DCP Midstream Partners LP Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 6.13 | About: DCP Midstream (DPM)

DCP Midstream Partners LP (NYSE:DPM)

Q3 2013 Earnings Call

November 06, 2013 9:00 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

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

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

Matt Niblack

Michael Del Papa

Operator

Welcome to the DCP Midstream Partners Third Quarter 2013 Earnings Call. My name is Christine, and I will be the operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I would now like to turn the call over to Ms. Andrea Attel. You may begin.

Andrea Attel

Thank you, Christine. Good morning, everyone, and welcome to the DCP Midstream Partners Third 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 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 presentation regarding forward-looking statements, noting that our business is subject to a variety of risks and uncertainties that may affect our actual results. For a complete listing of these and other risk factors that may impact our business results, please review the partnership's most recently filed 10-K and 10-Q.

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

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 our third quarter results. I'm also here with Rose Robeson, our CFO.

As you saw in our press release last night, we had a great third quarter. DPM reported strong third quarter earnings, where we achieved solid DCF of $72 million, double our distributable cash flow from third quarter of last year.

We also delivered our 12th consecutive distribution increase, which now stands at $2.88 per share annually. Our third quarter was very active. We closed on the dropdowns of the O'Connor Plant, which was formerly known as LaSalle, and 1/3 interest in the Front Range Pipeline.

We've successfully accessed the equity capital markets. And with the O'Connor Plant now in service, volumes are ramping up nicely. In fact, recently, we've been running at about 100 million a day or 90% of capacity. As we bring new compression on, we believe the O'Connor Plant will be full by year end, and expansion is underway to reach 160 million a day early next year.

We're also pleased with the performance of our Eagle Ford system, which continues to ramp up and perform according to plan. These impressive quarterly results are underpinned by the partnership's fee-based earnings and attractive hedge book positions.

So here's a recap of our year so far. We've exceeded our $1 billion of dropdowns, and are well on our way to deploy over $1.5 billion of capital via dropdowns and organic growth. We feel very confident that our distributable cash flow forecast -- about our distributor cash flow forecast, and assuming our assets continue to run well, we expect DCF to be at or above the high-end of the $260 million to $280 million range for the full year.

We have significantly increased the scale and scope of DPM by expanding both our gathering and processing and downstream logistics businesses. And as we continue on this high-growth trajectory, DPM as a standalone and is well on its way to becoming one of the largest G&P and NGL-producing MLPs.

Slide 4 shows our historical capital spend over the past couple of years and our 2014 capital forecast. This is the second year in a row that we have exceeded $1 billion of targeted dropdowns. As you look back, you can clearly see that the growth in dropdowns have continued and we are delivering on our plan as promised.

We achieved our distribution growth target in 2013, and believe sustainable distribution growth will continue looking forward. As mentioned in my opening, we expect to achieve $1.5 billion of growth in 2013. I'll talk more about the progress of our organic projects in just a minute.

Keep in mind, DPM continues to be the funding vehicle for the capital needs of the DCP Enterprise. So looking forward, our targeted $1 billion of dropdowns in 2014 may be conservative. Additionally, subject to the approvals of both the DCP Midstream and DPM boards, 2014 would include the expected dropdowns of DCP Midstream's 1/3 interest in the Southern Hills and Sand Hills Pipelines.

Now starting on Slide 5, I'll provide a brief operational update on our 3 business segments, all of which performed well this quarter. Our Natural Gas Services segment continues to experience substantial growth with the completion of the Eagle Ford and O'Connor dropdowns. These assets will continue to be a major source of growth in the coming years.

In October, the O'Connor Plant, serving the rapidly expanding DJ Basin, went into service. We recently renamed this plant in honor of Tom O'Connor, DPM's Chairman and former CEO. It was Tom's leadership that propelled not only DPM, but the DCP Enterprise, into expanding both to gas services and logistics businesses. We must have the luck of the Irish, as the 110-million-a-day O'Connor plant had a smooth startup, continues to steadily ramp up, and has had several days at over 100 million a day of gas throughput.

While system balancing still needs to occur, it looks like we'll be ready for the incremental 50-million-a-day expansion in Q1 of 2014. The DJ Basin is an exceptional growth area, where we see volume growth and infrastructure needs as E&P capital spending continues to increase in this prolific area.

Now turning to the Eagle Ford, our 200-million-a-day Eagle Plant is currently running at about 85% full, so we are pleased with the ongoing volume ramp up to-date. And our Goliad Plant continues to progress on time and on budget, scheduled to meet the expected in-service date in early Q1 of 2014. This capacity will certainly be needed, as we just saw 4.5% quarter-over-quarter increase in our overall volumes in this area.

Finally, the Keathley Canyon pipeline project at our Discovery joint venture has now begun laying the shallow water portion of the pipeline. Williams, the operator, is now targeting an in-service date of Q4 of 2014.

As you see on Slide 6, our NGL Logistics segment continues to maintain a high growth rate. As we announced last week, the Texas Express Pipeline, operated by Enterprise, and owned 10% by DPM, has been placed into service. This means the take-or-pay agreements associated with this pipeline are now active, with revenues commencing in November 2013. This 580-mile pipeline is supported by long-term contracts and has an initial capacity of approximately 280,000 barrels per day, and readily expandable to approximately 400,000 barrels per day.

NGL volumes from the DJ Basin will be transported to Texas Express mainline via the Front Range Pipeline. This asset was dropped down in August of this year. So now DPM has ownership interest in both these pipelines. So when we talk about Front Range Pipeline, with the announcement of additional DJ plants not anticipated when this project was originally approved, we believe there is significant upside opportunity. The operator now expects Front Range Pipeline to be in service in the first quarter of 2014. This pipeline is a great long-term asset that is predominantly fee-based and is anchored by ship-or-pay commitments from DCP Midstream and Anadarko.

Turning to our storage asset, our Marysville ethane storage expansion is nearing completion, and is expected to be in service in the fourth quarter. As demand for storage in the northeast region continues to grow, engineering and commercial work is underway for additional Marysville storage expansions. Looking forward, we expect our NGL Logistics segment to continue to have significant growth in 2014, with the targeted dropdowns of the 1/3 interests in both Southern and Sand Hills Pipelines.

On Slide 7, in our Wholesale Propane segment, we are experiencing a better-than-usual start to the winter heating season, with recent propane demand being fairly robust. Additionally, Phase 1 of our Chesapeake export project, to de-bottleneck distribution into and out of the facility, is progressing nicely and is expected to be completed in the first quarter. This was the first of a 2-phase project, where Phase 2 will allow us to export either propane or butane from this facility.

We are pleased with the progress to date and would expect to be able to export in 2014.

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 this morning. As Bill summarized earlier, we had a very strong third quarter.

First, our third quarter adjusted EBITDA was up approximately $41 million versus third quarter of last year. These results reflect growth from dropdowns, as well as continued solid performance in our base business. Second, we generated DCF of $72 million in the third quarter of 2013, more than double the third quarter of 2012. And lastly, our cash distribution coverage for the quarter was approximately 1x and for the trailing 12 months, was 1.1x. So we are very pleased with these results and we continue to deliver on our forecast.

And as a reminder, as I walk through our results this morning, I'll discuss the quarter-over-quarter variances for the assets actually owned by the partnership, as shown on the shaded box on this and the next slide, even though for GAAP accounting purposes, our prior-year results are shown as if we owned the 80% interest in Eagle Ford during the third quarter of 2012.

So let me start with the Natural Gas Services segment on the next slide. Our adjusted EBITDA in this segment increased $39 million compared to the prior year. These results reflect growth from the Eagle Ford dropdowns, as well as the operation of our Eagle Plant that started up in March of this year. We also had favorable operating expense in our base business.

So overall, you can see our throughput volume decreased about 3%. However, our NGL production increased 12%. And these volumes do include the 80% interest in Eagle Ford. We are seeing very strong volume growth in Eagle Ford, as you would expect. We are also seeing a nice ramp up in NGL production in Eagle Ford and other assets, due to higher volume and improving recoveries from what we saw a year ago. These improvements are offsetting some volume declines in certain of our lower-margin areas. And lastly, our hedging program continues to provide earnings stability with very little exposure to commodity prices for the segment.

Turning to our NGL Logistics segment, DPM's third quarter adjusted EBITDA was up $5 million, a 31% increase from last year. This increase was primarily due to higher volumes and margins at the Mont Belvieu fractionators. We also saw about a 20% increase on pipeline throughput volumes, due primarily to increased volumes on Wilbreeze, with the startup of Sand Hills Pipeline.

Slide 11 shows the results for our Wholesale Propane segment. Our adjusted EBITDA was about breakeven for the quarter, reflecting our normal seasonality. Propane sales volumes were up over 10% compared to last year, reflecting the industry's excess inventory buildup in 2012.

So on the next slide, let me recap our sensitivities and our DCF targets. So as a reminder, about 95% of our margin is fee-based or hedged. And as shown on this slide, for 2013, we are neutral to changes in natural gas and crude prices, and our sensitivity to the NGL-to-crude relationship is about a $1 million impact for a 1% change. So we have very limited exposure to commodity prices in 2013. Our third quarter DCF of $72 million is ahead of plan, but does reflect some discretionary maintenance capital carrying into 2014.

Our current maintenance capital run rate is about $20 million to $25 million in 2013, lower than our original forecast of $30 million to $35 million. And as Bill mentioned earlier, in terms of our full year forecast, with the startup of the O'Connor Plant in October, we expect to be at or above the high end of our DCF forecast range of $260 million to $280 million. And lastly, we achieved 6% distribution growth on a cash-paid basis in 2013.

Slide 13 outlines our financial position at the end of the quarter. We continue to maintain a strong capital structure and a competitive cost to capital. Our average cost of debt was 3.6% and we had approximately $790 million available under our revolver at the end of the quarter. We completed a $450 million equity offering in August, so our balance sheet is in great shape. Our debt-to-EBITDA at the end of the quarter was 3.6x, after adjusting for acquisition and project credits. This is around the midpoint of our target range of 3x to 4x. We also recently launched a commercial paper program for DPM, which should lower our short-term borrowing cost.

So we continue to be well-positioned to serve as a significant source of funding for growth capital for the DCP Enterprise.

And with that, I'll turn it back to you, Bill.

William S. Waldheim

Thanks, Rose. I would like to close this morning by leaving you with the following. We had a great third quarter, and are looking forward to a strong finish in 2013. We have doubled our third quarter DCF and our unit holders have enjoyed 12 consecutive quarterly distribution increases, now at $2.88 annually. We're very excited about our Eagle Ford system and it is performing well, and is a large contributor to our strong third quarter results.

So as the O'Connor Plant ramps up faster than expected, and the Front Range Pipeline comes online in the first quarter of next year, we are looking forward to sustainable distribution growth and continued value creation for our unitholders.

So again, thank you for your interest in DPM. And I'll turn it back to Christine, our operator, for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Gabe Moreen from Bank of America Merrill Lynch.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

A couple-part question on the Chesapeake terminal, just wondering if what CapEx, in that $200 million guidance for next year, what CapEx is baked in from Chesapeake in that $200 million number for '14? And also, just kind of what your status is in terms of contracting potentially Phase 2, and then would you need additional permits that you think, you would need for Phase 2?

William S. Waldheim

Gabe, yes, the Chesapeake project has been ongoing for a while now, and we've been working, as I said, on phasing it in, with Phase 1 being really the transportation into and out of the facility. The overall project is probably, in total, maybe a $25 million to $35 million-type project. But Phase 2, as we get through with that, a lot of the engineering has been done. And really, we're just, hopefully, planching up some of the commercial aspects of the business arrangement, so we can be ready to export in 2014. We are primarily looking to be more of a service provider and really working on a fee-based arrangement for the services. So overall, you know, the project is moving well and we hope to be exporting next year.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

So is there going to be an official open season for that, Bill? And is that also something that your parent company would help, potentially, base load with export volumes? Or is it just that their NGL barrels are too far away from that project to actually help out there?

William S. Waldheim

Yes, I mean, I think right now we're primarily working with producers out of the Utica Marcellus area, because that's the logical sourcing of product for the facility. So again, I think not necessarily an open season. I think we're working directly with several customers to be our customers at this facility. So again, we believe things are moving well on the front of negotiating our arrangements, and you'll know more as we know more.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Okay. And then shifting gears to the billion in drops in '14 and Southern Hiils and Sand Hills, can you talk about timing on when you'd contemplate doing those dropdowns in '14? And also, in that billion-dollar figure, is that just Southern Hills and Sand Hills, or do you have other stuff in there, too?

William S. Waldheim

Well, again, we've had a great quarter, and looking forward to finishing the year real strong. When we look at the DCP Enterprise, they've got a lot of projects that they're still working on in the Permian and the DJ Basin in Colorado. So we are the funding vehicle for the DCP Enterprise. And as we look to 2014, we can't say specifically how and when, but we certainly have communicated that the Southern and Sand Hills Pipelines, at some point, will be part of the drops. And I think as we look at the level of guidance for 2014 at this point, I think we're very good [ph] at this point.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Got it. And then last question for me, just in terms of the 6% to 10% growth being laid out for next year. Can you talk about some of the variables that would cause it to be at the lower or the higher end of that range? How do you think about maybe distribution coverage for next year, as well?

William S. Waldheim

Sure. Again, as you look at this year, we are having a good year and I think our coverage has been improving. As an enterprise, we are -- or as DPM is, we are funding a lot of organic growth projects. And so those are generally good to be doing for continuing the longer-term sustainability of our dividend growth. So we really, at this point, are looking at threading the needle, if you will, on keeping a good coverage ratio, along with funding organic projects. And so, right now, I think we're -- at one point, we had guided 6% to 10%, I don't think we'd be at the very high end of that range, but I think we'll certainly be in the wheelhouse as we look into 2014.

Operator

Our next question comes from Ross Dean [ph] from Wells Fargo.

Unknown Analyst

Bill, you guys have had some nice dropdowns from a DCP Mid. Given the commodity nature of many of the assets, do you expect future dropdowns to be hedged by DCP Midstream, or are you getting to the size where you can shoulder some of that? And then lastly, how do we think about the kind of size that we might see in the next couple of years out of DCP Mid moving down towards you?

William S. Waldheim

Ross, over the years, we've done drops in several different ways. I mean, we have received direct commodity price hedges from our owners when we did the Eagle Ford dropdown. More recently, when we did the LaSalle facility, we actually converted a commodity-sensitive type asset more towards fee. So, I think, as an enterprise, we understand that it's important to the MLP to have fee-based type earnings. As we look forward and we look at the pipeline of organic projects that are in the mill, we have a lot of fee aspects associated with many of the assets, Southern and Sand Hills Pipelines, for instance, are all fee. The Keathley Canyon project is 90% fee-based. And even the O'Connor Plant is a lot of fee as well, which is just now ramping up. So again, I think, as we look at DPM, currently at 50% fee, I think that trend might be on an increase as far as moving higher from 50%. I think we'll always have some form of commodity exposure and we do hedge that. And it -- whether it be with the owners or in the third-party markets, we do look forward and hedge those commodity exposures. So it's hard to say what would be coming to us from the owners. I can't say, there would or wouldn't be fee associated with it. But overall, I think we manage our commodity exposure very well looking forward.

Unknown Analyst

Okay. And Bill, just absent organic projects, any thought on the kind of volume of assets we may see heading your way just from DCP Mid, some legacy assets?

William S. Waldheim

Yes, I think, as I've said in my earlier comments, the Enterprise -- DCP Enterprise, continues to experience a lot of capital growth needs in and around its primary assets, and being the funding vehicle for the Enterprise, I think, as we look to the billion dollars of dropdowns that we've -- that would be a 2014 number, I just think it's going to be conservative. But beyond that, I really can't comment much.

Operator

Our next question comes from Michael Blum from Wells Fargo.

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

Just a couple of questions, back to the Chesapeake terminal. Can you just remind us what would be the capacity to export, and kind of what percent do you think you would need contracted of that capacity to move forward?

William S. Waldheim

Michael, I don't know if we've ever actually mentioned the capacity. I think as we are able to talk about it more fully, once we've planched up all the arrangements, I think, we'll be able to share what we're looking at as far as the ability to export. But there's really -- the only limiting factor is really how many rail cars we can offload, and that's work that's ongoing today as far as adding powers and fracs, so we can get a lot more volume through and into the facility. As far as actually exporting out of the banks themselves, it's a deepwater port, and we can handle the small ships all the way up to the large VLGCs. So I think we'll become more apt to talk about that once we get -- and planch up our commercial arrangement.

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

Okay. And then, have you any sense of if you're going to be moving propanes, butanes or both, what that might look like?

William S. Waldheim

I think, right now, we're actually looking at the terminal being able to handle both. I do know there has been more interest recently in butane. But I think the thought would be that we would be able to handle both. And so we're -- again, we're working with our customers to determine what is the best use for that facility at this time.

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

Okay, great. And then just one more kind of, I guess, macro industry question, but -- since you guys are based in Colorado, you have the 4 counties that it looks like they're voting to sustain their moratorium on fracking. Do you see that as any real threat to drilling activity, longer term, in kind of Colorado and areas that you have a pretty big presence as DCP?

William S. Waldheim

You know, Mike, that was something that just occurred last night in the election themselves, and so that's fairly new news to us as well. I could tell you we've been working with the state and local governments around these types of initiatives and how we -- and what they might do as they affect our business. But it's a little premature to comment just what impact something like this would have, I don't think it'll be material, but I think it's something that we are following. And I know that the associations -- the E&P community and ourselves are all working together to understand what this means as -- on a go-forward basis.

Operator

Our next question comes from Matt Niblack from HITE.

Matt Niblack

Just a couple of questions, it looks like the Eagle Ford was particularly strong for you, can you maybe comment on what drove that strength and whether this was sort of a timing issue, with volumes coming quicker than you expected or whether this is indicative of a larger overall ramp?

William S. Waldheim

I'll take that question, but I might have Rose comment a little bit on that as well. You know, as you look back at Eagle Ford, we are a legacy company in this area, and so we got in early, and I think we got very strong producers and acreage positions behind our assets. And so we've been seeing a nice ramp up in volumes from the producers that are behind our asset. Our Eagle Ford asset, or the asset in South Central Texas is comprised of not only the Eagle Ford volumes, but some legacy volumes as well. Overall, that total volume of gas has been increasing, as I mentioned earlier. I think the Eagle Ford gas in and of itself is growing faster than the overall pool. So again, we're seeing real volume growth. What's really driving some of these results -- and then I'll let Rose comment further, is our recovery efficiencies at the plant themselves are improving. As these plants come online, we line them up, and then we get better at what to do. And so our recovery efficiencies have really been improving and our earnings are reflecting that. I don't know if Rose, you had some comments as well?

Rose M. Robeson

Yes, just in terms of Eagle Ford, we were -- this is the Eagle Ford joint venture as well as Eagle Plant, we were up about 4% on a sequential quarter basis in terms of throughput, and about 12% up from last year. So we are seeing very good volume growth. We did have one plant that had a turnaround last quarter, so there was some impact from that, but overall, we're seeing very robust volumes in Eagle Ford.

Matt Niblack

Great. And then another question, it's the last one, it's a little more, I guess, conceptual or strategic in nature. But the unit prices recently of DPM have been fairly weak, despite your strong position overall in the market and strong backlog of growth projects. And it seems that is caused perhaps by the high multiple of the recent dropdown. And some of the communication that you're -- that may be taken, that you're predominantly a funding vehicle and not used strategically by the parent. Could you maybe comment, is there any thought to, sort of, trying to change that narrative so the marketplace does not unfairly punish the units relative to the fundamentals?

William S. Waldheim

I'll try to answer that question. I mean, certainly the strategy has always been, at DCP, is to grow the partnership, the size and scale, where we are able to fund organic growth on our own, we can -- are big enough to acquire assets or companies for that matter, and help DCP Midstream in their capital need. So I think we are certainly accomplishing that. The size of DPM has doubled in the last few years, and I think you'll probably see it double in the next several years looking forward. So as we get scale and size, I think we aren't just a dropdown story. I think we do see opportunities in the marketplace for acquisition. But more recently, organic growth projects, when you've got a lot of them and they're good multiple -- good kind of return projects, I think we definitely want to be pursuing those types of opportunities.

Operator

[Operator Instructions] We have a question from Michael Del Papa from Castleton Commodities.

Michael Del Papa

I was just wondering if maybe I can ask a little bit more about your Chesapeake terminal, and I guess regarding importing of supply for the winter, with all the growth in liquids production coming out of the Marcellus and the Utica, I guess I'm curious as to why there would be an need to bring in supply via import as opposed to just sourcing it out of the Marcellus and Utica?

William S. Waldheim

Generally speaking, our Wholesale Propane business is a business that really tries to source product from its most advantageous source, and over the years, we have imported a lot of propane into these facilities, more recently, I think with, as you mentioned, some of the growth in the production in the Marcellus, you've seen our sourcing more turn towards rail supply, but I think we're always going to source product at its most advantageous point. We don't know what the markets are going to give us as we look forward, but I think the international price of propane has been a little higher than what we'd normally we see, and so importing propane has not been the best use of that facility. But going forward, it's, I don't know if several years from now if that will change and we'll be importing propane once again as more propane finds its way down potential pipelines that are being built.

Michael Del Papa

Okay, fair enough. I must say I think the exporting the propane at Chesapeake sounds like a very needed capacity, with on the reverse side of that growth is in liquids production out of the Marcellus and the Utica, they are looking for outlook for that, and I was just wondering, when you said that you can support both VLGC, very large gas carriers, in addition to your [indiscernible] sizes smaller than those, are these going to be low-ethane propane exports headed for international markets, and if so, how do you plan to source that low-ethane propane?

William S. Waldheim

Again, I think, our intent would be to take product out of the Marcellus and export it to Central and South America, that will be the logical market for this product. And so again, there is interest from the producers in this market. So I think, as you just said, and I think as what we're seeing in the marketplace, there's an interest for export.

Operator

And we have no further questions at this time.

William S. Waldheim

Well, thank you very much for your interest in DPM, and if there are any other questions you have, please contact Andrea, Rose or myself. Have a nice day.

Operator

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

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