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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 March 31, 2019
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)
None
(Former name, former address and former fiscal year, if changed since last report)
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 every Interactive Data File required to be submitted 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 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common units representing limited partner interests
 
DCP
 
New York Stock Exchange
7.875% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
DCP PRB
 
New York Stock Exchange
7.95% Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
DCP PRC
 
New York Stock Exchange

As of May 1, 2019, there were 143,317,328 common units representing limited partner interests outstanding.



DCP MIDSTREAM, LP
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2019
TABLE OF CONTENTS
 
 
 
 
Item
 
Page
 
PART I. FINANCIAL INFORMATION
 
1.
Financial Statements (unaudited):
 
 
Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018
 
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018
 
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018
 
Condensed Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2019
 
Condensed Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2018
 
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 for the quarter ended March 31, 2019, and in our Annual Report on Form 10-K for the year ended December 31, 2018, 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;
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, climate change legislation, regulation of over-the-counter derivatives market and entities, and hydraulic fracturing regulations, or the increased regulation of our industry, including additional local control over such activities, and their impact on producers and customers served by our systems;
volatility in the price of our common units and preferred units;
general economic, market and business conditions;
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;
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;
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 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
DCP MIDSTREAM, LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31, 2019
 
December 31, 2018
ASSETS
(millions)
Current assets:
 
 
 
Cash and cash equivalents
$
1

 
$
1

Accounts receivable:
 
 
 
Trade, net of allowance for doubtful accounts of $3 and $3 million, respectively
732

 
860

Affiliates
176

 
166

Other
6

 
7

Inventories
52

 
79

Unrealized gains on derivative instruments
35

 
108

Collateral cash deposits
64

 
34

Other
16

 
16

Total current assets
1,082

 
1,271

Property, plant and equipment, net
9,110

 
9,135

Goodwill
194

 
231

Intangible assets, net
77

 
97

Investments in unconsolidated affiliates
3,460

 
3,340

Unrealized gains on derivative instruments
2

 
8

Operating lease assets
78

 

Other long-term assets
184

 
184

Total assets
$
14,187

 
$
14,266

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable:
 
 
 
Trade
$
786

 
$
807

Affiliates
116

 
96

Other
30

 
23

Current debt
1,125

 
525

Unrealized losses on derivative instruments
61

 
91

Accrued interest
72

 
71

Accrued taxes
65

 
64

Accrued wages and benefits
25

 
64

Capital spending accrual
28

 
63

Other
96

 
100

Total current liabilities
2,404

 
1,904

Long-term debt
4,236

 
4,782

Unrealized losses on derivative instruments
5

 
8

Deferred income taxes
32

 
32

Operating lease liabilities
66

 

Other long-term liabilities
231

 
243

Total liabilities
6,974

 
6,969

Commitments and contingent liabilities (see note 18)

 

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

 
489

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

 
156

Series C preferred limited partners (4,400,000 preferred units authorized, issued and outstanding, respectively)
106

 
106

General partner
105

 
107

Limited partners (143,317,328 common units authorized, issued and outstanding, respectively)
6,327

 
6,418

Accumulated other comprehensive loss
(8
)
 
(8
)
Total partners’ equity
7,184

 
7,268

Noncontrolling interests
29

 
29

Total equity
7,213

 
7,297

Total liabilities and equity
$
14,187

 
$
14,266


See accompanying notes to condensed consolidated financial statements.

1


DCP MIDSTREAM, LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
(millions, except per unit amounts)
Operating revenues:
 
 
 
 
Sales of natural gas, NGLs and condensate
 
$
1,771

 
$
1,744

Sales of natural gas, NGLs and condensate to affiliates
 
340

 
325

Transportation, processing and other
 
115

 
111

Trading and marketing losses, net
 
(27
)
 
(41
)
Total operating revenues
 
2,199

 
2,139

Operating costs and expenses:
 
 
 
 
Purchases and related costs
 
1,533

 
1,604

Purchases and related costs from affiliates
 
271

 
165

Operating and maintenance expense
 
178

 
162

Depreciation and amortization expense
 
103

 
94

General and administrative expense
 
67

 
59

Other expense, net
 
5

 
2

Loss on sale of assets, net
 
9

 

Total operating costs and expenses
 
2,166

 
2,086

Operating income
 
33

 
53

Earnings from unconsolidated affiliates
 
113

 
78

Interest expense, net
 
(69
)
 
(67
)
Income before income taxes
 
77

 
64

Income tax expense
 
(1
)
 
(1
)
Net income
 
76

 
63

Net income attributable to noncontrolling interests
 
(1
)
 
(1
)
Net income attributable to partners
 
75

 
62

Series A preferred limited partners' interest in net income
 
(9
)
 
(9
)
Series B preferred limited partners' interest in net income
 
(3
)
 

Series C preferred limited partners' interest in net income
 
(2
)
 

General partner’s interest in net income
 
(41
)
 
(41
)
Net income allocable to limited partners
 
$
20

 
$
12

Net income per limited partner unit — basic and diluted
 
$
0.14

 
$
0.08

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

 
143.3

See accompanying notes to condensed consolidated financial statements.


2


DCP MIDSTREAM, LP
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
(millions)
Net income
 
$
76

 
$
63

Other comprehensive income:
 
 
 
 
Total other comprehensive income
 

 

Total comprehensive income
 
76

 
63

Total comprehensive income attributable to noncontrolling interests
 
(1
)
 
(1
)
Total comprehensive income attributable to partners
 
$
75

 
$
62

See accompanying notes to condensed consolidated financial statements.


3


DCP MIDSTREAM, LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
 
(millions)
OPERATING ACTIVITIES:
 
 
 
Net income
$
76

 
$
63

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

 

Depreciation and amortization expense
103

 
94

Earnings from unconsolidated affiliates
(113
)
 
(78
)
Distributions from unconsolidated affiliates
124

 
91

Net unrealized losses on derivative instruments
54

 
29

Loss on sale of assets, net
9

 

Other, net
6

 
6

Change in operating assets and liabilities, which provided (used) cash:
 
 
 
Accounts receivable
118

 
161

Inventories
14

 
17

Accounts payable
29

 
(151
)
Other assets and liabilities
(103
)
 
(110
)
Net cash provided by operating activities
317

 
122

INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(182
)
 
(124
)
Investments in unconsolidated affiliates
(131
)
 
(60
)
Proceeds from sale of assets
103

 
3

Net cash used in investing activities
(210
)
 
(181
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from debt
1,402

 
635

Payments of debt
(1,348
)
 
(535
)
Distributions to preferred limited partners
(5
)
 

Distributions to limited partners and general partner
(154
)
 
(194
)
Distributions to noncontrolling interests
(1
)
 
(1
)
Other
(1
)
 

Net cash used in financing activities
(107
)
 
(95
)
Net change in cash and cash equivalents

 
(154
)
Cash and cash equivalents, beginning of period
1

 
156

Cash and cash equivalents, end of period
$
1

 
$
2


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
 
Series C Preferred Limited Partners
 
Limited 
Partners
 
General 
Partner
 
Accumulated 
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
Equity
 
(millions)
Balance, January 1, 2019
 
$
489

 
$
156

 
$
106

 
$
6,418

 
$
107

 
$
(8
)
 
$
29

 
$
7,297

Net income
 
9

 
3

 
2

 
20

 
41

 

 
1

 
76

Distributions to unitholders
 

 
(3
)
 
(2
)
 
(111
)
 
(43
)
 

 

 
(159
)
Distributions to noncontrolling interests
 

 

 

 

 

 

 
(1
)
 
(1
)
Balance, March 31, 2019
 
$
498

 
$
156

 
$
106

 
$
6,327

 
$
105

 
$
(8
)
 
$
29

 
$
7,213

See accompanying notes to condensed consolidated financial statements.


5


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

 
$
6,772

 
$
154

 
$
(9
)
 
$
30

 
$
7,438

Cumulative-effect adjustment
 

 
6

 

 

 

 
6

Net income
 
9

 
12

 
41

 

 
1

 
63

Distributions to noncontrolling interests
 

 

 

 

 
(1
)
 
(1
)
Distributions to unitholders
 

 
(111
)
 
(83
)
 

 

 
(194
)
Balance, March 31, 2018
 
$
500

 
$
6,679

 
$
112

 
$
(9
)
 
$
30

 
$
7,312

 
See accompanying notes to condensed consolidated financial statements.


6


DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2019 and 2018
(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 Logistics and Marketing and Gathering and Processing segments. For additional information regarding these segments, see Note 19 - 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 March 31, 2019, 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. 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 (the 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 months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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 2018 audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.




7

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2019 and 2018 (Continued)
(Unaudited)


2. Update to Significant Accounting Policies

Our significant accounting policies are detailed in Note 2 - Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the year ended December 31, 2018. Significant changes to our accounting policies as a result of Topic 842 (as defined below) are discussed below:

Leases - Our leasing activity primarily consists of transportation agreements, office space, vehicles, compressors and field equipment. We determine if an arrangement is an operating or finance lease at inception. Right of use assets represent our right to use an underlying asset for the lease term when we control the use of the asset by obtaining substantially all of the economic benefits of the asset and direct the use of the asset. Lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right of use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The interest rate used to calculate the present value of lease payments is the rate implicit in the lease when determinable or our incremental borrowing rate. Our incremental borrowing rate is primarily based on our collateralized borrowing rate when such borrowings exist or an estimated collateralized borrowing rate based on independent third party quotes when such borrowings do not exist. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term.

3. New Accounting Pronouncements

Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" or ASU 2016-13 - In June 2016, the FASB issued ASU 2016-13, which amends current measurement techniques used to estimate credit losses for financial assets. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019, with the option to early adopt for financial statements that have not been issued. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.

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. We adopted this ASU on January 1, 2019 using the modified retrospective approach without application to prior periods. We implemented the following practical expedients and policy elections permitted under the new standard: (a) the package of practical expedients allowing us to not reassess whether expired or existing contracts contain a lease, the lease classification for any expired or existing leases and the treatment of initial direct costs for any expired or existing leases, (b) the land easement practical expedient, allowing us to carry forward our current accounting treatment for land easements on existing agreements, (c) not recognizing lease assets or liabilities when lease terms are less than twelve months and (d) for agreements that contain both lease and non-lease components, combining these components together and accounting for them as a single lease.
The effect of the changes made to our consolidated January 1, 2019 balance sheet as a result of the adoption of Topic 842 was as follows:
 
 
Balance at
 
Adjustments due to Topic 842
 
Balance at
 
 
December 31, 2018
 
 
January 1, 2019
 
 
(millions)
Balance Sheet
 
 
 
 
 
 
Operating lease assets
 
$

 
$
84

 
$
84

 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Other
 
$
100

 
$
25

 
$
125

Operating lease liabilities
 
$

 
$
66

 
$
66

Other long-term liabilities
 
$
243

 
$
(7
)
 
$
236


This change did not have any impact on our consolidated statement of operations or consolidated statement of cash flows.
 
 


8

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2019 and 2018 (Continued)
(Unaudited)


4. Dispositions

On January 30, 2019, we entered into a purchase and sale agreement with NGL Energy Partners LP to sell Gas Supply Resources, our wholesale propane business primarily consisting of seven natural gas liquids terminals in the Eastern United States within our Logistics and Marketing segment for a purchase price of $90 million. Net proceeds received were approximately $103 million due to customary purchase price adjustments. The transaction closed effective March 1, 2019. We recognized a loss on sale of $9 million, net of goodwill, in the first quarter of 2019.

5. Revenue Recognition

We disaggregate our revenue from contracts with customers by type of contract 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:
 
 
 
Three Months Ended March 31, 2019
 
 
Logistics and Marketing
 
Gathering and Processing
 
Eliminations
 
Total
 
 
(millions)
Sales of natural gas
 
$
637

 
$
557

 
$
(498
)
 
$
696

Sales of NGLs and condensate (a)
 
1,403

 
648

 
(636
)
 
1,415

Transportation, processing and other
 
12

 
103

 

 
115

Trading and marketing losses, net (b)
 
$
(7
)
 
$
(20
)
 

 
(27
)
     Total operating revenues
 
$
2,045

 
$
1,288

 
$
(1,134
)
 
$
2,199


 
 
Three Months Ended March 31, 2018
 
 
Logistics and Marketing
 
Gathering and Processing
 
Eliminations
 
Total
 
 
(millions)
Sales of natural gas
 
$
553

 
$
446

 
$
(419
)
 
$
580

Sales of NGLs and condensate (a)
 
1,456

 
740

 
(707
)
 
1,489

Transportation, processing and other
 
14

 
97

 

 
111

Trading and marketing (losses) gains, net (b)
 
$
(44
)
 
$
3

 

 
(41
)
     Total operating revenues
 
$
1,979

 
$
1,286

 
$
(1,126
)
 
$
2,139


(a)   Includes $858 million and $793 million for the three months ended March 31, 2019 and 2018, respectively, of revenues from physical sales contracts and buy-sell exchange transactions in our logistics and marketing segment, which are not within the scope of FASB ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606).
(b)   Not within the scope of Topic 606.

The revenue expected to be recognized in the future related to performance obligations that are not satisfied is approximately $212 million as of March 31, 2019. Our remaining performance obligations primarily consist of minimum volume commitment fee arrangements and are expected to be recognized through 2028 with a weighted average remaining life of 5 years as of March 31, 2019. As a practical expedient permitted by ASC 606, this amount excludes variable consideration as well as remaining performance obligations that have original expected durations of one year or less, as applicable. Our remaining performance obligations also exclude estimates of variable rate escalation clauses in our contracts with customers.

6. Contract Liabilities

Our contract liabilities consist of deferred revenue received from reimbursable projects. The noncurrent portion of deferred revenue is included in other long-term liabilities on our condensed consolidated balance sheet.


9

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2019 and 2018 (Continued)
(Unaudited)


The following table summarizes changes in contract liabilities included in our condensed consolidated balance sheet:
 
 
March 31,
 
 
2019
 
 
(millions)
Balance, beginning of period
 
$
34

Revenue recognized (a)
 

Balance, end of period
 
$
34


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

The contract liabilities disclosed in the table above will be recognized as revenue as the obligations are satisfied over their average remaining contract life, which is 35 years as of March 31, 2019.

7. 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 March 31,

 
2019
 
2018
 
(millions)
Employee related costs charged by DCP Midstream, LLC
 
 
 
 
Operating and maintenance expense
 
$
49

 
$
50

General and administrative expense
 
$
47

 
$
38



Phillips 66 and its Affiliates

We sell a portion of our residue gas and NGLs to and purchase NGLs from Phillips 66 and its respective affiliates. We anticipate continuing to sell commodities to and purchase commodities from Phillips 66 and its affiliates 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.



10

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2019 and 2018 (Continued)
(Unaudited)


Summary of Transactions with Affiliates
The following table summarizes our transactions with affiliates:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
(millions)
Phillips 66 (including its affiliates):
 
 
 
 
Sales of natural gas, NGLs and condensate to affiliates
 
$
326

 
$
302

Purchases and related costs from affiliates
 
$
45

 
$
10

Operating and maintenance and general administrative expenses
 
$
4

 
$
3

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

 
$
12

Purchases and related costs from affiliates
 
$
7

 
$
10

Unconsolidated affiliates:
 
 
 
 
Sales of natural gas, NGLs and condensate to affiliates
 
$
14

 
$
11

Transportation, processing, and other to affiliates
 
$
1

 
$
1

Purchases and related costs from affiliates
 
$
219

 
$
145


 We had balances with affiliates as follows:
 
March 31, 2019
 
December 31, 2018
 
(millions)
Phillips 66 (including its affiliates):
 
 
 
Accounts receivable
$
146

 
$
145

Accounts payable
$
28

 
$
22

Enbridge (including its affiliates):
 
 
 
Accounts payable
$
2

 
$
2

Unconsolidated affiliates:
 
 
 
Accounts receivable
$
30

 
$
21

Accounts payable
$
86

 
$
72



8. Inventories
Inventories were as follows: 
 
March 31, 2019
 
December 31, 2018
 
(millions)
Natural gas
$
23

 
$
34

NGLs
29

 
45

Total inventories
$
52

 
$
79


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. During the three months ended March 31, 2019, we recognized lower of cost or net realizable value adjustments of $5 million. We recognized no lower of cost or net realizable value adjustments during the three months ended March 31, 2018.

11

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2019 and 2018 (Continued)
(Unaudited)


9. Property, Plant and Equipment
A summary of property, plant and equipment by classification is as follows:
 
Depreciable
Life
 
March 31, 2019
 
December 31, 2018
 
 
 
(millions)
Gathering and transmission systems
20 — 50 Years
 
$
8,539

 
$
8,492

Processing, storage and terminal facilities
35 — 60 Years
 
5,149

 
5,194

Other
3 —  30 Years
 
571

 
568

Construction work in progress
 
 
527

 
470

Property, plant and equipment
 
 
14,786

 
14,724

Accumulated depreciation
 
 
(5,676
)
 
(5,589
)
Property, plant and equipment, net
 
 
$
9,110

 
$
9,135


Interest capitalized on construction projects was $5 million for the three months ended March 31, 2019 and 2018, respectively.
Depreciation expense was $101 million and $92 million for the three months ended March 31, 2019 and 2018, respectively.
 

10. Goodwill

The carrying amount of goodwill in each of our reportable segments was as follows:
 

 
March 31, 2019
 
(millions)
 
Gathering and Processing
 
Logistics and Marketing
 
Total
Balance, beginning of period
$
159

 
$
72

 
$
231

Dispositions

 
(37
)
 
(37
)
Balance, end of period
$
159

 
$
35

 
$
194



11. Investments in Unconsolidated Affiliates
The following table summarizes our investments in unconsolidated affiliates:
 
 
 
Carrying Value as of
 
Percentage
Ownership
 
March 31,
2019
 
December 31, 2018
 
 
 
(millions)
DCP Sand Hills Pipeline, LLC
66.67%
 
$
1,787

 
$
1,791

DCP Southern Hills Pipeline, LLC
66.67%
 
731

 
728

Discovery Producer Services LLC
40.00%
 
339

 
344

Front Range Pipeline LLC
33.33%
 
185

 
175

Texas Express Pipeline LLC
10.00%
 
98

 
95

Gulf Coast Express Pipeline LLC
25.00%
 
257

 
146

Mont Belvieu Enterprise Fractionator
12.50%
 
27

 
24

Panola Pipeline Company, LLC
15.00%
 
22

 
23

Mont Belvieu 1 Fractionator
20.00%
 
10

 
10

Other
Various
 
4

 
4

Total investments in unconsolidated affiliates
 
 
$
3,460

 
$
3,340





12

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2019 and 2018 (Continued)
(Unaudited)


 
Earnings from investments in unconsolidated affiliates were as follows:
 
Three Months Ended March 31,
 
2019

2018
 
(millions)
DCP Sand Hills Pipeline, LLC
$
68


$
48

DCP Southern Hills Pipeline, LLC
23


13

Discovery Producer Services LLC


1

Front Range Pipeline LLC
7


5

Texas Express Pipeline LLC
5


2

Mont Belvieu Enterprise Fractionator
4


4

Mont Belvieu 1 Fractionator
4


4

Other
2


1

Total earnings from unconsolidated affiliates
$
113


$
78



The following tables summarize the combined financial information of our investments in unconsolidated affiliates:
 
Three Months Ended March 31,
 
2019
 
2018
 
(millions)
Statements of operations:
 
 
 
Operating revenue
$
421

 
$
334

Operating expenses
$
191

 
$
139

Net income
$
231

 
$
194


 
 
March 31,
2019
 
December 31,
2018
 
(millions)
Balance sheets:
 
 
 
Current assets
$
327

 
$
411

Long-term assets
6,941

 
6,359

Current liabilities
(450
)
 
(424
)
Long-term liabilities
(249
)
 
(221
)
Net assets
$
6,569

 
$
6,125



12. Fair Value Measurement
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.

13

DCP MIDSTREAM, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2019 and 2018 (Continued)
(Unaudited)


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 r