DCP MIDSTREAM, LP The following discussion analyzes our financial condition and results of operations. You should read the following discussion of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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.
Common Unit Acquisition Proposal
OnAugust 17, 2022 , the Board of Directors of ourGeneral Partner (the "Board") received a non-binding proposal from Phillips 66 to acquire all of the Partnership's issued and outstanding publicly-held common units not already owned byDCP Midstream, LLC or its subsidiaries at a value of$34.75 per each issued and outstanding publicly-held common unit (the "Proposal"). The Board appointed the conflicts committee to review, evaluate and negotiate the Proposal. The proposed transaction is subject to a number of contingencies, including approval by the conflicts committee and the Board, the negotiation of a definitive agreement concerning the transaction, and the satisfaction of conditions to the consummation of a transaction set forth in any such definitive agreement. There can be no assurance that such definitive agreement will be executed or that any transaction will be consummated on the terms described above or at all.
General Trends and Outlook
We anticipate our business will continue to be affected by the following key trends. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, our actual results may vary materially from our expected results.
Our business is impacted by commodity prices and volumes. We mitigate a significant portion of commodity price risk on an overall Partnership basis 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 been volatile during 2022 and are subject to global energy
supply and demand fundamentals as well as geopolitical disruptions. Drilling
activity levels vary by geographic area and we will continue to target our
strategy in geographic areas where we expect producer drilling activity.
Our long-term view is that commodity prices will be at levels that we believe
will support sustained or increasing levels of domestic production. Our business
is predominantly fee-based and we have a diversified portfolio to balance the
upside of our earnings potential while reducing our 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.
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We intend to be a proactive participant in the transition to a lower carbon
energy future. In August 2021 , we announced two goals for companywide greenhouse
gas (GHG) emission reductions. By 2030, our goal is to reduce our total Scope 1
and Scope 2 greenhouse gas emissions by 30% from our 2018 baseline.
Additionally, by 2050, our goal is to achieve net zero greenhouse gas emissions.
We plan to achieve these targets through increased efficiency and modernization
of existing operations and reducing greenhouse gas emissions within the base
business. We are continuously working to improve operational and energy
efficiency through resource and energy conservation throughout our operations
and made progress towards our goals by reducing Scope 1 and Scope 2 GHG
emissions across our operations by approximately 23% from the 2018 baseline
through the end of 2021.We also plan to leverage our existing infrastructure to
establish adjacent lines of business that capture growing market opportunities
and capitalize on green energy growth. To measure and report progress against
these targets, we utilize an emission calculation protocol intended to align
with the Energy Infrastructure Council (EIC) Midstream ESG Reporting Template,
which is based upon the principles noted in the World Resources Institute (WRI)
Corporate Accounting and Reporting Standard & Scope 2 Protocols. While we
believe these goals align with our long-term growth strategy and financial and
operational priorities, they are aspirational and may change, and there is no
guarantee that they will be met.
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 negatively by, among other things,
reduced drilling activity, depressed commodity prices, severe weather
disruptions, operational outages and ethane rejection. Upstream producers
response to changes in commodity prices and demand remain uncertain.
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, and 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, 5 have investment
grade credit ratings. During February 2021 , Winter Storm Uri resulted in lower
volumes and abnormally high gas prices in certain regions. Certain counterparty
billings during this time remain under dispute and are taking longer to collect
than normal.
The global economic outlook continues to be a cause for concern for
We believe we are positioned to withstand future commodity price volatility as a result of the following:
•Our 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 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 2022, 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.
We incur capital expenditures for our consolidated entities and our
unconsolidated affiliates. Our 2022 plan includes sustaining capital
expenditures of between
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Common and Preferred Distributions
OnOctober 13, 2022 , we announced that the board of directors of the General Partner declared a quarterly distribution on our common units of$0.43 per common unit. The distribution will be paid onNovember 14, 2022 to unitholders of record onOctober 28, 2022 . Also onOctober 13, 2022 , 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 onDecember 15, 2022 to unitholders of record onDecember 1, 2022 . Also onOctober 13, 2022 , 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 onDecember 15, 2022 to unitholders of record onDecember 1, 2022 . The Series C distribution will be paid onJanuary 17, 2023 to unitholders of record onJanuary 3, 2023 . 31 --------------------------------------------------------------------------------
Results of Operations
Consolidated Overview
The following table and discussion provides a summary of our consolidated
results of operations for the three and nine months ended
Three Months Ended September Nine Months Ended September Variance Three Months
Variance Nine Months
30, 30, 2022 vs. 2021 2022 vs. 2021
Increase Increase
2022 2021 2022 2021 (Decrease) Percent (Decrease) Percent
(millions, except operating data)
Operating revenues (a):
Logistics and Marketing $ 3,829 $ 2,668 $ 10,781 $ 6,683 $ 1,161 44 % $ 4,098 61 %
Gathering and Processing 3,060 1,821 8,133 4,449 1,239 68 % 3,684 83 %
Inter-segment eliminations (2,570) (1,662) (6,951) (3,902) 908 55 % 3,049 78 %
Total operating revenues 4,319 2,827 11,963 7,230 1,492 53 % 4,733 65 %
Purchases and related costs
Logistics and Marketing (3,796) (2,633) (10,692) (6,605) 1,163 44 % 4,087 62 %
Gathering and Processing (2,471) (1,540) (6,675) (3,684) 931 60 % 2,991 81 %
Inter-segment eliminations 2,570 1,662 6,951 3,902 908 55 % 3,049 78 %
Total purchases (3,697) (2,511) (10,416) (6,387) 1,186 47 % 4,029 63 %
Operating and maintenance expense (193) (168) (534) (482) 25 15 % 52 11 %
Depreciation and amortization expense (90) (89) (270) (273) 1 1 % (3) (1 %)
General and administrative expense (90) (63) (210) (158) 27 43 % 52 33 %
Asset impairments - - (1) (20) - - % (19) (95 %)
Other (expense) income, net (3) (2) 5 4 1 50 % 1 25 %
Gain (loss) on sale of assets, net 1 - 8 (1) 1 * 9 *
Earnings from unconsolidated
affiliates (b) 153 134 464 393 19 14 % 71 18 %
Interest expense (69) (73) (210) (227) (4) (5 %) (17) (7 %)
Income tax expense (1) - (4) - 1 * 4 *
Net income attributable to *
noncontrolling interests (2) (1) (4) (3) 1 1 33 %
Net income attributable to partners
$ 791 $ 76 $ 274 *$ 715 * Other data: Adjusted gross margin (c): Logistics and Marketing$ 33 $ 35 $ 89 $ 78 $ (2) (6 %)$ 11 14 % Gathering and Processing 589 281 1,458 765 308 * 693 91 % Total adjusted gross margin$ 622 $ 316 $ 1,547 $ 843 $ 306 97 %$ 704 84 % Non-cash commodity derivative mark-to-market$ 77 $ (107) $ 2 $ (296) $ 184 *$ 298 * NGL pipelines throughput (MBbls/d) (d) 731 668 711 639 63 9 % 72 11 % Gas pipelines throughput (TBtu/d) (d) 1.07 1.08 1.09 1.04 (0.01) (1 %) 0.05 5 % Natural gas wellhead (MMcf/d) (d) 4,492 4,221 4,328 4,212 271 6 % 116 3 % NGL gross production (MBbls/d) (d) 436 406 422 392 30 7 % 30 8 % * 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. (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". 32 --------------------------------------------------------------------------------
(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.
Three Months Ended
Total Operating Revenues - Total operating revenues increased
•$1,239 million increase for our Gathering and Processing segment, primarily due to higher commodity prices, favorable commodity derivative activity, higher volumes in the Permian, Midcontinent, andDJ Basin , and an increase in transportation, processing and other, partially offset by lower volumes in the South region; and •$1,161 million increase for our Logistics and Marketing segment, primarily due to higher commodity prices, and an increase attributable to higher gas and NGL volumes, partially offset by unfavorable commodity derivative activity.
These increases were partially offset by:
•$908 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.
Total Purchases - Total purchases increased
•$1,163 million increase for our Logistics and Marketing segment for the reasons discussed above; and
•$931 million increase for our Gathering and Processing segment for the reasons discussed above.
These increases were partially offset by:
•$908 million change in inter-segment eliminations, for the reasons discussed above.
Operating and Maintenance Expense - Operating and maintenance expense increased in 2022 compared to 2021 primarily due to higher base costs primarily in the Permian, and higher reliability and pipeline integrity spend.
General and Administrative Expense - General and administrative expense increased in 2022 compared to 2021, primarily due to higher employee costs and benefits.
Earnings from Unconsolidated Affiliates - Earnings from unconsolidated affiliates increased in 2022 compared to 2021 primarily as a result of higher throughput volumes on theSand Hills ,Front Range , and Texas Express pipelines, and higher NGL pipeline tariffs.
Net Income Attributable to Partners - Net income attributable to partners increased in 2022 compared to 2021 for the reasons discussed above.
Adjusted Gross Margin - Gross margin increased
•$308 million increase for our Gathering and Processing segment primarily as a result of commodity derivative activity as discussed above, higher commodity prices, higher volumes across all regions, and higher gathering and processing margins in the Midcontinent and Permian.
This increase was partially offset by:
•$2 million decrease for our Logistics and Marketing segment primarily as a result of commodity derivative activity and unfavorable NGL marketing activity, partially offset by gas marketing and storage margins. NGL Pipelines Throughput - NGL pipelines throughput increased in 2022 compared to 2021 due to increased volumes on theSand Hills ,Front Range ,Southern Hills , and Texas Express pipelines.
Natural Gas Wellhead - Natural gas wellhead increased in 2022 compared to 2021 due to increased volumes across all regions.
NGL Gross Production - NGL gross production increased in 2022 compared to 2021
due to increased volumes in the Permian region and
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Nine Months Ended
Total Operating Revenues - Total operating revenues increased
•$4,098 million increase for our Logistics and Marketing segment, primarily due to higher commodity prices, higher gas and NGL volumes, favorable commodity derivative activity, and an increase in transportation, processing and other; and •$3,684 million increase for our Gathering and Processing segment, primarily due to higher commodity prices, higher volumes in the Permian,DJ Basin , and Midcontinent regions, an increase in transportation, processing and other, and favorable commodity derivative activity, partially offset by lower volumes in the South region.
These increases were partially offset by:
•$3,049 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.
Total Purchases - Total purchases increased
•$4,087 million increase for our Logistics and Marketing segment for the commodity price and volume changes discussed above; and
•$2,991 million increase for our Gathering and Processing segment for the commodity price and volume changes discussed above.
These increases were partially offset by:
•$3,049 million change in inter-segment eliminations, for the reasons discussed above.
Operating and Maintenance Expense - Operating and maintenance expense increased in 2022 compared to 2021 primarily due to higher base costs primarily in the Permian, and higher reliability and pipeline integrity spend.
General and Administrative Expense - General and administrative expense increased in 2022 compared to 2021, primarily due to higher employee costs and benefits.
Asset Impairments - Asset impairments in 2021 relate to long-lived assets in the Midcontinent region of our Gathering and Processing segment and the Logistics and Marketing segment.
Gain on sale of assets - The net gain on sale of assets in 2022 represents the sale of a gathering system in the Permian region.
Earnings from Unconsolidated Affiliates - Earnings from unconsolidated affiliates increased in 2022 compared to 2021 primarily as a result of a contract amendment with a third party customer that modified performance obligations and conditions, resulting in higher non-recurring earnings on theSand Hills pipeline, higher throughput volumes on theSand Hills ,Front Range , and Texas Express pipelines, and higher NGL pipeline tariffs.
Interest Expense - Interest expense decreased in 2022 compared to 2021 primarily as a result of lower average outstanding debt balances.
Net Income Attributable to Partners - Net income attributable to partners increased in 2022 compared to 2021 for all of the reasons discussed above.
Adjusted Gross Margin - Adjusted gross margin increased
•$693 million increase for our Gathering and Processing segment, primarily as a result of higher commodity prices, favorable derivative activity attributable to our corporate equity hedge program, higher margins in the Permian and Midcontinent, higher volumes in the Permian andDJ Basin , and the negative impact of Winter Storm Uri resulting in producer shut-ins in the first quarter of 2021; and •$11 million increase for our Logistics and Marketing segment, primarily as a result of an increase in gas pipeline and storage marketing margins due to more favorable commodity spreads in 2022, the negative impact of Winter Storm Uri in the first 34 --------------------------------------------------------------------------------
quarter of 2021, and an increase in NGL pipeline margins, partially offset by a contract settlement and unfavorable NGL marketing activity.
NGL Pipelines Throughput - NGL pipelines throughput increased in 2022 compared to 2021 due to increased volumes on theSand Hills ,Front Range ,Southern Hills , and Texas Express pipelines.
Natural Gas Wellhead - Natural gas wellhead increased in 2022 compared to 2021
due to increased volumes in the Permian region and
NGL Gross Production - NGL gross production increased in 2022 compared to 2021
due to increased volumes in the Permian region and
Supplemental Information on Unconsolidated Affiliates
The following tables present financial information related to unconsolidated affiliates during the three and nine months endedSeptember 30, 2022 and 2021, respectively:
Earnings from investments in unconsolidated affiliates were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(millions)
DCP Sand Hills Pipeline, LLC $ 80 $ 68 $ 255 $ 202
DCP Southern Hills Pipeline, LLC 21 21 66 67
Gulf Coast Express LLC 18 16 50 46
Front Range Pipeline LLC 12 10 33 28
Texas Express Pipeline LLC 6 5 16 14
Mont Belvieu 1 Fractionator 5 6 12 12
Discovery Producer Services LLC 5 2 14 13
Cheyenne Connector, LLC 4 4 11 8
Mont Belvieu Enterprise Fractionator 1 2 5 1
Other 1 - 2 2
Total earnings from unconsolidated affiliates
134
Distributions received from unconsolidated affiliates were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(millions)
DCP Sand Hills Pipeline, LLC $ 94 $ 79 $ 294 $ 218
DCP Southern Hills Pipeline, LLC 27 30 84 85
Gulf Coast Express LLC 21 19 61 58
Front Range Pipeline LLC 13 10 37 32
Texas Express Pipeline LLC 6 5 18 16
Mont Belvieu 1 Fractionator 5 5 11 11
Discovery Producer Services LLC 8 9 23 26
Cheyenne Connector, LLC 5 5 14 13
Mont Belvieu Enterprise Fractionator (1) - 3 -
Other - 1 2 3
Total distributions from unconsolidated affiliates
163$ 547 $ 462 35
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Results of Operations - Logistics and Marketing Segment
Operating Data
Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
Approximate Approximate Gas
Approximate Throughput Capacity Throughput Capacity Pipeline Throughput Pipeline Throughput Pipeline Throughput Pipeline Throughput
System System Length (Miles) Fractionators (MBbls/d) (a) (TBtus/d) (a) (MBbls/d) (a) (TBtus/d) (a) (MBbls/d) (a) (TBtus/d) (a)
Sand Hills pipeline 1,400 - 333 - 313 - 302 -
Southern Hills pipeline 950 - 128 - 117 - 119 -
Front Range pipeline 450 - 87 - 79 - 77 -
Texas Express pipeline 600 - 37 - 23 - 22 -
Other NGL pipelines (a) 1,100 - 310 - 199 - 191 -
Gulf Coast Express pipeline 500 - - 0.50 - 0.49 - 0.49
Guadalupe pipeline 600 - - 0.25 - 0.28 - 0.29
Cheyenne Connector 70 - - 0.30 - 0.30 - 0.31
Mont Belvieu fractionators - 2 - - - - - -
Pipelines total 5,670 2 895 1.05 731 1.07 711 1.09
(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 September Nine Months Ended September Variance Three Months Variance Nine Months
30, 30, 2022 vs. 2021 2022 vs. 2021
Increase Increase
2022 2021 2022 2021 (Decrease) Percent (Decrease) Percent
(millions, except operating data)
Operating revenues:
Sales of natural gas, NGLs and
$ 1,166 44 %$ 3,862 56 %
condensate
Transportation, processing and other 19 19 56 46 - - % 10 22 % Trading and marketing losses, net (19) (14) (58) (284) (5) (36 %) 226 80 % Total operating revenues 3,829 2,668 10,781 6,683 1,161 44 % 4,098 61 % Purchases and related costs (3,796) (2,633) (10,692) (6,605) 1,163 44 % 4,087 62 % Operating and maintenance expense (12) (11) (29) (29) 1 9 % - - % Depreciation and amortization expense (4) (3) (10) (9) 1 33 % 1 11 % General and administrative expense (1) (1) (4) (4) - - % - - % Asset impairments - - - (13) - - % (13) * Other (expense) income, net (2) - 8 5 (2) * 3 60 % Earnings from unconsolidated affiliates 148 133 450 380 15 11 % 70 18 %
(a)
Segment net income attributable to
$ 9 6 % $ 96 24 %
partners
Other data:
Segment adjusted gross margin (b)
$ (2) (6 %)$ 11 14 % Non-cash commodity derivative$ (34) $ (7) $ (53) $ (47) $ (27) *$ (6) (13 %)
mark-to-market
NGL pipelines throughput (MBbls/d) (c) 731 668 711 639 63 9 % 72 11 %
Gas pipelines throughput (TBtu/d) (c) 1.07 1.08 1.09 1.04 (0.01) (1 %) 0.05 5 %
* 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.
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(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.
Three Months Ended
Total Operating Revenues - Total operating revenues increased
•$949 million increase as a result of higher commodity prices before the impact of derivative activity; and
•$217 million increase attributable to higher gas and NGL volumes.
These increases were partially offset by:
•$5 million decrease as a result of commodity derivative activity attributable to a$27 million decrease in unrealized commodity derivative losses partially offset by an increase in realized cash settlement gains of$22 million due to movements in forward prices of commodities in 2022.
Purchases and Related Costs - Purchases and related costs increased
Earnings from Unconsolidated Affiliates - Earnings from unconsolidated affiliates increased in 2022 compared to 2021 primarily as a result of higher throughput volumes on theSand Hills ,Front Range , and Texas Express pipelines, and higher NGL pipeline tariffs.
Segment Gross Margin - Segment gross margin decreased
•$5 million decrease as a result of commodity derivative activity discussed above; and
•$2 million decrease as a result of unfavorable NGL marketing activity.
These decreases were partially offset by:
•$5 million increase as a result of favorable gas marketing and storage margins.
NGL Pipelines Throughput - NGL pipelines throughput increased in 2022 compared to 2021 due to increased volumes on theSand Hills ,Front Range ,Southern Hills , and Texas Express pipelines.
Nine Months Ended
Total Operating Revenues - Total operating revenues increased
•$3,341 million increase as a result of higher commodity prices before the impact of derivative activity;
•$521 million increase attributable to higher gas and NGL volumes;
•$226 million increase as a result of commodity derivative activity attributable to a decrease in realized cash settlement losses of$232 million , partially offset by a increase in unrealized commodity derivative losses of$6 million due to movements in forward prices of commodities; and
•$10 million increase in transportation, processing and other.
Purchases and Related Costs - Purchases and related costs increased
Asset Impairments - Asset impairments in 2021 relate to an asset inSouth Texas where we determined a triggering event occurred due to a negative outlook for long-term volume forecasts.
Earnings from Unconsolidated Affiliates - Earnings from unconsolidated affiliates increased in 2022 compared to 2021 primarily as a result of a contract amendment with a third party customer that modified performance obligations and conditions, resulting in higher non-
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recurring earnings on the Sand Hills pipeline, higher throughput volumes on the
Sand Hills , Front Range , and Texas Express pipelines, and higher NGL pipeline
tariffs.
Segment Adjusted Gross Margin - Segment adjusted gross margin increased
•$26 million increase as a result of increased gas pipeline and storage marketing margins due to more favorable commodity spreads in 2022;
•$5 million increase as a result of the negative impacts of Winter Storm Uri in the first quarter 2021; and
•$4 million increase as a result of NGL pipeline margins.
These increases were partially offset by:
•$16 million contract settlement; and
•$8 million decrease as a result of unfavorable NGL marketing activity in 2022.
NGL Pipelines Throughput - NGL pipelines throughput increased in 2022 compared to 2021 due to increased volumes on theSand Hills ,Front Range ,Southern Hills , and Texas Express pipelines. 38 --------------------------------------------------------------------------------
Results of Operations - Gathering and Processing Segment
Operating Data
Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
Approximate Approximate
Gathering Net Nameplate Plant Natural Gas NGL Natural Gas NGL
and Transmission Capacity Wellhead Volume Production Wellhead Volume Production
Regions Plants Systems (Miles) (MMcf/d) (a) (MMcf/d) (a) (MBbls/d) (a) (MMcf/d) (a) (MBbls/d) (a)
North 13 3,500 1,580 1,600 158 1,582 155
Midcontinent 6 23,000 1,110 840 68 825 71
Permian 10 15,000 1,220 1,047 134 998 124
South 7 7,000 1,630 1,005 76 923 72
Total 36 48,500 5,540 4,492 436 4,328 422
(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 September Nine Months Ended September Variance Three Months 2022 vs. Variance Nine Months
30, 30, 2021 2022 vs. 2021
Increase Increase
2022 2021 2022 2021 (Decrease) Percent (Decrease) Percent
(millions, except operating data)
Operating revenues:
Sales of natural gas, NGLs and
condensate $ 2,876 $ 1,854 $ 7,857 $ 4,518 $ 1,022 55 % $ 3,339 74 %
Transportation, processing and other 165 126 467 342 39 31 % 125 37 %
Trading and marketing losses, net 19 (159) (191) (411) 178 * 220 54 %
Total operating revenues 3,060 1,821 8,133 4,449 1,239 68 % 3,684 83 %
Purchases and related costs (2,471) (1,540) (6,675) (3,684) 931 60 % 2,991 81 %
Operating and maintenance expense (174) (157) (489) (443) 17 11 % 46 10 %
Depreciation and amortization expense (82) (80) (245) (243) 2 3 % 2 1 %
General and administrative expense (5) (4) (14) (12) 1 25 % 2 17 %
Asset impairments - - (1) (7) - - % (6) (86 %)
Other expense, net (1) (2) (3) (1) (1) (50 %) 2 *
Gain (loss) on sale of assets, net 1 - 8 (1) 1 * 9 *
Earnings from unconsolidated affiliates *
(a) 5 1 14 13 4 1 8 %
Segment net income 333 39 728 71 294 * 657 *
Segment net income attributable to
noncontrolling interests (2) (1) (4) (3) (1) 100 % (1) (33 %)
Segment net income attributable to * *
partners $ 331 $ 38 $ 724 $ 68 $ 293 $ 656
Other data:
Segment adjusted gross margin (b) $ 589 $ 281 $ 1,458 $ 765 $ 308 * $ 693 91 %
Non-cash commodity derivative
mark-to-market $ 111 $ (100) $ 55 $ (249) 211 * $ 304 *
Natural gas wellhead (MMcf/d) (c) 4,492 4,221 4,328 4,212 271 6 % 116 3 %
NGL gross production (MBbls/d) (c) 436 406 422 392 30 7 % 30 8 %
* 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) 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
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Three Months Ended
Total Operating Revenues - Total operating revenues increased
•$848 million increase attributable to higher commodity prices, before the impact of derivative activity;
•$178 million increase as a result of commodity derivative activity attributable to a$211 million increase in unrealized commodity derivative gains partially offset by an increase in realized cash settlement losses of$33 million due to movements in forward prices of commodities in 2022;
•$174 million increase as a result of higher volumes in the Permian,
Midcontinent, and
•$39 million increase in transportation, processing and other.
Purchases and Related Costs - Purchases and related costs increased
Operating and Maintenance Expense - Operating and maintenance expense increased in 2022 compared to 2021 primarily due to higher base costs primarily in the Permian, and higher reliability and pipeline integrity spend.
Segment Gross Margin - Segment gross margin increased
•$178 million increase as a result of commodity derivative activity as discussed above;
•$80 million increase as a result of higher commodity prices; and
•$50 million increase due to higher volumes across all regions, and higher gathering and processing margins in the Midcontinent and Permian.
Natural Gas Wellhead - Natural gas wellhead increased in 2022 compared to 2021 across all regions.
NGL Gross Production - NGL gross production increased in 2022 compared to 2021
due to increased volumes in the Permian region and
Nine Months Ended
Total Operating Revenues - Total operating revenues increased
•$2,883 million increase attributable to higher commodity prices, before the impact of derivative activity;
•$456 million increase as a result of higher volumes in the Permian,
•$125 million increase in transportation, processing and other; and
•$220 million increase as a result of commodity derivative activity attributable to a$304 million increase in unrealized commodity derivative gains partially offset by an increase in realized cash settlement losses of$84 million due to movements in forward prices of commodities in 2022.
Purchases and Related Costs - Purchases and related costs increased
Operating and Maintenance Expense - Operating and maintenance expense increased in 2022 compared to 2021 primarily due to higher base costs primarily in the Permian, and higher reliability and pipeline integrity spend.
Asset Impairments - Asset impairments in 2021 relate to certain long-lived assets in the Midcontinent region.
40
--------------------------------------------------------------------------------Gain on Sale of Assets, net - The net gain on sale of assets in 2022 represents the sale of a gathering system in the Permian region.
Segment Adjusted Gross Margin - Segment adjusted gross margin increased
•$383 million increase as a result of higher commodity prices;
•$151 million increase as a result of favorable commodity derivative activity attributable to our corporate equity hedge program as discussed above;
•$124 million increase due to higher margins in the Permian and Midcontinent
regions and higher volumes in the Permian and
•$35 million increase as a result of the negative impact of Winter Storm Uri in the first quarter 2021 which reflected reduced volumes due to producer shut-ins, commodity derivative activity associated with swaps, and the net impact of producer payments and marketing activity.
Natural Gas Wellhead - Natural gas wellhead increased in 2022 compared to 2021
due to increased volumes in the Permian region and
NGL Gross Production - NGL gross production increased in 2022 compared to 2021
due to increased volumes in the Permian region and
41
--------------------------------------------------------------------------------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 and Securitization Facility;
•proceeds from asset rationalization;
•debt offerings;
•borrowings under term loans, or other credit facilities; and
•issuances of additional common units, preferred units or other securities.
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 or retire our debt or Preferred Units;
•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 cash generated from these sources will be sufficient to meet our short-term working capital requirements, long-term capital expenditures and quarterly cash distributions.
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 - OnJanuary 3, 2022 , we repaid, at par, prior to maturity all$350 million of aggregate principal amount outstanding of our 4.95% Senior Notes dueApril 1, 2022 , using borrowings under our Credit Facility and Securitization Facility. Credit Agreement -OnMarch 18, 2022 , we amended the Credit Agreement. The amendment extended the term of the Credit Agreement fromDecember 9, 2024 toMarch 18, 2027 . The amendment also includes sustainability linked key performance indicators that increase or decrease the applicable margin and facility fee payable thereunder based on our safety performance relative to our peers and year-over-year change in our greenhouse gas emissions intensity rate. The Credit Agreement provides up to$1.4 billion of borrowing capacity and bears interest at either the term SOFR rate or the base rate plus, in each case, an applicable margin based on our credit rating. As ofSeptember 30, 2022 , we had unused borrowing capacity of$1,390 million , net of$10 million letters of credit, under the Credit Agreement, of which at least$1,390 million would have been available to borrow for working capital and other general partnership purposes based on the financial covenants set forth in the Credit Agreement. As ofOctober 28, 2022 , 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. 42 -------------------------------------------------------------------------------- Accounts Receivable Securitization Facility - As ofSeptember 30, 2022 , we had unused borrowing capacity of$350 million under the Securitization Facility, secured by approximately$1,559 million of our accounts receivable at DCP Receivables. 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 number 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 nine months endedSeptember 30, 2022 , 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$67 million and$81 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively; •Balances related to debt of$4.823 billion and$5.174 billion as ofSeptember 30, 2022 andDecember 31, 2021 , respectively; and •Interest expense, net of$67 million and$72 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$205 million and$224 million for the nine months endedSeptember 30, 2022 and 2021, 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 43 -------------------------------------------------------------------------------- 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 regional 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 are taking longer to collect than normal, which continues to impact our working capital atSeptember 30, 2022 . We believe the amounts due to us are owed and are vigorously pursuing legal avenues to collect these receivables. We had working capital deficits of$481 million and$261 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively, driven by current maturities of long term debt of$506 million and$355 million , respectively. We had net derivative working capital deficits of$94 million and$59 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively.
Cash Flow - Operating, investing and financing activities were as follows:
Nine Months Ended September 30,
2022 2021
(millions)
Net cash provided by operating activities $ 1,275 $ 255
Net cash used in investing activities $ (273) $ (73)
Net cash used in financing activities $
(910)
Nine Months Ended
Operating Activities - Net cash provided by operating activities increased$1,020 million in 2022 compared to the same period in 2021. The changes in net cash provided by operating activities are attributable to our net income adjusted for non-cash charges and changes in working capital as presented in the condensed consolidated statements of cash flows. For additional information regarding fluctuations in our earnings and distributions from unconsolidated affiliates, please read "Supplemental Information on Unconsolidated Affiliates" under "Results of Operations". Investing Activities - Net cash used in investing activities increased$200 million in 2022 compared to the same period in 2021, primarily as a result of an increase in capital expenditures and the acquisition of theJames Lake System, partially offset by proceeds from the sale of assets.
Financing Activities - Net cash used in financing activities increased
Contractual Obligations - Material contractual obligations arising in the normal course of business primarily consist of purchase obligations, long-term debt and related interest payments, leases, and other long-term liabilities. See Note 11 to the Condensed Consolidated Financial Statements included in Item 1 "Financial Statements" for amounts outstanding onSeptember 30, 2022 , related to debt.
Purchase Obligations are contractual obligations and include various non-cancelable commitments to purchase physical quantities of commodities in future periods and other items, including gas supply, fractionation and transportation agreements in the ordinary course of business.
Management believes that our cash and investment position and operating cash
flows as well as capacity under existing and available credit agreements will be
sufficient to meet our liquidity and capital requirements for the foreseeable
future. We believe that our current and projected asset position is sufficient
to meet our liquidity requirements.
Capital Requirements - The midstream energy business can be capital intensive,
requiring significant investment to maintain and upgrade existing operations. In
the ordinary course of our business, we purchase physical commodities and enter
into arrangements related to other items, including long-term fractionation and
transportation agreements, in future periods. We establish a margin for these
purchases by entering into physical and financial sale and exchange transactions
to maintain a balanced position between purchases and sales and future delivery
obligations. We expect to fund the obligations with the corresponding sales to
entities that we deem creditworthy or who have provided credit support we
consider adequate. We may enter into purchase order and non-cancelable
construction agreements for capital expenditures. Our capital requirements have
consisted primarily of, and we anticipate will continue to consist of the
following:
44
--------------------------------------------------------------------------------
•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 2022 plan includes sustaining capital
expenditures of between
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. We funded our acquisition of theJames Lake system with cash and borrowings under our Credit Facility. 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$252 million during the nine months endedSeptember 30, 2022 and 2021. OnOctober 13, 2022 , we announced that the board of directors of the General Partner declared a quarterly distribution on our common units of$0.43 per common unit. The distribution will be paid onNovember 14, 2022 to unitholders of record onOctober 28, 2022 . Also onOctober 13, 2022 , 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 onDecember 15, 2022 to unitholders of record onDecember 1, 2022 . Also onOctober 13, 2022 , 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 onDecember 15, 2022 to unitholders of record onDecember 1, 2022 . The Series C distribution will be paid onJanuary 17, 2023 to unitholders of record onJanuary 3, 2023 .
We expect to continue to use cash provided by operating activities for the payment of distributions to our unitholders. See Note 13 . "Partnership Equity and Distributions" in the Notes to the Condensed Consolidated Financial Statements in Item 1. "Financial Statements."
45
--------------------------------------------------------------------------------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
46
--------------------------------------------------------------------------------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 the board of directors of the General Partner, 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. 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. 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.
47
--------------------------------------------------------------------------------
The following table sets forth our reconciliation of certain non-GAAP measures:
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 2022 2021
Reconciliation of Non-GAAP Measures (millions)
Reconciliation of gross margin to adjusted gross margin: Operating revenues$ 4,319 $ 2,827 $ 11,963 $ 7,230 Cost of revenues Purchases and related costs 3,344 2,181 9,332 5,484 Purchases and related costs from affiliates 56 81 255 183 Transportation and related costs from affiliates 297 249 829 720 Depreciation and amortization expense 90 89 270 273 Gross margin 532 227 1,277 570 Depreciation and amortization expense 90 89 270 273 Adjusted gross margin$ 622
Reconciliation of segment gross margin to segment adjusted gross margin: Logistics and Marketing segment: Operating revenues$ 3,829 $ 2,668 $ 10,781 $ 6,683 Cost of revenues Purchases and related costs 3,796 2,633 10,692 6,605 Depreciation and amortization expense 4 3 10 9 Segment gross margin 29 32 79 69 Depreciation and amortization expense 4 3 10 9 Segment adjusted gross margin$ 33
Gathering and Processing segment: Operating revenues$ 3,060 $ 1,821 $ 8,133 $ 4,449 Cost of revenues Purchases and related costs 2,471 1,540 6,675 3,684 Depreciation and amortization expense 82 80 245 243 Segment gross margin 507 201 1,213 522 Depreciation and amortization expense 82 80 245 243 Segment adjusted gross margin$ 589
48
--------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(millions)
Reconciliation of net income attributable to
partners to adjusted segment EBITDA:
Logistics and Marketing segment:
Segment net income attributable to partners (a) $ 162 $ 153 $ 504 $ 408
Non-cash commodity derivative mark-to-market 34 7 53 47
Depreciation and amortization expense, net of
noncontrolling interest 4 3 10 9
Distributions from unconsolidated affiliates, net
of earnings 22 21 74 56
Asset impairments - - - 13
Other expense 2 - - -
Adjusted segment EBITDA $ 224 $ 184 $ 641 $ 533
Gathering and Processing segment:
Segment net income attributable to partners $ 331 $ 38 $ 724 $ 68
Non-cash commodity derivative mark-to-market (111) 100 (55) 249
Depreciation and amortization expense, net of
noncontrolling interest 82 80 244 241
Distributions from unconsolidated affiliates, net
of earnings 3 8 9 13
Asset impairments - - 1 7
Gain on sale of assets (1) - (8) -
Other expense 2 1 4 2
Adjusted segment EBITDA $ 306 $ 227 $ 919 $ 580 (a) We recognized
49
--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in "Critical Accounting 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, 2021 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, 2021 . The accounting policies and estimates used in preparing our interim condensed consolidated financial statements for the three and nine months endedSeptember 30, 2022 are the same as those described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , except as follows below. 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, 2021 . Business combinations - We account for business combinations under ASC 805 which, among other things, requires the allocation of the company's purchase price to the various assets and liabilities of the acquired business at their respective fair values at the date of acquisition. We estimate fair value measurements in accordance with ASC 820. These significant estimates, judgments, inputs, and assumptions include, when applicable, the selection of an appropriate valuation method depending on the nature of the respective asset, such as the income approach, the market or sales comparison approach. Determining the fair values of assets acquired generally involves assumptions regarding the amounts and timing of future revenues and expenditures, as well as discount rates. The assumptions and inputs incorporated within the fair value estimates are subject to considerable management judgement and are based on historical trends, industry, market, and economic conditions prevalent at the time of the acquisition. Although we based these estimates on assumptions believed to be reasonable, these estimates are inherently unpredictable, uncertain and sensitive to change and the actual results could affect the accuracy or validity of our estimates.
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