis.
(3)Recorded in Long-lived asset and other impairments in the consolidated statements of operations.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EQUITY INVESTMENTS
The investment balance in White Cliffs at December 31, 2020, is $5.2 million less than the Partnership’s underlying equity in White Cliffs’ net assets, primarily due to the Partnership recording the acquisition of its initial 0.4% interest in White Cliffs at Anadarko’s historic carrying value. This difference will be amortized to Equity income, net - related parties in the consolidated statements of operations over the remaining estimated useful life of the White Cliffs pipeline.
The investment balance in Rendezvous at December 31, 2020, includes $30.4 million for the purchase price allocated to the investment in Rendezvous in excess of the historic cost basis of WGRI, the entity that previously owned the interest in Rendezvous, which Anadarko acquired in August 2006. This excess balance is attributable to the difference between the fair value and book value of such gathering and treating facilities (at the time WGRI was acquired by Anadarko) and will be amortized to Equity income, net - related parties in the consolidated statements of operations over the remaining estimated useful life of those facilities.
The investment balance in Whitethorn LLC at December 31, 2020, is $36.2 million less than the Partnership’s underlying equity in Whitethorn LLC’s net assets, primarily due to terms of the acquisition agreement which provided the Partnership a share of pre-acquisition operating cash flow. This difference will be amortized to Equity income, net - related parties in the consolidated statements of operations over the remaining estimated useful life of Whitethorn.
The investment balance in Saddlehorn at December 31, 2020, was $17.0 million less than the Partnership’s underlying equity in Saddlehorn’s net assets, primarily due to income from an expansion project that was funded by Saddlehorn’s other owners being disproportionately allocated to the Partnership beginning in the second quarter of 2020. This difference will be amortized to Equity income, net - related parties in the consolidated statements of operations over the remaining estimated useful life of the Saddlehorn pipeline.
The investment balance in Ranch Westex at December 31, 2020, was $25.4 million less than the Partnership’s underlying equity in Ranch Westex’s net assets, primarily due to an impairment loss recognized by the Partnership in the third quarter of 2020. The impairment loss of $29.4 million resulted from a decline in value below the carrying value, which was determined to be other than temporary in nature. This investment was impaired to its estimated fair value of $16.7 million at September 30, 2020, using the income approach and Level-3 fair value inputs, due to a reduction in estimated future cash flows resulting from lower forecasted producer throughput.
Management evaluates its equity investments for impairment whenever events or changes in circumstances indicate that the carrying value of such investments may have experienced a decline in value that is other than temporary. When evidence of loss in value has occurred, management compares the estimated fair value of the investment to the carrying value of the investment to determine whether the investment has been impaired. Management assesses the fair value of equity investments using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third-party comparable sales and discounted cash flow models. If the estimated fair value is less than the carrying value, the excess of the carrying value over the estimated fair value is recognized as an impairment loss in the consolidated statements of operations.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EQUITY INVESTMENTS
The following tables present the summarized combined financial information for equity investments (amounts represent 100% of investee financial information):
8. INCOME TAXES
The Partnership is 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. 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.
For the year ended December 31, 2020, the variance from the federal statutory rate was primarily due to our Texas margin tax liability. For the years ended December 31, 2019 and 2018, 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.
The components of income tax expense (benefit) are as follows:
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
Total income taxes differed from the amounts computed by applying the statutory income tax rate to income (loss) before income taxes. The sources of these differences are as follows:
The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are as follows:
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. PROPERTY, PLANT, AND EQUIPMENT
A summary of the historical cost of property, plant, and equipment is as follows:
The cost of property classified as “Assets under construction” is excluded from capitalized costs being depreciated. These amounts represent property that is not yet placed into productive service as of the respective balance sheet date.
Long-lived asset and other impairments. During the year ended December 31, 2020, the Partnership recognized impairments of $203.9 million, primarily due to $150.2 million of impairments for assets located in Wyoming and Utah. These assets were impaired to estimated fair values of $105.5 million. The Partnership assesses whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The fair value of assets with impairment triggers were measured using the income approach and Level-3 fair value inputs. The income approach was based on the Partnership’s projected future EBITDA and free cash flows, which requires significant assumptions including, among others, future throughput volumes based on current expectations of producer activity and operating costs. These impairments were primarily triggered by reductions in estimated future cash flows resulting from lower forecasted producer throughput and lower commodity prices. Long-lived asset and other impairments on the consolidated statements of operations for the year ended December 31, 2020, also includes a $29.4 million other-than-temporary impairment of the Partnership’s investment in Ranch Westex (see Note 7). The remaining impairments of $24.3 million were primarily at the DJ Basin complex and DBM oil system due to the cancellation of projects and impairments of rights-of-way.
During the year ended December 31, 2019, the Partnership recognized impairments of $6.3 million, primarily at the DJ Basin complex due to impairments of rights-of-way and cancellation of projects.
During the year ended December 31, 2018, the Partnership recognized impairments of $230.6 million, including impairments of $125.9 million at the Third Creek gathering system and $8.1 million at the Kitty Draw gathering system. These assets were impaired to estimated salvage values of $1.8 million and zero, respectively, using the market approach and Level-3 fair value inputs, due to the shutdown of these systems in May 2018. During 2018, the Partnership also recognized impairments of $38.7 million and $34.6 million at the Hilight and MIGC systems, respectively. These assets were impaired to estimated fair values of $4.9 million and $15.2 million, respectively, using the income approach and Level-3 fair value inputs, due to a reduction in estimated future cash flows. The remaining $23.3 million of impairments primarily was related to (i) a $10.9 million impairment at the GNB NGL pipeline, which was impaired to estimated fair value of $10.0 million using the income approach and Level-3 fair value inputs, and (ii) a $5.6 million impairment related to an idle facility at the Chipeta complex, which was impaired to estimated salvage value of $1.5 million using the market approach and Level-3 fair value inputs.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. PROPERTY, PLANT, AND EQUIPMENT
Potential future long-lived asset impairments. As of December 31, 2020, it is reasonably possible that prolonged low commodity prices, further commodity-price declines, changes to producers’ drilling plans in response to lower prices, and potential producer bankruptcies could result in future long-lived asset impairments. For example, on April 29, 2020, the Partnership received notice that Sanchez is attempting to reject a number of midstream and downstream agreements with commercial counterparties, including Sanchez’s Springfield gathering agreements and agreements obligating Sanchez to deliver the gas volumes gathered by the Springfield system to our Brasada processing plant. If the attempted rejection is successful, the Partnership’s South Texas assets could be impaired.
10. GOODWILL AND OTHER INTANGIBLES
Goodwill. Goodwill is recorded when the purchase price of a business acquired exceeds the fair market value of the tangible and separately measurable intangible net assets. Goodwill also includes the allocated historic carrying value of midstream goodwill attributed to the Partnership’s assets previously acquired from Anadarko. The Partnership’s goodwill has been allocated to two reporting units: (i) gathering and processing and (ii) transportation.
The Partnership evaluates goodwill for impairment at the reporting-unit level on an annual basis, as of October 1, or more often as facts and circumstances warrant. An initial qualitative assessment is performed to determine the likelihood of whether goodwill is impaired and if deemed necessary based on this assessment, a quantitative assessment is then performed. If the quantitative assessment indicates that the carrying value of the reporting unit, including goodwill, exceeds its fair value, a goodwill impairment is recorded for the amount by which the reporting unit’s carrying value exceeds its fair value.
During the three months ended March 31, 2020, the Partnership performed an interim goodwill impairment test due to a significant decline in the trading price of the Partnership’s common units, triggered by the combined impacts from the global outbreak of COVID-19 and the oil-market disruption resulting from significantly lower global demand and corresponding oversupply of crude oil. The Partnership primarily used the market approach and Level-3 inputs to estimate the fair value of its two reporting units. The market approach was based on multiples of EBITDA and the Partnership’s projected future EBITDA. The EBITDA multiples were based on current and historic multiples for comparable midstream companies of similar size and business profit to the Partnership. The EBITDA projections require significant assumptions including, among others, future throughput volumes based on current expectations of producer activity and operating costs. The reasonableness of the market approach was tested against an income approach that was based on a discounted cash-flow analysis. Key assumptions in this analysis include the use of an appropriate discount rate, terminal-year multiples, and estimated future cash flows, including estimates of throughput, capital expenditures, operating, and general and administrative costs. The Partnership also reviewed the reasonableness of the total fair value of both reporting units to the market capitalization as of March 31, 2020, and the reasonableness of an implied acquisition premium. Impairment determinations involve significant assumptions and judgments, and differing assumptions regarding any of these inputs could have a significant effect on the valuations. As a result of the interim impairment test, the Partnership recognized a goodwill impairment of $441.0 million during the first quarter of 2020, which reduced the carrying value of goodwill for the gathering and processing reporting unit to zero. Goodwill allocated to the transportation reporting unit of $4.8 million as of March 31, 2020, was not impaired.
The Partnership’s annual qualitative goodwill impairment assessment as of October 1, 2020, indicated no further impairment. Qualitative factors also were assessed in the fourth quarter of 2020 to review any changes in circumstances subsequent to the annual test. This assessment also indicated no impairment.
Other intangible assets. The other intangible assets balance on the consolidated balance sheets includes the fair value, net of amortization, primarily related to (i) contracts assumed in connection with the Platte Valley and Wattenberg processing plant acquisitions in 2011, which are being amortized on a straight-line basis over 38 years and (ii) contracts assumed in connection with the DBM acquisition in November 2014, which are being amortized on a straight-line basis over 30 years.
The Partnership assesses other intangible assets for impairment together with related underlying long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. See Property, plant, and equipment and other intangible assets in Note 1 for further discussion of management’s process to evaluate potential impairment of long-lived assets.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. GOODWILL AND OTHER INTANGIBLES
The following table presents the gross carrying value and accumulated amortization of other intangible assets:
Amortization expense for intangible assets was $33.0 million, $32.0 million, and $30.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. Intangible asset amortization to be recorded in each of the next five years is estimated to be $31.7 million for the years ended December 31, 2021 to December 31, 2025.
11. SELECTED COMPONENTS OF WORKING CAPITAL
A summary of accounts receivable, net is as follows:
A summary of other current assets is as follows:
_________________________________________________________________________________________
(1)See Note 1.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SELECTED COMPONENTS OF WORKING CAPITAL
A summary of accrued liabilities is as follows:
_________________________________________________________________________________________
(1)As of December 31, 2019, includes amounts related to WES Operating’s interest-rate swap agreements and lease liabilities related to the implementation of ASU 2016-02, Leases (Topic 842) (see Note 13 and Note 14).
12. ASSET RETIREMENT OBLIGATIONS
The following table provides a summary of changes in asset retirement obligations:
Revisions in estimated liabilities for the year ended December 31, 2020, primarily related to a reduction in expected settlement costs across several of the Partnership’s assets, with the largest decreases at the Third Creek gathering system, DJ Basin complex, Hilight system, and West Texas complex.
Liabilities incurred for the year ended December 31, 2019, represented additions in asset retirement obligations primarily due to capital expansions at the West Texas and DJ Basin complexes. Revisions in estimated liabilities for the year ended December 31, 2019, primarily related to (i) changes in expected settlement costs at the West Texas and DJ Basin complexes and (ii) changes to the expected abandonment timing of transportation assets in Wyoming.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DEBT AND INTEREST EXPENSE
WES Operating is the borrower for all outstanding debt and is expected to be the borrower for all future debt issuances. The following table presents the outstanding debt:
_________________________________________________________________________________________
(1)Fair value is measured using the market approach and Level-2 fair value inputs.
(2)Includes related-party amounts as of December 31, 2019.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DEBT AND INTEREST EXPENSE
Debt activity. The following table presents the debt activity for the years ended December 31, 2020 and 2019:
WES Operating Senior Notes. In January 2020, WES Operating issued the following notes:
•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 (collectively referred to as the “Fixed-Rate Senior Notes”). Including the effects of the issuance prices, underwriting discounts, and interest-rate adjustments (described below), the effective interest rates of the Senior Notes due 2025, 2030, and 2050, were 4.291%, 5.173%, and 6.375%, respectively, at December 31, 2020. These effective interest rates will increase by 0.25% on February 1, 2021, due to credit-rating downgrades. Interest is paid on each such series semi-annually on February 1 and August 1 of each year, beginning August 1, 2020; and
•Floating-Rate Senior Notes due 2023 (the “Floating-Rate Senior Notes”). As of December 31, 2020, the interest rate on the Floating-Rate Senior Notes was 2.07%. Interest is paid quarterly in arrears on January 13, April 13, July 13, and October 13 of each year. Interest is determined at a benchmark rate (which is initially a three-month London Interbank Offered Rate) on the interest determination date plus an initial spread of 0.85%.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DEBT AND INTEREST EXPENSE
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. In 2020, Fitch Ratings and Standard and Poor’s downgraded WES Operating’s long-term debt from “BBB-” to “BB” and Moody’s Investors Service downgraded WES Operating’s long-term debt from “Ba1” to “Ba2.” As a result of these downgrades, annualized borrowing costs will increase by $43.0 million.
During the year ended December 31, 2020, WES Operating purchased and retired $218.0 million of certain of its senior notes and Floating-Rate Senior Notes via open-market repurchases, and gains of $13.5 million were recognized for the early retirement of these notes.
As of December 31, 2020, the 5.375% Senior Notes due 2021 were classified as short-term debt on the consolidated balance sheet. Subsequent to December 31, 2020, WES Operating delivered notice to redeem the 5.375% Senior Notes due 2021 on March 1, 2021, as per the optional redemption terms in WES Operating’s indenture. At December 31, 2020, WES Operating was in compliance with all covenants under the relevant governing indentures.
WGP RCF. The WGP RCF, which previously was available to purchase WES Operating common units and for general partnership purposes, matured in March 2019, and the $28.0 million of outstanding borrowings were repaid.
Revolving credit facility. The RCF is expandable to a maximum of $2.5 billion and bears interest at the London Interbank Offered Rate (“LIBOR”), plus applicable margins ranging from 1.00% to 1.50%, or an alternate base rate equal to the greatest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.50%, or (c) LIBOR plus 1.00%, in each case plus applicable margins currently ranging from zero to 0.50%, based on WES Operating’s senior unsecured debt rating. A required quarterly facility fee is paid ranging from 0.125% to 0.250% of the commitment amount (whether drawn or undrawn), which also is based on the senior unsecured debt rating. In December 2019, WES Operating entered into an amendment to the RCF to, among other things, exercise the final one-year extension option to extend the maturity date of the RCF from February 2024 to February 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, remains February 2024. See Note 1.
As of December 31, 2020, there were no outstanding borrowings and $5.1 million of outstanding letters of credit, resulting in $2.0 billion of available borrowing capacity under the RCF. As of December 31, 2020 and 2019, the interest rate on any outstanding RCF borrowings was 1.64% and 3.04%, respectively. The facility-fee rate was 0.25% and 0.20% at December 31, 2020 and 2019, respectively. At December 31, 2020, WES Operating was in compliance with all covenants under the RCF.
As a result of credit-rating downgrades (see WES Operating Senior Notes above), 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%.
Term loan facility. In December 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). As of December 31, 2019, the interest rate on the outstanding borrowings was 3.10%. In January 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 (see WES Operating Senior Notes above). During the first quarter of 2020, a loss of $2.3 million was recognized for the early termination of the Term loan facility.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DEBT AND INTEREST EXPENSE
APCWH Note Payable. In June 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 with Anadarko. 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.
Interest-rate swaps. In December 2018 and March 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. Pursuant to these swap agreements, WES Operating received a floating interest rate indexed to the three-month LIBOR and paid a fixed interest rate. In November and December 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 in December 2018 and March 2019.
In December 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 year ended December 31, 2020, WES Operating made cash payments of $25.6 million. These cash payments were classified as cash flows from operating activities in the consolidated statements of cash flows.
The Partnership did not apply hedge accounting and, therefore, gains and losses associated with the interest-rate swap agreements were recognized in earnings. For the year ended December 31, 2019, non-cash losses of $125.3 million were recognized, which are included in Other income (expense), net in the consolidated statements of operations.
Interest expense. The following table summarizes the amounts included in interest expense:
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. LEASES
The Partnership adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019, using the modified retrospective method applied to all leases in existence on January 1, 2019, and prior-period financial statements were not adjusted. The Partnership elected not to reassess contracts that commenced prior to adoption, to continue applying its current accounting policy for existing or expired land easements, and not to recognize ROU assets or lease liabilities for short-term leases.
Lessee. The Partnership has entered into operating leases that extend through 2039 for corporate offices, shared field offices, easements, and equipment supporting the Partnership’s operations, with both Occidental and third parties as lessors. The Partnership also had subleased equipment from Occidental via finance leases that extended through April 2020. During the first quarter of 2020, the Partnership entered into finance leases with third parties for equipment and vehicles extending through 2029.
The following table summarizes information related to the Partnership’s leases:
________________________________________________________________________________________
(1)Includes additions to ROU assets and lease liabilities of $39.7 million and $8.5 million related to finance leases for the year ended December 31, 2020 and 2019, respectively. Includes additions to ROU assets and lease liabilities of $40.5 million related to operating leases for the year ended December 31, 2020.
Lease expense charged to the Partnership was $56.5 million for the year ended December 31, 2018. The following table summarizes the Partnership’s lease cost:
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. LEASES
The following table summarizes cash paid for amounts included in the measurement of lease liabilities:
The following table reconciles the undiscounted cash flows to the operating and finance lease liabilities at December 31, 2020:
Lessor. Effective December 31, 2019, an affiliate of Occidental and a wholly owned subsidiary of the Partnership entered into an operating and maintenance agreement pursuant to which Occidental provides operational and maintenance services with respect to a crude-oil gathering system and associated treating facilities owned by the Partnership through December 31, 2021. The agreement and underlying contracts include (i) fixed consideration, which is measured as the minimum-volume commitment for both gathering and treating, and (ii) variable consideration, which consists of all volumes above the minimum-volume commitment. Subsequent to the initial two-year term, the agreement provides for automatic one-year extensions, unless either party exercises its option to terminate the lease with advance notice. For the year ended December 31, 2020, the Partnership recognized fixed-lease revenue of $175.8 million and variable-lease revenue of $47.9 million related to these agreements, with such amounts included in Service revenues - fee based in the consolidated statements of operations.
The following table presents the undiscounted cash flows expected to be received for all operating leases in effect as of December 31, 2020. This presentation includes minimum fixed lease payments and does not include an estimate of variable lease consideration.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. EQUITY-BASED COMPENSATION
The general partner has the authority to grant equity compensation awards under the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan (“WES LTIP”) and the Western Gas Partners, LP 2017 Long-Term Incentive Plan (assumed by the Partnership in connection with the Merger) to its independent directors, executive officers, and employees. As of December 31, 2020, the WES LTIP and the Western Gas Partners, LP 2017 Long-Term Incentive Plan had 2,823,967 and 3,431,251 units, respectively, available for future issuance.
On February 10, 2020, the Board of Directors approved awards of phantom units (the “Awards”) to the Partnership’s executive officers under the WES LTIP. The Awards include (i) an award of time-vested phantom units that vest ratably over a three-year period (“Time-Based Awards”), (ii) a market award that vests after a three-year performance period based on the Partnership’s relative total unitholder return as compared to a group of peer companies (“TUR Awards”), and (iii) a performance award that vests based on the Partnership’s average return on assets over a three-year performance period (“ROA Awards”). At vesting, the number of vested units for the TUR Awards and the ROA Awards will be determined in accordance with the terms of the respective Award Agreements that provide for payout percentages ranging from 0% to 200% based on results achieved over the applicable performance period. At vesting, the Awards generally will be settled in Partnership common units. Prior to vesting, the Awards pay in-kind distributions in the form of Partnership common units. During the year ended December 31, 2020, the Partnership issued 48,070 common units as in-kind distributions under such Awards.
In addition, time-vested phantom units are awarded under the WES LTIP to non-executive employees and independent directors of the Partnership from time to time, which vest ratably over a three-year period and one year from the grant date, respectively. Prior to vesting, the awards to non-executive employees and independent directors pay distribution equivalents in cash.
The equity-based compensation expense attributable to these awards is amortized over the vesting periods applicable to the awards using the straight-line method. Expense is recognized based on the grant-date fair value and recorded, net of actual forfeitures, as General and administrative expense in the consolidated statements of operations. The fair value of the Time-Based Awards and non-executive awards is based on the observable market price of the Partnership’s units on the grant date of the award. The fair value of the TUR Awards is determined using a Monte Carlo simulation at the grant date of the award. The fair value of the ROA awards is adjusted quarterly based on the current period unit price and the estimated performance rating at vesting. For ROA Awards, all performance-related fair-value changes are recognized in compensation expense during the performance period. The total fair value of phantom units vested was $0.5 million, $1.2 million, and $0.6 million for the years ended December 31, 2020, 2019, and 2018, respectively, based on the market price at the vesting date. Compensation expense for the long-term incentive plans was $7.9 million, $1.0 million, and $0.7 million for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, the Partnership had $16.9 million of estimated unrecognized compensation expense attributable to the WES LTIP that will be recognized over a weighted-average period of 1.6 years.
The following table summarizes time-vested award activity under the WES LTIP for the years ended December 31, 2020, 2019, and 2018:
________________________________________________________________________________________
(1)At closing of the Merger, WES Operating phantom units awarded under the Western Gas Partners, LP 2017 Long-Term Incentive Plan converted into phantom units of the Partnership under the WES LTIP.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. EQUITY-BASED COMPENSATION
The following table summarizes TUR Awards and ROA Awards activity under the WES LTIP for the year ended December 31, 2020:
The following table summarizes award activity under the Western Gas Partners, LP 2017 Long-Term Incentive Plan for the years ended December 31, 2019 and 2018. There were no awards issued under this plan in 2020.
_________________________________________________________________________________________
(1)At closing of the Merger, WES Operating phantom units awarded under the Western Gas Partners, LP 2017 Long-Term Incentive Plan converted into phantom units of the Partnership under the WES LTIP.
WESTERN MIDSTREAM PARTNERS, LP AND WESTERN MIDSTREAM OPERATING, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS AND CONTINGENCIES
Environmental obligations. The Partnership is subject to various environmental-remediation obligations arising from federal, state, and local regulations regarding air and water quality, hazardous and solid waste disposal, and other environmental matters. As of December 31, 2020 and 2019, the consolidated balance sheets included $8.2 million and $5.4 million, respectively, of liabilities for remediation and reclamation obligations. The current portion of these amounts is included in Accrued liabilities, and the long-term portion of these amounts is included in Other liabilities. The recorded obligations do not include any anticipated insurance recoveries. The majority of payments related to these obligations are expected to be made over the next five years. Management regularly monitors the remediation and reclamation process and the liabilities recorded and believes its environmental obligations are adequate to fund remedial actions required to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not differ materially from recorded amounts nor materially affect the overall results of operations, cash flows, or financial condition. There can be no assurance, however, that current regulatory requirements will not change, or past non-compliance with environmental issues will not be discovered. See Note 11.
Litigation and legal proceedings. From time to time, the Partnership is involved in legal, tax, regulatory, and other proceedings in various forums regarding performance, contracts, and other matters that arise in the ordinary course of business. Management is not aware of any such proceeding for which the final disposition could have a material adverse effect on the Partnership’s financial condition, results of operations, or cash flows.
Other commitments. The Partnership has short-term payment obligations, or commitments, related to its capital spending programs, and those of its unconsolidated related parties, the majority of which is expected to be paid in the next twelve months. These commitments primarily relate to construction and expansion projects at the West Texas and DJ Basin complexes, DBM water systems, and DBM oil system.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. The Chief Executive Officer and Chief Financial Officer of WES’s general partner and WES Operating GP (for purposes of this Item 9A, “Management”) performed an evaluation of WES’s and WES Operating’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. WES’s and WES Operating’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information required to be disclosed in the reports that are filed or submitted under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, Management concluded that WES’s and WES Operating’s disclosure controls and procedures were effective as of December 31, 2020.
Management’s Annual Report on Internal Control Over Financial Reporting. See Management’s Assessment of Internal Control Over Financial Reporting under Part II, Item 8 of this Form 10-K.
Attestation Report of the Registered Public Accounting Firm. See Report of Independent Registered Public Accounting Firm under Part II, Item 8 of this Form 10-K.
Changes in Internal Control Over Financial Reporting. Except as described below, there were no changes in WES’s or WES Operating’s internal control over financial reporting during the quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, WES’s or WES Operating’s internal control over financial reporting.
In October 2020, WES and WES Operating transitioned from Occidental’s Enterprise Resource Planning (“ERP”) system to a stand-alone ERP system. As a result of this implementation, certain processes and internal controls over financial reporting that were provided by Occidental under the Services Agreement have transitioned to WES. Information technology general controls and associated business process controls have been implemented by WES to address the new environment associated with the implementation of this system. There are inherent risks in implementing any new system, and Management will continue to evaluate these control changes as part of its assessment of internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers, and Corporate Governance
Management of Western Midstream Partners, LP
As an MLP, we have no directors or officers. Instead, our general partner manages our operations and activities. The directors of our general partner oversee our operations. Unitholders are not entitled to elect the directors of our general partner or directly or indirectly participate in our management or operations. However, our general partner owes duties to our unitholders as defined and described in our partnership agreement. Our general partner will be liable, as general partner, for all of our debts (to the extent not paid from our assets), except for indebtedness or other obligations that are made specifically nonrecourse to it. Our general partner, therefore, may cause us to incur indebtedness or other obligations that are nonrecourse to it. The officers of our general partner are also officers of WES Operating GP.
Our Board of Directors has eight members, three of whom are independent as defined under the independence standards established by the NYSE and the Exchange Act. The NYSE does not require a listed limited partnership, such as us, to have a majority of independent directors on the Board of Directors or to establish a compensation committee or a nominating committee. Our Board of Directors has affirmatively determined that Messrs. Kenneth F. Owen and David J. Schulte and Ms. Lisa A. Stewart are independent as described in the rules of the NYSE and the Exchange Act.
Board Leadership Structure
Occidental owns our general partner and, within the limitations of our partnership agreement and applicable SEC and NYSE rules and regulations, also exercises broad discretion in establishing the governance provisions of our general partner’s limited liability company agreement. Accordingly, our general partner’s board structure is established by Occidental.
Although our general partner’s board structure has historically separated the roles of Chairman and Chief Executive Officer (“CEO”), our general partner’s limited liability company agreement and Corporate Governance Guidelines permit the roles of Chairman and CEO to be combined. Those roles may be combined in the future.
Directors and Executive Officers
The biography of each director below contains information regarding that person’s service as a director, business experience, director positions held currently or at any time during the last five years, and involvement in certain legal or administrative proceedings, if applicable, and the experiences, qualifications, attributes, or skills that caused our general partner and its Board of Directors to determine that the person should serve as a director of our general partner. In light of our strategic relationship with our sponsor, Occidental, our general partner considers service as an Occidental executive to be a meaningful qualification for service as a non-independent director of our general partner.
The following table sets forth certain information with respect to the directors and executive officers of our general partner as of February 22, 2021.
Our directors hold office until their successors are duly elected and qualified or until the earlier of their death, resignation, removal, or disqualification. Officers serve at the discretion of the Board of Directors. There are no family relationships among any of our directors or executive officers.
Glenn Vangolen
Houston, Texas
Director since:
August 2019
Not Independent
Biography/Qualifications
Mr. Vangolen has served as a director of our general partner’s Board of Directors since August 2019. Mr. Vangolen has been Senior Vice President, Business Support of Occidental since February 2015. In this role, Mr. Vangolen oversees the Human Resources and Administration; Information Technology; Flight Operations; Health, Environment, Safety, and Security; Government Relations and Corporate Secretary functions of Occidental. Mr. Vangolen has held positions of increasing responsibility in the oil and gas and corporate segments within Occidental, including senior leadership positions in the Middle East.
Michael P. Ure
Houston, Texas
Director since:
August 2019
Not Independent
Officer since:
August 2019
Biography/Qualifications
Mr. Ure has served as President and Chief Executive Officer of our general partner and as a director of our general partner’s Board of Directors since August 2019. Prior to joining WES, Mr. Ure served as Senior Vice President, Business Development of Occidental Oil and Gas beginning in July 2017 and as Vice President, Mergers and Acquisitions of Occidental from October 2014 to July 2017. Mr. Ure held a leadership role in evaluating acquisition and divestiture opportunities including, during his tenure, accountability for Occidental’s business development activities in North and Latin America. Prior to joining Occidental, Mr. Ure served in a leadership role with Shell Exploration and Production’s Upstream Americas Business Development organization and as an investment banker in New York, London, and Houston; most recently with Goldman, Sachs & Co. During his career, Mr. Ure has worked on total closed transactions representing more than $150 billion in value.
Robert W. Bourne
Houston, Texas
Officer since:
October 2019
Biography/Qualifications
Mr. Bourne has served as Senior Vice President and Chief Commercial Officer of our general partner since October 2019. Prior to joining WES, Mr. Bourne served as a member of the board of directors of Altus Midstream Company from November 2018 to August 2019. Mr. Bourne also served as a member of the board of directors and Vice President of Business Development - Marketing of Apache Corporation from April 2017 to August 2019. Prior to joining Apache Corporation, Mr. Bourne served as a consultant advising Smith Production Inc. Mr. Bourne served as Senior Vice President of Business Development at American Midstream GP LLC, the general partner of American Midstream Partners, LP from November 2014 until December 31, 2015. Mr. Bourne has more than 30 years of experience in midstream corporate business development focused on producer and end-user relations, and was one of the founding members of the executive management team for Coral Energy.
Craig W. Collins
Houston, Texas
Officer since:
August 2019
Biography/Qualifications
Mr. Collins has served as Senior Vice President and Chief Operating Officer of our general partner since August 2019. Mr. Collins served as Vice President, Midstream of Occidental from June 2019 through December 2019. In that role, Mr. Collins was responsible for leading Occidental’s midstream operations business unit. From April 2019 to May 2019, Mr. Collins served as Chief Operating Officer of Altus Midstream. From April 2018 to April 2019, Mr. Collins served as Vice President - Midstream, of Alta Mesa Resources, Inc., which filed a petition under the federal bankruptcy laws in September 2019. Concurrent with the role at Alta Mesa Resources, Inc., Mr. Collins also served as Chief Operating Officer of Kingfisher Midstream, a wholly owned subsidiary of Alta Mesa Resources, Inc. From February 2017 to April 2018, Mr. Collins served as Senior Vice President and Chief Operating Officer of the general partner and the general partner of Western Gas Partners, LP (now WES Operating) (“Western Gas”). Mr. Collins previously served as Director of Midstream Engineering for Anadarko from July 2016 to February 2017, during which time he was responsible for the engineering and construction of midstream infrastructure for Anadarko and Western Gas. Mr. Collins joined Anadarko in 2003 and served in several roles of increasing responsibility in Anadarko’s Treasury, Corporate Development, and Midstream groups.
Christopher B. Dial
Houston, Texas
Officer since:
December 2019
Biography/Qualifications
Mr. Dial has served as Senior Vice President, General Counsel and Secretary of our general partner since December 2019. Prior to joining WES, Mr. Dial served as Senior Vice President, General Counsel, and Chief Compliance Officer of the general partner of American Midstream Partners, LP from January 2018 to September 2019. Prior to joining American Midstream Partners, LP, Mr. Dial served as General Counsel of Susser Holdings II, L.P. after spending over eight years in a number of roles, most recently as Associate General Counsel and Corporate Secretary, with both Susser Holdings Corporation and Sunoco LP. Mr. Dial began his career as an attorney for Andrews Kurth, LLP, representing clients on a variety of corporate, capital markets, and other transactional matters.
Catherine A. Green
Houston, Texas
Officer since:
October 2019
Biography/Qualifications
Ms. Green has served as Vice President and Chief Accounting Officer of our general partner since October 2019. Ms. Green joined Anadarko in 2001 and has more than 20 years of accounting and audit experience. During her 18 years at Anadarko, Ms. Green served in a variety of diverse roles throughout the Anadarko accounting and finance organization, including internal audit, technical U.S. GAAP accounting, internal controls, and most recently as Director, Expenditure Accounting. Prior to joining Anadarko, Ms. Green was an auditor with Grant Thornton LLP in the United Kingdom and Houston.
Charles G. Griffie
Houston, Texas
Officer since:
October 2019
Biography/Qualifications
Mr. Griffie has served as Senior Vice President, Operations and Engineering since October 2019. Mr. Griffie was named Senior Vice President, U.S. Onshore Field Operations of Anadarko in November 2018. Prior to this role, Mr. Griffie served as Senior Vice President, Midstream and Marketing at Huntley & Huntley Energy Exploration from June 2016 to November 2018. From 2006 through June 2016, Mr. Griffie held various operational leadership positions at Anadarko, including as General Manager U.S. Onshore Business Advisor, Eagleford Operations Manager, Appalachian Basin Midstream Manager, and Director of Midstream Engineering. Mr. Griffie joined Anadarko through its acquisition of Western Gas Resources, Inc.
Peter J. Bennett
Houston, Texas
Director since:
August 2019
Not Independent
Biography/Qualifications
Mr. Bennett has served as a director of our general partner’s Board of Directors since August 2019. Mr. Bennett has served as Senior Vice President, Permian Resources of Occidental Oil and Gas, a subsidiary of Occidental, since April 2018 and Vice President of Occidental since December 2016. In this role, Mr. Bennett is responsible for the operations, growth, and optimization strategy for all of Occidental’s Permian Resources business. Mr. Bennett previously served as President and General Manager - Permian Resources, New Mexico Delaware Basin, from January 2017 to April 2018, Chief Transformation Officer from June 2016 to January 2017, Vice President, Portfolio and Optimization of Occidental Oil and Gas from February 2016 to June 2016 and, prior to that, pioneered innovative logistical and operational solutions as Vice President, Operations Portfolio and Integrated Planning of Occidental Oil and Gas from October 2015 to February 2016.
Oscar K. Brown
Houston, Texas
Director since:
August 2019
Not Independent
Biography/Qualifications
Mr. Brown has served as a director of our general partner’s Board of Directors since August 2019. Mr. Brown served as Senior Vice President, Strategy, Business Development and Supply Chain of Occidental from November 2018 to March 2020. In this role, Mr. Brown was responsible for, among other things, Occidental’s global business development functions and global supply chain management. Mr. Brown previously served as Senior Vice President, Corporate Strategy and Business Development from July 2017 to November 2018. Prior to joining Occidental in 2016, Mr. Brown worked at Bank of America Merrill Lynch, where he most recently served as managing director and co-head of Americas Energy Investment Banking. Mr. Brown served as Occidental’s designated representative on the board of directors of Plains All American Pipeline’s governing entity, PAA GP Holdings LLC (NYSE: PAA and PAGP) from August 2017 to September 2019. Mr. Brown also serves on the board of Houston’s Alley Theatre, and as a member of that board’s Executive Committee.
Nicole E. Clark
Houston, Texas
Director since:
December 2020
Not Independent
Biography/Qualifications
Ms. Clark has served as a director of our general partner’s Board of Directors since December 2020. Ms. Clark presently holds the position of Vice President, Deputy General Counsel and Corporate Secretary at Occidental, having joined Occidental in 2014. Prior to joining Occidental, Ms. Clark was Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer at a private-equity backed industrial distributor to the energy and petrochemicals markets. Before that, Ms. Clark was a Corporate Partner at Vinson & Elkins LLP, where she specialized in mergers and acquisitions, securities regulation and corporate governance. She began her legal career with Wachtell, Lipton, Rosen & Katz where she was a Corporate Associate. Prior to entering the law, Ms. Clark was an auditor at Arthur Andersen LLP.
Kenneth F. Owen
Houston, Texas
Director since:
September 2020
Independent
Biography/Qualifications
Mr. Owen has served as a director of our general partner, Chairman of the Audit Committee, and a member of the Special Committee of the Board of Directors since September 2020. Mr. Owen has been a consultant and entrepreneur since March 2018 and previously served as Co-founder, President and Chief Executive Officer of Moda Midstream from 2015 to 2018. Prior to Moda, Mr. Owen was at Oiltanking Partners, where he served as President and Chief Executive Officer of the general partner of Oiltanking Partners, L.P. (NYSE: OILT) and Oiltanking North America (OTNA). Mr. Owen originally joined OTNA in 2011 as Vice President and Chief Financial Officer and led the IPO of Oiltanking Partners, later moving into an operations role running the company's largest global terminal assets before becoming Chief Executive Officer. Before he joined Oiltanking, Mr. Owen worked in the energy investment banking groups at Citigroup Global Markets Inc. and UBS Investment Bank, where he advised on mergers and acquisitions, joint ventures, IPOs, and equity and debt transactions primarily for the midstream energy sector.
David J. Schulte
Kansas City, Missouri
Director since:
September 2020
Independent
Biography/Qualifications
Mr. Schulte has served as a director of our general partner, Chairman of the Special Committee, and a member of the Audit Committee of the Board of Directors since September 2020. Mr. Schulte serves as Chairman, Chief Executive Officer and President of CorEnergy Infrastructure, Inc., the first publicly traded energy infrastructure real estate investment trust. Prior to founding CorEnergy, Mr. Schulte was a co-founder and a Managing Director of Tortoise Capital Advisors where, from 2002 to 2015, he served on the investment committee and as a leader of new product development, and as President of several NYSE listed closed-end funds. Tortoise is a pioneer in developing funds focused on listed energy infrastructure debt and equity securities, including the first closed end master limited partnership fund in 2004. Prior to Tortoise, Mr. Schulte had professional experience in private equity and investment banking.
Lisa A. Stewart
Houston, Texas
Director since:
September 2020
Independent
Biography/Qualifications
Ms. Stewart has served as a director of our general partner, a member of the Audit Committee, and a member of the Special Committee of the Board of Directors since September 2020. Ms. Stewart serves as Sheridan Production Partners Executive Chairman, a position she has held since April 2020. From the founding of Sheridan in 2006, she served as Chairman, Chief Executive Officer and Chief Investment Officer overseeing all aspects of Sheridan acquisitions and the implementation of Sheridan’s strategy. In September 2019, eight Sheridan entities for which Ms. Stewart served as an executive officer filed a Chapter 11 bankruptcy case in the Southern District of Texas. Ms. Stewart has more than 35 years of experience in the oil and gas industry in engineering and management positions. Prior to founding Sheridan, Ms. Stewart served as Executive Vice President of El Paso Corporation and President of El Paso E&P and other non-regulated businesses. Prior to her time at El Paso, Ms. Stewart spent 20 years at Apache, leaving in January 2004 as Executive Vice President with responsibility for reservoir engineering, business development, land, environmental, health and safety, and corporate purchasing.
Reimbursement of Expenses of Our General Partner and Its Related Parties
Our general partner does not receive any management fee or other compensation for its management of WES. During 2019 under the WES omnibus agreement, we paid an annual general and administrative expense reimbursement of $250,000 and reimbursed Occidental for all insurance coverage expenses it incurred or payments it made on our behalf. Also during 2019, under WES Operating’s partnership agreement and WES Operating’s omnibus agreement, WES Operating reimbursed Occidental for general and administrative expenses allocated to it, as determined by Occidental in its reasonable discretion. On December 31, 2019, the WES and WES Operating omnibus agreements were terminated and replaced with the Services Agreement. Read Part III, Item 13 of this Form 10-K for additional information regarding these agreements.
Board Committees
The Board of Directors has two standing committees: the Audit Committee and the Special Committee.
Audit Committee. The Audit Committee is comprised of three independent directors, Messrs. Owen (Chairman) and Schulte and Ms. Stewart, each of whom is able to understand fundamental financial statements and at least one of whom has past experience in accounting or related financial management experience. The Board has determined that each member of the Audit Committee is independent under the NYSE listing standards and the Exchange Act. In making the independence determination, the Board considered the requirements of the NYSE and our Code of Ethics and Business Conduct. The Audit Committee held four meetings in 2020.
Mr. Owen has been designated by the Board of Directors as the “Audit Committee financial expert” meeting the requirements promulgated by the SEC based upon his education and employment experience as more fully detailed in Mr. Owen’s biography set forth above.
The Audit Committee assists the Board of Directors in its oversight of the integrity of the consolidated financial statements, internal control over financial reporting, and compliance with legal and regulatory requirements, and the policies and controls of WES and WES Operating. The Audit Committee has the sole authority to, among other things, (i) retain and terminate our independent registered public accounting firm, (ii) approve all auditing services and related fees and the terms thereof performed by our independent registered public accounting firm, and (iii) establish policies and procedures for the pre-approval of all audit, audit-related, non-audit, and tax services to be rendered by our independent registered public accounting firm. The Audit Committee is also responsible for confirming the independence and objectivity of our independent registered public accounting firm. Our independent registered public accounting firm has been given unrestricted access to the Audit Committee and to our management, as necessary.
Special Committee. The Special Committee is comprised of three independent directors, Messrs. Schulte (Chairman) and Owen and Ms. Stewart. The Special Committee reviews specific matters that the Board believes may involve conflicts of interest (including certain transactions with Occidental). The Special Committee will determine, as set forth in our partnership agreement, if the resolution of a conflict of interest submitted to it is fair and reasonable to us. The members of the Special Committee are not officers or employees of our general partner or directors, officers, or employees of its related parties, including Occidental. Our partnership agreement provides that any matters approved in good faith by the Special Committee will be conclusively deemed to be fair and reasonable to us, approved by all of our partners, and not a breach by our general partner of any duties it may owe us or our unitholders. The Special Committee held two meetings during 2020.
Meeting of Non-Management Directors and Communications with Directors
At each quarterly meeting of our Board of Directors, all of our independent directors meet in an executive session without management participation or participation by non-independent directors. Under our Corporate Governance Guidelines, these meetings are chaired on a rotating basis by the chairpersons of the Board’s Audit Committee and Special Committee.
The Board of Directors welcomes questions or comments about WES and its operations. Unitholders or interested parties may contact the Board of Directors, including any individual director, at BoardofDirectors@westernmidstream.com or at the following address: Name of the Director(s), c/o Secretary, Western Midstream Holdings, LLC, 9950 Woodloch Forest Drive, Suite 2800, The Woodlands, Texas 77380.
Code of Ethics, Corporate Governance Guidelines, and Board Committee Charters
Our general partner has adopted a Code of Ethics and Business Conduct (the “Code of Ethics”), which applies to our general partner’s Chief Executive Officer, Chief Financial Officer, principal accounting officer, Controller, and all other senior financial and accounting officers of our general partner. Our Code of Ethics is also applicable to all WES employees. If the general partner amends the Code of Ethics or grants a waiver, including an implicit waiver, from the Code of Ethics, we will disclose the information on our website. Our general partner has also adopted Corporate Governance Guidelines that outline the important policies and practices regarding our governance.
We make available free of charge, within the “Governance” section of our website at www.westernmidstream.com, and in print to any unitholder who so requests, our Code of Ethics, Corporate Governance Guidelines, Audit Committee charter, and Special Committee charter. Requests for print copies may be directed to investors@westernmidstream.com or to: Investor Relations, Western Midstream Partners, LP, 9950 Woodloch Forest Drive, Suite 2800, The Woodlands, Texas 77380, or telephone (832) 636-1009. The information contained on, or connected to, our website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the SEC.
Item 11.
Item 11. Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis (“CD&A”) describes the material elements, objectives, and principles of WES’s 2020 executive compensation program for its named executive officers (“NEOs”), recent compensation decisions, and the factors the Board considered in making those decisions. The NEOs for 2020 were:
_________________________________________________________________________________________
(1)Mr. Pearl left WES on September 11, 2020.
Executive Summary
Prior to December 31, 2019, we did not directly employ any of the persons responsible for managing our business. Our employees, including executive officers, who managed our business, were employed by Occidental (or, prior to the Occidental Merger, by Anadarko) and their respective subsidiaries other than us. During this period, compensation decisions for our executive officers were made by Occidental or Anadarko, and we reimbursed them for a portion of compensation expense that was allocated to us pursuant to the terms of our omnibus agreement.
Subsequent to the Occidental Merger, WES undertook a strategic shift toward becoming a functionally-independent company based on the recognition that operating our business under a midstream-focused organizational infrastructure, with an independent management team solely dedicated to WES, would position WES to achieve long-term cost efficiencies, increase the quality, safety, and reliability of WES’s service offerings and operate more competitively, thereby promoting the creation of long-term value for WES unitholders. Our executive management team, none of whom have any remaining role or responsibilities at Anadarko or Occidental, was brought into WES between August of 2019 and year-end 2019 to execute this transition. This change in organizational structure was and is a significant undertaking that informed all of our compensation decisions, including pay levels, the design of short-and long-term incentive programs, the determination of WES specific metrics used in these programs, and the benefit programs we provide.
In December 2019, we executed several agreements with Occidental designed to provide the legal and organizational framework for this transition. Among these agreements was the Amended and Restated Services, Secondment, and Employee Transfer Agreement (“Services Agreement”), which transferred employment of WES’s management team from Occidental to WES at year-end 2019 and provided for the secondment of all remaining WES-dedicated employees through the date of their formal transfer to WES-which occurred in the first quarter of 2020. Following the execution of the Services Agreement, the Board of Directors of our general partner (the “Board”) was vested with responsibility for all decisions relating to WES’s compensation programs, including the compensation of our NEOs.
The compensation actions taken by the Board in 2020 were designed to promote and align with this strategic and operational transition, but were also-in certain respects-limited or influenced by structural considerations relating to this transition and/or the Occidental Merger. For example:
•Under the Anadarko Change of Control Plan, any material diminution in compensation or benefits in connection with the transfer to WES of legacy Anadarko employees-who compromise the majority of our workforce-could have given rise to constructive termination claims and severance obligations.
•Although WES was deconsolidated from Occidental at year-end 2019, there were significant transition considerations in establishing standalone compensation program structures and administrative functions applicable to the newly-formed WES workforce. The WES organization therefore relied upon and
remained influenced to some degree by the established infrastructure and programs that existed at Occidental during 2020.
•Because WES did not have any employees prior to 2020, and all members of our executive management team were new to the organization, WES management did not have years of accumulated equity grants tending to establish unitholder alignment and retention incentives.
During this transition period, our Board took several key actions-both in furtherance of WES’s strategic objectives and in reaction to external factors-which directly or indirectly impacted executive compensation:
•Approved the Services Agreement with Occidental that outlined the terms of transferring employees, including our NEOs, to WES; this agreement specified that the terms and conditions of employment, including employee aggregate benefit values, be substantially the same as those provided to employees immediately prior to the transfer;
•Hired an independent compensation consultant;
•Established an annual cash incentive program with performance measures aligned solely with WES’s performance;
•Established an annual equity-based long-term incentive program that rewards executives based on WES’s absolute unit price performance, relative unit price performance compared to industry peers, and return on assets over a three-year performance period;
•Reviewed and made compensation changes to our executive officer base salaries, target bonus opportunities, and long-term incentive awards;
•Approved a 50% cut to our quarterly distributions to secure the Partnership’s long-term financial health; executives participated in the distribution reductions on their own unit holdings, and through tandem distribution rights on their outstanding unvested unit awards.
As our transition to a standalone midstream company evolves, we will continue to review our compensation and benefit programs in order to ensure they align with WES’s overall strategy, provide for the attraction and retention of executive talent, and align executive officers’ interests with those of our long-term unitholders.
2020 Business and Performance Highlights
2020 was a transformative year for WES as it embarked on a business transition predicated on the idea that WES could drive and sustain greater unitholder value by functioning as an independent enterprise and simultaneously shifting its financial strategy toward optimizing its balance sheet and ability to self-fund future growth. While executing this transition, and despite the challenges occasioned by a world-wide pandemic, during the 2020 fiscal year WES:
•Maintained 99.1% system availability.
•Achieved year-over-year increases in throughput for natural gas, crude oil and NGLs, and produced water despite a significantly challenged commodity price environment.
•Generated $1.23 billion in Free Cash Flow, more than thirty times that generated during 2019 and representing a roughly $1.93 billion improvement to the negative $704.5 million generated by the business in 2018.
•Achieved its 2021 target of below 4.0X consolidated total leverage a full year ahead of schedule.
•Worked to reduce future cash obligations and leverage by retiring 30.2 million units, via repurchases and redemptions, and $218.0 million of senior notes.
•Refinanced $3.0 billion in debt coming due in 2020 at highly attractive rates.
•Generated record, above-forecast, 2020 EBITDA primarily through cost-saving initiatives.
•Published our first ESG report.
How We Make Compensation Decisions
Our Board has responsibility for evaluating and approving the officer and director compensation plans, policies, and programs of the Partnership. The Board uses several resources in reviewing elements of executive compensation and making compensation decisions. These decisions are not purely formulaic, and the Board exercises judgement and discretion as appropriate.
Compensation Philosophy. Our compensation programs are designed to attract, retain, and motivate our executive team to successfully manage the operations of a standalone midstream company. Specifically, our compensation programs are designed to:
•Align with unitholder interests;
•Emphasize performance-based compensation, balancing short-term and long-term results;
•Reward absolute and relative performance; and
•Provide total compensation opportunities competitive with those offered to other executives across our industry.
Compensation Consultant. In 2020, the Board engaged Meridian Compensation Partners, LLC (Meridian) as its independent compensation consultant to provide advice on various executive compensation matters. Because 2020 was the first year our Board became fully responsible for making pay decisions related to our NEOs, this was our first year to use an independent compensation consultant. In 2020, Meridian provided guidance on our benchmarking peer group, pay levels, pay mix, severance benefits, and overall executive compensation program design.
Benchmarking Peers. With assistance from Meridian, the Board looked at several factors when determining an appropriate peer group of companies to use for benchmarking compensation opportunities. These factors included: similar midstream businesses of comparable size and scope, comparable executive roles and responsibilities, similar structure (largely independent strategy and governance (whether MLP or C-Corp)), and companies that are in competition for the same senior executive talent.
The Partnership’s peer group used for conducting the 2020 executive benchmarking assessment is listed below:
•Crestwood Equity Partners LP
•Magellan Midstream Partners LP
•DCP Midstream LP
•ONEOK, Inc.
•Enable Midstream Partners LP
•Plains All American Pipeline LP
•EnLink Midstream, LLC
•Targa Resources Corp.
•Equitrans Midstream Corporation
•Williams Companies, Inc.
Benchmarking Data. To assist in reviewing the design and structure of our executive compensation program, Meridian provided the Board with an independent assessment of the compensation programs and practices in our industry peer group. This assessment included compensation data and program design information that was obtained from the most recent public filings for each company. When reviewing benchmarking data, the Board reviewed 25th, 50th, and 75th percentile data, however, the Board does not target a specific percentile of the benchmark data, and in making officer compensation decisions, they take into account other considerations as noted below.
Role of Executive Officers in Executive Compensation. The Board, after reviewing the information provided by Meridian and considering other factors and with input from Meridian, determines each element of compensation for our CEO. When making determinations about each element of compensation for our other executive officers, the Board also considers recommendations from our CEO. Additionally, at the Board’s request, our executive officers may assess the design of, and make recommendations related to, our compensation and benefit programs, including recommendations related to the performance measures used in our incentive programs. The Board is under no obligation to implement these recommendations. Executive officers and others may also attend Board meetings when invited to do so, but the executive officers do not attend when their individual compensation is being discussed.
Other Considerations. In addition to the above resources, the Board considers other factors when making compensation decisions, such as individual experience, individual performance, internal pay equity, development and succession status, and other individual or organizational circumstances, including the current market and business environment. With respect to equity-based awards, the Board also considers the expense of such awards, the impact on dilution, and the relative value of each element comprising the executive officers’ target total compensation opportunity.
2020 Annual Compensation Program
Our executive compensation program includes direct and indirect compensation elements. We believe that a majority of an executive officer’s total compensation opportunity should be performance-based; however, we do not have a specified formula that dictates the overall weighting of each element. Beginning in 2020, as part of our transition to a standalone company, the Board established an annual target total compensation program that supports WES’s long-term strategic objectives and is competitive with industry practices.
As illustrated in the charts below, a majority of our NEO targeted annual direct compensation is at-risk; 85% for our CEO and 76%, on average, for our other NEOs. Specifically, 70% of our CEO’s compensation and 56%, on average, for our other NEOs’ compensation is tied directly to WES’s unit performance through their annual long-term incentive awards.
The charts above are based on the following compensation elements, as discussed under Analysis of 2020 Compensation Actions: base salaries approved in 2020; target bonus opportunities approved by the Board in 2020; and the target value of the 2020 annual long-term incentive awards.
Direct Compensation Elements. The direct compensation elements for our 2020 annual compensation program are outlined in the table below. The indirect compensation elements are outlined in the Indirect Compensation Elements section below.
Analysis of 2020 Compensation Actions
The following is a discussion of the specific actions taken by the Board in 2020 related to each of our direct compensation elements. Each element is reviewed annually, unless circumstances, such as a promotion, other change in responsibilities, significant corporate event or a material change in market conditions require a more frequent review.
Base Salary. In setting base salary levels for each of the NEOs, the Board considered a number of factors, including each executive’s experience, individual performance, internal pay equity, development, and other individual or organizational circumstances, including the current market and business environment.
Prior to 2020, the compensation of WES’s executive officers, who became WES employees at year-end 2019, was based on decisions made by Anadarko and/or Occidental based on their roles in 2019. The table below reflects the base salaries for the NEOs established in 2020 at the commencement of the WES Board’s role in determining executive compensation at levels the Board believed were consistent with the transition and changes in their WES-dedicated roles and responsibilities.
Mr. Ure’s salary reflects his responsibilities leading WES as a standalone company, based-in part- on our peer benchmark data. The establishment of salaries for the other NEOs was also informed by peer benchmark data with a view toward promoting internal compensation alignment.
Equity-Based Long-term Incentive Awards. Prior to the Occidental Merger, Anadarko periodically granted equity-based awards under their Omnibus Incentive Plan and, likewise, Occidental granted equity-based awards under the
Occidental LTIP Plan. As part of our transition to a standalone company, in February 2020, our Board established an annual long-term incentive program that consists of a combination of time-based units and performance-based units.
This use of both time-based and performance-based awards was intended to provide a combination of equity-based vehicles that are performance-based in absolute and relative terms while also encouraging retention. Our equity-based long-term incentive program is designed to reward our executive officers for sustained long-term unit performance. This program represents 70% of targeted annual direct compensation for our CEO and an average of 56% for our other NEOs.
Time-Based Units. These units, reflecting 50% of the overall 2020 annual long-term incentive awards, vest annually over a three-year period. Upon vesting, the awards are settled in WES common units. Distribution equivalent rights for time-based awards made during 2020 are paid during the vesting period in the form of WES common units.
Return on Asset Performance Units (“ROA Units”). The Board established ROA as a performance criterion for 25% of the 2020 annual long-term incentive awards. ROA is calculated each year during a three-year performance period as follows:
Adjusted
EBITDAdivided byAverage
Consolidated Total
Assets
The actual number of units earned for the three-year performance period will be based on WES’s average annual ROA during this period. The following table reflects the payout scale used to determine the number of units earned. In the event performance falls between a whole percentage, the payout will be interpolated linearly.
The number of units earned will be paid in the form of WES common units after the end of the performance period and after the Board has certified the attainment of ROA. Distribution equivalent rights for ROA Unit awards made during 2020 are paid during the performance period in the form of WES common units, assuming target performance.
Total Unit Return Performance Units (“TUR Units”). The Board established relative TUR as a performance criterion for 25% of the 2020 annual long-term incentive awards. The units are subject to relative TUR over a three-year performance period, with TUR calculated as follows:
Average Closing Common Unit Price for the last 30 trading days of the performance periodminusAverage Closing Common Unit Price for the 30 trading days preceding the beginning of the performance periodplusDistributions paid per Common Unit over the performance period (based on ex-dividend date)
divided by
Average Closing Common Unit Price for the 30 trading days preceding the beginning of the performance period
The industry peer group for our 2020 TUR awards is listed below. The TUR peer group differs from our compensation benchmarking peer group due primarily to the exclusion of C-Corp peers, whose securities have a different trading profile than that of master limited partnerships.
•Crestwood Equity Partners LP
•EQM Midstream Partners LP
•DCP Midstream LP
•Magellan Midstream Partners LP
•Enable Midstream Partners LP
•Noble Midstream Partners LP
•EnLink Midstream, LLC
•Plains All American Pipeline LP
If during the performance period, a peer company is acquired, ceases to exist, ceases to be a publicly-traded partnership, files for bankruptcy, spins off 25% or more of its assets, or sells all or substantially all of its assets, then such partnership shall be deemed to fall to the bottom of the relative TUR ranking for the performance period.
The actual number of units earned for the three-year performance period will be based on WES’s relative TUR during this period. The following table reflects the payout scale used to determine the number of units earned.
The number of units earned will be paid in the form of WES common units after the end of the performance period and after the Board has certified the attainment of relative TUR. Distribution equivalent rights for TUR Unit awards made during 2020 are paid during the performance period in the form of WES common units, assuming target performance.
2020 Equity Awards. Effective February 12, 2020, the Board approved the following annual long-term incentive awards under the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan. These awards are included in the Grants of Plan-Based Awards Table. In determining the annual equity awards, the Board took into consideration our peer benchmarking data, internal pay equity, retention concerns, and current NEO unit ownership levels. Because each of our executive officers was newly-appointed to WES, each of them generally had minimal or no equity interest in WES prior to the 2020 LTI award cycle.
_________________________________________________________________________________________
(1)Target LTI values vary slightly from those reported in the Summary Compensation Table and Grants of Plan-Based Awards Table, which are calculated in accordance with FASB ASC Topic 718.
Special Equity Awards. In addition to the annual awards, in February 2020, the Board approved special equity awards in the form of time-based units to each of the NEOs. Because our NEOs were new to the Partnership in 2019 and had minimal WES equity, these grants were made to increase their equity holdings to a level adequate to instill an ownership culture more closely aligning their interests with those of our unitholders and to provide additional retentive value. These units vest annually over a three-year period, and upon vesting, the awards are settled in WES common units. Distribution equivalent rights are paid during the vesting period in the form of WES common units. The table below shows the special equity awards granted to each NEO.
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(1)Target LTI values vary slightly from those reported in the Summary Compensation Table and Grants of Plan-Based Awards Table, which are calculated in accordance with FASB ASC Topic 718.
Performance-Based Annual Cash Incentives-WES Cash Bonus Program. During 2020, as part of our transition to a standalone business, the Board approved the WES Cash Bonus Program (“WCB Program”) under the US Incentive Compensation Program. Under this program, annual cash bonus awards are earned by eligible employees, including our NEOs, based on the board’s discretion, taking into account the achievement of specified business objectives and individual performance objectives.
In February 2020, individual target bonus opportunities were approved by the Board for each of our NEOs as noted in the table below.
The NEO target bonuses were determined based on a review of our peer benchmarking data and internal pay equity considerations.
Performance Metrics. In February 2020, the Board approved performance measures and targets to be used as an aid in determining annual cash awards under the WCB Program for the one-year performance period that ended December 31, 2020. Our annual incentive program was designed to include measures that support our primary business strategy of creating long-term value for our unitholders by safely delivering above-average customer service and system availability, and obtaining new business over time, while achieving costs efficiencies and optimizing our financial profile.
The table below reflects the Partnership’s original 2020 performance metrics, performance targets and actual performance under these metrics.
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(1)Controllable Cash includes operating expenses and general and administrative expenses, excluding non-cash restricted stock unit, bonus and benefits expense.
(2)System Availability is a measure of the “real” average availability experienced by WES’s customers related to its gas systems, oil systems, and water-disposal wells. It considers the ratio of average actual daily volumes to expected daily volumes and includes all experienced sources of downtime, such as scheduled and unscheduled downtime, logistic downtime, etc. The total availability score is a weighted average with more weight given to higher gross-margin-producing assets.
(3)Discretionary Capital Spend (Discretionary Capital Expenditures plus Equity Investments) includes expansion capital expenditures and expenditures related to equity investments. This metric does not include maintenance capital expenditures, as defined in WES’s financial statements.
(4)Leverage is calculated as the December 31, 2020 total debt balance divided by the trailing 12-months adjusted EBITDA.
(5)TRIR includes injuries or illnesses that result in any of the following: days away from work, restricted work or transfer to another job, medical treatment beyond first aid, loss of consciousness, or death.
(6)Overall Performance is assessed based upon WES’s year-over-year performance, including the ability to generate accretive third-party business and distributable cash flow.
COVID 19 and Our Board’s Approach to 2020 Bonuses. Shortly after the approval of the 2020 executive compensation programs described above, including the WCB Program, the energy industry found itself confronted with unprecedented challenges spurred by the COVID 19 global pandemic. Commodity prices fell and many producers forecasted significant production curtailments. In response to these challenges, WES cut its distribution to unitholders by 50%, eliminated geographical bonuses to certain employees, suspended promotions and pay raises for all of its personnel and required many of its personnel to work remotely. In March 2020, Mr. Ure informed the Board that he intended to forego cash bonus eligibility in order to reduce his cash compensation for the 2020 fiscal year.
This rapid change in the global economy prompted WES’s management team and Board to quickly recognize that the WCB Program performance targets described above, while valid leading indicators of WES’s performance in delivering long-term, sustainable value for unitholders, were not necessarily the most appropriate near-term measures of WES’s ability to withstand the immediate challenges brought by COVID 19. Accordingly, the Board utilized greater discretion in approaching 2020 bonuses than might ordinarily be expected and considered many factors, including not just WES’s attainment of previously enunciated goals, but also the recognition that the industry as a whole experienced significant challenges in 2020, which were shared by WES unitholders and employees alike, and that ongoing economic uncertainty is likely to persist into 2021. As a result, despite the fact that management’s overall performance exceeded the quantitative metrics established by the Board, it was determined that a 95% payout under the 2020 WCB Program was appropriate. This bonus level recognized WES’s meaningful financial and operational performance while also attempting to strike an appropriate balance with the hardships occasioned by-and remaining challenges coming out of-the COVID 19 pandemic and associated disruptions to the energy sector as a whole. The payout level was derived with particular importance placed on and potential improvement opportunities related to operating safely. Further, while recognizing that Mr. Ure previously informed the WES Board of his intent to forego a cash bonus as part of WES’s initial response to COVID 19, the Board determined that he should nevertheless be rewarded in light of WES’s performance during the particular challenges brought by 2020.
Actual Bonuses Earned for 2020. The cash bonus awards for 2020 for our NEOs are shown in the table below and are reflected in the “Bonus” column of the Summary Compensation Table.
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(1)Mr. Pearl is excluded from this table as he had left WES prior to the determination of awards and did not receive a 2020 bonus award.
Indirect Compensation Elements
As identified in the table below, the Partnership provides certain benefits and perquisites (considered indirect compensation elements) that are considered typical within our industry and necessary to attract and retain executive talent. The value of each element of indirect compensation is generally structured to be competitive within our industry.
Retirement Benefits. Beginning in 2020, all our regular employees, including our NEOs, are eligible to participate in the Western Midstream Savings Plan, a defined-contribution benefit plan maintained by WES. We do not have a non-qualified savings restoration plan that provides for the accrual and deferral of employer contributions that the participant would have otherwise been eligible for absent the Internal Revenue Code (“IRC”) limitations that restrict the amount of benefits payable under the tax-qualified savings plan. However, in 2020, the Board approved a cash restoration payment program that provides a direct cash payment to participants in the amount of employer contributions that would have been allocated to the participant’s savings plan account each year, without regard to the IRC limitations. Prior to 2020, our NEOs participated in retirement plans provided by their legacy employer (Occidental or Anadarko). Their participation in these plans ceased when their employment was transferred to the Partnership on December 31, 2019 and we are not responsible for any expense related to these prior benefits.
Other Benefits. We provide other benefits such as medical, dental, vision, flexible spending and health savings accounts, paid time off, life insurance, and disability coverage to our executive officers. These benefits are also provided to all other eligible U.S. based employees. As legacy Anadarko management employees, Messrs. Pearl and Griffie were eligible for participation in a Management Life Insurance Plan, which provides an additional life insurance benefit of up to two times base salary. This plan was eliminated for 2021.
Perquisites. We provide a limited number of perquisites, including reimbursement of financial counseling, tax preparation, and estate planning services expense up to $4,000 annually, and reimbursement for the cost of personal excess liability insurance. The expenses related to the perquisites are imputed and considered taxable income to the executive officers, as applicable. We do not provide tax gross-ups on these perquisites. The incremental costs of the perquisites provided are included in the “All Other Compensation” column and supporting footnotes of the Summary Compensation Table.
Severance Benefits. In connection with the transfer of employment of our employees to WES on December 31, 2019, and per the terms of our Services Agreement, we assumed certain severance and termination pay obligations under existing Anadarko and Occidental plans and agreements for all employees, including officers, who were employed with Anadarko prior to the Occidental Merger. While employees maintain their eligibility and participation under these arrangements, our obligations are limited to no greater than:
•Six months of employee’s base salary or
•An amount the officer would be entitled to receive under the formulas set forth in Anadarko’s non-change in control Officer Severance Plan
•The Anadarko Entities, not our General Partner, are responsible for any payments that exceed these amounts.
Because Messrs. Pearl and Griffie were employees with Anadarko prior to the Occidental Merger, per the terms of our Services Agreement they were eligible for the benefits noted above. However, in connection with their acceptance of special retention awards granted to them in 2019, Messrs. Pearl and Griffie waved their right to receive severance pay or benefits upon resignation of employment for good reason or involuntary termination without cause.
In order to provide for uniformity in severance entitlements, on December 31, 2019, our Board extended the benefits under the Anadarko Change of Control Plan to all WES employees who were not employed with Anadarko prior to the Occidental Merger (this includes Messrs. Ure, Collins, and Bourne). These benefits will apply for so long as the Anadarko Change of Control Plan continues to apply for the former Anadarko employees who are now employed with us. For these NEOs, we will be responsible for 100% of these broad-based severance payments and benefits available under the plan.
A detailed discussion of the benefits under these programs is included in the Potential Payments Upon Termination or Change of Control section below.
Additional Compensation Policies and Provisions
The following provides a discussion of additional policies and provisions we have in place related to our overall executive compensation program.
Equity Grant Practices. WES maintains the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan and the Western Gas Partners, LP 2017 Long-Term Incentive Plan, which govern the issuance of equity and equity-based awards. Under the provisions of these Plans, the Board has the authority to grant equity awards to our Section 16 officers. The grant date fair value of each award is based on the closing unit price of WES’s common units on the NYSE on the grant date as designated by the Board. The grant date fair value of the TUR and ROA awards also incorporates the estimated payout percentage of the award on the grant date. As authorized by the terms of the Plans, the Board has delegated to Mr. Ure the authority to grant equity awards in certain circumstances to new employees and to grant equity awards to WES’s employees who are not Section 16 officers.
Clawback Provisions. Per the terms of our 2020 long-term incentive awards which were granted under the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan, if WES is required to prepare an accounting restatement due to the material noncompliance of the Partnership, as a result of misconduct, with any financial reporting requirement under the securities laws, and if the recipient knowingly engaged in the misconduct (whether or not they are an individual subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002), the Board (or delegated Plan Administrator) may determine that the recipient must reimburse WES the amount of any payment in settlement of an award earned or accrued during the twelve-month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever first occurred) of the financial document embodying such financial reporting requirement.
Prohibition Against Derivative Transactions and Hedging. Our Insider Trading Policy expressly prohibits directors, officers and designated employees from directly or indirectly entering into equity derivative or other financial instruments (including, but not limited to, options, puts, calls, swaps, collars, forward contracts, hedges, exchange funds or short sales) tied to WES securities (including equity securities received as part of a compensation program as well as WES equity securities acquired personally).
Tax Law Considerations. We are a limited partnership for United States federal income tax purposes. Therefore, the compensation paid to our NEOs is not subject to the deduction limitations under Section 162(m) of the IRC. We have structured our compensation programs in a manner intended to be exempt from, or to comply with Section 409A of the IRC.
Compensation Committee Report
Neither we nor our general partner has a compensation committee. The Board of Directors has reviewed and discussed the Compensation Discussion and Analysis set forth above and based on this review and discussion has approved it for inclusion in this Form 10-K.
The Board of Directors of Western Midstream Holdings, LLC:
Glenn Vangolen
Michael P. Ure
Peter J. Bennett
Oscar K. Brown
Nicole E. Clark
Kenneth F. Owen
David J. Schulte
Lisa A. Stewart
EXECUTIVE COMPENSATION
As noted above, prior to 2020, we did not directly employ any of the persons responsible for managing or operating our business. Instead, we were managed by our general partner, and our executive officers were employees of Anadarko and Occidental. During this period, our reimbursement for the compensation of our executive officers was governed by the omnibus agreement. In December 2019, we executed several agreements with Occidental that enabled us to operate as a standalone business. Among these agreements was the Services Agreement, which transferred employment of WES’s management team from Occidental to WES.
Summary Compensation Table
The following table summarizes the compensation amounts expensed by us for our NEOs for the years ended December 31, 2020, 2019, and 2018. For 2020, the amounts include the full expense of our officers. For 2019, the amounts reflect the portion of the expense allocated to us by Anadarko and Occidental. None of these officers were considered NEOs in 2018, so there was no allocated expense to disclose for this year.
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(1)For 2020, the amounts reflect each officer’s full base salary expense. For Messers. Ure, Collins and Bourne their 2020 amounts reflect one additional pay period that occurred during the year because of the administrative timing of transferring from the Occidental payroll to WES’s payroll. The 2019 amounts reflect the base salary expense allocated to us by Anadarko and Occidental.
(2)This column reflects annual cash bonus awards under the WCB Program for the year ended December 31, 2020.
(3)This column reflects the aggregate grant date fair value of stock awards, computed in accordance with FASB ASC Topic 718 (without respect to the risk of forfeitures). The value ultimately realized upon the actual vesting of the award(s) may or may not be equal to this determined value. The 2020 amounts reflect the full grant date fair value of awards granted during the year. The 2019 amounts reflect the allocated grant date fair value of awards granted in 2019. For information regarding the awards granted in 2020, see the Grants of Plan-Based Awards in 2020 table. Upon Mr. Pearl’s termination from the Partnership on September 11, 2020, he received a prorated portion of the disclosed 2020 awards based on the number of days he was employed during the vesting period and applicable performance period.
(4)This column reflects annual cash bonus compensation amounts allocated to us for the year ended December 31, 2019 under the Anadarko and Occidental plans.
(5)For 2019, the amounts in this column reflect the compensation expenses related to Anadarko’s and Occidental’s retirement and savings plans that were allocated to us for the year. For 2020, the amounts reflect the expenses detailed in the table below:
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(1)In conjunction with Mr. Pearl’s termination from the Partnership on September 11, 2020, he received a payout of his accrued but unused paid time off balance of $67,813 and also received a cash payment of $167,146 to restore the employer contributions under the employee 401(k) plan he would have otherwise been entitled to absent the IRS compensation limits.
Grants of Plan-Based Awards in 2020
The following table sets forth information concerning annual cash incentive awards, equity incentive plan awards, and unit awards. The equity incentive plan and unit awards were granted pursuant to the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan during 2020 to each of the NEOs as described below.
Non-Equity Incentive Plan Awards (WCB Program). Values disclosed reflect the estimated cash payouts under the WES WCB Program, as discussed in the Compensation Discussion and Analysis. If threshold levels of performance are not met, the payout can be zero. If maximum levels of performance are achieved, the plan funding is capped at 200% of target payout. Because of the significant amount of discretion exercised by the Board in determining this year’s bonus amounts under the WCB Program, the amounts actually paid to the NEOs for 2020 are disclosed in the Summary Compensation Table in the “Bonus” column.
Equity Incentive Plan Awards (ROA Units and TUR Units). Values disclosed reflect grant date fair values for ROA Units and relative TUR Units, as discussed in the Compensation Discussion and Analysis. Officers may earn between 0% and 200% of the target awards based on WES’s performance over a three-year performance period. Performance units earned are settled in the form of common units. The awards include tandem distribution equivalent rights in the form of common units paid on the applicable distribution payment date.
Time-Based Unit Awards. Values disclosed reflect grant date fair values for time-based unit awards that vest ratably over three years, beginning with the first anniversary of the grant date. The awards include tandem distribution equivalent rights in the form of common units paid on the applicable distribution payment date.
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(1)The non-equity incentive plan has a maximum overall funding of 200%, but there are no individual maximums established.
(2)The amounts reflect the fair value on the grant date of the awards made to the NEOs in 2020 computed in accordance with FASB ASC Topic 718. The value ultimately realized by the executive upon the actual vesting of the award(s) may or may not be equal to the determined value. For a discussion of valuation assumptions for the awards, see Note 15-Equity-Based Compensation in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
(3)Mr. Pearl’s employment with the Partnership ended on September 11, 2020 and he did not receive a payout under the non-equity incentive plan and also forfeited a prorated portion of his equity incentive awards and stock awards upon his resignation. The values disclosed reflect the full awards granted to him in 2020.
Outstanding Equity Awards at Year-End 2020
The following table reflects outstanding equity awards for each NEO as of December 31, 2020. The market values shown are based on WES’s closing unit price of $13.82 on December 31, 2020. The table excludes any prior outstanding awards granted under the Occidental LTIP Plan, as per the terms of the December 2019 Services Agreement, the Partnership no longer reimburses Occidental for the expense of these awards that were granted prior to 2020.
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(1)The time-based units vest ratably over three years in installments on the first, second, and third anniversaries of the grant date. One-third of the outstanding units vested on February 12, 2021, and the remaining unvested portion will vest one-third on February 12, 2022 and one-third on February 12, 2023. At the end of each vesting period, the number of units that vest are settled in unrestricted WES common units, less any units withheld for taxes.
(2)The number of outstanding performance units (including ROA units and TUR units) and the estimated payout values disclosed for each award, are calculated based on WES’s return on assets performance and relative total unit return performance ranking as of December 31, 2020, and are not necessarily indicative of what the payout earned will be at the end of each three-year performance period. Mr. Pearl’s outstanding units are based on his awards that were prorated upon his termination and continue to be subject to the original performance criteria. The three-year performance period for these awards is January 1, 2020 to December 31, 2022. WES’s performance to date as of December 31, 2020 under the ROA awards was 145% and 175% under the TUR awards.
Option Exercises and Units Vested in 2020
The following table reflects information about the aggregate dollar value realized during 2020 by our NEOs for WES awards that vested in 2020. The table below excludes the vesting of any prior awards granted under the Occidental LTIP, as per the terms of the December 2019 Services Agreement, the Partnership no longer reimburses Occidental for the expense of awards that were granted prior to 2020.
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(1)The number of units acquired on vesting include the vesting of distribution equivalent rights that, per the terms of the underlying award agreements, were settled in common units on the date of the distribution payment. Mr. Pearl’s value also includes the prorated number of WES time-based units that vested upon his termination of employment on September 11, 2020.
(2)The value realized on vesting represents the aggregate number of units that vested multiplied by the common unit price on the vesting date. The actual value ultimately realized by the officer, may be more or less than the valued disclosed in the above table, depending upon the timing in which he held or sold the units associated with the vesting occurrence.
Pension Benefits for 2020
WES does not have a defined benefit pension plan that provides NEOs a fixed monthly retirement payment. Instead, all salaried employees on the U.S. dollar payroll, including the NEOs, are eligible to participate in a tax-qualified defined contribution plan.
Nonqualified Deferred Compensation for 2020
WES does not have a nonqualified deferred compensation plan that allows employees the ability to accumulate additional retirement through deferrals of compensation.
Potential Payments Upon Termination or Change of Control
In connection with the transfer of employment of our NEOs to a subsidiary of WES on December 31, 2019, and per the terms of our Services Agreement, we assumed severance and termination pay obligations under plans and programs maintained by Anadarko and Occidental. The severance and termination pay arrangements of Anadarko included, for Messrs. Pearl and Griffie, a key employee change of control contract, pursuant to which the executive would be entitled to enhanced severance benefits in the event of an involuntary termination of employment without cause or resignation for good reason following a change of control of Anadarko. The Occidental Merger constituted a change of control of Anadarko for purposes of these agreements. In 2019, to encourage retention and dedication, Messrs. Pearl and Griffie were granted retention awards by Occidental in exchange for waiving their right to receive severance pay or benefits upon a resignation of employment for good reason or involuntary termination without cause under these agreements. Pursuant to the Services Agreement, we are not responsible for the cost of these retention awards.
The severance and termination pay arrangements of Anadarko also included the Anadarko Petroleum Corporation Amended and Restated Change of Control Severance Plan, which was a broad-based plan covering substantially all of Anadarko’s employees who provided services to us and provided for enhanced severance benefits following a change of control of Anadarko (the “Anadarko COC Plan”). The Anadarko COC Plan provided that eligible participants are entitled to certain severance benefits if (i)(A) the participant’s employment is terminated without cause by the participant’s employer or (B) if the participant terminates his or her employment within ninety days following the sale or disposition of the participant’s employer in which the participant was not offered substantially similar employment and compensation terms with the purchaser, in each case, within three years of a change of control or (ii) the participant resigns for good reason within one year following a change of control (all such terminations, a “Qualifying Termination”). Assuming there is a Qualifying Termination, the severance benefits upon termination under the Anadarko COC Plan include the following:
•A cash lump sum equal to (A) 50% of the sum of (i) the participant’s monthly base salary plus (ii) the highest annual bonus received by the participant over the previous three years, divided by twelve, multiplied by the number of years of service by the participant (clauses (i) and (ii), “Monthly Compensation”) and (B) one month of Monthly Compensation for each $10,000 of annual compensation (base salary plus highest annual bonus), rounding up to the next highest whole multiple of $10,000 if the participant’s annual compensation is not a multiple of $10,000 (the “Severance Benefit”);
•A cash lump sum equal to the pro-rata annual bonus based on the participant’s target bonus percentage; and
•Continuation of medical and dental insurance coverage for up to six months following termination of employment.
Notwithstanding the foregoing benefits, the minimum Severance Benefit under the Anadarko COC Plan is three times the Monthly Compensation and the maximum Severance Benefit is twenty-four times the Monthly Compensation. While employees maintain their eligibility and participation under these arrangements, our obligations are limited to no greater than 6 months of employee’s base salary or for our NEOs, an amount the officer would be entitled to receive under the formulas set forth in Anadarko’s non-change in control Officer Severance Plan. The Anadarko Entities, not our General Partner, are responsible for any payments that exceed these amounts.
In order to provide for uniformity in severance entitlements, on December 31, 2019, our Board extended the benefits under the Anadarko COC Plan to the NEOs who were not employed with Anadarko prior to the Occidental Merger (this includes Messrs. Ure, Collins, and Bourne). These benefits will apply for so long as the Anadarko COC Plan continues to apply for the former Anadarko employees who are now employed with us. For these NEOs, we will be responsible for 100% of these broad-based severance payments and benefits available under the plan.
Per the terms of our Services Agreement we will not reimburse Occidental in cash for amounts related to the vesting of any outstanding equity or long-term incentive awards (whether vested, unvested, deferred, or otherwise) previously granted by Anadarko or Occidental to our NEOs, accordingly these awards are excluded from the amounts shown below.
Involuntary For Cause. For “cause” is generally defined as: (i) conviction of a felony or of a misdemeanor involving moral turpitude, (ii) willful failure to perform duties or responsibilities, (iii) engaging in conduct which is injurious (monetarily or otherwise) to the Partnership (or any affiliates), (iv) engaging in business activities which are in conflict with the business interests of the Partnership (or any affiliates), (v) insubordination, (vi) engaging in conduct which is in violation of any applicable policy or work rule, (vii) engaging in conduct in violation of applicable safety rules or standards, or (viii) engaging in conduct that is in violation of the applicable Code of Ethics and Business Conduct.
Involuntary Not For Cause Termination. As of December 31, 2020, unless otherwise noted, our NEOs were eligible for severance benefits under the broad-based Anadarko COC Plan in the event they are terminated without cause before the end of the change of control period defined under the Plan, which is August 8, 2022. The original severance benefits were subject to a double-trigger; however, the Occidental Merger constituted a change of control of Anadarko for purposes of these arrangements and met the requirements for the first trigger. Accordingly, benefits are now subject only to the second trigger of an involuntary not for cause termination.
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(1)The amounts above for Messrs. Ure, Collins and Bourne reflect the double-trigger broad-based rights extended to them under the Anadarko COC Plan. Due to the waiver of certain change of control rights discussed above, Messrs. Pearl and Griffie do not have arrangements covering involuntary not for cause termination. Mr. Pearl left the Partnership on September 11, 2020, and did not receive any cash severance in connection with his departure.
(2)The amounts for Messrs. Ure, Collins and Bourne reflect a prorated annual bonus based on their target bonus for the year, assuming that each such NEO’s employment terminates as of December 31 of the applicable year, pursuant to the rights extended to them under the Anadarko COC Plan. Mr. Pearl did not receive a bonus upon his termination and Mr. Griffie, as discussed above, has waived his rights to a prorated bonus.
(3)The amounts reflect the estimated current value of a prorated portion of unvested time-based units and unvested performance units, based on performance to date, all as of December 31, 2020. In the event of an involuntary termination not for cause, the performance units would be paid after the end of the performance period, based on actual performance.
(4)In conjunction with Mr. Pearl’s termination from the Partnership on September 11, 2020, he received a cash payment to restore the employer contributions under the employee 401(k) plan he would have otherwise been entitled to absent the IRS compensation limits.
Change of Control: Involuntary Termination or Voluntary For Good Reason. As noted above, on December 31, 2020 certain of our NEOs were eligible for severance benefits under the broad-based Anadarko COC Plan in the event they are terminated without cause before the end of the change of control period defined under the Plan, which is August 8, 2022. Per the terms of the Services Agreement, we assumed Mr. Griffie’s Anadarko key employee change of control contract and while he waived any additional benefits related to the Occidental Merger, he is eligible for severance benefits under this contract in the event of a change of control of WES and a qualifying termination event. In the event there is a change of control of WES and a qualifying termination event, the NEOs would also receive the accelerated vesting of their WES equity awards.
Per the terms of the award agreements, a change of control is deemed to have occurred in the event: (i) any person or group other than the Partnership or Occidental (or affiliate) becomes the beneficial owner of more than 50% of the combined voting power of the equity interests in the General Partner, (ii) our equity holders approve, in one or a series of transactions, a plan of complete liquidation of the Partnership, (iii) the sale or disposition by the Partnership of all or substantially all of its assets to any person other than an affiliate of the General Partner or Partnership, or (iv) the General Partner or an affiliate of the General Partner ceases to be the general partners of the Partnership and a single person or group other than the Partnership or Occidental (or affiliate) beneficially owns more than 50% of the combined voting power of the equity interests in the entity that is or becomes the general partner of the Partnership.
Because the one-year good reason protection period under the Anadarko COC Plan has lapsed, a voluntary termination for good reason is no longer a qualifying termination event under that Plan. Mr. Griffie’s change of control contract and the WES equity award agreements include good reason as a qualifying termination event, with good reason generally defined as any one of the following occurrences within two years of a change of control: (i) a diminution of duties and responsibilities, (ii) a material reduction in compensation, (iii) a material change in work location, as defined in the applicable agreement, or (iv) a requirement to travel for business to a substantially greater extent, with all occurrences compared to agreements in place immediately prior to the change of control.
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(1)The amounts for Messrs. Ure, Collins, and Bourne reflect the double-trigger broad-based rights extended to them under the Anadarko COC Plan. Mr. Griffie’s benefits reflect the cash severance benefits payable under his legacy Anadarko key employee change of control contract that we assumed as part of the Services Agreement.
(2)Messrs. Ure, Collins, and Bourne values reflect a prorated annual bonus based on their target bonus for the year, pursuant to the rights extended to them under the Anadarko COC Plan. Pursuant to the terms of his key employee contract, Mr. Griffie’s value reflects a prorated target bonus for the year.
(3)The amounts reflect the estimated current value of unvested performance units based on performance to date and the value of unvested time-based units, all as of December 31, 2020. In the event of a change of control, the performance would be calculated based on the change of control date.
Disability
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(1)Values reflect the estimated current value of unvested performance units based on performance to date and the value of unvested time-based units, all as of December 31, 2020. In the event of a disability termination, the performance units would be paid after the end of the performance period, based on actual performance.
Death
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(1)Values reflect the estimated current value of unvested performance units based on performance to date and the value of unvested time-based units, all as of December 31, 2020. In the event of death, the performance units would be paid after the end of the performance period, based on actual performance.
CEO Pay Ratio
Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, require disclosure regarding the relationship of the annual compensation of our employees and the annual compensation of Mr. Michael P. Ure, our Chief Executive Officer (CEO). Prior to 2020, because we did not directly have any employees, our pay ratio was based on those employees of Anadarko and Occidental that provided services to us pursuant to (i) the Services and Secondment Agreement and (ii) the omnibus agreement. As discussed in the Employees section in Business and Properties under Part I, Items 1 and 2 of this Form 10-K, as of December 31, 2020, we had 1,045 employees.
We identified the median employee by using base salary earnings for all employees, excluding our CEO, who were employed by us on December 31, 2020. We included all employees, whether employed on a full-time or part-time basis, and did not make any estimates, assumptions, or adjustments to the data. After identifying the median employee, we calculated annual total compensation for such employee using the same methodology used for our NEOs as set forth in the above 2020 Summary Compensation Table. The pay ratio provided has been calculated as the total 2020 annual compensation for Mr. Ure of $5,434,887, divided by the total 2020 annual compensation of the median employee of $139,573. For 2020, the ratio resulting from this calculation was 39 to 1.
Director Compensation
On September 11, 2020, WES announced a re-composition of the board of directors of its general partner. Kenneth F. Owen, David J. Schulte, and Lisa A. Stewart (each a "New Director") were appointed as independent directors. In connection with a reduction in the size of the Board from eleven to eight directors, Steven D. Arnold, Marcia E. Backus, James R. Crane, Thomas R. Hix, Craig W. Stewart, and David J. Tudor left the Board. Officers or employees of Occidental who also serve as directors of our general partner do not receive additional compensation for their service as a director of our general partner. Non-employee directors of our general partner received compensation during 2020 for their Board service and for attending Board and committee meetings pursuant to a director compensation plan approved by the Board. There were no changes to the director compensation plan during 2020.
Compensation for non-employee directors during 2020 consisted of the following:
•an annual retainer of $110,000 for each non-employee Board member;
•an annual retainer of $2,000 for each member of the Audit Committee, or $22,000 for the Audit Committee chair;
•an annual retainer of $2,000 for each member of the Special Committee, or $22,000 for the Special Committee chair;
•a fee of $2,000 for each Board and committee meeting attended to the extent a non-employee Board member attends in excess of 10 total Board and committee meetings in one calendar year; and
•annual grants of phantom units with a value of approximately $125,000.
In addition, each non-employee director is reimbursed for out-of-pocket expenses in connection with attending meetings of the Board of Directors or committees and for costs associated with participation in continuing director education programs. Each director is fully indemnified by us, pursuant to individual indemnification agreements and our partnership agreement, for actions associated with being a director to the fullest extent permitted under Delaware law.
The following table sets forth information concerning total director compensation earned during 2020 by each non-employee director:
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(1)The amounts include fees earned during the year and an additional payment made to Messrs. Hix, Stewart, Tudor, Arnold, and Crane upon their resignation from the Board.
(2)The amounts included in the Stock Awards column represent the grant date fair value of phantom units made to directors in 2020, computed in accordance with FASB ASC Topic 718. Upon the September 11, 2020 departure of Messrs. Hix, Stewart, Tudor, Arnold, and Crane, the Board approved the vesting of their outstanding phantom units. For these directors, the amounts include the incremental fair value of the awards on the modification date, of $58,444, valued in accordance with FASB ASC Topic 718. See the table below for phantom units awarded to each non-employee director during 2020. As of December 31, 2020, Messrs. Owen and Schulte and Ms. Stewart each had 7,182 outstanding phantom units; Mr. Brown had 7,803 outstanding phantom units; and Messrs. Hix, Stewart, Tudor, Arnold, and Crane had no outstanding phantom units.
The table below contains the grant date fair value of phantom unit awards made to each non-employee director during 2020:
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(1)The awards granted on September 23, 2020 reflect a prorated annual award granted to the new directors upon their appointment to the Board and will vest on February 12, 2021, a vesting date that aligns with the annual vesting of our NEO awards. Mr. Brown’s award granted on May 14, 2020 vests on May 14, 2021. On September 11, 2020, upon the departure of Messrs. Hix, Stewart, Tudor, Arnold, and Crane, the Board approved the vesting of their outstanding units granted on May 14, 2020.
(2)The amounts included in the Grant Date Fair Value of Stock Awards column represent the grant date fair value of the awards made to non-employee directors in 2020 computed in accordance with FASB ASC Topic 718. The value ultimately realized by a director upon the actual vesting of the award(s) may or may not have been equal to the value included above.
Compensation Committee Interlocks and Insider Participation
As previously discussed, our general partner’s Board of Directors is not required to maintain, and does not maintain, a compensation committee. Messrs. Vangolen and Bennett, and Ms. Clark, who are directors of our general partner, are also executive or corporate officers of Occidental. However, all compensation decisions with respect to each of these persons are made by Occidental, and none of these individuals receive any compensation directly from us or our general partner for their service as directors. Read Part III, Item 13 below in this Form 10-K for information about relationships among us, our general partner, and Occidental.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth the beneficial ownership of our common units held by the following as of February 22, 2021:
•each member of the Board of Directors;
•each named executive officer of our general partner;
•all directors and officers of our general partner as a group; and
•Occidental and its affiliates.
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*Less than 1%.
(1)The address for Occidental and its representatives on the Board of Directors of our general partner is 5 Greenway Plaza, Suite 110, Houston, Texas 77046. The address for all other beneficial owners in this table is 9950 Woodloch Forest Drive, Suite 2800, The Woodlands, Texas 77380.
(2)WGRI owns 161,319,520 common units, AMH owns 457,849 common units, WGRAH owns 38,139,260 common units, and Anadarko USH1 Corporation owns 14,364,949 common units of WES. Occidental is the ultimate parent company of each of the foregoing entities and may, therefore, be deemed to beneficially own the units held by such entities.
(3)Includes 10,000 common units held in a margin account. However, there are currently no margin borrowings associated with this account.
The following table sets forth owners of 5% or greater of our common units, other than Occidental and its affiliates, the holdings of which are listed in the first table of this Item 12.
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(1)Based upon its Schedule 13G/A filed February 9, 2021, with the SEC with respect to Partnership securities held as of December 31, 2020, ALPS Advisors, Inc. (“ALPS”) has shared voting and dispositive power as to 24,153,629 common units and Alerian MLP ETF, a fund controlled by ALPS, also has shared voting and dispositive power as to 24,098,923 of the common units held by ALPS.
(2)Based upon its Schedule 13G filed February 16, 2021, with the SEC with respect to Partnership securities held as of December 31, 2020, Invesco Ltd. has sole voting and dispositive power as to 21,340,971 common units.
Securities Authorized for Issuance Under Equity Compensation Plan
The following table sets forth information with respect to the securities that may be issued under the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan and the Western Gas Partners, LP 2017 Long-Term Incentive Plan as of December 31, 2020. For more information regarding the plans, read Note 15-Equity-Based Compensation in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
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(1)Includes performance units at their maximum payout of 200%.
(2)Phantom and performance units constitute the only rights outstanding under the Western Gas Equity Partners, LP 2012 Long-Term Incentive Plan. Each phantom or performance unit that may be settled in common units entitles the holder to receive, upon vesting and determination of any performance criteria, if applicable, one common unit with respect to each phantom or performance unit, without payment of any cash. Accordingly, there is no reportable weighted-average exercise price.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
As of February 22, 2021, Occidental held (i) 214,281,578 of our common units, representing a 50.8% limited partner interest in us, (ii) through its ownership of the general partner, 9,060,641 general partner units, representing a 2.1% general partner interest in us, and (iii) a 2.0% limited partner interest in WES Operating through its ownership of WGRAH.
We control, manage, and operate WES Operating through our ownership of WES Operating GP. We, directly and indirectly through our ownership of WES Operating GP, owned a 98.0% limited partner interest and the entire non-economic general partner interest in WES Operating.
The officers of our general partner are also officers of WES Operating GP and our general partner’s officers operate WES Operating’s business. Five of our directors are currently or formerly affiliated with Occidental and our remaining directors are independent as defined by the NYSE.
Agreements with Occidental
We, WES Operating, and other parties have entered into various agreements with Occidental as discussed below. These agreements were not the result of arm’s-length negotiations and, as such, they or the related underlying transactions may not be based on terms as favorable as those that could have been obtained from unaffiliated third parties. See Note 6-Related-Party Transactions in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for more information regarding the transactions and agreements discussed below.
Summary of Material Related-Party Transactions
The following tables summarize material related-party transactions included in our consolidated financial statements (see Note 6-Related-Party Transactions in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K):
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(1)See Note 7-Equity Investments in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
(2)Includes (i) amounts charged by Occidental pursuant to the shared services agreements (see Shared services agreements within this Item 13) and (ii) equity-based compensation expense allocated to us by Occidental, portions of which are not reimbursed to Occidental and are reflected as contributions to partners’ capital in the consolidated statements of equity and partners’ capital (see Incentive Plans within this Item 13).
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(1)See Note 7-Equity Investments in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
(2)Includes amounts related to finance leases (see Note 14-Leases in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K).
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(1)Represents distributions paid to Occidental pursuant to our partnership agreement (see Note 4-Partnership Distributions and Note 5-Equity and Partners’ Capital in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K).
(2)Represents distributions paid to certain subsidiaries of Occidental pursuant to WES Operating’s partnership agreement (see Note 4-Partnership Distributions and Note 5-Equity and Partners’ Capital in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K).
The following tables summarize material related-party transactions for WES Operating (which are included in our consolidated financial statements) to the extent the amounts differ from our consolidated financial statements:
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(1)Includes (i) amounts charged by Occidental pursuant to the shared services agreements and (ii) equity-based compensation expense allocated to WES Operating by Occidental, portions of which are not reimbursed to Occidental and are reflected as contributions to partners’ capital in the consolidated statements of equity and partners’ capital (see Incentive Plans within this Item 13).
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(1)Represents distributions paid to us and certain subsidiaries of Occidental pursuant to WES Operating’s partnership agreement (see Note 4-Partnership Distributions and Note 5-Equity and Partners’ Capital in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K).
Related-party revenues. Related-party revenues include (i) income from our investments accounted for under the equity method of accounting (see Note 7 in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K) and (ii) amounts earned by us from services provided to Occidental and from the sale of natural gas, condensate, and NGLs to Occidental.
Gathering and processing agreements. We have significant gathering and processing arrangements with affiliates of Occidental on most of our systems. While Occidental is our contracting counterparty, these arrangements with Occidental include not just Occidental-produced volumes, but also, in some instances, the volumes of other working-interest owners of Occidental who rely on our infrastructure to bring their volumes to market. For the year ended December 31, 2020, production owned or controlled by Occidental represented 41% of our throughput for natural-gas assets (excluding equity-investment throughput) and 88% of our throughput for crude-oil and NGLs assets (excluding equity-investment throughput), and 87% of our throughput for produced-water assets.
In connection with the sale of its Eagle Ford assets in 2017, Anadarko remained the primary counterparty to our Brasada gas processing agreement and entered into an agency relationship with Sanchez Energy Corporation, now Mesquite Energy, Inc. (“Mesquite”) that allows Mesquite to process gas under such agreement. For this reason, Anadarko continues to be liable under the Brasada gas processing agreement through 2034 to the extent Mesquite does not perform. For all periods presented, Mesquite has performed Anadarko’s obligations under the Brasada gas processing agreement pursuant to its agency arrangement with Anadarko.
Further, in connection with the sale of its Uinta Basin assets in 2020, Kerr McGee Oil & Gas Onshore LP, a subsidiary of Occidental, retained the deficiency payment obligations under a gas processing agreement at the Chipeta plant. This contingent payment obligation extends through the earlier of October 1, 2022, or the termination of the processing agreement.
Commodity purchase and sale agreements. Through December 31, 2020, we sold a significant amount of our natural gas and NGLs to AESC, Occidental’s marketing affiliate. Prior to April 1, 2020, AESC acted as an agent on behalf of either us or our customers for third-party sales. Where AESC sold natural gas and NGLs on our customers’ behalf, we recognized associated service revenues and cost of product expense for the marketing services performed by AESC. When product sales were on our behalf, we recognized product sales revenues based on Occidental’s sales price to the third party and recorded the associated cost of product expense associated with the marketing activities provided by AESC. Effective April 1, 2020, changes to marketing-contract terms with AESC terminated AESC’s prior status as our agent for third-party sales and established AESC as our customer. Accordingly, we no longer recognize service revenues and/or product sales revenues and the equivalent cost of product expense for the marketing services performed by AESC. This change has no impact to Operating income (loss), Net income (loss), the balance sheets, cash flows, or any non-GAAP metric used to evaluate the Partnership’s operations (see Key Performance Metrics under Part II, Item 7 of this Form 10-K). In addition, we purchase natural gas from AESC pursuant to purchase agreements.
Marketing Transition Services Agreement. Effective December 31, 2019, certain subsidiaries of Anadarko entered into a transition services agreement (the “Marketing Transition Services Agreement”) to provide marketing-related services to certain of our subsidiaries through December 31, 2020, subject to the option to extend such services for an additional six-month period. The Marketing Transition Services Agreement terminated on December 31, 2020. While we still have some marketing agreements with affiliates of Occidental, we began marketing and selling substantially all of our natural gas and NGLs directly to third parties beginning on January 1, 2021.
Operating lease. Effective December 31, 2019, an affiliate of Occidental and a wholly owned subsidiary of WES, the lessor, entered into an operating and maintenance agreement pursuant to which Occidental provides operational and maintenance services with respect to a crude-oil gathering system and associated treating facilities owned by us through December 31, 2021. See Note 14-Leases in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
Related-party expenses. Operation and maintenance expense includes amounts accrued for or paid to related parties for the operation of our assets and for services provided to related parties, including field labor, measurement and analysis, and other disbursements. A portion of general and administrative expense is paid by Occidental, which results in related-party transactions pursuant to the reimbursement provisions of our and WES Operating’s agreements with Occidental. Related-party expenses do not bear a direct relationship to related-party revenues, and third-party expenses do not bear a direct relationship to third-party revenues.
Shared services agreements. General and administrative expense includes costs incurred pursuant to the agreements discussed below. Under these agreements Occidental has performed certain centralized corporate functions for us and WES Operating.
•Services Agreement. Pursuant to the Services Agreement, which was amended and restated on December 31, 2019, specified employees of Occidental were seconded to WES Operating GP to provide, under the direction, supervision, and control of the general partner, (i) operating and routine maintenance service and (ii) corporate, administrative, and other services, with respect to the assets owned and operated by us. Occidental was reimbursed for the services provided by the seconded employees. 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. In late March 2020, seconded employees’ employment was transferred to us. Occidental continues to provide certain limited administrative and operational services to us, with most services expected to be fully transitioned to us by December 31, 2021.
•WES omnibus agreement. Prior to December 31, 2019, we had an omnibus agreement with Occidental and the general partner (the “WES omnibus agreement”) that governed (i) our obligation to reimburse Occidental for expenses incurred or payments made on our behalf in connection with Occidental’s provision of general and administrative services provided to us, including certain public company expenses and general and administrative expenses, (ii) our obligation to pay Occidental, in quarterly installments, an administrative services fee of $250,000 per year, which was subject to an annual increase pursuant to the omnibus agreement, and (iii) our obligation to reimburse Occidental for all insurance coverage expenses it incurred or payments it made on our behalf. The WES omnibus agreement was terminated as part of the December 2019 Agreements.
•WES Operating omnibus agreement. Prior to December 31, 2019, WES Operating had a separate omnibus agreement with Occidental and WES Operating GP (the “WES Operating omnibus agreement”) that governed (i) Occidental’s obligation to indemnify WES Operating for certain liabilities and WES Operating’s obligation to indemnify Occidental for certain liabilities, (ii) WES Operating’s obligation to reimburse Occidental for expenses incurred or payments made on its behalf in conjunction with Occidental’s provision of general and administrative services provided to WES Operating, including salary and benefits of Occidental personnel, public company expenses, general and administrative expenses, and salaries and benefits of WES Operating’s executive management who were employees of Occidental, and (iii) WES Operating’s obligation to reimburse Occidental for all insurance coverage expenses it incurred or payments it made with respect to WES Operating’s assets. Occidental, in accordance with the partnership agreement and the WES Operating omnibus agreement, determined, in its reasonable discretion, amounts to be reimbursed by WES Operating in exchange for services provided under the WES Operating omnibus agreement. The WES Operating omnibus agreement was terminated as part of the December 2019 Agreements.
Incentive Plans. General and administrative expense includes equity-based compensation expense allocated to us by Occidental for awards granted to the executive officers of the general partner and to other employees prior to their employment with us under (i) the Anadarko Petroleum Corporation 2012 Omnibus Incentive Compensation Plan, as amended and restated, (ii) Occidental’s 2015 Long-Term Incentive Plan, and (iii) Occidental’s Phantom Share Unit Award Plan (collectively referred to as the “Incentive Plans”). General and administrative expense includes costs related to the Incentive Plans of $14.6 million, $12.9 million, and $6.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. See Note 6-Related-Party Transactions in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
Anadarko note receivable. On September 11, 2020, we and Occidental entered into a Unit Redemption Agreement, pursuant to which (i) WES Operating transferred and assigned its interest in the Anadarko note receivable to its limited partners on a pro-rata basis, transferring 98% of its interest in (and accrued interest owed under) the Anadarko note receivable to us and the remaining 2% to WGRAH, a subsidiary of Occidental, (ii) we subsequently assigned the 98% interest in (and accrued interest owed under) the Anadarko note receivable to Anadarko, which Anadarko canceled and retired immediately upon receipt, in exchange for which Occidental caused certain of its subsidiaries to transfer an aggregate of 27,855,398 of our common units to us, and (iii) we canceled such common units immediately upon receipt. See Note 6-Related-Party Transactions in the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
Indemnification agreements with directors and officers. Our general partner has entered into indemnification agreements with each of its officers and directors (each, an “Indemnitee”). The indemnification agreements provide that each Indemnitee will be indemnified and held harmless against all expense, liability, and loss (including attorney’s fees, judgments, fines or penalties, and amounts to be paid in settlement) actually and reasonably incurred or suffered by the Indemnitee in connection with serving in their capacity as officers and directors of our general partner (or of any subsidiary of our general partner) or in any capacity at the request of our general partner or its Board of Directors to the fullest extent permitted by applicable law, including Section 18-108 of the Delaware Limited Liability Company Act in effect on the date of the agreement or as such laws may be amended to provide more advantageous rights to the Indemnitee. The indemnification agreements also provide that advance payment of certain expenses must be made to the Indemnitee, including fees of counsel, in advance of final disposition of any proceeding subject to receipt of an undertaking from the Indemnitee to return such advance if it is ultimately determined that the Indemnitee is not entitled to indemnification.
Through December 31, 2020, there have been no payments or claims to Occidental related to these indemnification agreements and no payments or claims have been received from Occidental related to these indemnification agreements.
Chipeta LLC agreement. We are party to the Chipeta LLC agreement, together with a third-party member. Among other things, the Chipeta LLC agreement provides the following:
•Chipeta’s members will be required from time to time to make capital contributions to Chipeta to the extent approved by the members in connection with Chipeta’s annual budget;
•Chipeta will distribute available cash, as defined in the Chipeta LLC agreement, if any, to its members quarterly in accordance with those members’ membership interests; and
•Chipeta’s membership interests are subject to significant restrictions on transfer.
We are the managing member of Chipeta. As managing member, we manage the day-to-day operations of Chipeta and receive a management fee from the other member, which is intended to compensate the managing member for the performance of its duties. We may be removed as the managing member only if we are grossly negligent or fraudulent, breach our primary duties, or fail to respond in a commercially reasonable manner to written business proposals from the other member, and such behavior, breach, or failure has a material adverse effect to Chipeta.
Purchases from related parties. During the fourth quarter of 2020, a subsidiary of WES entered into an agreement to purchase three electrical substations located in the DJ Basin from a subsidiary of Occidental for $2.0 million. This purchase was recorded as an Accrued capital expenditure as of December 31, 2020, and cash was paid in January of 2021.
Conflicts of Interest
Conflicts of interest exist and may arise in the future as a result of the relationships between our general partner and its related parties, including Occidental, on the one hand, and our partnership and our limited partners, on the other hand. The directors and officers of our general partner have fiduciary duties to manage our general partner in a manner beneficial to its owner (Occidental). At the same time, our general partner also has duties to manage our partnership in a manner beneficial to us and our unitholders.
Whenever a conflict arises between our general partner or its related parties, on the one hand, and us and our limited partners, on the other hand, our general partner will resolve the conflict. Our partnership agreement contains provisions that modify and limit our general partner’s default state law fiduciary duties to our unitholders. Our partnership agreement also restricts the remedies available to our unitholders for actions taken by our general partner that, without those limitations, might constitute breaches of fiduciary duties otherwise applicable under state law. See Special Committee under Part III, Item 10 of this Form 10-K.
Our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our unitholders if the resolution of the conflict is any of the following:
•approved by the Special Committee of our general partner, although our general partner is not obligated to seek such approval;
•approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner or any of its affiliates;
•on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or
•fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.
Our general partner may, but in most circumstances is not required to, seek the approval of such resolution from the Special Committee of its Board of Directors. In connection with a situation involving a conflict of interest, any determination by our general partner involving the resolution of the conflict of interest must be made in good faith, provided that, if our general partner does not seek approval from the Special Committee and its Board of Directors determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the third and fourth bullet points above, then it will be presumed that, in making its decision, the Board of Directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the Partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Unless the resolution of a conflict is specifically provided for in the partnership agreement, our general partner or the Special Committee may consider any factors that it determines in good faith to be appropriate when resolving a conflict. Our partnership agreement provides that for someone to act in good faith, that person must reasonably believe he is acting in the best interests of the Partnership.
Additionally, the Board of Directors has adopted a written Code of Ethics and Business Conduct (the “Code”), under which all directors and officers of the general partner, and employees working on our behalf, are expected to avoid conflicts or the appearance of conflicts in relation to their duties and responsibilities to us, and report any violation of the Code by any person. Under our Corporate Governance Guidelines, any waivers of the Code for any officer or director may only be made by the Board of Directors or by a committee of the Board of Directors composed of independent directors.
Item 14.
Item 14. Principal Accounting Fees and Services
We have engaged KPMG LLP as our and WES Operating’s independent registered public accounting firm. The following table presents fees for the audit of the annual consolidated financial statements for the last two fiscal years and for other services provided by KPMG LLP:
Audit fees are primarily for the audit of our and WES Operating’s consolidated financial statements, including the audit of the effectiveness of internal control over financial reporting, consents, comfort letters, other audits, and the reviews of financial statements included in the Forms 10-Q. Audit-related fees are primarily for certain financial accounting consultations.
Audit Committee Approval of Audit and Non-Audit Services
The Audit Committee of our general partner has adopted a Pre-Approval Policy with respect to services that may be performed by KPMG LLP. This policy lists specific audit-related services and any other services that KPMG LLP is authorized to perform and sets out specific dollar limits for each specific service, which may not be exceeded without additional Audit Committee authorization. The Audit Committee receives quarterly reports on the status of expenditures pursuant to that Pre-Approval Policy. The Audit Committee reviews the policy at least annually in order to approve services and limits for the current year. Any service that is not clearly enumerated in the policy must receive specific pre-approval by the Audit Committee or by its Chairman, to whom such authority has been conditionally delegated, prior to engagement. During 2020, no fees for services outside the scope of audit, review, or attestation that exceed the waiver provisions of 17 CFR 210.2-01(c)(7)(i)(C) were approved by the Audit Committee. During 2020, the Audit Committee reviewed and approved the use of KPMG LLP’s Accounting research and disclosure checklist applications for no additional fee.
The Audit Committee has approved the appointment of KPMG LLP as independent registered public accounting firm to conduct the audit of our and WES Operating’s consolidated financial statements for the year ended December 31, 2021.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
Our consolidated financial statements are included under Part II, Item 8 of this Form 10-K. For a listing of these statements and accompanying footnotes, see the Index to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
(a)(2) Financial Statement Schedules
Financial statement schedules have been omitted because they are not required, not applicable, or the information is included under Part II, Item 8 of this Form 10-K.
(a)(3) Exhibits
Exhibit Index
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*Filed herewith
**Furnished herewith
#Pursuant to Item 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
†Portions of this exhibit have been omitted as confidential pursuant to Item 601(b)(10) of Regulation S-K or a request for confidential treatment.
‡Management contracts or compensatory plans or arrangements required to be filed pursuant to Item 15.
Item 16. Form 10-K Summary
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
WESTERN MIDSTREAM PARTNERS, LP
February 26, 2021
/s/ Michael P. Ure
Michael P. Ure
President, Chief Executive Officer and Chief Financial Officer
Western Midstream Holdings, LLC
(as general partner of Western Midstream Partners, LP)
WESTERN MIDSTREAM OPERATING, LP
February 26, 2021
/s/ Michael P. Ure
Michael P. Ure
President, Chief Executive Officer and Chief Financial Officer
Western Midstream Operating GP, LLC
(as general partner of Western Midstream Operating, LP)
Each person whose signature appears below constitutes and appoints Michael P. Ure his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Form 10-K, and to file the same, with all, exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each, and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or the substitute or substitutes of may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 26, 2021.
SignatureTitle (Position with Western Midstream Holdings, LLC)
/s/ Glenn VangolenChairman
Glenn Vangolen
/s/ Michael P. UrePresident, Chief Executive Officer, Chief Financial Officer and Director
Michael P. Ure(Principal Executive and Financial Officer)
/s/ Catherine A. GreenVice President and Chief Accounting Officer
Catherine A. Green(Principal Accounting Officer)
/s/ Peter J. BennettDirector
Peter J. Bennett
/s/ Oscar K. BrownDirector
Oscar K. Brown
/s/ Nicole E. ClarkDirector
Nicole E. Clark
/s/ Kenneth F. OwenDirector
Kenneth F. Owen
/s/ David J. SchulteDirector
David J. Schulte
/s/ Lisa A. StewartDirector
Lisa A. Stewart