DCP Midstream Partners L P. Q1 2010 Earnings Call Transcript

| About: DCP Midstream (DPM)

DCP Midstream Partners (NYSE:DPM)

Q1 2010 Earnings Call

May 7, 2010 10:00 a.m. ET


Mike Richards - Vice President and General Counsel

Mark Borer - President and Chief Executive Officer

Angela Minas - Vice President and Chief Financial Officer


Rebecca Followill – Tudor Pickering & Co.

Andrew Gundlach – ASB

Jeremy Tenney [ph].



Good morning, and welcome to the DCP Midstream Partners First Quarter 2010 Earnings Conference Call. All participants will be in a listen-only-mode. (Operator Instructions) After today's presentation there will be an opportunity for you to ask questions. Please note that today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Mike Richards, Vice President and General Counsel. Mr. Richard, please go ahead.

Mike Richards

Thank you, Jamie [ph]. Good morning, and welcome to the DCP Midstream Partners first quarter 2010 earnings release conference call. As always we want to thank you for your interest in the partnership. Today you will hear from Mark Borer, President and Chief Executive Officer, and Angela Minas, Vice President and Chief Financial Officer. Before turning it over to Mark I will mention a couple of items.

First, all of the slides we will be talking from today are available on our website at www.dcppartners.com in PDF format. You may access them by clicking on the investor page and then the webcast icon.

Next, I will like to remind you that 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 forward-looking statements and lists some of the risk factors that may affect actual results. For a complete listing of the risk factors that may impact our business results please review our Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 11, 2010 and updated through subsequent SEC filings.

In addition, during our discussion we will use various non-GAAP measures, including distributable cash flow, adjusted EBITDA and adjusted segment EBITDA. These measures are reconciled to the nearest GAAP measures and schedules provided on our website. We ask that you review that information as well.

And finally, a note about the presentation of our earnings, in April 2009 the partnership completed the acquisition of additional 25.1% interest in DCP East Texas Holdings, LLC or East Texas, from DCP Midstream, LLC. Prior to this transaction, the partnership owned a 25% interest, which was accounted for under the equity method. Subsequent to this transaction, the partnership owns a 50.1% interest in East Texas and accounts for East Texas as a consolidated subsidiary.

The results of operations presented today include the historical consolidated results of East Texas for all periods presented. For comparison purposes, we have also included our 2009 historical results as reported in 2009 when our partnership -- ownership interest in East Texas was 25%.

And now, I will turn it over to Mark Borer.

Mark Borer

Thanks, Mike. Good morning, everyone, and thanks for joining us today for discussion of our fist quarter results. We are continue to experience improvement in the business environment and we are off to a solid start 2010. As you saw on our press release last evening, we reported first quarter results, which were inline that 2010 DCF forecast we provided on our last earnings call.

On slide three, you’ll see our agenda for this morning. I will begin some highlights of the quarter and we will then provide an operational update Angela will follow with the financial overview of the quarter. We will then close with our outlook in summary.

We are optimistic about emerging growth opportunities and believe we are favorably positioned as we move through 2010 and beyond.

Turning to Slide 4, let's discuss some highlights for the quarter. We generated distributable cash flow of $31.7 million for the quarter, providing a distribution coverage ratio of 1.3 times. Improvement in the business environment along with opportunities in the market has enabled us to continue to execute on our growth objectives.

In January, we committed $40 million to a strategic investment for the DCP Enterprise in the Denver-Julesburg Basin or DJ Basin. This was comprised of 22 million acquisition of the Wattenberg fee-based NGL pipeline and related $18 million expansion capital project.

2010, is the integration year for both the Michigan gathering and treating system we have acquired in November 2009, as well as our January 2010 Wattenberg pipeline acquisitions. This recent acquisitions are each very complementary to our asset base, provide a 100% fee-based margins and improved our competitive positions.

In summary, we are off to a good start in delivering on our 2010 business plans commitments.

We will now turn to Slide 5. I will provide the brief operational updates, starting first with our natural gas service segments. As indicates again this quarter we view our diverse geographic footprint as a strong positive, as it provides us with access to multiple resource plays, contract types, and customers.

Excluding the recent Michigan acquisition gas throughput volumes have been held firm [ph] and was virtually flat on a sequential quarter based. In the second quarter of 2009 gas throughput volumes have been down a modest 2%. Our rig count activity is still considerably below 2008 levels. We are beginning experience a modest recovery from the lows we experienced in the second quarter of 2009. With the exception of the weather related operating challenges that East Texas Northern Louisiana, which occurred during the quarter which I’ll discuss more in a moment.

NGL production also helped flat out of sequential quarter basis, having then up by approximately 7% previous quarter. Near record cold weather during early January caused operating challenges that are Northern Louisiana and East Texas plants causing periods of low NGL recoveries in volume curtailments due to the plant shutdowns and producer wellhead freeze offs. Angela will discuss in a new few moments the impact this had upon the first quarter.

Integration efforts related to our recent both to our acquisition of fee-based assets Michigan are well underway in proceeding according to plan on time and on budget. These assets are in some cases already interconnected with our existing sale. As such, we expect to see operating synergies and opportunities to consolidate treating plant infrastructure with the benefits being largely realized beginning next year. Performance of the acquired assets continue to meet our expectations.

Now moving to slide six, in our wholesale propane segment, we are pleased to report record financial results for the past heating season for fiscal year which runs from April 2009 to March 2010. These results were achieved despite the winter in the northeast that had 5% heating for three days than the five year average. While we’ve experienced early cold this winter, the January-March period was the eighth warmest in the 115 plus year period of record keeping [ph].

Timing of sales and winter weather tend to vary somewhat each year. This year’s winter season was a marked contrast to last year, where winter weather and high spots sales buys occurred later in the season, mostly falling in the first quarter of 2009.

In our Northeast market area, we continue to see strong demands in the residential service providers for next season. Through our successful contracting efforts we are well positioned for this upcoming fiscal year. As the last several years have shown this business model the consistent performer and it’s able to deliver solid results in both mild and harsh winters.

This business has a key a competitive advantage with it’s breath of supply options which not only supply our base business but allow us to capture upside opportunities during favorable marketing conditions. We continue to pursue opportunities to expand its new market in this sector.

Now moving to slide seven for our NGL Logistics segment, pipeline volumes were strong again this quarter. We added the Wattenberg volumes in January and continue take advantage on attractive market opportunity with the additional supply connection to our Seabreeze pipeline.

Just to refresh, we have launched a project to spend approximately $18 million of expansion capital to connect and integrate the recently acquired Wattenberg pipeline to DCP Midstream’s facilities.

Midstream, the largest gatherer and processor in the DJ Basin, is investing capital to construct the new natural gas processing plant. It is expected to be completed by early 2011, at which time we also expect to begin receiving cash flow contributions from our investment. The 100% fee-based margin profile of this pipeline is an excellent fit with our asset portfolio. This is also a great example of utilizing the partnership as the growth vehicle to expand the DCP enterprise footprint.

Now, I’ll turn it over to Angela to review the financial results.

Angela Minas

Thanks, Mark, and thank you for joining us today. On slide eight, we begin with the consolidated financial results. Results are adjusted to remove the impact of non-cash mark-to-market activities of our commodity hedges which are outlined in the appendix, as well as the non-controlling interest in our joint ventures.

In addition to the consolidated results, which are required to be recast, we also show the results as reported in 2009 which reflect trends and results achieved over time. As such, I’ll generally be discussing the results as reported in 2009 as the basis for comparison.

Adjusted EBITDA increased from $39.2 million to $40.1 million for the quarter. Distributable cash flow for the quarter increased from $27.6 million to $31.7 million resulting in a 1.3 times coverage ratio for the quarter.

Although there were lots of moving parts, the plus and minuses in the first quarter 2009 largely offset with one another. As you may recall, wholesale propane reported an exceptional quarter as a result of a positive recovery of non-cash inventory write-down from 2008 and strong spot sales which provided incremental upside opportunity. On the negative side, 2009 GAAP services results were impacted by hurricanes and operational downturn.

A more detail on results, let me move to the segments. On slide nine, with natural gas services. Adjusted EBITDA increased from $20.7 million to $33.3 million for the quarter. Results for the quarter were positively impacted by the addition of our East Texas and Michigan acquisitions, organic growth at our Discovery and the uncertain assets and increased NGL production. Partially offset by the impact of operating challenges as a result of new record cold weather and lower gas throughput volumes at certain assets.

Results for 2009 included the impact of operational downtime at our Discovery, East Texas and Wyoming Gas. Non-recurring EBITDA impact associated with weather is estimated to be approximately 3 million in the quarter. Our equity investment represents a 40% interest in Discovery, 2009 results reflect the impact of hurricanes and as a reminder hedge settlements for Discovery resides in the adjusted segment gross margin line.

Slide 10, indicates the result from our wholesale propane segment. Due to the timing of winter and propane demand orderly results off and do not provide a meaningful comparison. As such we view results of this business on a fiscal year for heating season basis, April 1 to March 31.

But the heating season just completed with the first quarter of 2010 this business delivered record adjusted EBITDA of 26.6 million. The graph on this slide illustrates the steady growth trends since we acquired business in 2006. Strong fiscal year results were driven by favorable unit margins partially offset by a modest 2% decline in volumes.

Q1 2009 results reflected like when or whether [ph] increase stock sales opportunities driven by favorable marketing environment and approximately 6 million in margin attributable to the sale of the inventories that which written down at the end of Q4, 2008.

On slide 11, Our NGL logistic EBITDA increase from 1.4 million in 2009 to 3.7 million in 2010. Delivering record EBITDA results for the quarter. Higher EBITDA reflects additional volume associated with the marketing opportunity that we’ve been taking advantage of it Seabreeze as well as the Wattenberg acquisition.

Over Wattenberg had a -- modest positive impact to EBITDA in Q1 we do not expect positive cash flow for the balance of the year. As we complete our integration and expansion project.

Positive cash flow contributions begin early 2011. 2009, EBITDA results were impacted by ethane rejection in lower volume from certain connective process.

Slide 12, reflect that 2010, DCF forecast which we provided on our last earnings call. First quarter results were in line with our forecast. If you take into account the commodity prices year to date and general market views of prices for the balance of 2010.

The highlighted section in the table would indicate 2010, DCF between a 105 and a 130 million. Providing a distribution coverage of 1.1 to 1.3 time at our current 98 million distribution level.

This forecast excludes the impact of potential acquisitions or any unannounced organic project. We believe there could be additional bolt-on opportunity that could increase expansion capital up to 100 million, consistent with our estimate of annual opportunities in our footprint.

As we look at our base business beyond 2010, we would forecast additional cash flow contribution as the Wattenberg integration and expansion is completed in early 2011, and as we move beyond the integration of the Michigan acquisition and more fully realized the synergy benefit.

Although, we do not provide quarterly forecast data, I will provide you that the couple of guideline. In terms of how to think about the annual forecast over the next few quarters. As a reminder our wholesale Propane business produces the majority of its earnings during the fourth and first quarter. Fourth quarter cash flows for our gas services business are estimated to be positively impacted by commercial activity such as minimum throughput agreement and natural gas storage.

On Slide 13, key to our distributable cash flow performance is the nature of our contracts and our commodity hedging program. At current commodity prices we estimate approximately 55% of our forecasted margin is fee-based. Of our commodity-base margins, we have hedged over 80% of our equity position in natural gas liquids, condensate and natural gas. This results in 90% of our 2010 margins being fee-based or supported by commodity hedging.

Our 2010 position is part of multi-year hedging program that now extends into 2015. Consistent with our strategy, we recently added crude hedges at favorable prices for the 2014-15 period.

As cited by S&P with our recent investment-grade rating announcements, our sizable fee- based revenues and multiyear hedging policy our key strength in our financial position which I’ll discuss on Slide 14.

We’re continuing to execute on our investment-grade plan, which has been accelerated from our regional objective of obtaining investment-grade rating prior to the majority of our credit facility in June 2012. We believe that they are certainly benefits to doing so, with respect to cost to capital, access to capital, and competitive positioning. We’re pleased to have been able to achieve our S&P BBB-/Stable rating well ahead of our targeted timetable. We have an accelerated plan to obtain ratings from other agencies and we’ll keep you inform as we progress.

As we look into 2010 and beyond and consider our growth outlook, a key element of that is our financial position. We’re committed to a financing strategy that maintains a strong capital structure and significant liquidity to enable us to execute our growth strategy. Our credit facility is more than adequate to support our 2010 forecast and plan capital spending. Our successful November equity offering demonstrates our ability to access the equity markets and our investment-grade plan positioned us well to access public debt markets.

With respect to transitioning to long term debt financing, we’ll take a strategic and discipline approach as with our equity offering, financing and conjunction with growth is also with consideration. We have an excellent 825 million credit facility that extends through June 2012. At the end of the first quarter, we had drawn $615 million resulting in available capacity of $210 million.

Our cost of debt is highly competitive, with the interest rate on our revolver currently at LIBOR plus 44 basis points. Similar to our view on commodity risk management, we utilize interest rate hedges to provide cash flow stability. Our current hedge position on $575 million of our revolver provides us with an effective pre-spread borrowing rate of 3.8% to 4.2% over the 2010 to 2012 period.

We’re comfortably within our debt covenants. At the end of the quarter, our leverage ratio was 3.8 times. We have maintained liquidity in credit metrics consistent with our investment-grade rating and plan to continue to do so in future.

And now, I will turn it back over to Mark.

Mark Borer

Thanks, Angela. Turing to slide 15, I would like to close this morning with our outlook with few summary points. First, our results today position us well. We are on track to achieve our 2010 business plans commitments and forecast. Second, we look into 2010 and beyond, we see a variety of growth opportunities across our business segments.

On our year-end earnings call, I will provide you some insights since the how we are thinking about future growth opportunities. Summary is included in the appendix. As evidenced by the transactions that we recently closed, we continue to see improve deal flow as well as more opportunities for develop of infrastructure to support the emerging shale plays.

We are focused on capturing opportunities that will enable increase cash distributions to our unit holders. As we discussed on the year-end earnings call resuming distribution growth is the 2010 objectives. We are targeting top quartile total shareholder return for our unit holders. We believe that is achievable given the breath of the DCP enterprise and its investment opportunity.

As we continue to grow the partnership having the strong sponsorship of DCP Midstream, Spectra Energy and ConocoPhillips is the significant benefit to us in our unit holders. That is the conclusion of our prepared remarks. As I turn it back over to the operator for your questions. I’d like to thank you for your interest in the partnership.

Question-and-Answer Session


We are now ready to begin the question-and-answer session. (Operator Instructions) And our first question comes from Rebecca Followill from Tudor Pickering & Co.

Rebecca Followill Tudor Pickering & Co.

Good morning. I am only going to look at the distribution growth in 2010. Can you walk us through; I know coverage ratio is clearly a factor there, commodity prices. Can you walk us to the things that you are looking for in order to get that increase? And then, sorry put along but when did question here enlight [ph] of the tragic accident in the Gulf of Mexico, and potential constraints on drilling, how is that factor in to your thoughts on discovery and the overall distribution growth rate? Thank you.

Mark Borer

Thanks, Rebecca, and good morning. We had a -- as I mentioned in my opening comments, we’ve had a moderately improving environment. I think it's own relative to distribution growth and such that one needs to have healthy respect for but I would say, things have been improving. As also as I mentioned, resuming distribution growth is 2010 objective. We have previously outlined in the past that we would manage our distribution between 11 and 12 generally. Our trailing four quarters at this point is about 1.2 times.

And so, as we kind of look out it's going to really be – what we see from a drilling and overall in business environment, as I mentioned that is improving. I would also say that as we also look down the road, we are effectively, we do like we’re effectively executing on the integration of Wattenberg and Michigan, which will provide some nice cash flow upside to 2011. But I really think as current environment, its drilling activity, its commodity price relationship and can be overall business environment, that we are in the high-end of the range that we manage it.

Relative to the BP incidence, I think it's also early access the impact or speculate how this might impact discovery. The industries having a good long-term operating record in the offshore, really this is a major setback and will need to be assessed. I do have lots of faith in technology and ability of people to do this type of work environmentally sound and safe. Thoroughly the deepwater and the offshore is an important domestic energy source for the country. But we’ll have to as things we look for will have to assess the impact and we won't hesitate to adjust our plans accordingly.

Rebecca Followill Tudor Pickering & Co.

Yes. There were to be a slowdown or for some reason a whole instrument in the activity in the Gulf of Mexico. What would be the decline rate on the discovery volumes and how does it impacted your equity income?

Mark Borer

I wouldn’t have those type of numbers, right at my finger tips here but I would – we have a number of platforms that are in a development phase and there really where producers are, really, completing wells and developing. You can see in our financials what overall equity earnings are but we think, we have pretty good development activity. I think it will be very pre mature speculated that sort of activity would see for an extended period of time.

Rebecca Followill Tudor Pickering & Co.

Okay. Thank you. And then, the next question is, Karen, have an announcements today on another shale on this one in the interim shale, which is right in your new back yard. Can you – do you guys have any comments on that on how force your system already, how much incremental could you take and I know which way you’re going, but just trying to get yourself for that?

Mark Borer

Yes. We did see the announcement from a footprint view plans. The accountings that we’re mentioned are all around our interim shale, CO2 treating and gathering assets. So, it’s something that we’re actually where we continue to access. I think it will be a function of gas quality in that area. We do have sealed to treating. We obviously have people on the ground and assets in the area and definitely planned to development something with interest partnership.

Rebecca Followill Tudor Pickering & Co.

Do you have a sufficient spare capacity that you could capitalize on it without much capital investments?

Mark Borer

To the extent that they would have gas that needs CO2 treating, yes, we have -- we are in a very good capacity situation.

Rebecca Followill – Tudor Pickering & Co.

Great. Thank you.

Mark Borer

Thank you.


Our next question comes from Andrew Gundlach. Please go ahead with your question.

Andrew Gundlach – ASB

Good morning, Mark, regarding the CapEx you are still around 35 or so for projects up that you have announced and up to a 100, but you haven’t change since the last call anything in terms of spending that different some 65. Can you share with us anything that’s a little bit closer to when we spoke last time?

Mark Borer

Well, we continue to see good opportunities in our footprint both from what’s happening in for the need for infrastructure, emerging shale play opportunities, we are seeing some increase drilling activity around, but that was footprint. We are not providing any forward forecast as to where we exactly stand on those. We did say on our last call that we had 30 to 35 built into our 2010 plan, but that we saw up to a 100 million of potential activity around our footprint. So no specific update on our projects, obviously we accomplish the Wattenberg acquisition in the first quarter; we did Michigan in the fourth quarter, and we think we will have more things as the year moves on but no specific updates right now.

Andrew Gundlach – ASB

So that Delta is all related to CapEx, none of it for acquisition, is that right?

Mark Borer

It’s for CapEx which could include in very small bolt-on, it could be organic growth, it could be adding a terminal, those types of things, Andrew.

Andrew Gundlach – ASB

Got you. Okay. And then just a quick question on the operations. The ethylene price have come quite a bit further down and therefore I think the export market might open up again, which obviously would be good for ethane, do you have views on that?

And then, the second question related to the operations is that the I guess, Propane inventories have started to build and ethane inventories are -- they are all kind of around five year averages, kind of worked off the excesses from last year, and as the growth in the economy starting to pick up, and I’m just curious if you have an outlook for these products and how you see them bouncing around over the next 6 to 18 months?

Mark Borer

I can give you just a few thoughts, Andrew. We have come out of the period of time where there were number of outages in the Gulf Coast. I think there were some seven units that were out ethylene and petrochemicals type units that were on outages in March and April. I think four of them were actually unplanned.

The default to that is either back up or coming back up as we speak. So we just went through a quarter where ethane demand was probably down in the neighborhood of probably 5%, say from the fourth quarter run rate or the run rate over the past several months. From an outlook view point, we’re tending to be kind of that’s the mid range of the five year and maybe Propane is probably at the lower end. Although I haven’t seen just the most recent numbers, but all-in-all we have a pretty constructive outlook. I think as, as the economy improves that will help. During the last 12 months we’ve had quite a few factors that have converted. I’ve seen estimates that -- consumption would be 60,000 to 70,000 barrels a day of ethane alone. There is definitely some more potential conversion.

So we see a pretty constructive environment. I do think we have come through particularly in the March and April period. A period of time where there were a number of outages, some of them unexpected, which clearly put some pressure on ethane price. The ethylene prices have been strong. So I think that at the end of the day we’re in a pretty decent environment there.

Andrew Gundlach – ASB

And last question on that. Some people say truck line is creating ethane, some not. Assuming truck line would come on at a stronger rate can the market absorb that and hold its good prices, the ethane market?

Mark Borer

Andrew, I am not sure I understand your question on truck line.

Andrew Gundlach – ASB

Will, the ethane that they would create as, I guess, buy product over there LNG?

Mark Borer

Okay, you’re saying relatively LNG.

Andrew Gundlach – ASB


Mark Borer

My sense is they do have some ethane that will be recovered out of the stream. I think LNG imports are remains to be determined at what level those would actually hit the US. But all-in-all I think it’s probably really more about the improved demand that we see as a result of the various conversions, that if we’ll use ethane and propane going forward.

Andrew Gundlach – ASB

Got you. Thanks for your thoughts.

Mark Borer

Thank you.


And our next question comes from Jeremy Tenney [ph]. Please go ahead with your question.

Unidentified Analyst

Hi, good morning.

Mark Borer

Good morning.

Unidentified Analyst

I just had a question on the NGL volumes. It seems year-over-year, they jumped up a bit higher than we expected. Could we possible get a bit more color on that?

Mark Borer

Yes. We’ll give you a little bit more color, Jeremy. The last year, I would say it’s a little bit -- somewhat difficult to look at year-over-year given some of the operational destruction. It’s already got hurricane in the first quarter; that were carried over from the previous fall as well as East Texas outages.

The way we kind of look at it is that, we kind of go from second quarter ‘09. Third quarter we were up about 8%, were up another 7%, third to fourth quarter. And then if you isolate out the weather impacts we had in the first quarter we were about the last the fourth quarter or the first quarter.

Our production has been bolstered by the Tahiti project with some of the other discovery connections that’s probably been the biggest driver. We are seeing some increased NGL recoveries out of the beyond spacing as well. But I would say the largest driver is really the Tahiti project ramping up, and then obviously -- because lot of our contracts are percent of liquids where we have commodity exposure, we constantly focus on the efficiency and recoveries at all of our plans cost consistent.

Unidentified Analyst

That’s helpful. Thank you.

Mark Borer

Thank you.


(Operator Instructions) And we have a follow-up question from Andrew Gundlach. Please go ahead with your follow-up.

Andrew Gundlach – ASB

Mark, sorry. One other quick question starting to here with quite a bit about the now Barnett shale, I guess Eastern Colorado and I am just guessing that your – what does that your facilities there, which I guess sort of the DJ based but also served those that shale we should approve to be as interesting as some people talked about it is that incorrect?

Mark Borer

Well, that’s assessment, the producers are continuing the focus on look at some wells around the Nigeria [ph] continue to prove up that resource we continue to see very good drilling activity in the DJ or Denver-Julesburg Basin, Midstream has a very active footprints there and the result of the in the Nigeria can bring on more rich gases that would result in increasing liquids and production.

Andrew Gundlach – ASB

But do you see that will it proved, will it to be as interesting as some anticipate is that require a lot of additional capital expenditures or is the equipment already there that’s question number one. Question number two is would you see those volumes as added to which already getting or replacing the declines elsewhere is our growth there in other words?

Mark Borer

We think that there can be growth there, our pipeline system as we mentioned in last first call as well once we bring it on in early 2011 else around 22,000, 23,000 barrels a day capacity. So we think that, this will help to fill it up as we move forward relative to investment or in order of our general partner Midstream has a ongoing development to bring on a new plant early 2011 as part as they’re also building some gathering system expansions. So I think overall the Enterprise is very well positioned to continue to participate this very active drilling area.

Andrew Gundlach – ASB

Great, thanks.

Mark Borer

Thank you.


And at this time I’m showing no additional questions and would like the turn the comments call over to Mark Borer for any closing remarks. Mr. Borer.

Mark Borer

Thank you. I just want to express my appreciation for your interest in the partnership and joining the call today. If you have any follow up questions over the next coming days or weeks. Please feel free to initiate contact with Angela Minas. Angela can make yourself fulfill with the business. So we appreciate your interest and have a good day.


The conference is now concluded, we thank you for attending today’s presentation. Your may now disconnect your telephone lines. Thank you

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