Western Midstream Partners, LP — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a stand-alone Q4 report. WES is a midstream partnership gathering, processing, treating, and transporting natural gas, crude oil and NGLs, and gathering and disposing of produced water. The filing also includes separate statements for consolidated subsidiary Western Midstream Operating, LP.
Financial and operating performance
| Metric | FY 2021 | FY 2020 | Change |
|---|---|---|---|
| Total revenue and other | $2.877 billion | $2.773 billion | +4% |
| Operating income | $1.336 billion | $879 million | +52% |
| Net income attributable to WES | $916 million | $527 million | +74% |
| GAAP gross margin | $2.003 billion | $2.093 billion | -4% |
| Adjusted gross margin (non-GAAP) | $2.668 billion | $2.718 billion | -2% |
| Adjusted EBITDA (non-GAAP) | $1.947 billion | $2.030 billion | -4% |
| Cash from operating activities | $1.767 billion | $1.637 billion | +8% |
| Free cash flow (non-GAAP) | $1.490 billion | $1.227 billion | +21% |
Net income per common unit was $2.18, versus $1.18. Adjusted gross margin per unit of throughput was $1.24/Mcf for natural-gas assets (+7%), $2.28/Bbl for crude-oil and NGLs assets (-10%), and $0.93/Bbl for produced-water assets (-5%). These are company-defined non-GAAP metrics, not conventional profit margins.
- WES-attributable natural-gas throughput fell 3% to 4,148 MMcf/d; crude-oil and NGLs throughput fell 6% to 659 MBbl/d; produced-water throughput rose 1% to 703 MBbl/d.
- Cash capital expenditures were $314 million, down from $424 million. Cash distributions paid to WES unitholders totaled $534 million.
- Year-end debt carrying value was $6.9 billion, down from $7.9 billion. Cash was $202 million. The $2.0 billion revolving credit facility had no borrowings and $2.0 billion of available capacity.
- Working capital was negative $455 million, primarily because $502 million of 4.00% notes due 2022 were classified as short-term debt. WES Operating reported compliance with debt covenants.
Material changes versus 2020
- Revenue rose, but fee-based service revenue declined 5%; product sales increased 110%, reflecting higher average commodity prices. The shift in Occidental affiliate marketing arrangements changed reported revenue and product costs but, according to the filing, did not affect operating income, net income, cash flows, or the cited non-GAAP measures.
- Operating income and net income increased in part because 2020 included a $441 million goodwill impairment and higher long-lived asset impairments. 2021 included $31 million of long-lived asset and other impairments, including $12 million on the Ranch Westex investment.
- Adjusted EBITDA declined, primarily due to higher product costs and G&A and lower distributions from equity investments. Operating cash flow and free cash flow improved, with lower capital spending contributing to free cash flow growth.
- WES redeemed $431 million of 5.375% notes due 2021 and tendered for $500 million of other senior notes; it recognized a $25 million loss on early debt extinguishment. The partnership completed its $250 million unit repurchase authorization, repurchasing $217 million of units in 2021.
- Winter Storm Uri and a Colorado blizzard reduced estimated 2021 net income and Adjusted EBITDA by approximately $30 million.
Outlook, risks and contingencies
- Management estimated 2022 capital expenditures of $375 million to $475 million on an accrual basis, including equity investments and excluding specified items. The filing does not provide formal earnings or throughput guidance.
- In February 2022, WES announced a unit repurchase program of up to $1.0 billion through December 31, 2024; purchases are discretionary. The fourth-quarter 2021 distribution was $0.327 per unit, about 5% higher year over year, and was paid in February 2022.
- Occidental remained a significant concentration: it accounted for 57% of 2021 revenue and production owned or controlled by Occidental represented 36% of natural-gas throughput, 89% of crude-oil and NGLs throughput, and 87% of produced-water throughput. Occidental owns the general partner and nearly half of WES’s common units, creating customer and governance concentration and potential conflicts.
- Key exposures include producer activity and throughput declines, commodity-price effects on customer drilling and product-linked contracts, inflation and supply-chain costs, regulation of methane emissions and pipeline safety, produced-water disposal restrictions and induced seismicity, and future impairment risk. Management said further commodity-price weakness or reduced producer drilling could lead to future long-lived asset impairments.
- Legal matters include a DOJ/EPA and Colorado enforcement action over alleged leak-detection violations at the Fort Lupton facility; management could not reasonably estimate the outcome. A dispute with Occidental over DJ Basin oil-gathering cost-of-service rates could reduce rates and cause a non-cash earnings charge. A declaratory-judgment case over Mont Belvieu JV revenue allocation also remained unresolved. The Springfield-related bankruptcy disputes were settled in December 2021.
- Auditors issued unqualified opinions on the financial statements and WES’s internal controls; management reported effective financial reporting controls at year-end. KPMG identified assessment of potential long-lived asset impairment indicators as a critical audit matter.
Investor verification priorities
- Track Occidental’s production plans, contract volumes, receivables, and ability to meet payment and minimum-volume commitments.
- Review the 2022 maturity and refinancing of the $502 million notes, debt ratings and interest costs, and progress toward leverage targets.
- Reconcile Adjusted EBITDA and free cash flow to GAAP cash flows, and assess whether distributions and buybacks remain supported after capital spending and debt service.
- Monitor the DJ Basin cost-of-service dispute, the Fort Lupton enforcement action, and the Mont Belvieu JV litigation for potential financial or operating effects.
- Assess whether throughput recovery, inflation, regulatory changes, and producer activity alter impairment assumptions or the stated capital-spending outlook.