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 consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K.
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 a pandemic, and theU.S. economy began to experience pronounced effects of the COVID-19 pandemic, curtailing global operations and travel, government mandated quarantines and stay at home orders, and an overall substantial slowdown of economic activity. A further downturn in global economic growth, or recessionary conditions in major geographic regions, is expected to lead to continued reduced demand for gas and NGLs, to negatively affect the market prices of our products, and to 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 of the COVID-19 pandemic and its related impact on us. We have experienced a negative effect on our results of operations during 2020 due to industry wide conditions, significantly depressed commodity prices and volumes 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 in 2021 and 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 in order to maintain essential business functions at our plants and critical infrastructure with minimal disruptions. Our current continuity plan specifically addresses technology, communications, and remote operations. To protect our workforce, we have encouraged those employees who are able to work from home do so, while implementing additional safety guidelines at our plants for those who 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 the COVID-19 pandemic. 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. In 2020 we actively responded to the uncertain and volatile commodity and financial market conditions by executing a reduction of costs, capital and distributions. As uncertainty persists we will sustain cost reductions into 2021 and continue to increase efficiency via our transformation efforts. We are maintaining our cost discipline and reduced capital expenditures while optimizing our assets to generate and retain excess free cash flow to fund our business operations, maintain our distribution, and to retire debt and strengthen our balance sheet. 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 7A. "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 will 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, more heavily focused on the business of the Logistics segment to reduce commodity exposure. In addition, we use our strategic hedging program to further mitigate 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, 58 -------------------------------------------------------------------------------- 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 impacted by, among other things, reduced drilling activity, depressed commodity prices, severe weather disruptions, operational outages and ethane rejection. Due to the COVID-19 pandemic, there was a significant, unprecedented reduction in global demand for crude oil during the first half of 2020. This resulted in well curtailments and a precipitous drop in drilling activity. Upstream producers have maintained their reduced capital expenditures as uncertainty continues into 2021. As a result, we expect volumes to remain below 2019 levels which will to continue to impact earnings. 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, 6 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 reduction 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 2021, our strategic objectives are to generate Excess Free Cash Flows (a non-GAAP measure defined in "Reconciliation of Non-GAAP Measures - Excess Free Cash Flows") and reduce leverage. We believe the key elements to generating Excess Free 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 Excess Free Cash Flows. We will continue to pursue incremental revenue, cost efficiencies and operating improvements of our assets through process and technology improvements. 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. We incur capital expenditures for our consolidated entities and our unconsolidated affiliates. Our 2021 plan includes sustaining capital expenditures of between$45 million and$85 million and expansion capital expenditures of between$25 million and$75 million . Recent Events Common and Preferred Distributions OnJanuary 21, 2021 , 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 was paid onFebruary 12, 2021 to unitholders of record onFebruary 5, 2021 . 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 onMarch 15, 2021 to 59 -------------------------------------------------------------------------------- unitholders of record onMarch 1, 2021 . The Series C distribution will be paid onApril 15, 2021 to unitholders of record onApril 1, 2021 . Factors That May Significantly Affect Our Results Logistics and Marketing Segment Our Logistics and Marketing segment operating results are impacted by, among other things, the throughput volumes of the NGLs we transport on our NGL pipelines and the volumes of NGLs we fractionate and store. We transport, fractionate and store NGLs primarily on a fee basis. Throughput may be negatively impacted as a result of our customers operating their processing plants in ethane rejection mode, often as a result of low ethane prices relative to natural gas prices. Factors that impact the supply and demand of NGLs, as described below in our Gathering and Processing segment, may also impact the throughput and volume for our Logistics and Marketing segment. These contractual arrangements may require our customers to commit a minimum level of volumes to our pipelines and facilities, thereby mitigating our exposure to volume risk. However, the results of operations for this business segment are generally dependent upon the volume of product transported, fractionated or stored and the level of fees charged to customers. We do not take title to the products transported on our NGL pipelines, fractionated in our fractionation facilities or stored in our storage facility; rather, the customer retains title and the associated commodity price risk. The volumes of NGLs transported on our pipelines are dependent on the level of production of NGLs from processing plants connected to our NGL pipelines. When natural gas prices are high relative to NGL prices, it is less profitable to process natural gas because of the higher value of natural gas compared to the value of NGLs and because of the increased cost of separating the NGLs from the natural gas. As a result, we have experienced periods in the past, in which higher natural gas or lower NGL prices reduce the volume of NGLs extracted at plants connected to our NGL pipelines and, in turn, lower the NGL throughput on our assets. Our results of operations for our Logistics and Marketing segment are also impacted by increases and decreases in the volume, price and basis differentials of natural gas associated with our natural gas storage and pipeline assets, as well as our underlying derivatives associated with these assets. We manage commodity price risk related to our natural gas storage and pipeline assets through our commodity derivative program. The commercial activities related to our natural gas storage and pipeline assets primarily consist of the purchase and sale of gas and associated time spreads and basis spreads. A time spread transaction is executed by establishing a long gas position at one point in time and establishing an equal short gas position at a different point in time. Time spread transactions allow us to lock in a margin supported by the injection, withdrawal, and storage capacity of our natural gas storage assets. We may execute basis spread transactions to mitigate the risk of sale and purchase price differentials across our system. A basis spread transaction allows us to lock in a margin on our physical purchases and sales of gas, including injections and withdrawals from storage. Gathering and Processing Segment Our results of operations for our Gathering and Processing segment are impacted by (1) the prices of and relationship between commodities such as NGLs, crude oil and natural gas, (2) increases and decreases in the wellhead volume and quality of natural gas that we gather, (3) the associated Btu content of our system throughput and our related processing volumes, (4) the operating efficiency and reliability of our processing facilities, (5) potential limitations on throughput volumes arising from downstream and infrastructure capacity constraints, and (6) the terms of our processing contract arrangements with producers. This is not a complete list of factors that may impact our results of operations but, rather, are those we believe are most likely to impact those results. Volume and operating efficiency generally are driven by wellhead production, plant recoveries, operating availability of our facilities, physical integrity and our competitive position on a regional basis, and more broadly by demand for natural gas, NGLs and condensate. Historical and current trends in the price changes of commodities may not be indicative of future trends. Volume and prices are also driven by demand and take-away capacity for residue natural gas and NGLs. Our processing contract arrangements can have a significant impact on our profitability and cash flow. Our actual contract terms are based upon a variety of factors, including the commodity pricing environment at the time the contract is executed, natural gas quality, geographic location, customer requirements and competition from other midstream service providers. Our gathering and processing contract mix and, accordingly, our exposure to natural gas, NGL and condensate prices, may change as a result of producer preferences, impacting our expansion in regions where certain types of contracts are more common as well as other market factors. We generate our revenues and our adjusted gross margin for our Gathering and Processing 60 -------------------------------------------------------------------------------- segment principally from contracts that contain a combination of fee based arrangements and percent-of-proceeds/liquids arrangements. Our Gathering and Processing segment operating results are impacted by market conditions causing variability in natural gas, crude oil and NGL prices. The midstream natural gas industry is cyclical, with the operating results of companies in the industry significantly affected by drilling activity, which may be impacted by prevailing commodity prices and global demand. The number of active oil and gas drilling rigs inthe United States significantly decreased, from 866 onDecember 31, 2019 to 351 onDecember 31, 2020 . Although the prevailing price of residue natural gas has less short-term significance to our operating results than the price of NGLs, in the long-term, the growth and sustainability of our business depends on commodity prices being at levels sufficient to provide incentives and capital for producers to explore for and produce natural gas. The prices of NGLs, crude oil and natural gas can be extremely volatile for periods of time, and may not always have a close relationship. Due to our hedging program, changes in the relationship of the price of NGLs and crude oil may cause our commodity price exposure to vary, which we have attempted to capture in our commodity price sensitivities in Item 7A in this 2020 Form 10-K, "Quantitative and Qualitative Disclosures about Market Risk." Our results may also be impacted as a result of non-cash lower of cost or net realizable value inventory or imbalance adjustments, which occur when the market value of commodities decline below our carrying value. We face strong competition in acquiring raw natural gas supplies. Our competitors in obtaining additional gas supplies and in gathering and processing raw natural gas includes major integrated oil and gas companies, interstate and intrastate pipelines, and companies that gather, compress, treat, process, transport, store and/or market natural gas. Competition is often the greatest in geographic areas experiencing robust drilling by producers and during periods of high commodity prices for crude oil, natural gas and/or NGLs. Competition is also increased in those geographic areas where our commercial contracts with our customers are shorter term and therefore must be renegotiated on a more frequent basis. Weather The economic impact of severe weather may negatively affect the nation's short-term energy supply and demand, and may result in commodity price volatility. Additionally, severe weather may restrict or prevent us from fully utilizing our assets, by damaging our assets, interrupting utilities, and through possible NGL and natural gas curtailments downstream of our facilities, which restricts our production. These impacts may linger past the time of the actual weather event. Although we carry insurance on the vast majority of our assets, insurance may be inadequate to cover our loss in some instances, and in certain circumstances we have been unable to obtain insurance on commercially reasonable terms, if at all. Many parts ofthe United States are currently experiencing winter storms that brought extraordinary arctic conditions, record low temperatures, and precipitation. This extreme weather event in February impacted the commodity markets, particularly natural gas pricing. Wide fluctuations in the price of natural gas caused by extreme weather events increase our working capital requirements in order to fund settlements or margin requirements on open positions on commodities exchanges. As described in Liquidity and Capital Resources, we have borrowed on our Credit Agreement to meet these short-term needs as a result of timing differences between our obligations and billing our customers. We expect these short-term working capital borrowings to decrease in the ordinary course of business in connection with monthly contract settlements with our customers and counterparties.
Capital Markets
Volatility in the capital markets may impact our business in multiple ways, including limiting our producers' ability to finance their drilling programs and operations and limiting our ability to support or fund our operations and growth. These events may impact our counterparties' ability to perform under their credit or commercial obligations. Where possible, we have obtained additional collateral agreements, letters of credit from highly rated banks, or have managed credit lines to mitigate a portion of these risks.
Impact of Inflation
Inflation has been relatively low inthe United States in recent years. However, the inflation rates impacting our business fluctuate throughout the broad economic and energy business cycles. Consequently, our costs for chemicals, utilities, materials and supplies, labor and major equipment purchases may increase during periods of general business inflation or periods of relatively high energy commodity prices. 61 --------------------------------------------------------------------------------
Other
The above factors, including sustained deterioration in commodity prices and
volumes, other market declines or a decline in our common unit price, may
negatively impact our results of operations, and may increase the likelihood of
a non-cash impairment charge or non-cash lower of cost or net realizable value
inventory adjustments.
How We Evaluate Our Operations
Our management uses a variety of financial and operational measurements to
analyze our performance. These measurements include the following: (1) volumes;
(2) adjusted gross margin and segment adjusted gross margin; (3) operating and
maintenance expense, and general and administrative expense; (4) adjusted
EBITDA; (5) adjusted segment EBITDA; (6) Distributable Cash Flow and (7) Excess
Free Cash Flow. Adjusted gross margin, segment adjusted gross margin, adjusted
EBITDA, adjusted segment EBITDA, Distributable Cash Flow and Excess Free Cash
Flow are non-GAAP. To the extent permitted, we present certain non-GAAP measures
and reconciliations of those measures to their most directly comparable
financial measures as calculated and presented in accordance with GAAP. These
non-GAAP measures may not be comparable to a similarly titled measure of another
company because other entities may not calculate these non-GAAP measures in the
same manner.
Volumes - We view wellhead, throughput and storage volumes as important factors
affecting our profitability. We gather and transport some of the natural gas and
NGLs under fee-based transportation contracts. Revenue from these contracts is
derived by applying the rates stipulated to the volumes transported. Pipeline
throughput volumes from existing wells connected to our pipelines will naturally
decline over time as wells deplete. Accordingly, to maintain or to increase
throughput levels on these pipelines and the utilization rate of our natural gas
processing plants, we must continually obtain new supplies of natural gas and
NGLs. Our ability to maintain existing supplies of natural gas and NGLs and
obtain new supplies are impacted by: (1) the level of workovers or recompletions
of existing connected wells and successful drilling activity in areas currently
dedicated to our pipelines; and (2) our ability to compete for volumes from
existing and successful new wells in other areas. The throughput volumes of NGLs
and gas on our pipelines are substantially dependent upon the quantities of NGLs
and gas produced at our processing plants, as well as NGLs and gas produced at
other processing plants that have pipeline connections with our NGL and gas
pipelines. We regularly monitor producer activity in the areas we serve and in
which our pipelines are located, and pursue opportunities to connect new supply
to these pipelines. We also monitor our inventory in our NGL and gas storage
facilities, as well as overall demand for storage based on seasonal patterns and
other market factors such as weather and overall market demand.
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Results of Operations
Consolidated Overview The following table and discussion provides a summary of our consolidated results of operations for the years endedDecember 31, 2020 , 2019, and 2018. The results of operations by segment are discussed in further detail following this consolidated overview discussion. Discussions for the year endedDecember 31, 2019 vs. year endedDecember 31, 2018 can be found in our Annual Report Form 10-K for the year endedDecember 31, 2019 and should be read in conjunction with the discussions below. Variance Variance Year Ended December 31, 2020 vs. 2019 2019 vs. 2018 Increase Increase 2020 2019 2018 (Decrease) Percent (Decrease) Percent (millions, except operating data)
Operating revenues (a): Logistics and Marketing$ 5,530 $ 6,856 $ 9,014 $ (1,326) (19) %$ (2,158) (24) % Gathering and Processing 3,479 4,319 5,843 (840) (19) % (1,524) (26) % Inter-segment eliminations (2,707) (3,550) (5,035) (843) (24) % (1,485) (29) % Total operating revenues 6,302 7,625 9,822 (1,323) (17) % (2,197) (22) % Purchases and related costs Logistics and Marketing (5,197) (6,602) (8,789) (1,405) (21) % (2,187) (25) % Gathering and Processing (2,253) (2,970) (4,265) (717) (24) % (1,295) (30) % Inter-segment eliminations 2,707 3,550 5,035 (843) (24) % (1,485) (29) % Total purchases (4,743) (6,022) (8,019) (1,279) (21) % (1,997) (25) % Operating and maintenance expense (607) (728) (760) (121) (17) % (32) (4) % Depreciation and amortization expense (376) (404) (388) (28) (7) % 16 4 % General and administrative expense (253) (275) (276) (22) (8) % (1) - % Asset impairments (746) (247) (145) 499 * 102 * Other expense, net (15) (8) (11) 7 * (3) (27) % Loss on sale of assets, net - (80) - (80) * 80 * Restructuring costs (9) (11) - (2) (18) % 11 * Loss from financing activities - - (19) - - % (19) * Earnings from unconsolidated affiliates (b) 447 474 370 (27) (6) % 104 28 % Interest expense (302) (304) (269) (2) (1) % 35 13 % Income tax expense - 1 (3) 1 * (4) * Net income attributable to noncontrolling interests (4) (4) (4) - - % - - % Net (loss) income attributable to partners$ (306) $ 17 $ 298 $ (323) *$ (281) (94) % Other data: Adjusted gross margin (c): Logistics and Marketing$ 333 $ 254 $ 225 $ 79 31 %$ 29 13 % Gathering and Processing 1,226 1,349 1,578 (123) (9) % (229) (15) % Total adjusted gross margin$ 1,559 $ 1,603 $ 1,803 $ (44) (3) %$ (200) (11) % Non-cash commodity derivative mark-to-market$ 55 $ (78) $ 108 $ 133 *$ (186) * NGL pipelines throughput (MBbls/d) (d) 661 626 582 35 6 % 44 8 % Gas pipelines throughput (TBtu/d) (d) (e) 1.1 0.4 0.2 0.7 * 0.2 * Natural gas wellhead (MMcf/d) (d) 4,558 4,941 4,769 (383) (8) % 172 4 % NGL gross production (MBbls/d) (d) 400 417 413 (17) (4) % 4 1 % * Percentage change is not meaningful. (a) Operating revenues include the impact of trading and marketing gains (losses), net. (b) Earnings for certain unconsolidated affiliates include the amortization of the net difference between the carrying amount of the investments and the underlying equity of the entities and impairment of$61 million of our equity investment inDiscovery Producer Services LLC . 63 -------------------------------------------------------------------------------- (c) Adjusted gross margin consists of total operating revenues less purchases and related costs. Segment adjusted 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. (e) Represents average throughput for full years 2020 and 2019. Cheyenne Connector was placed in serviceJune 2020 and had an average throughput of .3 TBtu/d for the fourth quarter of 2020. Gulf Coast Express pipeline was placed in serviceSeptember 2019 and had an average throughput of .5 TBtu/d for the fourth quarter of 2019. Year EndedDecember 31, 2020 vs. Year EndedDecember 31, 2019 Total Operating Revenues - Total operating revenues decreased$1,323 million in 2020 compared to 2019, primarily as a result of the following: •$1,326 million decrease for our Logistics and Marketing segment, primarily due to lower commodity prices and lower NGL and gas sales volumes, partially offset by favorable commodity derivative activity and increase in transportation, processing and other; and •$840 million decrease for our Gathering and Processing segment, primarily due to lower commodity prices and decreased volumes in the Midcontinent and South regions, partially offset by increased volume from growth projects in theDJ Basin , increased volumes in the Permian region and favorable commodity derivative activity and an increase in transportation, processing and other. These decreases were partially offset by: •$843 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 and gas sales volumes. Total Purchases - Total purchases decreased$1,279 million in 2020 compared to 2019, primarily as a result of the following: •$1,405 million decrease for our Logistics and Marketing segment for the commodity price and volume changes discussed above; and •$717 million decrease for our Gathering and Processing segment for the commodity price and volume changes discussed above. These decreases were partially offset by: •$843 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 across all regions as a result of transformation efforts, restructuring and operational efficiencies. Depreciation and Amortization Expense - Depreciation and amortization expense decreased in 2020 compared to 2019, primarily as a result of asset dispositions and asset impairments. General and Administrative Expense - General and administrative expense decreased in 2020 compared to 2019, primarily as a result of reduced headcount and employee benefits, partially offset by fees. Asset Impairments - Asset impairments in 2020 relate to long-lived assets in the Permian and South regions and goodwill related to our North region. Asset impairments in 2019 relate to property, plant and equipment in the Midcontinent and Permian regions and goodwill in our Marysville reporting unit. Other Expense, net - Other expense, net primarily relates to pipeline linefill adjustments and asset write offs. 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. 64 -------------------------------------------------------------------------------- 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 in the third quarter of 2019, and the Cheyenne Connector pipeline coming online in the second quarter of 2020. Net (Loss) Income Attributable to Partners - Net (loss) income attributable to partners decreased in 2020 compared to 2019 for the reasons discussed above. Adjusted Gross Margin - Adjusted gross margin decreased$44 million in 2020 compared to 2019, primarily as a result of the following: •$123 million decrease for our Gathering and Processing segment, primarily related to lower commodity prices and lower margins and volumes in the South region and lower volumes in the Midcontinent region, partially offset by favorable commodity derivative activity, increased volumes from growth projects in theDJ Basin and increased volumes in the Permian region, partially offset by •$79 million increase for our Logistics and Marketing segment, primarily related to favorable commodity derivative activity, higher gas storage marketing margins and theDJ Basin Southern Hills extension , partially offset by lower gas pipeline 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 and pipeline margins. Supplemental Information on Unconsolidated Affiliates The following tables present financial information related to unconsolidated affiliates during the years endedDecember 31, 2020 , 2019 and 2018, respectively: Earnings from investments in unconsolidated affiliates were as follows: Year Ended December 31, 2020 2019 2018 (millions)DCP Sand Hills Pipeline, LLC
DCP Southern Hills Pipeline, LLC 78 77 68 Gulf Coast Express LLC 66 27 - Front Range Pipeline LLC 38 32 24Texas Express Pipeline LLC
18 16 19
Discovery Producer Services LLC (a)
(63) 6 8
Mont Belvieu 1 Fractionator
12 13 16
Mont Belvieu Enterprise Fractionator 11 14 10 Cheyenne Connector, LLC 6 - - Other 2 2 2 Total earnings from unconsolidated affiliates
(a) Includes an other than temporary impairment of
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Year Ended December 31,
2020 (a) 2019 2018
(millions)
DCP Sand Hills Pipeline, LLC $ 335 $ 322 $ 252
DCP Southern Hills Pipeline, LLC 92 89 83
Gulf Coast Express LLC 81 25 -
Front Range Pipeline LLC 49 31 29
Texas Express Pipeline LLC 22 16 20
Discovery Producer Services LLC 14 28 30
Mont Belvieu 1 Fractionator 14 14 15
Mont Belvieu Enterprise Fractionator 12 11 9
Cheyenne Connector, LLC 7 - -
Other 5 4 3
Total distributions from unconsolidated affiliates
(a) Excludes a
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Results of Operations - Logistics and Marketing Segment
The results of operations for our Logistics and Marketing segment are as
follows:
Variance Variance
Year Ended December 31, 2020 vs. 2019 2019 vs. 2018
Increase Increase
2020 2019 2018 (Decrease) Percent (Decrease) Percent
Operating revenues:
Sales of natural gas, NGLs and condensate $ 5,355 $ 6,842 $ 9,017 $ (1,487) (22) % $ (2,175) (24) %
Transportation, processing and other 51 46 57 5 11 % (11) (19) %
Trading and marketing gains (losses), net 124 (32) (60) 156 * 28 47 %
Total operating revenues 5,530 6,856 9,014 (1,326) (19) % (2,158) (24) %
Purchases and related costs (5,197) (6,602) (8,789) (1,405) (21) % (2,187) (25) %
Operating and maintenance expense (36) (42) (47) (6) (14) % (5) (11) %
Depreciation and amortization expense (13) (19) (15) (6) (32) % 4 27 %
General and administrative expense (7) (8) (12) (1) (13) % (4) (33) %
Asset impairments - (35) - (35) * 35 *
Other expense, net (10) (3) (4) 7 * (1) (25) %
Earnings from unconsolidated affiliates
(a) 510 468 362 42 9 % 106 29 %
Loss on sale of assets, net - (10) - (10) * (10) *
Segment net income attributable to
partners $ 777 $ 605 $ 509 $ 172 28 % $ 96 19 %
Other data:
Segment adjusted gross margin (b) $ 333 $ 254 $ 225 $ 79 31 % $ 29 13 %
Non-cash commodity derivative
mark-to-market $ 78 $ (29) $ (4) $ 107 * $ (25) *
NGL pipelines throughput (MBbls/d) (c) 661 626 582 35 6 % 44 8 %
Gas pipelines throughput (TBtu/d) (c) 1.1 0.4 0.2 0.7 * 0.2 *
* Percentage change is not meaningful.
(a) Earnings for certain unconsolidated affiliates include the amortization of
the net difference between the carrying amount of the investments and the
underlying equity of the entities.
(b) Adjusted gross margin consists of total operating revenues less purchases
and related costs. Segment adjusted 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 throughput volumes.
Year Ended December 31, 2020 vs. Year Ended December 31, 2019
Total Operating Revenues - Total operating revenues decreased $1,326 million in
2020 compared to 2019, primarily as a result of the following:
•$1,068 million decrease as a result of lower commodity prices before the impact
of derivative activity; and
•$419 million decrease attributable to lower NGL and gas sales volumes.
These decreases were partially offset by:
•$156 million increase as a result of commodity derivative activity attributable
to an increase in unrealized commodity derivative gains of $107 million due to
movements in forward prices of commodities in 2020 and an increase in realized
cash settlement gains of $49 million ; and
•$5 million increase in transportation, processing and other.
Purchases and Related Costs - Purchases and related costs decreased
$1,405 million in 2020 compared to 2019, as a result of the commodity price and
volume changes discussed above.
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Operating and Maintenance Expense - Operating and maintenance expense decreased
in 2020 compared to 2019, as a result of focused cost reduction efforts.
Asset Impairments - Asset impairments in 2019 relate to goodwill allocated to
the Marysville reporting unit.
Other Expense, net - Other expense, net primarily relates to pipeline linefill
adjustments.
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 in the third quarter 2019, the Cheyenne
Connector pipeline coming online in the second quarter 2020, partially offset by
decreased volumes on the Sand Hills pipeline.
Loss on Sale of Assets, net - The loss on sale of assets, net in 2019 represents
the sale of our wholesale propane business and other non-core assets.
Segment Adjusted Gross Margin - Segment adjusted gross margin increased $79
million in 2020 compared to 2019, primarily as a result of the following:
•$156 million increase as a result of commodity derivative activity as discussed
above;
•$13 million increase as a result of gas storage marketing margins; and
•$10 million increase as a result of the DJ Basin Southern Hills extension.
These increases were partially offset by:
•$88 million decrease primarily as a result of decreased gas pipeline marketing
margins due to less favorable commodity spreads in 2020;
•$6 million decrease as a result of the sale of our wholesale propane business
in 2019;
•$5 million decrease as a result of decreased NGL storage margins; and
•$1 million decrease as a result of decreased other NGL pipeline margins.
NGL Pipelines Throughput - NGL pipelines throughput increased in 2020 compared
to 2019, primarily as a result of the addition of the DJ Basin Southern Hills
extension and increased volumes on the other NGL pipelines and the Front Range
pipeline, partially offset by decreased throughput on the Sand Hills pipeline.
Gas Pipelines Throughput - Gas throughput increased in 2020 compared to 2019,
primarily as a result of the Gulf Coast Express pipeline coming online in the
third quarter 2019 and the Cheyenne Connector pipeline coming online in the
second quarter 2020.
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Results of Operations - Gathering and Processing Segment
The results of operations for our Gathering and Processing segment are as
follows:
Variance Variance
Year Ended December 31, 2020 vs. 2019 2019 vs. 2018
Increase Increase
2020 2019 2018 (Decrease) Percent (Decrease) Percent
(millions, except operating data)
Operating revenues:
Sales of natural gas, NGLs and condensate $ 3,042 $ 3,905 $ 5,392 $ (863) (22) % $ (1,487) (28) %
Transportation, processing and other 405 395 432 10 3 % (37) (9) %
Trading and marketing gains, net 32 19 19 13 68 % - - %
Total operating revenues 3,479 4,319 5,843 (840) (19) % (1,524) (26) %
Purchases and related costs (2,253) (2,970) (4,265) (717) (24) % (1,295) (30) %
Operating and maintenance expense (554) (664) (692) (110) (17) % (28) (4) %
Depreciation and amortization expense (333) (355) (346) (22) (6) % 9 3 %
General and administrative expense (22) (23) (19) (1) (4) % 4 21 %
Asset impairments (746) (212) (145) 534 * 67 46 %
Other expense, net (3) (5) (6) (2) (40) % (1) (17) %
Loss on sale of assets, net - (70) - (70) * (70) *
(Loss) earnings from unconsolidated
affiliates (a) (63) 6 8 (69) * (2) (25) %
Segment net (loss) income (495) 26 378 (521) * (352) (93) %
Segment net income attributable to
noncontrolling interests (4) (4) (4) - - % - - %
Segment net (loss) income attributable to
partners $ (499) $ 22 $ 374 $ (521) * $ (352) (94) %
Other data:
Segment adjusted gross margin (b) $ 1,226 $ 1,349 $ 1,578 $ (123) (9) % $ (229) (15) %
Non-cash commodity derivative
mark-to-market $ (23) $ (49) $ 112 $ 26 53 % $ (161) (144) %
Natural gas wellhead (MMcf/d) (c) 4,558 4,941 4,769 (383) (8) % 172 4 %
NGL gross production (MBbls/d) (c) 400 417 413 (17) (4) % 4 1 %
* Percentage change is not meaningful.
(a) Earnings for certain unconsolidated affiliates include the amortization of
the net difference between the carrying amount of the investments and the
underlying equity of the entities and impairment of $61 million of our equity
investment in Discovery Producer Services LLC .
(b) Segment adjusted 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 NGL production
Year Ended December 31, 2020 vs. Year Ended December 31, 2019
Total Operating Revenues - Total operating revenues decreased $840 million in
2020 compared to 2019, primarily as a result of the following:
•$748 million decrease attributable to lower commodity prices, before the impact
of derivative activity; and
•$362 million decrease primarily as a result of decreased volumes in the
Midcontinent and South regions.
These decreases were partially offset by:
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•$247 million increase primarily as a result of increased volume from growth
projects in the DJ Basin and increased volumes in the Permian region;
•$13 million increase as a result of commodity derivative activity attributable
to a decrease in unrealized commodity derivative losses of $26 million due to
movements in forward prices of commodities in 2020, partially offset by a
decrease in realized cash settlement gains of $13 million ; and
•$10 million increase in transportation, processing and other.
Purchases and Related Costs - Purchases and related costs decreased $717 million
in 2020 compared to 2019, primarily 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 across all regions as a result of transformation efforts, restructuring
and operational efficiencies.
Depreciation and Amortization Expense - Depreciation and amortization expense
decreased in 2020 compared to 2019, primarily as a result of asset dispositions
and asset impairments.
General and Administrative Expense - General and administrative expense
decreased in 2020 compared to 2019, as a result of reduced headcount and
employee benefits, partially offset by fees.
Asset Impairments - Asset impairments in 2020 relate to long-lived assets in the
Permian and South regions and goodwill in the North region. Asset impairments in
2019 relate to property, plant and equipment in the Midcontinent and Permian
regions.
Loss on Sale of Assets, net - The net loss on sale of assets in 2019 represents
the sale of non-core assets in the Midcontinent and Permian regions.
(Loss) Earnings from Unconsolidated Affiliates - (Loss) earnings from
unconsolidated affiliates primarily relates to an impairment of our equity
investment in Discovery.
Segment Adjusted Gross Margin - Segment adjusted gross margin decreased $123
million in 2020 compared to 2019, primarily as a result of the following:
•$130 million decrease as a result of lower commodity prices; and
•$6 million decrease as a result of lower volumes in the Midcontinent region and
lower margins and volumes in the South region, partially offset by increased
volumes from growth projects in the DJ Basin and increased volumes in the
Permian region.
This decrease was partially offset by:
•$13 million increase as a result of commodity derivative activity as discussed
above.
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 DJ Basin and the Permian region.
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, partially offset by increased volumes in the DJ Basin and the Permian
region.
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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;
•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 that commodity prices will remain volatile and volumes may decline in
the near term due to the COVID-19 pandemic and its impact on the U.S. economy.
We anticipate this will have an indirect impact on our leverage. While we have
taken significant actions to mitigate the impact of the effects resulting of the
COVID-19 pandemic and reduce our debt in 2020, our leverage may increase as a
result of the current economic environment.
We believe that cash generated from these sources and other proactive cost
reduction actions will be sufficient to meet our short-term working capital
requirements, long-term capital expenditures and quarterly cash distributions
for at least the next twelve months.
We routinely evaluate opportunities for strategic investments or acquisitions.
Future material investments or acquisitions may require that we obtain
additional capital, assume third party debt or incur other long-term
obligations. We have the option to utilize both equity and debt instruments as
vehicles for the long-term financing of our investment activities or
acquisitions.
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 - On June 24, 2020 , we issued $500 million aggregate principal
amount of 5.625% Senior Notes due July 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 on
January 15 and July 15 of each year, commencing January 15, 2021 .
Credit Agreement - As of December 31, 2020 , we had unused borrowing capacity of
$1,390 million , net of $10 million of letters of credit under the Credit
Agreement. Our cost of borrowing under the Credit Agreement is determined by a
ratings-based pricing grid.
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Many parts of the United States are currently experiencing winter storms that
brought extraordinary arctic conditions, record low temperatures, and
precipitation. This extreme weather event in February impacted the commodity
markets, particularly natural gas pricing. Wide fluctuations in the price of
natural gas caused by extreme weather events increase our working capital
requirements in order to fund settlements or margin requirements on open
positions on commodities exchanges. We have borrowed on our Credit Agreement to
meet these short-term needs as a result of timing differences between our
obligations and billing our customers. We expect these short-term working
capital borrowings to decrease in the ordinary course of business in connection
with monthly contract settlements with our customers and counterparties. As of
February 19, 2021 , we had over $1 billion of unused borrowing capacity, net of
$10 million of letters of credit and $381 million of borrowings under the Credit
Agreement. Additionally, as of February 19, 2021 , we held letters of credit of
$183 million from counterparties to secure their future performance under
financial or physical contracts.
Accounts Receivable Securitization Facility - As of December 31, 2020 , we had
$350 million of outstanding borrowings under our Securitization Facility at
LIBOR market index rates plus a margin.
Issuance of Securities - In October 2020 , 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, debt securities, and
guarantees of debt securities
In October 2020 , we also 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 to replace the expired shelf registration statement.
During the year ended December 31, 2020 , prior to October 2, 2020 , we did not
issue any common units pursuant to the now expired registration statement from
and after October 2, 2020 , we did not issue any common units pursuant to the new
registration statement, and subsequent to December 31, 2020 , we did not issue
any common units pursuant to the new 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 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 $87 million and $83 million
as of December 31, 2020 and December 31, 2019 , respectively;
•Balances related to debt of $5.273 billion and $5.549 billion as of
December 31, 2020 and December 31, 2019 , respectively; and
•Interest expense, net of $297 million and $293 million for the year ended
December 31, 2020 and 2019, respectively.
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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 7A. "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
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 $613 million and $713 million as of
December 31, 2020 and December 31, 2019 , respectively, driven by current
maturities of long term debt of $505 million and $603 million , respectively. We
had a net derivative working capital surplus of $7 million as of December 31,
2020 and deficit of $26 million as of December 31, 2019 .
As of December 31, 2020 , we had $52 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:
Year Ended December 31,
2020 2019 2018
(millions)
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Year EndedDecember 31, 2020 vs. Year EndedDecember 31, 2019 Operating Activities - Net cash provided by operating activities increased$240 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 consolidated statements of cash flows. For additional information regarding fluctuations in our earnings and distributions from unconsolidated affiliates, please read "Supplemental Information on Unconsolidated Affiliates" under "Results of Operations". Investing Activities - Net cash used in investing activities decreased$501 million in 2020 compared to the same period in 2019, primarily as a result of lower capital expenditures due to completed capital projects and lower investments in unconsolidated affiliates, primarily related to the completion of construction of the Gulf Coast Express pipeline, partially offset by asset divestitures in 2019. Financing Activities - Net cash used in financing activities increased$686 million in 2020 compared to the same period in 2019, primarily as a result of higher net payments of debt, partially offset by lower distributions paid to limited partners following our distribution reduction in the first quarter of 2020. 73 -------------------------------------------------------------------------------- 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 •Expansion capital expenditures, which are cash expenditures to increase our cash flows, or 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 2021 plan includes sustaining capital expenditures of between$45 million and$85 million and expansion capital expenditures of between$25 million and$75 million . 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 our excess free cash flow. We expect to fund future acquisitions and capital expenditures with funds generated from our operations, borrowings under our Credit Agreement, Securitization Facility and the issuance of additional debt and equity securities. Future material investments or acquisitions may require that we obtain additional capital, assume third party debt or incur other long-term obligations. We have the option to utilize both equity and debt instruments as vehicles for the long-term financing of our investment activities and acquisitions. 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$406 million and$618 million during the years endedDecember 31, 2020 and 2019, respectively. OnJanuary 21, 2021 , 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 onFebruary 12, 2021 to unitholders of record onFebruary 5, 2021 . 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$0.4969 per unit, respectively. The Series B distributions will be paid onMarch 15, 2021 to unitholders of record onMarch 1, 2021 . The Series C distribution will be paid onApril 15, 2021 to unitholders of record onApril 1, 2021 . We expect to continue to use cash provided by operating activities for the payment of distributions to our unitholders. See Note 16. "Partnership Equity and Distributions" in the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements." 74 -------------------------------------------------------------------------------- Total Contractual Cash Obligations A summary of our total contractual cash obligations as ofDecember 31, 2020 , was as follows: Payments Due by Period Less than Total 1 year 1-3 years 3-5 years Thereafter (millions) Debt (a)$ 8,179 $ 792 $ 1,347 $ 1,269 $ 4,771 Finance lease obligations 33 5 10 8 10 Operating lease obligations 115 28 43 20 24 Purchase obligations (b) 9,182 1,442 2,832 2,160 2,748 Other long-term liabilities (c) 159 - 28 16 115 Total$ 17,668 $ 2,267 $ 4,260 $ 3,473 $ 7,668 (a) Includes interest payments on debt securities that have been issued. These interest payments are$292 million ,$497 million ,$444 million , and$1,671 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 ofDecember 31, 2020 . Purchase obligations exclude accounts payable, accrued taxes and other current liabilities recognized in the consolidated balance sheets. Purchase obligations also exclude current and long-term unrealized losses on derivative instruments included in the 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 theDecember 31, 2020 consolidated balance sheet. The table above excludes non-cash obligations as well as$35 million of Executive Deferred Compensation Plan contributions and$9 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 ofDecember 31, 2020 , we had no items that were classified as off-balance sheet obligations. 75 -------------------------------------------------------------------------------- Reconciliation of Non-GAAP Measures Adjusted Gross Margin and Segment Adjusted Gross Margin - In addition to net income, we view our adjusted gross margin as an important performance measure of the core profitability of our operations. We review our adjusted gross margin monthly for consistency and trend analysis. We define adjusted gross margin as total operating revenues, less purchases and related costs, and we define segment adjusted gross margin for each segment as total operating revenues for that segment less purchases and related costs for that segment. Our adjusted gross margin equals the sum of our segment adjusted gross margins. Adjusted gross margin and segment adjusted 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, adjusted gross margin and segment adjusted gross margin should not be considered an alternative to, or more meaningful than, operating revenues, gross margin, segment gross margin, 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. We believe adjusted gross margin provides useful information to our investors because our management views our adjusted gross margin and segment adjusted gross margin as important performance measures that represent the results of product sales and purchases, a key component of our operations. We review our adjusted gross margin and segment adjusted gross margin monthly for consistency and trend analysis. We believe that investors benefit from having access to the same financial measures that management uses in evaluating our operating results. 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 adjusted gross margin, segment adjusted 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 76 --------------------------------------------------------------------------------
same manner. The accompanying schedules provide reconciliations of adjusted gross margin, segment adjusted 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 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.
Excess Free Cash Flow - We define Excess Free Cash Flow as Distributable Cash
Flow, as defined above, less distributions to limited partners and the general
partner, less expansion capital expenditures, net of reimbursable projects, and
contributions to equity method investments and certain other items. Expansion
capital expenditures are cash expenditures to increase our cash flows, or
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).
Excess 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 definition of Excess Free Cash Flow is limited in that it does not represent
residual cash flows available for discretionary expenditures. Therefore, we
believe the use of Excess 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. Excess Free
Cash Flow may not be comparable to a similarly titled measure of another company
because other entities may not calculate Excess Free Cash Flow in the same
manner.
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The following table sets forth our reconciliation of certain non-GAAP measures:
Year Ended December 31,
2020 2019 2018
Reconciliation of Non-GAAP Measures (millions)
Reconciliation of gross margin to adjusted gross margin:
Operating revenues$ 6,302 $ 7,625 $ 9,822 Cost of revenues Purchases and related costs 3,627 4,933 7,123 Purchases and related costs from affiliates 166 223 228 Transportation and related costs from affiliates 950 866 668 Depreciation and amortization expense 376 404 388 Gross margin 1,183 1,199 1,415 Depreciation and amortization expense 376 404$ 388 Adjusted gross margin
Reconciliation of segment gross margin to segment adjusted gross margin:
Logistics and Marketing segment: Operating revenues$ 5,530 $ 6,856 $ 9,014 Cost of revenues Purchases and related costs 5,197 6,602 8,789 Depreciation and amortization expense 13 19 15 Segment gross margin 320 235$ 210 Depreciation and amortization expense 13 19$ 15 Segment adjusted gross margin
Gathering and Processing segment: Operating revenues$ 3,479 $ 4,319 $ 5,843 Cost of revenues Purchases and related costs 2,253 2,970 4,265 Depreciation and amortization expense 333 355 346 Segment gross margin 893 994 1,232 Depreciation and amortization expense 333 355 346 Segment adjusted gross margin$ 1,226 $ 1,349 $ 1,578 78
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Year Ended December 31,
2020 2019 2018
(millions)Reconciliation of net income attributable to partners to adjusted segment EBITDA:
Logistics and Marketing segment: Segment net income attributable to partners (a)$ 777 $ 605 $ 509 Non-cash commodity derivative mark-to-market (78) 29 4
Depreciation and amortization expense, net of noncontrolling interest
13 19 15
Distributions from unconsolidated affiliates, net of earnings 106 44 49
Loss on sale of assets, net - 10 -
Asset impairments - 35 -
Other expense 2 - -
Adjusted segment EBITDA $ 820 $ 742 $ 577
Gathering and Processing segment:
Segment net (loss) income attributable to partners $ (499) $ 22 $ 374
Non-cash commodity derivative mark-to-market 23 49 (112)
Depreciation and amortization expense, net of noncontrolling interest
332 354 345
Asset impairments 746 212 145
Loss on sale of assets, net - 70 -
Distributions from unconsolidated affiliates, net of earnings 78 22 22
Other expense 3 6 7
Adjusted segment EBITDA $ 683 $ 735 $ 781 (a) We recognized
Operating and Maintenance and General and Administrative Expense Pursuant to the Contribution Agreement, onJanuary 1, 2017 , the Partnership entered into the Services Agreement, which replaced the services agreement between the Partnership andDCP Midstream, LLC , datedFebruary 14, 2013 , as amended. Under the Services Agreement, we are required to reimburseDCP Midstream, LLC for salaries of personnel and employee benefits, as well as capital expenditures, maintenance and repair costs, taxes and other direct costs incurred byDCP Midstream, LLC on our behalf. There is no limit on the reimbursements we make toDCP Midstream, LLC under the Services Agreement for other expenses and expenditures incurred or payments made on our behalf. Operating and maintenance expenses are costs associated with the operation of a specific asset and are primarily comprised of direct labor, ad valorem taxes, repairs and maintenance, lease expenses, utilities and contract services. These expenses fluctuate depending on the activities performed during a specific period. General and administrative expense represents costs incurred to manage the business. This expense includes cost of centralized corporate functions performed byDCP Midstream, LLC , including legal, accounting, cash management, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll and engineering and all other expenses necessary or appropriate to the conduct of the business. We also incurred third party general and administrative expenses, which were primarily related to compensation and benefit expenses of the personnel who provide direct support to our operations. Also included are expenses associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, due 79 --------------------------------------------------------------------------------
diligence and acquisition costs, costs associated with the Sarbanes-Oxley Act of 2002, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs, and director compensation.
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--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
Our financial statements reflect the selection and application of accounting
policies that require management to make estimates and assumptions. We believe
that the following are the more critical judgment areas in the application of
our accounting policies that currently affect our financial condition and
results of operations. These accounting policies are described further in Note 2
of the Notes to Consolidated Financial Statements in Item 8. "Financial
Statements and Supplementary Data."
Effect if Actual Results Differ
Description Judgments and Uncertainties from Assumptions
Impairment of Goodwill
We evaluate goodwill for We determine fair value using We primarily use a discounted cash
impairment annually in the third widely accepted valuation flow analysis, supplemented by a
quarter, and whenever events or techniques, namely discounted cash market approach analysis, to
changes in circumstances indicate flow and market multiple analyses. perform the assessment. Key
it is more likely than not that These techniques are also used when assumptions in the analysis
the fair value of a reporting unit assigning the purchase price to include the use of an appropriate
is less than its carrying amount. acquired assets and liabilities. discount rate, terminal year
These types of analyses require us multiples, and estimated future
to make assumptions and estimates cash flows including an estimate
regarding industry and economic of operating and general and
factors and the profitability of administrative costs. In
future business strategies. It is estimating cash flows, we
our policy to conduct impairment incorporate current market
testing based on our current information (including forecasted
business strategy in light of commodity prices and volumes), as
present industry and economic well as historical and other
conditions, as well as future factors. If our assumptions are
expectations. not appropriate, or future events
indicate that our goodwill is
impaired, our net income would be
impacted by the amount by which
the carrying value exceeds the
fair value of the reporting unit,
to the extent of the balance of
goodwill. We recorded $159 million
of goodwill impairment during the
year ended December 31, 2020.
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Effect if Actual Results Differ
Description Judgments and Uncertainties from Assumptions
Impairment of Long-Lived Assets
We periodically evaluate whether Our impairment analyses require Using the impairment review
the carrying value of long-lived management to apply judgment in methodology described herein, we
assets has been impaired when estimating future cash flows recorded a $587 million impairment
circumstances indicate the carrying including forecasting useful lives charge on long-lived assets during
value of those assets may not be of the assets, future commodity the year ended December 31, 2020
recoverable. For purposes of this prices, volumes, and operating when it was determined that the
evaluation, long-lived assets with costs, assessing the probability of carrying value of certain asset
recovery periods in excess of the different outcomes, and with groups were not recoverable or
weighted average remaining useful respect to any required fair value when we determine assets within an
life of our fixed assets are estimate, selecting the discount asset group will provide no
further analyzed to determine if a rate that reflects the risk further benefit. If actual results
triggering event occurred. If it is inherent in future cash flows. If are not consistent with our
determined that a triggering event the carrying value is not assumptions and estimates or our
has occurred, we prepare a recoverable, we assess the fair assumptions and estimates change
quantitative evaluation based on value of long-lived assets using due to new information, we may be
undiscounted cash flow projections commonly accepted techniques, and exposed to additional impairment
expected to be realized over the may use more than one method, charges. If our forecast indicates
remaining useful life of the including, but not limited to, lower commodity prices in future
primary asset. The carrying amount recent third party comparable sales periods at a level and duration
is not recoverable if it exceeds and discounted cash flow models. that results in producers
the sum of undiscounted cash flows curtailing or redirecting drilling
expected to result from the use and in areas where we operate this may
eventual disposition of the asset. adversely affect our estimate of
If the carrying value is not future operating results, which
recoverable, the impairment loss is could result in future impairment
measured as the excess of the due to the potential impact on our
asset's carrying value over its operations and cash flows.
fair value.
Impairment of Investments in Unconsolidated Affiliates We evaluate our investments in
Our impairment analyses require Using the impairment review
unconsolidated affiliates for management to apply judgment in methodology described herein, we
impairment whenever events or estimating future cash flows and recorded a $61 million impairment
changes in circumstances indicate, asset fair values, including charge on investments in
in management's judgment, that the forecasting useful lives of the unconsolidated affiliates during
carrying value of such investment assets, future volumes, assessing the year ended December 31, 2020
may have experienced a decline in the probability of differing when it was determined that our
value that is other than temporary. estimated outcomes, and selecting investment had suffered a decline
When evidence of loss in value has the discount rate that reflects the in fair value that we concluded to
occurred that is determined to be risk inherent in future cash flows. be other than temporary. If the
other an temporary, we compare the When there is evidence of an other estimated fair value of our
estimated fair value of the than temporary loss in value, we unconsolidated affiliates is less
investment to the carrying value of assess the fair value of our than the carrying value, we would
the investment to determine whether unconsolidated affiliates using recognize an impairment loss for
an impairment has occurred. commonly accepted techniques, and the excess of the carrying value
may use more than one method, but over the estimated fair value only
is primarily measured with if the loss is other than
discounted cash flow models. temporary. A period of lower
commodity prices may adversely
affect our estimate of future
operating results, which could
result in future impairment due to
the potential impact on the
investee's operations and cash
flows.
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Effect if Actual Results Differ
Description Judgments and Uncertainties from Assumptions
Accounting for Risk Management Activities and Financial Instruments Each derivative not qualifying When available, quoted market
If our estimates of fair value are
for the normal purchases and prices or prices obtained through inaccurate, we may be exposed to
normal sales exception is external sources are used to losses or gains that could be
recorded on a gross basis in the determine a contract's fair value. material. A 10% difference in our
consolidated balance sheets at For contracts with a delivery estimated fair value of
its fair value as unrealized location or duration for which derivatives at December 31, 2020
gains or unrealized losses on quoted market prices are not would have affected net income by
derivative instruments. available, fair value is determined approximately $2 million based on
Derivative assets and liabilities based on pricing models developed our net derivative position for
remain classified in our primarily from historical the year ended December 31, 2020.
consolidated balance sheets as information and the expected
unrealized gains or unrealized relationship with quoted market
losses on derivative instruments prices.
at fair value until the end of
the contractual settlement
period. Values are adjusted to
reflect the credit risk inherent
in the transaction as well as the
potential impact of liquidating
open positions in an orderly
manner over a reasonable time
period under current conditions.
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