What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-10 · 198 added, 152 removed, 668 unchanged (34% of the section changed)

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• our ability to acquire assets on acceptable terms from third parties;

• non-payment or non-performance of significant customers, including under gathering, processing, transportation, and disposal agreements and the Anadarko note receivable;

• 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;

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EXECUTIVE SUMMARY

During the first and second quarters of 2020, the global outbreak of COVID-19 caused a sharp decline in the worldwide demand for oil, natural gas, and NGLs, which contributed significantly to recent commodity-price declines and oversupplied commodities markets.

During the nine months ended September 30, 2020, the global outbreak of COVID-19 caused a sharp decline in the worldwide demand for oil, natural gas, and NGLs, which contributed significantly to recent commodity-price declines and oversupplied commodities markets.

These market dynamics have an adverse impact on producers that provide throughput into our systems and we have experienced decreased throughput at many of our locations, which may adversely affect our results of operations and cash flows.

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In our capacity as a natural-gas processor, we also buy and sell natural gas, NGLs, and condensate on behalf of ourselves and as an agent for our customers under certain contracts.

As of June 30, 2020, our assets and investments consisted of the following:

As of September 30, 2020, our assets and investments consisted of the following:

Operated Operated

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Crude-oil pipelines 3 1 — 3

_________________________________________________________________________________________

(1) Includes the DBM water systems.

Significant financial and operational events during the six months ended June 30, 2020, included the following:

• Our second-quarter 2020 distribution is unchanged from the first-quarter 2020 per-unit distribution of $0.31100.

• We commenced operations of Latham Train II at the DJ Basin complex (with capacity of 250 MMcf/d) and Loving ROTF Train III at the DBM oil system (with capacity of 30 MBbls/d) during the first quarter of 2020.

Significant financial and operational events during the nine months ended September 30, 2020, included the following:

• 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% to WES and 2% to WGRAH, a subsidiary of Occidental, (ii) WES subsequently assigned its 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 the units immediately upon receipt.

• Our third-quarter 2020 distribution is unchanged from the first- and second-quarter 2020 per-unit distribution of $0.31100.

• 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.

• 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.

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See Liquidity and Capital Resources within this Item 2 for additional information.

• During the first six months of 2020, WES Operating purchased and retired $164.5 million of certain of its senior notes and Floating-Rate Senior Notes.

• During the nine months ended September 30, 2020, WES Operating purchased and retired $193.5 million of certain of its senior notes and Floating-Rate Senior Notes.

See Liquidity and Capital Resources within this Item 2 for additional information.

• Natural-gas throughput attributable to WES totaled 4,413 MMcf/d and 4,439 MMcf/d for the three and six months ended June 30, 2020, respectively, representing a 3% and 5% increase, respectively, compared to the same periods in 2019.

• Crude-oil and NGLs throughput attributable to WES totaled 711 MBbls/d and 736 MBbls/d for the three and six months ended June 30, 2020, respectively, representing a 19% and 23% increase, respectively, compared to the same periods in 2019.

• Produced-water throughput attributable to WES totaled 758 MBbls/d and 730 MBbls/d for the three and six months ended June 30, 2020, respectively, representing a 50% and 44% increase, respectively, compared to the same periods in 2019.

• Operating income (loss) was $373.8 million for the three months ended June 30, 2020, representing a 21% increase compared to the same period in 2019.

Operating income (loss) was $158.9 million for the six months ended June 30, 2020, which includes goodwill and long-lived asset impairments of $596.8 million during the first quarter, representing a 75% decrease compared to the same period in 2019.

• Adjusted gross margin for natural-gas assets (as defined under the caption Key Performance Metrics within this Item 2) averaged $1.13 per Mcf and $1.15 per Mcf for the three and six months ended June 30, 2020, respectively, representing a 7% and 6% increase, respectively, compared to the same periods in 2019.

• Adjusted gross margin for crude-oil and NGLs assets (as defined under the caption Key Performance Metrics within this Item 2) averaged $2.56 per Bbl for the three months ended June 30, 2020, representing a 2% increase compared to the same period in 2019.

Adjusted gross margin for crude-oil and NGLs assets averaged $2.49 per Bbl for the six months ended June 30, 2020, remaining flat compared to the same period in 2019.

• Adjusted gross margin for produced-water assets (as defined under the caption Key Performance Metrics within this Item 2) averaged $0.97 per Bbl for the three and six months ended June 30, 2020, representing a 4% and 1% decrease, respectively, compared to the same periods in 2019.

• Natural-gas throughput attributable to WES totaled 4,253 MMcf/d and 4,377 MMcf/d for the three and nine months ended September 30, 2020, respectively, representing a 1% and 4% increase, respectively, compared to the same periods in 2019.

• Crude-oil and NGLs throughput attributable to WES totaled 689 MBbls/d and 723 MBbls/d for the three and nine months ended September 30, 2020, respectively, representing an 11% and 19% increase, respectively, compared to the same periods in 2019.

• Produced-water throughput attributable to WES totaled 673 MBbls/d and 711 MBbls/d for the three and nine months ended September 30, 2020, respectively, representing an 18% and 35% increase, respectively, compared to the same periods in 2019.

• Operating income (loss) was $347.1 million for the three months ended September 30, 2020, representing a 29% increase compared to the same period in 2019.

Operating income (loss) was $506.0 million for the nine months ended September 30, 2020, which includes goodwill and long-lived asset impairments of $596.8 million during the first quarter, representing a 44% decrease compared to the same period in 2019.

• Adjusted gross margin for natural-gas assets (as defined under the caption Key Performance Metrics within this Item 2) averaged $1.17 per Mcf and $1.15 per Mcf for the three and nine months ended September 30, 2020, respectively, representing a 13% and 8% increase, respectively, compared to the same periods in 2019.

• Adjusted gross margin for crude-oil and NGLs assets (as defined under the caption Key Performance Metrics within this Item 2) averaged $2.54 per Bbl and $2.50 per Bbl for the three and nine months ended September 30, 2020, respectively, representing a 2% and 1% decrease, respectively, compared to the same periods in 2019.

• Adjusted gross margin for produced-water assets (as defined under the caption Key Performance Metrics within this Item 2) averaged $1.00 per Bbl and $0.98 per Bbl for the three and nine months ended September 30, 2020, respectively, representing a 3% increase and no change, respectively, compared to the same periods in 2019.

The following tables provide additional information on throughput for the periods presented below:

Three Months Ended June 30,

Three Months Ended September 30,

2020 2019 Inc/

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4,412 4,371 1 % 703 635 11 % 687 580 18 %

Six Months Ended June 30,

Nine Months Ended September 30,

2020 2019 Inc/

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Accordingly, the Partnership no longer recognizes service revenues and/or product sales revenues and the equivalent cost of product expense for the marketing services performed by AESC.

Period-over-period variances for the three and six months ended June 30, 2020, include the following impacts related to this change (i) decreases of $47.1 million and $56.2 million, respectively, in Service revenues – fee based, (ii) a decrease of $17.5 million and an increase of $4.7 million, respectively, in Product sales, and (iii) decreases of $64.6 million and $51.5 million, respectively, in Cost of product expense.

Period-over-period variances for the three and nine months ended September 30, 2020, include the following impacts related to this change (i) decreases of $37.7 million and $93.9 million, respectively, in Service revenues – fee based, (ii) decreases of $18.4 million and $13.7 million, respectively, in Product sales, and (iii) decreases of $56.1 million and $107.6 million, respectively, in Cost of product expense.

These changes had no impact to Operating income (loss), Net income (loss), the balance sheets, cash flows, or any non-GAAP metric used to evaluate our operations (see Key Performance Metrics within this Item 2).

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During the first quarter of 2020, oil and natural-gas prices decreased significantly, driven by the expectation of increased supply and sharp declines in demand resulting from the worldwide macroeconomic downturn that followed the global outbreak of COVID-19.

For example, NYMEX West Texas Intermediate crude-oil daily settlement prices recently ranged from a high of $63.27 per barrel in January 2020 to a low below $20.00 per barrel in April 2020.

For example, NYMEX West Texas Intermediate crude-oil daily settlement prices recently ranged from a high of $63.27 per barrel in January 2020 to a low below $20.00 per barrel in April 2020, with prices rebounding to $40.22 per barrel at September 30, 2020.

While the extent and duration of the recent commodity-price declines cannot be predicted, potential impacts to our business include the following:

• With continued excess supply, domestic oil-storage capacity may reach operational limits, causing downstream-storage constraints and potential production curtailments that could adversely impact revenues generated from our midstream gathering and processing contracts.

As available storage nears capacity, our customers may shut-in field production due to their inability to access downstream-takeaway alternatives or challenged wellhead economics.

• We have exposure to increased credit risk to the extent any of our customers, including Occidental, is in financial distress.

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See Liquidity and Capital Resources—Debt and credit facilities within this Item 2 for additional information.

• As of June 30, 2020, it is reasonably possible that prolonged low commodity prices, further commodity-price declines, and changes to producers’ drilling plans in response to lower prices could result in future long-lived asset impairments.

• As of September 30, 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.

To the extent producers continue with development plans in our areas of operation, we will continue to connect new wells or production facilities to our systems to maintain throughput on our systems and mitigate the impact of production declines.

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• We may be obligated to provide financial assurance of our performance under certain contractual arrangements requiring us to post collateral in the form of letters of credit or cash.

At June 30, 2020, we had $5.0 million in letters of credit or cash-provided assurance of our performance outstanding under contractual arrangements with credit-risk-related contingent features.

At September 30, 2020, we had $5.0 million in letters of credit or cash-provided assurance of our performance outstanding under contractual arrangements with credit-risk-related contingent features.

Additional downgrades to WES Operating’s credit ratings will further impact its borrowing costs negatively, and may adversely affect WES Operating’s ability to issue public debt and effectively execute aspects of our business strategy.

Per-unit distribution reduction and revised capital guidance.

On April 20, 2020, we announced the below-described per-unit distribution and cost reductions.

During 2020, we announced the below-described per-unit distribution and cost reductions.

These cash-preservation measures are intended to enhance our liquidity for the duration of the COVID-19 macroeconomic disruption and the weakened commodity-price environment;

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• A quarterly cash distribution of $0.31100 per unit for the first quarter of 2020, which represents a 50% reduction to the distribution paid for the previous quarter.

• For the year ended December 31, 2020, capital expenditures are expected to be $450.0 million to $550.0 million, representing a 45% reduction to prior guidance.

This reduction results from deferred producer activity in all basins and the elimination of associated capital expenditures, other than those expenditures that are necessary to support proper maintenance and long-term asset integrity.

• We expect to achieve other cost reductions of approximately $75.0 million through operating and maintenance and general and administrative expense cost-saving initiatives.

On July 16, 2020, we announced that our per-unit distribution for the second quarter of 2020 is unchanged from the first-quarter 2020 $0.31100 per-unit distribution.

On August 10, 2020, we announced a further downward revision to our estimated full-year 2020 capital expenditures, which currently are expected to be $400.0 million to $450.0 million, representing a $75.0 million reduction to the April 2020 guidance midpoint of $500.0 million.

On October 20, 2020, we announced that our per-unit distribution for the third quarter of 2020 was unchanged from the first- and second-quarter 2020 $0.31100 per-unit distributions.

• On April 20, 2020, we announced capital expenditures for the year ended December 31, 2020, were expected to be $450.0 million to $550.0 million, representing a 45% reduction to prior guidance.

This reduction resulted from deferred producer activity in all basins and the elimination of associated capital expenditures, other than those expenditures that are necessary to support proper maintenance and long-term asset integrity.

On August 10, 2020, we announced a further downward revision to our estimated full-year 2020 capital expenditures, which were expected to be $400.0 million to $450.0 million, representing a $75.0 million reduction to the April 2020 guidance midpoint of $500.0 million.

On November 9, 2020, we announced that we expect our full-year capital expenditures to be meaningfully below the low-end of our previously updated 2020 guidance range of $400.0 million to $450.0 million.

• On April 20, 2020, we announced expected other cost reductions of approximately $75.0 million through operating and maintenance and general and administrative expense cost-saving initiatives.

On November 9, 2020, we announced that we expect to realize approximately $175.0 million in operating and maintenance and general and administrative expense cost savings.

BASIS OF PRESENTATION FOR ACQUIRED ASSETS AND RESULTS OF OPERATIONS

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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.

Fort Union and Bison facilities.

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 during the first quarter of 2021, located in Northeast Wyoming, to a third party.

We 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 will be recorded in the fourth quarter of 2020.

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.

Presentation of the Partnership’s assets.

Our assets include assets owned and ownership interests accounted for by us under the equity method of accounting, through our 98% partnership interest in WES Operating as of June 30, 2020 (see Note 7—Equity Investments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q).

Our assets include assets owned and ownership interests accounted for by us under the equity method of accounting, through our 98% partnership interest in WES Operating as of September 30, 2020 (see Note 7—Equity Investments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q).

We also own and control the entire non-economic general partner interest in WES Operating GP, and our general partner is owned by Occidental.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

thousands 2020 2019 2020 2019

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Adjusted gross margin $ 681,529 $ 599,644 $ 2,069,801 $ 1,783,814

$ 686,957 $ 596,476 $ 1,388,272 $ 1,184,170

Adjusted EBITDA 518,358 410,213 1,546,386 1,271,463

Free cash flow 339,154 70,679 762,364 (7,496)

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(1) Total revenues and other includes amounts earned from services provided to related parties and from the sale of residue gas and NGLs to related parties.

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For reconciliations of these non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with GAAP, see Key Performance Metrics—Reconciliation of non-GAAP financial measures within this Item 2.

For purposes of the following discussion, any increases or decreases “for the three months ended June 30, 2020” refer to the comparison of the three months ended June 30, 2020, to the three months ended June 30, 2019;

any increases or decreases “for the six months ended June 30, 2020” refer to the comparison of the six months ended June 30, 2020, to the six months ended June 30, 2019;

and any increases or decreases “for the three and six months ended June 30, 2020” refer to the comparison of these 2020 periods to the corresponding three- and six-month periods ended June 30, 2019.

For purposes of the following discussion, any increases or decreases “for the three months ended September 30, 2020” refer to the comparison of the three months ended September 30, 2020, to the three months ended September 30, 2019;

any increases or decreases “for the nine months ended September 30, 2020” refer to the comparison of the nine months ended September 30, 2020, to the nine months ended September 30, 2019;

and any increases or decreases “for the three and nine months ended September 30, 2020” refer to the comparison of these 2020 periods to the corresponding three- and nine-month periods ended September 30, 2019.

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 Inc/

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673 568 18 % 711 527 35 %

_________________________________________________________________________________________

(1) Represents the 14.81% share of average Fort Union throughput, 22% share of average Rendezvous throughput, 50% share of average Mi Vida and Ranch Westex throughput, and 30% share of average Red Bluff Express throughput.

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Natural-gas assets

Gathering, treating, and transportation throughput increased by 26 MMcf/d and 20 MMcf/d for the three and six months ended June 30, 2020, respectively, primarily due to increased production in areas around the Marcellus Interest systems, partially offset by production declines in areas around the Bison facility and Springfield gas-gathering system.

Processing throughput increased by 39 MMcf/d and 107 MMcf/d for the three and six months ended June 30, 2020, respectively, primarily due to (i) increased production in areas around the West Texas and DJ Basin complexes, (ii) the start-up of Latham Train II at the DJ Basin complex during the first quarter of 2020, and (iii) the start-up of Mentone Train II at the West Texas complex in March 2019.

These increases were offset partially by (i) lower throughput at the Chipeta complex due to production declines in the area and a third-party contract that terminated during the fourth quarter of 2019, (ii) third-party volumes being diverted away from the Granger straddle plant beginning in the fourth quarter of 2019, and (iii) lower throughput at the Red Desert complex due to production declines in the area.

Equity-investment throughput increased by 56 MMcf/d and 61 MMcf/d for the three and six months ended June 30, 2020, respectively, primarily due to increased volumes on Red Bluff Express resulting from increased production in the area, partially offset by decreased volumes at the Mi Vida plant due to a decrease in third-party processed volumes.

Gathering, treating, and transportation throughput increased by 35 MMcf/d and 25 MMcf/d for the three and nine months ended September 30, 2020, respectively, primarily due to increased production in areas around the Marcellus Interest systems, partially offset by production declines in areas around the Bison facility and Springfield gas-gathering system.

Processing throughput decreased by 54 MMcf/d for the three months ended September 30, 2020, primarily due to (i) the Granger straddle plant being held idle during the third quarter of 2020, (ii) lower throughput at the Chipeta complex due to production declines in the area and a third-party contract that terminated during the fourth quarter of 2019, and (iii) lower throughput at the Red Desert complex and Granger system due to production declines in the area.

These decreases were offset partially by (i) increased production in areas around the West Texas and DJ Basin complexes and (ii) the start-up of Latham Train II at the DJ Basin complex during the first quarter of 2020.

Processing throughput increased by 53 MMcf/d for the nine months ended September 30, 2020, primarily due to (i) increased production in areas around the West Texas and DJ Basin complexes, (ii) the start-up of Latham Train II at the DJ Basin complex during the first quarter of 2020, and (iii) the start-up of Mentone Train II at the West Texas complex in March 2019.

These increases were offset partially by (i) third-party volumes being diverted away from the Granger straddle plant beginning in the fourth quarter of 2019 and the plant being held idle during the third quarter of 2020, (ii) lower throughput at the Chipeta complex due to production declines in the area and a third-party contract that terminated during the fourth quarter of 2019, and (iii) lower throughput at the Red Desert complex due to production declines in the area.

Equity-investment throughput increased by 60 MMcf/d and 61 MMcf/d for the three and nine months ended September 30, 2020, respectively, primarily due to increased volumes on Red Bluff Express resulting from increased production in the area.

This increase was offset partially by (i) decreased third-party volumes at the Fort Union system and (ii) decreased volumes at the Rendezvous system due to production declines in the area.

Crude-oil and NGLs assets

Gathering, treating, and transportation throughput increased by 57 MBbls/d for the three and six months ended June 30, 2020, primarily due to (i) increased throughput at the DBM oil system with the commencement of Loving ROTF Train III operations during the first quarter of 2020 and increased production, and (ii) increased throughput into the DJ Basin oil system.

Equity-investment throughput increased by 56 MBbls/d and 83 MBbls/d for the three and six months ended June 30, 2020, respectively, primarily due to (i) the acquisition of our interest in Cactus II in June 2018, which began delivering crude oil during the third quarter of 2019, (ii) increased volumes on FRP resulting from a pipeline expansion project completed during the second quarter of 2020, and (iii) increased volumes on the Saddlehorn pipeline resulting from incentive tariffs and additional committed volumes beginning in the third quarter of 2019.

Gathering, treating, and transportation throughput decreased by 18 MBbls/d for the three months ended September 30, 2020, primarily due to decreased throughput into the DJ Basin oil system, partially offset by increased throughput at the DBM oil system with the commencement of Loving ROTF Train III operations during the first quarter of 2020 and increased production.

Gathering, treating, and transportation throughput increased by 32 MBbls/d for the nine months ended September 30, 2020, primarily due to increased throughput at the DBM oil system with the commencement of Loving ROTF Train III operations during the first quarter of 2020 and increased production.

Equity-investment throughput increased by 86 MBbls/d and 87 MBbls/d for the three and nine months ended September 30, 2020, respectively, primarily due to (i) the acquisition of our interest in Cactus II in June 2018, which began delivering crude oil during the third quarter of 2019, and (ii) increased volumes on FRP resulting from a pipeline expansion project completed during the second quarter of 2020.

These increases were offset partially by decreased volumes on the Whitethorn pipeline.

Produced-water assets

Gathering and disposal throughput increased by 258 MBbls/d and 229 MBbls/d for the three and six months ended June 30, 2020, respectively, due to increased throughput at the DBM water systems resulting from additional (i) producer activity, (ii) water-disposal facilities, and (iii) offload connections that increased capacity of the systems.

Gathering and disposal throughput increased by 107 MBbls/d and 188 MBbls/d for the three and nine months ended September 30, 2020, respectively, due to increased throughput at the DBM water systems resulting from additional (i) producer activity, (ii) water-disposal facilities, and (iii) offload connections that increased capacity of the systems.

Service Revenues

Three Months Ended

June 30, Six Months Ended

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thousands except percentages 2020 2019 Inc/

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Service revenues – fee based

Service revenues – fee based increased by $49.1 million and $170.5 million for the three and six months ended June 30, 2020, respectively, primarily due to increases of (i) $29.1 million and $70.2 million, respectively, at the West Texas complex and $19.5 million and $55.9 million, respectively, at the DJ Basin complex from increased throughput, (ii) $22.7 million and $45.6 million, respectively, at the DBM oil system from increased throughput and the effect of the straight-line treatment of lease revenue under the new operating and maintenance agreement with Occidental effective December 31, 2019, (iii) $22.1 million and $41.2 million, respectively, at the DBM water systems from increased throughput and a higher average fee resulting from a cost-of-service rate redetermination that occurred during the first quarter of 2020, and (iv) $5.4 million and $15.9 million, respectively, at the DJ Basin oil system from increased throughput and higher average fees resulting from an annual cost-of-service rate adjustment that occurred during the fourth quarter of 2019.

Service revenues – fee based increased by $48.6 million and $219.1 million for the three and nine months ended September 30, 2020, respectively, primarily due to increases of (i) $40.2 million and $96.0 million, respectively, at the DJ Basin complex and $20.7 million and $91.0 million, respectively, at the West Texas complex from increased throughput, (ii) $14.2 million and $59.8 million, respectively, at the DBM oil system from increased throughput and the effect of the straight-line treatment of lease revenue under the new operating and maintenance agreement with Occidental effective December 31, 2019, and (iii) $12.5 million and $53.7 million, respectively, at the DBM water systems from increased throughput and a higher average fee resulting from a cost-of-service rate redetermination that occurred during the first quarter of 2020.

These increases were offset partially by decreases of $37.7 million and $93.9 million, respectively, resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2).

Service revenues – product based

Service revenues – product based decreased by $9.7 million and $13.1 million for the three and six months ended June 30, 2020, respectively, primarily due to decreased volumes and pricing across several systems.

Service revenues – product based decreased by $10.3 million for the nine months ended September 30, 2020, primarily due to decreased volumes and pricing across several systems, offset partially by increased volumes at the West Texas complex.

Product Sales

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

thousands except percentages and

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Natural-gas sales

Natural-gas sales decreased by $18.8 million for the six months ended June 30, 2020, primarily due to decreases of (i) $5.5 million and $2.8 million at the DJ Basin complex and MGR assets, respectively, attributable to decreases in average prices, (ii) $5.3 million at the Hilight system resulting from an accrual reversal in the first quarter of 2019 related to the Kitty Draw gathering-system shutdown (see Note 1—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q), and (iii) $2.6 million resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2).

NGLs sales decreased by $50.7 million and $49.4 million for the three and six months ended June 30, 2020, respectively, primarily due to decreases of (i) $15.1 million and $24.6 million, respectively, at the West Texas complex attributable to a decrease in average prices, partially offset by increased volumes, (ii) $6.2 million and $13.1 million, respectively, at the DJ Basin complex attributable to a decrease in average prices, and (iii) $2.6 million and $6.1 million, respectively, at the Chipeta complex, $3.9 million and $4.9 million, respectively, at the Brasada complex, and $2.2 million and $4.0 million, respectively, at the MGR assets resulting from decreases in average prices and volumes sold.

The above decreases also were impacted by a $17.8 million decrease and a $7.3 million increase, respectively, resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2).

Natural-gas sales decreased by $6.1 million for the three months ended September 30, 2020, primarily due to a decrease in average prices at the DJ Basin complex.

Natural-gas sales decreased by $25.0 million for the nine months ended September 30, 2020, primarily due to decreases of (i) $10.7 million at the DJ Basin complex attributable to a decrease in average prices, (ii) $6.0 million at the Hilight system resulting from an accrual reversal in the first quarter of 2019 related to the Kitty Draw gathering-system shutdown (see Note 1—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q), (iii) $3.2 million at the MGR assets attributable to decreases in average prices and volumes sold, and (iv) $2.6 million resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2).

NGLs sales decreased by $32.0 million and $81.4 million for the three and nine months ended September 30, 2020, respectively, primarily due to decreases of (i) $7.6 million and $32.2 million, respectively, at the West Texas complex attributable to a decrease in average prices, partially offset by increased volumes sold, (ii) $4.4 million and $9.4 million, respectively, at the Brasada complex resulting from decreases in average prices and volumes sold, and (iii) $18.4 million and $11.1 million, respectively, resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2).

In addition, for the nine months ended September 30, 2020, NGLs sales decreased due to (i) $12.4 million at the DJ Basin complex attributable to a decrease in average prices and (ii) $6.0 million at the MGR assets and $5.4 million at the Chipeta complex resulting from decreases in average prices and volumes sold.

Equity Income, Net – Related Parties

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

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thousands except percentages 2020 2019 Inc/

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Equity income, net – related parties $ 61,026 $ 53,893 13 % $ 176,788 $ 175,483 1 %

Equity income, net – related parties decreased by $9.2 million and $5.8 million for the three and six months ended June 30, 2020, respectively, primarily due to a decrease in equity income from Whitethorn LLC related to commercial activities, partially offset by increases related to the acquisition of our interest in Cactus II in June 2018, which began delivering crude oil during the third quarter of 2019.

In addition, the decrease for the six months ended June 30, 2020, was offset partially by increased volumes on FRP resulting from a pipeline expansion project completed during the second quarter of 2020.

Equity income, net – related parties increased by $7.1 million and $1.3 million for the three and nine months ended September 30, 2020, respectively, primarily due to increases related to the acquisition of our interest in Cactus II in June 2018, which began delivering crude oil during the third quarter of 2019, and increased volumes on TEP, FRP, and Red Bluff Express.

These increases were offset partially by a decrease in equity income from Whitethorn LLC related to commercial activities.

Cost of Product and Operation and Maintenance Expenses

Three Months Ended

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September 30, Nine Months Ended

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thousands except percentages 2020 2019 Inc/

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NGLs purchases

NGLs purchases decreased by $86.9 million for the three months ended June 30, 2020, primarily due to decreases of (i) $58.8 million resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2), (ii) $14.8 million at the West Texas complex attributable to an average-price decrease partially offset by a purchased-volume increase, (iii) $3.6 million and $2.6 million at the Brasada and Chipeta complexes, respectively, due to average-price and purchased-volume decreases, and (iv) $2.4 million at the DJ Basin complex attributable to an average-price decrease.

NGLs purchases decreased by $82.9 million for the six months ended June 30, 2020, primarily due to decreases of (i) $43.4 million resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2), (ii) $22.3 million at the West Texas complex due to an average-price decrease, (iii) $4.7 million at both the Brasada and Chipeta complexes attributable to average-price and purchased-volume decreases, and (iv) $2.9 million at the DJ Basin complex attributable to an average-price decrease.

NGLs purchases decreased by $57.8 million for the three months ended September 30, 2020, primarily due to decreases of (i) $50.1 million resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2) and (ii) $4.1 million at the Brasada complex attributable to average-price and purchased-volume decreases.

NGLs purchases decreased by $140.7 million for the nine months ended September 30, 2020, primarily due to decreases of (i) $93.5 million resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2), (ii) $23.9 million at the West Texas complex due to an average-price decrease, partially offset by a purchased-volume increase, and (iii) $8.8 million and $5.3 million at the Brasada and Chipeta complexes, respectively, attributable to average-price and purchased-volume decreases.

Residue purchases

Residue purchases decreased by $6.0 million for the three months ended June 30, 2020, primarily due to decreases of (i) $5.8 million resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y — Commodity purchase and sale agreements within this Item 2), (ii) $1.8 million at the DJ Basin complex attributable to average-price and purchased-volume decreases, and (iii) $1.5 million at the MGR assets attributable to an average-price decrease.

These amounts were offset partially by an increase of $3.7 million at the West Texas complex attributable to an average-price increase.

Residue purchases decreased by $18.5 million for the six months ended June 30, 2020, primarily due to decreases of (i) $8.1 million resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y — Commodity purchase and sale agreements within this Item 2) and (ii) $5.4 million and $3.8 million at the DJ Basin complex and MGR assets, respectively, attributable to an average-price decrease.

Other items decreased by $11.4 million and $13.7 million for the three and six months ended June 30, 2020, respectively, primarily due to decreases of (i) $8.4 million and $10.6 million, respectively, at the West Texas complex due to changes in imbalance positions and (ii) $3.0 million and $4.4 million, respectively, at the DJ Basin complex due to decreases in transportation costs.

Residue purchases decreased by $7.5 million for the three months ended September 30, 2020, primarily due to decreases of (i) $6.0 million resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2) and (ii) $3.9 million at the DJ Basin complex attributable to an average-price decrease.

These amounts were offset partially by an increase of $3.6 million at the West Texas complex due to an average-price increase.

Residue purchases decreased by $25.9 million for the nine months ended September 30, 2020, primarily due to decreases of (i) $14.1 million resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2) and (ii) $9.2 million and $4.5 million at the DJ Basin complex and MGR assets, respectively, attributable to an average-price decrease.

These amounts were offset partially by a $5.0 million increase at the West Texas complex attributable to an average-price increase.

Other items decreased by $14.6 million for the nine months ended September 30, 2020, primarily due to decreases of (i) $11.7 million at the West Texas complex due to changes in imbalance positions and (ii) $4.1 million at the DJ Basin complex due to a decrease in transportation costs.

Operation and maintenance expense

Operation and maintenance expense increased by $13.1 million for the six months ended June 30, 2020, primarily due to increases of (i) $11.5 million and $3.7 million at the DJ Basin and West Texas complexes, respectively, primarily resulting from increased utilities and maintenance expense and (ii) $9.5 million at the DBM water systems primarily attributable to higher surface-use fees and throughput, contract labor and consulting services, and maintenance and utilities expense.

These increases were offset partially by decreases of (i) $7.1 million in overhead expense primarily related to fleet management, equipment rentals, and other miscellaneous field expenses, and (ii) $4.6 million at the Springfield system primarily due to decreases in maintenance and salary expense.

Operation and maintenance expense decreased by $44.3 million for the three months ended September 30, 2020, primarily due to decreases of (i) $21.5 million at the West Texas complex primarily resulting from decreased utilities and maintenance expense, and salaries and wages, (ii) $6.8 million at the DBM water systems primarily attributable to lower surface-use fees and utilities expense, (iii) $4.4 million at the DJ Basin complex primarily attributable to decreased surface maintenance and plant repairs, and chemicals and treating services, and (iv) $4.0 million at the DBM oil system primarily attributable to decreased salaries and wages, surface maintenance and plant repairs, and utilities expense.

Operation and maintenance expense decreased by $31.2 million for the nine months ended September 30, 2020, primarily due to decreases of (i) $17.8 million and $5.4 million at the West Texas complex and Springfield system, respectively, primarily resulting from decreased utilities and maintenance expense, salaries and wages, and contract labor and consulting services, (ii) $7.7 million in overhead expense primarily related to fleet management and other miscellaneous field expenses, and (iii) $3.4 million at the DBM oil system primarily attributable to decreased surface maintenance and plant repairs, and salaries and wages expense.

These amounts were offset partially by an increase of $7.1 million at the DJ Basin complex primarily due to an increase in utilities and safety expense.

Other Operating Expenses

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Depreciation and amortization 132,564 127,914 4 % 384,688 362,977 6 %

Long-lived asset impairments

10,150 797 NM 165,935 1,187 NM

Long-lived asset and other impairments 34,640 3,107 NM 200,575 4,294 NM

Goodwill impairment

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Total other operating expenses

$ 185,773 $ 166,223 12 % $ 973,835 $ 319,688 NM

$ 228,174 $ 177,071 29 % $ 1,202,009 $ 496,759 142 %

_________________________________________________________________________________________

NM — Not meaningful

General and administrative expenses

General and administrative expenses increased by $6.4 million and $24.0 million for the three and six months ended June 30, 2020, respectively, primarily due to certain increases relating to the Services Agreement, including (i) $1.6 million and $16.6 million, respectively, in personnel costs primarily resulting from WES securing its own dedicated workforce as of December 31, 2019, and (ii) $3.6 million and $8.4 million, respectively, of additional expense primarily related to services provided by Occidental to WES for information technology services.

General and administrative expenses increased by $10.8 million for the three months ended September 30, 2020, primarily due to certain increases relating to the Services Agreement, including $6.5 million of additional expense primarily related to services provided by Occidental to WES for information technology services.

General and administrative expenses also increased by $6.3 million for the three months ended September 30, 2020 due to increases in other corporate expenses.

General and administrative expenses increased by $34.8 million for the nine months ended September 30, 2020, primarily due to certain increases relating to the Services Agreement, including (i) $15.2 million in personnel costs primarily resulting from WES securing its own dedicated workforce as of December 31, 2019, and (ii) $14.9 million of additional expense primarily related to services provided by Occidental to WES for information technology services.

General and administrative expenses also increased by $6.2 million for the nine months ended September 30, 2020 due to increases in other corporate expenses.

See Executive Summary—December 2019 Agreements within this Item 2.

Property and other taxes

Property and other taxes increased by $5.1 million and $7.3 million for the three and six months ended June 30, 2020, respectively, primarily due to ad valorem tax increases at (i) the West Texas complex due to general expansion, including the completion of Mentone Train II in March 2019 and (ii) at the DJ Basin complex due to general expansion, including the completion of Latham Train I in November 2019.

Property and other taxes increased by $4.1 million and $11.4 million for the three and nine months ended September 30, 2020, respectively, primarily due to ad valorem tax increases at (i) the West Texas complex due to general expansion, including the completion of Mentone Train II in March 2019 and (ii) at the DJ Basin complex due to general expansion, including the completion of Latham Train I in November 2019.

Depreciation and amortization expense

Depreciation and amortization expense decreased by $1.3 million for the three months ended June 30, 2020, primarily due to a decrease of $7.5 million at the DJ Basin complex as a result of a change in estimate for asset retirement obligations.

The decrease was offset partially by increases of (i) $4.4 million at the West Texas complex and DBM oil system, resulting from capital projects being placed into service, and (ii) $2.0 million of amortization expense related to finance leases.

Depreciation and amortization expense increased by $17.1 million for the six months ended June 30, 2020, primarily due to increases of (i) $6.1 million at the West Texas complex and $4.8 million at the DBM oil system and DBM water systems, all primarily resulting from capital projects being placed into service, and (ii) $4.2 million of amortization expense related to finance leases.

Depreciation and amortization expense increased by $4.7 million for the three months ended September 30, 2020, primarily due to increases of (i) $3.9 million at the DJ Basin complex primarily as a result of capital projects being placed into service, offset by a change in estimate for asset retirement obligations, (ii) $3.2 million at the West Texas complex resulting from capital projects being placed into service, and (iii) $1.8 million of amortization expense related to finance leases.

These increases were offset partially by a decrease of $4.2 million at the Hilight system primarily due to an acceleration of depreciation expense in the comparative prior period.

Depreciation and amortization expense increased by $21.7 million for the nine months ended September 30, 2020, primarily due to increases of (i) $9.3 million, $4.7 million, and $3.1 million at the West Texas complex, DBM oil system, and DJ Basin complex, respectively, all primarily resulting from capital projects being placed into service, and (ii) $6.0 million of amortization expense related to finance leases.

These increases were offset partially by a $3.4 million decrease at the Chipeta complex primarily due to lower depreciation as a result of the impairment incurred during the first quarter of 2020.

For further information regarding capital projects, see Liquidity and Capital Resources—Capital expenditures within this Item 2.

Long-lived asset impairment expense

Long-lived asset impairment expense for the three months ended June 30, 2020, was primarily due to (i) impairments of $5.1 million at the DJ Basin and West Texas complexes due to cancellation of projects and (ii) a $5.1 million impairment for an asset located in Wyoming, which was impaired to estimated fair value.

Long-lived asset impairment expense for the six months ended June 30, 2020, was primarily due to (i) $149.4 million of impairments for assets located in Wyoming and Utah and (ii) impairments at the DJ Basin complex.

For further information on long-lived asset impairment expense for the six months ended June 30, 2020, see Note 8—Property, Plant, and Equipment in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Long-lived asset and other impairment expense

Long-lived asset and other impairment expense for the three months ended September 30, 2020, was primarily due to (i) a $29.4 million other-than-temporary impairment of our investment in Ranch Westex, (ii) impairments of rights-of-way for $3.8 million at the DJ Basin complex, and (iii) impairments of $2.0 million at the DBM water systems due to cancellation of projects.

Long-lived asset and other impairment expense for the nine months ended September 30, 2020, was primarily due to $150.2 million of impairments for assets located in Wyoming and Utah, (ii) impairments of $14.8 million primarily at the DJ Basin complex, DBM water systems, and West Texas complex due to cancellation of projects, and (iii) impairments of rights-of-way for $6.2 million at the DJ Basin complex.

For further information on long-lived asset and other impairment expense for the nine months ended September 30, 2020, see Note 8—Property, Plant, and Equipment and Note 7—Equity Investments in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Goodwill impairment expense

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Interest expense $ (95,571) $ (78,524) 22 % $ (278,811) $ (223,872) 25 %

Interest expense increased by $15.2 million and $37.9 million for the three and six months ended June 30, 2020, respectively, primarily due to (i) $35.6 million and $66.7 million, respectively, of interest incurred on the 3.100% Senior Notes due 2025, 4.050% Senior Notes due 2030, 5.250% Senior Notes due 2050, and Floating-Rate Senior Notes due 2023 that were issued in January 2020 and (ii) decreases of $7.5 million and $8.9 million, respectively, in capitalized interest.

Interest income

Interest income - Anadarko note receivable decreased by $0.9 million for both the three and nine months ended September 30, 2020, due to the exchange of the Anadarko note receivable under the Unit Redemption Agreement.

See Note 6—Related-Party Transactions in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Interest expense

Interest expense increased by $17.0 million and $54.9 million for the three and nine months ended September 30, 2020, respectively, primarily due to (i) $41.0 million and $107.7 million, respectively, of interest incurred on the 3.100% Senior Notes due 2025, 4.050% Senior Notes due 2030, 5.250% Senior Notes due 2050, and Floating-Rate Senior Notes due 2023 that were issued in January 2020 and (ii) decreases of $5.9 million and $14.9 million, respectively, in capitalized interest.

These increases were offset partially by decreases of (i) $21.0 million and $49.8 million, respectively, that occurred as a result of the repayment and termination of the Term loan facility in January 2020 and (ii) $7.4 million and $13.7 million, respectively, due to lower outstanding borrowings under the RCF in 2020.

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Other income (expense), net $ 720 $ (67,894) 101 % $ 612 $ (161,577) 100 %

Other income (expense), net increased by $60.1 million and $93.6 million for the three and six months ended June 30, 2020, respectively, primarily due to non-cash losses of $59.0 million and $94.6 million on interest-rate swaps incurred during the three and six months ended June 30, 2019, respectively.

Other income (expense), net increased by $68.6 million and $162.2 million for the three and nine months ended September 30, 2020, respectively, primarily due to non-cash losses of $68.3 million and $162.9 million on interest-rate swaps incurred during the three and nine months ended September 30, 2019, respectively.

All outstanding interest-rate swap agreements were settled in December 2019 (see Note 11—Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q).

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Income (loss) before income taxes $ 257,163 $ 126,532 103 % $ 249,868 $ 524,939 (52) %

Income tax expense (benefit) 5,044 1,278 NM 764 11,370 (93) %

Effective tax rate 2 % 1 % NM 3 %

Income tax expense (benefit) 3,028 1,309 131 % 3,792 12,679 (70) %

Effective tax rate 1 % 1 % 2 % 2 %

We are not a taxable entity for U.S.

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However, income apportionable to Texas is subject to Texas margin tax.

For the six months ended June 30, 2019, the variance from the federal statutory rate primarily was due to federal and state taxes on pre-acquisition income attributable to assets previously acquired from Anadarko, and our share of applicable Texas margin tax.

For the nine months ended September 30, 2019, the variance from the federal statutory rate primarily was due to federal and state taxes on pre-acquisition income attributable to assets previously acquired from Anadarko, and our share of applicable Texas margin tax.

For all other periods presented, the variance from the federal statutory rate was primarily due to our Texas margin tax liability.

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339,154 70,679 NM 762,364 (7,496) NM

_________________________________________________________________________________________

(1) For a reconciliation of Adjusted gross margin, Adjusted EBITDA, and Free cash flow to the most directly comparable financial measure calculated and presented in accordance with GAAP, see the below descriptions.

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To facilitate investor and industry analyst comparisons between us and our peers, we also disclose per-Mcf Adjusted gross margin for natural-gas assets, per-Bbl Adjusted gross margin for crude-oil and NGLs assets, and per-Bbl Adjusted gross margin for produced-water assets .

Adjusted gross margin increased by $90.5 million and $204.1 million for the three and six months ended June 30, 2020, respectively, primarily due to (i) increased throughput at the West Texas and DJ Basin complexes, (ii) increased throughput and the effect of the straight-line treatment of lease revenue under the new operating and maintenance agreement with Occidental effective December 31, 2019, at the DBM oil system, (iii) increased throughput and higher average fees at the DBM water systems and DJ Basin oil system, and (iv) increased volumes on FRP resulting from a pipeline expansion project completed during the second quarter of 2020.

Adjusted gross margin increased by $81.9 million and $286.0 million for the three and nine months ended September 30, 2020, respectively, primarily due to (i) increased throughput at the West Texas and DJ Basin complexes, (ii) increased throughput and the effect of the straight-line treatment of lease revenue under the new operating and maintenance agreement with Occidental effective December 31, 2019, at the DBM oil system, (iii) increased throughput and higher average fees at the DBM water systems, (iv) the acquisition of our interest in Cactus II in June 2018, which began delivering crude oil during the third quarter of 2019, and (v) increased volumes on FRP resulting from a pipeline expansion project completed during the second quarter of 2020.

These increases were offset partially by (i) a decrease in distributions from Whitethorn LLC related to commercial activities and (ii) a decrease at the Hilight system resulting from lower throughput and an accrual reversal in the first quarter of 2019 related to the Kitty Draw gathering-system shutdown (see Note 1—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q).

Per-Mcf Adjusted gross margin for natural-gas assets increased by $0.07 for the three and six months ended June 30, 2020, primarily due to increased throughput at the West Texas complex, which has a higher-than-average per-Mcf margin as compared to our other natural-gas assets.

Per-Bbl Adjusted gross margin for crude-oil and NGLs assets increased by $0.04 and was flat for the three and six months ended June 30, 2020, respectively, primarily due to (i) increased throughput and higher average gathering and processing fees at the DJ Basin oil system, (ii) increased throughput and the effect of the straight-line treatment of lease revenue under the new operating and maintenance agreement with Occidental effective December 31, 2019, at the DBM oil system, and (iii) increased volumes on FRP resulting from a pipeline expansion project completed during the second quarter of 2020.

These increases were partially offset by a decrease in distributions from Whitethorn LLC related to commercial activities.

Per-Bbl Adjusted gross margin for produced-water assets decreased by $0.04 and $0.01 for the three and six months ended June 30, 2020, respectively, primarily due to increased throughput on volumes with lower-than-average per-Bbl margin.

Per-Mcf Adjusted gross margin for natural-gas assets increased by $0.13 and $0.09 for the three and nine months ended September 30, 2020, respectively, primarily due to increased throughput at the West Texas and DJ Basin complexes, which have higher-than-average per-Mcf margins as compared to our other natural-gas assets.

Per-Bbl Adjusted gross margin for crude-oil and NGLs assets decreased by $0.04 and $0.02 for the three and nine months ended September 30, 2020, respectively, primarily due to (i) a decrease in distributions from Whitethorn LLC related to commercial activities and (ii) the acquisition of our interest in Cactus II in June 2018, which began delivering crude oil during the third quarter of 2019 at a lower-than-average per-Bbl margin.

These decreases were offset partially by (i) increased throughput and the effect of the straight-line treatment of lease revenue under the new operating and maintenance agreement with Occidental effective December 31, 2019, at the DBM oil system and (ii) increased volumes on FRP resulting from a pipeline expansion project completed during the second quarter of 2020.

Per-Bbl Adjusted gross margin for produced-water assets increased by $0.03 for the three months ended September 30, 2020, primarily due to increased throughput on volumes with higher-than-average per-Bbl margin.

Adjusted EBITDA.

We define Adjusted EBITDA attributable to Western Midstream Partners, LP (“Adjusted EBITDA”) as net income (loss), plus (i) distributions from equity investments, (ii) non-cash equity-based compensation expense, (iii) interest expense, (iv) income tax expense, (v) depreciation and amortization, (vi) impairments, and (vii) other expense (including lower of cost or market inventory adjustments recorded in cost of product), less (i) gain (loss) on divestiture and other, net, (ii) gain (loss) on early extinguishment of debt, (iii) income from equity investments, (iv) interest income, (v) income tax benefit, (vi) other income, and (vii) the noncontrolling interests owners’ proportionate share of revenues and expenses.

We define Adjusted EBITDA attributable to Western Midstream Partners, LP (“Adjusted EBITDA”) as net income (loss), plus (i) distributions from equity investments, (ii) non-cash equity-based compensation expense, (iii) interest expense, (iv) income tax expense, (v) depreciation and amortization, (vi) impairments, and (vii) other expense (including lower of cost or market inventory adjustments recorded in cost of product), less (i) gain (loss) on divestiture and other, net, (ii) gain (loss) on early extinguishment of debt, (iii) income from equity investments, (iv) interest income, (v) other income, (vi) income tax benefit, and (vii) the noncontrolling interests owners’ proportionate share of revenues and expenses.

We believe the presentation of Adjusted EBITDA provides information useful to investors in assessing our financial condition and results of operations and that Adjusted EBITDA is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures, and make distributions.

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• the viability of acquisitions and capital expenditures and the returns on investment of various investment opportunities.

Adjusted EBITDA increased by $81.5 million for the three months ended June 30, 2020, primarily due to (i) a $104.1 million decrease in cost of product (net of lower of cost or market inventory adjustments) and (ii) a $3.2 million decrease in operation and maintenance expenses.

These amounts were offset partially by (i) a $13.3 million decrease in total revenues and other, (ii) a $5.1 million increase in property taxes, and (iii) a $5.1 million increase in general and administrative expenses excluding non-cash equity-based compensation expense.

Adjusted EBITDA increased by $166.8 million for the six months ended June 30, 2020, primarily due to (i) a $115.1 million decrease in cost of product (net of lower of cost or market inventory adjustments), (ii) an $89.1 million increase in total revenues and other, and (iii) a $5.0 million increase in distributions from equity investments.

These amounts were offset partially by (i) a $19.2 million increase in general and administrative expenses excluding non-cash equity-based compensation expense, (ii) a $13.1 million increase in operation and maintenance expenses, and (iii) a $7.3 million increase in property taxes.

The above-described decreases in cost of product and total revenues and other include the impacts resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020 (see Executive Summar y —Commodity purchase and sale agreements within this Item 2).

Adjusted EBITDA increased by $108.1 million for the three months ended September 30, 2020, primarily due to (i) a $66.0 million decrease in cost of product (net of lower of cost or market inventory adjustments), (ii) a $44.3 million decrease in operation and maintenance expenses, and (iii) a $13.0 million increase in total revenues and other.

These amounts were offset partially by (i) a $9.3 million increase in general and administrative expenses excluding non-cash equity-based compensation expense and (ii) a $4.1 million increase in property taxes.

Adjusted EBITDA increased by $274.9 million for the nine months ended September 30, 2020, primarily due to (i) a $181.1 million decrease in cost of product (net of lower of cost or market inventory adjustments), (ii) a $102.1 million increase in total revenues and other, (iii) a $31.2 million decrease in operation and maintenance expenses, and (iv) a $6.0 million increase in distributions from equity investments.

These amounts were offset partially by (i) a $28.6 million increase in general and administrative expenses excluding non-cash equity-based compensation expense and (ii) an $11.4 million increase in property taxes.

The above-described decreases in cost of product and total revenues and other include the impacts resulting from a change in accounting for the marketing contracts with AESC effective April 1, 2020, which had no net impact on Adjusted EBITDA (see Executive Summar y —Commodity purchase and sale agreements within this Item 2).

Free cash flow.

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Instead, Free cash flow should be considered indicative of the amount of cash that is available for distributions, debt repayments, and other general partnership purposes.

Free cash flow increased by $215.0 million and $501.4 million for the three and six months ended June 30, 2020, respectively, primarily due to (i) decreases of $178.0 million and $391.4 million, respectively, in capital expenditures, (ii) decreases of $35.7 million and $61.3 million, respectively, in contributions to equity investments, and (iii) increases of $2.2 million and $52.5 million, respectively, in net cash provided by operating activities.

These amounts were offset by decreases of $1.0 million and $3.7 million, respectively, in distributions from equity investments in excess of cumulative earnings.

Free cash flow increased by $268.5 million and $769.9 million for the three and nine months ended September 30, 2020, respectively, primarily due to (i) decreases of $183.6 million and $575.0 million, respectively, in capital expenditures, (ii) increases of $52.7 million and $105.2 million, respectively, in net cash provided by operating activities, and (iii) decreases of $27.8 million and $89.1 million, respectively, in contributions to equity investments.

See Capital Expenditures and Historical Cash Flow within this Item 2 for further information.

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61,853 50,446 190,688 140,608

(1) Includes goodwill impairment for the six months ended June 30, 2020.

_________________________________________________________________________________________

(1) Includes goodwill impairment for the nine months ended September 30, 2020.

See Note 9—Goodwill in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

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Net cash provided by (used in) financing activities (667,140) 2,133,246

(1) Includes goodwill impairment for the six months ended June 30, 2020.

_________________________________________________________________________________________

(1) Includes goodwill impairment for the nine months ended September 30, 2020.

See Note 9—Goodwill in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

(2) For all periods presented, includes (i) the 25% third-party interest in Chipeta and (ii) the 2.0% Occidental subsidiary-owned limited partner interest in WES Operating, which collectively represent WES’s noncontrolling interests.

(3) Excludes non-cash losses on interest-rate swaps of $59.0 million and $94.6 million for the three and six months ended June 30, 2019, respectively.

(3) Excludes non-cash losses on interest-rate swaps of $68.3 million and $162.9 million for the three and nine months ended September 30, 2019, respectively.

See Note 11—Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

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Contributions to equity investments 2,953 30,785 19,017 108,118

Distributions from equity investments in excess of cumulative earnings 8,288 9,260 13,340 17,052

Distributions from equity investments in excess of cumulative earnings – related parties 8,410 4,151 21,750 21,203

Free cash flow $ 339,154 $ 70,679 $ 762,364 $ (7,496)

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Our primary cash uses include capital expenditures, debt service, customary operating expenses, quarterly distributions, and distributions to our noncontrolling interest owners.

Our sources of liquidity as of June 30, 2020, included cash and cash equivalents, cash flows generated from operations, interest income on our Anadarko note receivable, available borrowing capacity under the RCF, and potential issuances of additional equity or debt securities.

Our sources of liquidity as of September 30, 2020, included cash and cash equivalents, cash flows generated from operations, available borrowing capacity under the RCF, and potential issuances of additional equity or debt securities.

We believe that cash flows generated from these sources will be sufficient to satisfy our short-term working capital requirements and long-term capital-expenditure requirements.

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We have made cash distributions to our unitholders each quarter since our IPO in 2012.

The Board of Directors declared a cash distribution to unitholders for the second quarter of 2020 of $0.31100 per unit, or $140.9 million in the aggregate.

The cash distribution is payable on August 13, 2020, to our unitholders of record at the close of business on July 31, 2020.

The Board of Directors declared a cash distribution to unitholders for the third quarter of 2020 of $0.31100 per unit, or $132.3 million in the aggregate.

The cash distribution is payable on November 13, 2020, to our unitholders of record at the close of business on October 30, 2020.

See Outlook within this Item 2.

In November 2020, we announced a buyback program of up to $250 million of our common units through December 31, 2021.

The common units may be purchased from time to time in the open market at prevailing market prices or in privately negotiated transactions.

The timing and amount of purchases under the program will be determined based on ongoing assessments of capital needs, our financial performance, the market price of the common units, and other factors, including organic growth and acquisition opportunities and general market conditions.

The program does not obligate us to purchase any specific dollar amount or number of units and may be suspended or discontinued at any time.

Management continuously monitors our leverage po sition and coordinates our capital expenditures and quarterly distributions with expected cash inflows and projected debt service requirements.

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Working capital .

As of June 30, 2020, we had a $331.9 million working capital deficit, which we define as the amount by which current liabilities exceed current assets.

As of September 30, 2020, we had a $193.5 million working capital deficit, which we define as the amount by which current liabilities exceed current assets.

Working capital is an indication of liquidity and potential needs for short-term funding.

Working capital requirements are driven by changes in accounts receivable and accounts payable and other factors such as credit extended to, and the timing of collections from, our customers, and the level and timing of our spending for acquisitions, maintenance, and capital activities.

Our working capital deficit was primarily due to the 5.375% Senior Notes due 2021 being classified as short-term debt on the consolidated balance sheet as of June 30, 2020.

As of June 30, 2020, there was $1.9 billion available for borrowing under the RCF.

Our working capital deficit was primarily due to the 5.375% Senior Notes due 2021 being classified as short-term debt on the consolidated balance sheet as of September 30, 2020.

As of September 30, 2020, there was $2.0 billion available for borrowing under the RCF.

See Note 10—Components of Working Capital and Note 11—Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

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Acquisitions and capital expenditures as presented in the consolidated statements of cash flows and capital incurred were as follows:

Six Months Ended

Nine Months Ended

September 30,

thousands 2020 2019

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251,315 826,713

(1) For the six months ended June 30, 2020 and 2019, included $3.6 million and $9.5 million, respectively, of capitalized interest.

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(1) For the nine months ended September 30, 2020 and 2019, included $6.1 million and $16.1 million, respectively, of capitalized interest.

Acquisitions during 2019 included AMA and the 30% interest in Red Bluff Express.

See Note 3—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Capital expenditures decreased by $391.4 million for the six months ended June 30, 2020, primarily due to decreases of (i) $182.1 million at the DJ Basin complex primarily related to the completion of Latham Trains I and II that commenced operations in November 2019 and February 2020, respectively, (ii) $100.7 million at the West Texas complex primarily related to the completion of Mentone Train II that commenced operations in March 2019, (iii) $51.8 million at the DBM oil system primarily related to the completion of the Loving ROTF Train III that commenced operations in January 2020, and (iv) $31.7 million at the DBM water systems primarily related to reduced construction of additional water-disposal facilities.

Capital expenditures decreased by $575.0 million for the nine months ended September 30, 2020, primarily due to decreases of (i) $267.0 million at the DJ Basin complex primarily related to the completion of Latham Trains I and II that commenced operations in November 2019 and February 2020, respectively, (ii) $135.5 million at the West Texas complex primarily related to the completion of Mentone Train II that commenced operations in March 2019, (iii) $82.4 million at the DBM oil system primarily related to the completion of the Loving ROTF Train III that commenced operations in January 2020, and (iv) $67.1 million at the DBM water systems primarily related to reduced construction of additional water-disposal facilities.

Historical cash flow .

The following table and discussion present a summary of our net cash flows provided by (used in) operating activities, investing activities, and financing activities:

Six Months Ended

The following table and discussion present a summary of our net cash flows provided by (used in) operating, investing, and financing activities:

Nine Months Ended

September 30,

thousands 2020 2019

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Operating Activities .

Net cash provided by operating activities increased for the six months ended June 30, 2020, primarily due to higher cash operating income and increased distributions from equity investments, offset partially by (i) higher interest expense, (ii) cash paid to settle interest-rate swaps, and (iii) the impact of changes in assets and liabilities, including the timing of $141.8 million of related-party cash receipts included in the June 30, 2020, Accounts receivable, net balance we received by July 3, 2020.

Net cash provided by operating activities increased for the nine months ended September 30, 2020, primarily due to higher cash operating income offset partially by (i) higher interest expense, (ii) cash paid to settle interest-rate swaps, and (iii) the impact of changes in assets and liabilities, including the timing of $74.8 million of related-party cash receipts included in the September 30, 2020, Accounts receivable, net balance we received by October 7, 2020.

Refer to Operating Results within this Item 2 for a discussion of our results of operations as compared to the prior periods.

Investing Activities .

Net cash used in investing activities for the six months ended June 30, 2020, included the following:

Net cash used in investing activities for the nine months ended September 30, 2020, included the following:

• $372.3 million of capital expenditures, primarily related to construction and expansion at the West Texas and DJ Basin complexes, DBM water systems, and DBM oil system;

• $39.2 million of materials and supplies inventory purchases;

• $57.1 million of additions to materials and supplies inventory;

• $19.0 million of capital contributions primarily paid to Cactus II and FRP for construction activities;

• $21.8 million of distributions received from equity investments in excess of cumulative earnings.

Net cash used in investing activities for the six months ended June 30, 2019, included the following:

Net cash used in investing activities for the nine months ended September 30, 2019, included the following:

• $2.0 billion of cash paid for the acquisition of AMA;

• $947.3 million of capital expenditures, primarily related to construction and expansion at the DBM oil and DBM water systems and the West Texas and DJ Basin complexes;

• $108.1 million of capital contributions primarily paid to Cactus II, the TEFR Interests, Whitethorn LLC, Red Bluff Express, and White Cliffs for construction activities;

• $92.5 million of cash paid for the acquisition of our interest in Red Bluff Express;

• $77.3 million of capital contributions paid to Cactus II, the TEFR Interests, Whitethorn LLC, Red Bluff Express, and White Cliffs for construction activities;

• $21.2 million of distributions received from equity investments in excess of cumulative earnings.

Financing Activities .

Net cash used in financing activities for the six months ended June 30, 2020, included the following:

Net cash used in financing activities for the nine months ended September 30, 2020, included the following:

• $3.0 billion of repayments of outstanding borrowings under the Term loan facility;

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• $20.0 million of a one-time cash contribution from Occidental received in January 2020, pursuant to the Services Agreement, for anticipated transition costs required to establish stand-alone human resources and information technology functions.

Net cash provided by financing activities for the six months ended June 30, 2019, included the following:

• $2.0 billion of borrowings under the Term loan facility, net of issuance costs, which were used to fund the acquisition of AMA and to repay the APCWH Note Payable;

Net cash provided by financing activities for the nine months ended September 30, 2019, included the following:

• $3.0 billion of borrowings under the Term loan facility, net of issuance costs, which were used to fund the acquisition of AMA, to repay the APCWH Note Payable, and to repay amounts outstanding under the RCF;

• $940.0 million of borrowings under the RCF, which were used for general partnership purposes, including the funding of capital expenditures;

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• $7.4 million of capital contributions from Anadarko related to the above-market component of swap agreements;

• $439.6 million of repayments of the total outstanding balance under the APCWH Note Payable;

• $1.0 billion of repayments of outstanding borrowings under the RCF;

• $688.2 million of distributions paid to WES unitholders;

• $439.6 million of repayments of the total outstanding balance under the APCWH Note Payable;

• $112.4 million of distributions paid to the noncontrolling interest owners of WES Operating;

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Debt and credit facilities.

As of June 30, 2020, the carrying value of outstanding debt was $8.0 billion.

As of September 30, 2020, the carrying value of outstanding debt was $7.9 billion.

See Note 11—Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

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• Fixed-Rate 3.100% Senior Notes due 2025, 4.050% Senior Notes due 2030, and 5.250% Senior Notes due 2050, offered to the public at prices of 99.962%, 99.900%, and 99.442%, respectively, of the face amount.

Including the effects of the issuance and underwriting discounts, the effective interest rates of the Senior Notes due 2025, 2030, and 2050, are 3.287%, 4.168%, and 5.362%, respectively.

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 September 30, 2020, and 3.287%, 4.168%, and 5.362%, respectively, at June 30, 2020.

Interest is paid on each such series semi-annually on February 1 and August 1 of each year, beginning August 1, 2020;

• Floating-Rate Senior Notes due 2023.

As of June 30, 2020, the interest rate on the Floating-Rate Senior Notes was 2.66%.

As of September 30, 2020, the interest rate on the Floating-Rate Senior Notes was 2.12%.

Interest is paid quarterly in arrears on January 13, April 13, July 13, and October 13 of each year.

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See Outlook within this Item 2.

During the first quarter of 2020, WES Operating purchased and retired $61.4 million of the 5.375% Senior Notes due 2021 and $38.6 million of the 4.000% Senior Notes due 2022 via open-market repurchases.

During the second quarter of 2020, WES Operating purchased and retired (i) an additional $7.5 million of the 5.375% Senior Notes due 2021 and $47.0 million of the 4.000% Senior Notes due 2022, and (ii) $10.0 million of the Floating-Rate Senior Notes, each via open-market repurchases.

For the three and six months ended June 30, 2020, gains of $1.4 million and $11.0 million, respectively, were recognized for the early retirement of these notes.

As of June 30, 2020, the 5.375% Senior Notes due 2021 was classified as short-term debt on the consolidated balance sheet.

At June 30, 2020, WES Operating was in compliance with all covenants under the relevant governing indentures.

During the three and nine months ended September 30, 2020, WES Operating purchased and retired $29.0 million and $193.5 million, respectively, of certain of its senior notes and Floating-Rate Senior Notes via open-market repurchases.

For the three and nine months ended September 30, 2020, gains of $1.7 million and $12.7 million, respectively, were recognized for the early retirement of these notes.

As of September 30, 2020, the 5.375% Senior Notes due 2021 were classified as short-term debt on the consolidated balance sheet.

At September 30, 2020, WES Operating was in compliance with all covenants under the relevant governing indentures.

We may, from time to time, seek to retire, rearrange, or amend some or all of our outstanding debt or debt agreements through cash purchases, exchanges, open-market repurchases, privately negotiated transactions, tender offers, or otherwise.

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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—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for more information.

As of June 30, 2020, there were $75.0 million of outstanding borrowings and $5.0 million of outstanding letters of credit, resulting in $1.9 billion of available borrowing capacity under the RCF.

At June 30, 2020, the interest rate on any outstanding RCF borrowings was 1.66% and the facility-fee rate was 0.25%.

At June 30, 2020, WES Operating was in compliance with all covenants under the RCF.

See Note 1—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

As of September 30, 2020, there were no outstanding borrowings and $5.0 million of outstanding letters of credit, resulting in $2.0 billion of available borrowing capacity under the RCF.

At September 30, 2020, the interest rate on any outstanding RCF borrowings was 1.65% and the facility-fee rate was 0.25%.

At September 30, 2020, WES Operating was in compliance with all covenants under the RCF.

As a result of credit-rating downgrades received from Fitch and S&P, beginning in the second quarter of 2020, the interest rate on our outstanding RCF borrowings increased by 0.20% and the RCF facility-fee rate increased by 0.05%, from 0.20% to 0.25%.

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During the first quarter of 2020, a loss of $2.3 million was recognized for the early termination of the Term loan facility.

See Note 11—Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for additional information.

See Note 11—Debt and Interest Expense in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Finance lease liabilities.

WES subleased equipment from Occidental via finance leases through April 2020.

During the first quarter of 2020, WES entered into finance leases with third parties for equipment and vehicles extending through 2029, with future lease payments of $41.3 million as of June 30, 2020.

During the first quarter of 2020, WES entered into finance leases with third parties for equipment and vehicles extending through 2029, with future lease payments of $39.0 million as of September 30, 2020.

APCWH Note Payable.

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The APCWH Note Payable was repaid at Merger completion.

See Note 1—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for additional information.

See Note 1—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Interest-rate swaps.

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As part of the settlement, WES Operating made cash payments of $107.7 million and recorded an accrued liability of $25.6 million to be paid quarterly in 2020.

For the six months ended June 30, 2020, WES Operating made cash payments of $12.8 million.

For the nine months ended September 30, 2020, WES Operating made cash payments of $19.2 million.

These cash payments were classified as cash flows from operating activities in the consolidated statements of cash flows.

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We expect our exposure to concentrated risk of non-payment or non-performance to continue for as long as our commercial relationships with Occidental generate a significant portion of our revenues.

Additionally, we are exposed to credit risk on our Anadarko note receivable.

We also are party to agreements with Occidental under which Occidental is required to indemnify us for certain environmental claims, losses arising from rights-of-way claims, failures to obtain required consents or governmental permits, and income taxes with respect to the assets previously acquired from Anadarko.

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commodity purchase and sale agreements;

Anadarko’s note payable to WES Operating;

the contribution agreements;

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Our results of operations do not differ materially from the results of operations and cash flows of WES Operating, which are reconciled below.

Reconciliation of net income (loss) attributable to WES to net income (loss) attributable to WES Operating.

The differences between net income (loss) attributable to WES and net income (loss) attributable to WES Operating are reconciled as follows:

Reconciliation of net income (loss).

The differences between net income (loss) attributable to WES and WES Operating are reconciled as follows:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

thousands 2020 2019 2020 2019

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$ 251,740 $ 125,415 $ 271,224 $ 513,023

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(1) Represents the portion of net income (loss) allocated to the limited partner interests in WES Operating not held by WES.

A subsidiary of Occidental held a 2.0% limited partner interest in WES Operating as of June 30, 2020 and 2019.

A subsidiary of Occidental held a 2.0% limited partner interest in WES Operating as of September 30, 2020 and 2019.

Immediately prior to the Merger closing, the WES Operating IDRs and the general partner units were converted into a non-economic general partner interest in WES Operating and WES Operating common units, and at Merger completion, all WES Operating common units held by the public and subsidiaries of Anadarko (other than common units held by WES, WES Operating GP, and 6.4 million common units held by a subsidiary of Anadarko) were converted into WES common units.

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The differences between net cash provided by (used in) operating and financing activities for WES and WES Operating are reconciled as follows:

Six Months Ended

Nine Months Ended

September 30,

thousands 2020 2019

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WES Operating net cash provided by (used in) financing activities $ (668,822) $ 2,128,012

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(1) Represents general and administrative expenses incurred by WES separate from, and in addition to, those incurred by WES Operating.

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Noncontrolling interest.

WES Operating’s noncontrolling interest consists of the 25% third-party interest in Chipeta (see Note 1—Description of Business and Basis of Presentation in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for further information).

WES Operating distributions.

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For the quarters ended March 31, 2019, June 30, 2019, September 30, 2019, and December 31, 2019, WES Operating distributed $283.3 million, $288.1 million, $289.7 million, and $290.3 million, respectively, to its limited partners.

For the quarter ended March 31, 2020, WES Operating distributed $143.4 million to its limited partners.

For the quarter ended June 30, 2020, WES Operating will distribute $143.4 million to its limited partners.

For each quarter ended March 31, 2020, and June 30, 2020, WES Operating distributed $143.4 million to its limited partners.

For the quarter ended September 30, 2020, WES Operating will distribute $143.4 million to its limited partners.

See Note 5—Equity and Partners’ Capital in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q .

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Our contractual obligations include, among other things, a revolving credit facility, other third-party long-term debt, capital obligations related to expansion projects, and various operating and finance leases.

Refer to Note 11—Debt and Interest Expense and Note 12—Commitments and Contingencies in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for an update to contractual obligations as of June 30, 2020.

OFF-BALANCE-SHEET ARRANGEMENTS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis