Q4 2023 Western Midstream Partners LP Earnings Call
Participants
Daniel Edwards Jenkins; Director of IR - Western Midstream Holdings LLC; Western Midstream Partners, LP
Kristen S. Shults; Senior VP & CFO - Western Midstream Holdings LLC; Western Midstream Partners, LP
Michael P. Ure; President, CEO & Director - Western Midstream Holdings LLC; Western Midstream Partners, LP
Brian Patrick Reynolds; Analyst; UBS Investment Bank, Research Division
Indraneel Mitra; Analyst; BofA Securities, Research Division
Jeremy Bryan Tonet; Senior Analyst; JPMorgan Chase & Co, Research Division
Keith T. Stanley; Research Analyst; Wolfe Research, LLC
Ned Antonov Baramov; Senior Analyst; Wells Fargo Securities, LLC, Research Division
Robert Mosca; Associate of Americas Research; Mizuho Securities USA LLC, Research Division
Selman Akyol; MD of Equity Research; Stifel, Nicolaus & Company, Incorporated, Research Division
Spiro Michael Dounis; Research Analyst; Citigroup Inc., Research Division
Zackery Lee Van Everen; Associate; Tudor, Pickering, Holt & Co. Securities, LLC, Research Division
Presentation
Operator
Good afternoon. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Midstream Partners Fourth Quarter and Full Year 2023 Earnings Conference Call. (Operator Instructions)
Thank you. I would now like to turn the conference over to Daniel Jenkins, Director of Investor Relations. Please go ahead.
Daniel Edwards Jenkins
Thank you. I'm glad you could join us today for Western Midstream's fourth quarter 2023 conference call. I would like to remind you that today's call, the accompanying slide deck, and last night's earnings release contain important disclosures regarding forward-looking statements and non-GAAP reconciliations. Please reference Western Midstream's most recent form 10-K and other public filings for a description of risk factors that could cause actual results to differ materially from what we discussed today. Relevant reference materials are posted on our website.
Additionally, I'm pleased to inform you that the Western Midstream Partners K-1 will be available via our website beginning March 8. Hard copies will be mailed out the following week. With me today are Michael Ure, our Chief Executive Officer and Kristen Shults, our Chief Financial Officer.
I'll now turn the call over to Michael.
Michael P. Ure
Thank you, Daniel, and good afternoon, everyone. Before we discuss our fourth quarter and full year 2023 operational and financial results, I'm excited to announce that we recently executed a series of agreements to divest of WES's remaining interest in several non-core, non-operated assets for $790 million. This includes WES's interest in the Whitethorn, Panola and Saddlehorn pipelines, the Mont Belvieu joint venture, and the Marcellus gathering system in Pennsylvania. The proceeds from these transactions, which in the aggregate represent an attractive accretive multiple of approximately 9.6x our 2023 adjusted EBITDA will provide liquidity to further strengthen our balance sheet and accelerate the return of capital to our unitholders in 2024.
For the past few years, we have successfully executed our strategy of divesting legacy, non-core assets and reallocating capital into our core asset base with the goal of generating incremental business and accelerating capital return to our unitholders. Furthermore, by coupling divestitures with strategic M&A, such as the Meritage Midstream acquisition, we have been able to cost-efficiently grow and further diversify our operated asset footprint.
Additionally, as a result of WES's meaningful net leverage reduction, reduced unit count and significant sustainable free cash flow generation, management plans to recommend a base distribution increase of 52%, starting in the first quarter of 2024, which equates to $0.875 per unit on a quarterly basis and $3.50 per unit on an annualized basis. Management's confidence in the sustainability of our free cash flow generation underpins our recommendation to increase the base distribution rather than pay a material enhanced distribution in future years.
While the enhanced distribution is a critical component of our capital allocation framework, we believe aligning the base distribution with the expected baseline cash generation of the business generates maximum unitholder value and allows the enhanced distribution to provide for incremental returns to unitholders when the business outperforms.
Since becoming a standalone enterprise in 2020, we have also focused on growing our third-party business, maximizing our partnership with Occidental, and operating our existing assets efficiently and safely. As of year-end 2023, we have grown our adjusted gross margin 22% relative to year-end 2019. Additionally, by focusing on capital-efficient growth and capital discipline, we have been able to grow our free cash flow from $37 million at year-end 2019 to an expected $1.15 billion at the midpoint based on our 2024 free cash flow guidance.
Furthermore, throughout this period, we have continued to return more value to stakeholders through our diversified, transparent capital return framework. Since January 2020, we have repurchased 15% of our unaffected unit count outstanding, inclusive of the anticipated quarterly $0.30 per unit increase. This will have resulted in an expected $500 million cumulative reduction in total distribution burden through year-end 2024.
The reduction in unit count at the $3.50 per unit annualized amount also equates to roughly $230 million of reduced distributions that can be reallocated to existing unitholders starting in 2025, thus equating to such a significant per-unit distribution growth rate. Additionally, we also allocated meaningful cash flow to retiring and repurchasing debt, which materially reduced leverage from WES's 2019 high watermark of 4.6x to an expected 3.0x by year-end 2024.
All of these actions have put our partnership at a position of strength, which has ultimately resulted in our ability to accelerate the return of capital to our unitholders and target an increase to our quarterly base distribution of 41% relative to our pre-pandemic quarterly distribution level. Even with an increase of this magnitude, we believe we will still have room to target additional base distribution increases in future years as the business performs and free cash flow generation continues to grow.
Turning to our 2023 results. 2023 was a successful and pivotal year for WES as we achieved another year of record throughput growth across all 3 products, further diversified our asset and customer base through commercial successes and accretive M&A, and returned $1.1 billion to unitholders through our capital return framework. Our ability to continue capturing throughput growth from our core basins, while maintaining cost and capital discipline, has positioned WES on solid financial and operational footing as we enter 2024. This is reflected in our strong 2024 guidance that we announced in yesterday's press release, which anticipates continued throughput growth in 2024 and into 2025 and includes the capital investment necessary to complete the construction of Mentone III and the majority of the North Loving plants. Our guidance also includes the impact of our announced non-core asset divestitures from yesterday.
Before we discuss our fourth quarter results in more detail, I would like to highlight several accomplishments in 2023 that helped position WES for growth and success in 2024 and beyond. Focusing on the Delaware Basin, this was an extremely successful year for WES as throughput increased across all three products, resulting in record throughput from the basin. We also experienced tremendous commercial success and further diversified our customer base by adding 12 new third-party customers across both our natural gas and produced water businesses.
Since late 2021, we have executed multiple long-term agreements with Occidental and other third-party customers that provide up to 950 million cubic feet per day of firm processing commitments, and our commercial team has materially increased third-party volumes on our system. These commercial successes were the primary drivers behind the sanctioning of both Mentone III and the North Loving plant, which will increase our total processing capacity in the basin by 34% and maintain WES's position as one of the top 5 natural gas processors in the Delaware Basin. These accomplishments have also helped WES grow its third-party natural gas throughput at more than double the rate of the basin since early 2021.
In the DJ Basin, throughput declines subsided in the second half of 2023, and we experienced sequential quarter crude oil and NGL's throughput growth starting in the third quarter for the first time since late 2021. In the Powder River Basin, we closed the Meritage acquisition early in the fourth quarter, which is the second-largest unaffiliated corporate-level M&A transaction in WES's history and our first significant acquisition since becoming a stand-alone partnership in 2020.
Our M&A strategy remains focused on accretive deals that optimize the value of our existing asset base and enable us to leverage our operational expertise to generate incremental value for our unitholders. Since closing the Meritage transaction and working to integrate it into our business, we have been pleased with its performance relative to our baseline expectations, and we have identified another $6 million of operational cost savings that we believe are achievable by the end of 2024.
Furthermore, we have identified at least $6 million of incremental cost savings that can be realized from certain field-level efficiencies. With that said, we are off to a strong start and plan to make substantial progress capturing expected cost savings and implementing operational efficiencies throughout 2024.
As we discussed on prior earnings calls, we strive to maintain a strong balance sheet and investment-grade credit rating with the goal of ultimately driving leverage down towards our long-term leverage thresholds in order to accelerate additional capital return to our unitholders.
In 2023, WES bought back $135 million of common units as well as increased our base distribution twice during the year to $2.30 per unit on an annualized basis, representing a 15% year-over-year increase. Additionally, in May of 2023, we paid our first enhanced distribution of $0.356 per unit, or $140 million, based on our 2022 financial performance. In total, we paid $978 million to unitholders in 2023 in the form of distributions, an increase of 33% compared to distributions paid in 2022.
Inclusive of yesterday's announced asset divestitures and our expected 2024 guidance ranges, we expect to reduce net leverage to approximately 3x by year-end 2024. Coupled with free cash flow growth and the reduction in our overall unit count, these divestitures allow us to accelerate the return of capital to unitholders through the anticipated distribution increase of 52%.
With that, I will turn the call over to Kristen to discuss our operational and financial performance.
Kristen S. Shults
Thank you, Michael, and good afternoon, everyone. Our fourth quarter natural gas throughput increased by 9% on a sequential quarter basis. This was almost entirely due to increased throughput in the Powder River Basin, resulting from the Meritage acquisition that closed in early October. Our crude oil and NGLs throughput increased by 5% on a sequential quarter basis, also due to increased throughput in the Powder River Basin from the Meritage acquisition and increased throughput from the DJ Basin.
We also experienced slightly higher throughput from the Delaware Basin quarter-over-quarter. Used water throughput decreased by 2% on a sequential quarter basis due to temporary volume curtailments associated with activities to support adjacent producer development.
Our fourth quarter per McF adjusted gross margin for natural gas assets increased by $0.03 compared to the prior quarter. This increase was primarily driven by increased throughput from operated assets, including Delaware, DJ and the Powder River Basin, increased distributions from our equity investments and the favorable revenue recognition cumulative adjustment recorded in the fourth quarter, associated with a higher cost of service rate pertaining to our South Texas assets.
We expect our first quarter per McF adjusted gross margin to be flat with the fourth quarter, primarily due to higher go-forward rates associated with the cost of service rate redeterminations that are offset by the loss of volumes from the recently divested Marcellus Gathering System in Pennsylvania.
Our fourth quarter per barrel adjusted gross margin for our crude oil and NGL assets increased by $0.16 compared to the prior quarter, primarily due to a favorable revenue recognition cumulative adjustment recorded in the fourth quarter associated with the higher cost of service rates at our DJ Basin and South Texas oil systems.
We expect our first quarter per barrel adjusted gross margin to increase by approximately 5% relative to the fourth quarter, mostly due to the loss of volumes associated with the sale of the Whitethorn Pipeline and the Mont Belvieu JV, both of which closed last week. Additionally, we expect our per barrel adjusted gross margin to increase another 15% in the second quarter, once the Saddlehorn and Panola Pipeline assets sales close.
Our fourth quarter per barrel adjusted gross margin for our produced water assets increased by $0.02 compared to the prior quarter, mostly due to contract mix and increased efficiency fee revenue. We expect our first quarter per barrel adjusted gross margin to increase modestly relative to the fourth quarter, mostly due to the cost of service rate redetermination that became effective on January 1.
During the fourth quarter, we generated net income attributable to limited partners of $282 million and adjusted EBITDA of $571 million. Relative to the third quarter, our adjusted gross margin increased by $77 million. This increase was mostly driven by the gross margin contribution from the Meritage acquisition and the recording of $20 million of favorable revenue recognition cumulative adjustments associated with redetermined cost of service rates on certain contracts associated with our assets in South Texas and our DJ Basin oil system.
Turning to expenses, inclusive of 2.5 months of Meritage activity, our operations and maintenance expense decreased slightly quarter-over-quarter, mostly due to lower utilities expense. As we look to the future, we expect our 2024 operation and maintenance expense to trend modestly higher than 2023 as a result of increased throughput and our expanded asset base. As a reminder, we expect seasonality associated with our utility expense in the summer months due to higher overall electricity pricing and greater energy usage in conjunction with increased throughput.
Turning to cash flow, our fourth quarter cash flow from operating activities totaled $473 million, generating free cash flow of $282 million. Free cash flow after our November distribution payment was $59 million. Our fourth quarter 2023 cash-based distribution of $0.575 per unit was unchanged relative to the prior quarter's distribution and was paid on February 13 to unitholders as of February 1.
Turning to our full-year results. Average throughput across all 3 products increased year-over-year, excluding the sale of Cactus II, which impacted our crude oil and NGL's volumes in 2022. For full year 2023, natural gas throughput averaged 4.4 billion cubic feet per day, representing a 5% year-over-year increase. Full year 2023 crude oil and NGL throughput averaged 652,000 barrels per day, a 7% year-over-year increase. This is an average of approximately 65,000 barrels per day of throughput in 2022 associated with the sale of Cactus II and includes approximately 5,000 barrels per day of throughput associated with Meritage assets in the fourth quarter of 2023.
Full year 2023 produced water throughput averaged just over 1 million barrels per day, an increase of 21% compared to full year 2022. For our full-year financial performance, we recorded just under $1 billion of net income attributable to limited partners, generating $2.07 billion of adjusted EBITDA, slightly exceeding the top end of our revised 2023 adjusted EBITDA guidance range of $2.05 billion.
Our adjusted EBITDA performance was primarily driven by increased throughput from all 3 products in the Delaware Basin and the addition of 2.5 months of throughput and the associated financial contribution from Meritage during the fourth quarter. This growth positioned WES to deliver another year of strong operating cash flow, which totaled approximately $1.7 billion for 2023.
Our capital expenditures totaled $739 million in 2023 and consisted of predominantly expansion capital, largely associated with the construction of Mentone III to support the growing needs of our customers. Our capital spend was toward the low end of our revised 2023 guidance range, resulting largely from several expansion projects shifting into early 2024.
Our free cash flow generation totaled $964 million in 2023 within our revised guidance range. Our performance highlights the profitable nature of our asset base and our disciplined approach towards managing both operational costs and capital spending. Finally, WES declared base distributions that totaled $2.21 for 2023, including our recent fourth quarter base distribution of $0.575 per unit. This amount exceeded our full-year 2023 base distribution guidance of $2.1875 per unit. Additionally, we paid an enhanced distribution of $0.356 per unit in May of 2023.
Turning our attention to 2024, we expect our portfolio-wide average year-over-year throughput to increase by low to mid-teens percentage for natural gas, upper single-digit percentage for crude oil and NGLs, and a low to mid-teens percentage for produced water. Our 2024 throughput guidance takes into account the non-core asset sales we announced yesterday and excludes those volumes from our 2023 reported results for year-over-year comparative purposes.
In the Delaware Basin, we expect average year-over-year throughput to increase for natural gas and crude oil and NGLs at growth rates similar to, or better than 2023. We expect to see a slight decline in produced water volumes relative to 2023. This is mostly due to continued strong producer activity levels and a steady number of wells coming online throughout 2024. While the forecasted number of wells expected to come to market in 2024 is flat relative to 2023, producer-driven efficiencies such as multi-well pad drilling and longer laterals per well are expected to result in higher throughput across our asset base.
In the DJ Basin, we expect average year-over-year throughput to increase for both natural gas and crude oil and NGLs. We expect the positive trends in the second half of 2023 to continue into 2024, namely strong producer activity levels and steady on-loan activity that resulted in throughput increases in the second half of the year. As of our latest forecast, we expect to see consistent throughput growth in 2024 from approximately double the new well count in 2024 relative to 2023, in addition to steady on loan activity.
Keep in mind that increases in crude oil and NGL throughput in 2024 will have a minimal impact on our adjusted EBITDA in the near term due to the current structure of demand fee revenue. Finally, we expect meaningful throughput growth from the Powder River Basin in 2024 for both natural gas and crude oil and NGLs, primarily due to the full year's contribution from heritage and steady throughput growth from customers in the basin.
Turning to our 2024 financial guidance, we expect our adjusted EBITDA to range between $2.2 billion to $2.4 billion for the year, implying a midpoint of $2.3 billion, which represents growth of more than 11% year-over-year at the midpoint, even after giving effect to the non-core asset sales announced yesterday.
Focusing on 2024, the overall distribution of adjusted EBITDA will change slightly compared to 2023, primarily due to the Meritage acquisition and our non-core asset sales announcement. However, we estimate that the Delaware Basin will remain our largest contributor at 51%, while the DJ and the Powder River Basin are expected to contribute 32% and 7% of our overall 2024 adjusted EBITDA, respectively. Sale of non-core assets and the acquisition of Meritage has allowed us to generate incremental adjusted EBITDA and expand our operated asset base while reducing leverage.
We expect our 2024 capital expenditure guidance to range between $700 million and $850 million, implying a midpoint of $775 million, which also includes the impact of yesterday's non-core asset sale announcement. We expect 81% of our capital budget to be spent in the Delaware Basin. The majority of our capital spent will be expansion capital pertaining to the construction of the North Loving plant, the completion of Mentone III, and additional system expansion in our core operating basins due to continued commercial success from both new and existing customers.
We still plan to enter the commissioning and start-up phase for Mentone III in the second half of March and expect to begin benefiting financially from Mentone early in the second quarter of 2024. We also expect to have higher overall well connect capital due to an increased number of total wells coming to market and higher overall maintenance capital, mostly due to the needs of our produced water business and our expanded asset base.
Focusing on the Meritage transaction, since taking ownership of the assets, our team has better refined the Powder River Basin capital assumptions and in combination with some of those operational efficiencies we are implementing, we were able to reduce our initial expansion capital assumptions in this basin for 2024.
Taking both of our adjusted EBITDA and capital expenditure guidance ranges into account, we expect to generate free cash flow between $1.05 billion and $1.25 billion in 2024, implying a midpoint of $1.15 billion, which includes the impact of yesterday's non-core asset sale announcement and represents growth of 19% year-over-year at the midpoint.
Including our expected increase, we are guiding to a full-year base distribution of at least $3.20 per unit. As Michael mentioned, $0.875 per quarter is 41% higher than WES's 2019 pre-COVID quarterly distribution level. We will continue to evaluate the base distribution on a quarterly basis and we believe we will have room to target additional base distribution increases in future years based on the health and growth trajectory of our business. Any potential enhanced distribution payment in 2025 will be based on our full-year 2024 financial performance governed by our year-end 2024 leverage threshold of 3x and subject to the Board's discretion.
Now I'll turn the call back over to Michael.
Michael P. Ure
Thank you, Kristen. Before we open it up for Q&A, I would like to reiterate our excitement regarding the partnership's current financial and operational position and our 2024 outlook. Significant effort has been invested by our people to put our partnership into the position of strength that we are in today.
In early 2020, we had more than 450 million units outstanding, net leverage of approximately 4.6x, and we faced a monumental task in building the workforce, culture and back-office infrastructure necessary to establish ourselves as a standalone entity. When the pandemic hit in 2020, WES was downgraded below investment grade, and we immediately took significant steps to materially reduce leverage and improve the health of the balance sheet.
Since that time, we assembled a dedicated employee base focused on generating incremental business from existing customers and attracting new customers onto our system. We also adopted an entrepreneurial mentality and re-examined every aspect of our operations to identify incremental cost savings opportunities and to pursue efficiencies to improve our profitability. We have also implemented new technologies and processes to increase operational efficiencies, enhance employee development and safety, and to minimize our environmental footprint.
We were the first midstream MLP to pivot and focus on free cash flow as a financial performance indicator as opposed to the conventional MLP standard metrics of distributable cash flow and distribution coverage. The shift to free cash flow generation has led to strong results, including repurchasing 15% of our unaffected unit count and reducing our expected year-end net leverage by more than one and a half turns since the end of 2019 when taking into account the non-core asset divestitures and 2024 financial guidance we announced yesterday.
We also regained our investment-grade credit rating, and our ability to meaningfully improve the balance sheet put us in a position to debt finance the Meritage midstream acquisition and transform our Powder River Basin footprint in the second half of 2023. Additionally, we have returned to growth mode, sanctioning Mentone Train III in 2022 and the North Loving plant in 2023, both of which were underwritten by long-term contracts backed by minimum volume commitments, and further demonstrates our commitment to capital discipline.
These actions, coupled with the recent non-core asset divestitures, have ultimately resulted in our ability to accelerate the return of capital to our unitholders and position us to recommend a 52% increase to the base distribution. At $0.875 per unit quarterly, our target 2024 base distribution represents a 41% increase relative to our pre-pandemic distribution level, which should make WES one of the highest, if not the highest, yielding investment-grade midstream entities when compared to other midstream companies and the Russell 3000 Index.
In fact, WES has already been one of the leaders over the past several quarters even before our most recent 52% base distribution increase. Without a doubt, all of our efforts over the past few years have greatly improved WES's balance sheet and free cash flow generation, and have provided significant flexibility to be able to return more capital to unitholders. WES leads its peer group in total capital return yield, and has a higher yield than the S&P Energy Sector and the S&P 500 Index.
We have also returned a higher percentage of our enterprise value back to unitholders than other midstream companies, and we continue to be top-tier in return on total capital employed. Finally, we are excited about the trajectory of our business in 2024. The financial outlook for WES remains strong as we transition into 2024, which we expect will be driven by another year of throughput growth that generates an 11% increase in adjusted EBITDA and a 19% increase in free cash flow at the midpoint.
I would like to close the call by thanking the entire WES workforce for all of their hard work and dedication throughout our company's history. Our people's hard work and dedication to WES's foundational principles and core values enabled us to make landmark achievements for the organization and create sustainable value for our stakeholders. I look forward to updating you on our progress toward our 2024 goals on our first quarter call in May.
With that, we will open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Your first question comes from Spiro Dounis with Citi.
Spiro Michael Dounis
Maybe to pick up on the distribution, if we could, I wanted to go through some of the implications on what this new higher payout means. So one it sounds like you guys put a lot of thought into the sustainability of it and the ability to grow it. I guess in the near term here, it does seem to consume a lot of your free cash flow, maybe perhaps over the next 2 years or so. But I guess what's implicit in that is that there now seems to be some level of sort of self-restraint on CapEx.
And I think some of our numbers imply spending kind of below $700 million for the next few years to continue to radically grow this distribution. So one, are we sort of reading that correctly, that there is a presumption here that CapEx does decline at some sort of normalized level? And then two, as we think about what that level is, what does that mean for the growth rate from here? How much do you think you can grow with lower CapEx?
Michael P. Ure
Yes. Spiro, I think a couple of comments. Yes. We do see 2023 and 2024 as higher expected capital periods relative to a go-forward rate. And really the reasons behind that are because of the 2 new plants that we're building that we believe are going to be able to sustain the growth level that we're expecting into the future. And so, as you look at 2025 and beyond, all things considered based on our current expectations, we would expect that that capital would actually be reduced relative to the higher levels that we've seen in 2023 and 2024.
Spiro Michael Dounis
And as far as what that reduced level is, I don't know if you guys have a sort of a longer-term growth trajectory out there. Obviously, your plan is just still to grow the distribution. Do you have a stated goal yet to sort of grow mid single-digits? Anything we could have sort of penciled in?
Michael P. Ure
Yes. I would just look from a capital perspective, I'd probably turn you to 2022, which was a period of growth for us, but did not include the significant capital associated with building new plants as an indicative amount of capital, what it might look like on a sustainable basis going forward. We still, again, believe that that's going to result in positive outcomes from a free cash flow generation point of view going forward, which is, to your point, the incident or the commentary that we made around the sustainability of the distribution at that level and even the potential for increased distributions going forward.
Spiro Michael Dounis
And second question, quickly, just to touch on the asset sales. That was something that was not on our radar maybe it should have been. But just curious, I guess, how you describe your appetite here to continue to sell more assets, is what you've left -- got left with now at this point screen is core?
Michael P. Ure
Yes. We've actually always held the perspective that those assets were non-core to us, that obviously we see great value in them, but they're not core to us. And so should someone see more value in those assets than we do, then we would divest of them similar to what we did at the end of 2022 as well. And so we do have some equity method investments that we've retained. We maintain the same perspective around those that they have great value to us. But shouldn't someone else see greater value than what we do, then we would look to divest them in the future.
Operator
Your next question comes from Jeremy Tonet with JPMorgan.
Jeremy Bryan Tonet
Jeremy Tone from JPMorgan. Just wanted to, you know, maybe pick up a little bit with what Spiro was asking there and just want to refresh view as you guys think about the current portfolio in front of you. How do you guys think about, I guess, it's a difficult question to answer. But the capital needed to kind of sustain the earnings power of the business at this point, as we kind of think about that going forward?
Michael P. Ure
Yes. So I'd reiterate, again, the comment that I would probably turn you to 2022 as the best sort of indicative levels for us as you think about sustaining with even a lean towards growth in terms of the amount of capital necessary. And that's a -- call it about a $0.50 of capital range. So that's the best guidance that I think we can give to you as it relates to what we would expect for a sustained level to be in the absence of some of the chunkier sort of capital projects, like the 2 plants that we have building right now.
Jeremy Bryan Tonet
So when we think about this distribution increase, as it were today, was kind of looking at that level of CapEx as determining the right level of an increase, 52% versus something higher or lower, or just trying to see, I guess, how you think about the parameters of the payout going forward, whether it's that or whether it's kind of free cash flow?
Michael P. Ure
Yes. So a couple of things that went into that, and we did a lot of analysis together with our board to take a look at it. And really it focused on, number one, we put out a target a couple of years ago of where we would like to be from a leverage standpoint at the end of 2024, and that was at 3x. The 3x times level, we think is on the lower end, but gives us the flexibility to be able to continue to grow our business and even offers opportunity for us to buy back units opportunistically and continue to support and sustain the business as it relates to inorganic opportunities on the M&A side.
And so, as we took a look at the health of the business, we took a look at the asset divestitures and targeted where we might be able to achieve a 3x leverage level exiting 2024. That's where we came out at the $3.50 level. Then we sensitized that on a go-forward basis relative to expectations and have confidence that that is a sustained level going forward and, frankly, even provides an opportunity for us to grow that even further into the future.
Jeremy Bryan Tonet
And then just one quick last one, if I could. Amidst this period of kind of consolidation, as we see in the midstream industry, just curious how you think WES's role in that progresses going forward at this point?
Michael P. Ure
Yes. I think I'd probably point you to the recent past in that regard. I think from our standpoint, we have incredible confidence in the culture of the team, our operational capabilities to be able to go out there and acquire bolt-on acquisitions in areas in which we operate that we can enhance our existing position, drive synergies through the system and then increase our free cash flow going forward. So obviously, we're constantly scouring the landscape to be able to be open to opportunities where we can continue to do that, similar to what we saw in the Meritage acquisition.
Operator
(Operator Instructions) Your next question comes from Brian Reynolds with UBS.
Brian Patrick Reynolds
Maybe just a follow up on some of the Delaware activity. As I remember, you're offloading kind of a significant amount of volumes before the North Loving and Mentone plant come on. So can you just remind us how much volumes are being offloaded currently? And kind of following on some of the growth comments like, could we see another need for another plant at North Loving in the 2025-'26 timeframe, just given the growth trajectory, particularly in the Delaware?
Michael P. Ure
Yes. Brian, we would expect that once Mentone III comes online that that plant is largely full. So I think that should give you a pretty good sense for an offload volume perspective. As we see here today, we actually believe that with North Loving Train I coming online that we're sufficient to be able to handle the growth that we're projecting and expecting going forward. So between Mentone III coming online shortly and then North Loving Train I, we think that that sets us up nicely to be able to handle the growth that we're seeing in our asset base.
Brian Patrick Reynolds
And maybe to touch on the recent announcements of Oxy's potential divestment of WES. I appreciate the release that you guys announced about no ongoing sale process, but perhaps could you just remind us about how your independent board kind of separates WES from the Oxy sale process, ultimately with the board structure, if you could just remind us there?
Michael P. Ure
Yes. Good question, Brian. So our board is set up. We have 3 Oxy appointees that are on the board and then the remaining 5 of the 8 are non-Oxy employees, including myself.
Operator
Your next question comes from Zackery Van Everen with TPH.
Zackery Lee Van Everen
Just one on the DJ. I know you noted that you're still below NVC levels on the crude oil side of things. Can you remind us if you're below or above some of the NVCs you have on the processing side there?
Kristen S. Shults
Yes. We've got a good mix of different customers on the gas side and the DJ, and so it just depends on a contract by contract basis what that looks like from an NVC perspective. But I would expect as the year is going on and we're increasing from a volumetric side on the gas side that you're seeing an increase on the EBITDA side as well.
Zackery Lee Van Everen
And then following up on a previous question with Delaware growth, once North Loving is on, do you imagine offloading some of your volumes into the future if you do grow beyond the capacity of the 2 new plants?
Michael P. Ure
Yes. We don't currently foresee the need to be doing offloads after North Loving I is completed. We believe that the capacity that we'll have, we'll be able to handle the growth and volumes that we're currently expecting.
Operator
Your next question comes from Gabriel Moreen with Mizuho.
Robert Mosca
This is Rob on for Gabe. I'm wondering if you could speak to the cost of service payments that you received in 4Q. Is that being driven by a closer scrutiny of these contracts or how that's been expected from the onset of '23? And are you expecting similar payments as cost of service redeterminations occur throughout the year?
Michael P. Ure
Yes. So the revenue recognition that was an impact to EBITDA on the fourth quarter is actually a non-cash item. So that is just trying to align the expected revenues that should have been booked based on expectations and weren't. And so that's actually a non-cash adjustment that occurs with any of our cost of service contracts that have demand payments. So no cash associated with that. Kirsten, anything else you had on that?
Kristen S. Shults
Yes. And then those are only booked in the fourth quarter. The ones that you see in the fourth quarter of 2023, we do that same exercise every year and would only be coming in the fourth quarter.
Robert Mosca
And maybe on the enhanced distribution, is the right way to think about it now that you don't really want to see big payouts with that year-in, year-out? And you want to ensure it's being capitalized or that your base distribution is being capitalized and kind of in accordance with this run rate CapEx that you expect as you manage to that long-term, 3x leveraged target?
Michael P. Ure
Yes. So the way that the enhanced distribution framework was intended was to set a distribution level that we believe was sustainable going forward. And now that the business has continued to perform and we expect it to perform, that's where we're expecting to recommend that to the $3.50 level on an annualized basis. The enhanced distribution was intended to be where if the business does outperform and we can't find another use for that capital, that we were going to return it back to our investors.
And so I think your question and your comment there definitely accurately captures the way that we're thinking about it. So we take an assessment on a quarterly basis to be able to take a look at the health of the business and what it is that we believe that we can sustain going forward. Should it outperform relative to that and should we not find another use for enhanced distribution on an annual determination?
Operator
Your next question comes from the line of Keith Stanley with Wolfe Research.
Keith T. Stanley
Sorry, it's for the multi-part question on the distribution. But a couple of things there. Just any comments you can make on how comfortable you are as a policy to have distributions above free cash flow over the long term? How did you consider buybacks as part of this analysis, just because you're getting $800 million of cash in the door as an alternative to the large base distribution increase? And then lastly, any comment you can make on conversations with the general partner on capital return strategy and how it fits with their objectives?
Michael P. Ure
Yes. So first comment there as it relates to the comfortability. I would just correct maybe one item there, and that is that we don't expect that the base distribution encompasses greater than our free cash flow generation on a go-forward basis. And so that's part of the level of comfort that the board and the management team has in recommending that level is that we do expect that our free cash flow generation throughout the projected period actually does exceed the distribution level. For this year, you did point out the $790 million coming in the door. And what that really did is it allowed us to get down to a leverage level when combined with the expected growth from EBITDA and free cash flow for the year to exit 2024 at or around 3x.
And so that's really more in light of the Meritage acquisition. This is a way for us to effectively recycle that capital that we spent on Meritage by selling our equity method investments that are non-operated and sold at a much higher multiple to bring down that leverage to where we could get to a more sustainable leverage level and then pay a distribution that we believe is commensurate with a free cash flow generation of the business, plus the ability to be able to lever other -- pull other levers as it relates to growth capital, M&A and buybacks as a whole.
As it relates to the GP, I would say it's a very interactive level that we have with all of our board members, not just the GP, as it relates to the health of the business, as it relates to what it is that we think is in the best interest of WES, is in the best interest of Wes. We've had great support both from all of our board members, both non-Oxy and Oxy board members, as it relates to trying to drive value overall for WES as a whole. And this is definitely a decision that was driven exclusively with the purpose of trying to drive value to our unitholders collectively in light of the incredible performance of the business and the leverage reduction that occurred as a result of the sell-down of the assets.
Keith T. Stanley
Second one, just want to follow up on the processing plant strategy. So you said offloads, Mentone III will basically take up all the offloads that you're doing today. You're going to have volume growth through this year. And so, when North Loving comes on in the beginning of 2025, presumably you wouldn't need to offload anymore and you'd have some space left on North Loving. But can you just walk through why, given how fast your system's growing in the Permian, why you wouldn't have a need for another plant in the 2026 type of time frame?
Michael P. Ure
Yes. As we projected today, you're right in that we will have Mentone III that will largely be full when it opens up. There will still be some offloads as a bridge to when we get North Loving out there. And then, according to our projections, with the inclusion of North Loving, we believe today, as it relates to the volume forecast that we have, that that should be sufficient for us from a processing standpoint. Should, obviously, we get incremental commitments, incremental growth, then at that point there would be additional need for us to build a plant. But as we look at it today, we don't need that.
Operator
Your next question comes from Selman Akyol with Stifel.
Selman Akyol
Just a real quick one for me. Going to be growth for 2024, obviously, for the full year. But I think you also referenced sort of growth within the basin, and I'm just curious as to what kind of growth you're seeing out of that basin?
Michael P. Ure
We are projecting, even if you looked, Selman, at it on a annualized, full annual 2023 basis compared to 2024, we actually do still project growth in the Powder River Basin 2024 on 2023. That's as it relates to both volume growth as well as EBITDA, we highlighted in there some of the synergies that we were able to achieve already for that acquisition and incremental opportunities that we believe may be available to us going forward. So from an EBITDA and free cash flow growth, there's even better growth than what you might expect just from a throughput standpoint.
Operator
Your next question comes from Ned Baramov with Wells Fargo.
Ned Antonov Baramov
On this last point, are the additional Meritage cost savings and efficiencies you noted in your prepared remarks reflected in the roughly 5x post-synergy acquisition multiple, or are these incremental items that could potentially further lower the multiple?
Kristen S. Shults
Those are incremental. So those were synergies that we did not take into account when we reported the multiple, and all of those and anything else we find would move us lower than that multiple.
Ned Antonov Baramov
And then, it seems every few years, we have to talk about permitting and risks to future development in Colorado. What are you hearing on this front and on the most recent draft bill? Is there anything that's different this time around?
Michael P. Ure
Yes. I would just actually highlight that the fourth quarter last year was actually the most successful quarter, I think, since those new rules came into play as it relates to the number of new permits that were achieved. And so I think that there's increased confidence in the process that it would take. We always expected that there would be a little bit of time for companies to get familiar with what it is that it was going to take to get those approvals through. And actually, the fourth quarter of last year, I think there was a lot of positivity in light of the fact that there was the most that were achieved in any other period.
Operator
Your next question comes from Neel Mitra with Bank of America.
Indraneel Mitra
I wanted to maybe isolate the Delaware growth and understand the drivers behind it. It's very strong, obviously. Oxy said basin-wide that they were going to be flat. So first, can you maybe talk about how that affects you? I understand that it's a portfolio basis, so every system is different. But any other drivers that are helping drive the growth in '24 in the Delaware system?
Michael P. Ure
Yes. So, a couple of comments on that. You're right in that the commentary from Oxy is a portfolio-wide or a basin-wide expectation, not just specific to the areas in which WES operates and is partners with Oxy. There's a couple of comments I would make around it. First of all, the world performance, as we highlighted, has been very strong under the assets that WES services.
In addition, 2023 was really the first year where they had the elevated level of activities. If you actually go back to the beginning of 2022, it was roughly half of the activity that then got stepped up around mid-year of 2022. And so you have the full year now of 2023 of that increased higher activity levels where you're seeing, obviously, an exit rate. We exited much higher than we entered 2023. And so those tailwinds, along with that continued expected activity, is part of the reasons why you're seeing a lot of the growth coming out of the Delaware Basin.
I would also highlight, we mentioned it in the prepared remarks, that we've added a pretty meaningful amount of third-party business coming into it. And so as we take a look at our third-party business, it's actually grown. The volumes on the third-party side have actually grown at double the pace of the Permian as a whole over the past couple of years. And so, for us, what it is that we're doing to focus on growing the pie as a whole for all customers and then emphasizing what it is that we can do that we're really unique in terms of our offering, our customer service focus, has resulted in new third-party volumes that is accelerating that growth profile relative to what you might expect from a basin-wide perspective.
Indraneel Mitra
And then, when you think about the distribution in past 2024, understand that the Delaware DJ and PRB are all growing this year, but how do you look at the PRB and the DJ and 25 plus under a oil price environment kind of where we are right now? Do you expect continued growth or continued growth or flatlining, just understanding the expectations to underwrite the distribution?
Michael P. Ure
Yes. So a couple things. Actually, for 2024, we're really expecting growth across all of our operated assets irrespective of area or basin. And so, we're quite optimistic as it relates to the performance of those assets, not only for 2024 as we look into future periods as well. And so, that's part of the reason why there's great confidence in the sustainability at this stage for the distribution increase at $3.50 and why we think that there may even be incremental opportunities to increase that further into the future.
Operator
There are no further questions at this time. Mr. Ure, I turn the call back over to you.
Michael P. Ure
Thank you all for joining the call. I want to, again, express my appreciation for all of the WES employees for their extra strong effort to put us in the position that we are today. And we look forward to speaking with you 3 months from now to discuss the results of our first quarter 2024 performance. Thank you all.
Operator
This concludes today's conference call. You may now disconnect.
