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Executives

Jonni Anwar

William S. Waldheim - Director

Rose M. Robeson - Chief Financial Officer of DCP Midstream GP Llc and Senior Vice President of DCP Midstream GP Llc

Analysts

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Brett Reilly - Crédit Suisse AG, Research Division

Rebecca Followill - U.S. Capital Advisors LLC, Research Division

Heejung Ryoo - Barclays Capital, Research Division

Stanley Ross Payne - Wells Fargo Securities, LLC, Research Division

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

DCP Midstream Partners LP (DPM) Q4 2012 Earnings Call February 28, 2013 8:00 AM ET

Operator

Welcome to the DCP Midstream Partners' Fourth Quarter 2012 Earnings Conference Call. My name is Dawn, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Jonni Anwar. You may begin.

Jonni Anwar

Thank you, Dawn. Good morning, and welcome to the DCP Midstream Partners Fourth Quarter and Year End 2012 Earnings Call. As always, we want to thank you for your interest in the Partnership. This call is being webcast and the slides used for today's call are available on our website at www.dcppartners.com.

As a reminder, our discussion today may contain forward-looking statements. Actual results may differ due to certain risk factors that affect our business. Please review the second slide in the deck that describes our use of our forward-looking statements and lists some of the risk factors that may affect our actual results. For a complete listing of the risk factors that may impact our business results, please review our most recent Form 10-K that's filed yesterday with the SEC.

During our discussion, we will use various non-GAAP measures, which are reconciled to the nearest GAAP measure in schedule in the appendix section of the earnings slide.

We also announced last night the launch of a public equity offering. We will not be commenting on the offering and will not be answering any questions regarding the offering on this call.

And now let me turn it over to our first speaker, Bill Waldheim, President of DPM.

William S. Waldheim

Thanks, Jonni. Good morning, everyone, and thanks for joining us today for discussion of DPM's Fourth Quarter and Year End results. I'm also joined this morning by Rose Robeson, our CFO.

As you saw in our press release last evening, we reported record adjusted EBITDA and record distributable cash flow in 2012. Despite commodity headwinds we also delivered on our 2012 distribution growth target. In addition to our strong financial performance, we also announced another significant drop-down in the Eagle Ford. With the drop-down of this additional interest in the Eagle Ford joint venture, we will have 80% interest in one of the largest gathering processing systems in the prolific Eagle Ford shale play with 1.2 Bcf per day of total processing capacity. This $626 million transaction represents the largest drop-down in the history of the Partnership and a continuation of our transformational growth, as well as the demonstration of DCP's incredible support and commitment to grow DPM. This transaction is expected to close in March. In addition to our immediately accretive Eagle Ford drop-down, we also announced 2 strategic organic growth projects, which I'll discuss further in detail shortly.

2012 was a year of significant and sustainable growth for DPM, and despite a challenged commodity price environment, we generated record distributable cash flow of $180 million in 2012. We raised our distribution for the ninth consecutive quarter, representing a 1.5% sequential quarter increase and a 6% year-over-year increase, also in line with our forecast. This increase reflects our continued confidence and sustainable future cash flows from our visible growth. With our announced and planned drop-downs and organic growth, we are targeting distribution growth of 6% to 8% in 2013 and 6% to 10% in 2014.

With that, let me briefly touch on each business segment and associated growth projects. Starting with our Natural Gas Services segment, this area continues to experience substantial growth with the announcement yesterday of our immediately accretive drop-down in the Eagle Ford joint venture, bringing DPM's total ownership in this area to over 80%. Also we are increasing our ownership in the previously announced 200 million a day Goliad Plant to 80%. As we consolidate this acquisition at DPM, the Eagle Ford area will account for substantial percentage of our Natural Gas Services segment and will continue to be a major source of growth in the coming years. I will provide more details on this drop-down in a moment.

The other organic -- major organic project in the segment is our Keathley Canyon pipeline at our Discovery joint venture. This project is progressing nicely. All permits have been secured, the pipe is arriving stacked and ready and the ship to label line is arriving next month. Williams is operator of Discovery and is managing the construction of this project with an expected in-service date of mid-2014.

In our NGL Logistics segment, we also have some exciting growth projects. As you saw in our press release last night, we announced a long-term methane storage agreement with Nova Chemical, underpinning the expansion of our Marysville NGL storage facility. Our investment in this project is about $25 million and includes new ethane storage capacity of approximately 1 million barrels. This expansion will serve the growing needs for NGL products supply storage for the Utica and Marcellus producers. This project is expected to be in service in Q4 of 2013.

And lastly, our 10% interest in Texas Express is nearing completion and is expected to be in service in the third quarter of this year. Looking forward, we expect our NGL Logistics segment to continue to have significant growth in the next couple of years, with the targeted drop-down of a 1/3 interest in the Southern Hills and Sand Hills pipelines from our general partner.

In our Wholesale Propane segment, I'm excited to report that we've successfully exported 6 million gallons of propane out of our Chesapeake terminal on January. Further work is required to export purity products on an ongoing basis. However, we are encouraged by the commercial results and will continue to explore this opportunity.

So let me give you more details on our Eagle Ford drop-down. Yesterday, we signed an agreement with DCP Midstream with the immediately accretive drop-down of an additional 47% interest in the Eagle Ford joint venture for $626 million. DCP Midstream is expected to take 20% of the consideration for this drop-down in DPM units.

Many of you are familiar or already have heard of the Eagle Ford shale play. It is one of the hottest plays -- shale plays in the country, with E&P companies spending billions of dollars chasing this liquids-rich formation. Currently, there are 225 rigs running in this play with gas production approaching 3 Bcf per day. We are extremely pleased with DPM's growth in this area, our returns to date and we expect this trend to continue. DPM's Eagle Ford joint venture is a fully integrated Midstream business, which includes approximately 6,000 miles of natural gas pipelines, 5 natural gas processing plants totaling 760 million a day of processing capacity, 3 fractionators with 36,000 barrels per day of capacity and favorable access to intra and interstate gas markets.

With the additional buildout of the 2 new plants, Goliad and our wholly-owned Eagle Plant, the total processing capacity would be 1.2 Bcf per day. In conjunction with the transaction, DCP Midstream will provide Partnership with a direct commodity price hedge for a 3-year period, similar to the previous Eagle Ford joint venture transaction, as well as a direct commodity price hedge on the Goliad Plant volumes. This transaction, which provides immediately accretive cash flows, is expected to close at the end of March. This is another great example of how we work with our general partner to fund DCP Enterprise growth.

Turning to the next slide, let's look at our growth forecast. Please note our capital for 2012 as well as our forecast capital is now based on the timing of our cash spend. For 2013, we are targeting about $1 billion of drop-down opportunities with our general partner, which includes the just-announced Eagle Ford joint venture drop-down. In addition, we are going -- we have ongoing organic growth of another $500 million, which includes our investment in the Goliad Plant and Keathley Canyon expansion project.

In 2014, we would expect another $1 billion of drop-down opportunities, subject to the approval of both the DC Midstream and Partner's Fords, this would include the expected drop-down of DCP Midstream's 1/3 interest in Southern Hills and Sand Hills pipelines to DPM. Also shown on this slide are the in-service dates for the various organic growth projects. The EBITDA from our drop-downs and organic growth will support distribution growth targets of 6% to 8% in 2013 and 6% to 10% in 2014.

With that, I will turn it over to Rose to review the financial results.

Rose M. Robeson

Thanks, Bill, and thank you for joining us today. Let me now take you through the numbers. For the fourth quarter, our adjusted EBITDA was up over 70% versus last year. Adjusted EBITDA was $86 million for the fourth quarter of 2012 versus $50 million in the fourth quarter of last year. Each of our segments were up quarter-over-quarter, and I will review the details in the next few slides. For the full year, our adjusted EBITDA was up over -- was over $250 million, which is a pretty big milestone for our company.

Fourth quarter distributable cash flow is $68 million providing a 1.3x cash distribution coverage ratio for the quarter. For the year, distributable cash flow was $180 million, providing a onetime cash distribution coverage for 2012.

If you turn to the next slide, let me now talk about our Natural Gas Services segment. Our adjusted EBITDA was about 35% -- was up about 35% at $51 million compared to last year's fourth quarter of $38 million. Our growth from drop-downs more than offset the impact of commodity prices and lower volumes at East Texas due primarily to a planned turnaround. Our hedging program continues to provide significant stability in our Natural Gas Services segment. I will discuss our updated hedge percentages later in the slide deck. Our volumes are also up significantly year-over-year due to our drop-downs at East Texas, Southeast Texas and Eagle Ford, as well as the Crossroads acquisition in East Texas.

Turning now to our NGL Logistics segment, we doubled our fourth quarter adjusted EBITDA from last year to $20 million. This increase is due to the drop-down of the Mont Belvieu fracs, as well as higher volumes on our existing assets. We are excited about the continued growth prospects around our pipeline fractionation and storage assets. Our announced Marysville storage expansion projects is another nice fee-based organic growth project for this segment.

If you turn to Slide 10, in Wholesale Propane, we more than doubled our fourth quarter adjusted EBITDA from 2011 to $27 million. As expected, Wholesale Propane had a record quarter due to the substantial recovery of the lower of cost or market adjustment taken in the second quarter. Even factoring out the LCM recovery, Wholesale Propane was up due to higher per unit margins, partially offset by lower volumes. Volumes were down versus last year due to the significant inventory builds coming out of last year's record warm winter. I'm happy to say this business is performing nicely this winter with more normal weather and healthy per unit margins. As a reminder, this business does have seasonality with the majority of earnings coming during the fourth and the first quarters.

So if you turn to Slide 11, our actual DCF results for 2012 were in line with our forecast. The 2012 average crude oil price of $95 and NGL to crude relationship in the mid-40s for the year placed us in the forecast range of about $165 million to $180 million as highlighted in the chart. Our actual DCF for the year was 180 million, which would be at the top of the range. We also delivered on a distribution growth forecast we provided this time last year with actual distribution growth for the year of 6% within our forecast range. Our coverage is running lower than our target range of 1.1 to 1.2, reflecting the financing late time impact of our ongoing organic growth projects, including the Eagle Plant and Keathley Canyon. We expect to be back within our target range as our organic growth projects begin to come online.

So if we turn to the next slide, let me now walk through our DCF and distribution growth targets. Our 2013 distributable cash flow forecast is provided in the context of various commodity price scenarios. Based on current commodity price forecast and our current NGL barrel composition for 2013, the table would indicate DCF between $260 million and $280 million, which represents a 45% to 55% increase over 2012. Our forecast includes the impact of the announced Eagle Ford drop-down and our in-flight approved organic growth projects.

We are also assuming maintenance capital of about $30 million to $35 million in 2013. And consistent with our past practice, our DCF forecast excludes the impact of potential future acquisitions or drop-downs or any unannounced organic expansion projects. So the drop-downs and other growth completed in 2012 and organic growth projects that come online in 2013 and 2014 are supporting our sustained distribution growth targets. As Bill mentioned earlier, we are targeting distribution growth of 6% to 8% in 2013 and 6% to 10% in 2014. We believe we can achieve these targets through our existing asset base, as well as identified and targeted drop-downs and organic growth over this period.

Slide 13 outlines our financial position at the end of 2012. We are committed to a financing strategy that maintains a strong capital structure, a competitive cost of capital and significant liquidity to enable us to execute our growth strategy. At the end of the year, our average cost of debt was about 3% and we had about $475 million in unutilized revolver capacity. Our debt-to-EBITDA ratio was 4.2x. Although our leverage is slightly above our target range of 3 to 4x, we are committed to maintaining our investment-grade rating. We continue to believe DPM is in a great position to serve as an attractive funding source for the sizable growth projects for the DCP Midstream enterprise.

Slide 14 shows our updated sensitivities as well as our breakdown of fee and commodity sensitive margins for 2013. Please note that these sensitivities do not include the additional 47% of Eagle Ford. In 2013, about 90% of our margin is either fee-based or hedged; and at the hedged NGL exposure, almost 60% is hedged with direct commodity price hedges. When including our natural gas and our condensate hedges, over 75% of our 2013 hedges are direct product hedges.

Our sensitivities for 2013 are also included on this slide. Our exposure to natural gas is very small, a $0.10 change is the $200,000 impact; our crude sensitivity is for $1 per barrel change, a $0.5 million impact; and finally, for a 1% change in our NGL to crude relationship, the impact is about $2 million. This sensitivity is based on a 45% NGL to crude relationship. So as you can see, we have fairly limited exposure to commodity prices in 2013.

So I'll now turn it back to you, Bill, for some summary remarks.

William S. Waldheim

Thanks, Rose. I'd like to close with the next slide, which illustrates our financial results over the past 3 years. We have had a 30% compounded annual growth rate in both our adjusted EBITDA and distributable cash flow over this period. This year alone, we have record growth, record adjusted EBITDA and record distributable cash flow. Executing on our growth strategy in conjunction with our stable cash flow has underpinned this impressive growth. Our goal is to have sustainable distribution growth and I'm happy to report that we've had 9 consecutive quarterly distribution increases. Despite commodity headwinds we delivered on our 2012 business plan, and we are well on our way to accomplishing our growth targets for 2013.

And finally, we couldn't be more pleased with DPM's newly acquired position in Eagle Ford given this area's prolific growth and organic capital opportunities. The visible growth opportunities growing our pipeline puts us well on our way to becoming the large scale, fully integrated midstream service provider. And having the strong sponsorship from our general partner, DCP Midstream, and its owners, Phillips 66 and Spectra Energy, we are competitively positioned to succeed.

So with that, I want to thank you for your interest in the Partnership. I will turn it back to our operator, Dawn, for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Elvira Scotto from RBC Capital Markets.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Question on the drop-down. Last quarter, you had indicated or you may be talked about acquiring the 33% of this Eagle Ford -- these Eagle Ford assets, and at that time, you'd indicated it was around the 7x to 9x 2013 EBITDA multiple and then you gave some color around the hedges that you would put in place. This acquisition of this incremental 47%, is that consistent with what you did with the first portion of the drop-down?

William S. Waldheim

Elvira, this is Bill. Yes, the 47% interest drop-down is consistent with the first 1/3 interest, and the hedges themselves are at the same price levels that we did on that 1/3 interest. So everything that we did several months ago is consistent with this particular drop-down.

Rose M. Robeson

And Elvira, just in terms of the multiple, the 7x to 9x, I think that you can think about this drop-down in those terms as well.

William S. Waldheim

Yes.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Great. And I want to make sure I understand how the hedges work. These are direct commodity hedges -- are they perfected? Meaning that this is essentially becomes almost a fee-based asset for the next 3 years?

William S. Waldheim

Yes, these are perfected hedges, direct commodity price hedges, so the ethane, the propane, every individual project is hedged for the forecasted equity production that we would have in these assets.

Rose M. Robeson

So I think you should think about it more in terms of fee-based.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Okay, great. And then just going -- looking out into 2015, I think historically, you had said the actual fee-based margins would be around, I believe, 65% to 80%. Is that -- does that still hold?

William S. Waldheim

Elvira, the -- as we look forward, we've had a number of drop-downs and fee-based opportunities with the Partnership. For instance, the Keathley Canyon project in 2014 is predominantly fee-based, the fractionators that we dropped the last year are fee-based, and actually as we look forward, the pipelines would be fee-based as well. So in total, it's difficult to pinpoint where we would be on fee versus commodity, but we'd like to think of it as currently, we're 55% fee-based and we would expect that to possibly be increasing. But when you include that with the perfected hedges, we're 90% hedged or fee-based at the Partnership as we sit here today.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Okay, great. And then one other question. Given the commodity price environment, NGLs and particularly ethane, if we were in a period of sort of sustained ethane rejection, prolonged ethane rejection and ethane prices stay low, does that have any impact on your outlook as you've provided it today?

William S. Waldheim

I'd give you the answer several ways. I would say generally not. The ethane environment is going to be oversupplied, we would think, in the next several years. But I think the ethane rejection that you're hearing about is really -- I think we talked about this before, it's really the ethane that's being rejected in the disadvantaged areas, which is Wyoming, the Bakken, in those types of areas. And if you look at where DPM's assets reside, they're generally, predominantly in the Gulf Coast, West Texas and East Texas. So the -- our transportation costs and T&F into the Mont Belvieu markets are fairly -- is fairly good when compared to the other areas. So I would generally say that we won't be affected necessarily by ethane rejection. And I just remind everybody that the ethane component of the barrel is only about 10% of its value. We really are looking for a recovery in the price of propane with these export terminals that will be starting as we speak. And actually this summer, with increased propane exports, we would expect propane to begin to move to higher levels, which actually should help the price of ethane as well. But I don't think it has a material impact on our earnings this year and looking forward.

Operator

Our next question comes from Michael Blum from Wells Fargo.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

A couple of questions for me. One, can you just talk about the -- I guess, your decision to, I guess, narrow your distribution growth targets for 2013 from what I believe before was 6% to 10%, and now you're saying 6% to 8%. Exactly what's going on there?

William S. Waldheim

Sure, Michael. That's -- We'd be happy to talk about that. Certainly in 2013, we have better line of sight with our current projections for the year. I'd also like to remind, with the Eagle Ford drop-down, we do have organic projects that are now being funded by the Partnership. And so as we look at 2013, we're comfortable with the 6% to 8% guidance. That is still, in our opinion, within the guidance that we previous have given, so we're comfortable with that guidance. And I think generally speaking, our goal is to have sustained long-term distribution growth. And I think at this level, we certainly can achieve that. Our next -- 2014, we still are guiding 6% to 10%. We have some good organic growth projects that would be coming online, and so we are going to keep that guidance as it is.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Okay. And then thinking about 2014 distribution guidance and the pretty big uptick in organic capital you're spending in 2013, do you think that could play out, that you'd be able to perhaps hit towards the higher end of that range in 2014?

William S. Waldheim

Michael, I'd like to think of it this way, we are also managing the coverage of our distribution, and I think our coverage target is 1.1 to 1.2. With the organic growth projects that are coming online, we believe we'll have improved distributable cash flow from the generation of earnings from those projects but we'll also be managing our coverage accordingly. So whether we're in the mid to upper range, I think we will be within that range and within the targets for our investment -- for the rating agencies as well.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Okay. And then last question for me. Of the $500 million in organic capital, I think on Slide 6, you lay out the various pieces of where that capital being spent, and obviously, the $230 million is for the Goliad Plant, but I was wondering if you could delineate the rest of that $270 million. How it's being spent among the various projects?

William S. Waldheim

I'll let Rose take that question.

Rose M. Robeson

Yes. Michael, the largest single project in the balance is the Keathley Canyon project, and overall, that project in total is around $300 million. And the majority of the spend will occur in 2013, and some of it will come into 2014 as well.

Operator

Our next question comes from Brett Reilly from Crédit Suisse.

Brett Reilly - Crédit Suisse AG, Research Division

Could we just get a little bit more color, I guess, on some of your assumptions for distribution coverage in the context of your commodity price outlook and distribution growth outlook for this year?

William S. Waldheim

Sure. Our distribution coverage is predicated on a $90 crude oil price and about a mid-40s percent NGL to crude relationship.

Rose M. Robeson

Yes. And Brett, in terms of our distribution coverage, as we sit here today, on a trailing '12, it's about 1x. And with our forecast for 2013, we think we will be -- and as the organic, of course, the Eagle Plant is coming online, it's actually in start-up mode. And as Keathley Canyon comes online, certainly, we expect to be back in the 1.1 to 1.2 range, so...

Brett Reilly - Crédit Suisse AG, Research Division

Okay. So for the full year, based on your assumptions as it stands today at a minimum, you think it'll be around 1.1?

Rose M. Robeson

By the end of 2013, we would be kind in that zip code.

Brett Reilly - Crédit Suisse AG, Research Division

Okay. And then you mentioned the 40% NGL -- or 45% NGL assumption is based upon the composition of your barrel. Can you just give us a little color as to what you're expecting just for the overall barrel across the DCP, I guess, portfolio?

William S. Waldheim

Sure, I can do that. The change from last year to this year, our composition has become a little bit lighter with the more modern cryogenic facilities that are now in the Partnership from the Eagle Ford drop-down, so the composition has gotten a little lighter. I just say the ethane composition's between 45% to 50% of the total barrel, in that range.

Brett Reilly - Crédit Suisse AG, Research Division

Okay. So I mean, it would appear that you guys aren't really, I guess, forecasting much ethane rejection across your plants for the year as you sort of mentioned with Elvira earlier?

William S. Waldheim

Yes, as I mentioned, our plants are generally in the southern markets and very close to the Mont Belvieu hub. So at this juncture, we wouldn't be planning to do -- having a lot of ethane rejection at our facilities.

Brett Reilly - Crédit Suisse AG, Research Division

Okay. And I guess the last one is on the Keathley Canyon projects, you mentioned $300 million total spend there. Is that for the entire projects or just for your interest in the project?

William S. Waldheim

That would be for our interest in the project.

Operator

Our next question comes from Rebecca Followill from U.S. Capital Advisors.

Rebecca Followill - U.S. Capital Advisors LLC, Research Division

You mentioned the export terminal at Chesapeake testing exports of propane. Can you talk about what needs to happen in order to get the purity product and really have that meaningfully export propane, and how big could that be?

William S. Waldheim

Sure, I can address that. The Chesapeake terminal is a deepwater port terminal, so it is well suited for export capability. What would need to happen is just expanding some of the rail siding, so we could bring in more product into the facility. And some engineering is currently underway to work the refrigeration of the product, so when it is in the tank, it is then able to be exported through and onto the ships. And so that work is ongoing, and we would hope -- that facility is a 2-tank facility, and so we would be able to probably handle both propane and butane through that facility if this project moves forward.

Rebecca Followill - U.S. Capital Advisors LLC, Research Division

And the magnitude of the exports?

William S. Waldheim

Well, that's a little difficult to say. It would obviously depend on the ability to unload railcars and those types of things. We're still working those dynamics, and so -- and it's also maybe seasonal. So again, a number of factors go into answering that question which I don't think I'm quite prepared to answer at this point.

Rebecca Followill - U.S. Capital Advisors LLC, Research Division

Okay. And then on your Eagle Ford plants, can you talk about what the current capacity utilization is at the plants that are online, the roughly 800 million a day? And then the expected ramp-up of Eagle and Goliad over the next 3 to 5 years?

William S. Waldheim

Sure, I'll be able to handle that as well. The Eagle Ford system as we sit here today, is generally completely full, with possibly the exception of our La Gloria plant, which -- that's the only plant in the fleet that we didn't modify to handle the richer Eagle Ford shale gas, but even that plant is running at a fair high level of utilization. So generally speaking, we're full today. The Eagle Plant is currently in start-up mode. It's mechanically complete. They are, actually, as we are talking, drying out the plant and hope to introduce gas into the facility this weekend, so we're very excited about that plant start up. And we would expect that plant to have a ramp-up period. But certainly, in 2013, we would like to see the plant be substantially full by the end of the year. The La Gloria plant -- I'm sorry, the Goliad plant is also under construction and -- for the first quarter start-up of next year, and we have additional contracts and extensions of existing contracts that support that facility. So contractually, we feel very good about the producers and the support behind that plant. So generally speaking, everything that we see in the Eagle Ford is really been on plan as far as volumes and the growth targets that we've had laid out for these projects.

Rebecca Followill - U.S. Capital Advisors LLC, Research Division

So that ramps up to full capacity by the end of '14.

William S. Waldheim

Well, the -- I'll just say the Goliad plant because it's the last plant coming out. I think we targeted a several year ramp-up in volumes of that facility, so it would take a little bit longer being the newest one online. But I think the Eagle Plant would be full relatively quick.

Rebecca Followill - U.S. Capital Advisors LLC, Research Division

And last question is on the hedges that DCP is going to do for you guys for the 27-month period for Goliad. Are those similar to the ones for the 80% interest in the Eagle investment?

William S. Waldheim

Yes, they are the same.

Operator

Our next question comes from Helen Ryoo from Barclays.

Heejung Ryoo - Barclays Capital, Research Division

The -- just starting with some questions on the Sand Hills and Southern Hills pipeline, I think, Bill, did you say that you're targeting for 2014 drop-down on these assets? And also could you provide a contracting update, how much contracting has taken place? And also the third party contract versus the parent contract on that roughly -- rough breakdown?

William S. Waldheim

Sure. I think you're correct, we did say that the targeted drop-down potentially is in the 2014 timeframe. We would like those assets to be up and running and generating earnings before they come to the Partnership because that would obviously be better for the Partnership that they got cash flow and earnings. But relative to the facilities themselves and the contract, and I think nothing's really changed as far as the percents of contract. I think we've always said between 50% and 70% is really DCP volume, and the other percentage would be really third party contracted. I would say we continue to add contracts to -- and volumes to the system as other third parties, and even as we announce new plants, such as our Rawhide Plant in West Texas and those types of projects, as they are announced, those volumes would be targeted for Sandhills pipeline. But the volumes -- the volume ramp-up, we've always said, has been over a 2- or 3-year period. I don't think that's changed much. We are optimistic that we're pulling some of those volumes forward and are seeing good visibility that the ramp-up could be a little quicker, but I don't think we're too far off our original estimates of a several year ramp-up period for the pipelines.

Heejung Ryoo - Barclays Capital, Research Division

And when you think about these contracts, are they mostly plant dedications, or do you have some take-or-pay type of contract mix?

William S. Waldheim

We certainly have a combination, Helen. The take-or-pay contracts, there are numerous take-or-pay contracts with these facilities. There are also plants that, frankly, we're already operating. We could see their production levels. And so for the facilities like that, we are very happy with the 15-year type plant dedications to the system. So it is a combination of T&Ds and plant dedications, but we're very comfortable with the mix and the ability to fill these systems.

Heejung Ryoo - Barclays Capital, Research Division

And just related to the ethane rejection question that came along, I understand that given where your systems are located, probably you're not -- may not be subject to a lot of these, but I mean, in the scenario that there is a lot of, let's say, ethane rejection going on behind your Southern Hills plants, would that impact the cash flow in Southern Hills, or are you sufficiently protected with this take-or-pay contracts that you shouldn't really feel the effect?

William S. Waldheim

Well, I think we're sufficiently protected with take-or-pay contracts. And I'd also just mention that the transportation from these facilities are certainly better suited for continued ethane recovery versus the higher transportation rates of other areas. And so again, as we look forward to the amount of rejection that might occur in the industry, we feel comfortable that the Mid-Continent is going to recovering ethane. And with the direct line to Mont Belvieu now and what we believe will be a higher valued market, we would expect the Mid-Continent to generally be an ethane recovery. But we don't have -- we, ourselves, don't have -- DPM's plants aren't up there, but there are other producers that are in that rig [ph] area. But Southern Hills should be in good shape to continue to move product to the Gulf coast.

Heejung Ryoo - Barclays Capital, Research Division

Okay. And then just on -- switching over to, I guess, the Eagle Ford. Could you remind me if there was any parent plants remaining in the Eagle Ford shale at this point, or did you guys acquire all of the plants? I know there's still 20% interest on that JV, but are there any plants that are outside of the JV that belongs to the parent?

William S. Waldheim

Helen, at this point, the entire Eagle Ford in South Texas business is part of the joint venture, and the parent does not have any further 100% owned facilities in this area.

Rose M. Robeson

And of course, the Eagle Plant is 100% DPM owned.

William S. Waldheim

That is correct.

Heejung Ryoo - Barclays Capital, Research Division

Right. And if you were to put in more plants in the Eagle Ford area, would it likely be your project, or would it be the parent project?

William S. Waldheim

Well, at this point, because the asset is 80%-owned DPM, any future plants would really be a Partnership project, and the JV currently would fund and move forward with any new projects. And should the JV ever become 100%, then it'd just be all the Partnership's decision to move forward with any additional facilities.

Operator

Our next question comes from Ross Payne from Wells Fargo.

Stanley Ross Payne - Wells Fargo Securities, LLC, Research Division

For Sand Hills and Southern Hills, that's obviously going to change the product -- I mean, the asset mix pretty notably in 2014, where do you see the pure fee-based going? You're 55% this year. Where do you see that going in 2014 with the addition of those 2 pipelines?

William S. Waldheim

Ross, I would generally point to the -- that fee-based increasing. And the reason why I would say that is even in the Eagle Ford drop-down, we have a significant producer contract, which is fee-based. And we do think, generally speaking, the industry is tending to move to more fee-based-type processing agreements, and so certainly, the Southern Hills and Sand Hills pipeline will be fee-based. Keathley Canyon is all or predominantly a fee-based asset, which will be in 2014 as well. So we think the trend is certainly going to be higher fee-based earnings. And then just through general attrition and renegotiation of processing agreements, I would expect that trend to continue in an upward manner.

Stanley Ross Payne - Wells Fargo Securities, LLC, Research Division

Okay. And for Sand Hills and Southern Hills, I know it's a several year ramp-up, but perhaps, by the end of '14, any expectations on what percentage of utilization you'll get on those 2 pipes?

William S. Waldheim

I would love to speculate on that, Ross. We -- every indication is that we're going to be every -- on target with our projections. The producers that are behind our pipelines are all -- the large Permian producers, the Eagle Ford producers, and so there's nothing that we see that's not going to prevent these from ramping up according to plan, if not maybe a little bit ahead of plan.

Stanley Ross Payne - Wells Fargo Securities, LLC, Research Division

Okay. And then finally, perhaps for Rose, any expectations on what your leverage number may look like at the end of '13?

Rose M. Robeson

Well, Ross, as I indicated, our target range is 3 to 4x on our debt-to-EBITDA, and we expect to be in that range. And so I think we're committed obviously to our investment-grade rating.

Operator

We have Selman Akyol from Stifel on line.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Two quick questions for me. First of all, on the 3-year commodity hedge provided by Midstream for the Eagle Ford joint venture, at the end of the 3 years and that rolls off, do you anticipate the Partnership will retain the commodity hedge, or would they reenter into another agreement?

William S. Waldheim

It's not expected that commodity hedge would go beyond the 3-year period. But I would like to point out that the Partnership has and will continue to have an ongoing hedging program. And so we opportunistically look forward into the markets for chances to lock in the commodity prices out in the future, and so that continues to this day. And so opportunistically, as we see the markets where we -- I think are favorable to the Partnership, we'll lock in forward prices beyond that 3-year period, and we have some hedges out in that period as well, excluding the direct commodity price hedges. So that will be an ongoing program.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

All right. And then just real quickly, on logistics, you guys talked about 1 million barrels coming online for, I think, storage up in the Utica/Marcellus in the fourth quarter of this year. I was curious, is that completely sold out? Are you seeing overwhelming demand there? Is there any way that you can talk about that picture?

William S. Waldheim

Sure. For the ethane cavern itself, that is a dedicated cavern under long-term agreement with Nova. But the -- there is certainly interest in, and we are working other projects to potentially expand the capabilities on the other purity products, the propane and butane. Marysville is well-suited and situated to really help the continued growth of purity products in this market. And there is demand. We've been 100% subscribed on our storage in the past several years, and looking forward, it appears that we'll continue to be 100% subscribed. So we're looking forward to possibly expanding the facility and continuing to serve the producers in the Marcellus and Utica area.

Operator

That was our last question. I will now turn it back to the presenter for closing comments.

William S. Waldheim

Well, we just like to thank you again for your interest in the Partnership. We've had a great year and looking forward to a productive 2013. And with that, we appreciate your interest.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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