Results of Operations — Logistics and Marketing Segment
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| Operating Data |
| | | | | | | | | | | | | | | | Three Months Ended June 30, 2022 | | Six Months Ended June 30, 2022 |
| System | | | | Approximate
System Length (Miles) | | Fractionators | | Approximate
Throughput Capacity
(MBbls/d) (a) | | Approximate Gas Throughput Capacity
(TBtus/d) (a) | | | | | | | | Pipeline Throughput
(MBbls/d) (a) | | Pipeline Throughput
(TBtus/d) (a) | | | | Pipeline Throughput
(MBbls/d) (a) | | Pipeline Throughput
(TBtus/d) (a) | | |
| Sand Hills pipeline | | | | 1,400 | | | — | | | 333 | | | — | | | | | | | | | 304 | | | — | | | | | 296 | | | — | | | |
| Southern Hills pipeline | | | | 950 | | | — | | | 128 | | | — | | | | | | | | | 122 | | | — | | | | | 120 | | | — | | | |
| Front Range pipeline | | | | 450 | | | — | | | 87 | | | — | | | | | | | | | 78 | | | — | | | | | 75 | | | — | | | |
| Texas Express pipeline | | | | 600 | | | — | | | 37 | | | — | | | | | | | | | 23 | | | — | | | | | 22 | | | — | | | |
| Other NGL pipelines (a) | | | | 1,100 | | | — | | | 310 | | | — | | | | | | | | | 193 | | | — | | | | | 188 | | | — | | | |
| Gulf Coast Express pipeline | | | | 500 | | | — | | | — | | | 0.50 | | | | | | | | | — | | | 0.49 | | | | | — | | | 0.49 | | | |
| Guadalupe pipeline | | | | 600 | | | — | | | — | | | 0.25 | | | | | | | | | — | | | 0.29 | | | | | — | | | 0.29 | | | |
| Cheyenne Connector | | | | 70 | | | — | | | — | | | 0.30 | | | | | | | | | — | | | 0.30 | | | | | — | | | 0.31 | | | |
| Mont Belvieu fractionators | | | | — | | | 2 | | | — | | | — | | | | | | | | | — | | | — | | | | | — | | | — | | | |
| Pipelines total | | | | 5,670 | | | 2 | | | 895 | | | 1.05 | | | | | | | | | 720 | | | 1.08 | | | | | 701 | | | 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 June 30, | | Six Months Ended June 30, | | Variance Three Months 2022 vs. 2021 | | Variance Six Months
2022 vs. 2021 | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | Increase
(Decrease) | | Percent | | Increase
(Decrease) | | Percent | | | | |
| | (millions, except operating data) |
| Operating revenues: | | | | | | | | | | | | | | | | | | | | | |
| Sales of natural gas, NGLs and condensate | $ | 3,769 | | | $ | 1,933 | | | $ | 6,954 | | | $ | 4,258 | | | | | $ | 1,836 | | | 95 | % | | $ | 2,696 | | | 63 | % | | | | |
| Transportation, processing and other | 18 | | | 13 | | | 37 | | | 27 | | | | | 5 | | | 38 | % | | 10 | | | 37 | % | | | | |
| Trading and marketing gains (losses), net | 2 | | | (29) | | | (39) | | | (270) | | | | | 31 | | | * | | 231 | | | 86 | % | | | | |
| Total operating revenues | 3,789 | | | 1,917 | | | 6,952 | | | 4,015 | | | | | 1,872 | | | 98 | % | | 2,937 | | | 73 | % | | | | |
| Purchases and related costs | (3,749) | | | (1,910) | | | (6,896) | | | (3,972) | | | | | 1,839 | | | 96 | % | | 2,924 | | | 74 | % | | | | |
| Operating and maintenance expense | (9) | | | (12) | | | (17) | | | (18) | | | | | (3) | | | (25 | %) | | (1) | | | (6 | %) | | | | |
| Depreciation and amortization expense | (3) | | | (3) | | | (6) | | | (6) | | | | | — | | | — | % | | — | | | — | % | | | | |
| General and administrative expense | (2) | | | (2) | | | (3) | | | (3) | | | | | — | | | — | % | | — | | | — | % | | | | |
| Asset impairments | — | | | (13) | | | — | | | (13) | | | | | (13) | | | * | | (13) | | | * | | | | |
| Other income, net | 10 | | | 5 | | | 10 | | | 5 | | | | | 5 | | | * | | 5 | | | * | | | | |
| Earnings from unconsolidated affiliates (a) | 165 | | | 127 | | | 302 | | | 247 | | | | | 38 | | | 30 | % | | 55 | | | 22 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Segment net income attributable to partners | $ | 201 | | | $ | 109 | | | $ | 342 | | | $ | 255 | | | | | $ | 92 | | | 84 | % | | $ | 87 | | | 34 | % | | | | |
| Other data: | | | | | | | | | | | | | | | | | | | | | |
| Segment adjusted gross margin (b) | $ | 40 | | | $ | 7 | | | $ | 56 | | | $ | 43 | | | | | $ | 33 | | | * | | $ | 13 | | | 30 | % | | | | |
| Non-cash commodity derivative mark-to-market | $ | 26 | | | $ | (35) | | | $ | (19) | | | $ | (40) | | | | | $ | 61 | | | * | | $ | 21 | | | 53 | % | | | | |
| NGL pipelines throughput (MBbls/d) (c) | 720 | | | 671 | | | 701 | | | 625 | | | | | 49 | | | 7 | % | | 76 | | | 12 | % | | | | |
| Gas pipelines throughput (TBtu/d) (c) | 1.1 | | | 1.0 | | | 1.1 | | | 1.0 | | | | | 0.1 | | | 10 | % | | 0.1 | | | 10 | % | | | | |
* 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.
Three Months Ended June 30, 2022 vs. Three Months Ended June 30, 2021
Total Operating Revenues — Total operating revenues increased $1,872 million in 2022 compared to 2021, primarily as a result of the following:
•$1,848 million increase as a result of higher commodity prices before the impact of derivative activity; and
•$31 million increase as a result of commodity derivative activity attributable to a $61 million increase in unrealized commodity derivative gains partially offset by an increase in realized cash settlement losses of $30 million due to movements in forward prices of commodities in 2022; and.
•$5 million increase in transportation, processing and other.
These increases were partially offset by:
•$12 million decrease attributable to lower gas volumes partially offset by higher NGL volumes.
Purchases and Related Costs — Purchases and related costs increased $1,839 million in 2022 compared to 2021, for the reasons discussed above.
Asset Impairments — Asset impairments in 2021 relate to an asset in South Texas where we determined a triggering event occurred due to a negative outlook for long-term volume forecasts.
Other Income — Other income in 2022 and 2021 was primarily a result of contractual settlements.
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 the Sand Hills pipeline, and higher throughput volumes on the Sand Hills pipeline.
Segment Gross Margin — Segment gross margin increased $33 million in 2022 compared to 2021, primarily as a result of the following:
•$31 million increase as a result of commodity derivative activity discussed above; and
•$23 million increase as a result of gas marketing and storage margins.
These increases were partially offset by:
•$16 million contract settlement; and
•$5 million decrease as a result of unfavorable NGL marketing activity.
NGL Pipelines Throughput — NGL pipelines throughput increased in 2022 compared to 2021 due to increased volumes on the Front Range, Sand Hills, and Southern Hills pipelines.
Six Months Ended June 30, 2022 vs. Six Months Ended June 30, 2021
Total Operating Revenues — Total operating revenues increased $2,937 million in 2022 compared to 2021, primarily as a result of the following:
•$2,392 million increase as a result of higher commodity prices before the impact of derivative activity; and
•$304 million increase attributable to higher gas and NGL volumes; and
•$231 million increase as a result of commodity derivative activity attributable to a decrease in realized cash settlement losses of $210 million and a decrease in unrealized commodity derivative losses of $21 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 $2,924 million in 2022 compared to 2021, for the reasons discussed above.
Asset Impairments — Asset impairments in 2021 relate to an asset in South Texas where we determined a triggering event occurred due to a negative outlook for long-term volume forecasts.
Other Income — Other income in 2022 and 2021 was primarily a result of contractual settlements.
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 the Sand Hills pipeline, and higher throughput volumes on the Sand Hills pipeline.
Segment Adjusted Gross Margin — Segment adjusted gross margin increased $13 million in 2022 compared to 2021, primarily as a result of the following:
•$27 million increase as a result of increased gas pipeline and storage marketing margins due to more favorable commodity spreads in 2022; and
•$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
•$7 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 the Sand Hills, Front Range, and Southern Hills pipelines.
Results of Operations — Gathering and Processing Segment
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| Operating Data |
| | Three Months Ended June 30, 2022 | | Six Months Ended June 30, 2022 |
| Regions | | Plants | | Approximate
Gathering
and Transmission
Systems (Miles) | | Approximate
Net Nameplate Plant
Capacity
(MMcf/d) (a) | | Natural Gas
Wellhead Volume
(MMcf/d) (a) | | NGL
Production
(MBbls/d) (a) | | Natural Gas
Wellhead Volume
(MMcf/d) (a) | | NGL
Production
(MBbls/d) (a) |
| North | | 13 | | | 3,500 | | | 1,580 | | | 1,578 | | | 157 | | | 1,572 | | | 153 | |
| Midcontinent | | 6 | | | 23,500 | | | 1,110 | | | 838 | | 75 | | 818 | | | 72 | |
| Permian | | 9 | | | 15,000 | | | 1,100 | | | 982 | | 122 | | 974 | | | 119 | |
| South | | 7 | | | 7,000 | | | 1,630 | | | 985 | | 73 | | 882 | | | 70 | |
| Total | | 35 | | | 49,000 | | | 5,420 | | | 4,383 | | | 427 | | | 4,246 | | | 414 | |
(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 June 30, | | Six Months Ended June 30, | | Variance Three Months 2022 vs. 2021 | | Variance Six Months
2022 vs. 2021 | | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | | Increase
(Decrease) | | Percent | | Increase
(Decrease) | | Percent | | | | |
| | (millions, except operating data) |
| Operating revenues: | | | | | | | | | | | | | | | | | | | | | | |
| Sales of natural gas, NGLs and condensate | | $ | 2,817 | | | $ | 1,326 | | | $ | 4,981 | | | $ | 2,664 | | | | | $ | 1,491 | | | * | | $ | 2,317 | | | 87 | % | | | | |
| Transportation, processing and other | | 166 | | | 112 | | | 302 | | | 216 | | | | | 54 | | | 48 | % | | 86 | | | 40 | % | | | | |
| Trading and marketing losses, net | | (16) | | | (124) | | | (210) | | | (252) | | | | | 108 | | | 87 | % | | 42 | | | 17 | % | | | | |
| Total operating revenues | | 2,967 | | | 1,314 | | | 5,073 | | | 2,628 | | | | | 1,653 | | | * | | 2,445 | | | 93 | % | | | | |
| Purchases and related costs | | (2,382) | | | (1,075) | | | (4,204) | | | (2,144) | | | | | 1,307 | | | * | | 2,060 | | | 96 | % | | | | |
| Operating and maintenance expense | | (175) | | | (146) | | | (315) | | | (286) | | | | | 29 | | | 20 | % | | 29 | | | 10 | % | | | | |
| Depreciation and amortization expense | | (82) | | | (82) | | | (163) | | | (163) | | | | | — | | | — | % | | — | | | — | % | | | | |
| General and administrative expense | | (5) | | | (4) | | | (9) | | | (8) | | | | | 1 | | | 25 | % | | 1 | | | 13 | % | | | | |
| Asset impairments | | (1) | | | (7) | | | (1) | | | (7) | | | | | (6) | | | (86 | %) | | (6) | | | (86 | %) | | | | |
| Other (expense) income, net | | (2) | | | 1 | | | (2) | | | 1 | | | | | 3 | | | * | | 3 | | | * | | | | |
| (Loss) gain on sale of assets, net | | — | | | (1) | | | 7 | | | (1) | | | | | (1) | | | * | | (8) | | | * | | | | |
| Earnings from unconsolidated affiliates (a) | | 3 | | | 4 | | | 9 | | | 12 | | | | | (1) | | | (25 | %) | | (3) | | | (25 | %) | | | | |
| Segment net income | | 323 | | | 4 | | | 395 | | | 32 | | | | | 319 | | | * | | 363 | | | * | | | | |
| Segment net income attributable to noncontrolling interests | | (1) | | | (1) | | | (2) | | | (2) | | | | | — | | | — | % | | — | | | — | % | | | | |
| Segment net income attributable to partners | | $ | 322 | | | $ | 3 | | | $ | 393 | | | $ | 30 | | | | | $ | 319 | | | * | | $ | 363 | | | * | | | | |
| Other data: | | | | | | | | | | | | | | | | | | | | | | |
| Segment adjusted gross margin (b) | | $ | 585 | | | $ | 239 | | | $ | 869 | | | $ | 484 | | | | | $ | 346 | | | * | | $ | 385 | | | 80 | % | | | | |
| Non-cash commodity derivative mark-to-market | | $ | 75 | | | $ | (101) | | | $ | (56) | | | $ | (149) | | | | | 176 | | | * | | $ | 93 | | | 62 | % | | | | |
| Natural gas wellhead (MMcf/d) (c) | | 4,383 | | | 4,338 | | | 4,246 | | | 4,206 | | | | | 45 | | | 1 | % | | 40 | | | 1 | % | | | | |
| NGL gross production (MBbls/d) (c) | | 427 | | | 409 | | | 414 | | | 385 | | | | | 18 | | | 4 | % | | 29 | | | 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
Three Months Ended June 30, 2022 vs. Three Months Ended June 30, 2021
Total Operating Revenues — Total operating revenues increased $1,653 millions in 2022 compared to 2021, primarily as a result of the following:
•$1,401 million increase attributable to higher commodity prices, before the impact of derivative activity; and
•$108 million increase as a result of commodity derivative activity attributable to a $176 million increase in unrealized commodity derivative gains partially offset by an increase in realized cash settlement losses of $68 million due to movements in forward prices of commodities in 2022; and
•$90 million increase as a result of higher volumes in the DJ Basin, Permian, and Midcontinent regions, partially offset by lower volumes in the South region; and
•$54 million increase in transportation, processing and other.
Purchases and Related Costs — Purchases and related costs decreased $1,307 million in 2022 compared to 2021, 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 and reliability spend primarily in the Permian and North.
Asset Impairments — Asset impairments in 2021 relate to certain long-lived assets in the Midcontinent region.
Segment Gross Margin — Segment gross margin increased $346 million in 2022 compared to 2021, primarily as a result of the following:
•$180 million increase as a result of higher commodity prices;
•$108 million increase as a result of commodity derivative activity as discussed above; and
•$58 million increase due to higher gathering and processing margins and higher volumes in the Permian and DJ Basin, and higher margins in the Midcontinent, partially offset by lower volumes in the South.
NGL Gross Production — NGL gross production increased in 2022 compared to 2021 due to increased volumes in the Permian and DJ Basin.
Six Months Ended June 30, 2022 vs. Six Months Ended June 30, 2021
Total Operating Revenues — Total operating revenues increased $2,445 million in 2022 compared to 2021, primarily as a result of the following:
•$2,035 million increase attributable to higher commodity prices, before the impact of derivative activity; and
•$282 million increase as a result of higher volumes in the Permian, DJ Basin, and Midcontinent regions, partially offset by lower volumes in the South region; and
•$86 million increase in transportation, processing and other.
•$42 million increase as a result of commodity derivative activity attributable to a $93 million decrease in unrealized commodity derivative losses partially offset by an increase in realized cash settlement losses of $51 million due to movements in forward prices of commodities in 2022.
Purchases and Related Costs — Purchases and related costs increased $2,060 million in 2022 compared to 2021, primarily as a result of the commodity price and volume changes discussed above.
Operating and Maintenance Expense — Operating and maintenance expense increased in 2022 compared to 2021 primarily due to higher base costs and reliability spend primarily in the Permian and North.
Asset Impairments — Asset impairments in 2021 relate to certain long-lived assets in the Midcontinent region.
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 $385 million in 2022 compared to 2021, primarily as a result of the following:
•$307 million increase as a result of higher commodity prices; and
•$69 million increase due to higher gathering and processing margins and higher volumes in the Permian and DJ Basin and higher margins in the Midcontinent, partially offset by lower volumes in the South Region; 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.
These increases were partially offset by:
•$26 million decrease as a result of unfavorable commodity derivative activity attributable to our corporate equity hedge program.
NGL Gross Production — NGL gross production increased in 2022 compared to 2021 due to increased volumes in the Permian region and DJ Basin.
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 our debt;
•capital expenditures;
•contributions to our unconsolidated affiliates to finance our share of their capital expenditures;
•business and asset acquisitions; and
•collateral with counterparties to our swap contracts to secure potential exposure under these contracts, which may, at times, be significant depending on commodity price movements.
We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements, long-term capital expenditures and quarterly cash distributions for at least the next twelve months.
We routinely evaluate opportunities for strategic investments or acquisitions. Future material investments or acquisitions may require that we obtain additional capital, assume third party debt or incur other long-term obligations. We have the option to utilize both equity and debt instruments as vehicles for the long-term financing of our investment activities or acquisitions.
Based on current and anticipated levels of operations, we believe we have adequate committed financial resources to conduct our ongoing business, although deterioration in our operating environment could limit our borrowing capacity, impact our credit ratings, raise our financing costs, as well as impact our compliance with the financial covenants contained in the Credit Agreement and other debt instruments.
Senior Notes — On January 3, 2022, we repaid, at par, prior to maturity all $350 million of aggregate principal amount outstanding of our 4.95% Senior Notes due April 1, 2022, using borrowings under our Credit Facility and Securitization Facility.
Credit Agreement —On March 18, 2022, we amended the Credit Agreement. The amendment extended the term of the Credit Agreement from December 9, 2024 to March 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 of June 30, 2022, we had unused borrowing capacity of $1,380 million, net of $20 million letters of credit, under the Credit Agreement, of which $1,380 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. Except in the case of a default, amounts borrowed under our Credit Agreement will not become due prior to the March 18, 2027 maturity date. As of July 29, 2022, we had unused borrowing capacity of $1,380 million, net of $20 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 June 30, 2022, we had $305 million of outstanding borrowings under our Securitization Facility at an adjusted SOFR.
Issuance of Securities — In October 2020, we filed a shelf registration statement with the SEC that became effective upon filing and allows us to issue an indeterminate number of common units, preferred units, debt securities, and guarantees of debt securities.
In October 2020, we also filed a shelf registration statement with the SEC, which allows us to issue up to $750 million in common units pursuant to our at-the-market program. During the six months ended June 30, 2022, we did not issue any common units pursuant to this registration statement, and $750 million remained available for future sales.
Guarantee of Registered Debt Securities — The condensed consolidated financial statements of DCP Midstream, LP, or “parent guarantor”, include the accounts of DCP Midstream Operating LP, or “subsidiary issuer”, which is a 100% owned subsidiary, and all other subsidiaries which are all non-guarantor subsidiaries. The parent guarantor has agreed to fully and unconditionally guarantee the senior notes. The entirety of the Company’s operating assets and liabilities, operating revenues, expenses and other comprehensive income exist at its non-guarantor subsidiaries, and the parent guarantor and subsidiary issuer have no assets, liabilities or operations independent of their respective financing activities and investments in non-guarantor subsidiaries. All covenants in the indentures governing the notes limit the activities of subsidiary issuer, including limitations on the ability to pay dividends, incur additional indebtedness, make restricted payments, create liens, sell assets or make loans to parent guarantor.
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 $84 million and $81 million as of June 30, 2022 and December 31, 2021, respectively;
•Balances related to debt of $4.822 billion and $5.174 billion as of June 30, 2022 and December 31, 2021, respectively; and
•Interest expense, net of $69 million and $76 million for the three months ended June 30, 2022 and 2021, respectively, and $138 million and $152 million for the six months ended June 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 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. During February 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 at June 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 $267 million and $261 million as of June 30, 2022 and December 31, 2021, respectively, driven by current maturities of long term debt of $505 million and $355 million, respectively. We had net derivative working capital deficits of $125 million and $59 million as of June 30, 2022 and December 31, 2021, respectively.
Cash Flow — Operating, investing and financing activities were as follows:
| | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2022 | | 2021 | | |
| | (millions) |
| Net cash provided by operating activities | $ | 574 | | | $ | 68 | | | |
| Net cash used in investing activities | $ | (61) | | | $ | (41) | | | |
| Net cash used in financing activities | $ | (506) | | | $ | (77) | | | |
Six Months Ended June 30, 2022 vs. Six Months Ended June 30, 2021
Operating Activities — Net cash provided by operating activities increased $506 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 $20 million in 2022 compared to the same period in 2021, primarily as a result of an increase in capital expenditures and a deposit for an acquisition, partially offset by proceeds from the sale of assets.
Financing Activities — Net cash used in financing activities increased $429 million in 2022 compared to the same period in 2021, primarily as a result of higher net payments of debt.
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 8 to the Condensed Consolidated Financial Statements included in Item 1 "Financial Statements" for amounts outstanding on June 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:
•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 $100 million and $140 million and expansion capital expenditures of between $100 million and $150 million.
We expect to fund future acquisitions and capital expenditures with funds generated from our operations, borrowings under our Credit Agreement, Securitization Facility and the issuance of additional debt and equity securities. We funded our acquisition of the James Lake system with with cash and borrowings on 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 $163 million during the six months ended June 30, 2022 and 2021.
On July 19, 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 on August 12, 2022 to unitholders of record on July 29, 2022.
On the same date, the board of directors of the General Partner declared a quarterly distribution on our Series B and Series C Preferred Units of $0.4922 and $0.4969 per unit, respectively. The Series B distributions will be paid on September 15, 2022 to unitholders of record on September 1, 2022. The Series C distribution will be paid on October 17, 2022 to unitholders of record on October 3, 2022.
We expect to continue to use cash provided by operating activities for the payment of distributions to our unitholders. See Note 10. “Partnership Equity and Distributions” in the Notes to the Condensed Consolidated Financial Statements in Item 1. “Financial Statements.”
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
same manner. The accompanying schedules provide reconciliations of adjusted gross margin, segment adjusted gross margin and adjusted segment EBITDA to their most directly comparable GAAP financial measures.
Distributable Cash Flow — We define Distributable Cash Flow as adjusted EBITDA, as defined above, less sustaining capital expenditures, net of reimbursable projects, less interest expense, less income attributable to preferred units, and certain other items. Sustaining capital expenditures are cash expenditures made to maintain our cash flows, operating or earnings capacity. These expenditures add on to or improve capital assets owned, including certain system integrity, compliance and safety improvements. Sustaining capital expenditures also include certain well connects, and may include the acquisition or construction of new capital assets. Income attributable to preferred units represent cash distributions earned by the preferred units. Cash distributions to be paid to the holders of the preferred units assuming a distribution is declared by our board of directors, are not available to common unit holders. Non-cash mark-to-market of derivative instruments is considered to be non-cash for the purpose of computing Distributable Cash Flow because settlement will not occur until future periods, and will be impacted by future changes in commodity prices and interest rates. 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.
The following table sets forth our reconciliation of certain non-GAAP measures: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | |
| Reconciliation of Non-GAAP Measures | | (millions) |
| | | | | | | | | | |
| Reconciliation of gross margin to adjusted gross margin: | | | | | | | | | | |
| | | | | | | | | | |
| Operating revenues | | $ | 4,269 | | | $ | 2,085 | | | $ | 7,644 | | | $ | 4,403 | | | |
| Cost of revenues | | | | | | | | | | |
| Purchases and related costs | | 3,269 | | | 1,540 | | | 5,988 | | | 3,303 | | | |
| Purchases and related costs from affiliates | | 100 | | | 47 | | | 199 | | | 102 | | | |
| Transportation and related costs from affiliates | | 275 | | | 252 | | | 532 | | | 471 | | | |
| Depreciation and amortization expense | | 90 | | | 93 | | | 180 | | | 184 | | | |
| Gross margin | | 535 | | | 153 | | | 745 | | | 343 | | | |
| Depreciation and amortization expense | | 90 | | | 93 | | | 180 | | | 184 | | | |
| Adjusted gross margin | | $ | 625 | | | $ | 246 | | | $ | 925 | | | $ | 527 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Reconciliation of segment gross margin to segment adjusted gross margin: | | | | | | | | | | |
| | | | | | | | | | |
| Logistics and Marketing segment: | | | | | | | | | | |
| Operating revenues | | $ | 3,789 | | | $ | 1,917 | | | $ | 6,952 | | | $ | 4,015 | | | |
| Cost of revenues | | | | | | | | | | |
| Purchases and related costs | | 3,749 | | | 1,910 | | | 6,896 | | | 3,972 | | | |
| Depreciation and amortization expense | | 3 | | | 3 | | | 6 | | | 6 | | | |
| Segment gross margin | | 37 | | | 4 | | | 50 | | | 37 | | | |
| Depreciation and amortization expense | | 3 | | | 3 | | | 6 | | | 6 | | | |
| Segment adjusted gross margin | | $ | 40 | | | $ | 7 | | | $ | 56 | | | $ | 43 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Gathering and Processing segment: | | | | | | | | | | |
| Operating revenues | | $ | 2,967 | | | $ | 1,314 | | | $ | 5,073 | | | $ | 2,628 | | | |
| Cost of revenues | | | | | | | | | | |
| Purchases and related costs | | 2,382 | | | 1,075 | | | 4,204 | | | 2,144 | | | |
| Depreciation and amortization expense | | 82 | | | 82 | | | 163 | | | 163 | | | |
| Segment gross margin | | 503 | | | 157 | | | 706 | | | 321 | | | |
| Depreciation and amortization expense | | 82 | | | 82 | | | 163 | | | 163 | | | |
| Segment adjusted gross margin | | $ | 585 | | | $ | 239 | | | $ | 869 | | | $ | 484 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 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) | | $ | 201 | | | $ | 109 | | | $ | 342 | | | $ | 255 | | | |
Non-cash commodity derivative mark-to-market | | (26) | | | 35 | | | 19 | | | 40 | | | |
| Depreciation and amortization expense, net of noncontrolling interest | | 3 | | | 3 | | | 6 | | | 6 | | | |
Distributions from unconsolidated affiliates, net of earnings | | 29 | | | 34 | | | 52 | | | 35 | | | |
| | | | | | | | | | |
Asset impairments | | — | | | 13 | | | — | | | 13 | | | |
Other income | | (2) | | | — | | | (2) | | | — | | | |
| Adjusted segment EBITDA | | $ | 205 | | | $ | 194 | | | $ | 417 | | | $ | 349 | | | |
| | | | | | | | | | |
| Gathering and Processing segment: | | | | | | | | | | |
| Segment net income attributable to partners | | $ | 322 | | | $ | 3 | | | $ | 393 | | | $ | 30 | | | |
| Non-cash commodity derivative mark-to-market | | (75) | | | 101 | | | 56 | | | 149 | | | |
| Depreciation and amortization expense, net of noncontrolling interest | | 81 | | | 80 | | | 162 | | | 161 | | | |
| Distributions from unconsolidated affiliates, net of earnings | | 4 | | | 5 | | | 6 | | | 5 | | | |
| Asset impairments | | 1 | | | 7 | | | 1 | | | 7 | | | |
| | | | | | | | | | |
| Gain on sale of assets | | — | | | — | | | (7) | | | — | | | |
| Other expense | | 2 | | | 1 | | | 2 | | | 1 | | | |
| Adjusted segment EBITDA | | $ | 335 | | | $ | 197 | | | $ | 613 | | | $ | 353 | | | |
(a) We recognized no lower of cost or net realizable value adjustment for the three and six months ended June 30, 2022 and 2021, respectively.
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, 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 ended December 31, 2021. The accounting policies and estimates used in preparing our interim condensed consolidated financial statements for the three and six months ended June 30, 2022 are the same as those described in our Annual Report on Form 10-K for the year ended December 31, 2021. 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 the SEC, 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 ended December 31, 2021.