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, 2022 .
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.
Realignment Transaction
OnAugust 17, 2022 , in connection with the closing of the Realignment Transaction between Phillips 66 and Enbridge, PGC, an indirect wholly owned subsidiary of Phillips 66, andSpectra DEFS Holding, LLC , an indirect wholly owned subsidiary of Enbridge, as the members ofDCP Midstream, LLC , entered into the Third A&R LLC Agreement, which, among other things, designated PGC as the Class A Managing Member ofDCP Midstream, LLC with the power to conduct, direct and manage all activities ofDCP Midstream, LLC associated with the Partnership and each of its subsidiaries,GP LP and ourGeneral Partner , and, in each case, the businesses, activities and liabilities thereof. The Third A&R LLC Agreement also provided PGC with the power to exerciseDCP Midstream, LLC's rights to appoint or remove any director on the board of directors of ourGeneral Partner and vote the common units representing limited partner interests in the Partnership that are owned directly or indirectly byDCP Midstream, LLC . Following the completion of the Realignment Transaction, we began to integrate certain of our operations with Phillips 66's midstream segment, including the integration of operational services that are currently, or were previously, provided byDCP Services, LLC . As part of these integration efforts, continuing employees transferred employment to a Phillips 66 subsidiary onApril 1, 2023 , and general and administrative services will be provided by Phillips 66 or one or more of its subsidiaries going forward. We expect such integration efforts to continue regardless of the outcome of the pending Merger with Phillips 66 described below.
Pending Merger with Phillips 66
OnJanuary 5, 2023 , we entered into the Merger Agreement with Phillips 66, PDI, Merger Sub,GP LP and ourGeneral Partner , pursuant to which, at the effective time of the Merger, each common unit representing a limited partner interest in the Partnership (other than the common units owned byDCP Midstream, LLC andGP LP ) will be converted into the right to receive$41.75 per common unit in cash, without interest.GP LP has agreed to declare, and cause the Partnership to pay, a cash distribution in respect of the common units in an amount equal to$0.43 per common unit for each completed quarter ending on or afterDecember 31, 2022 and prior to the effective time of the Merger. The Merger Agreement and the transactions contemplated thereby, including the Merger, were unanimously approved on behalf of the Partnership by the special committee and the board of directors of the General Partner, which is the general partner ofGP LP . The special committee, which is comprised of independent members of the board of directors of our general partner, retained independent legal and financial advisors to assist it in evaluating and negotiating the Merger Agreement and the Merger.
The Merger is expected to close in the second quarter of 2023, subject to customary closing conditions. There can be no assurance that the Merger will be consummated on the terms described above or at all.
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--------------------------------------------------------------------------------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 portion of commodity price risk on an overall Partnership basis through our fee-based assets. 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 2023 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. Our financial position has improved as a result of strong 2022 results and in the first half of 2023, following a decrease in commodity prices and related increase in the fair value of our equity derivative assets, substantially all of our outstanding equity derivative contracts were settled prior to the expiration of the contractual maturities. Consequently, our equity exposure for 2023 and beyond is currently not hedged and is directly exposed to continued volatility in commodity prices, whether favorable or unfavorable. We expect future commodity prices will be influenced by global economic conditions and geopolitical disruptions, 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. We expect to be a proactive participant in the transition to a lower carbon energy future through increased efficiency and modernization of existing operations, which we expect will reduce the greenhouse gas emissions from our base business. Going forward, our assets will be managed in a manner consistent with the emissions goals of Phillips 66. 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 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.
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 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 2023, 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 and our
fee-based business which represents a significant portion of our estimated
margins. We will continue to pursue incremental revenue, cost efficiencies and
operating improvements of our assets through process and technology
improvements.
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We incur capital expenditures for our consolidated entities and our
unconsolidated affiliates. Our 2023 plan includes sustaining capital
expenditures of approximately
Recent Events
Integration with Phillips 66
As part of the integration efforts with Phillips 66, continuing employees
transferred employment to a Phillips 66 subsidiary on
Junior Notes Redemption
OnApril 19, 2023 , we announced our intent to redeem, at par, prior to maturity all$550 million of aggregate principal amount outstanding of our 5.850% Junior Notes dueMay 2043 on or aboutMay 21, 2023 . We expect to use borrowings under our Revolving Credit Facility and AR Securitization Facility.
Common and Preferred Distributions
On
Also onApril 19, 2023 , 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$0.4969 per unit, respectively. The Series B distribution will be paid onJune 15, 2023 to unitholders of record onJune 1, 2023 . The Series C distribution will be paid onJuly 17, 2023 to unitholders of record onJuly 3, 2023 . 26
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Results of Operations
Consolidated Overview
The following table and discussion provides a summary of our consolidated results of operations for the three months endedMarch 31, 2023 and 2022. The results of operations by segment are discussed in further detail following this consolidated overview discussion. Three Months Variance Ended March 31, 2023 vs. 2022 Increase 2023 2022 (Decrease) Percent (millions, except operating data) Operating revenues (a): Logistics and Marketing$ 2,392 $ 3,163 $ (771) (24 %) Gathering and Processing 1,766 2,106 (340) (16 %) Inter-segment eliminations (1,432) (1,894) (462) (24 %) Total operating revenues 2,726 3,375 (649) (19 %) Purchases and related costs Logistics and Marketing (2,338) (3,147) (809) (26 %) Gathering and Processing (1,322) (1,822) (500) (27 %) Inter-segment eliminations 1,432 1,894 (462) (24 %) Total purchases (2,228) (3,075) (847) (28 %) Operating and maintenance expense (197) (152) 45 30 % Depreciation and amortization expense (90) (90) - - % General and administrative expense (80) (55) 25 45 % Gain on sale of assets, net - 7 (7) * Restructuring costs (10) - 10 * Earnings from unconsolidated affiliates (b) 160 143 17 12 % Interest expense (68) (71) (3) (4 %) Income tax expense (1) (1) - - % Net income attributable to noncontrolling interests (1) (1) - - % Net income attributable to partners$ 211 $ 80 $ 131 * Other data: Adjusted gross margin (c): Logistics and Marketing$ 54 $ 16 $ 38 * Gathering and Processing 444 284 160 56 % Total adjusted gross margin$ 498 $ 300 $ 198 66 % Non-cash commodity derivative mark-to-market$ 40 $ (176) $ 216 * NGL pipelines throughput (MBbls/d) (d) 723 682 41 6 % Gas pipelines throughput (TBtu/d) (d) 1.08 1.04 0.04 4 % Natural gas wellhead (MMcf/d) (d) 4,473 4,110 363 9 % NGL gross production (MBbls/d) (d) 419 402 17 4 % * 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". (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. 27 --------------------------------------------------------------------------------
Three Months Ended
Total Operating Revenues - Total operating revenues decreased
•$771 million decrease for our Logistics and Marketing segment, primarily due to lower commodity prices, partially offset by higher gas and NGL volumes, and favorable commodity derivative activity; and
•$340 million decrease for our Gathering and Processing segment, primarily due to lower commodity prices, partially offset by favorable commodity derivative activity, higher volumes across all regions, and an increase in transportation, processing and other.
These decreases were partially offset by:
•$462 million change in inter-segment eliminations, which relate to sales of gas and NGL volumes from our Gathering and Processing segment to our Logistics and Marketing segment, primarily due to lower commodity prices.
Total Purchases - Total purchases decreased
•$809 million decrease for our Logistics and Marketing segment for the commodity price and volume changes discussed above; and
•$500 million decrease for our Gathering and Processing segment for the commodity price and volume changes discussed above.
These decreases was partially offset by:
•$462 million change in inter-segment eliminations, for the reasons discussed above.
Operating and Maintenance Expense - Operating and maintenance expense increased in 2023 compared to 2022 largely due to higher base costs primarily in the Permian region and higher reliability and pipeline integrity spend.
General and Administrative Expense - General and administrative expense increased in 2023 compared to 2022, primarily due to higher employee costs and benefits, and integration costs.
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.
Restructuring Costs - Restructuring costs increased in 2023 compared to 2022 primarily as a result of severance for termination benefits and other costs as a result of our ongoing integration with Phillips 66 following the Realignment Transaction.
Earnings from Unconsolidated Affiliates - Earnings from unconsolidated
affiliates increased in 2023 compared to 2022 primarily as a result of higher
throughput volumes on the
Net Income Attributable to Partners - Net income attributable to partners increased in 2023 compared to 2022 for all of the reasons discussed above.
Adjusted Gross Margin - Adjusted gross margin increased
•$160 million increase for our Gathering and Processing segment, primarily as a result of favorable derivative activity attributable to our corporate equity hedge program, higher volumes in the Permian, South andDJ Basin , and improved performance in the Permian region, partially offset by lower lower margins in the South,DJ Basin and Midcontinent regions, and lower commodity prices; and •$38 million increase for our Logistics and Marketing segment, primarily as a result of favorable commodity derivative activity on gas pipelines and improved gas storage margins, partially offset by a decrease as a result of unfavorable NGL marketing activity contract settlement.
NGL Pipelines Throughput - NGL pipelines throughput increased in 2023 compared
to 2022 due to increased volumes on the
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Natural Gas Wellhead - Natural gas wellhead increased in 2023 compared to 2022
due to increased volumes in the South, Permian, and
NGL Gross Production - NGL gross production increased in 2023 compared to 2022
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 months ended
Earnings from investments in unconsolidated affiliates were as follows:
Three Months Ended March 31,
2023 2022
(millions)
DCP Sand Hills Pipeline, LLC $ 87 $ 71
DCP Southern Hills Pipeline, LLC 25 24
Gulf Coast Express LLC 17 16
Front Range Pipeline LLC 11 10
Texas Express Pipeline LLC 5 5
Mont Belvieu 1 Fractionator 4 4
Discovery Producer Services LLC 6 6
Cheyenne Connector, LLC 3 4
Mont Belvieu Enterprise Fractionator 1 2
Other 1 1
Total earnings from unconsolidated affiliates Distributions received from unconsolidated affiliates were as follows:
Three Months Ended
March 31,
2023 2022
(millions)
DCP Sand Hills Pipeline, LLC $ 82 $ 83
DCP Southern Hills Pipeline, LLC 28 28
Gulf Coast Express LLC 21 20
Front Range Pipeline LLC 13 12
Texas Express Pipeline LLC 6 6
Mont Belvieu 1 Fractionator 3 4
Discovery Producer Services LLC 11 8
Cheyenne Connector, LLC 4 5
Mont Belvieu Enterprise Fractionator (1) 1
Other 1 1
Total distributions from unconsolidated affiliates $ 168 $ 168
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Results of Operations - Logistics and Marketing Segment
Operating Data
Three Months Ended March 31, 2023
Approximate Approximate Gas
Approximate Throughput Capacity Throughput Capacity Pipeline Throughput Pipeline Throughput
System System Length (Miles) Fractionators (MBbls/d) (a) (TBtus/d) (a) (MBbls/d) (a) (TBtus/d) (a)
Sand Hills pipeline 1,400 - 333 - 312 -
Southern Hills pipeline 950 - 128 - 115 -
Front Range pipeline 450 - 87 - 76 -
Texas Express pipeline 600 - 37 - 23 -
Other NGL pipelines (a) 1,050 - 310 - 197 -
Gulf Coast Express pipeline 500 - - 0.50 - 0.50
Guadalupe pipeline 600 - - 0.25 - 0.27
Cheyenne Connector 70 - - 0.30 - 0.31
Mont Belvieu fractionators - 2 - - - -
Pipelines total 5,620 2 895 1.05 723 1.08
(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, 2023 vs. 2022
Increase
2023 2022 (Decrease) Percent
(millions, except operating data)
Operating revenues:
Sales of natural gas, NGLs and condensate $ 2,330 $ 3,185 $ (855) (27 %)
Transportation, processing and other 19 19 - - %
Trading and marketing gains (losses), net 43 (41) 84 *
Total operating revenues 2,392 3,163 (771) (24 %)
Purchases and related costs (2,338) (3,147) (809) (26 %)
Operating and maintenance expense (9) (8) 1 13 %
Depreciation and amortization expense (2) (3) (1) (33 %)
General and administrative expense (2) (1) 1 *
Earnings from unconsolidated affiliates (a) 154 137 17 12 %
Segment net income attributable to partners $ 195 $ 141 $ 54 38 %
Other data:
Segment adjusted gross margin (b) $ 54 $ 16 $ 38 *
Non-cash commodity derivative mark-to-market $ (5) $ (45) $ 40 89 %
NGL pipelines throughput (MBbls/d) (c) 723 682 41 6 %
Gas pipelines throughput (TBtu/d) (c) 1.08 1.04 0.04 4 %
* 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.
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Three Months Ended
Total Operating Revenues - Total operating revenues decreased
•$1,040 million decrease as a result of lower commodity prices before the impact of derivative activity.
This decrease was partially offset by:
•$185 million increase attributable to higher gas and NGL volumes; and
•$84 million increase as a result of commodity derivative activity attributable to a decrease in realized cash settlement losses of$124 million , partially offset by an increase in unrealized commodity derivative losses of$40 million due to movements in forward prices of commodities.
Purchases and Related Costs - Purchases and related costs decreased
Earnings from Unconsolidated Affiliates - Earnings from unconsolidated
affiliates increased in 2023 compared to 2022 primarily as a result of a higher
throughput volumes on the
Segment Adjusted Gross Margin - Segment adjusted gross margin increased
•$37 million increase as a result of commodity derivative activity on gas pipelines; and
•$14 million increase as a result of improved gas storage margins.
These increases were partially offset by:
•$13 million decrease as a result of unfavorable NGL marketing activity contract settlement.
NGL Pipelines Throughput - NGL pipelines throughput increased in 2023 compared
to 2022 due to increased volumes on the
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--------------------------------------------------------------------------------Results of Operations - Gathering and Processing Segment
Operating Data
Three Months Ended March 31, 2023
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 1,575 157
Midcontinent 6 23,000 1,110 803 62
Permian 10 15,000 1,220 1,091 134
South 7 6,500 1,630 1,004 66
Total 36 48,000 5,540 4,473 419
(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 Variance
Ended March 31, 2023 vs. 2022
Increase
2023 2022 (Decrease) Percent
(millions, except operating data)
Operating revenues:
Sales of natural gas, NGLs and condensate $ 1,578 $ 2,164 $ (586) (27 %)
Transportation, processing and other 144 136 8 6 %
Trading and marketing gains (losses), net 44 (194) 238 *
Total operating revenues 1,766 2,106 (340) (16 %)
Purchases and related costs (1,322) (1,822) (500) (27 %)
Operating and maintenance expense (182) (140) 42 30 %
Depreciation and amortization expense (84) (81) 3 4 %
General and administrative expense (4) (4) - - %
Gain on sale of assets, net - 7 (7) *
Earnings from unconsolidated affiliates (a) 6 6 - - %
Segment net income 180 72 108 *
Segment net income attributable to noncontrolling interests (1) (1) - - %
Segment net income attributable to partners $ 179 $ 71 $ 108 *
Other data:
Segment adjusted gross margin (b) $ 444 $ 284 $ 160 56 %
Non-cash commodity derivative mark-to-market $ 45 $ (131) $ 176 *
Natural gas wellhead (MMcf/d) (c) 4,473 4,110 363 9 %
NGL gross production (MBbls/d) (c) 419 402 17 4 %
* 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 decreased
•$739 million decrease attributable to lower commodity prices, before the impact of derivative activity.
This decrease was partially offset by:
•$238 million increase as a result of commodity derivative activity attributable to a$176 million increase in unrealized commodity derivative gains and an increase in realized cash settlement gains of$62 million due to movements in forward prices of commodities in 2023;
•$153 million increase as a result of higher volumes in all regions; and
•$8 million increase in transportation, processing and other.
Purchases and Related Costs - Purchases and related costs decreased
Operating and Maintenance Expense - Operating and maintenance expense increased in 2023 compared to 2022 largely due to higher base costs primarily in the Permian region and higher reliability and pipeline integrity spend.
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
•$238 million increase as a result of favorable commodity derivative activity attributable to our corporate equity hedge program as discussed above; and
•$4 million increase due to higher volumes in the Permian, South and
These increases were partially offset by:
•$82 million decrease as a result of lower commodity prices.
Natural Gas Wellhead - Natural gas wellhead increased in 2023 compared to 2022
due to increased volumes in the South region, Permian region, and
NGL Gross Production - NGL gross production increased in 2023 compared to 2022
due to increased volumes in the Permian region and
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--------------------------------------------------------------------------------Liquidity and Capital Resources
We expect our sources of liquidity to include:
•cash generated from operations;
•cash distributions from our unconsolidated affiliates;
•borrowings under our Credit Agreement and Securitization Facility;
•proceeds from asset rationalization;
•debt offerings; and
•borrowings under term loans, or other credit facilities.
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; and
•contributions to our unconsolidated affiliates to finance our share of their capital expenditures.
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 debt and equity instruments as vehicles for the long-term financing of our investment activities or acquisitions. Based on current and anticipated levels of operations, we believe we have adequate committed financial resources to conduct our ongoing business, although deterioration in our operating environment could limit our borrowing capacity, impact our credit ratings, raise our financing costs, as well as impact our compliance with the financial covenants contained in the Credit Agreement and other debt instruments.
Senior Notes -On
Credit Agreement - We are party to a Credit Agreement that provides up to
As ofMarch 31, 2023 , we had unused borrowing capacity of$1,173 million , net of$225 million of outstanding borrowings and$2 million letters of credit, under the Credit Agreement, of which at least$1,173 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 ofApril 28, 2023 , we had unused borrowing capacity of$1,173 million , net of$225 million of outstanding borrowings and$2 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 of
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 three months endedMarch 31, 2023 , we did not issue any common units pursuant to this registration statement, and$750 million remained available for future sales. 34 -------------------------------------------------------------------------------- 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$80 million as ofMarch 31, 2023 andDecember 31, 2022 , respectively; •Balances related to debt of$4.549 billion and$4.823 billion as ofMarch 31, 2023 andDecember 31, 2022 , respectively; and •Interest expense, net of$66 million and$69 million for the three months endedMarch 31, 2023 and 2022, 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 therein. When we enter into commodity swap contracts, we may be required to provide collateral to the counterparties in the event that our potential payment exposure exceeds a predetermined collateral threshold. Collateral thresholds are set by us and each counterparty, as applicable, in the master contract that governs our financial transactions based on our and the counterparty's assessment of creditworthiness. The assessment of our position with respect to the collateral thresholds are determined on a counterparty by counterparty basis, and are impacted by the representative forward price curves and notional quantities under our swap contracts. Due to the interrelation between the representative crude oil and natural gas forward price curves, it is not practical to determine a pricing point at which our swap contracts will meet the collateral thresholds as we may transact multiple commodities with the same counterparty. Depending on daily commodity prices, the amount of collateral posted can go up or down on a daily basis. Working Capital - Working capital is the amount by which current assets exceed current liabilities. Current assets are reduced in part by our quarterly distributions, which are required under the terms of our Partnership Agreement based on Available Cash, as defined in the Partnership Agreement. In general, our working capital is impacted by changes in the prices of commodities that we buy and sell, inventory levels, and other business factors that affect our net income and cash flows. Our working capital is also impacted by the timing of operating cash receipts and disbursements, cash collateral we may be required to post with counterparties to our commodity derivative instruments, borrowings of and payments on debt and the Securitization Facility, capital expenditures, and increases or decreases in other long-term assets. We expect that our future working capital requirements will be impacted by these same recurring factors. We had working capital deficits of$119 million and$802 million as ofMarch 31, 2023 andDecember 31, 2022 , respectively, driven by current maturities of long term debt of$7 million and$506 million , respectively. We had net derivative working capital surplus of$19 million and deficit of$8 million as ofMarch 31, 2023 andDecember 31, 2022 , respectively. 35 --------------------------------------------------------------------------------
Cash Flow - Operating, investing and financing activities were as follows:
Three Months Ended March 31,
2023 2022
(millions)
Net cash provided by operating activities $ 135 Net cash used in investing activities $ (72)
Net cash used in financing activities $ (64)
Three Months Ended
Operating Activities - Net cash provided by operating activities decreased$54 million in 2023 compared to the same period in 2022. 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$64 million in 2023 compared to the same period in 2022, primarily as a result of an increase in capital expenditures, partially offset by a return of capital from an investment.
Financing Activities - Net cash used in financing activities decreased
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, asset retirement obligations, and other long-term liabilities. See Note 8 to the Condensed Consolidated Financial Statements included in Item 1 "Financial Statements" for amounts outstanding onMarch 31, 2023 , related to debt. Lease and asset retirement obligations are not materially different from what was disclosed in Notes 14 and 15 , respectively, to the Consolidated Financial Statements included in Item 8 "Financial Statements" in Part II of form 10-K for the year endedDecember 31, 2022 .
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 that 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:
•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).
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We incur capital expenditures for our consolidated entities and our
unconsolidated affiliates. Our 2023 plan includes sustaining capital
expenditures of
We expect to fund future capital expenditures with funds generated from our operations, borrowings under our Credit Agreement, Securitization Facility and the issuance of additional debt and equity securities. Future material investments 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. 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$90 million and$81 million during the three months endedMarch 31, 2023 and 2022, respectively.
On
Also onApril 19, 2023 , 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 distribution will be paid onJune 15, 2023 to unitholders of record onJune 1, 2023 . The Series C distribution will be paid onJuly 17, 2023 to unitholders of record onJuly 3, 2023 . We expect to continue to use cash provided by operating activities for the payment of distributions to our unitholders. See Note 1 0 . "Partnership Equity and Distributions" in the Notes to the Condensed Consolidated Financial Statements in Item 1. "Financial Statements". 37 --------------------------------------------------------------------------------
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
38
--------------------------------------------------------------------------------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.
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The following table sets forth our reconciliation of certain non-GAAP measures:
Three Months Ended
March 31,
2023 2022
Reconciliation of Non-GAAP Measures (millions)
Reconciliation of gross margin to adjusted gross margin:
Operating revenues$ 2,726 $ 3,375 Cost of revenues Purchases and related costs 1,852 2,719 Purchases and related costs from affiliates 97 99 Transportation and related costs from affiliates 279 257 Depreciation and amortization expense 90 90 Gross margin 408 210 Depreciation and amortization expense 90 90 Adjusted gross margin
Reconciliation of segment gross margin to segment adjusted gross margin:
Logistics and Marketing segment: Operating revenues$ 2,392 $ 3,163 Cost of revenues Purchases and related costs 2,338 3,147 Depreciation and amortization expense 2 3 Segment gross margin 52 13 Depreciation and amortization expense 2 3 Segment adjusted gross margin
Gathering and Processing segment: Operating revenues$ 1,766 $ 2,106 Cost of revenues Purchases and related costs 1,322 1,822 Depreciation and amortization expense 84 81 Segment gross margin 360 203 Depreciation and amortization expense 84 81 Segment adjusted gross margin
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Three Months Ended
March 31,
2023 2022
(millions)Reconciliation of net income attributable to partners to adjusted segment EBITDA:
Logistics and Marketing segment: Segment net income attributable to partners (a)$ 195 $ 141 Non-cash commodity derivative mark-to-market 5 45
Depreciation and amortization expense, net of noncontrolling interest
2 3
Distributions from unconsolidated affiliates, net of earnings 3 23
Adjusted segment EBITDA $ 205 $ 212
Gathering and Processing segment:
Segment net income attributable to partners $ 179 $ 71
Non-cash commodity derivative mark-to-market (45) 131
Depreciation and amortization expense, net of noncontrolling interest
84 81
Distributions from unconsolidated affiliates, net of earnings 5 2
Gain on sale of assets, net - (7)
Adjusted segment EBITDA $ 223 $ 278
(a) We recognized $22 million of lower of cost or net realizable value
adjustment for the three months ended March 31, 2023 . We recognized no lower of
cost or net realizable value adjustment for the three months ended March 31,
2022 .
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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 ended December 31, 2022 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, 2022 . The accounting policies and estimates used in preparing our interim condensed consolidated financial statements for the three months endedMarch 31, 2023 are the same as those described in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . 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, 2022 .
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