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, 2020 .
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 The COVID-19 pandemic, continued to disrupt theU.S. economy causing reduced demand for gas and NGLs that materially and adversely affect our business, results of operations and liquidity. Additionally, inFebruary 2021 , theU.S. experienced Winter Storm Uri, bringing extreme cold temperatures, ice, and snow to the centralU.S. that adversely impacted producer volumes, substantially disrupted regional gas market prices and temporarily disrupted the operations of some the Company's assets in the Permian, South and Midcontinent Regions. The extent of the impact of Winter Storm Uri and 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. 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 possibly 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. Our business is impacted by commodity prices and volumes. We mitigate a significant portion of commodity price risk on an overall Partnership basis through 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 recovered since the start of the pandemic, however demand and production remain limited and our natural gas throughput and NGL volumes continue to be impacted. 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 and Marketing 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, 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. Upstream producers have reduced capital expenditures in response to COVID-19 demand decreases and are maintaining this reduction 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. DuringFebruary 2021 , Winter Storm Uri resulted in lower volumes and abnormally high gas prices. Certain counterparty billings during this time are under dispute and may take longer to collect than normal. 29 -------------------------------------------------------------------------------- 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 fee-based business represents a significant portion of our margins. •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 OnApril 20, 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 onMay 14, 2021 to unitholders of record onApril 30, 2021 . On the same date, we announced that the board of directors of the General Partner declared a semi-annual distribution on our Series A Preferred Units of$36.875 per unit. The distribution will be paid onJune 15 , 2021to unitholders of record onJune 1, 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$0.4969 per unit, respectively. The Series B distributions will be paid onJune 15, 2021 to unitholders of record onJune 1, 2021 . The Series C distribution will be paid onJuly 15, 2021 to unitholders of record onJuly 1, 2021 . 30
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Results of Operations
Consolidated Overview The following table and discussion provides a summary of our consolidated results of operations for the three months endedMarch 31, 2021 and 2020. The results of operations by segment are discussed in further detail following this consolidated overview discussion. Three Months Ended Variance March 31, 2021 vs. 2020 Increase 2021 2020 (Decrease) Percent (millions, except operating data) Operating revenues (a): Logistics and Marketing$ 2,098 $ 1,358 $ 740 54 % Gathering and Processing 1,314 913 401 44 % Inter-segment eliminations (1,094) (614) 480 78 % Total operating revenues 2,318 1,657 661 40 % Purchases and related costs Logistics and Marketing (2,062) (1,247) 815 65 % Gathering and Processing (1,069) (513) 556 * Inter-segment eliminations 1,094 614 480 78 % Total purchases (2,037) (1,146) 891 78 % Operating and maintenance expense (149) (153) (4) (3 %) Depreciation and amortization expense (91) (99) (8) (8 %) General and administrative expense (38) (56) (18) (32 %) Asset impairments - (746) (746) * Other expense, net - (3) (3) * Earnings from unconsolidated affiliates 128 76 52 68 % Interest expense (77) (78) (1) (1 %) Income tax expense - (1) (1) * Net income attributable to noncontrolling interests (1) (1) - - % Net income (loss) attributable to partners$ 53 $ (550) $ 603 * Other data: Adjusted gross margin (b): Logistics and Marketing$ 36 $ 111 $ (75) (68 %) Gathering and Processing 245 400 (155) (39 %) Total adjusted gross margin$ 281 $ 511 $ (230) (45 %) Non-cash commodity derivative mark-to-market$ (53) $ 134 $ (187) * NGL pipelines throughput (MBbls/d) (c) 578 677 (99) (15 %) Gas pipelines throughput (TBtu/d) (c) 1.0 0.80 0.20 25 % Natural gas wellhead (MMcf/d) (c) 4,077 4,940 (863) (17 %) NGL gross production (MBbls/d) (c) 361 404 (43) (11 %) * Percentage change is not meaningful. (a) Operating revenues include the impact of trading and marketing gains (losses), net. (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 wellhead and throughput volumes and NGL production. 31
-------------------------------------------------------------------------------- Three Months EndedMarch 31, 2021 vs. Three Months EndedMarch 31, 2020 Total Operating Revenues - Total operating revenues increased$661 million in 2021 compared to 2020, primarily as a result of the following: •$740 million increase for our Logistics and Marketing segment, primarily due to higher commodity prices and an increase in transportation, processing and other, partially offset by lower NGL and gas sales volumes and unfavorable commodity derivative activity; and •$401 million increase for our Gathering and Processing segment, primarily due to higher commodity prices and an increase in transportation, processing and other, partially offset by unfavorable commodity derivative activity and decreased volumes in all regions. These increases were partially offset by: •$480 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 higher commodity prices, partially offset by lower NGL and gas sales volumes. Total Purchases - Total purchases increased$891 million in 2021 compared to 2020, primarily as a result of the following: •$815 million increase for our Logistics and Marketing segment for the commodity price and volume changes discussed above; and •$556 million increase for our Gathering and Processing segment for the commodity price and volume changes discussed above. These increases were partially offset by: •$480 million change in inter-segment eliminations, for the reasons discussed above. General and Administrative Expense - General and administrative expense decreased in 2021 compared to 2020, 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. Earnings from Unconsolidated Affiliates - Earnings from unconsolidated affiliates increased in 2021 compared to 2020, primarily as a result of an impairment in our equity investment in Discovery in 2020, partially offset by decline of volumes from third party production on theSand Hills pipeline in 2021. Net Income (Loss) Attributable to Partners - Net income (loss) attributable to partners increased in 2021 compared to 2020 for the reasons discussed above. Adjusted Gross Margin - Adjusted gross margin decreased$230 million in 2021 compared to 2020, primarily as a result of the following: •$155 million decrease for our Gathering and Processing segment, primarily as a result of unfavorable commodity derivative activity attributable to our corporate equity hedge program, lower base volumes and margins in the South, Permian, and Midcontinent, lower margins in theDJ Basin due to offload processing fees and the negative impact of Winter Storm Uri resulting in producer shut-ins, unfavorable commodity derivative activity associated with swaps and reduced producer payments and marketing activity, partially offset by higher commodity pricing; and •$75 million decrease for our Logistics and Marketing segment, primarily related to lower gas pipeline marketing margins due to less favorable commodity spreads, less favorable NGL marketing and storage activity, and negative impact on our gas marketing pipeline assets due to Winter Storm Uri, partially offset by favorable gas storage margins. 32 -------------------------------------------------------------------------------- Supplemental Information on Unconsolidated Affiliates The following tables present financial information related to unconsolidated affiliates during the three months endedMarch 31, 2021 and 2020, respectively: Earnings from investments in unconsolidated affiliates were as follows: Three Months EndedMarch 31, 2021 2020 (millions)DCP Sand Hills Pipeline, LLC
DCP Southern Hills Pipeline, LLC 24 20 Gulf Coast Express LLC 15 16 Front Range Pipeline LLC 9 11 Texas Express Pipeline LLC 4 4 Discovery Producer Services LLC (a) 8 (61) Mont Belvieu 1 Fractionator 2 3 Mont Belvieu Enterprise Fractionator 1 3 Cheyenne Connector, LLC 3 - Other - 2 Total earnings from unconsolidated affiliates
(a) Includes an other than temporary impairment of
Three Months Ended March 31, 2021 2020 (millions) DCP Sand Hills Pipeline, LLC$ 52 $ 79 DCP Southern Hills Pipeline, LLC 25 22 Gulf Coast Express LLC 19 21 Front Range Pipeline LLC 12 12 Texas Express Pipeline LLC 5 5 Discovery Producer Services LLC 8 6 Mont Belvieu 1 Fractionator 2 4 Mont Belvieu Enterprise Fractionator 1 3 Cheyenne Connector, LLC 4 - Other 1 1 Total distributions from unconsolidated affiliates$ 129 $ 153 33
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Results of Operations - Logistics and Marketing Segment
Operating Data Three months ended March 31, 2021 Approximate Approximate Gas Approximate Throughput Capacity Throughput Capacity Pipeline Throughput Pipeline Throughput Fractionator Throughput System System Length (Miles) Fractionators (MBbls/d) (a) (Bcf/d) (a) (MBbls/d) (a) (TBtus/d) (a) (MBbls/d) (a) Sand Hills pipeline 1,410 - 333 - 228 - -Southern Hills pipeline 950 - 128 - 105 - -Front Range pipeline 450 - 87 - 56 - - Texas Express pipeline 600 - 37 - 19 - - Other NGL pipelines (a) 1,110 - 310 - 170 - - Gulf Coast Express pipeline 500 - - 500 - 0.47 - Guadalupe pipeline 600 - - 245 - 0.25 - Cheyenne Connector 70 - - 300 - 0.30 - Mont Belvieu fractionators - 2 - - - - 43 Pipelines total 5,690 2 895 1,045 578 1.02 43
(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: Three Months Ended Variance March 31, 2021 vs. 2020 Increase 2021 2020 (Decrease) Percent Operating revenues: Sales of natural gas, NGLs and condensate$ 2,325 $ 1,294 $ 1,031 80 % Transportation, processing and other 14 13 1 8 % Trading and marketing (losses) gains, net (241) 51 (292) * Total operating revenues 2,098 1,358 740 54 % Purchases and related costs (2,062) (1,247) 815 65 % Operating and maintenance expense (6) (7) (1) (14 %) Depreciation and amortization expense (3) (3) - - % General and administrative expense (1) (2) (1) (50 %) Earnings from unconsolidated affiliates (a) 120 137 (17) (12 %) Segment net income attributable to partners$ 146 $ 236 $ (90) (38 %) Other data: Segment adjusted gross margin (b)$ 36 $ 111 $ (75) (68 %) Non-cash commodity derivative mark-to-market$ (5) $ 42 $ (47) * NGL pipelines throughput (MBbls/d) (c) 578 677 (99) (15 %) Gas pipelines throughput (TBtu/d) (c) 1.0 0.80 0.2 25 % * 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. 34 -------------------------------------------------------------------------------- Three Months EndedMarch 31, 2021 vs. Three Months EndedMarch 31, 2020 Total Operating Revenues - Total operating revenues increased$740 million in 2021 compared to 2020, primarily as a result of the following: •$1,382 million increase as a result of higher commodity prices before the impact of derivative activity; and •$1 million increase in transportation, processing and other. These increases were partially offset by: •$351 million decrease attributable to lower NGL and gas sales volumes; and •$292 million decrease as a result of commodity derivative activity attributable to an increase in realized cash settlement losses of$245 million and an increase in unrealized commodity derivative losses of$47 million due to movements in forward prices of commodities. Purchases and Related Costs - Purchases and related costs increased$815 million in 2021 compared to 2020, primarily as a result of the commodity price and volume changes discussed above. Earnings from Unconsolidated Affiliates - Earnings from unconsolidated affiliates decreased in 2021 compared to 2020, primarily due to decline of volumes from third party production on the Sand Hills pipeline. Segment Adjusted Gross Margin - Segment adjusted gross margin decreased$75 million in 2021 compared to 2020, primarily as a result of the following: •$57 million decrease as a result of gas pipeline marketing margins due to less favorable commodity spreads in 2021, which includes unrealized derivatives losses of$47 million due to forward price movements of commodities in 2021; •$13 million decrease as a result of less favorable NGL marketing and storage activity in 2021; and •$5 million decrease as a result of Winter Storm Uri, which adversely impacted our gas marketing pipeline assets, with a large favorable offset at gas storage margins. NGL Pipelines Throughput - NGL pipelines throughput decreased in 2021 compared to 2020 primarily due to decline of volumes from third party production on the Sand Hills pipeline. Gas Pipelines Throughput - Gas throughput increased in 2021 compared to 2020, primarily as a result of the Cheyenne Connector pipeline coming online in the second quarter 2020. 35
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Results of Operations - Gathering and Processing Segment
Operating Data Three months ended March 31, 2021 Approximate Approximate Gathering Net Nameplate Plant Natural Gas NGL and Transmission Capacity Wellhead Volume Production Regions Plants Systems (Miles) (MMcf/d) (a) (MMcf/d) (a) (MBbls/d) (a) North 13 3,500 1,580 1,520 136 Midcontinent 6 24,500 1,110 799 65 Permian 10 15,400 1,200 858 93 South 8 7,000 1,730 900 67 Total 37 50,400 5,620 4,077 361 (a) Represents total capacity or total volumes allocated to our proportionate ownership share. The results of operations for our Gathering and Processing segment are as follows: Three Months Ended March Variance 31, 2021 vs. 2020 Increase 2021 2020 (Decrease) Percent (millions, except operating data) Operating revenues: Sales of natural gas, NGLs and condensate$ 1,338 $ 713 $ 625 88 % Transportation, processing and other 104 99 5 5 % Trading and marketing (losses) gains, net (128) 101 (229) * Total operating revenues 1,314 913 401 44 % Purchases and related costs (1,069) (513) 556 * Operating and maintenance expense (140) (142) (2) (1 %) Depreciation and amortization expense (81) (89) (8) (9 %) General and administrative expense (4) (3) 1 33 % Asset impairments - (746) (746) * Other expense, net - (3) (3) * Earnings (loss) from unconsolidated affiliates (a) 8 (61) 69 * Segment net income (loss) 28 (644) 672 * Segment net income attributable to noncontrolling interests (1) (1) - - % Segment net income (loss) attributable to partners$ 27 $ (645) $ 672 * Other data: Segment adjusted gross margin (b)$ 245 $ 400 $ (155) (39 %) Non-cash commodity derivative mark-to-market$ (48) $ 92 $ (140) * Natural gas wellhead (MMcf/d) (c) 4,077 4,940 (863) (17 %) NGL gross production (MBbls/d) (c) 361 404 (43) (11 %) * 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 inDiscovery 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
Three Months Ended
36 -------------------------------------------------------------------------------- result of the following: •$792 million increase attributable to higher commodity prices, before the impact of derivative activity; and •$5 million increase in transportation, processing and other. These increases were partially offset by: •$229 million decrease as a result of commodity derivative activity attributable to a increase in unrealized commodity derivative losses of$140 million due to movements in forward prices of commodities in 2021 and an increase in realized cash settlement losses of$89 million ; and •$167 million decrease primarily as a result of decreased volumes in all regions. Purchases and Related Costs - Purchases and related costs increased$556 million in 2021 compared to 2020, primarily as a result of the commodity price and volume changes discussed above. 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 increased in 2021 compared to 2020, primarily as a result of an impairment in our equity investment in Discovery in 2020. Segment Adjusted Gross Margin - Segment adjusted gross margin decreased$155 million in 2021 compared to 2020, primarily as a result of the following: •$162 million decrease as a result of unfavorable commodity derivative activity attributable to our corporate equity hedge program; •$62 million decrease due primarily to lower base volumes and margins in the South, Permian, and Midcontinent regions, and lower margins in theDJ Basin due to offload processing fees; and •$35 million decrease as a result of Winter Storm Uri, reflecting reduced volumes due to producer shut-ins, commodity derivative activity associated with swaps, and the net impact of producer payments and marketing activity. This decrease was partially offset by: •$104 million increase as a result of higher commodity prices. Total Wellhead - Natural gas wellhead decreased in 2021 compared to 2020 primarily as a result of base declines and contract expirations in the South, base declines in Midcontinent and Permian regions, and lower volumes due to impact of Winter Storm Uri. NGL Gross Production - NGL gross production decreased in 2021 compared to 2020, primarily as a result of base declines and contract expirations in the South, base declines in Midcontinent and Permian regions, and lower volumes due to impact of Winter Storm Uri, partially offset by lower ethane rejection across all regions. 37 -------------------------------------------------------------------------------- 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 global 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, 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. Credit Agreement - As ofMarch 31, 2021 , we had unused borrowing capacity of$1,332 million , net of$58 million of outstanding borrowings and$10 million of letters of credit, under the Credit Agreement, of which at least$1,123 million would have been available to borrow for working capital and other general partnership purposes based on financial covenants set forth in the Credit Agreement. As ofApril 30, 2021 , we had unused borrowing capacity of$1,276 million , net of$115 million of outstanding borrowings and$9 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. Accounts Receivable Securitization Facility - As ofMarch 31, 2021 , we had$350 million of outstanding borrowings under our Securitization Facility at LIBOR market index rates plus a margin. 38 -------------------------------------------------------------------------------- Issuance of Securities - InOctober 2020 , we filed a shelf registration statement with theSEC 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. InOctober 2020 , we also filed a shelf registration statement with theSEC , which allows us to issue up to$750 million in common units pursuant to our at-the-market program. During the three months endedMarch 31, 2021 , we did not issue any common units pursuant to this registration statement, and$750 million remained available for future sales. Guarantee ofRegistered Debt Securities - The condensed consolidated financial statements ofDCP Midstream, LP , or "parent guarantor", include the accounts ofDCP 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. The Company qualifies for alternative disclosure under Rule 13-01 of Regulation S-X, 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. Summarized financial information is presented as follows. 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$87 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively; •Balances related to debt of$5.332 billion and$5.273 billion as ofMarch 31, 2021 andDecember 31, 2020 , respectively; and •Interest expense, net of$76 million and$75 million for the three months endedMarch 31, 2021 and 2020, 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 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. DuringFebruary 2021 , Winter Storm Uri resulted in lower volumes and abnormally high gas prices for a period of days. A majority of our receivables associated with Winter Storm Uri have been collected. Certain counterparty billings during this time are under dispute and will take longer to collect than normal, 39 -------------------------------------------------------------------------------- which have negatively impacted working capital atMarch 31, 2021 . We believe the amounts due to us are owed and intend to vigorously pursue legal avenues to collect these receivables. We had working capital deficits of$513 million and$613 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively, driven by current maturities of long term debt of$504 million and$505 million , respectively. We had a net derivative working capital deficit of$19 million as ofMarch 31, 2021 and surplus of$7 million as ofDecember 31, 2020 . As ofMarch 31, 2021 , we had$5 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:
Three Months Ended March 31, 2021 2020 (millions) Net cash (used in) provided by operating activities $ (4)$ 314 Net cash used in investing activities $ (14)$ (103) Net cash used in financing activities $
(30)
Three Months EndedMarch 31, 2021 vs. Three Months EndedMarch 31, 2020 Operating Activities - Net cash provided by operating activities decreased$318 million in 2021 compared to the same period in 2020. The changes in net cash provided by operating activities are attributable to our net income (loss) 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 "Supplemental Information on Unconsolidated Affiliates" under "Results of Operations". Investing Activities - Net cash used in investing activities decreased$89 million in 2021 compared to the same period in 2020, primarily as a result of lower capital expenditures due to completed capital projects and lower investments in unconsolidated affiliates. Financing Activities - Net cash used in financing activities decreased$141 million in 2021 compared to the same period in 2020, primarily as a result of lower distributions and higher net proceeds of debt in the first quarter of 2021. 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 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. 40 -------------------------------------------------------------------------------- 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$81 million and$162 million during the three months endedMarch 31, 2021 and 2020, respectively. OnApril 20, 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 onMay 14, 2021 to unitholders of record onApril 30, 2021 . On the same date, we announced that the board of directors of the General Partner declared a semi-annual distribution on our Series A Preferred Units of$36.875 per unit. The distribution will be paid onJune 15 , 2021to unitholders of record onJune 1, 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$0.4969 per unit, respectively. The Series B distributions will be paid onJune 15, 2021 to unitholders of record onJune 1, 2021 . The Series C distribution will be paid onJuly 15, 2021 to unitholders of record onJuly 1, 2021 . We expect to continue to use cash provided by operating activities for the payment of distributions to our unitholders. See Note 12. "Partnership Equity and Distributions" in the Notes to the Condensed Consolidated Financial Statements in Item 1. "Financial Statements." 41 -------------------------------------------------------------------------------- Total Contractual Cash Obligations A summary of our total contractual cash obligations as ofMarch 31, 2021 , was as follows: Payments Due by Period Less than Total 1 year 1-3 years 3-5 years Thereafter (millions) Debt (a)$ 8,089 $ 780 $ 1,337 $ 1,247 $ 4,725 Finance lease obligations 31 4 10 8 9 Operating lease obligations 106 20 43 20 23 Purchase obligations (b) 9,786 1,591 3,026 2,273 2,896 Other long-term liabilities (c) 160 - 27 16 117 Total$ 18,172 $ 2,395 $ 4,443 $ 3,564 $ 7,770 (a) Includes interest payments on debt securities that have been issued. These interest payments are$280 million ,$487 million ,$422 million , and$1,625 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 gas supply, 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 ofMarch 31, 2021 . 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 theMarch 31, 2021 condensed consolidated balance sheet. The table above excludes non-cash obligations as well as$36 million of Executive Deferred Compensation Plan contributions and$8 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 ofMarch 31, 2021 , we had no items that were classified as off-balance sheet obligations. 42 -------------------------------------------------------------------------------- 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 pay 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 43 --------------------------------------------------------------------------------
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, 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. 44
-------------------------------------------------------------------------------- The following table sets forth our reconciliation of certain non-GAAP measures: Three Months EndedMarch 31, 2021 2020 Reconciliation of Non-GAAP Measures (millions)
Reconciliation of gross margin to adjusted gross margin:
Operating revenues$ 2,318 $ 1,657 Cost of revenues Purchases and related costs 1,763 872 Purchases and related costs from affiliates 55 36 Transportation and related costs from affiliates 219 238 Depreciation and amortization expense 91 99 Gross margin 190 412 Depreciation and amortization expense 91 99 Adjusted gross margin$ 281 $ 511
Reconciliation of segment gross margin to segment adjusted gross margin:
Logistics and Marketing segment: Operating revenues$ 2,098 $ 1,358 Cost of revenues Purchases and related costs 2,062 1,247 Depreciation and amortization expense 3 3 Segment gross margin 33 108 Depreciation and amortization expense 3 3 Segment adjusted gross margin$ 36 $ 111 Gathering and Processing segment: Operating revenues$ 1,314 $ 913 Cost of revenues Purchases and related costs 1,069 513 Depreciation and amortization expense 81 89 Segment gross margin 164 311 Depreciation and amortization expense 81 89 Segment adjusted gross margin$ 245 $ 400 45
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Three Months EndedMarch 31, 2021 2020 (millions)
Reconciliation of net income attributable to partners to adjusted segment EBITDA:
Logistics and Marketing segment: Segment net income attributable to partners (a)$ 146 $ 236 Non-cash commodity derivative mark-to-market 5 (42)
Depreciation and amortization expense, net of noncontrolling interest
3 3 Distributions from unconsolidated affiliates, net of earnings 1 10 Other expense - 1 Adjusted segment EBITDA$ 155 $ 208 Gathering and Processing segment: Segment net income (loss) attributable to partners$ 27 $ (645) Non-cash commodity derivative mark-to-market 48 (92)
Depreciation and amortization expense, net of noncontrolling interest
81 89 Asset impairments - 746 Distributions from unconsolidated affiliates, net of earnings - 67 Other expense - 3 Adjusted segment EBITDA$ 156 $ 168 (a) We recognized no lower of cost or net realizable value adjustment for the three months endedMarch 31, 2021 . We recognized$4 million of lower of cost or net realizable value adjustments for the three months endedMarch 31, 2020 . 46 --------------------------------------------------------------------------------
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, 2020 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, 2020 . The accounting policies and estimates used in preparing our interim condensed consolidated financial statements for the three months endedMarch 31, 2021 are the same as those described in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 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, 2020 .
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