DCP MIDSTREAM, LP The following discussion analyzes our financial condition and results of operations. You should read the following discussion of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Overview
We are aDelaware limited partnership formed byDCP Midstream, LLC to own, operate, acquire and develop a diversified portfolio of complementary midstream energy assets. Our operations are organized into two reportable segments: (i) Logistics and Marketing and (ii) Gathering and Processing. Our Logistics and Marketing segment includes transporting, trading, marketing and storing natural gas and NGLs, and fractionating NGLs. Our Gathering and Processing segment consists of gathering, compressing, treating, and processing natural gas, producing and fractionating NGLs, and recovering condensate. General Trends and Outlook InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 to be a pandemic, and theU.S. economy began to experience pronounced effects curtailing global operations and travel, quarantines, and an overall substantial slowdown of economic activity. A further downturn in global economic growth, or recessionary conditions in major geographic regions, will lead to continued reduced demand for gas and NGLs and negatively affect the market prices of our products, further materially and adversely affecting our business, results of operations and liquidity. The extent of the impact of the COVID-19 pandemic on our operational and financial performance is anticipated to be temporary, but there is uncertainty around the extent and duration. We experienced a negative effect on our results of operations for the first half of 2020 due to industry conditions and the economic impact of the COVID-19 pandemic. Management anticipates that our results of operations will continue to be negatively affected by the industry and economic impact of the COVID-19 pandemic for the remainder of 2020 and perhaps beyond, however, the degree to which these factors will impact our business remains uncertain and the related financial impact of any such disruption cannot be reasonably estimated at this time. We have taken proactive measures to address the unprecedented COVID-19 pandemic to maintain essential business functions at our plants and critical infrastructure without disruptions. Our current continuity plan specifically addresses technology, communications, and remote operations. To protect our workforce, we have encouraged those employeeswho are able to work from home do so, while implementing additional safety guidelines at our plants for those that cannot. We continue to prioritize safe and reliable operations and have not experienced a disruption to operations or incurred significant additional costs as a result of COVID-19. The sustained deterioration in commodity prices and volumes, other market declines or a decline in our unit price, may negatively impact our results of operations, and may increase the likelihood of further non-cash impairment charges or non-cash lower of cost or net realizable value inventory adjustments. To address the extraordinary and volatile market conditions, we reduced our quarterly distribution by 50%, resulting in$325 million of cash we are using to reduce leverage and strengthen our balance sheet. Additionally, we continue to focus on cost reductions of approximately$120 million and a reduction of growth capital expenditures by$400 million . Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about or interpretations of available information prove to be incorrect, our actual results may vary materially from our expected results. Our business is impacted by commodity prices and volumes. We mitigate a significant portion of commodity price risk on an overall Partnership basis by growing our fee based assets and by executing on our hedging program. Various factors impact both commodity prices and volumes, and as indicated in Item 3. "Quantitative and Qualitative Disclosures about Market Risk," we have sensitivities to certain cash and non-cash changes in commodity prices. Commodity prices have declined substantially and experienced significant volatility in 2020. If commodity prices remain weak for a sustained period, our natural gas throughput and NGL volumes may be impacted, particularly as producers are curtailing or redirecting drilling. Our long-term view is that commodity prices will be at levels that we believe will support sustained or increasing levels of domestic production. In recent years we have transformed our business to a more fee-based portfolio focused more on the logistics business to reduce commodity exposure. In addition, we use our strategic hedging program to further mitigate 34 -------------------------------------------------------------------------------- commodity price exposure. We expect future commodity prices will be influenced by tariffs and other global economic conditions, the level of North American production and drilling activity by exploration and production companies, the balance of trade between imports and exports of liquid natural gas, NGLs and crude oil, and the severity of winter and summer weather. Our business is primarily driven by the level of production of natural gas by producers and of NGLs from processing plants connected to our pipelines and fractionators. These volumes can be affected by, among other things, reduced drilling activity, severe weather disruptions, operational outages and ethane rejection. Due to the COVID-19 pandemic, there has been a significant, unprecedented reduction in global demand for crude oil. This critical demand destruction has led to commodity price declines and storage capacity constraints. As a result, we expect meaningful volume declines to affect our earnings as producers reduce capital expenditures and shut-in wells. We hedge commodity prices associated with a portion of our expected natural gas, NGL and condensate equity volumes in our Gathering and Processing segment. Drilling activity levels vary by geographic area; we will continue to target our strategy in geographic areas where we expect producer drilling activity. We believe our contract structure with our producers provides us with significant protection from credit risk since we generally hold the product, sell it and withhold our fees prior to remittance of payments to the producer. Currently, our top 20 producers account for a majority of the total natural gas that we gather and process and of these top 20 producers, 8 have investment grade credit ratings. The global economic outlook continues to be cause for concern forU.S. financial markets and businesses and investors alike. This uncertainty may contribute to volatility in financial and commodity markets. We believe we are positioned to withstand current and future commodity price volatility as a result of the following: •Our growing fee-based business represents a significant portion of our margins. •We have positive operating cash flow from our well-positioned and diversified assets. •We have focused cost reductions efforts. •We have a well-defined and targeted multi-year hedging program. •We manage our disciplined capital growth program with a significant focus on fee-based agreements and projects with long-term volume outlooks. •We believe we have a solid capital structure and balance sheet. •We believe we have access to sufficient capital to fund our growth including excess distribution coverage and divestitures. During 2020, our strategic objectives will continue to focus on maintaining stable Cash Flows (a non-GAAP measure defined in "Reconciliation of Non-GAAP Measures - Distributable Cash Flows") from our existing assets and executing on opportunities to sustain our long-term Distributable Cash Flows. We believe the key elements to stable Distributable Cash Flows are the diversity of our asset portfolio, our fee-based business which represents a significant portion of our estimated margins, plus our hedged commodity position, the objective of which is to protect against downside risk in our Distributable Cash Flows. We will continue to pursue incremental revenue, cost efficiencies and operating improvements of our assets through process and technology improvements. In response to our commitment to reduce growth capital spend in 2020, only necessary and strategic projects that are currently underway will continue. The remaining projects will be deferred and evaluated in the future. Some of our growth projects include the following: •Within our Logistics and Marketing segment, we exercised an increased 50% ownership option for the Cheyenne Connector pipeline in October of 2019. The pipeline was placed in service in the second quarter of 2020. •Front Range's expansion to a capacity of 260 MBbls/d and Texas Express' expansion to a capacity of 370 MBbls/d were placed into service in the second quarter of 2020. •Within our Gathering and Processing Segment, DCP has moved the Latham 2 offload project to the end of 2020. The delay will not hinder DCP's ability to meet minimum volume commitments effectiveJanuary 1, 2021 . The Latham 2 offload will add up to 225 MMcf/d of incrementalDJ Basin processing capacity. 35 -------------------------------------------------------------------------------- We incur capital expenditures for our consolidated entities and our unconsolidated affiliates. Our 2020 plan includes sustaining capital expenditures of between$75 million and$95 million and expansion capital expenditures of between$150 million and$190 million . Expansion capital expenditures include the construction of the Cheyenne Connector pipeline. Recent Events Senior Notes Issuance OnJune 24, 2020 , we issued$500 million aggregate principal amount of 5.625% Senior Notes dueJuly 2027 , unless redeemed prior to maturity. We received proceeds of$494 million , net of underwriters' fees and related expenses, which we used for general partnership purposes, including the repayment of indebtedness under our Credit Agreement and the funding of capital expenditures. Interest on the notes is payable semi-annually in arrears onJanuary 15 andJuly 15 of each year, commencingJanuary 15, 2021 . Common and Preferred Distributions OnJuly 21, 2020 , we announced that the board of directors of the General Partner declared a quarterly distribution on our common units of$0.39 per common unit. The distribution will be paid onAugust 14, 2020 to unitholders of record onJuly 31, 2020 . On the same date, the board of directors of the General Partner declared a quarterly distribution on our Series B and Series C Preferred Units of$0.4922 and 0.4969 per unit, respectively. The Series B distributions will be paid onSeptember 15, 2020 to unitholders of record onSeptember 1, 2020 . The Series C distribution will be paid onOctober 15, 2020 to unitholders of record onOctober 1, 2020 . Results of Operations Consolidated Overview The following table and discussion is a summary of our consolidated results of operations for the six months endedJune 30, 2020 and 2019. The results of operations by segment are discussed in further detail following this consolidated overview discussion. 36 --------------------------------------------------------------------------------
Variance Three Months 2020 Variance Six Months
Three Months Ended June 30 , Six Months Ended June 30 , vs. 2019 2020 vs. 2019
Increase Increase
2020 2019 2020 2019 (Decrease) Percent (Decrease) Percent
(millions, except operating data)
Operating revenues (a):
Logistics and Marketing $ 1,150 $ 1,613 $ 2,508 $ 3,658 $ (463) (29) % $ (1,150) (31) %
Gathering and Processing 618 1,024 1,531 2,312 (406) (40) % (781) (34) %
Inter-segment eliminations (494) (839) (1,108) (1,973) (345) (41) % (865) (44) %
Total operating revenues 1,274 1,798 2,931 3,997 (524) (29) % (1,066) (27) %
Purchases and related costs
Logistics and Marketing (1,081) (1,525) (2,328) (3,512) (444) (29) % (1,184) (34) %
Gathering and Processing (387) (670) (900) (1,621) (283) (42) % (721) (44) %
Inter-segment eliminations 494 839 1,108 1,973 (345) (41) % (865) (44) %
Total purchases (974) (1,356) (2,120) (3,160) (382) (28) % (1,040) (33) %
Operating and maintenance expense (148) (182) (301) (360) (34) (19) % (59) (16) %
Depreciation and amortization expense (93) (101) (192) (204) (8) (8) % (12) (6) %
General and administrative expense (51) (68) (107) (135) (17) (25) % (28) (21) %
Asset impairments - - (746) - - * 746 *
Other expense, net (5) (1) (8) (6) 4 * 2 33 %
Loss on sale of assets, net - (5) - (14) (5) * (14) *
Restructuring costs (9) (9) (9) (9) - - % - - %
Earnings from unconsolidated affiliates (b) 125 117 201 230 8 7 % (29) (13) %
Interest expense (71) (73) (149) (142) (2) (3) % 7 5 %
Income tax expense - - (1) (1) - * - - %
Net income attributable to noncontrolling
interests (1) (1) (2) (2) - - % - - %
Net income (loss) attributable to partners $ 47 $ 119 $ (503) $ 194 $ (72) (61) % $ (697) *
Other data:
Gross margin (c):
Logistics and Marketing $ 69 $ 88 $ 180 $ 146 $ (19) (22) % $ 34 23 %
Gathering and Processing 231 354 631 691 (123) (35) % (60) (9) %
Total gross margin $ 300 $ 442 $ 811 $ 837 $ (142) (32) % $ (26) (3) %
Non-cash commodity derivative
mark-to-market $ (57) $ 39 $ 77 $ (15) $ (96) * $ 92 *
NGL pipelines throughput (MBbls/d) (d) 676 637 677 652 39 6 % 25 4 %
Gas pipelines throughput (TBtu/d) (d) 0.75 0.25 0.75 0.25 0.5 * 0.5 *
Natural gas wellhead (MMcf/d) (d) 4,487 4,866 4,713 4,902 (379) (8) % (189) (4) %
NGL gross production (MBbls/d) (d) 376 422 390 429 (46) (11) % (39) (9) %
* Percentage change is not meaningful.
(a) Operating revenues include the impact of trading and marketing gains
(losses), net.
(b) Earnings for Sand Hills pipeline, Southern Hills pipeline, Front Range
pipeline, Gulf Coast Express pipeline, Texas Express pipeline and Mont Belvieu 1
fractionator include the amortization of the net difference between the carrying
amount of the investments and the underlying equity of the entities.
(c) Gross margin consists of total operating revenues less purchases and related
costs. Segment gross margin for each segment consists of total operating
revenues for that segment less purchases and related costs for that segment.
Please read "Reconciliation of Non-GAAP Measures".
(d) For entities not wholly-owned by us, includes our share, based on our
ownership percentage, of the wellhead and throughput volumes and NGL production.
37-------------------------------------------------------------------------------- Three Months EndedJune 30, 2020 vs. Three Months EndedJune 30, 2019 Total Operating Revenues - Total operating revenues decreased$524 million in 2020 compared to 2019, primarily as a result of the following: •$463 million decrease for our Logistics and Marketing segment primarily due to lower commodity prices, lower gas and NGL sales volumes, and a decrease in transportation, processing and other, partially offset by favorable commodity derivative; and •$406 million decrease for our Gathering and Processing segment primarily due to lower commodity prices, decreased volumes in the Midcontinent and South regions and unfavorable commodity derivative activity, partially offset by increased sales volumes from growth projects in theDJ Basin and increased volumes in the Permian region. These decreases were partially offset by: •$345 million change in inter-segment eliminations, which relate to sales of gas and NGL volumes from our Gathering and Processing segment to our Logistics and Marketing segment, primarily due to lower commodity prices and lower gas and NGL sales volumes. Total Purchases - Total purchases decreased$382 million in 2020 compared to 2019, primarily as a result of the following: •$444 million decrease for our Logistics and Marketing segment for the commodity price and volume changes discussed above; and •$283 million decrease for our Gathering and Processing segment for the commodity price and volume changes discussed above. These decreases were partially offset by: •$345 million change in inter-segment eliminations, for the reasons discussed above. Operating and Maintenance Expense - Operating and maintenance expense decreased in 2020 compared to 2019, primarily as a result of decreased base operating costs in the Permian and Midcontinent regions. General and Administrative Expense - General and administrative expense decreased in 2020 compared to 2019, primarily as a result of reduced headcount and employee benefits. Loss on Sale of Assets, net - The loss on sale of assets in 2019 represents the sale of non-core assets. Earnings from Unconsolidated Affiliates - Earnings from unconsolidated affiliates increased in 2020 compared to 2019, primarily as a result of the Gulf Coast Express pipeline coming online. Net Income (Loss) Attributable to Partners - Net income (loss) attributable to partners decreased in 2020 compared to 2019 for the reasons discussed above. Gross Margin - Gross margin decreased$142 million in 2020 compared to 2019, primarily as a result of the following: •$19 million decrease for our Logistics and Marketing segment primarily related to lower gas marketing margins due to less favorable commodity spreads primarily associated with the Guadalupe pipeline in 2020, and a decrease in NGL storage margins, partially offset by favorable commodity derivative activity, higher NGL marketing and gas storage margins and theDJ Basin Southern Hills extension; and •$123 million decrease for our Gathering and Processing segment primarily related to unfavorable commodity derivative activity, lower commodity prices and decreased margins and volumes in the South and Midcontinent regions, partially offset by increased volumes and margins in the North and Permian regions. 38 -------------------------------------------------------------------------------- Six Months EndedJune 30, 2020 vs. Six Months EndedJune 30, 2019 Total Operating Revenues - Total operating revenues decreased$1,066 million in 2020 compared to 2019, primarily as a result of the following: •$1,150 million decrease for our Logistics and Marketing segment primarily due to lower commodity prices and lower NGL sales volumes, partially offset by favorable commodity derivative activity and higher gas sales volumes; and •$781 million decrease for our Gathering and Processing segment primarily due to lower commodity prices, decreased volumes in the Midcontinent and South regions and a decrease in transportation, processing and other, partially offset by favorable commodity derivative activity, increased volume from growth projects in theDJ Basin , and increased volumes in the Permian region. These decreases were partially offset by: •$865 million change in inter-segment eliminations, which relate to sales of gas and NGL volumes from our Gathering and Processing segment to our Logistics and Marketing segment, primarily due to lower commodity prices and lower NGL sales volumes, partially offset by higher gas sales volumes. Total Purchases - Total purchases decreased$1,040 million in 2020 compared to 2019, primarily as a result of the following: •$1,184 million decrease for our Logistics and Marketing segment for the commodity price and volume changes discussed above; and •$721 million decrease for our Gathering and Processing segment for the commodity price and volume changes discussed above. These decreases were partially offset by: •$865 million change in inter-segment eliminations, for the reasons discussed above. Operating and Maintenance Expense - Operating and maintenance expense decreased in 2020 compared to 2019, primarily as a result of decreased base operating costs in the Permian, Midcontinent and South regions. General and Administrative Expense - General and administrative expense decreased in 2020 compared to 2019, primarily as a result of reduced headcount and employee benefits. Asset Impairments - Asset impairments in 2020 relate to long-lived assets in the Permian and South regions and goodwill related to our North region. Loss on Sale of Assets, net - The loss on sale of assets in 2019 represents the sale of our wholesale propane business and other non-core assets. Earnings from Unconsolidated Affiliates - Earnings from unconsolidated affiliates decreased in 2020 compared to 2019, primarily as a result of an impairment in our equity investment in Discovery, partially offset by the Gulf Coast Express pipeline coming online. Net Income (Loss) Attributable to Partners - Net income (loss) attributable to partners decreased in 2020 compared to 2019 for the reasons discussed above. Gross Margin - Gross margin decreased$26 million in 2020 compared to 2019, primarily as a result of the following: •$34 million increase for our Logistics and Marketing segment primarily related to favorable commodity derivative activity, higher NGL marketing and gas storage margins, and theDJ Basin Southern Hills extension, partially offset by lower gas marketing margins due to less favorable commodity spreads primarily associated with the Guadalupe pipeline in 2020, the sale of our wholesale propane business in 2019 and decreased NGL storage margins; and 39 -------------------------------------------------------------------------------- •$60 million decrease for our Gathering and Processing segment primarily related to lower commodity prices, lower volumes and margins in the South region and lower volumes in the Midcontinent region, partially offset by favorable commodity derivative activity and increased volumes from growth projects in theDJ Basin and increased volumes in the Permian region. Supplemental Information on Unconsolidated Affiliates The following table presents financial information related to unconsolidated affiliates: Earnings from investments in unconsolidated affiliates were as follows: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 (millions) DCP Sand Hills Pipeline, LLC $ 70$ 72 $ 148 $ 140 DCP Southern Hills Pipeline, LLC 20 22 40 45 Front Range Pipeline LLC 9 9 20 16 Gulf Coast Express LLC 16 - 32 - Texas Express Pipeline LLC 5 4 9 9 Mont Belvieu Enterprise Fractionator 3 3 6 7 Mont Belvieu 1 Fractionator 3 4 6 8 Discovery Producer Services LLC 1 3 (60) 3 Other (2) - - 2
Total earnings from unconsolidated affiliates
Distributions received from unconsolidated affiliates were as follows:
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(millions)
DCP Sand Hills Pipeline, LLC $ 90 $ 81 $ 169 $ 157
DCP Southern Hills Pipeline, LLC 26 27 48 52
Front Range Pipeline LLC 14 9 26 15
Gulf Coast Express LLC 20 - 41 -
Texas Express Pipeline LLC 6 3 11 8
Mont Belvieu Enterprise Fractionator 3 3 6 4
Mont Belvieu 1 Fractionator 3 5 7 10
Discovery Producer Services LLC 5 6 11 11
Other - 1 1 2
Total distributions from unconsolidated affiliates
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--------------------------------------------------------------------------------Results of Operations - Logistics and Marketing Segment
Operating Data
Six Months Ended June
Three Months Ended June 30, 2020 30, 2020
Approximate Gas
Approximate Approximate Throughput Pipeline Pipeline Pipeline Pipeline
System Length Throughput Capacity Capacity Throughput Throughput Throughput Throughput
System (Miles) (MBbls/d) (a) (Bcf/d) (a) (MBbls/d) (a) (TBtus/d) (a) (MBbls/d) (a) (TBtus/d) (a)
Sand Hills pipeline 1,400 333 - 312 - 317 -
Southern Hills pipeline 950 128 - 100 - 96 -
Front Range pipeline 450 87 - 56 - 58 -
Texas Express pipeline 600 37 - 19 - 20 -
Other NGL pipelines (a) 1,110 400 - 189 - 186 -
Gulf Coast Express pipeline 500 - 0.50 - 0.50 - 0.50
Guadalupe pipeline 600 - 0.25 - 0.25 - 0.25
Pipelines total 5,610 985 0.75 676 0.75 677 0.75
(a) Represents total capacity or total volumes allocated to our proportionate ownership share.
The results of operations for our Logistics and Marketing segment are as
follows:
Six Months Ended June Variance Six Months
Three Months Ended June 30 , 30, Variance Three Months 2020 vs. 2019 2020 vs. 2019
Increase Increase
2020 2019 2020 2019 (Decrease) Percent (Decrease) Percent
Operating revenues:
Sales of natural gas, NGLs and condensate $ 1,113 $ 1,600 $ 2,407 $ 3,640 $ (487) (30) % $ (1,233) (34) %
Transportation, processing and other 11 12 24 24 (1) (8) % - - %
Trading and marketing gains (losses), net 26 1 77 (6) 25 * 83 *
Total operating revenues 1,150 1,613 2,508 3,658 (463) (29) % (1,150) (31) %
Purchases and related costs (1,081) (1,525) (2,328) (3,512) (444) (29) % (1,184) (34) %
Operating and maintenance expense (9) (11) (16) (20) (2) (18) % (4) (20) %
Depreciation and amortization expense (3) (3) (6) (6) - - % - - %
General and administrative expense (1) (1) (3) (4) - - % (1) (25) %
Other expense, net (4) (1) (4) (1) 3 * 3 *
Earnings from unconsolidated affiliates
(a) 125 114 262 227 11 10 % 35 15 %
Loss on sale of assets, net - (1) - (10) 1 * (10) *
Segment net income attributable to
partners $ 177 $ 185 $ 413 $ 332 $ (8) (4) % $ 81 24 %
Other data:
Segment gross margin (b) $ 69 $ 88 $ 180 $ 146 $ (19) (22) % $ 34 23 %
Non-cash commodity derivative
mark-to-market $ 5 $ 24 $ 47 $ 6 $ (19) (79) % $ 41 *
NGL pipelines throughput (MBbls/d) (c) 676 637 677 652 39 6 % 25 4 %
Gas pipelines throughput (TBtu/d) (c) 0.75 0.25 0.75 0.25 0.5 * 0.5 *
* Percentage change is not meaningful.
(a) Earnings for Sand Hills pipeline, Southern Hills pipeline, Front Range
pipeline, Gulf Coast Express pipeline, Texas Express pipeline and Mont Belvieu 1
fractionator include the amortization of the net difference between the carrying
amount of the investments and the underlying equity of the entities.
(b) Gross margin consists of total operating revenues less purchases and related
costs. Segment gross margin for each segment consists of total operating
revenues for that segment less purchases and related costs for that segment.
Please read "Reconciliation of Non-GAAP Measures".
41
--------------------------------------------------------------------------------(c) For entities not wholly-owned by us, includes our share, based on our ownership percentage, of the wellhead and throughput volumes and NGL production.
Three Months EndedJune 30, 2020 vs. Three Months EndedJune 30, 2019 Total Operating Revenues - Total operating revenues decreased$463 million in 2020 compared to 2019, primarily as a result of the following: •$469 million decrease as a result of lower commodity prices before the impact of derivative activity; •$18 million decrease attributable to lower gas and NGL sales volumes; and •$1 million decrease in transportation, processing and other. These decreases were partially offset by: •$25 million increase as a result of commodity derivative activity attributable to an increase in realized cash settlement gains of$44 million , partially offset by a decrease in unrealized commodity derivative gains of$19 million due to movements in forward prices of commodities in 2020. Purchases and Related Costs - Purchases and related costs decreased$444 million in 2020 compared to 2019, as a result of the commodity price and volume changes discussed above. Earnings from Unconsolidated Affiliates - Earnings from unconsolidated affiliates increased in 2020 compared to 2019, primarily as a result of the Gulf Coast Express pipeline coming online. Segment Gross Margin - Segment gross margin decreased$19 million in 2020 compared to 2019, primarily as a result of the following: •$46 million decrease primarily as a result of decreased gas marketing margins due to less favorable commodity spreads in 2020; and •$4 million decrease as a result of decreased NGL storage margins. These decreases were partially offset by: •$25 million increase as a result of commodity derivative activity discussed above; •$3 million increase as a result of increased NGL marketing and gas storage margins; and •$3 million increase as a result of theDJ Basin Southern Hills extension. NGL Pipelines Throughput - NGL pipelines throughput increased in 2020 compared to 2019, primarily as a result of the addition of theDJ Basin Southern Hills extension and increased volumes on the other NGL pipelines and theFront Range pipeline, partially offset by decreased throughput on theSouthern Hills andSand Hills pipelines. Gas Pipelines Throughput - Gas throughput increased in 2020 compared to 2019, primarily as a result of the Gulf Coast Express pipeline coming online. Six Months EndedJune 30, 2020 vs. Six Months EndedJune 30, 2019 Total Operating Revenues - Total operating revenues decreased$1,150 million in 2020 compared to 2019, primarily as a result of the following: •$1,247 million decrease as a result of lower commodity prices before the impact of derivative activity. This decrease was partially offset by: •$83 million increase as a result of commodity derivative activity attributable to an increase in realized cash settlement gains of$42 million as well as an increase in unrealized commodity derivative gains of$41 million due to movements in forward prices of commodities in 2020; and 42 -------------------------------------------------------------------------------- •$14 million increase attributable to higher gas sales activity, partially offset by lower NGL sales volumes. Purchases and Related Costs - Purchases and related costs decreased$1,184 million in 2020 compared to 2019, as a result of the commodity price and volume changes discussed above. Earnings from Unconsolidated Affiliates - Earnings from unconsolidated affiliates increased in 2020 compared to 2019, primarily as a result of the Gulf Coast Express pipeline coming online. Loss on Sale of Assets, net - The loss on sale of assets in 2019 represents the sale of our wholesale propane business. Segment Gross Margin - Segment gross margin increased$34 million in 2020 compared to 2019, primarily as a result of the following: •$83 million increase as a result of commodity derivative activity as discussed above; •$11 million increase as a result of increased NGL marketing and gas storage margins; and •$5 million increase as a result of theDJ Basin Southern Hills extension. These increases were partially offset by: •$53 million decrease primarily as a result of decreased gas marketing margins due to less favorable commodity spreads in 2020; •$7 million decrease due to the sale of our wholesale propane business; and •$5 million decrease as a result of decreased NGL storage margins. NGL Pipelines Throughput - NGL pipelines throughput increased in 2020 compared to 2019, primarily as a result of the addition of theDJ Basin Southern Hills extension and increased volumes on the other NGL pipelines and theFront Range pipeline, partially offset by decreased throughput on theSouthern Hills andSand Hills pipelines. Gas Pipelines Throughput - Gas throughput increased in 2020 compared to 2019, primarily as a result of the Gulf Coast Express pipeline coming online. 43
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Results of Operations - Gathering and Processing Segment
Operating Data
Six Months Ended June
Three Months Ended June 30, 2020 30, 2020
Approximate Approximate
Gathering Net Nameplate Plant Natural Gas NGL Natural Gas NGL
and Transmission Capacity Wellhead Volume Production Wellhead Volume Production
Regions Plants Systems (Miles) (MMcf/d) (a) (MMcf/d) (a) (MBbls/d) (a) (MMcf/d) (a) (MBbls/d) (a)
North 13 4,000 1,580 1,531 122 1,567 123
Permian 10 15,500 1,200 987 106 1,013 111
Midcontinent 6 24,500 1,110 842 64 901 66
South 10 7,000 2,120 1,127 84 1,232 90
Total 39 51,000 6,010 4,487 376 4,713 390
(a) For entities not wholly-owned by us, includes our share, based on our ownership percentage, of the wellhead volume and NGL production.
The results of operations for our Gathering and Processing segment are as
follows:
Six Months Ended June Variance Six Months
Three Months Ended June 30 , 30, Variance Three Months 2020 vs. 2019 2020 vs. 2019
Increase Increase
2020 2019 2020 2019 (Decrease) Percent (Decrease) Percent
(millions, except operating data)
Operating revenues:
Sales of natural gas, NGLs and condensate $ 553 $ 898 $ 1,266 $ 2,103 $ (345) (38) % $ (837) (40) %
Transportation, processing and other 98 98 197 201 - - % (4) (2) %
Trading and marketing (losses) gains, net (33) 28 68 8 (61) * 60 *
Total operating revenues 618 1,024 1,531 2,312 (406) (40) % (781) (34) %
Purchases and related costs (387) (670) (900) (1,621) (283) (42) % (721) (44) %
Operating and maintenance expense (134) (165) (276) (330) (31) (19) % (54) (16) %
Depreciation and amortization expense (82) (91) (171) (184) (9) (10) % (13) (7) %
General and administrative expense (4) (6) (7) (12) (2) (33) % (5) (42) %
Asset impairments - - (746) - - * 746 *
Other expense, net 1 - (2) (5) (1) * (3) (60) %
Loss on sale of assets, net - (4) - (4) (4) * (4) *
Earnings (loss) from unconsolidated
affiliates (a) - 3 (61) 3 (3) * (64) *
Segment net income (loss) 12 91 (632) 159 (79) (87) % (791) *
Segment net income attributable to
noncontrolling interests (1) (1) (2) (2) $ - - % - - %
Segment net income (loss) attributable to
partners $ 11 $ 90 $ (634) $ 157 $ (79) (88) % $ (791) *
Other data:
Segment gross margin (b) $ 231 $ 354 $ 631 $ 691 $ (123) (35) % $ (60) (9) %
Non-cash commodity derivative
mark-to-market $ (62) $ 15 $ 30 $ (21) $ (77) * $ 51 *
Natural gas wellhead (MMcf/d) (c) 4,487 4,866 4,713 4,902 (379) (8) % (189) (4) %
NGL gross production (MBbls/d) (c) 376 422 390 429 (46) (11) % (39) (9) %
* Percentage change is not meaningful.
(a) Earnings for Sand Hills pipeline, Southern Hills pipeline, Front Range
pipeline, Gulf Coast Express pipeline, Texas Express pipeline and Mont Belvieu 1
fractionator include the amortization of the net difference between the carrying
amount of the investments and the underlying equity of the entities.
44
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(b) Gross margin consists of total operating revenues less purchases and related
costs. Segment gross margin for each segment consists of total operating
revenues for that segment less purchases and related costs for that segment.
Please read "Reconciliation of Non-GAAP Measures".
(c) For entities not wholly-owned by us, includes our share, based on our
ownership percentage, of the wellhead and throughput volumes and NGL production.
Three Months Ended
Total Operating Revenues - Total operating revenues decreased$406 million in 2020 compared to 2019, primarily as a result of the following: •$274 million decrease attributable to lower commodity prices before the impact of derivative activity; •$111 million decrease primarily as a result of decreased sales volumes in the Midcontinent and South regions; and •$61 million decrease as a result of commodity derivative activity attributable to an increase in unrealized commodity derivative losses of$77 million due to movements in forward prices of commodities in 2020, partially offset by an increase in realized cash settlement gains of$16 million . These decreases were partially offset by: •$40 million increase primarily as a result of increased sales volumes from growth projects in theDJ Basin and increased volumes in the Permian region. Purchases and Related Costs - Purchases and related costs decreased$283 million in 2020 compared to 2019, as a result of the commodity price and volume changes discussed above. Operating and Maintenance Expense - Operating and maintenance expense decreased in 2020 compared to 2019, primarily as a result of decreased base operating costs in the Permian and Midcontinent regions. Depreciation and Amortization Expense - Depreciation and amortization expense decreased in 2020 compared to 2019, primarily as a result of asset dispositions and asset impairments. Segment Gross Margin - Segment gross margin decreased$123 million in 2020 compared to 2019, primarily as a result of the following: •$61 million decrease as a result of commodity derivative activity as discussed above; •$54 million decrease as a result of lower commodity prices; and •$8 million decrease primarily as a result of lower volumes and margins in the South and Midcontinent regions, partially offset by increased volumes and margins in the North and Permian regions. Total Wellhead - Natural gas wellhead decreased in 2020 compared to 2019, reflecting lower volumes in the Midcontinent and South regions, partially offset by increased volumes in the North and Permian regions. NGL Gross Production - NGL gross production decreased in 2020 compared to 2019, primarily as a result of decreased volumes in the Midcontinent and South regions and higher ethane rejection across several regions, partially offset by increased volumes in theDJ Basin . Six Months EndedJune 30, 2020 vs. Six Months EndedJune 30, 2019 Total Operating Revenues - Total operating revenues decreased$781 million in 2020 compared to 2019, primarily as a result of the following: •$810 million decrease attributable to lower commodity prices, before the impact of derivative activity; •$153 million decrease primarily as a result of decreased volumes in the Midcontinent and South regions; and •$4 million decrease in transportation, processing and other. These decreases were partially offset by: 45 -------------------------------------------------------------------------------- •$60 million increase as a result of commodity derivative activity attributable to an increase in unrealized commodity derivative gains of$51 million due to movements in forward prices of commodities in 2020 as well as an increase in realized cash settlement gains of$9 million ; and •$126 million increase primarily as a result of increased volume from growth projects in theDJ Basin and increased volumes in the Permian region. Purchases and Related Costs - Purchases and related costs decreased$721 million in 2020 compared to 2019, as a result of the commodity price and volume changes discussed above. Operating and Maintenance Expense - Operating and maintenance expense decreased in 2020 compared to 2019, primarily as a result of decreased base operating costs in the Permian, Midcontinent and South regions. Asset Impairments - Asset impairments in 2020 relate to long-lived assets in the Permian and South regions and goodwill in the North region. Earnings (loss) from Unconsolidated Affiliates - Earnings (loss) from unconsolidated affiliates primarily relates to an impairment of our equity investment in Discovery. Segment Gross Margin - Segment gross margin decreased$60 million in 2020 compared to 2019, primarily as a result of the following: •$125 million decrease as a result of lower commodity prices. This decrease was partially offset by: •$60 million increase as a result of commodity derivative activity as discussed above; and •$5 million increase primarily as a result of increased volume from growth projects in theDJ Basin and increased volumes in the Permian region, partially offset by lower margins and volumes in the South region and lower volumes in the Midcontinent region. Total Wellhead - Natural gas wellhead decreased in 2020 compared to 2019 reflecting lower volumes in the Midcontinent and South regions, partially offset by increased volumes in the North and Permian regions. NGL Gross Production - NGL gross production decreased in 2020 compared to 2019, primarily as a result of decreased volumes in the Midcontinent and South regions and higher ethane rejection across all regions, partially offset by increased volumes in theDJ Basin . 46 -------------------------------------------------------------------------------- Liquidity and Capital Resources We expect our sources of liquidity to include: •cash generated from operations; •cash distributions from our unconsolidated affiliates; •borrowings under our Credit Agreement; •proceeds from asset rationalization; •debt offerings; •borrowings under term loans, securitization agreements or other credit facilities; •issuances of additional common units, preferred units or other securities; and •letters of credit. We anticipate our more significant uses of resources to include: •quarterly distributions to our common unitholders and distributions to our preferred unitholders; •payments to service our debt; •growth capital expenditures; •contributions to our unconsolidated affiliates to finance our share of their capital expenditures; •business and asset acquisitions; and •collateral with counterparties to our swap contracts to secure potential exposure under these contracts, which may, at times, be significant depending on commodity price movements. We believe prices will remain volatile and volumes will decline in the near term due to the COVID-19 pandemic and its impact on theU.S. economy and this will have an indirect impact on our leverage. While we are taking actions to mitigate the impact, our leverage may increase as a result of these actions. Further, it is possible we may not maintain our current credit ratings or compliance with the financial covenants contained in the Credit Agreement and other debt instruments due to the uncertainty in commodity pricing and volume declines and their effect on our operations. Failure to comply with our financial covenants, if not waived, would result in an event of default and potential acceleration of outstanding debt. We believe that the actions we are taking and may take in the future will avoid any event of default. To address the extraordinary and volatile market conditions, we reduced our quarterly distribution by 50%, resulting in$325 million of cash we are using to reduce leverage and strengthen our balance sheet. Additionally, we continue to focus on cost reductions of approximately$120 million and a reduction of growth capital expenditures by$400 million . We believe that cash generated from these sources and actions will be sufficient to meet our short-term working capital requirements, long-term capital expenditure and quarterly cash distributions for the next twelve months. Based on current and anticipated levels of operations, we believe we have adequate committed financial resources to conduct our ongoing business, although deterioration in our operating environment could limit our borrowing capacity, impact our credit ratings, raise our financing costs, as well as impact our compliance with the financial covenants contained in the Credit Agreement and other debt instruments. Senior Notes - OnJune 24, 2020 , we issued$500 million aggregate principal amount of 5.625% Senior Notes dueJuly 2027 , unless redeemed prior to maturity. We received proceeds of$494 million , net of underwriters' fees and related expenses, which we used for general partnership purposes, including the repayment of indebtedness under our Credit Agreement and the funding of capital expenditures. Interest on the notes is payable semi-annually in arrears onJanuary 15 andJuly 15 of each year, commencingJanuary 15, 2021 .
Credit Agreement - As of
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letters of credit and $281 million in borrowings under the Credit Agreement. Our
cost of borrowing under the Credit Agreement is determined by a ratings-based
pricing grid. As of July 31, 2020 , we had approximately $1,163 million of unused
borrowing capacity under the Credit Agreement, net of $14 million of letters of
credit and $223 million of borrowings under the Credit Agreement.
Accounts Receivable Securitization Facility - As of June 30, 2020 , we had $350
million of outstanding borrowings under our Securitization Facility at LIBOR
market index rates plus a margin.
Issuance of Securities - In November 2017 , we filed a shelf registration
statement with the SEC that became effective upon filing and allows us to issue
an indeterminate amount of common units, preferred units, and debt securities.
We intend to file a new shelf registration statement with the SEC to replace the
expiring shelf registration statement.
In August 2017 , we filed a shelf registration statement with the SEC which
allows us to issue up to $750 million in common units pursuant to our
at-the-market program. We intend to file a new shelf registration statement with
the SEC to replace the expiring shelf registration statement. During the six
months ended June 30, 2020 , we did not issue any common units pursuant to this
registration statement, and $750 million remained available for future sales.
Guarantee of Registered Debt Securities - The consolidated financial statements
of DCP Midstream, LP , or "parent guarantor", include the accounts of DCP
Midstream Operating LP , or "subsidiary issuer", which is a 100% owned
subsidiary, and all other subsidiaries which are all non-guarantor subsidiaries.
The parent guarantor has agreed to fully and unconditionally guarantee the
senior notes. The entirety of the Company's operating assets and liabilities,
operating revenues, expenses and other comprehensive income exist at its
non-guarantor subsidiaries, and the parent guarantor and subsidiary issuer have
no assets, liabilities or operations independent of their respective financing
activities and investments in non-guarantor subsidiaries. All covenants in the
indentures governing the notes limit the activities of subsidiary issuer,
including limitations on the ability to pay dividends, incur additional
indebtedness, make restricted payments, create liens, sell assets or make loans
to parent guarantor.
In March 2020 , the SEC issued a final rule, Financial Disclosures About
Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities
Collateralize a Registrant's Securities, which amends the disclosure
requirements related to certain registered securities which require separate
financial statements for subsidiary issuers and guarantors of registered debt
securities unless certain exceptions are met. Alternative disclosures are
available for each subsidiary/parent issuer/guarantor when they are consolidated
and the parent company either issues or guarantees, on a full and unconditional
basis, the guaranteed securities. If a registrant qualifies for alternative
disclosure, the registrant may omit summarized financial information when not
material and provide narrative disclosure of the guarantor structure, including
terms and conditions of the guarantees.
The Company qualifies for alternative disclosure because the combined financial
information of the subsidiary issuer and parent guarantor, excluding investments
in subsidiaries that are not issuers or guarantors, reflect no material assets,
liabilities or results of operations apart from their respective financing
activities and investments in non-guarantor subsidiaries. Therefore, the Company
is no longer presenting condensed consolidating financial information for its
parent guarantor, subsidiary issuer, and non-guarantor subsidiaries. The only
assets, liabilities and results of operations of the subsidiary issuer and
parent guarantor on a combined basis, independent of their respective
investments in non-guarantor subsidiaries are:
•Accounts payable and other current liabilities of $74 million and $83 million
as of June 30, 2020 and December 31, 2019 , respectively;
•Balances related to debt of $5.551 billion and $5.549 billion as of June 30,
2020 and December 31, 2019 , respectively; and
•Interest expense, net of $71 million and $71 million for the three months ended
June 30, 2020 and 2019, respectively, and $146 million and $138 million for the
six months ended June 30, 2020 and 2019, respectively.
Commodity Swaps and Collateral - Changes in natural gas, NGL and condensate
prices and the terms of our processing arrangements have a direct impact on our
generation and use of cash from operations due to their impact on net income,
along with the resulting changes in working capital. For additional information
regarding our derivative activities, please read Item 3. "Quantitative and
Qualitative Disclosures about Market Risk" contained herein.
When we enter into commodity swap contracts we may be required to provide
collateral to the counterparties in the event that our potential payment
exposure exceeds a predetermined collateral threshold. Collateral thresholds are
set by us and each counterparty, as applicable, in the master contract that
governs our financial transactions based on our and the counterparty's
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assessment of creditworthiness. The assessment of our position with respect to
the collateral thresholds are determined on a counterparty by counterparty
basis, and are impacted by the representative forward price curves and notional
quantities under our swap contracts. Due to the interrelation between the
representative crude oil and natural gas forward price curves, it is not
practical to determine a pricing point at which our swap contracts will meet the
collateral thresholds as we may transact multiple commodities with the same
counterparty. Depending on daily commodity prices, the amount of collateral
posted can go up or down on a daily basis.
Working Capital - Working capital is the amount by which current assets exceed
current liabilities. Current assets are reduced in part by our quarterly
distributions, which are required under the terms of our Partnership Agreement
based on Available Cash, as defined in the Partnership Agreement. In general,
our working capital is impacted by changes in the prices of commodities that we
buy and sell, inventory levels, and other business factors that affect our net
income and cash flows. Our working capital is also impacted by the timing of
operating cash receipts and disbursements, cash collateral we may be required to
post with counterparties to our commodity derivative instruments, borrowings of
and payments on debt and the Securitization Facility, capital expenditures, and
increases or decreases in other long-term assets. We expect that our future
working capital requirements will be impacted by these same recurring factors.
We had working capital deficits of $10 million and $713 million as of June 30,
2020 and December 31, 2019 , respectively, driven by current maturities of long
term debt of $3 million and $603 million , respectively. We had a net derivative
working capital surplus of $32 million as of June 30, 2020 and deficit of
$26 million as of December 31, 2019 .
As of June 30, 2020 , we had $12 million in cash and cash equivalents, of which
$1 million was held by consolidated subsidiaries we do not wholly own.
Cash Flow - Operating, investing and financing activities were as follows:
Six Months Ended June 30,
2020 2019
(millions)
Net cash provided by operating activities $ 523 $ 546
Net cash used in investing activities $ (192) $ (446)
Net cash used in financing activities $ (305) $ (100)
Six Months Ended June 30, 2020 vs. Six Months Ended June 30, 2019
Operating Activities - Net cash provided by operating activities decreased
$23 million in 2020 compared to the same period in 2019. The changes in net cash
provided by operating activities are attributable to our net (loss) income
adjusted for non-cash charges and changes in working capital as presented in the
condensed consolidated statements of cash flows. For additional information
regarding fluctuations in our earnings and distributions from unconsolidated
affiliates, please read "Results of Operations".
Investing Activities - Net cash used in investing activities decreased
$254 million in 2020 compared to the same period in 2019, primarily as a result
of lower capital expenditures due to completed or deferred capital projects and
lower investments in unconsolidated affiliates, primarily related to the
completion of construction of the Gulf Coast Express pipeline.
Financing Activities - Net cash used in financing activities increased
$205 million in 2020 compared to the same period in 2019, primarily as a result
of lower net proceeds of debt, partially offset by lower distributions paid to
limited partners following our distribution reduction in the first quarter of
2020.
Capital Requirements - The midstream energy business can be capital intensive,
requiring significant investment to maintain and upgrade existing operations.
Our capital requirements have consisted primarily of, and we anticipate will
continue to consist of the following:
•Sustaining capital expenditures, which are cash expenditures to maintain our
cash flows, operating or earnings capacity. These expenditures add on to or
improve capital assets owned, including certain system integrity, compliance and
safety improvements. Sustaining capital expenditures also include certain well
connects, and may include the acquisition or construction of new capital assets;
and
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•Expansion capital expenditures, which are cash expenditures to increase our
cash flows, operating or earnings capacity. Expansion capital expenditures
include acquisitions or capital improvements (where we add on to or improve the
capital assets owned, or acquire or construct new gathering lines and well
connects, treating facilities, processing plants, fractionation facilities,
pipelines, terminals, docks, truck racks, tankage and other storage,
distribution or transportation facilities and related or similar midstream
assets).
We incur capital expenditures for our consolidated entities and our
unconsolidated affiliates. Our 2020 plan includes sustaining capital
expenditures of between $75 million and $95 million and expansion capital
expenditures of between $150 million and $190 million . Expansion capital
expenditures include the construction of the Cheyenne Connector pipeline.
We intend to make cash distributions to our unitholders. Due to our cash
distribution policy, we expect that we will distribute to our unitholders most
of the cash generated by our operations. As a result, we expect that we will
rely upon external financing sources, to fund future acquisitions and capital
expenditures.
We expect to fund future capital expenditures with funds generated from our
operations, borrowings under our Credit Agreement, Securitization Facility and
the issuance of additional debt and equity securities.
Cash Distributions to Unitholders - Our Partnership Agreement requires that,
within 45 days after the end of each quarter, we distribute all Available Cash,
as defined in the Partnership Agreement. We made cash distributions to our
common unitholders and general partner of $243 million and $309 million during
the six months ended June 30, 2020 and 2019, respectively.
On July 21, 2020 , we announced that the board of directors of the General
Partner declared a quarterly distribution on our common units of $0.39 per
common unit. The distribution will be paid on August 14, 2020 to unitholders of
record on July 31, 2020 .
On the same date, the board of directors of the General Partner declared a
quarterly distribution on our Series B and Series C Preferred Units of $0.4922
and 0.4969 per unit, respectively. The Series B distributions will be paid on
September 15, 2020 to unitholders of record on September 1, 2020 . The Series C
distribution will be paid on October 15, 2020 to unitholders of record on
October 1, 2020 .
We expect to continue to use cash provided by operating activities for the
payment of distributions to our unitholders. See Note 15. "Partnership Equity
and Distributions" in the Notes to the Condensed Consolidated Financial
Statements in Item 1. "Financial Statements."
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Total Contractual Cash Obligations
A summary of our total contractual cash obligations as of June 30, 2020 , was as
follows:
Payments Due by Period
Less than
Total 1 year 1-3 years 3-5 years Thereafter
(millions)
Debt (a) $ 8,318 $ 278 $ 1,882 $ 445 $ 5,713
Finance lease obligations 27 2 8 8 9
Operating lease obligations 114 13 46 26 29
Purchase obligations (b) 8,845 1,368 2,543 2,068 2,866
Other long-term liabilities (c) 160 - 33 3 124
Total $ 17,464 $ 1,661 $ 4,512 $ 2,550 $ 8,741
(a) Includes interest payments on debt securities that have been issued. These
interest payments are $278 million , $532 million , $445 million , and $1,788
million for less than one year, one to three years, three to five years, and
thereafter, respectively.
(b) Our purchase obligations are contractual obligations and include purchase
orders and non-cancelable construction agreements for capital expenditures,
various non-cancelable commitments to purchase physical quantities of
commodities in future periods and other items, including long-term fractionation
and transportation agreements. For contracts where the price paid is based on an
index or other market-based rates, the amount is based on the forward market
prices or current market rates as of June 30, 2020 . Purchase obligations exclude
accounts payable, accrued taxes and other current liabilities recognized in the
condensed consolidated balance sheets. Purchase obligations also exclude current
and long-term unrealized losses on derivative instruments included in the
condensed consolidated balance sheets, which represent the current fair value of
various derivative contracts and do not represent future cash purchase
obligations. These contracts may be settled financially at the difference
between the future market price and the contractual price and may result in cash
payments or cash receipts in the future, but generally do not require delivery
of physical quantities of the underlying commodity. In addition, many of our gas
purchase contracts include short and long-term commitments to purchase produced
gas at market prices. These contracts, which have no minimum quantities, are
excluded from the table.
(c) Other long-term liabilities include asset retirement obligations, long-term
environmental remediation liabilities, gas purchase liabilities and other
miscellaneous liabilities recognized in the June 30, 2020 condensed consolidated
balance sheet. The table above excludes non-cash obligations as well as $31
million of Executive Deferred Compensation Plan contributions and $4 million of
long-term incentive plans as the amount and timing of any payments are not
subject to reasonable estimation.
Off-Balance Sheet Obligations
As of June 30, 2020 , we had no items that were classified as off-balance sheet
obligations.
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Reconciliation of Non-GAAP Measures
Gross Margin and Segment Gross Margin - In addition to net income, we view our
gross margin as an important performance measure of the core profitability of
our operations. We review our gross margin monthly for consistency and trend
analysis.
We define gross margin as total operating revenues, less purchases and related
costs, and we define segment gross margin for each segment as total operating
revenues for that segment less commodity purchases for that segment. Our gross
margin equals the sum of our segment gross margins. Gross margin and segment
gross margin are primary performance measures used by management, as these
measures represent the results of product sales and purchases, a key component
of our operations. As an indicator of our operating performance, gross margin
and segment gross margin should not be considered an alternative to, or more
meaningful than, operating revenues, net income or loss, net income or loss
attributable to partners, operating income, net cash provided by operating
activities or any other measure of financial performance presented in accordance
with GAAP.
Adjusted EBITDA - We define adjusted EBITDA as net income or loss attributable
to partners adjusted for (i) distributions from unconsolidated affiliates, net
of earnings, (ii) depreciation and amortization expense, (iii) net interest
expense, (iv) noncontrolling interest in depreciation and income tax expense,
(v) unrealized gains and losses from commodity derivatives, (vi) income tax
expense or benefit, (vii) impairment expense and (viii) certain other non-cash
items. Adjusted EBITDA further excludes items of income or loss that we
characterize as unrepresentative of our ongoing operations. Management believes
these measures provide investors meaningful insight into results from ongoing
operations.
Adjusted EBITDA should not be considered an alternative to, or more meaningful
than, net income or loss, net income or loss attributable to partners, operating
income, net cash provided by operating activities or any other measure of
financial performance presented in accordance with GAAP as measures of operating
performance, liquidity or ability to service debt obligations.
Adjusted EBITDA is used as a supplemental liquidity and performance measure and
adjusted segment EBITDA is used as a supplemental performance measure by our
management and by external users of our financial statements, such as investors,
commercial banks, research analysts and others to assess:
•financial performance of our assets without regard to financing methods,
capital structure or historical cost basis;
•our operating performance and return on capital as compared to those of other
companies in the midstream energy industry, without regard to financing methods
or capital structure;
•viability and performance of acquisitions and capital expenditure projects and
the overall rates of return on investment opportunities; and
•in the case of Adjusted EBITDA, the ability of our assets to generate cash
sufficient to pay interest costs, support our indebtedness, make cash
distributions to our unitholders and finance sustaining capital expenditures.
Adjusted Segment EBITDA - We define adjusted segment EBITDA for each segment as
segment net income or loss attributable to partners adjusted for (i)
distributions from unconsolidated affiliates, net of earnings, (ii) depreciation
and amortization expense, (iii) net interest expense, (iv) noncontrolling
interest in depreciation and income tax expense, (v) unrealized gains and losses
from commodity derivatives, (vi) income tax expense or benefit, (vii) impairment
expense and (viii) certain other non-cash items. Adjusted segment EBITDA further
excludes items of income or loss that we characterize as unrepresentative of our
ongoing operations for that segment. Our adjusted segment EBITDA may not be
comparable to similarly titled measures of other companies because they may not
calculate adjusted segment EBITDA in the same manner.
Adjusted segment EBITDA should not be considered in isolation or as an
alternative to our financial measures presented in accordance with GAAP,
including operating revenues, net income or loss attributable to partners, or
any other measure of performance presented in accordance with GAAP.
Our gross margin, segment gross margin, adjusted EBITDA and adjusted segment
EBITDA may not be comparable to a similarly titled measure of another company
because other entities may not calculate these measures in the same manner. The
accompanying schedules provide reconciliations of gross margin, segment gross
margin and adjusted segment EBITDA to their most directly comparable GAAP
financial measures.
Distributable Cash Flow - We define Distributable Cash Flow as adjusted EBITDA,
as defined above, less sustaining capital expenditures, net of reimbursable
projects, less interest expense, less income attributable to preferred units,
and certain other items. Sustaining capital expenditures are cash expenditures
made to maintain our cash flows, operating or earnings capacity. These
expenditures add on to or improve capital assets owned, including certain system
integrity, compliance and
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safety improvements. Sustaining capital expenditures also include certain well
connects, and may include the acquisition or construction of new capital assets.
Income attributable to preferred units represent cash distributions earned by
the preferred units. Cash distributions to be paid to the holders of the
preferred units assuming a distribution is declared by our board of directors,
are not available to common unit holders. Non-cash mark-to-market of derivative
instruments is considered to be non-cash for the purpose of computing
Distributable Cash Flow because settlement will not occur until future periods,
and will be impacted by future changes in commodity prices and interest rates.
We compare the Distributable Cash Flow we generate to the cash distributions we
expect to pay our partners. Distributable Cash Flow is used as a supplemental
liquidity and performance measure by our management and by external users of our
financial statements, such as investors, commercial banks, research analysts and
others, to assess our ability to make cash distributions to our unitholders and
our general partner.
Our Distributable Cash Flow may not be comparable to a similarly titled measure
of another company because other entities may not calculate Distributable Cash
Flow in the same manner.
Free Cash Flow - We define Free Cash Flow as Distributable Cash Flow, as defined
above, less distributions to limited partners and the general partner, less
distributions to noncontrolling interests, and less expansion capital
expenditures and contributions to equity method investments. Expansion capital
expenditures are cash expenditures to increase our cash flows, operating or
earnings capacity. Expansion capital expenditures add on to or improve the
capital assets owned, or acquire or construct new gathering lines and well
connects, treating facilities, processing plants, fractionation facilities,
pipelines, terminals, docks, truck racks, tankage and other storage,
distribution or transportation facilities and related or similar midstream
assets.
Free Cash Flow is used as a supplemental liquidity and performance measure by
our management and by external users of our financial statements, such as
investors, commercial banks, research analysts and others, and is useful to
investors and management as a measure of our ability to generate cash
particularly in light of an ongoing transition in the midstream industry that
has shifted investor focus from distribution growth to capital discipline, cost
efficiency, and balance-sheet strength. Once business needs and obligations are
met, including cash reserves to provide funds for distribution payments on our
units and the proper conduct of our business, which includes cash reserves for
future capital expenditures and anticipated credit needs, this cash can be used
to reduce debt, reinvest in the company for future growth, or return to
unitholders.
Our use of Free Cash Flow for the limited purposes described above and in this
report is not a substitute for net cash flows provided by operating activities,
which is the most comparable GAAP measure. Free Cash Flow may not be comparable
to a similarly titled measure of another company because other entities may not
calculate Free Cash Flow in the same manner.
The following table sets forth our reconciliation of certain non-GAAP measures:
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Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Reconciliation of Non-GAAP Measures (millions)
Reconciliation of net income attributable to
partners to gross margin:
Net income (loss) attributable to partners $ 47 $ 119 $ (503) $ 194
Interest expense 71 73 149 142
Income tax expense - - 1 1
Operating and maintenance expense 148 182 301 360
Depreciation and amortization expense 93 101 192 204
General and administrative expense 51 68 107 135
Asset impairments - - 746 -
Restructuring costs 9 9 9 9
Other expense, net 5 1 8 6
Earnings from unconsolidated affiliates (125) (117) (201) (230)
Loss on sale of assets, net - 5 - 14
Net income attributable to noncontrolling interests 1 1 2 2
Gross margin $ 300 $ (57)
Reconciliation of segment net income attributable to partners to segment gross margin:
Logistics and Marketing segment: Segment net income attributable to partners$ 177
9 11 16 20
Depreciation and amortization expense 3 3 6 6
General and administrative expense 1 1 3 4
Other expense, net 4 1 4 1
Earnings from unconsolidated affiliates (125) (114) (262) (227)
Loss on sale of assets, net - 1 - 10
Segment gross margin $ 69 $ 88 $ 180 $ 146
Non-cash commodity derivative mark-to-market (a) $ 5 Gathering and Processing segment: Segment net income (loss) attributable to partners $ 11
134 165 276 330
Depreciation and amortization expense 82 91 171 184
General and administrative expense 4 6 7 12
Asset impairments - - 746 -
Other (income) expense, net (1) - 2 5
(Earnings) losses from unconsolidated affiliates - (3) 61 (3)
Loss on sale of assets, net - 4 - 4
Net income attributable to noncontrolling interests 1 1 2 2
Segment gross margin $ 231 $ (62)
(a) Non-cash commodity derivative mark-to-market is included in gross margin and
segment gross margin, along with cash settlements for our commodity derivative
contracts.
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Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(millions)
Reconciliation of net income attributable to
partners to adjusted segment EBITDA:
Logistics and Marketing segment:
Segment net income attributable to partners (a) $ 177
(5) (24) (47) (6)
Depreciation and amortization expense, net of
noncontrolling interest 3 3 6 6
Distributions from unconsolidated affiliates, net of earnings
37 15 47 21
Loss on sale of assets, net - 1 - 10
Other expense 1 1 2 1
Adjusted segment EBITDA $ 213 $ 181 $ 421 $ 364
Gathering and Processing segment:
Segment net income (loss) attributable to partners $ 11
62 (15) (30) 21
Depreciation and amortization expense, net of
noncontrolling interest 81 91 170 183
Asset impairments - - 746 -
Loss on sale of assets, net - 4 - 4
Distributions from unconsolidated affiliates, net of
earnings 5 3 72 8
Other (income) expense (1) - 2 5
Adjusted segment EBITDA $ 158 $ 173 $ 326 $ 378
(a) We recognized $2 million and $6 million for the three and six months ended
June 30, 2020 , respectively, and $3 million and $8 million of lower of cost or
net realizable value adjustments during the three and six months ended June 30,
2019 , respectively.
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Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in "Critical Accounting Policies and Estimates" within Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and Note 2 of the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data" included as Item 8 in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . With the exception of updates to significant accounting policies discussed in Note 2 of this Quarterly Report on Form 10-Q, the accounting policies and estimates used in preparing our interim condensed consolidated financial statements for the three and six months endedJune 30, 2020 are the same as those described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Certain information and note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted from the interim financial statements included in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of theSEC , although we believe that the disclosures made are adequate to make the information not misleading. The unaudited condensed consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
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