DCP Midstream Partners LP Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: DCP Midstream (DPM)

DCP Midstream Partners LP (NYSE:DPM)

Q1 2013 Earnings Call

May 07, 2013 9:30 am ET

Executives

Andrea Attel

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

Jeremy Tonet - JP Morgan Chase & Co, Research Division

Operator

Welcome to the DCP Midstream Partners' First Quarter 2013 Earnings Conference Call. My name is Christine, 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 Andrea Attel. You may begin.

Andrea Attel

Thank you, Christine. Good morning, everyone, and welcome to the DCP Midstream Partners' First Quarter 2013 Earnings Call. As always, we want to thank you for your interest in DPM. This call is being webcast and the slides used for today's call are available on our website at www.dcppartners.com.

Before I turn it over to Bill, I want to remind you that in the course of our discussion today and in the subsequent Q&A session, we may be making forward-looking statements. Please review the second slide in the deck regarding forward-looking statements, noting that our business is subject to a variety of risks and uncertainties that may affect actual results. For a complete listing of these and other risk factors that may impact our business results, please review the partnerships' most recent Form 10-K filed with the SEC. Also during our discussion, we'll be using various non-GAAP measures, which are reconciled to the nearest GAAP measure schedules in the appendix section of our earnings slide. With that, I'll turn the call over to DPM's President, Bill Waldheim.

William S. Waldheim

Thanks, Andrea. Good morning, everyone, and thanks for joining us today for a discussion of DPM's first quarter results. Before I get started, I want to welcome Andrea to our team. She'll be picking up the investor relations role, where Jonni Anwar left off as he moves on to another role in DPM. So welcome, Andrea. I also have with me Rose Robeson, our CFO.

I hope you saw our press release last night, which showed solid first quarter distributable cash flow of $77 million, up 40% from Q1 of 2012 and in line with our 2013 target. For the 10th consecutive quarter, we have increased our distribution. That represents a 1.4% sequential quarter and 6% year-over-year increase, in line with our forecast of 6% to 8% distribution growth for 2013. This increase also demonstrates the partnership's stable earnings due to our fee-based income and attractively positioned hedge book that we are confident -- and that we are confident in the future cash flows from the visible growth we have talked about.

As mentioned, we generated distributable cash flow of $77 million in the first quarter, which I'd like to point out was a record for DPM. We also couldn't be happier that we completed the Eagle Ford joint venture dropdown with DPM's interest now at 80%. This is one of the largest gathering and processing systems in the prolific Eagle Ford shale play with 1.2 Bcf per day of total processing capacity. This $626 million transaction not only adds volumes, but it speaks volumes about how we are executing on our strategy, so we're very excited about this accretive transaction. Additionally during the quarter, we raised approximately $1 billion of capital through execution of offerings in both the equity and debt capital markets. Rose will provide some more details later in the call.

We're very happy with these results and believe this puts DPM's balance sheet in great shape. This financing is another achievement that underscores our position to serve as an attractive funding source for the DCP Midstream Enterprise. With that overview, I'd like to offer up some more specifics on our growth projects.

On Slide 4, let me start by talking about our growth and dropdown activity with our general partner over the past couple of years. Our cumulative amount of growth since the beginning of Q1 of 2011 now stands at $2.5 billion. You can clearly see that the growth in drop-downs continue at an accelerating pace. And with the additional investment in Eagle Ford, our strategy is playing out, where DPM as a financing vehicle for DCP Midstream, is receiving some great assets and growth. That means we are achieving our goal of providing unitholders sustainable distribution growth.

Next, on Slide 5, you can see our growth forecast, which is shown based on the timing of our cash spend. For 2013, we are targeting about $1 billion of dropdown opportunities, which includes the recently completed Eagle Ford dropdown. We also have ongoing organic growth of another $500 million. In fact, I recently visited our Goliad Plant site, where construction is progressing nicely. Compressors are set and towers are going up, so it's beginning to look like a real plant. In 2014, we would expect another $1 billion of dropdown opportunities. And subject to the approvals of both the DCP Midstream and DPM boards, this would include the expected drop-downs of DCP Midstream's 1/3 interest in Southern Hills and Sand Hills pipelines. We also wanted you to know on this slide the in-service states 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.

So now just a quick comment on the Eagle Ford dropdown. In March, we completed the immediately accretive dropdown from our general partner of an additional 47% interest in the Eagle Ford joint venture, bringing our total ownership to 80%. DCP Midstream took 20% of the consideration for this dropdown in DPM common units, which shows their continued belief in these assets. When the Eagle Ford buildout is complete, DPM will own one of the largest gathering and processing systems in the area. And once our Goliad Plant is complete, we'll have total processing capacity of 1.2 Bcf per day. Along with this transaction, DCP Midstream has provided a 3-year direct commodity price hedge for the Eagle Ford dropdown and a direct commodity price hedge on the Goliad Plant volumes. The earnings stability these hedges provide differentiates DPM from our peers. This transaction is another great example of how we work with our general partner to fund DCP Enterprise growth.

With that, let me provide a brief operational update. Beginning on Slide 7, our Natural Gas Services segment continues to experience substantial growth with the completion of the dropdown we just discussed. The consolidation of the Eagle Ford joint venture into DPM will continue to be a major source of growth in the coming years. Also during the quarter, we placed our 200 million a day Eagle Plant into service, which I'm happy to report is already at 60% to 65% utilization and climbing. The Keathley Canyon pipeline project at our Discovery joint venture is also progressing nicely with an in-service target date of mid-2014. Additional reserves continue to be added to this project with deepwater producers announcing success in and around this area.

Next, in our NGL Logistics segment. Our exciting organic growth projects are progressing as expected. Both our Texas Express joint venture pipeline and our Marysville ethane storage expansion projects are on-time and on-budget. Further, as the demand for storage in the Northeast region continues to grow, additional Marysville expansions are being considered. Looking forward, we expect our NGL Logistics segment to continue to have significant growth in the next couple of years with the targeted dropdown of the 1/3 interest of the Southern and Sand Hills pipelines from our general partner. Both pipelines are currently taking NGL raw make into their systems and building line fill.

Finally, in our Wholesale Propane segment, we had an excellent first quarter with what I'm happy to report was a normal or should I say cold winter with a cool spring. Of interest, we recently contracted to import to ship this summer and have presold most of the product for next winter, locking in attractive margins on this volume. Work is underway on both the commercial and engineering fronts to solidify Chesapeake as both an import and export facility, and we are encouraged by our work to date.

With that, let me turn it over to Rose to review our financial results.

Rose M. Robeson

Thanks, Bill, and thanks, everyone, for joining us today. As we stated in our earnings release last night, we are required to recast our 2013 quarter for the 47% Eagle Ford dropdown and our 2012 quarter for our 80% interest in Eagle Ford and the 2/3 interest in Southeast Texas. This is required even though DPM did not own these assets during these periods. So this creates a lot of complexity in our numbers.

So while we hedge the majority of commodity risk at DPM, prior-period GAAP results reflect DCP Midstream's unhedged portion of its ownership interest in Eagle Ford and Southeast Texas during those periods, which reflects higher commodity prices in 2012. So as the basis for comparison, I will discuss the quarter-over-quarter variances for the assets actually owned by the partnership during the first quarter of 2013 and 2012, better reflecting the trends and results we achieved. These results are shown in the shaded box on this slide.

So excluding results attributable to DCP Midstream's ownership in the dropdown assets, DPM's adjusted EBITDA was up approximately $18 million or almost 25% over first quarter of last year. I will review the details by segment in the next 2 slides. We generated DCF of $77 million in the first quarter of 2013. Our cash distribution coverage was 1.4x and slightly over 1x for the trailing 12-month. Keep in mind, our first and fourth quarters are our strongest quarters due to seasonality in our Wholesale Propane business. For the full year 2013, we expect coverage to be below our long-term target range of 1.1 to 1.2x, reflecting the financing lead time of our organic growth projects. But we do expect to be back within range once these organic projects come online.

So if you turn to the next slide, I'll review our results of our Natural Gas Services segment. And again excluding results attributable to DCP Midstream's ownership of the dropdown assets, DPM's adjusted EBITDA increased $6 million or 10% compared to the prior year. Growth from Southeast Texas and the initial Eagle Ford dropdown more than offset the impact of lower volumes across certain assets, lower commodity prices and operating expense timing. Our hedging program continues to provide stability in our Natural Gas Services segment. And I will discuss our updated hedge percentages and sensitivities in a moment.

Turning now to our NGL Logistics segment. We almost doubled our first quarter adjusted EBITDA from last year to $23 million. This increase is primarily due to the dropdown of the Mont Belvieu fractionators and higher margins at our Marysville storage facility.

Slide 11 shows the results of our Wholesale Propane segment. Our adjusted EBITDA increased over 20% from 2012 to $22 million. With a return to more normal weather, adjusted EBITDA was up almost 45%, excluding a noncash project writeoff. And as I mentioned earlier, this business does have seasonality with the majority of earnings coming during the first and fourth quarters.

On the next slide, let me recap our DCF and our distribution growth targets, as well as provide an update on sensitivities. Our fee-based and hedged margins, as well as our sensitivities, have been updated for the Eagle Ford dropdown, including the associated direct commodity price hedges. Post the Eagle Ford dropdown, about 95% of our margin is now fee-based or hedged. Our updated sensitivities for 2013 show that we are now neutral to changes in natural gas and crude prices and our sensitivity to the NGL-to-crude relationship is now about half of what it was prior to the recent Eagle Ford dropdown. So we have very limited exposure to commodity prices in 2013.

Our 2013 DCF forecast, which includes the Eagle Ford dropdown, remains the same at $260 million to $280 million. With the addition of the perfected hedges associated with the Eagle Ford dropdown, commodity price impacts on 2013 DCF have been significantly reduced. Consistent with past practice, our DCF forecast for 2013 excludes the impact of potential future acquisitions or dropdowns or any unannounced organic expansion projects. And lastly, our first quarter DCF of $77 million is in line with our full year forecast, and we are on track to achieve our 6% to 8% distribution growth target in 2013.

Slide 13 shows our updated hedge book. The key points to note on this slide are: we are 95% fee-based or hedged; 50% of our margin is fee-based; and on the remaining 50% of commodity-based margins, we are 90% hedged. It is important to note that the 90% of our hedges are now direct commodity price hedges. So with this attractive hedge book, we have significantly reduced our exposure to both commodity prices, as well as the exposure to the relationship between crude oil and NGL prices.

Slide 14 outlines our financial position at the end of the quarter. We continue to maintain a strong capital structure and a competitive cost of capital. During the quarter, we raised approximately $1 billion of capital through the successful execution of offerings in both the equity and debt capital markets. We raised approximately $500 million in the equity market through the largest equity offering in DPM's history. We also raised an additional $500 million of 10-year bonds at a very attractive rate of 3 7/8%. Our average cost of debt is 3.7% and we had approximately $850 million in unutilized revolver capacity. And finally, our debt-to-EBITDA leverage ratio is 3.8x. And as Bill said earlier, our balance sheet is in great shape after our equity offering.

I would also like to note that both S&P and Fitch have recently affirmed DPM's BBB- investment-grade ratings and stable outlook. We remain committed to our investment-grade ratings and continue to be an attractive funding source for the DCP Midstream Enterprise. So with that, Bill, I'll turn it back to you for some summary of remarks.

William S. Waldheim

Thanks, Rose. I would like to close this morning by leaving you with the following. Our first quarter distributable cash flow of $77 million was up 40% over Q1 of 2012. This fact alone highlights the growth that we are achieving at DPM. We've had 10 consecutive quarterly distribution increases. Our financial results are in line with our 6% to 8% distribution growth targets for 2013. And finally, the visible growth opportunities this year and next put us well on our way to executing on our growth targets and becoming a fully integrated midstream service provider.

So with that, I want to thank you for your interest in DPM, and I will turn it back to Christine for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Elvira Scotto of RBC Capital Markets.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Can you provide some more details on the propane exports out of the Chesapeake terminal? Any more detail around the terminal? How much did you export this quarter? And what do you think you can ultimately do out of that terminal?

William S. Waldheim

Elvira, this is Bill. As we stated previously, this last quarter, we exported about 6 million gallons out of the Chesapeake terminal. And we are currently working on debottlenecking the logistics in and out of that facility. So we will have the ability to bring product in, into Chesapeake for export. We are also working on some of the engineering to be able to chill that propane for export. Right now, we would anticipate -- the project is moving along nicely at this point. It's a little too early to say if it's going to be a go yet. But we're very encouraged by our discussions with the commercial -- from the commercial team to the customers and also from engineering's look at the project. So it's a little early to tell exactly what we'd be able to export on an ongoing basis at this point.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

So is this project not included in your 2013 outlook?

William S. Waldheim

No. This project would not be included in the 2013 outlook. In fact, we do have some integrity work that's occurring at that facility this summer. So probably the earliest we'd be exporting would be into early next year.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Okay, great. And then can you just talk maybe a little bit about ethane rejection? Are you seeing anything across your systems or DCP systems that impact your volumes?

William S. Waldheim

Elvira, I'll talk about it, I guess, in 2 aspects. Across the entire DCP Enterprise, we've had some modest rejection in the Mid-Continent, as you might expect. As we've said, DPM's assets are more to the further south and closer to the end-use market. So we've had very limited rejection in and around the DPM assets at this time. I point out that contract structure, it's a complex question on whether you reject or not. Contract structures behind your plants do matter, as well as the quality of the plant itself and its ability to reject ethane. So we've seen some limited rejection. But all in all, I wouldn't call it very material at this point.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Okay. And then the last one for me. Sand Hills and Southern Hills, can you just remind us of the -- how the volume ramps on those 2 lines?

William S. Waldheim

Sure. I'll start with Sand Hills Pipeline. The pipeline is now executing its line fill operation as we speak. And that will take a month or 2 to actually get the line full of product, at which time, it will begin service. We've always said that it will take several years to actually ramp up to the volume that we anticipated. And I believe the we've stated 200,000 barrels a day is the initial capacity we target in the 2- to 3-year time horizon. And so that's still the plan at this point. The Southern Hills Pipeline is about 150,000 barrel a day facility. And it, too, is executing its line fill operations as we speak and will be in service here shortly as well. I'd say the same things about that system. We really anticipate those systems to fill up. The Southern Hills, in particular, have certain contracts roll off. And as those contracts roll off, we'll be diverting product into that line, which will take several years to actually accomplish. So both systems will be ramping up in 2013 and '14 to what we would hope there is their projected initial volume outlook.

Operator

[Operator Instructions] Our next question is from Michael Blum of Wells Fargo.

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

Just 2 quick questions for me on the propane segment. One, just -- and I apologize if I missed this in remarks. But you had a writeoff or a discontinued construction project. Can you just talk about what that was?

William S. Waldheim

Sure. We were, as you know, working for a possible facility in the Maine Searsport area. And as we pursued that project, the permitting was going along very well. But in the end, the city did not allow for our permit. And at that point, we decided that, that project would no longer be viable. So that's where that writeoff comes from.

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

Okay, great. And then just more of a big-picture question for me. It clearly looks like the Northeast will be long propane at least for part of the year, and there's probably going to be a need for more storage. Are there -- are you looking at opportunities like that? Or do you see anything in the near-term that could be developing for that business for you?

William S. Waldheim

Yes. I think, as we mentioned, the Marysville facility is actually in a very good location to act as a buffer for the extra production that's coming out in the Marcellus and Utica shales. With the conversion of the facility to actually now handle ethane for NOVA Chem, we have additional opportunities to enlarge the propane and butane storage at that location. And as I mentioned, we are looking at that as we speak. And you'll probably hear more about that in the months to come.

Operator

Our next question is from Jeremy Tonet of JPMorgan.

Jeremy Tonet - JP Morgan Chase & Co, Research Division

Thanks for the updated disclosures on the commodity hedge position. It seems like you guys have really knocked out a lot of price sensitivity there. I was just curious as far as '14 and '15, if sensitivity levels would be similar to what they are in '13. It looks like the amount that is hedged is somewhat similar. So I'm just curious as far as this removing commodity price exposure is more than just '13, if sensitivities in '14 and '15 would be similar.

William S. Waldheim

Jeremy, I'm going to let Rose take that one.

Rose M. Robeson

Sure. Certainly, as we look at the hedge book for '14 and '15, we are similarly hedged in '14 and '15 at about 90%. And we do have some fairly significant fee-based projects coming online in '14, the Keathley Canyon project. And so we would expect that certainly as we sit here today, '14 and '15, looks like we have certainly significantly increased our commodity exposure for those years as well.

Jeremy Tonet - JP Morgan Chase & Co, Research Division

Got you. Okay. And I apologize if I missed it in the prepared...

Rose M. Robeson

I'm sorry. We decreased our commodity exposure. Sorry.

Jeremy Tonet - JP Morgan Chase & Co, Research Division

Great. Sorry if I missed it in the prepared remarks. But I was just wondering, given all the spend that's happening upstairs, if there's any potential to accelerate the dropdown program. It seems like you guys have had good success in accessing the capital markets and it seems like there's a need up top. So I'm just curious what your thoughts are there.

William S. Waldheim

Jeremy, this is Bill. When we look at the financing needs for the enterprise, it really is dependent upon the spend at DCP Midstream. And as they've indicated, they have a nice backlog of projects, if you will. So the projects or the spend that we've laid out in our guidance is what we have very good line of sight on and feel comfortable guiding with. But that spend is always subject to change based upon the needs of DCP Midstream.

Operator

[Operator Instructions] We have no further questions at this time. I will turn the call back over to Bill Waldheim.

William S. Waldheim

Thank you, Christine. And thanks, everyone, again for your interest in DPM. If you have any follow-up questions over the coming days, feel free to contact Andrea, Rose or myself and we can make ourselves available. So thank you.

Operator

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

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