The following discussion and analysis should be read in conjunction with our
unaudited Consolidated Financial Statements and the Notes to Consolidated
Financial Statements in this Quarterly Report, as well as our Annual Report.
RECENT DEVELOPMENTS
Please refer to the "Financial Results and Operating Information" and "Liquidity
and Capital Resources" sections of Management's Discussion and Analysis of
Financial Condition and Results of Operations in this Quarterly Report for
additional information.
Market Conditions and Business Update - In the second quarter 2022, we benefited
from higher commodity prices, compared to the second quarter 2021. Volumes
remained relatively unchanged in the second quarter 2022, compared with the
second quarter 2021, due primarily to increased producer activity in the Permian
Basin and Rocky Mountain region and increased ethane production in the Rocky
Mountain region, which was offset by the impact of severe weather in the Rocky
Mountain region in 2022. We also benefited from completed capital-growth
projects, highlighting our extensive and integrated assets that are located in
some of the most productive shale basins in the United States. Although the
energy industry has experienced many commodity cycles, we have positioned
ourselves to reduce exposure to direct commodity price volatility. Each of our
three reportable segments are primarily fee-based, and we expect our
consolidated earnings to be approximately 90% fee-based in 2022. While our
Natural Gas Gathering and Processing segment's earnings are primarily fee-based,
we have direct commodity price exposure related primarily to fee with POP
contracts. In addition, our Natural Gas Gathering and Processing and Natural Gas
Liquids segments are exposed to volumetric risk as a result of drilling and
completion activity, normal volumetric well declines which are offset partially
by rising gas-to-oil ratios, severe weather disruptions, operational outages and
crude oil, NGL and natural gas demand. Our Natural Gas Pipelines segment is not
exposed to significant volumetric risk due to nearly all of our capacity being
subscribed under long-term, firm fee-based contracts.
Medford Incident - On July 9, 2022, a fire occurred at our 210 MBbl/d Medford,
Oklahoma, natural gas liquids fractionation facility. All personnel are safe and
accounted for with evacuations of local residents taken as a precautionary
measure. While the facility is not currently operational, we are using our
integrated NGL pipeline system between the Mid-Continent and Gulf Coast, along
with our fractionation and storage assets and fractionation and storage
arrangements with industry peers, to provide midstream services. We are working
to reduce future impacts to our suppliers and customers. We are cooperating with
government agencies, as applicable, and we continue our efforts to determine the
cause of the event and expect the Medford facility to remain out of service for
an extended period. Subject to the terms and conditions of the policies and any
applicable sub-limits, we have property damage and business interruption
insurance coverage with a combined per occurrence limit of $2 billion and
deductibles of $5 million per occurrence for property damage and a 45-day
waiting period per occurrence for business interruption coverage.
We are in the early stages of determining the full extent of property damage and
developing information to support a claim for property damage and business
interruption losses. We expect our insurance coverage to mitigate our financial
loss, which cannot be reasonably estimated at this time. As a result of our
insurance coverage, we do not currently anticipate that the
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Medford incident will have a material effect on our financial condition, results
of operations or cash flows. However, the timing of insurance proceeds may
impact our results in a given quarter or year.
Severe weather - In the second quarter 2022, we experienced two separate severe
weather events in the Rocky Mountain region that brought disruptions to our
operations. Our employees in the region were well prepared and made the
necessary operational adjustments to maintain the safety of our employees, their
families and our assets. Blizzard conditions and region-wide power outages
negatively impacted the gathered and processed volumes in our Natural Gas
Gathering and Processing segment, and NGL volumes delivered to and transported
by our Natural Gas Liquids segment, including volumes from third parties, in
April and May 2022. By the end of May, volumes approached pre-outage levels.
Geopolitical events and supply chain - Recent geopolitical events have disrupted
global supply chains and have caused volatile commodity prices for natural gas,
NGLs and crude oil. The United States has banned the import of Russian oil and
other energy commodities, and European countries have taken steps to reduce
imports of Russian oil and natural gas. In addition, a recent LNG facility
outage has further disrupted the overseas and domestic natural gas markets.
These events have highlighted the importance of a strong national energy supply
and infrastructure supporting the United States economy and national security.
We operate an integrated, reliable, resilient and diversified network of NGL and
natural gas gathering, processing, fractionation, storage and transportation
assets connecting supply in the Rocky Mountain, Mid-Continent, Permian and Gulf
Coast regions with key market centers. We believe our assets are well positioned
to provide midstream services to producers and end-use markets as they respond
to increased domestic and international demand.
Inflation - Inflation in the United States increased significantly in late 2021
and into 2022. This rise in inflation has generally resulted in higher costs in
2022. Although it is expected that this trend will continue, we do not expect a
material impact on our results of operations as we believe the fee escalators or
fuel recovery mechanisms on many of our natural gas liquids and natural gas
gathering and processing contracts offset the increase in costs.
See Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk,
in this Quarterly Report for more information on our exposure to market risk.
Natural Gas - In our Natural Gas Gathering and Processing segment, we benefited
from higher realized commodity prices, net of hedging, in the second quarter
2022, compared with the second quarter 2021. Gathered and processed volumes
remained relatively unchanged in the second quarter 2022, compared with the
second quarter 2021, due primarily to increased producer activity in the Rocky
Mountain region and SCOOP and STACK areas of Oklahoma, offset partially by the
impact of severe weather in the Rocky Mountain region in 2022.
In our Natural Gas Pipelines segment, continued demand from local distribution
companies, electric-generation facilities and large industrial companies
resulted in low-cost expansions that position us well to provide additional
services to our customers. In April 2022, we completed a 1.1 Bcf expansion of
our Texas natural gas storage facilities' capacities, and the expansion is fully
subscribed through 2032. We are currently expanding the injection capabilities
of our Oklahoma natural gas storage facilities resulting in the ability to
utilize and subscribe an additional 4 Bcf of our existing storage capacity, with
expected completion in second quarter 2023. As of June 2022, we have subscribed
approximately 90% of the 4 Bcf of storage capacity through 2029 and continue to
market the remaining capacity.
NGLs - In our Natural Gas Liquids segment, NGL volumes increased in the second
quarter 2022, compared with the second quarter 2021, due primarily to increased
production in the Permian Basin and Rocky Mountain region and increased ethane
production in the Rocky Mountain region, which more than offset the impact of
severe weather in the Rocky Mountain region in 2022.
Ethane Production - Price differentials between ethane and natural gas can cause
natural gas processors to extract ethane or leave it in the natural gas stream,
known as ethane rejection. As a result of these ethane economics, ethane volumes
on our system can fluctuate. Ethane volumes under long-term contracts delivered
to our NGL system increased approximately 45 MBbl/d to an average of 480 MBbl/d
in the second quarter 2022, compared with 435 MBbl/d in the second quarter 2021,
due primarily to changes in ethane extraction economics. We estimate that there
are more than 225 MBbl/d of discretionary ethane, consisting of more than 125
MBbl/d in the Rocky Mountain region and approximately 100 MBbl/d in the
Mid-Continent region, that can be recovered and transported on our system.
Growth Projects - We announced plans in late 2021 to restart construction on our
200 MMcf/d Demicks Lake III natural gas processing plant in the Williston Basin
and our 125 MBbl/d MB-5 fractionator in Mont Belvieu, Texas, which are now
expected to be completed in the first quarter 2023 and second quarter 2023,
respectively. See "Executive Summary" in Part I,
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Item 1, Business and "Recent Developments" in Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, in our
Annual Report for more information on our growth projects.
Sustainability and Social Responsibility - In 2021 and 2022, we qualified for
inclusion in the S&P Global Sustainability Yearbook and received a perfect score
of 100 in the Human Rights Campaign Corporate Equality Index. In 2021, we
received an MSCI Inc. ESG Rating of AA, were named to JUST Capital's list of Top
100 U.S. Companies Supporting Healthy Families and Communities and received an
ESG Risk Rating placing us in the top 10% in the refiners and pipelines industry
assessed by Sustainalytics. We continue to look for ways to reduce our
environmental impact and utilize more efficient technologies. We are evaluating
the development of renewable energy and low-carbon projects, including
opportunities that may complement our extensive midstream assets and expertise.
Debt Repayments - In July 2022, we redeemed the remaining $895.8 million of our
$900 million, 3.375% senior notes due October 2022 at 100% of the principal
amount, plus accrued and unpaid interest, with cash on hand and short-term
borrowings. As of July 31, 2022, we had $860 million of short-term borrowings
outstanding.
Dividends - In February 2022 and May 2022, we maintained and paid a quarterly
common stock dividend of $0.935 per share ($3.74 per share on an annualized
basis), which is consistent with the respective quarters in the prior year. We
declared a quarterly common stock dividend of $0.935 per share ($3.74 per share
on an annualized basis) in July 2022. The quarterly common stock dividend will
be paid August 15, 2022, to shareholders of record at the close of business on
August 1, 2022.
FINANCIAL RESULTS AND OPERATING INFORMATION
How We Evaluate Our Operations
Management uses a variety of financial and operating metrics to analyze our
performance. Our consolidated financial metrics include: (1) operating income;
(2) net income; (3) diluted EPS; and (4) adjusted EBITDA. We evaluate segment
operating results using adjusted EBITDA and our operating metrics, which include
various volume and rate statistics that are relevant for the respective segment.
These operating metrics allow investors to analyze the various components of
segment financial results in terms of volumes and rate/price. Management uses
these metrics to analyze historical segment financial results and as the key
inputs for forecasting and budgeting segment financial results. For additional
information on our operating metrics, see the respective segment subsections of
this "Financial Results and Operating Information" section.
Non-GAAP Financial Measures - Adjusted EBITDA is a non-GAAP measure of our
financial performance. Adjusted EBITDA is defined as net income adjusted for
interest expense, depreciation and amortization, noncash impairment charges,
income taxes, allowance for equity funds used during construction, noncash
compensation expense and certain other noncash items. We believe this non-GAAP
financial measure is useful to investors because it and similar measures are
used by many companies in our industry as a measurement of financial performance
and is commonly employed by financial analysts and others to evaluate our
financial performance and to compare financial performance among companies in
our industry. Adjusted EBITDA should not be considered an alternative to net
income, EPS or any other measure of financial performance presented in
accordance with GAAP. Additionally, this calculation may not be comparable with
similarly titled measures of other companies.
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