Western Midstream Partners, LP annual report, FY2019

Western Midstream Partners, LP — 2019 Form 10-K

Business context and period. This combined annual report covers Western Midstream Partners, LP (WES) and its consolidated operating subsidiary, Western Midstream Operating, LP, for the fiscal year ended December 31, 2019. WES gathers, processes, treats, and transports natural gas, crude oil, NGLs, and produced water across the Rocky Mountains, Texas, New Mexico, and Pennsylvania. The year included WES’s February merger with WES Operating and acquisition of Anadarko Midstream Assets (AMA), and Occidental’s acquisition of Anadarko in August. Figures below are for WES unless stated otherwise; dollar amounts are in millions.

Financial and operating performance

Metric	2019	2018	Change
Revenue and other	$2,746.2	$2,299.7	+19%
Operating income	$1,231.3	$861.3	+43%
Net income attributable to WES	$697.2	$551.6	+26%
Diluted earnings per common unit	$1.59	$1.69	Down
Adjusted EBITDA (non-GAAP)	$1,719.1	$1,466.4	+17%
Distributable cash flow (non-GAAP)	$1,325.4	$1,139.6	+16%
Operating cash flow	$1,324.1	$1,348.2	Down 2%
Capital expenditures	$1,188.8	$1,948.6	Down 39%

Adjusted gross margin was $2,428.1 million, up 23%. Natural-gas asset margin rose 15% to $1,656.0 million; crude-oil, NGL, and produced-water margin rose 44% to $772.0 million. Per-unit margin was $1.07/Mcf for natural gas (+6%) and $1.77/Bbl for oil, NGLs, and water (−8%). These are non-GAAP measures.
WES-attributable natural-gas throughput increased 9% to 4,248 MMcf/d; oil, NGL, and produced-water throughput increased 57% to 1,195 MBbl/d. Growth reflected new capacity, higher Delaware Basin volumes, water-system ramp-up, and equity investments.
Distributable cash flow covered declared distributions 1.18 times. The 2019 distribution totaled $2.47 per unit; the fourth-quarter distribution was $0.622 per unit, or $281.8 million in aggregate, paid in February 2020.
Quarterly results: fourth-quarter revenue was $723.2 million, operating income $333.6 million, net income $295.4 million, and net income attributable to WES $287.8 million. Fourth-quarter diluted earnings were $0.62 per unit.

Balance sheet, liquidity, and debt

At year-end, total assets were $12,346.5 million and carrying value of debt was approximately $8.0 billion, versus $5.2 billion of long-term debt at year-end 2018. The increase largely reflects the merger financing and acquisition-related funding.
Cash was $100.0 million; working capital deficit was $83.5 million. The $2.0 billion revolving credit facility had $380 million drawn, $4.6 million of letters of credit, and $1.6 billion available. WES Operating reported compliance with debt covenants.
In January 2020, WES Operating issued $3.5 billion of fixed- and floating-rate notes and used net proceeds to repay the $3.0 billion term loan, repay RCF borrowings, and for general partnership purposes. The term loan had been due in December 2020. The RCF was extended to February 2025 for extending lenders; $100 million of lender commitments remained due in February 2024.
Interest expense rose to $303.3 million from $183.8 million. A $125.3 million loss on interest-rate swaps was recorded in 2019; WES paid $107.7 million to settle swaps and accrued a further $25.6 million payable in 2020.

Material changes and unusual items

The February 2019 merger consolidated WES Operating under WES, substantially increased WES’s unit count, and altered the presentation of noncontrolling interests. Dilution contributed to lower earnings per unit despite higher net income attributable to WES.
WES acquired AMA from Anadarko in February 2019 and a 30% interest in Red Bluff Express in January. Acquisition and merger activity makes year-over-year comparisons less directly comparable; certain acquired assets were recorded at Anadarko historical carrying values due to common control.
Lower expansion spending followed completion or ramp-up of major projects, including Mentone processing trains and DBM water and oil facilities. Latham Train II began operating in February 2020; Loving ROTF Train III began operating in January 2020, while Train IV was expected in fourth-quarter 2020.
Interest-rate swap settlement materially reduced reported earnings and operating cash flow. The reported DCF calculation excludes the $107.7 million swap settlement cash payment, so review the company’s reconciliation when assessing cash available for distributions.
2018 included $230.6 million of impairments, compared with $6.3 million in 2019; the lower impairment charge supported the operating-income increase. 2018 also reflected shutdowns of the Third Creek and Kitty Draw systems.
The 2018 adoption of revenue standard Topic 606 changed revenue and cost presentation; 2017 was not recast. The 2019 comparison also reflects acquisitions, newly operating facilities, and cost-of-service rate adjustments.

Outlook, risks, and contingencies

Management estimated 2020 capital expenditures of $875–$950 million, including maintenance capital of $125–$135 million; the estimate excludes acquisitions and includes WES’s share of Chipeta and equity-investment spending.
WES stated it expects operating cash flow, borrowing capacity, and capital-market access to fund working capital and planned capital needs, but its distribution policy makes it reliant on external financing for growth and acquisitions. The filing does not provide formal earnings or throughput guidance.
Occidental remained a major concentration: 59% of revenue and other, 38% of natural-gas throughput, and 83% of oil, NGL, and produced-water throughput were attributable to Occidental. The filing identifies Occidental’s production decisions, creditworthiness, and ownership of WES’s general partner as significant dependencies and potential conflict-of-interest risks.
Other risks include commodity-driven customer activity and volumes, customer concentration and credit risk (including Sanchez Energy’s Chapter 11 filing), pipeline and environmental regulation, produced-water disposal and induced seismicity, project execution, asset impairment, and access to capital. Most volumes are fee-based, but fee structures do not eliminate indirect exposure to producer activity or all commodity risk.
WES disclosed negotiations with the EPA and Colorado over alleged leak-detection violations at its Fort Lupton facility, and with the EPA and Wyoming concerning alleged violations at its Granger facility. Management considered fines or penalties exceeding $100,000 reasonably likely in each matter; amounts and outcomes were not determined.
The filing records $5.4 million of environmental remediation and reclamation liabilities. Management said ordinary-course proceedings were not expected to have a material adverse effect; outcomes of the cited regulatory negotiations remain uncertain.
Management reported effective disclosure controls and internal control over financial reporting as of year-end; KPMG issued unqualified opinions on the financial statements and WES internal controls. The auditor identified forecast receipt volumes used in cost-of-service revenue catch-up estimates as a critical audit matter.

Most important facts for investors to verify

Reconcile the $8.0 billion year-end debt balance, debt maturities, January 2020 note issuance, current borrowing capacity, and covenant headroom.
Assess distribution sustainability using operating cash flow and the disclosed DCF reconciliation, including the treatment of the swap settlement; confirm the 1.18x coverage basis.
Track Occidental’s production plans, payment performance, ownership, and the transition to WES’s stand-alone staffing and systems.
Verify actual commissioning, utilization, and returns for Latham Train II and Loving ROTF Trains III and IV against the announced schedule and 2020 capital range.
Monitor the Fort Lupton and Granger regulatory matters, produced-water disposal restrictions, and any related costs or operational limits.
Separate underlying operating growth from merger, acquisition, accounting-presentation, rate-reset, and impairment effects when comparing periods.