Debt and Interest Expense

9 Months Ended

Sep. 30, 2019

10. DEBT AND INTEREST EXPENSE

WES Operating is the borrower for all outstanding debt, excluding the WGP RCF, and is expected to be the borrower for all future debt issuances. The following table presents the outstanding debt:



	September 30, 2019						December 31, 2018
thousands	Principal		Carrying Value		Fair Value ⁽¹⁾		Principal		Carrying Value		Fair Value ⁽¹⁾
Short-term debt
WGP RCF	$	—	$	—	$	—	$	28,000	$	28,000	$	28,000
Finance lease liabilities ⁽²⁾	8,128		8,128		8,128		—		—		—
Total short-term debt	$	8,128	$	8,128	$	8,128	$	28,000	$	28,000	$	28,000

Long-term debt
5.375% Senior Notes due 2021	$	500,000	$	497,861	$	516,271	$	500,000	$	496,959	$	515,990
4.000% Senior Notes due 2022	670,000		669,260		678,551		670,000		669,078		662,109
3.950% Senior Notes due 2025	500,000		493,579		483,834		500,000		492,837		466,135
4.650% Senior Notes due 2026	500,000		496,074		494,665		500,000		495,710		483,994
4.500% Senior Notes due 2028	400,000		394,990		387,104		400,000		394,631		377,475
4.750% Senior Notes due 2028	400,000		396,101		394,121		400,000		395,841		384,370
5.450% Senior Notes due 2044	600,000		593,439		531,248		600,000		593,349		522,386
5.300% Senior Notes due 2048	700,000		686,793		608,994		700,000		686,648		605,327
5.500% Senior Notes due 2048	350,000		342,405		311,460		350,000		342,328		311,536
RCF	160,000		160,000		160,000		220,000		220,000		220,000
Term loan facility	3,000,000		3,000,000		3,000,000		—		—		—
APCWH Note Payable	—		—		—		427,493		427,493		427,493
Total long-term debt	$	7,780,000	$	7,730,502	$	7,566,248	$	5,267,493	$	5,214,874	$	4,976,815


⁽¹⁾	Fair value is measured using the market approach and Level-2 fair value inputs.


⁽²⁾	Amounts are considered affiliate. See Note 11.

10. DEBT AND INTEREST EXPENSE (CONTINUED)

Debt activity. The following table presents the debt activity for the nine months ended September 30, 2019:



thousands	Carrying Value
Balance at December 31, 2018	$	5,242,874
RCF borrowings	940,000
Term loan facility borrowings	3,000,000
APCWH Note Payable borrowings	11,000
Finance lease liabilities	8,128
Repayments of RCF borrowings	(1,000,000		)
Repayment of WGP RCF borrowings	(28,000		)
Repayment of APCWH Note Payable	(439,595		)
Other	4,223
Balance at September 30, 2019	$	7,738,630

WES Operating Senior Notes. At September 30, 2019, WES Operating was in compliance with all covenants under the relevant governing indentures.

WGP RCF. In February 2018, the Partnership voluntarily reduced aggregate commitments of the lenders under the WGP RCF to $35.0 million. The WGP RCF, which previously was available to purchase WES Operating common units and for general partnership purposes, matured in March 2019 and the $28.0 million of outstanding borrowings were repaid.

Revolving credit facility. WES Operating’s $2.0 billion senior unsecured revolving credit facility (“RCF) that matures in February 2024 is expandable to a maximum of $2.5 billion and bears interest at the London Interbank Offered Rate (“LIBOR”), plus applicable margins ranging from 1.00% to 1.50%, or an alternate base rate equal to the greatest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.50%, or (c) LIBOR plus 1.00%, in each case plus applicable margins currently ranging from zero to 0.50%, based upon WES Operating’s senior unsecured debt rating. A required quarterly facility fee is paid ranging from 0.125% to 0.250% of the commitment amount (whether used or unused), also based upon the senior unsecured debt rating.

As of September 30, 2019, there was $160.0 million of outstanding borrowings and $4.6 million of outstanding letters of credit, resulting in $1.8 billion available borrowing capacity under the RCF. As of September 30, 2019 and 2018, the interest rate on any outstanding RCF borrowings was 3.34% and 3.56%, respectively. The facility fee rate was 0.20% at September 30, 2019 and 2018. At September 30, 2019, WES Operating was in compliance with all covenants under the RCF.

Term loan facility. In December 2018, WES Operating entered into a $2.0 billion 364-day senior unsecured credit facility (the “Term loan facility”), the proceeds of which were used to fund substantially all of the cash portion of the consideration under the Merger Agreement and the payment of related transaction costs (see Note 1). The Term loan facility bears interest at LIBOR, plus applicable margins ranging from 1.000% to 1.625%, or an alternate base rate equal to the greatest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.50%, or (c) LIBOR plus 1.00%, in each case as defined in the Term loan facility and plus applicable margins currently ranging from zero to 0.625%, based upon WES Operating’s senior unsecured debt rating. Net cash proceeds received from future asset sales and debt or equity offerings must be used to repay amounts outstanding under the facility.

In July 2019, WES Operating entered into an amendment to the Term loan facility to (i) extend the maturity date from February 2020 to December 2020, (ii) increase the commitments available under the Term loan facility from $2.0 billion to $3.0 billion, the incremental $1.0 billion of which was subsequently drawn by WES Operating on September 13, 2019, and used to repay outstanding borrowings under the RCF, and (iii) modify the provision requiring that all debt issuance proceeds be used to repay the Term loan facility to allow for a $1.0 billion exclusion for debt offering proceeds.

10. DEBT AND INTEREST EXPENSE (CONTINUED)

As of September 30, 2019, there was $3.0 billion of outstanding borrowings under the Term loan facility that were subject to an interest rate of 3.42%. WES Operating was in compliance with all covenants under the Term loan facility as of September 30, 2019.

All of WES Operating’s notes and obligations under the RCF and Term loan facility are recourse to WES Operating GP. WES Operating GP is indemnified by wholly owned subsidiaries of Occidental against any claims made against WES Operating GP for WES Operating’s long-term debt and/or borrowings under the RCF and Term loan facility.

APCWH Note Payable. In June 2017, in connection with funding the construction of the APC water systems that were acquired as part of the AMA acquisition, APCWH entered into an eight-year note payable agreement with Anadarko. This note payable had a maximum borrowing limit of $500.0 million, including accrued interest, which was payable upon maturity at the applicable mid-term federal rate based on a quarterly compounding basis as determined by the U.S. Secretary of the Treasury. As of September 30, 2018, the interest rate on the outstanding borrowings was 2.83%. The APCWH Note Payable was repaid upon Merger completion. See Note 1.

Interest-rate swaps. In December 2018 and March 2019, WES Operating entered into interest-rate swap agreements with an aggregate notional amount of $750.0 million and $375.0 million, respectively, to manage interest rate risk associated with anticipated debt issuances. Pursuant to these swap agreements, a floating interest rate indexed to the three-month LIBOR was exchanged for a fixed interest rate. Depending on market conditions, liability management actions, or other factors, WES Operating may settle or amend certain or all of the currently outstanding interest-rate swaps. The following interest-rate swaps were outstanding as of September 30, 2019:



Notional Principal Amount	Reference Period	Mandatory Termination Date	Weighted-Average Interest Rate
$375.0 million	December 2019 - 2024	December 2019	2.662%
$375.0 million	December 2019 - 2029	December 2019	2.802%
$375.0 million	December 2019 - 2049	December 2019	2.885%

The Partnership does not apply hedge accounting and, therefore, gains and losses associated with currently outstanding interest-rate swaps are recognized currently in earnings. For the three and nine months ended September 30, 2019, non-cash losses of $68.3 million and $162.9 million, respectively, were recognized, which are included in Other income (expense), net in the consolidated statements of operations.

Valuation of the interest-rate swaps is based on similar transactions observable in active markets and industry standard models that primarily rely on market-observable inputs. Inputs used to estimate fair value in industry standard models are categorized as Level-2 inputs because substantially all assumptions and inputs are observable in active markets throughout the full term of the instruments. Inputs used to estimate the fair value include market price curves, contract terms and prices, and credit risk adjustments. The fair value of the interest-rate swaps was a liability of $170.9 million and $8.0 million at September 30, 2019, and December 31, 2018, respectively, which is reported within Accrued liabilities on the consolidated balance sheets.

10. DEBT AND INTEREST EXPENSE (CONTINUED)

Credit risk considerations. Over-the-counter traded swaps expose the Partnership to counterparty credit risk. The Partnership monitors the creditworthiness of its counterparties, establishes credit limits according to credit policies and guidelines, and assesses the impact on the fair value of its counterparties’ creditworthiness. Under certain circumstances, the Partnership has the ability to require cash collateral or letters of credit to mitigate its credit risk exposure. The interest-rate swaps are subject to individually negotiated credit provisions that may require cash collateral or letters of credit depending on the derivative’s portfolio valuation versus negotiated credit thresholds. These credit thresholds generally require full or partial collateralization of the Partnership’s obligations depending on certain credit-risk-related events. Specifically, collateral may be required to be posted with respect to the interest-rate swaps if WES Operating’s credit ratings decline below current levels, the existing liability associated with the swaps increases substantially, or certain credit event of default provisions are triggered. For example, based on the interest-rate derivative liability positions as of September 30, 2019, if WES Operating’s credit ratings from both Standard and Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”) were below the investment grade thresholds of BBB- and Baa3, respectively, cash collateral of up to approximately $78.3 million would have been required to be posted as of September 30, 2019. As of September 30, 2019, WES Operating’s credit rating was BBB- by S&P, Ba1 by Moody’s, and BBB- by Fitch Ratings. The aggregate fair value of interest-rate swaps with credit-risk related contingent features for which a net liability position existed was $142.6 million and $5.7 million at September 30, 2019, and December 31, 2018, respectively.

Interest expense. The following table summarizes the amounts included in interest expense:



	Three Months Ended September 30,						Nine Months Ended September 30,
thousands	2019			2018			2019			2018
Third parties
Long-term and short-term debt	$	(83,712	)	$	(53,229	)	$	(233,432	)	$	(143,436	)
Amortization of debt issuance costs and commitment fees	(3,139		)	(2,054		)	(9,461		)	(6,955		)
Capitalized interest	8,386			8,449			20,933			25,283
Total interest expense – third parties	(78,465		)	(46,834		)	(221,960		)	(125,108		)
Affiliates
APCWH Note Payable	—			(2,035		)	(1,833		)	(4,021		)
Finance lease liabilities	(59		)	—			(79		)	—
Total interest expense – affiliates	(59		)	(2,035		)	(1,912		)	(4,021		)
Interest expense	$	(78,524	)	$	(48,869	)	$	(223,872	)	$	(129,129	)