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DCP Midstream Partners, LP 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-12.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
DPM-2013.6.30-10Q
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 June 30, 2013
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 PARTNERS, 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)
Registrant’s telephone number, including area code: (303) 633-2900 
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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
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 August 2, 2013, there were outstanding 78,201,309 common units representing limited partner interests.




DCP MIDSTREAM PARTNERS, LP
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013
TABLE OF CONTENTS
 
 
 
 
Item
 
Page
 
PART I. FINANCIAL INFORMATION
 
 
 
 
1
 
 
 
 
 
 
 
 
2
3
4
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
1
1A.
6
 
 
 


i


GLOSSARY OF TERMS
The following is a list of certain industry terms used throughout this report:
 
 
 
 
Bbl
  
barrel
Bbls/d
  
barrels per day
Btu
  
British thermal unit, a measurement of energy
Fractionation
  
the process by which natural gas liquids are separated
    into individual components
MMBtu
  
one million Btus
MMBtu/d
  
one million Btus per day
MMcf/d
  
one 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 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, 2012, or our 2012 Form 10-K, as well as 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 prices through derivative financial instruments, and the potential impact of price and producers’ access to capital on natural gas drilling, demand for our services, and the volume of NGLs and condensate extracted;
general economic, market and business conditions;
volatility in the price of our common units;
the level and success of natural gas drilling around our assets, the level and quality of gas production volumes around our assets and our ability to connect supplies to our gathering and processing systems in light of competition;
our ability to grow through contributions from affiliates, acquisitions, or organic growth projects, and the successful integration and future performance of such assets;
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 loan agreements and our debt securities, as well as our ability to maintain our credit ratings;
the demand for NGL products by the petrochemical, refining or other industries;
our ability to purchase propane from our suppliers and make associated profitable sales transactions for our wholesale propane logistics business;
our ability to construct 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;
the creditworthiness of counterparties to our transactions;
weather and other natural phenomena, including 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 breaches, against, or otherwise impacting, our facilities and systems;
new, additions to and changes in laws and regulations, particularly with regard to taxes, safety and protection of the environment, including 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;
our ability to obtain insurance on commercially reasonable terms, if at all, as well as the adequacy of insurance to cover our losses;
the amount of gas we gather, compress, treat, process, transport, sell and store, or the NGLs we produce, fractionate, transport and store, may be reduced if the pipelines and storage and fractionation facilities to which we deliver the natural gas or NGLs are capacity constrained and cannot, or will not, accept the gas or NGLs;
industry changes, including the impact of consolidations, alternative energy sources, technological advances and changes in competition; and
the amount of collateral we may be required to post from time to time in our transactions.
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.

iii


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DCP MIDSTREAM PARTNERS, LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
June 30, 
 2013
 
December 31, 
 2012
 
(Millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9

 
$
2

Accounts receivable:
 
 
 
Trade, net of allowance for doubtful accounts of less than $1 million
109

 
107

Affiliates
167

 
132

Inventories
36

 
76

Unrealized gains on derivative instruments
97

 
49

Other
2

 
2

Total current assets
420

 
368

Property, plant and equipment, net
2,679

 
2,550

Goodwill
154

 
154

Intangible assets, net
133

 
137

Investments in unconsolidated affiliates
384

 
304

Unrealized gains on derivative instruments
146

 
70

Other long-term assets
23

 
20

Total assets
$
3,939

 
$
3,603

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable:
 
 
 
Trade
$
277

 
$
151

Affiliates
24

 
72

Unrealized losses on derivative instruments
22

 
31

Capital spending accrual
19

 
44

Other
68

 
47

Total current liabilities
410

 
345

Long-term debt
1,740

 
1,620

Unrealized losses on derivative instruments
3

 
8

Other long-term liabilities
36

 
36

Total liabilities
2,189

 
2,009

Commitments and contingent liabilities

 

Equity:
 
 
 
Predecessor equity

 
357

Limited partners (78,201,309 and 61,346,058 common units issued and outstanding, respectively)
1,542

 
1,063

General partner
4

 

Accumulated other comprehensive loss
(13
)
 
(15
)
Total partners’ equity
1,533

 
1,405

Noncontrolling interests
217

 
189

Total equity
1,750

 
1,594

Total liabilities and equity
$
3,939

 
$
3,603

See accompanying notes to condensed consolidated financial statements.

1


DCP MIDSTREAM PARTNERS, LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
 
(Millions, except per unit amounts)
Operating revenues:
 
 
 
 
 
 
 
Sales of natural gas, propane, NGLs and condensate
$
225

 
$
143

 
$
508

 
$
432

Sales of natural gas, propane, NGLs and condensate to affiliates
418

 
400

 
803

 
901

Transportation, processing and other
50

 
41

 
96

 
81

Transportation, processing and other to affiliates
11

 
9

 
28

 
21

Gains from commodity derivative activity, net
4

 
37

 
2

 
28

Gains from commodity derivative activity, net — affiliates
67

 
38

 
69

 
42

Total operating revenues
775

 
668

 
1,506

 
1,505

Operating costs and expenses:
 
 
 
 
 
 
 
Purchases of natural gas, propane and NGLs
534

 
407

 
1,058

 
906

Purchases of natural gas, propane and NGLs from affiliates
39

 
83

 
101

 
280

Operating and maintenance expense
51

 
50

 
96

 
92

Depreciation and amortization expense
23

 
15

 
43

 
49

General and administrative expense
5

 
4

 
10

 
8

General and administrative expense — affiliates
11

 
13

 
22

 
28

Other expense

 

 
4

 

Total operating costs and expenses
663

 
572

 
1,334

 
1,363

Operating income
112

 
96

 
172

 
142

Interest expense
(14
)
 
(11
)
 
(26
)
 
(24
)
Earnings from unconsolidated affiliates
8

 
2

 
16

 
8

Income before income taxes
106

 
87

 
162

 
126

Income tax expense

 

 
(1
)
 
(1
)
Net income
106

 
87

 
161

 
125

Net income attributable to noncontrolling interests
(4
)
 
(2
)
 
(7
)
 
(6
)
Net income attributable to partners
102

 
85

 
154

 
119

Net income attributable to predecessor operations

 
(6
)
 
(6
)
 
(20
)
General partner’s interest in net income
(16
)
 
(10
)
 
(31
)
 
(18
)
Net income allocable to limited partners
$
86

 
$
69

 
$
117

 
$
81

Net income per limited partner unit — basic and diluted
$
1.11

 
$
1.33

 
$
1.64

 
$
1.64

Weighted-average limited partner units outstanding — basic and diluted
77.3

 
51.9

 
71.3

 
49.4

See accompanying notes to condensed consolidated financial statements.


2


DCP MIDSTREAM PARTNERS, LP
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
 
(Millions)
Net income
$
106

 
$
87

 
$
161

 
$
125

Other comprehensive income:
 
 
 
 
 
 
 
Reclassification of cash flow hedge losses into earnings
1

 
4

 
2

 
9

Net unrealized losses on cash flow hedges

 
(2
)
 

 
(2
)
Total other comprehensive income
1

 
2

 
2

 
7

Total comprehensive income
107

 
89

 
163

 
132

Total comprehensive income attributable to noncontrolling interests
(4
)
 
(2
)
 
(7
)
 
(6
)
Total comprehensive income attributable to partners
$
103

 
$
87

 
$
156

 
$
126

See accompanying notes to condensed consolidated financial statements.


3


DCP MIDSTREAM PARTNERS, LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
(Millions)
OPERATING ACTIVITIES:
 
 
 
Net income
$
161

 
$
125

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
43

 
49

Earnings from unconsolidated affiliates
(16
)
 
(8
)
Distributions from unconsolidated affiliates
22

 
8

Net unrealized gains on derivative instruments
(48
)
 
(41
)
Other, net
6

 

Change in operating assets and liabilities, which (used) provided cash net of effects of acquisitions:
 
 
 
Accounts receivable
(26
)
 
98

Inventories
39

 
15

Accounts payable
72

 
(204
)
Accrued interest
6

 
5

Other current assets and liabilities
12

 
5

Other long-term assets and liabilities
(1
)
 
(5
)
Net cash provided by operating activities
270

 
47

INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(195
)
 
(218
)
Acquisitions, net of cash acquired

 
(291
)
Acquisition of an additional interest in the Eagle Ford system and commodity hedge
(486
)
 

Investments in unconsolidated affiliates
(87
)
 
(42
)
Return of investment from unconsolidated affiliate

 
1

Net cash used in investing activities
(768
)
 
(550
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from debt
1,079

 
1,008

Payments of debt
(960
)
 
(807
)
Payment of deferred financing costs
(4
)
 
(3
)
Excess purchase price over acquired interests and commodity hedges
(101
)
 

Proceeds from issuance of common units, net of offering costs
563

 
248

Net change in advances to predecessor from DCP Midstream, LLC
32

 
102

Net change in advances to predecessor – noncontrolling interest

 
28

Distributions to limited partners and general partner
(123
)
 
(79
)
Distributions to noncontrolling interests
(10
)
 
(3
)
Contributions from noncontrolling interests
31

 

Distributions to DCP Midstream, LLC
(3
)
 

Contributions from DCP Midstream, LLC
1

 
7

Net cash provided by financing activities
505

 
501

Net change in cash and cash equivalents
7

 
(2
)
Cash and cash equivalents, beginning of period
2

 
8

Cash and cash equivalents, end of period
$
9

 
$
6

See accompanying notes to condensed consolidated financial statements.

4


DCP MIDSTREAM PARTNERS, LP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 
 
Partners’ Equity
 
 
 
 
 
Predecessor
Equity
 
Limited Partners
 
General Partner
 
Accumulated Other
Comprehensive
(Loss) Income
 
Noncontrolling
Interests
 
Total
Equity
 
(Millions)
Balance, January 1, 2013
$
357

 
$
1,063

 
$

 
$
(15
)
 
$
189

 
$
1,594

Net income
6

 
117

 
31

 

 
7

 
161

Other comprehensive income

 

 

 
2

 

 
2

Net change in parent advances
32

 

 

 

 

 
32

Acquisition of an additional 46.67% interest in the Eagle Ford system
(395
)
 

 

 

 

 
(395
)
Issuance of units for the Eagle Ford system

 
125

 

 

 

 
125

Excess purchase price over carrying value of acquired investment of 33.33% interest in the Eagle Ford system and NGL hedge

 
(7
)
 

 

 

 
(7
)
Excess purchase price over carrying value of acquired additional 46.67% interest in the Eagle Ford system and commodity hedge

 
(219
)
 

 

 

 
(219
)
Issuance of 14,058,547 common units

 
561

 

 

 

 
561

Distributions to limited partners and general partner

 
(96
)
 
(27
)
 

 

 
(123
)
Distributions to noncontrolling interests

 

 

 

 
(10
)
 
(10
)
Contributions from noncontrolling interests

 

 

 

 
31

 
31

Contributions from DCP Midstream, LLC

 
1

 

 

 

 
1

Distributions to DCP Midstream, LLC

 
(3
)
 

 

 

 
(3
)
Balance, June 30, 2013
$

 
$
1,542

 
$
4

 
$
(13
)
 
$
217

 
$
1,750

See accompanying notes to condensed consolidated financial statements.


5


DCP MIDSTREAM PARTNERS, LP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 
 
Partners’ Equity
 
 
 
 
 
Predecessor
Equity
 
Limited Partners
 
General Partner
 
Accumulated Other
Comprehensive
(Loss) Income
 
Noncontrolling
Interests
 
Total
Equity
 
(Millions)
Balance, January 1, 2012
$
628

 
$
654

 
$
(5
)
 
$
(21
)
 
$
306

 
$
1,562

Net income
20

 
81

 
18

 

 
6

 
125

Other comprehensive (loss) income
(1
)
 

 

 
8

 

 
7

Net change in parent advances
102

 

 

 

 
28

 
130

Acquisition of an additional 66.67% interest in Southeast Texas and NGL Hedge
(248
)
 
40

 

 

 

 
(208
)
Acquisition of an additional 49.9% interest in East Texas

 

 

 

 
(176
)
 
(176
)
Issuance of units for Southeast Texas

 
48

 

 

 

 
48

Issuance of units for East Texas

 
33

 

 

 

 
33

Deficit purchase price under carrying value of acquired net assets

 
57

 

 
(4
)
 

 
53

Issuance of 5,487,300 common units

 
248

 

 

 

 
248

Equity-based compensation

 
(1
)
 

 

 

 
(1
)
Distributions to limited partners and general partner
 
 
(64
)
 
(15
)
 
 
 
 
 
(79
)
Distributions to noncontrolling interests

 

 

 

 
(3
)
 
(3
)
Contributions from DCP Midstream, LLC

 
7

 

 

 

 
7

Balance, June 30, 2012
$
501

 
$
1,103

 
$
(2
)
 
$
(17
)
 
$
161

 
$
1,746

See accompanying notes to condensed consolidated financial statements.


6


DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Basis of Presentation
DCP Midstream Partners, LP, with its consolidated subsidiaries, or us, we, our or the Partnership, is engaged in the business of gathering, compressing, treating, processing, transporting, storing and selling natural gas; producing, fractionating, transporting, storing and selling NGLs and condensate; and transporting, storing and selling propane in wholesale markets.
We are a Delaware limited partnership that was formed in August 2005. Our partnership includes: our natural gas services segment (which includes our Northern Louisiana system; our Southern Oklahoma system; our 40% interest in Discovery Producer Services LLC, or Discovery; our Wyoming system; a 75% interest in Collbran Valley Gas Gathering, LLC, or Collbran or our Colorado system; our East Texas system; our Michigan system; our Southeast Texas system; our 80% interest in the Eagle Ford system, including the Goliad plant (of which 33.33% and 46.67% were acquired in November 2012 and March 2013, respectively) and our wholly-owned Eagle Plant), our NGL logistics segment (which includes the Seabreeze and Wilbreeze intrastate NGL pipelines, the Wattenberg and Black Lake interstate NGL pipelines, our 10% interest in the Texas Express intrastate NGL pipeline, the NGL storage facility in Michigan, the DJ Basin NGL fractionators and our minority ownership interests in the Mont Belvieu fractionators), and our wholesale propane logistics segment.
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 is wholly-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 Spectra Energy Corp, or Spectra Energy. DCP Midstream, LLC directs our business operations through its ownership and control of the General Partner. DCP Midstream, LLC and its affiliates’ employees provide administrative support to us and operate most of our assets. DCP Midstream, LLC owns approximately 26% of us.
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. All intercompany balances and transactions have been eliminated.
Our predecessor operations consist of a 66.67% interest in Southeast Texas and commodity derivative hedge instruments related to the Southeast Texas storage business, which we acquired from DCP Midstream, LLC in March 2012, and an 80% interest in the Eagle Ford system, of which we acquired 33.33% and 46.67% in November 2012 and March 2013, respectively, from DCP Midstream, LLC. Prior to our acquisition of the remaining 66.67% interest in Southeast Texas, we accounted for our initial 33.33% interest as an unconsolidated affiliate using the equity method. Subsequent to the March 2012 transaction, we own 100% of Southeast Texas which we account for as a consolidated subsidiary. Prior to our acquisition of the additional 46.67% interest in the Eagle Ford system in March 2013, we accounted for our initial 33.33% interest as an unconsolidated affiliate using the equity method. Subsequent to the March 2013 transaction, we own 80% of the Eagle Ford system which we account for as a consolidated subsidiary. These transfers of net assets between entities under common control were accounted for as if the transfer occurred at the beginning of the period, and prior years were retrospectively adjusted to furnish comparative information, similar to the pooling method. Accordingly, our condensed consolidated financial statements include the historical results of our 100% interest in Southeast Texas and the natural gas commodity derivatives associated with the storage business, and 80% interest in the Eagle Ford system for all periods presented. We recognize transfers of net assets between entities under common control at DCP Midstream, LLC’s basis in the net assets contributed. The amount of the purchase price in excess or in deficit of DCP Midstream, LLC’s basis in the net assets is recognized as a reduction or an addition to limited partners’ equity. The financial statements of our predecessor have been prepared from the separate records maintained by DCP Midstream, LLC and may not necessarily be indicative of the conditions that would have existed or the results of operations if our predecessor had been operated as an unaffiliated entity. In addition, the results of operations for acquisitions accounted for as business combinations have been included in the condensed consolidated financial statements since their respective acquisition dates.
 
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 best available knowledge of current and expected future events, actual results could differ from those estimates. All intercompany balances and transactions have been eliminated. Transactions between us and other DCP Midstream, LLC operations have been identified in the condensed consolidated financial statements as transactions between affiliates.

7

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

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 Securities and Exchange Commission, or SEC. Accordingly, these condensed consolidated financial statements reflect all adjustments, consisting only 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 not misleading. Results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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 2012 audited consolidated financial statements and notes thereto included as Exhibit 99.3 in our Current Report on Form 8-K filed on June 14, 2013.
2. Acquisitions
On March 28, 2013, we acquired an additional 46.67% interest in DCP SC Texas GP, or the Eagle Ford system, from DCP Midstream, LLC and an $87 million fixed price commodity derivative hedge for a three-year period for aggregate consideration of $626 million, plus customary working capital and other purchase price adjustments. $490 million of the consideration was financed with the net proceeds from our 3.875% 10-year Senior Notes offering, $125 million was financed by the issuance at closing of an aggregate 2,789,739 of our common units to DCP Midstream, LLC and the remaining $11 million was paid with cash on hand. The $219 million excess purchase price over the carrying value of the acquired interest in the Eagle Ford system was recorded as a decrease in limited partners’ equity. We also reimbursed DCP Midstream, LLC $50 million for 46.67% of the capital spent to date by the Eagle Ford system for the construction of the Goliad plant, plus an incremental payment of $23 million as reimbursement for 46.67% of preformation capital expenditures. Prior to the acquisition of the additional interest in the Eagle Ford system, we owned a 33.33% interest which we accounted for as an unconsolidated affiliate using the equity method. The Eagle Ford system acquisition represents a transaction between entities under common control and a change in reporting entity. Accordingly, our condensed consolidated financial statements have been adjusted to retrospectively include the historical results of our 80% interest in the Eagle Ford system for all periods presented, similar to the pooling method.

8

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Historical Financial Information
The results of our 80% interest in the Eagle Ford system are included in the consolidated balance sheets as of December 31, 2012. The following table presents the previously reported December 31, 2012 consolidated balance sheet, adjusted for the acquisition of the additional 46.67% interest in the Eagle Ford system from DCP Midstream, LLC:

 
As of December 31, 2012
 
 
DCP
Midstream
Partners,  LP
(As previously reported on Form 10-K filed on 2/27/13) (a)
 
Consolidate
Eagle Ford
system (b)
 
Remove Eagle Ford system Investment in Unconsolidated Affiliate (c)
 
Condensed
Consolidated
DCP
Midstream
Partners, LP
(As currently
reported on Form 8-K filed on 6/14/13)
 
(Millions)
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1

 
$
1

 
$

 
$
2

Accounts receivable
182

 
57

 

 
239

Inventories
75

 
1

 

 
76

Other
51

 

 

 
51

Total current assets
309

 
59

 

 
368

Property, plant and equipment, net
1,727

 
823

 

 
2,550

Goodwill and intangible assets, net
291

 

 

 
291

Investments in unconsolidated affiliates
558

 
1

 
(255
)
 
304

Other non-current assets
87

 
3

 

 
90

Total assets
$
2,972

 
$
886

 
$
(255
)
 
$
3,603

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Accounts payable and other current liabilities
$
234

 
$
111

 
$

 
$
345

Long-term debt
1,620

 

 

 
1,620

Other long-term liabilities
35

 
9

 

 
44

Total liabilities
1,889

 
120

 

 
2,009

Commitments and contingent liabilities

 

 

 

Equity:
 
 
 
 
 
 
 
Partners’ equity
 
 
 
 
 
 
 
Net equity
1,063

 
612

 
(255
)
 
1,420

Accumulated other comprehensive loss
(15
)
 

 

 
(15
)
Total partners’ equity
1,048

 
612

 
(255
)
 
1,405

Noncontrolling interests
35

 
154

 

 
189

Total equity
1,083

 
766

 
(255
)
 
1,594

Total liabilities and equity
$
2,972

 
$
886

 
$
(255
)
 
$
3,603

 
(a)
Amounts as previously reported with 33.33% of the Eagle Ford system presented within investments in unconsolidated affiliates.
(b)
Adjustments to present the Eagle Ford system on a consolidated basis with a 20% noncontrolling interest.
(c)
Adjustments to remove our 33.33% investment in unconsolidated affiliates.

9

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

The results of our 80% interest in the Eagle Ford system are included in the condensed consolidated statements of operations for the three and six months ended June 30, 2013 and 2012. The following tables present the previously reported condensed consolidated statements of operations for the three and six months ended June 30, 2012, adjusted for the acquisition of an 80% interest in the Eagle Ford system from DCP Midstream, LLC:

 
Three Months Ended June 30, 2012
 
 
DCP
Midstream
Partners, LP
(As previously
reported on Form 10-Q filed on 8/8/12)
 
Consolidate
Eagle Ford
system (a)
 
Condensed
Consolidated
DCP
Midstream
Partners, LP
(As currently
reported)
 
(Millions)
Sales of natural gas, propane, NGLs and condensate
$
297

 
$
246

 
$
543

Transportation, processing and other
42

 
8

 
50

Gains from commodity derivative activity, net
75

 

 
75

Total operating revenues
414

 
254

 
668

Operating costs and expenses:
 
 
 
 
 
Purchases of natural gas, propane and NGLs
274

 
216

 
490

Operating and maintenance expense
30

 
20

 
50

Depreciation and amortization expense
10

 
5

 
15

General and administrative expense
11

 
6

 
17

Total operating costs and expenses
325

 
247

 
572

Operating income
89

 
7

 
96

Interest expense
(11
)
 

 
(11
)
Earnings from unconsolidated affiliates
2

 

 
2

Income before income taxes
80

 
7

 
87

Income tax expense

 

 

Net income
80

 
7

 
87

Net income attributable to noncontrolling interests
(1
)
 
(1
)
 
(2
)
Net income attributable to partners
$
79

 
$
6

 
$
85

 
(a)
Adjustments to present the Eagle Ford system on a consolidated basis with a 20% noncontrolling interest.



10

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Six Months Ended June 30, 2012

 
DCP
Midstream
Partners, LP
(As previously
reported on Form 10-Q filed on 8/8/12)
 
Consolidate
Eagle Ford
system (a)
 
Condensed
Consolidated
DCP
Midstream
Partners, LP
(As currently
reported)
 
(Millions)
Sales of natural gas, propane, NGLs and condensate
$
784

 
$
549

 
$
1,333

Transportation, processing and other
85

 
17

 
102

Gains from commodity derivative activity, net
70

 

 
70

Total operating revenues
939

 
566

 
1,505

Operating costs and expenses:
 
 
 
 
 
Purchases of natural gas, propane and NGLs
706

 
480

 
1,186

Operating and maintenance expense
56

 
36

 
92

Depreciation and amortization expense
34

 
15

 
49

General and administrative expense
22

 
14

 
36

Total operating costs and expenses
818

 
545

 
1,363

Operating income
121

 
21

 
142

Interest expense
(24
)
 

 
(24
)
Earnings from unconsolidated affiliates
8

 

 
8

Income before income taxes
105

 
21

 
126

Income tax expense
(1
)
 

 
(1
)
Net income
104

 
21

 
125

Net income attributable to noncontrolling interests
(2
)
 
(4
)
 
(6
)
Net income attributable to partners
$
102

 
$
17

 
$
119


(a)
Adjustments to present the Eagle Ford system on a consolidated basis with a 20% noncontrolling interest.
The currently reported results are not intended to reflect actual results that would have occurred if the acquired business had been consolidated during the period presented.
3. Agreements and Transactions with Affiliates
DCP Midstream, LLC
Services Agreement and Other General and Administrative Charges
On February 14, 2013, we entered into a Services Agreement with DCP Midstream, LLC, which replaced the Omnibus Agreement, whereby DCP Midstream, LLC will continue to provide us with the general and administrative services previously provided under the Omnibus Agreement. The annual fee payable in future years to DCP Midstream, LLC under the Services Agreement will be consistent with the fee structure previously payable under the Omnibus Agreement, and will be $29 million for 2013. The Services Agreement fee is subject to adjustment based on the scope of general and administrative services performed by DCP Midstream, LLC. Pursuant to the Services Agreement, we will reimburse DCP Midstream, LLC for expenses and expenditures incurred or payments made on our behalf.
 
Following is a summary of the fees we incurred under the Services Agreement and Omnibus Agreement as well as other fees paid to DCP Midstream, LLC:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
 
(Millions)
Services/Omnibus Agreement
$
7

 
$
7

 
$
14

 
$
12

Other fees — DCP Midstream, LLC
4

 
6

 
8

 
16

Total — DCP Midstream, LLC
$
11

 
$
13

 
$
22

 
$
28


11

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

In addition to the fees paid pursuant to the Services Agreement and Omnibus Agreement, we incurred other general and administrative fees with DCP Midstream, LLC of $1 million for the three and six months ended June 30, 2013 and less than $1 million for the three and six months ended June 30, 2012. These amounts include allocated expenses, including professional services, insurance and internal audit. The Eagle Ford system incurred $3 million and $6 million in general and administrative expenses directly from DCP Midstream, LLC for the three months ended June 30, 2013 and 2012, respectively, and $7 million and $13 million in general and administrative expenses directly from DCP Midstream, LLC for the six months ended June 30, 2013 and 2012, respectively. For the six months ended June 30, 2012, Southeast Texas incurred $3 million in general and administrative expenses directly from DCP Midstream, LLC, before the addition of Southeast Texas to the Omnibus Agreement in March 2012.
Other Agreements and Transactions with DCP Midstream, LLC
In conjunction with our acquisitions of our East Texas and Southeast Texas systems, which are part of our Natural Gas Services segment, we entered into agreements with DCP Midstream, LLC whereby DCP Midstream, LLC will reimburse us for certain expenditures on East Texas and Southeast Texas capital projects. These reimbursements are for specific capital projects which have commenced within three years from the respective acquisition dates. DCP Midstream, LLC made capital contributions to East Texas for capital projects of less than $1 million and $2 million for the three months ended June 30, 2013 and 2012, respectively, and $1 million and $5 million for the six months ended June 30, 2013 and 2012, respectively. DCP Midstream, LLC made capital contributions to Southeast Texas for capital projects of $2 million for both the three and six months ended June 30, 2012. We made a distribution to DCP Midstream, LLC related to capital projects at Southeast Texas of $3 million for the six months ended June 30, 2013.
DCP Midstream, LLC issued parental guarantees, totaling $25 million as of June 30, 2013, in favor of certain counterparties to our commodity derivative instruments to mitigate a portion of our collateral requirements with those counterparties. We paid DCP Midstream, LLC a fee of 0.5% per annum on these outstanding guarantees. In August 2013, we terminated these guarantees with DCP Midstream, LLC.
 
Summary of Transactions with Affiliates
The following table summarizes our transactions with affiliates:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
 
(Millions)
DCP Midstream, LLC:
 
 
 
 
 
 
 
Sales of natural gas, propane, NGLs and condensate
$
418

 
$
398

 
$
803

 
$892
Transportation, processing and other
$
11

 
$
8

 
$
28

 
$18
Purchases of natural gas, propane and NGLs
$
28

 
$
16

 
$
72

 
$76
Gains from commodity derivative activity, net
$
67

 
$
38

 
$
69

 
$42
General and administrative expense
$
11

 
$
13

 
$
22

 
$28
ConocoPhillips (a):
 
 
 
 
 
 
 
Sales of natural gas, propane, NGLs and condensate
$

 
$
2

 
$

 
$9
Transportation, processing and other
$

 
$
1

 
$

 
$3
Purchases of natural gas, propane and NGLs
$

 
$
18

 
$

 
$67
Spectra Energy:
 
 
 
 
 
 
 
Purchases of natural gas, propane and NGLs
$
11

 
$
49

 
$
29

 
$135
Unconsolidated affiliates:
 
 
 
 
 
 
 
Purchases of natural gas, propane and NGLs
$

 
$

 
$

 
$2
 
(a)
In connection with the Phillips 66 separation, ConocoPhillips is not considered to be a related party for periods after April 30, 2012 and Phillips 66 is considered a related party for periods starting May 1, 2012.

12

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

We had balances with affiliates as follows:
 
 
June 30, 
 2013
 
December 31, 
 2012
 
(Millions)
DCP Midstream, LLC:
 
 
 
Accounts receivable
$
167

 
$
132

Accounts payable
$
24

 
$
66

Unrealized gains on derivative instruments — current
$
96

 
$
48

Unrealized gains on derivative instruments — long-term
$
139

 
$
64

Unrealized losses on derivative instruments — current
$
6

 
$
11

Unrealized losses on derivative instruments — long-term
$
1

 
$

Spectra Energy:
 
 
 
Accounts payable
$

 
$
5

Unconsolidated affiliates:
 
 
 
Accounts payable
$

 
$
1

4. Inventories
Inventories were as follows:
 
 
June 30, 
 2013
 
December 31, 
 2012
 
(Millions)
Natural gas
$
21

 
$
22

NGLs
15

 
54

Total inventories
$
36

 
$
76

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 of natural gas, propane and NGLs in the condensed consolidated statements of operations. We recognized $3 million lower of cost or market adjustments during the three and six months ended June 30, 2013, and $14 million and $19 million in lower of cost or market adjustments during the three and six months ended June 30, 2012, respectively.
5. Property, Plant and Equipment
A summary of property, plant and equipment by classification is as follows:
 
 
Depreciable
Life
 
June 30, 
 2013
 
December 31, 
 2012
 
 
 
(Millions)
Gathering and transmission systems
20 — 50 Years
 
$
2,036

 
$
1,921

Processing, storage, and terminal facilities
35 — 60 Years
 
1,313

 
1,103

Other
3 —  30 Years
 
36

 
31

Construction work in progress
 
 
399

 
561

Property, plant and equipment
 
 
3,784

 
3,616

Accumulated depreciation
 
 
(1,105
)
 
(1,066
)
Property, plant and equipment, net
 
 
$
2,679

 
$
2,550

Interest capitalized on construction projects for the three months ended June 30, 2013 and 2012 was $3 million and $2 million, respectively, and for the six months ended June 30, 2013 and 2012 was $5 million and $3 million, respectively.

13

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

We revised the depreciable lives for our gathering and transmission systems, processing, storage and terminal facilities, and other assets effective April 1, 2012. The key contributing factors to the change in depreciable lives is an increase in the producers' estimated remaining economically recoverable reserves resulting from the widespread application of techniques, such as hydraulic fracturing and horizontal drilling, that improve commodity production in the regions our assets serve. Advances in extraction processes, along with better technology used to locate commodity reserves, is giving producers greater access to unconventional commodities. Based on our property, plant and equipment as of April 1, 2012, the new remaining depreciable lives resulted in an approximate $17 million reduction in depreciation expense for each of the three and six months ended June 30, 2012, which increased net income per limited partner unit by $0.33 and $0.34, respectively.
Depreciation expense was $21 million and $13 million for the three months ended June 30, 2013 and 2012, respectively, and $39 million and $45 million for the six months ended June 30, 2013 and 2012, respectively.
During the six months ended June 30, 2013, we discontinued certain construction projects and wrote off approximately $4 million in construction work in progress to other expense in the condensed consolidated statements of operations.
6. Investments in Unconsolidated Affiliates
The following table summarizes our investments in unconsolidated affiliates:
 
 
 
 
Carrying Value as of
 
Percentage
Ownership
 
June 30, 
 2013
 
December 31, 
 2012
 
 
 
(Millions)
Discovery Producer Services LLC
40%
 
$
260

 
$
223

Texas Express Pipeline
10%
 
80

 
41

Mont Belvieu Enterprise Fractionator
12.5%
 
21

 
19

Mont Belvieu 1 Fractionator
20%
 
16

 
14

CrossPoint Pipeline, LLC
50%
 
6

 
6

Other
Various
 
1

 
1

Total investments in unconsolidated affiliates
 
 
$
384

 
$
304

There was a deficit between the carrying amount of the investment and the underlying equity of Discovery of $29 million and $30 million at June 30, 2013 and December 31, 2012, respectively, which is associated with, and is being amortized over, the life of the underlying long-lived assets of Discovery.
There was a deficit between the carrying amount of the investment and the underlying equity of Mont Belvieu 1 of $5 million and $6 million at June 30, 2013 and December 31, 2012, respectively, which is associated with, and is being amortized over the life of the underlying long-lived assets of Mont Belvieu 1.
There was an excess of the carrying amount of the investment over the underlying equity of the Texas Express Pipeline of $2 million and less than $1 million at June 30, 2013 and December 31, 2012, respectively, which is associated with interest capitalized during the construction of the pipeline and will be amortized over the life of the underlying long-lived assets of Texas Express Pipeline.
Earnings from investments in unconsolidated affiliates were as follows:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
 
(Millions)
Discovery Producer Services LLC
$
1

 
$
2

 
$
1

 
$
8

Mont Belvieu Enterprise Fractionator
2

 

 
6

 

Mont Belvieu 1 Fractionator
5

 

 
9

 

Total earnings from unconsolidated affiliates
$
8

 
$
2

 
$
16

 
$
8


14

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

The following tables summarize the combined financial information of our investments in unconsolidated affiliates. The amounts included for the six months ended June 30, 2013 include corrected operating revenues, operating expenses and net income for the three months ended March 31, 2013 of $108 million, $67 million and $41 million, respectively. This change has no impact to our earnings from unconsolidated affiliates in our condensed consolidated financial statements.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2013
 
2012
 
2013
 
2012
 
(Millions)
Statements of operations:
 
 
 
 
 
 
 
Operating revenue
$
123

 
$
36

 
$
231

 
$
83

Operating expenses
$
72

 
$
32

 
$
139

 
$
66

Net income
$
51

 
$
4

 
$
92

 
$
16

 
 
June 30, 
 2013
 
December 31, 
 2012
 
(Millions)
Balance sheets:
 
 
 
Current assets
$
152

 
$
129

Long-term assets
1,760

 
1,288

Current liabilities
(120
)
 
(75
)
Long-term liabilities
(45
)
 
(43
)
Net assets
$
1,747

 
$
1,299

7. 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, the time value of money 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 position 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.

15

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

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 9 Risk Management and Hedging Activities.
Valuation Hierarchy
Our fair value measurements are grouped into a three-level valuation hierarchy. 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 input that requires the highest degree of judgment 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 over the counter, or OTC, instruments, such as natural gas, crude oil or NGL contracts.
Within our Natural Gas Services segment we typically use OTC derivative contracts in order to mitigate a portion of our exposure to natural gas, NGL and condensate price changes. We also may enter into natural gas derivatives to lock in margin around our storage and transportation assets. These instruments are generally classified as Level 2. Depending upon market conditions and our strategy, we may enter into OTC derivative positions with a significant time horizon to maturity, and market prices for these OTC derivatives 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 that 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.

16

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Within our Wholesale Propane Logistics segment, we may enter into a variety of financial instruments to either secure sales or purchase prices, or capture a variety of market opportunities. Since financial instruments for NGLs tend to be counterparty and location specific, we primarily use 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, historical and future expected relationship of NGL prices to crude oil prices, the knowledge of expected supply sources coming on line, 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.
 
Interest Rate Derivative Assets and Liabilities
We use interest rate swap agreements as part of our overall capital strategy. These instruments effectively exchange a portion of our existing floating rate debt for fixed-rate debt. Our swaps are generally priced based upon a London Interbank Offered Rate, or LIBOR, instrument with similar duration, adjusted by the credit spread between our company and the LIBOR instrument. Given that a portion of the swap value is derived from the credit spread, which may be observed by comparing similar assets in the market, these instruments are classified within Level 2. Default risk on either side of the swap transaction is also considered in the valuation. We record counterparty credit and entity valuation adjustments in the valuation of our interest rate swaps; however, these reserves are not considered to be a significant input to the overall valuation.
Nonfinancial Assets and Liabilities
We utilize fair value to perform impairment tests as required on our property, plant and equipment; goodwill; and intangible assets. Assets and liabilities acquired in 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.

17

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

The following table presents the financial instruments carried at fair value as of June 30, 2013 and December 31, 2012, by consolidated balance sheet caption and by valuation hierarchy, as described above:
 
 
June 30, 2013
 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Carrying
Value
 
(Millions)
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives (a)
$

 
$
10

 
$
87

 
$
97

 
$

 
$
9

 
$
40

 
$
49

Long-term assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives (b)
$

 
$
8

 
$
138

 
$
146

 
$

 
$
5

 
$
65

 
$
70

Current liabilities (c):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$

 
$
(18
)
 
$

 
$
(18
)
 
$

 
$
(26
)
 
$
(1
)
 
$
(27
)
Interest rate derivatives
$

 
$
(4
)
 
$

 
$
(4
)
 
$

 
$
(4
)
 
$

 
$
(4
)
Long-term liabilities (d):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$

 
$
(3
)
 
$

 
$
(3
)
 
$

 
$
(6
)
 
$

 
$
(6
)
Interest rate derivatives
$

 
$

 
$

 
$

 
$

 
$
(2
)
 
$

 
$
(2
)
 
(a)
Included in current unrealized gains on derivative instruments in our condensed consolidated balance sheets.
(b)
Included in long-term unrealized gains on derivative instruments in our condensed consolidated balance sheets.
(c)
Included in current unrealized losses on derivative instruments in our condensed consolidated balance sheets.
(d)
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 between Level 1 and Level 2 would be reflected in a table as Transfers in/out of Level 1/Level 2. During the three and six months ended June 30, 2013 and 2012, 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 consolidated balance sheets for derivative financial instruments that we have classified within Level 3. The determination to classify a financial instrument within Level 3 is based upon the significance of the unobservable factors used in determining the overall fair value of the instrument. 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 have reflected such items in the table below within the “Transfers into/out of Level 3” caption.
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.

18

DCP MIDSTREAM PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

 
Commodity Derivative Instruments
 
Current
Assets
 
Long-
Term
Assets
 
Current
Liabilities
 
Long-
Term
Liabilities
 
(Millions)
Three months ended June 30, 2013 (a):
 
 
 
 
 
 
 
Beginning balance
$