Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
FORM 10-Q
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018
or 
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 001-32678 
 
 
DCP MIDSTREAM, LP
(Exact name of registrant as specified in its charter) 
 
  
Delaware
 
03-0567133
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
370 17th Street, Suite 2500
Denver, Colorado
 
80202
(Address of principal executive offices)
 
(Zip Code)
(303) 595-3331
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨

 
Emerging growth company
¨
Non-accelerated filer
¨

 
Smaller reporting company
¨

 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

As of November 1, 2018, there were 143,317,328 common units representing limited partner interests outstanding.




DCP MIDSTREAM, LP
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS
 
 
 
 
Item
 
Page
 
PART I. FINANCIAL INFORMATION
 
1.
Financial Statements (unaudited):
 
 
Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017
 
Condensed Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2018
 
Condensed Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2017
 
Notes to the Condensed Consolidated Financial Statements
2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
3.
Quantitative and Qualitative Disclosures about Market Risk
4.
Controls and Procedures
 
PART II. OTHER INFORMATION
 
1.
Legal Proceedings
1A.
Risk Factors
6.
Exhibits
 
Signatures



 


i


GLOSSARY OF TERMS
The following is a list of certain industry terms used throughout this report:
 
 
 
 
Bbl
 
barrel
Bbls/d
 
barrels per day
Bcf
 
billion cubic feet
Bcf/d
 
billion cubic feet per day
Btu
 
British thermal unit, a measurement of energy
Fractionation
 
the process by which natural gas liquids are separated
    into individual components
MBbls
 
thousand barrels
MBbls/d
 
thousand barrels per day
MMBtu
 
million Btus
MMBtu/d
 
million Btus per day
MMcf
 
million cubic feet
MMcf/d
 
million cubic feet per day
NGLs
 
natural gas liquids
Throughput
 
the volume of product transported or passing through a
    pipeline or other facility
 


ii


CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Our reports, filings and other public announcements may from time to time contain statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can typically identify forward-looking statements by the use of forward-looking words, such as “may,” “could,” “should,” “intend,” “assume,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “potential,” “plan,” “forecast” and other similar words.
All statements that are not statements of historical facts, including, but not limited to, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements.
These forward-looking statements reflect our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors, many of which are outside our control. Important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements include known and unknown risks. Known risks and uncertainties include, but are not limited to, the risks set forth in Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2017, including the following risks and uncertainties:
the extent of changes in commodity prices and the demand for our products and services, our ability to effectively limit a portion of the adverse impact of potential changes in commodity prices through derivative financial instruments, and the potential impact of price, and of producers’ access to capital on natural gas drilling, demand for our services, and the volume of NGLs and condensate extracted;
the demand for crude oil, residue gas and NGL products;
the level and success of drilling and quality of production volumes around our assets and our ability to connect supplies to our gathering and processing systems, as well as our residue gas and NGL infrastructure;
the amount of natural gas we gather, compress, treat, process, transport, store and sell, or the NGLs we produce, fractionate, transport, store and sell, may be reduced if the pipelines, storage and fractionation facilities to which we deliver the natural gas or NGLs are capacity constrained and cannot, or will not, accept the natural gas or NGLs or we may be required to find alternative markets and arrangements for our natural gas and NGLs;
volatility in the price of our common units;
general economic, market and business conditions;
our ability to continue the safe and reliable operation of our assets;
our ability to construct and start up facilities on budget and in a timely fashion, which is partially dependent on obtaining required construction, environmental and other permits issued by federal, state and municipal governments, or agencies thereof, the availability of specialized contractors and laborers, and the price of and demand for materials;
our ability to access the debt and equity markets and the resulting cost of capital, which will depend on general market conditions, our financial and operating results, inflation rates, interest rates, our ability to comply with the covenants in our $1.4 billion unsecured revolving credit facility or other credit facilities, and the indentures governing our notes, as well as our ability to maintain our credit ratings;
the creditworthiness of our customers and the counterparties to our transactions;
the amount of collateral we may be required to post from time to time in our transactions;
industry changes, including the impact of bankruptcies, consolidations, alternative energy sources, technological advances, infrastructure constraints and changes in competition;
our ability to grow through organic growth projects, or acquisitions, and the successful integration and future performance of such assets;
our ability to hire, train, and retain qualified personnel and key management to execute our business strategy;
new, additions to, and changes in, laws and regulations, particularly with regard to taxes, safety, regulatory and protection of the environment, including, but not limited to, pending Colorado ballot initiatives, climate change legislation, regulation of over-the-counter derivatives market and entities, and hydraulic fracturing regulations, or the increased regulation of our industry, and their impact on producers and customers served by our systems;
weather, weather-related conditions and other natural phenomena, including, but not limited to, their potential impact on demand for the commodities we sell and the operation of company-owned and third party-owned infrastructure;
security threats such as military campaigns, terrorist attacks, and cybersecurity attacks and breaches, against, or otherwise impacting, our facilities and systems; and
our ability to obtain insurance on commercially reasonable terms, if at all, as well as the adequacy of insurance to cover our losses.

In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. The forward-looking statements in this report speak as of the filing date of this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws.

iii


PART I
Item 1. Financial Statements (Unaudited)
DCP MIDSTREAM, LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30, 
 2018
 
December 31, 
 2017
ASSETS
(millions)
Current assets:
 
 
 
Cash and cash equivalents
$
1

 
$
156

Accounts receivable:
 
 
 
Trade, net of allowance for doubtful accounts of $6 and $8 million, respectively
989

 
773

Affiliates
227

 
191

Other
18

 
17

Inventories
77

 
68

Unrealized gains on derivative instruments
57

 
30

Collateral cash deposits
140

 
75

Other
17

 
12

Total current assets
1,526

 
1,322

Property, plant and equipment, net
9,163

 
8,983

Goodwill
231

 
231

Intangible assets, net
99

 
106

Investments in unconsolidated affiliates
3,277

 
3,050

Unrealized gains on derivative instruments
19

 
3

Other long-term assets
170

 
183

Total assets
$
14,485

 
$
13,878

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable:
 
 
 
Trade
$
1,176

 
$
989

Affiliates
106

 
68

Other
40

 
19

Current debt
525

 

Unrealized losses on derivative instruments
157

 
76

Accrued interest
68

 
71

Accrued taxes
81

 
58

Accrued wages and benefits
52

 
65

Capital spending accrual
49

 
39

Other
79

 
103

Total current liabilities
2,333

 
1,488

Long-term debt
4,575

 
4,707

Unrealized losses on derivative instruments
37

 
15

Deferred income taxes
29

 
29

Other long-term liabilities
235

 
201

Total liabilities
7,209

 
6,440

Commitments and contingent liabilities (see note 14)

 

Equity:
 
 
 
Series A preferred limited partners (500,000 preferred units authorized, issued and outstanding, respectively)
498

 
491

Series B preferred limited partners (6,450,000 preferred units authorized, issued and outstanding, respectively)
156

 

General partner
109

 
154

Limited partners (143,317,328 and 143,309,828 common units authorized, issued and outstanding, respectively)
6,491

 
6,772

Accumulated other comprehensive loss
(8
)
 
(9
)
Total partners’ equity
7,246

 
7,408

Noncontrolling interests
30

 
30

Total equity
7,276

 
7,438

Total liabilities and equity
$
14,485

 
$
13,878


See accompanying notes to condensed consolidated financial statements.

1


DCP MIDSTREAM, LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(millions, except per unit amounts)
Operating revenues:
 
 
 
 
 
 
 
Sales of natural gas, NGLs and condensate
$
2,191

 
$
1,618

 
$
5,784

 
$
4,756

Sales of natural gas, NGLs and condensate to affiliates
491

 
318

 
1,224

 
885

Transportation, processing and other
133

 
162

 
371

 
474

Trading and marketing (losses) gains, net
(56
)
 
(43
)
 
(164
)
 
10

Total operating revenues
2,759

 
2,055

 
7,215

 
6,125

Operating costs and expenses:
 
 
 
 
 
 
 
Purchases and related costs
2,074

 
1,550

 
5,381

 
4,528

Purchases and related costs from affiliates
253

 
145

 
643

 
411

Operating and maintenance expense
196

 
168

 
543

 
513

Depreciation and amortization expense
98

 
94

 
289

 
282

General and administrative expense
70

 
69

 
199

 
202

Asset impairments

 
48

 

 
48

Other expense, net
2

 

 
7

 
15

Gain on sale of assets, net

 

 

 
(34
)
Total operating costs and expenses
2,693

 
2,074

 
7,062

 
5,965

Operating income (loss)
66

 
(19
)
 
153

 
160

Loss from financing activities
(19
)
 

 
(19
)
 

Earnings from unconsolidated affiliates
104

 
74

 
278

 
234

Interest expense, net
(69
)
 
(73
)
 
(203
)
 
(219
)
Income (loss) before income taxes
82

 
(18
)
 
209

 
175

Income tax expense

 
(2
)
 
(2
)
 
(5
)
Net income (loss)
82

 
(20
)
 
207

 
170

Net income attributable to noncontrolling interests
(1
)
 

 
(3
)
 
(1
)
Net income (loss) attributable to partners
81

 
(20
)
 
204

 
169

Series A preferred limited partners' interest in net income
(10
)
 

 
(28
)
 

Series B preferred limited partners' interest in net income
(3
)
 

 
(5
)
 

General partner’s interest in net income
(42
)
 
(39
)
 
(123
)
 
(122
)
Net income (loss) allocable to limited partners
$
26

 
$
(59
)
 
$
48

 
$
47

Net income (loss) per limited partner unit — basic and diluted
0.18

 
(0.41
)
 
0.33

 
0.33

Weighted-average limited partner units outstanding — basic and diluted
143.3

 
143.3

 
143.3

 
143.3

See accompanying notes to condensed consolidated financial statements.


2


DCP MIDSTREAM, LP
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(millions)
Net income (loss)
$
82

 
$
(20
)
 
$
207

 
$
170

Other comprehensive income:
 
 
 
 
 
 
 
Reclassification of cash flow hedge losses into earnings

 

 
1

 
1

Total other comprehensive income

 

 
1

 
1

Total comprehensive income (loss)
82

 
(20
)
 
208

 
171

Total comprehensive income attributable to noncontrolling interests
(1
)
 

 
(3
)
 
(1
)
Total comprehensive income (loss) attributable to partners
$
81

 
$
(20
)
 
$
205

 
$
170

See accompanying notes to condensed consolidated financial statements.


3


DCP MIDSTREAM, LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
 
(millions)
OPERATING ACTIVITIES:
 
 
 
Net income
$
207

 
$
170

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization expense
289

 
282

Earnings from unconsolidated affiliates
(278
)
 
(234
)
Distributions from unconsolidated affiliates
325

 
270

Net unrealized losses (gains) on derivative instruments
79

 
(1
)
Gain on sale of assets, net

 
(34
)
Asset impairments

 
48

Loss from financing activities
19

 

Other, net
13

 
29

Change in operating assets and liabilities, which provided (used) cash, net of effects of acquisitions:
 
 
 
Accounts receivable
(256
)
 
(59
)
Inventories
(9
)
 
10

Accounts payable
255

 
179

Other assets and liabilities
(103
)
 
24

Net cash provided by operating activities
541

 
684

INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(428
)
 
(258
)
Investments in unconsolidated affiliates, net
(265
)
 
(70
)
Proceeds from sale of assets
3

 
130

Net cash used in investing activities
(690
)
 
(198
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from debt
3,620

 

Payments of debt
(3,225
)
 
(195
)
Costs incurred to redeem senior notes
(18
)
 

Proceeds from issuance of preferred limited partner units, net of offering costs
155

 

Distributions to preferred limited partners
(25
)
 

Net change in advances to predecessor from DCP Midstream, LLC

 
418

Distributions to limited partners and general partner
(503
)
 
(390
)
Distributions to noncontrolling interests
(3
)
 
(6
)
Other
(7
)
 
(2
)
Net cash used in financing activities
(6
)
 
(175
)
Net change in cash and cash equivalents
(155
)
 
311

Cash and cash equivalents, beginning of period
156

 
1

Cash and cash equivalents, end of period
$
1

 
$
312


See accompanying notes to condensed consolidated financial statements.

4


DCP MIDSTREAM, LP
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
 
 
Partners’ Equity
 
 
 
 
 
 
Series A Preferred Limited Partners
 
Series B Preferred Limited Partners
 
Limited 
Partners
 
General 
Partner
 
Accumulated 
Other
Comprehensive
(Loss) Income
 
Noncontrolling
Interests
 
Total
Equity
 
(millions)
Balance, January 1, 2018
 
$
491

 
$

 
$
6,772

 
$
154

 
$
(9
)
 
$
30

 
$
7,438

Cumulative-effect adjustment
(see Note 2)
 

 

 
6

 

 

 

 
6

Net income
 
28

 
5

 
48

 
123

 

 
3

 
207

Other comprehensive income
 

 

 

 

 
1

 

 
1

Issuance of 6,450,000 Series B Preferred Units
 

 
155

 

 

 

 

 
155

Distributions to unitholders
 
(21
)
 
(4
)
 
(335
)
 
(168
)
 

 

 
(528
)
Distributions to noncontrolling interests
 

 

 

 

 

 
(3
)
 
(3
)
Balance, September 30, 2018
 
$
498

 
$
156

 
$
6,491

 
$
109

 
$
(8
)
 
$
30

 
$
7,276

See accompanying notes to condensed consolidated financial statements.


5


DCP MIDSTREAM, LP
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
 
Partners’ Equity
 
 
 
 
 
Predecessor
Equity
 
Limited 
Partners
 
General 
Partner
 
Accumulated 
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
Equity
 
(millions)
Balance, January 1, 2017
$
4,220

 
$
2,591

 
$
18

 
$
(8
)
 
$
32

 
$
6,853

Net income

 
47

 
122

 

 
1

 
170

Other comprehensive income

 

 

 
1

 

 
1

Net change in parent advances

 
418

 

 

 

 
418

Acquisition of the DCP Midstream Business
(4,220
)
 

 

 

 

 
(4,220
)
Deficit purchase price

 
3,094

 

 
(2
)
 

 
3,092

Issuance of 28,552,480 common units and 2,550,644 general partner units to DCP Midstream, LLC and affiliate

 
1,033

 
92

 

 

 
1,125

Distributions to limited partners and general partner

 
(313
)
 
(77
)
 

 

 
(390
)
Distributions to noncontrolling interests

 

 

 

 
(6
)
 
(6
)
Balance, September 30, 2017
$

 
$
6,870

 
$
155

 
$
(9
)
 
$
27

 
$
7,043

 
See accompanying notes to condensed consolidated financial statements.


6


DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017
(Unaudited)
1. Description of Business and Basis of Presentation

DCP Midstream, LP, with its consolidated subsidiaries, or "us", "we", "our" or the "Partnership" is a Delaware limited partnership formed in 2005 by DCP Midstream, LLC to own, operate, acquire and develop a diversified portfolio of complementary midstream energy assets.
Our Partnership includes our Gathering and Processing and Logistics and Marketing segments. For additional information regarding these segments, see Note 16 - Business Segments.
Our operations and activities are managed by our general partner, DCP Midstream GP, LP, which in turn is managed by its general partner, DCP Midstream GP, LLC, which we refer to as the General Partner, and which is 100% owned by DCP Midstream, LLC. DCP Midstream, LLC and its subsidiaries and affiliates, collectively referred to as DCP Midstream, LLC, is owned 50% by Phillips 66 and 50% by Enbridge Inc. and its affiliates, or Enbridge. DCP Midstream, LLC directs our business operations through its ownership and control of the General Partner. As of September 30, 2018, DCP Midstream, LLC owned approximately 38.1% of us, including limited partner and general partner interests.
The condensed consolidated financial statements include the accounts of the Partnership and all majority-owned subsidiaries where we have the ability to exercise control. Investments in greater than 20% owned affiliates that are not variable interest entities and where we do not have the ability to exercise control, and investments in less than 20% owned affiliates where we have the ability to exercise significant influence, are accounted for using the equity method.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. Conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and notes. Although these estimates are based on management’s knowledge of current and expected future events, actual results could differ from those estimates. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, these condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the respective interim periods. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted from these interim financial statements pursuant to such rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. Results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These unaudited condensed consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with the 2017 audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.

7

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

2. New Accounting Pronouncements

Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” or ASU 2016-15 - In August 2016, the FASB issued ASU 2016-15, which amends certain cash flow statement classification guidance. We adopted the ASU on January 1, 2018 and it has not had any impact on our condensed consolidated results of operations, cash flows and financial position.

FASB ASU, 2016-02 “Leases (Topic 842),” or ASU 2016-02 - In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize a lease liability on a discounted basis and the right of use of a specified asset at the commencement date for all leases. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018, with the option to early adopt for financial statements that have not been issued.
We will adopt Topic 842 on January 1, 2019, and intend to elect the land easement practical expedient. In addition, we intend to elect the package of practical expedients permitted under the transition guidance within the new standard. We are currently in the process of gathering a complete population of our lease arrangements, implementing a software solution, and evaluating the impact of the new standard on our consolidated financial statements. Based on our evaluation to-date and from the perspective as the lessee, our leasing activity primarily consists of transportation agreements, office space, vehicles and equipment. Though the evaluation process is still in progress, we currently anticipate that this new lease guidance will result in changes to the way we recognize, present and disclose our operating leases in our consolidated financial statements, including the recognition of a lease liability and an offsetting right-of-use asset in our consolidated balance sheets for our operating leases (with the exception of short-term leases excluded by practical expedient).

FASB ASU 2014-09 “Revenue from Contracts with Customers (Topic 606),” or ASU 2014-09 and related interpretations and amendments - In May 2014, the FASB issued ASU 2014-09, which supersedes the revenue recognition requirements of Accounting Standards Codification Topic 605 “Revenue Recognition.” We adopted this ASU on January 1, 2018 using the modified retrospective method for contracts that were not completed as of the date of adoption. Under this method, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those prior periods. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. We recognized the initial cumulative effect of applying this ASU as an adjustment to the opening balance of total partners’ equity.
 
In accordance with the new revenue standard requirements, the impact of adoption on our consolidated statement of operations was as follows:
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
 As Reported
 
Effect of Change
 
Presentation Without Adoption of ASC 606
 
 As Reported
 
Effect of Change
 
Presentation Without Adoption of ASC 606
 
 
(millions)
Statement of Operations
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
Sales of natural gas, NGLs and condensate
 
$
2,191

 
$
41

 
$
2,232

 
$
5,784

 
$
116

 
$
5,900

Transportation, processing and other
 
$
133

 
$
43

 
$
176

 
$
371

 
$
122

 
$
493

 
 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
 
 
 
 
 
Purchases and related costs
 
$
2,074

 
$
84

 
$
2,158

 
$
5,381

 
$
238

 
$
5,619

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
82

 
$

 
$
82

 
$
207

 
$

 
$
207



8

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

3. Revenue Recognition

Our operating revenues are primarily derived from the following activities:
    
sales of natural gas, NGLs, and condensate;
services related to gathering, compressing, treating and processing NGLs and natural gas; and
services related to transportation and storage of natural gas and NGLs.

Sales of natural gas, NGLs and condensate - We sell our commodities to a variety of customers ranging from large, multi-national petrochemical and refining companies to regional retail propane distributors. We recognize revenue from commodity sales at the point in time when the product is delivered to the customer. Generally, the transaction price is determined at the time of each delivery as the uncertainty of commodity pricing is resolved. Customers usually pay monthly based on the products purchased that month.

Sales of natural gas, NGLs and condensate include physical sales contracts which qualify as financial derivative instruments, and buy-sell and exchange transactions which involve purchases and sales of inventory with the same counterparty that are legally contingent or in contemplation of one another as a single transaction on a combined net basis. Neither of these types of arrangements are contracts with customers within the scope of Topic 606.

Gathering, compressing, treating and processing natural gas - For natural gas gathering and processing activities, we receive either fees and/or a percentage of proceeds from commodity sales as payment for these services, depending on the type of contract. For gathering and processing agreements within the scope of Topic 606, we recognize the revenue associated with our services when the gas is gathered, treated or processed at our facilities. Under fee-based contracts, we receive a fee for our services based on throughput volumes. Under percent-of-proceeds contracts, we receive either an agreed upon percentage of the actual proceeds received from our sale of the residue natural gas and NGLs or an agreed upon percentage based on index related prices for the natural gas and NGLs. Our percent-of-proceeds contracts may also include a fee-based component. 

Transportation and storage - Revenue from transportation and storage agreements is recognized based on contracted volumes transported and stored in the period the services are provided.

Our service contracts generally have terms that extend beyond one year, and are recognized over time. The performance obligation for most of our service contracts encompasses a series of distinct services performed on discrete daily quantities of natural gas or NGLs for purposes of allocating variable consideration and recognizing revenue while the customer simultaneously receives and consumes the benefits of the services provided. Revenue is recognized over time consistent with the transfer of good or service over time to the customer based on daily volumes delivered. Consideration is generally variable, and the transaction price cannot be determined at the inception of the contract, because the volume of natural gas or NGLs for which the service is provided is only specified on a daily or monthly basis. The transaction price is determined at the time the service is provided and the uncertainty is resolved. Customers usually pay monthly based on the services performed that month.

Purchase arrangements - Under purchase arrangements, we purchase natural gas at either the wellhead or the tailgate of a plant. These purchase arrangements represent an arrangement with a supplier and are recorded in “Purchases and related costs”. Often, we earn fees for services performed prior to taking control of the product in these arrangements and service revenue is recorded for these fees. Revenue generated from the sale of product obtained in these purchase arrangements are reported as “Sales of natural gas, NGLs and condensate” on the consolidated statements of operations and are recognized on a gross basis as we purchase and take control of the product prior to sale and are the principal in the transaction.

Practical expedients - We apply the practical expedients in Topic 606 and do not disclose information about transaction prices allocated to remaining performance obligations that have original expected durations of one year or less, nor do we disclose information about transaction prices allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation.

We disaggregate our revenue from contracts with customers by type for each of our reportable segments, as we believe it best depicts the nature, timing and uncertainty of our revenue and cash flows. The following tables set forth our revenue by those categories:


9

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

Revenue by type was as follows:
 
 
Three Months Ended September 30, 2018
 
 
Gathering and Processing
 
Logistics and Marketing
 
Eliminations
 
Total
 
 
(millions)
Sales of natural gas
 
$
469

 
$
530

 
$
(410
)
 
$
589

Sales of NGLs and condensate (a)
 
1,053

 
2,040

 
(1,000
)
 
2,093

Transportation, processing and other
 
118

 
15

 

 
133

Trading and marketing losses, net (c)
 
(61
)
 
5

 

 
(56
)
     Total operating revenues
 
$
1,579

 
$
2,590

 
$
(1,410
)
 
$
2,759


 
 
Nine Months Ended September 30, 2018
 
 
Gathering and Processing
 
Logistics and Marketing
 
Eliminations
 
Total
 
 
(millions)
Sales of natural gas
 
$
1,313

 
$
1,546

 
$
(1,182
)
 
$
1,677

Sales of NGLs and condensate (b)
 
2,663

 
5,210

 
(2,542
)
 
5,331

Transportation, processing and other
 
327

 
45

 
(1
)
 
371

Trading and marketing losses, net (c)
 
(124
)
 
(40
)
 

 
(164
)
     Total operating revenues
 
$
4,179


$
6,761


$
(3,725
)

$
7,215


(a)   Includes $1,379 million of revenues from physical sales contracts and buy-sell exchange transactions in our logistics and marketing segment, which are not within the scope of Topic 606.
(b)   Includes $3,280 million of revenues from physical sales contracts and buy-sell exchange transactions in our logistics and marketing segment, which are not within the scope of Topic 606.
(c)   Not within the scope of Topic 606.

4. Contract Liabilities

We have contracts with customers whereby the customer reimburses us for costs to construct certain connections to our operating assets. These agreements are typically entered into in contemplation with gathering and processing agreements and transportation agreements with customers, and are part of the consideration of the contract. Prior to the adoption of Topic 606, we accounted for these arrangements as a reduction to the cost basis of our long-lived assets which were amortized as a reduction to depreciation expense over the estimated useful life of the related assets. Under Topic 606, we record these payments as deferred revenue which will be amortized into revenue over the expected contract term. The noncurrent portion of deferred revenue is included in other long-term liabilities on our condensed consolidated balance sheet.

The following table summarizes changes in contract liabilities included in our condensed consolidated balance sheet:

 
 
September 30,
 
 
2018
 
 
(millions)
Balance, beginning of period
 
$

Cumulative effect of implementation of Topic 606
 
36

Revenue recognized (a)
 
(2
)
Balance, end of period
 
$
34

Current contract liabilities
 

Long-term contract liabilities
 
$
34


(a) Deferred revenue recognized is included in transportation, processing and other on the condensed consolidated statement of operations.

10

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)


The contract liabilities disclosed in the table above will be recognized as revenue as the obligations are satisfied over the next 35 years as of September 30, 2018.

5. Agreements and Transactions with Affiliates
DCP Midstream, LLC
Services Agreement and Other General and Administrative Charges
Under the Services and Employee Secondment Agreement (the “Services Agreement”), we are required to reimburse DCP Midstream, LLC for costs, expenses, and expenditures incurred or payments made on our behalf for general and administrative functions including, but not limited to, legal, accounting, compliance, treasury, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, benefit plan maintenance and administration, credit, payroll, internal audit, taxes and engineering, as well as salaries and benefits of seconded employees, insurance coverage and claims, capital expenditures, maintenance and repair costs and taxes. There is no limit on the reimbursements we make to DCP Midstream, LLC under the Services Agreement for costs, expenses and expenditures incurred or payments made on our behalf. The following table summarizes employee related costs that were charged by DCP Midstream, LLC to the Partnership that are included in the condensed consolidated statements of operations:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(millions)
Employee related costs charged by DCP Midstream, LLC
 
 
 
 
 
 
 
 
Operating and maintenance expense
 
$
54

 
$
50

 
$
156

 
$
149

General and administrative expense
 
$
51

 
$
46

 
$
136

 
$
116


Phillips 66 and its Affiliates

We sell a portion of our residue gas and NGLs to Phillips 66 and Chevron Phillips Chemical LLC, or CPChem. CPChem is owned 50% by Phillips 66, and is considered a related party. Approximately 18% of our NGL production was committed to Phillips 66 and CPChem as of September 30, 2018. The primary production commitment on certain contracts began a ratable wind down period in December 2014 which expires in January 2019. We anticipate continuing to purchase and sell commodities with Phillips 66 and CPChem in the ordinary course of business.

Enbridge and its Affiliates

We sell NGLs to and purchase NGLs from Enbridge and its affiliates. We anticipate continuing to sell commodities to and purchase commodities from Enbridge and its affiliates in the ordinary course of business.

Unconsolidated Affiliates

We sell a portion of our residue gas and NGLs to, purchase natural gas and other NGL products from, and provide gathering and transportation services to other unconsolidated affiliates. We anticipate continuing to purchase and sell commodities and provide services to unconsolidated affiliates in the ordinary course of business.

11

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

Summary of Transactions with Affiliates
The following table summarizes our transactions with affiliates:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(millions)
Phillips 66 (including its affiliates):
 
 
 
 
 
 
 
 
Sales of natural gas, NGLs and condensate to affiliates
 
$
483

 
$
289

 
$
1,166

 
$
814

Purchases and related costs from affiliates
 
$
57

 
$
7

 
$
95

 
$
22

Operating and maintenance and general administrative expenses
 
$
4

 
$

 
$
10

 
$
1

Enbridge (including its affiliates):
 
 
 
 
 
 
 
 
Sales of natural gas, NGLs and condensate to affiliates
 
$
(13
)
 
$
14

 
$
12

 
$
34

Purchases and related costs from affiliates
 
$
(2
)
 
$
12

 
$
26

 
$
31

Operating and maintenance and general administrative expenses
 
$

 
$
1

 
$

 
$
2

Unconsolidated affiliates:
 
 
 
 
 
 
 
 
Sales of natural gas, NGLs and condensate to affiliates
 
$
21

 
$
15

 
$
46

 
$
37

Transportation, processing, and other to affiliates
 
$
2

 
$
1

 
$
5

 
$
4

Purchases and related costs from affiliates
 
$
198

 
$
126

 
$
522

 
$
358


 We had balances with affiliates as follows:
 
September 30, 
 2018
 
December 31, 
 2017
 
(millions)
Phillips 66 (including its affiliates):
 
 
 
Accounts receivable
$
198

 
$
156

Accounts payable
$
25

 
$
6

Other assets
$
1

 
$

Enbridge (including its affiliates):
 
 
 
Accounts receivable
$
1

 
$
11

Accounts payable
$
5

 
$
9

Unconsolidated affiliates:
 
 
 
Accounts receivable
$
28

 
$
24

Accounts payable
$
76

 
$
53

Other assets
$
1

 
$
4

6. Inventories
Inventories were as follows: 
 
September 30, 
 2018
 
December 31, 
 2017
 
(millions)
Natural gas
$
16

 
$
30

NGLs
61

 
38

Total inventories
$
77

 
$
68

We recognize lower of cost or market adjustments when the carrying value of our inventories exceeds their estimated market value. These non-cash charges are a component of purchases and related costs in the condensed consolidated statements of operations. We recognized no lower of cost or net realizable value adjustments during the three and nine months ended September 30, 2018 and September 30, 2017, respectively.

12

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

7. Property, Plant and Equipment
A summary of property, plant and equipment by classification is as follows:
 
Depreciable
Life
 
September 30, 
 2018
 
December 31, 
 2017
 
 
 
(millions)
Gathering and transmission systems
20 — 50 Years
 
$
8,737

 
$
8,473

Processing, storage and terminal facilities
35 — 60 Years
 
5,317

 
5,128

Other
3 —  30 Years
 
564

 
557

Construction work in progress
 
 
382

 
374

Property, plant and equipment
 
 
15,000

 
14,532

Accumulated depreciation
 
 
(5,837
)
 
(5,549
)
Property, plant and equipment, net
 
 
$
9,163

 
$
8,983

Interest capitalized on construction projects was $4 million and $2 million for the three months ended September 30, 2018 and 2017, respectively, and $15 million and $4 million for the nine months ended September 30, 2018 and 2017, respectively.
Depreciation expense was $95 million and $90 million for the three months ended September 30, 2018 and 2017, respectively, and $281 million and $272 million for the nine months ended September 30, 2018 and 2017, respectively.
 

8. Goodwill
We performed our annual goodwill assessment during the third quarter of 2018 at the reporting unit level, which is conducted by assessing whether (i) the components of our operating segments constitute businesses for which discrete financial information is available, (ii) segment management regularly reviews the operating results of those components and (iii) whether the economic and regulatory characteristics are similar. As a result of our assessment, we concluded that the fair value of goodwill substantially exceeded its carrying value in our North reporting unit, the only reporting unit allocated goodwill included within our Gathering and Processing reportable segment, and in our Marysville reporting unit included within our Logistics and Marketing reportable segment. For our Wholesale Propane reporting unit, which is included in our Logistics and Marketing reportable segment, the fair value exceeded the carrying value (including approximately $37 million of allocated goodwill) by approximately 10%. We concluded that the entire amount of goodwill disclosed on the condensed consolidated balance sheet is recoverable.
We primarily used a discounted cash flow analysis, supplemented by a market approach analysis, to perform our goodwill assessment. Key assumptions in the analysis include the use of an appropriate discount rate, terminal year multiples, and estimated future cash flows, including an estimate of operating and general and administrative costs. In estimating cash flows, we incorporate current market information (including forecasted volumes and commodity prices), as well as historical and other factors. If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to goodwill impairment charges, which would be recognized in the period in which the carrying value exceeds fair value.
We expect that the fair value of our Wholesale Propane reporting unit will continue to exceed its carrying value so long as our estimate of future cash flows and the market valuation remain consistent with current levels. A continued period of volatile propane prices could result in further deterioration of market multiples, comparable sales transactions prices, weighted average costs of capital, and our cash flow estimates. Changes to any one or combination of these factors, would result in changes to the reporting unit fair values discussed above which could lead to future impairment charges. Such potential impairment could have a material effect on our results of operations.

13


During the three and nine months ended September 30, 2018, we had no additions to or dispositions from the carrying amount of goodwill in each of our reportable segments. The carrying amount of goodwill in each of our reportable segments was as follows:
 

 
September 30, 2018
 
(millions)
 
Gathering and Processing
 
Logistics and Marketing
 
Total
Balance, end of period
$
159

 
$
72

 
$
231


9. Investments in Unconsolidated Affiliates
The following table summarizes our investments in unconsolidated affiliates:
 
 
 
Carrying Value as of
 
Percentage
Ownership
 
September 30, 
 2018
 
December 31, 
 2017
 
 
 
(millions)
DCP Sand Hills Pipeline, LLC
66.67%
 
$
1,774

 
$
1,633

DCP Southern Hills Pipeline, LLC
66.67%
 
733

 
739

Discovery Producer Services LLC
40.00%
 
350

 
362

Front Range Pipeline LLC
33.33%
 
175

 
165

Texas Express Pipeline LLC
10.00%
 
92

 
90

Gulf Coast Express Pipeline LLC
25.00%
 
89

 

Mont Belvieu Enterprise Fractionator
12.50%
 
27

 
23

Panola Pipeline Company, LLC
15.00%
 
23

 
24

Mont Belvieu 1 Fractionator
20.00%
 
10

 
10

Other
Various
 
4

 
4

Total investments in unconsolidated affiliates
 
 
$
3,277

 
$
3,050

 
Earnings from investments in unconsolidated affiliates were as follows:
 
Three Months Ended September 30,

Nine Months Ended September 30,
 
2018
 
2017

2018

2017
 
(millions)
DCP Sand Hills Pipeline, LLC
$
64

 
$
37


$
170


$
105

DCP Southern Hills Pipeline, LLC
21

 
10


50


34

Discovery Producer Services LLC
1

 
14


4


59

Front Range Pipeline LLC
6

 
5


16


12

Texas Express Pipeline LLC
4

 
4


14


7

Mont Belvieu Enterprise Fractionator
3

 
3


10


10

Mont Belvieu 1 Fractionator
4

 
2


12


6

Other
1

 
(1
)

2


1

Total earnings from unconsolidated affiliates
$
104

 
$
74


$
278


$
234


14

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

The following tables summarize the combined financial information of our investments in unconsolidated affiliates:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(millions)
Statements of operations:
 
 
 
 
 
 
 
Operating revenue
$
407

 
$
358

 
$
1,149

 
$
1,063

Operating expenses
$
157

 
$
164

 
$
443

 
$
464

Net income
$
250

 
$
194

 
$
704

 
$
598

 
 
September 30, 
 2018
 
December 31, 
 2017
 
(millions)
Balance sheets:
 
 
 
Current assets
$
557

 
$
244

Long-term assets
5,937

 
5,319

Current liabilities
(412
)
 
(196
)
Long-term liabilities
(237
)
 
(200
)
Net assets
$
5,845

 
$
5,167



15

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

10. Fair Value Measurement
Determination of Fair Value
Below is a general description of our valuation methodologies for derivative financial assets and liabilities which are measured at fair value. Fair values are generally based upon quoted market prices or prices obtained through external sources, where available. If listed market prices or quotes are not available, we determine fair value based upon a market quote, adjusted by other market-based or independently sourced market data such as historical commodity volatilities, crude oil future yield curves, and/or counterparty specific considerations. These adjustments result in a fair value for each asset or liability under an “exit price” methodology, in line with how we believe a marketplace participant would value that asset or liability. Fair values are adjusted to reflect the credit risk inherent in the transaction as well as the potential impact of liquidating open positions in an orderly manner over a reasonable time period under current conditions. These adjustments may include amounts to reflect counterparty credit quality, the effect of our own creditworthiness, and/or the liquidity of the market.
Counterparty credit valuation adjustments are necessary when the market price of an instrument is not indicative of the fair value as a result of the credit quality of the counterparty. Generally, market quotes assume that all counterparties have near zero, or low, default rates and have equal credit quality. Therefore, an adjustment may be necessary to reflect the credit quality of a specific counterparty to determine the fair value of the instrument. We record counterparty credit valuation adjustments on all derivatives that are in a net asset position as of the measurement date in accordance with our established counterparty credit policy, which takes into account any collateral margin that a counterparty may have posted with us as well as any letters of credit that they have provided.
Entity valuation adjustments are necessary to reflect the effect of our own credit quality on the fair value of our net liability positions with each counterparty. This adjustment takes into account any credit enhancements, such as collateral margin we may have posted with a counterparty, as well as any letters of credit that we have provided. The methodology to determine this adjustment is consistent with how we evaluate counterparty credit risk, taking into account our own credit rating, current credit spreads, as well as any change in such spreads since the last measurement date.
Liquidity valuation adjustments are necessary when we are not able to observe a recent market price for financial instruments that trade in less active markets for the fair value to reflect the cost of exiting the position. Exchange traded contracts are valued at market value without making any additional valuation adjustments and, therefore, no liquidity reserve is applied. For contracts other than exchange traded instruments, we mark our positions to the midpoint of the bid/ask spread, and record a liquidity reserve based upon our total net position. We believe that such practice results in the most reliable fair value measurement as viewed by a market participant.
We manage our derivative instruments on a portfolio basis and the valuation adjustments described above are calculated on this basis. We believe that the portfolio level approach represents the highest and best use for these assets as there are benefits inherent in naturally offsetting positions within the portfolio at any given time, and this approach is consistent with how a market participant would view and value the assets and liabilities. Although we take a portfolio approach to managing these assets/liabilities, in order to reflect the fair value of any one individual contract within the portfolio, we allocate all valuation adjustments down to the contract level, to the extent deemed necessary, based upon either the notional contract volume, or the contract value, whichever is more applicable.
 
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe that our valuation methods are appropriate and consistent with other market participants, we recognize that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We review our fair value policies on a regular basis taking into consideration changes in the marketplace and, if necessary, will adjust our policies accordingly. See Note 12 - Risk Management and Hedging Activities.

16

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

Valuation Hierarchy
Our fair value measurements are grouped into a three-level valuation hierarchy and are categorized in their entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.
Level 1 — inputs are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — inputs are unobservable and considered significant to the fair value measurement.
A financial instrument’s categorization within the hierarchy is based upon the level of judgment involved in the most significant input in the determination of the instrument’s fair value. Following is a description of the valuation methodologies used as well as the general classification of such instruments pursuant to the hierarchy.
Commodity Derivative Assets and Liabilities

We enter into a variety of derivative financial instruments, which may include exchange traded instruments (such as New York Mercantile Exchange, or NYMEX, crude oil or natural gas futures) or over-the-counter, or OTC, instruments (such as natural gas contracts, crude oil or NGL swaps). The exchange traded instruments are generally executed with a highly rated broker dealer serving as the clearinghouse for individual transactions.

Our activities expose us to varying degrees of commodity price risk. To mitigate a portion of this risk and to manage commodity price risk related primarily to owned natural gas storage and pipeline assets, we engage in natural gas asset based trading and marketing, and we may enter into natural gas and crude oil derivatives to lock in a specific margin when market conditions are favorable. A portion of this may be accomplished through the use of exchange traded derivative contracts. Such instruments are generally classified as Level 1 since the value is equal to the quoted market price of the exchange traded instrument as of our balance sheet date, and no adjustments are required. Depending upon market conditions and our strategy we may enter into exchange traded derivative positions with a significant time horizon to maturity. Although such instruments are exchange traded, market prices may only be readily observable for a portion of the duration of the instrument. In order to calculate the fair value of these instruments, readily observable market information is utilized to the extent it is available; however, in the event that readily observable market data is not available, we may interpolate or extrapolate based upon observable data. In instances where we utilize an interpolated or extrapolated value, and it is considered significant to the valuation of the contract as a whole, we would classify the instrument within Level 3.

We also engage in the business of trading energy related products and services, which exposes us to market variables and commodity price risk. We may enter into physical contracts or financial instruments with the objective of realizing a positive margin from the purchase and sale of these commodity-based instruments. We may enter into derivative instruments for NGLs or other energy related products, primarily using the OTC derivative instrument markets, which are not as active and liquid as exchange traded instruments. Market quotes for such contracts may only be available for short dated positions (up to six months), and an active market itself may not exist beyond such time horizon. Contracts entered into with a relatively short time horizon for which prices are readily observable in the OTC market are generally classified within Level 2. Contracts with a longer time horizon, for which we internally generate a forward curve to value such instruments, are generally classified within Level 3. The internally generated curve may utilize a variety of assumptions including, but not limited to, data obtained from third-party pricing services, historical and future expected relationship of NGL prices to crude oil prices, the knowledge of expected supply sources coming online, expected weather trends within certain regions of the United States, and the future expected demand for NGLs.
Each instrument is assigned to a level within the hierarchy at the end of each financial quarter depending upon the extent to which the valuation inputs are observable. Generally, an instrument will move toward a level within the hierarchy that requires a lower degree of judgment as the time to maturity approaches, and as the markets in which the asset trades will likely become more liquid and prices more readily available in the market, thus reducing the need to rely upon our internally developed assumptions. However, the level of a given instrument may change, in either direction, depending upon market conditions and the availability of market observable data.

17

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

Nonfinancial Assets and Liabilities
We utilize fair value to perform impairment tests as required on our property, plant and equipment, goodwill, equity investments, and other long-lived intangible assets. Assets and liabilities acquired in third party business combinations are recorded at their fair value as of the date of acquisition. The inputs used to determine such fair value are primarily based upon internally developed cash flow models and would generally be classified within Level 3 in the event that we were required to measure and record such assets at fair value within our condensed consolidated financial statements. Additionally, we use fair value to determine the inception value of our asset retirement obligations. The inputs used to determine such fair value are primarily based upon costs incurred historically for similar work, as well as estimates from independent third parties for costs that would be incurred to restore leased property to the contractually stipulated condition, and would generally be classified within Level 3.

During the nine months ended September 30, 2018, we recognized no impairments of property, plant and equipment, intangible assets and investment in unconsolidated affiliates. During the nine months ended September 30, 2017, we recognized impairments of property, plant and equipment, intangible assets and investment in unconsolidated affiliates of $48 million in our condensed consolidated statement of operations as summarized in the table below. Our impairment determinations involved significant assumptions and judgments. Differing assumptions regarding any of these inputs could have a significant effect on the various valuations. As such, the fair value measurements utilized within these models are classified as non-recurring Level 3 measurements in the fair value hierarchy because they are not observable from objective sources.

The following tables present the carrying value of assets measured at fair value on a non-recurring basis, by condensed consolidated balance sheet caption and by valuation hierarchy, as of and for the nine months ended September 30, 2017:

 
Net Carrying
Value
 
Fair Value Measurements Using
 
Asset
Impairments
 
 
Level 1
 
Level 2
 
Level 3
 
 
(millions)
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment
$
14

 
$

 
$

 
$
14

 
$
26

Intangible assets
11

 

 

 
11

 
21

Investment in unconsolidated affiliates
1

 

 

 
1

 
1

    Total impairments
$
26

 
$

 
$

 
$
26

 
$
48



18

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

The following table presents the financial instruments carried at fair value as of September 30, 2018 and December 31, 2017, by condensed consolidated balance sheet caption and by valuation hierarchy, as described above:
 
September 30, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Carrying
Value
 
(millions)
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives (a)
$
44

 
$
9

 
$
4

 
$
57

 
$
10

 
$
17

 
$
3

 
$
30

Short-term investments (b)
$

 
$

 
$

 
$

 
$
156

 
$

 
$

 
$
156

Long-term assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives (c)
$
15

 
$
2

 
$
2

 
$
19

 
$
1

 
$
1

 
$
1

 
$
3

Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives (d)
$
(82
)
 
$
(57
)
 
$
(18
)
 
$
(157
)
 
$
(29
)
 
$
(34
)
 
$
(13
)
 
$
(76
)
Long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives (e)
$
(25
)
 
$
(7
)
 
$
(5
)
 
$
(37
)
 
$
(3
)
 
$
(11
)
 
$
(1
)
 
$
(15
)

(a)
Included in current unrealized gains on derivative instruments in our condensed consolidated balance sheets.
(b)
Includes short-term money market securities included in cash and cash equivalents in our condensed consolidated balance sheets.
(c)
Included in long-term unrealized gains on derivative instruments in our condensed consolidated balance sheets.
(d)
Included in current unrealized losses on derivative instruments in our condensed consolidated balance sheets.
(e)
Included in long-term unrealized losses on derivative instruments in our condensed consolidated balance sheets.

Changes in Levels 1 and 2 Fair Value Measurements
The determination to classify a financial instrument within Level 1 or Level 2 is based upon the availability of quoted prices for identical or similar assets and liabilities in active markets. Depending upon the information readily observable in the market, and/or the use of identical or similar quoted prices, which are significant to the overall valuation, the classification of any individual financial instrument may differ from one measurement date to the next. To qualify as a transfer, the asset or liability must have existed in the previous reporting period and moved into a different level during the current period. In the event that there is a movement between the classification of an instrument as Level 1 or 2, the transfer would be reflected in a table as “Transfers into or out of Level 1 and Level 2”. During the nine months ended September 30, 2018 and 2017, there were no transfers between Level 1 and Level 2 of the fair value hierarchy.
Changes in Level 3 Fair Value Measurements
The tables below illustrate a rollforward of the amounts included in our condensed consolidated balance sheets for derivative financial instruments that we have classified within Level 3. Since financial instruments classified as Level 3 typically include a combination of observable components (that is, components that are actively quoted and can be validated to external sources) and unobservable components, the gains and losses in the table below may include changes in fair value due in part to observable market factors, or changes to our assumptions on the unobservable components. Depending upon the information readily observable in the market, and/or the use of unobservable inputs, which are significant to the overall valuation, the classification of any individual financial instrument may differ from one measurement date to the next. The significant unobservable inputs used in determining fair value include adjustments by other market-based or independently sourced market data such as historical commodity volatilities, crude oil future yield curves, and/or counterparty specific considerations. In the event that there is a movement to/from the classification of an instrument as Level 3, we would reflect such items in the table below within the “Transfers into/out of Level 3” captions.
We manage our overall risk at the portfolio level and in the execution of our strategy, we may use a combination of financial instruments, which may be classified within any level. Since Level 1 and Level 2 risk management instruments are not included in the rollforward below, the gains or losses in the table do not reflect the effect of our total risk management activities.

19

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

 
Commodity Derivative Instruments
 
Current
Assets
 
Long-Term
Assets
 
Current
Liabilities
 
Long-Term
Liabilities
 
(millions)
Three months ended September 30, 2018 (a):
 
 
 
 
 
 
 
Beginning balance
$
1

 
$
1

 
$
(10
)
 
$
(7
)
Net unrealized gains (losses) included in earnings (b)
4

 
1

 
(20
)
 
2

Transfers out of Level 3 (c)
(1
)
 

 
5

 

Settlements

 

 
7

 

Ending balance
$
4

 
$
2

 
$
(18
)
 
$
(5
)
Net unrealized gains (losses) on derivatives still held included in earnings (b)
$
3

 
$
1

 
$
(15
)
 
$
2

Three months ended September 30, 2017 (a):
 
 
 
 
 
 
 
Beginning balance
$
7

 
$
2

 
$
(2
)
 
$
(3
)
Net unrealized gains (losses) included in earnings (b)

 
2

 
(26
)
 

Transfers out of Level 3 (c)

 

 
2

 

Settlements

 

 
2

 

CME Rule 814 adjustment
(5
)
 
(3
)
 
16

 
1

Ending balance
$
2

 
$
1

 
$
(8
)
 
$
(2
)
Net unrealized gains on derivatives still held included in earnings (b)
$
3

 
$
2

 
$
(22
)
 
$

 
Commodity Derivative Instruments
 
Current
Assets
 
Long-Term
Assets
 
Current
Liabilities
 
Long-Term
Liabilities
 
(millions)
Nine months ended September 30, 2018 (a):
 
 
 
 
 
 
 
Beginning balance
$
3

 
$
1

 
$
(13
)
 
$
(1
)
Net unrealized gains (losses) included in earnings (b)
2

 
1

 
(28
)
 
(4
)
Transfers out of Level 3 (c)
(1
)
 

 
10

 

Settlements

 

 
13

 

Ending balance
$
4

 
$
2

 
$
(18
)
 
$
(5
)
Net unrealized gains (losses) on derivatives still held included in earnings (b)
$
4

 
$
1

 
$
(17
)
 
$
(4
)
Nine months ended September 30, 2017 (a):
 
 
 
 
 
 
 
Beginning balance
$
9

 
$
5

 
$
(23
)
 
$

Net unrealized gains (losses) included in earnings (b)
4

 
(1
)
 
(20
)
 
(3
)
Transfers out of Level 3 (c)
(4
)
 

 
12

 

Settlements
(2
)
 

 
7

 

CME Rule 814 adjustment
$
(5
)
 
$
(3
)
 
$
16

 
$
1

Ending balance
$
2

 
$
1

 
$
(8
)
 
$
(2
)
Net unrealized gains (losses) on derivatives still held included in earnings (b)
$
7

 
$
(1
)
 
$
(21
)
 
$
(2
)
 
(a)
There were no purchases, issuances or sales of derivatives or transfers into Level 3 for the three and nine months ended September 30, 2018 and 2017.
(b)
Represents the amount of unrealized gains or losses for the period, included in trading and marketing gains (losses), net.
(c)
Amounts transferred out of Level 3 are reflected at fair value at the end of the period.

20

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

Quantitative Information and Fair Value Sensitivities Related to Level 3 Unobservable Inputs
We utilize the market approach to measure the fair value of our commodity contracts. The significant unobservable inputs used in this approach to fair value are longer dated price quotes. Our sensitivity to these longer dated forward curve prices are presented in the table below. Significant changes in any of those inputs in isolation would result in significantly different fair value measurements, depending on our short or long position in contracts.
 
September 30, 2018
 
 
Product Group
Fair Value
 
Forward
Curve Range
 
 
 
(millions)
 
 
Assets
 
 
 
 
 
NGLs
$
4

 
$0.38-$1.29
 
Per gallon
Natural gas
$
2

 
$1.87-$2.43
 
Per MMBtu
Liabilities
 
 
 
 
 
NGLs
$
(22
)
 
$0.15-$1.29
 
Per gallon
Natural gas
$
(1
)
 
$2.37-$2.80
 
Per MMBtu
Estimated Fair Value of Financial Instruments
Valuation of a contract’s fair value is validated by an internal group independent of the marketing group. While common industry practices are used to develop valuation techniques, changes in pricing methodologies or the underlying assumptions could result in significantly different fair values and income recognition. When available, quoted market prices or prices obtained through external sources are used to determine a contract’s fair value. For contracts with a delivery location or duration for which quoted market prices are not available, fair value is determined based on pricing models developed primarily from historical and expected relationships with quoted market prices.
Values are adjusted to reflect the credit risk inherent in the transaction as well as the potential impact of liquidating open positions in an orderly manner over a reasonable time period under current conditions. Changes in market prices and management estimates directly affect the estimated fair value of these contracts. Accordingly, it is reasonably possible that such estimates may change in the near term.
The fair value of our interest rate swaps, if any, and commodity non-trading derivatives is based on prices supported by quoted market prices and other external sources and prices based on models and other valuation methods. The “prices supported by quoted market prices and other external sources” category includes our interest rate swaps, if any, our NGL and crude oil swaps and our NYMEX positions in natural gas. In addition, this category includes our forward positions in natural gas for which our forward price curves are obtained from a third party pricing service and then validated through an internal process which includes the use of independent broker quotes. This category also includes our forward positions in NGLs at points for which OTC broker quotes for similar assets or liabilities are available for the full term of the instrument. This category also includes “strip” transactions whose pricing inputs are directly or indirectly observable from external sources and then modeled to daily or monthly prices as appropriate. The “prices based on models and other valuation methods” category includes the value of transactions for which inputs to the fair value of the instrument are unobservable in the marketplace and are considered significant to the overall fair value of the instrument. The fair value of these instruments may be based upon an internally developed price curve, which was constructed as a result of the long dated nature of the transaction or the illiquidity of the specific market point.
We have determined fair value amounts using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts.
The fair value of accounts receivable and accounts payable are not materially different from their carrying amounts because of the short-term nature of these instruments or the stated rates approximating market rates. Derivative instruments are carried at fair value.

21

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

We determine the fair value of our fixed-rate senior notes and junior subordinated notes based on quotes obtained from bond dealers. The fair value of borrowings under the Credit Agreement and our Accounts Receivable Securitization Facility (the "Securitization Facility") are based on carrying value, which approximates fair value as their interest rates are based on prevailing market interest rates. We classify the fair values of our outstanding debt balances within Level 2 of the valuation hierarchy. As of September 30, 2018 and December 31, 2017, the carrying value and fair value of our total debt, including current maturities, were as follows:
 
 
September 30, 2018
 
December 31, 2017
 
 
Carrying Value (a)
 
Fair Value
 
Carrying Value (a)
 
Fair Value
 
(millions)
 
 
 
 
 
 
 
 
 
Total debt
 
$
5,131

 
$
5,199

 
$
4,736

 
$
4,885

(a) Excludes unamortized issuance costs.

22

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

11. Debt
 
September 30, 
 2018
 
December 31, 
 2017
 
(millions)
Senior notes:
 
 
 
Issued February 2009, interest at 9.750% payable semiannually, due March 2019
$

 
$
450

Issued March 2014, interest at 2.700% payable semi-annually, due April 2019
325

 
325

Issued March 2010, interest at 5.350% payable semiannually, due March 2020 (a)
600

 
600

Issued September 2011, interest at 4.750% payable semiannually, due September 2021
500

 
500

Issued March 2012, interest at 4.950% payable semi-annually, due April 2022
350

 
350

Issued March 2013, interest at 3.875% payable semi-annually, due March 2023
500

 
500

Issued July 2018, interest at 5.375% payable semi-annually, due July 2025
500

 

Issued August 2000, interest at 8.125% payable semi-annually, due August 2030 (a)
300

 
300

Issued October 2006, interest at 6.450% payable semi-annually, due November 2036
300

 
300

Issued September 2007, interest at 6.750% payable semi-annually, due September 2037
450

 
450

Issued March 2014, interest at 5.600% payable semi-annually, due April 2044
400

 
400

Junior subordinated notes:
 
 
 
Issued May 2013, interest at 5.850% payable semi-annually, due May 2043
550

 
550

Credit agreement:
 
 
 
Revolving credit facility, weighted-average variable interest rate of 3.650%, as of September 30, 2018, due December 2022
145

 

Accounts Receivable Securitization Facility:
 
 
 
Accounts receivable securitization facility, weighted-average variable interest rate of 3.061% as of September 30, 2018, due August 2019
200

 

Fair value adjustments related to interest rate swap fair value hedges (a)
21

 
23

Unamortized issuance costs
(31
)
 
(29
)
Unamortized discount
(10
)
 
(12
)
Total debt
5,100

 
4,707

Current debt
525

 

Total long-term debt
$
4,575

 
$
4,707

(a) The swaps associated with this debt were previously terminated. The remaining long-term fair value of approximately
$21 million related to the swaps is being amortized as a reduction to interest expense through 2020 and 2030, the original maturity dates of the debt.

Accounts Receivable Securitization Facility

In August 2018, we entered into our Securitization Facility that provides up to $200 million of borrowing capacity through August 2019 at LIBOR market index rates plus a margin. Under this Securitization Facility, certain of the Partnership’s wholly owned subsidiaries sell or contribute receivables to another of the Partnership’s consolidated subsidiaries, DCP Receivables LLC (“DCP Receivables”), a bankruptcy-remote special purpose entity created for the sole purpose of this Securitization Facility. 

DCP Receivables’ sole activity consists of purchasing receivables from the Partnership’s wholly owned subsidiaries that participate in the Securitization Facility and providing these receivables as collateral for DCP Receivables’ borrowings under the Securitization Facility.  DCP Receivables is a separate legal entity and the accounts receivable of DCP Receivables, up to the amount of the outstanding debt under the Securitization Facility, are not available to satisfy the claims of creditors of the Partnership, its subsidiaries selling receivables under the Securitization Facility, or their affiliates. Any excess receivables are eligible to satisfy the claims of creditors of the Partnership, its subsidiaries selling receivables under the Securitization Facility, or their affiliates. The amount available for borrowing is based on the availability of eligible receivables and other customary factors and conditions. As of September 30, 2018, DCP Receivables had $838 million of our accounts receivable under its

23

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

Securitization Facility. Borrowings under the Securitization Facility are included in “Current debt” on the condensed consolidated balance sheet.

Senior Notes Redemption

In August 2018, we redeemed our outstanding $450 million 9.750% Senior Notes due March 2019, totaling $468 million in aggregate principal and make-whole payments, at a price of 104.008% plus accrued interest through the redemption date. The redemption resulted in a $19 million loss, which is reflected as loss from financing activities on the condensed consolidated statements of operations.

Senior Notes Issuance

On July 17, 2018, we issued $500 million of 5.375% Senior Notes due July 2025, unless redeemed prior to maturity. We received proceeds of $495 million, net of underwriters’ fees, related expenses and unamortized discounts which we used to redeem our $450 million 9.750% Senior Notes due March 2019. Interest on the notes will be paid semi-annually in arrears on January 15 and July 15 of each year, commencing January 15, 2019.

Credit Agreement

We are a party to a $1.4 billion unsecured revolving Credit Agreement (the "Credit Agreement") which matures on December 6, 2022. The Credit Agreement also grants us the option to increase the revolving loan commitment by an aggregate principal amount of up to $500 million, subject to requisite lender approval. The Credit Agreement may be extended for up to two additional one-year periods subject to requisite lender approval. Loans under the Credit Agreement may be used for working capital and other general partnership purposes including acquisitions.

The Credit Agreement allows for unrestricted cash and cash equivalents to be netted against consolidated indebtedness for purposes of calculating the Partnership’s Consolidated Leverage Ratio (as defined in the Credit Agreement). Additionally, under the Credit Agreement, the Consolidated Leverage Ratio of the Partnership as of the end of any fiscal quarter shall not exceed 5.00 to 1.0 for each fiscal quarter ending after September 30, 2018; provided that, if there is a Qualified Acquisition (as defined in the Credit Agreement) during any fiscal quarter ending September 30, 2018 or thereafter, the maximum Consolidated Leverage Ratio shall not exceed 5.50 to 1.0 at the end of the three consecutive fiscal quarters, including the fiscal quarter in which the Qualified Acquisition occurs.

Our cost of borrowing under the Credit Agreement is determined by a ratings-based pricing grid. Indebtedness under the Credit Agreement bears interest at either: (1) LIBOR, plus an applicable margin of 1.45% based on our current credit rating; or (2) (a) the base rate which shall be the higher of the prime rate, the Federal Funds rate plus 0.50% or the LIBOR Market Index rate plus 1%, plus (b) an applicable margin of 0.45% based on our current credit rating. The Credit Agreement incurs an annual facility fee of 0.30% based on our current credit rating. This fee is paid on drawn and undrawn portions of the $1.4 billion revolving credit facility.

As of September 30, 2018, we had unused borrowing capacity of $1,242 million, net of $13 million of letters of credit, under the Credit Agreement. Our borrowing capacity may be limited by financial covenants set forth in the Credit Agreement. The financial covenants set forth in the Credit Agreement limit the Partnership's ability to incur incremental debt by the unused borrowing capacity of $1,242 million as of September 30, 2018. Except in the case of a default, amounts borrowed under our Credit Agreement will not become due prior to the December 6, 2022 maturity date.

Senior Notes and Junior Subordinated Notes

Our senior notes and junior subordinated notes, collectively referred to as our debt securities, mature and become payable on their respective due dates, and are not subject to any sinking fund or mandatory redemption provisions. The senior notes are senior unsecured obligations that are guaranteed by the Partnership and rank equally in a right of payment with our other senior unsecured indebtedness, including indebtedness under our Credit Agreement, and the junior subordinated notes are unsecured and rank subordinate in right of payment to all of our existing and future senior indebtedness. The debt securities include an optional redemption whereby we may elect to redeem the notes, in whole or in part from time-to-time for a premium. Additionally, we may defer the payment of all or part of the interest on the junior subordinated notes for one or more periods up

24

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2018 and 2017 - (Continued)
(Unaudited)

to five consecutive years. The underwriters’ fees and related expenses are recorded in our condensed consolidated balance sheets within the carrying amount of long-term debt and will be amortized over the term of the notes.