DCP Midstream Partners, LP (NYSE:DPM)
2013 Wells Fargo Pipeline, MLP and Energy Symposium
December 10, 2013 10:35 AM ET
Wouter Van Kempen - CEO
Bill Waldheim - President
Sean O'Brien - CFO
Andrea Attel – Director, IR
Ross Payne - Wells Fargo
Ross Payne - Wells Fargo
Okay, our next presenter is DCP Midstream Partners. They continue to emerge as one of the next large players in the NGL space given its general partner DCP Midstream LLC owned by Spectra and Phillip 66, is the largest producer of NGLs in the country. DPM’s access to both the equity and bond market should help it become a primary growth engine for the DCP family. We are fortunate to have with us today Wouter Van Kempen CEO, Bill Waldheim President, Sean O'Brien CFO of DCP Midstream LLC and Andrea Attel of Investor Relations.
Wouter Van Kempen
Great, thank you. Thank you Ross Good morning everyone. I am Wouter Van Kempen. I am the CEO of DCP Midstream Partners. I am the Chairman and CEO of DCP Midstream. I am joined by Bill Waldheim today, President of DCP Midstream Partners, Sean O’Brien the CFO of DCP Midstream, and Andrea Attel our IR Director.
First of all let me thank Wells Fargo and Ross, thank you specifically for putting together this event and giving us the platform to talk to you about the transformation that DCP Enterprise has undergone in the past three years, the transformation that translates to long-term sustainable value for our investors. Before I jump in, please take a look at the Safe Harbor Statement here on slide 2. We will be all squared away on any forward-looking statements Bill or I may make.
I will start with little housekeeping around naming convention center ownership structure. When I talk about the DCP Enterprise, I am referring to the combination of DCP Midstream, the private joint venture owned by Phillip 66 and Spectra Energy and the publicly traded MLP, DCP Midstream Partners which I will call DPM. And let’s assume most of you know DCP Midstream owns the general partner of DPM. Both DCP Midstream and DPM are big companies with solid investment grade ratings. Together as an enterprise we executes on one strategy. And this is a powerful combination that has parlayed into long-term growth around our key metrics on both of our entities.
So let’s start with the overall asset growth. Since 2010, about 50% growth for DCP Midstream and an exponential 155% growth for DPM. Moving onto volume growth, since 2010 we’ve had double digit growth for the DCP Enterprise and exponential growth again for DPM. And cash distributions to DPM unit holders increased 17% since 2010 and we’ve had 12 quarterly increases. That’s our focus, long-term sustainable growth for all of our shareholders, and that’s the benefit of the DCP Enterprise. We’re able to drive optimization by using the strength of both the companies. Together we’re a G&P power house that extends it value chain into downstream logistics, founded upon an enviable footprint of assets and systems flexibility.
So in the next slide here you see our enviable footprints and our vision for 2015 that we put together about two years ago. Today two years into that transformation we’re successfully executing on that strategy with the majority of the projects on this map either announced, under construction, or completed, simple stated we have transformed the DCP Enterprise from a top tier gathering and processing company where we lead in the major processing basins to a top ranked fully integrated midstream leader, having built out our downstream logistics business connecting all of our assets and all of our customers to the major market hubs.
The DCP Enterprise holds an illustrious 1-1-and-3 position in the industry. We are the number one natural gas processor in the United States. We’re the number one natural gas liquids producer in the United States. And we are the third largest operator of NGL assets, of NGL pipelines.
Earlier this year we put into service Sand Hills and Southern Hills. NGL pipelines that were needed to debottleneck downstream logistics into Mont Belvieu. DPM’s Texas Express Pipeline is also online and Front Range Pipeline is not far away. Our web of NGOL logistics infrastructure is underpinning our forecasted 17 metro gas processing plants around the major producing basins. This year we’ve reached the new highs for processing volumes and our NGL barrel production and I’m very-very comfortable that our run rates NGL production will be well over 500,000 barrels is 2014, well ahead of division we put together in 2012.
So we’re capturing the full value of the energy chain and as an enterprise we top the list. I think it’s pretty interesting if you look at DCP Midstream Partners as a standalone company with its transformation to an integrated midstream company, DCP Midstream Partners would be in the top five gas processors and the top 10 NGL producer as a standalone company, so overall the DCP Enterprise is a gas processing juggernaut. We have brought multiple plants online in 2013 in the Eagle Ford, in the DJ Basin, and in the Permian. Additionally, we have a number of plants on construction that will come online throughout 2014 and we’re very actively working on new processing capacity for 2015 in both the Permian Basin and in the DJ Basin. Together the DCP Enterprise is $15 billion plus company, and we have the supports of $235 billion plus companies for our extensive capital programs and we have a fantastic drop down strategy with DPM to fund our overall enterprise growth.
So let’s switch over to DCP Midstream Partners specifically now. Being as firm third MLP, DPM is the primary source of equity for the DCP Enterprise and DPM is funding vehicle for long term investment strategy and growth in the midstream space. We have a clear line of site to ongoing growth project and we’ve already completed more than $2 billion in dropdowns in the last two years and about another $1 billion or so of organic growth. This has led to more than doubling the size of DPM. Our earnings are largely fee based or hatched greatly reducing commodity exposure and earnings volatility. So I am very excited for where we’ve grown and how we’ve grown DPM and we have a very proven strategy for our continuous growth.
Now I’ll hand it over to Bill Waldheim to talk specifically about DPM’s track records of success post our diversified portfolio.
Thanks Wouter and thanks everyone for being here today. As Wouter mentioned my name is Bill Waldheim and I’m President of DCP Midstream Partners or DPM as I will refer. At DPM we have undergone a transformation and scale and scope that I am very excited to talk about, with many quality growth projects in the execution phase of development. That’s why we continue to believe DPM is a compelling investment opportunity.
On this slide you can see DPM has a diversified portfolio of assets in multiple geographic areas. With our new O'Connor Plant and Texas Express Pipelines coming online in October, DPM now has 20 plants, nine fractionators and approximately 13,000 miles of pipeline. We also have 3 Bcf of gas processing capacity. The red and green assets on this map are DPM owned. This includes the premier assets in the premier Eagle Ford and DJ Basins. We also have assets in East Texas, North Louisiana, Wyoming and Michigan, plus our discovery joint venture in the deepwater Gulf of Mexico and wholesale propane business in the Northeast.
The assets that still remain at DCP Midstream, the private company, are shown in blue and are MLP friendly in many respects. In fact each one of DCP Midstream’s remaining geographic areas are the size of many publicly traded gathering and processing MLPs. They are predominantly GMP assets in the Permian, Midcontinent and DJ Basin in Colorado, and also the Southern and Sand Hills NGL pipelines.
The capital needs of the DCP Enterprise are significant with both entities continuing to grow. And as Wouter already mentioned DPM is funding the growth of the enterprise. Because of this growth, we have doubled the size of DPM over the past couple of years and look to double in size again over the next several.
As we turn to our capital and distribution outlook on slide six you can see our historical capital spend over the past couple of years. Our 2014 capital forecast and in service dates for our various organic growth projects. This is the second year in a row that we’ve exceeded $1 billion in targeted dropdowns and expect to achieve over $4 billion of growth between 2012 and 2014. As we look back, you can clearly see that we are delivering on our plan as promised. We achieved our distribution growth target of 6% to 8% in 2013 and continue to target sustainable distribution growth looking forward.
In 2014 we show another $1 billion of targeted dropdown opportunities. Keep in mind, DPM continues to be the funding vehicle for the capital needs of the DCP Enterprise, so looking forward, the $1 billion of targeted dropdowns in 2014 may be conservative. Subject to the approvals of both the DCP Midstream and DPM Boards this would include the expected dropdown of DCP Midstream’s one third interest in the Southern Hills and Sand Hills pipelines, which when you add it all up support DPM sustainable distribution growth.
Starting on slide seven, I’ll provide a brief operational update on DPM’s three business segments. Our Natural Gas Services segment continues to experience substantial growth with the continuing build-out of the Eagle Ford system, the O’Connor Plant dropdown and the ongoing construction of our Goliad Plant and Keathley Canyon pipeline. All of these projects will continue to contribute to our ongoing growth in the gas services segment.
As you can see our adjusted EBITDA has more than doubled since 2008, and is now at $218 million for the first nine months of 2013. This translates into a compounded annual growth rate of 20% since 2008. Our O’Connor Plant in the growing DJ Basin recently went into service with volumes ramping up faster than expected where we’re now averaging close to 100 million a day of throughput. As we bring on new compression, we believe O’Connor will be full by year end, and we are well on our way to having O’Connor’s plant capacity reach 160 million a day in Q1 of 2014 with the 50 million a day expansion almost complete.
The Eagle Ford assets are performing well as well performing very well with our 200 million a day Eagle plant currently running virtually full. So we are pleased with the volume ramp which has occurred as planned. These assets will continue to be a major source of growth in 2014 and beyond.
Our Goliad plant is also progressing on time and on budget, scheduled to meet the expected and service date in early Q1 of 2014. All indications are as we will need this capacity when ready. We are also seeing increased drilling activity around our Douglas asset in Wyoming. This activity may provide organic growth opportunities for additional gathering and plant infrastructure in and around this asset, so 2014 looks to be a very busy year in Wyoming as well.
Our assets in East Texas are also performing nicely with Crossroads plant acquisition and other organic growth in this area. Although we don’t talk as much about East Texas it has been a good growth story in 2013 and we expect volume increases and improved capacity utilization to continue in 2014. And finally the key Keathley Canyon deepwater pipeline project at our Discovery joint venture has now begun laying the shallow water portion of the pipeline. This is a great fee based asset with upside potential as producers continue to add reserves in and around this pipeline. Williams the operator is targeting an in service date of Q4 of 2014.
Moving to our NGL logistics segment we have a great slate of exciting organic growth projects that are progressing as expected. As mentioned the Texas Express pipeline operated by Enterprise and owned 10% by DPM was placed into service in October and the ship-or-pay agreements associated with this pipeline are now active. This 580 mile pipeline has an initial capacity of 280,000 barrels per day 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 which was dropped into DPM in August of this year.
A great fee based asset with ship-or-pay commitments from DCP Midstream and Anadarko so now DPM owns ownership both Texas Express and Front Range pipelines. So when we talk about Front Range pipeline there are additional DJ plants not anticipated when this project was originally proved. Therefore we believe there is significant upside opportunity associated with increased drilling and production activity in this area that will benefit Front Range pipeline.
And finally our Marysville ethane expansion project is now complete and is set to start up this month. Other projects the debottleneck transportation into and out of Marysville are underway and should be ready for the 2014 injection season. We believe Marysville is positioned to be the premiere NGL storage facility serving the needs of the Marcellus and Utica producers as well as end used refining chemical and wholesale propane customers.
So as you can see we spend a lot of time energy and capital in this business segment and the results are an impressive compounded annual growth rate of 75% since 2008. And looking forward we expect to see continued growth, why? Well Texas Express pipeline is now in service Front Range pipeline would be in service in early in 2014 and the expected dropdowns in 2014 of the one third interest and the Sand Hills and Southern Hills pipelines.
And finally in our wholesale propane segment we are experiencing a great start to the winter heating season. With recent propane demand being very robust this should be good for both contracts and spot sales of propane as we enter the winter demand months. The picture on this slide is of our Chesapeake terminal in Virginia where Phase 1 of our export project to debottleneck product distribution into and out of that facility is progressing nicely. And is expected to be in service in the first quarter, this is the first of a two phased project where Phase 2 will allow us to export either propane or butane from this facility. We are pleased with our progress to date.
On the next slide I will recap our sensitivities and distribution growth. First the left pie chart shows our margin breakdown by contract type where you can see we had 50% fee based earnings for the commodity sensitive earnings we are over 90% hedged so the pie chart on the right shows the overall fee and hedge percent at about 95% with 90% of our hedges being direct commodity priced hedges that extend through Q1 of 2016.
We believe our direct commodity priced hedges that extend us several years are a differentiator in DPM’s ability to predict sustainable growth. With this as our hedge position DPM’s sensitivities are now neutral to changes in natural gas and crude oil prices and our sensitivity to the NGL to crude relationship is about $1 million impact for a 1% change…
So we have very limited exposure to commodity prices through 2015 and commodity price impacts to distributable cash flow have been significantly reduced. And in terms of full year forecast we expect to be at or above the high end of our DCF forecast range of $260 million to $280 million and lastly we achieve 6% distribution growth on a cash paid basis in 2013 and have announced 12 consecutive quarterly distribution increases with our per share distribution now $2.88 annualized. We think this is important as we’re delivering on our promises.
The next slide outlines our financial position at the end of the third quarter. We continue to maintain a strong capital structure and competitive cost of capital. Our average cost of debt was 3.6% we had approximately $790 million of unutilized revolver capacity at the end of the third quarter. Our debt to EBITDA leverage ratio at the end of the quarter was 3.6 times and our long term debt maturity schedule which is also shown, you can see we don't have maturity until 2015.
So during 2013 we raised approximately $1 billion of equity and $05 billion of debt, so we continue to demonstrate great access to the capital markets. We also recently launched a commercial paper program for DPM that has lowered our short term borrowing cost. So altogether we remain committed to our investment grade ratings and continue to successfully fund the growth capital needs of the DCP enterprise.
And with I'll turn it back to Wouter for some final comments.
Wouter Van Kempen
Bill just covered an impressive slate of projects and somewhat operating performance at DPM. So I'll end it where I began. DPM is a very compelling investment opportunity founded on the strength of the DCP enterprise as a whole and the foundational support of Phillips 66 and Spectra Energy. This is one enterprise with one strategy made up of two companies. Designed to optimize and leverage each ones strength that will achieve long term sustainable growth for our unit holders.
And look at what we have already achieved; over $3 billion of drop downs in organic growth in the last two years. Looking forward we have a visible pipeline of organic and drop down growth opportunities with over $1 billion forecasted in 2014. All found on our enviable enterprise footprint across the county's liquid rich basins. Basically we’re where the drill bed is.
And this results in a long lead of amounts growth and a clear line of sight to new projects within the enterprise. We are top ranked as an enterprise and as DPM in its own right and with that we have the ability to capture value across the energy chain as a fully integrated midstream service provider and we have more than doubled the size of DPM.
And when it comes to our financial strength we have strong investment grade ratings to access debt and capital markets and DPMs diversified business model is 95% fee based or hedged and that means reduced earnings volatility. All of this spells why DPM makes for a great investment with sustainable distribution growth storage unit holders.
When you add up all these strengths you can see why the DCP enterprise holds this one and three position in the midstream industry and why DPM will continue to execute and to deliver. We're having a great year and the years leading up to now have transformed both DPM and the DCP enterprise to leader our industry. So with that I would like to thank you for your interest and would be happy to take any questions.
I think I'll jump in here real quick, one of the questions that I think bond holders have had is with this success of Spectra dropping almost all their assets down to SEP is that something that's likely to happen between DCP Midstream LLC and DPM and secondary if that were to happen or if lot of assets were to move down would you still maintain our current fee base and fee based plus hedge portfolio about 95%.
Wouter Van Kempen
Thanks. So, let me answer them, I think JV has to testify unlike this JV has been around for well over a decade, it’s been successful I think to fill up 66 specter energy with the gas distributions that we’ve made over the past years are owners at DCP Midstream, they’ve made their investments back many, many, many times over and on top of that we continue to grow the enterprise. So, if you look at the first slide that we have, we’ve grown since 2010, the asset base of Midstream by 50% to $12 billion, we’ve grown the asset base of partnership by 155% to over $4 billion.
So, looking back very successful, when you start looking forward, we continue to have very significant growth, we’re financing that through DPM or we’ll finance it through midstream and we really have this power of the two entities. We’ve got private company, we got publicly traded MLP and we can basically big choice structure where each of the assets that we continue to valid why they make more sense. Than lastly what I would like at is if you look at the underlying asset base unlike we’re growing LLC Midstream significantly while we’re growing the partnership as well. So, both entities are growing, in the end there is a good thing for both of the equity holder as well as for the fixed income investor.
The other thing I think you should take a look at LP and GP distributions continue to go up and that creates a very nice frame of fee based cash flow going up to midstream. So, I think in summary if I look at it, I think the relative we’ve been very successful I think a lot of opportunities to continue to structure and be very significantly very helpful for both of the equity holders structure energy fill up 66, the unit holders at DPM and fixed income investors both at DCP Midstream and at DCP Midstream partners.
I’d be curious to know if you’re cost of capital went from the 3.6% that you indicated on page 11, so let say 4.6%, we all know rates are going up. How does this affect your business? I mean cynics would say the MLP industry is been fueled by low cost capital, I don’t personally believe that but there is an argument to be made. So, higher rates not good, right.
Although rates are trending a little higher at this point as an MLP, we certainly feel that as long as you’ve got a good growth component to your operation and enterprise which we do that will tend to offset some of the dampening effect that higher interest rates would actually might occur. Recently we did come out with debt offering last year that 10 year bond of 3.78%; it’s a great time to capitalize the business. So as we continue to grow the enterprise, as we continue to look for potential drop downs, we will be funding the business with debt and equity and we think it is a good time to be doing that even though rates may move up slightly higher.
Wouter Van Kempen
Thank you very much.
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