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Executives

Jonni Anwar

Mark A. Borer - Chief Executive Officer of DCP Midstream GP LLC, President of DCP Midstream GP LLC and Director of DCP Midstream GP LLC

William S. Waldheim - President

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

Analysts

Cathleen King - BofA Merrill Lynch, Research Division

Brett Reilly - Crédit Suisse AG, Research Division

Heejung Ryoo - Barclays Capital, Research Division

Elvira Scotto - RBC Capital Markets, LLC, Research Division

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

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

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

Matt Niblack

DCP Midstream Partners LP (DPM) Q3 2012 Earnings Call November 7, 2012 10:00 AM ET

Operator

Welcome to the Q3 earnings release conference call. My name is John, and I'll 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 Mr. Jonni Anwar. Mr. Anwar, you may begin.

Jonni Anwar

Thank you, John. Good morning, and welcome to the DCP Midstream Partners' Third Quarter 2012 Earnings Conference 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.

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

During our discussion, we will use various non-GAAP measures, which are reconciled to the nearest GAAP measures and schedules provided in the Appendix section of slides used for today's call.

And now, let me turn it over to our first speaker, Mark Borer, our Chief Executive Officer.

Mark A. Borer

Thanks, Jonni. Good morning, everyone. First, let me wish everyone that has been affected by Hurricane Sandy the best of luck in the recovery efforts. Many of our employees, shareholders, customers and friends were impacted by this devastating storm and we're supportive with efforts being made to help get lives back to normal. Our thoughts and prayers are with you all.

Thanks for joining us today for discussion of our third quarter results. Also joining me today is Bill Waldheim, who was recently appointed as President of DPM; and Rose Robeson, our Chief Financial Officer.

As you saw in our press release last evening, we reported third quarter results which were in line with our 2012 DCF guidance. We raised our distribution again this quarter, representing a 6.25% year-over-year increase in line with our forecast of 6% to 8% distribution growth in 2012. This distribution increase reflects our continued confidence in the future cash flows from our visible growth.

We're also very pleased to announce that we have completed a $438 million transaction with our general partner in the prolific Eagle Ford area. This exciting and immediately accretive transaction is a continued demonstration of the attractiveness of our co-investment strategy with our general partner. This transaction is the largest in DPM's history, which Bill will cover in more detail shortly. With this co-investment, we have significantly exceeded our previously provided co-investment growth target for 2012 and are well on our way to meeting our targeted $3 billion of growth capital with a 2012 through '14 timeframe.

With that, let me turn things over to Bill Waldheim.

William S. Waldheim

Thanks, Mark, and thanks to everyone for joining us this morning. I'd first like to take this opportunity to thank Mark for his dedication and service to DPM and wish him well on his future endeavors. I'm also pleased to be assuming the leadership role at DPM, as we have a great base to build upon with tremendous growth opportunities before us. In short, I'm excited about the future of DPM.

Now if you turn to Slide 4, let me provide a brief operational overview and an update on our key growth projects. Our Natural Gas Services segment continues to experience substantial growth with the announcement yesterday of our drop-down of a 1/3 interest in the Eagle Ford system. This transaction is a strategic investment in the Eagle Ford Shale and is a nice complement to our Eagle processing plant, targeted to go into service later this year. I will provide more details on this transaction on the next slide.

In our Natural Gas Services segment, we continue to see strong drilling in the liquids-rich areas and a recent recovery in NGL prices. As a reminder, this segment generates margins from a mix of fee- and commodity-based businesses, with our commodity positions substantially hedged.

Turning to NGL Logistics. This segment provides broad exposure to the NGL value chain, with assets that are well-positioned in strong growing markets such as the Eagle Ford, DJ Basin and Mont Belvieu markets. We are pleased with the significant growth and scale and scope of this predominantly fee-based business over a short period of time, including the $200 million drop-down of the Mont Belvieu fractionators this past July. We expect this segment to have significant growth in the next couple of years, with a targeted drop-down of a 1/3 interest in the Southern Hills and Sand Hills pipelines from our general partner.

Our third segment is Wholesale Propane Logistics, which we are happy to report, did not experience any damage and only a minor business interruption from Hurricane Sandy. This segment is a seasonal business and we continue to have a favorable competitive position.

Turning to Slide 5. Let me provide some additional details on the Eagle Ford drop-down announced yesterday. Effective November 1, we have formed a joint venture with DCP Midstream in the Eagle Ford area, and DPM now owns a 1/3 interest. This immediately accretive drop-down includes 5 cryogenic plants with 760 million a day of processing capacity, approximately 6,000 miles of gathering systems, and 36,000 barrels per day of fractionation capacity. We have had tremendous success in this area with significant volume ramp up during the last 6 months, with production from 900,000 acres supported by acreage dedications or throughput commitments under long-term agreements. Our contracts are predominantly percent-of-proceeds. However, as part of this transaction, DCP Midstream provided a 3-year direct commodity price hedge. And lastly, this investment provides synergies with our Eagle Plant and associated fee-based processing contract, expected to come online later this year.

The Eagle Ford area continues to grow as we discussed last month at our DCP Midstream Investor Day. We expect to approve the construction of another plant in this area in the coming months, so more to follow.

Let me now give you an update on our co-investment activity with our general partner, DCP Midstream. This slide shows our updated co-investment activity and our various forms of co-investment. Co-investment has continued at a nice pace. As you can see with the addition of the Eagle Ford drop-down, the cumulative amount of co-investment now stands at about $1.4 billion since the fourth quarter of 2010.

If you turn to the next slide, with the Eagle Ford system co-investment, that brings our 2012 co-investment close to $1 billion, well in excess of our previous forecast of $685 million.

As Mark indicated earlier, we have significantly exceeded our previously provided co-investment growth target for 2012 and are well on our way to meeting our targeted $3 billion of growth capital for 2012 to 2014 timeframe. With this growth capital outlook, our targeted distribution growth remains intact at 6% to 8% in 2012, and 6% to 10% in the 2013 to 2014 timeframe.

Now, let me turn it over to Rose to review the numbers.

Rose M. Robeson

Thanks, Bill. I would also like to thank everyone for joining our call today. Before I review the results, I wanted to mention, as a reminder, under common control accounting treatment, our 2011 results reflect Southeast Texas as if we own the assets for the 2011 period. However, my discussion today will compare our results to the 2011 as reported numbers, which better reflect the trends and results achieved over time. So let's take a look at the quarter.

Our adjusted EBITDA for the third quarter of 2012 increased over 45% to $47.1 million, compared to adjusted EBITDA as reported for the third quarter of 2011 of $32.3 million. Third quarter results reflect growth in our Natural Gas Services segment from the drop-down of DCP Midstream's remaining interest in the East Texas and Southeast Texas joint ventures, the Crossroads acquisition and growth in our NGL Logistics segment from the July 2012 drop-down of the Mont Belvieu fractionators.

Distributable cash flow for the third quarter increased 28% to $35.4 million, as compared to $27.6 million in third quarter of 2011. Our distribution coverage ratio for the trailing 12 months is approximately 0.9x adjusted for the timing of actual distributions paid. Although this coverage is lower than our target range of 1.1x to 1.2x, this ratio includes a noncash, lower cost for market inventory adjustment recorded last quarter in our Wholesale Propane business and reflects the financing lead time impact of ongoing organic growth projects, such as the Eagle Plant and Keathley Canyon.

Now let's take a look at our earnings by business segment. Starting on Slide 9 with Natural Gas Services, our adjusted EBITDA for the third quarter increased 44% to $42.5 million from $29.6 million in third quarter of 2011, reflecting growth related to the East Texas and South East Texas drop-downs, as well as the Crossroads acquisition. Partially offsetting this growth was continued weakness in commodity prices and timing of storage margins and certain operating expenses. As a reminder for 2012, we are approximately 70% hedged on an overall basis and about 60% of our NGL hedges are direct product hedges. While the Mont Belvieu barrel experienced a 42% NGL to crude ratio for the quarter versus 67% in the third quarter of 2011, the barrel has recently recovered to nearly 50%, so we are seeing a nice recovery in the NGL to crude ratio. Our Natural Gas throughput is up 43% and NGL production is up 65% in the third quarter of 2012, versus the as reported volumes in 2011, primarily associated with growth from our East and Southeast Texas assets.

Turning to Slide 10. Our NGL Logistics' adjusted EBITDA for the third quarter increased 68% to $15.8 million from $9.4 million in third quarter of 2011, reflecting growth related to the Mont Belvieu fractionator drop-down and increased throughput on our pipeline. Third quarter of 2012 volumes are slightly higher than third quarter of 2011, reflecting growth on our pipeline, partially offset by lower throughput volumes due to ethane rejection at certain connected processing facilities.

Comparing our year-to-date volumes versus last year, volumes are 30% higher due to continued liquids-rich drilling in the DJ and Eagle Ford, related infrastructure growth and the Wattenberg expansion project.

Slide 11 shows results from our Wholesale Propane segment. Adjusted EBITDA in the third quarter was breakeven versus $2.7 million in third quarter of 2011. This business has significant seasonality with the majority of the earnings coming during the first and fourth quarters. In addition to our normal seasonality in the business, margins were down in the third quarter of 2012, due to the delayed start of our seasonal sales, resulting from higher than normal inventory levels. And lastly, our year-to-date results reflect a significant noncash LCM adjustment -- inventory adjustment recorded in the second quarter of 2012, which we expect to recover over the coming winter heating season.

Now let me review our DCF forecast. Although our business is substantially fee-based or commodity-hedged, we do provide our forecast in the context of the commodity pricing environment. If you take into account the commodity prices year-to-date and the forward curve for the balance of 2012, the table would indicate 2012 DCF at the low end of the $165 million to $180 million range. Our 2012 forecast did not include growth in 2012 except for the Southeast Texas drop-down closed at the end of the first quarter. The additional growth in 2012 is offsetting the weaker results in Wholesale Propane, therefore, we would expect to achieve our 2012 DCF forecast range. As we have previously indicated, we are targeting distribution growth of 6% to 8% in 2012. At a $0.01 increase per quarter, our 2012 distribution growth rate would be slightly above 6%, which is in line with our forecast.

And lastly, if you turn to Slide 13, we remain in a very strong position to continue to execute on our growth plans and provide a very effective source of funding growth for the DCP Midstream enterprise. We have a very competitive cost of capital, and with our investment grade ratings and demonstrated access to the capital market, we are well positioned to fund our growth. Our leverage ratio at the end of the third quarter was 3.3x, at the low end of our targeted range of 3x to 4x. And lastly, we continue to have significant liquidity to execute on our growth plans with about $700 million available on our revolving credit facility.

So now, let me turn it back to Mark for some concluding remarks.

Mark A. Borer

Thanks, Rose. Turning to Slide 14. As we outlined this morning, we are on track to deliver our 2012 business plan and 3-year outlook commitments. We're successfully executing on our growth strategy. The visible growth opportunities currently in our pipeline put us well on our way to becoming a large-scale, diversified midstream MLP. Given the sources of our opportunities at both DPM and our general partner, the growth strategy continues to be multifaceted with relatively more emphasis on co-investment over the next few years. Our target continues to be top quartile total shareholder return, which is underpinned by our visible growth opportunities and strong distribution growth outlook. And having the strong sponsorship from our general partner, DCP Midstream, and its owners, Spectra Energy and Phillips 66, provides us with a competitive advantage.

Finally, as I announced in August, I am retiring as CEO of DPM at the end of the year. My last 6 years as CEO have been truly a rewarding experience. I'm proud of what we have accomplished over this time and the value creation that we have provided to our shareholders. Looking forward with a strong portfolio of growth projects, DPM is well positioned for future growth. The transition with Bill has gone well. I'm confident that Bill will continue to lead and execute the growth strategy for this great company. I certainly enjoyed working with all of you over the years. While I will miss leading DPM, I am looking forward to the opportunity to experience other avenues of personal and professional growth.

With that, I want to thank you for your interest in DPM and I'll turn it back to the operator for your questions.

Question-and-Answer Session

Operator

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

Cathleen King - BofA Merrill Lynch, Research Division

This is actually Cathleen King in place of Gabe. But first question just on the drop-down, I know you guys put out there some historical financials associated with the Eagle Ford assets and is 15x 2011 EBITDA a reasonable multiple or am I off in that calculation?

Mark A. Borer

Cathleen, Rose and I will take that one. Just first I'd say, while we do not disclose the specific acquisition multiple, historically we've stood behind that our drop-down multiples have been in the 7 to 9 range based on the 12 -- first 12 month of us owning the asset. And this transaction is really no different as to how we look at it. Rose, can you kind of walk us through a little bit the historicals and the financials we filed on the 8-K?

Rose M. Robeson

Sure. Thanks, Mark. Cathleen, I -- just a couple of things. We did file our audited financial statements yesterday and I think the first point that I would make is that the methodology for allocating G&A for the newly formed JV is based on a modified mass formula versus our audited historical results or based on an allocation of G&A, based on net book value of the asset. So that's somewhere in around a 13 million impact, so it's not a true comparison. And then my second point is that this area has seen a significant ramp up in margins and volumes in the last several months. We talked about this a little bit on our Investor Day. If you look back at the end of 2010, we processed about 10 million a day of Eagle Ford gas. Today, we're at 250 a day, and would expect to exit this year at north of 300 million a day, almost a 30-fold increase in 2 years. And then, the production that feeds these volumes is backed by almost 900,000 acres up from about 500,000 acres in 2011. And then, legacy volumes make up over half of our values today. So I think, again, to reemphasize Mark's point, I think the way to think about the multiple is more on a forward EBITDA basis and you can think about it in terms of some of our other G&P drop-down transactions, so something in the 7x to 9x range.

Cathleen King - BofA Merrill Lynch, Research Division

Got it. That's really helpful color. And then question on the hedges, can you talk about what price levels those hedges are versus current market prices? And then also if those are NGL product-specific hedges or if they're more crude oil proxy hedges?

Mark A. Borer

Yes, Cathleen. What we put in place -- first of all, the asset generates about 80%, 85% of commodity-based margins with the balance of it being fee-based. And we're -- at the end of the day, we're long NGLs, long residue gas and condensate. Specifically, we did put on direct product hedges for the NGL exposure. That's the majority of the commodity exposure. We also put on residue gas hedges and some crude oil hedges. In round numbers, if you're looking at it on a Belvieu -- kind of an industry Belvieu barrel, our hedges -- the direct product hedges average about $1.10 per gallon on a Mont Belvieu barrel. And as you'll see when we file the 10-Q, we've also have the -- about $95 on the crude oil hedges and about $450 on natural gas.

Cathleen King - BofA Merrill Lynch, Research Division

Got it. And then switching gears onto Wholesale Propane. I know you guys talked about a higher inventories impacting this quarter's results. Do you expect any continued impacts of higher inventories on your winter results for the upcoming season?

William S. Waldheim

Cathleen, this is Bill Waldheim. The Wholesale Propane business had a good contracting season this year. And we expect to have, assuming normal weather, back to normal sales for this business. And as we work off that inventory, we will recover the LCM that was taken earlier this year.

Cathleen King - BofA Merrill Lynch, Research Division

Okay. And then last one for me, just any updates on the Discovery asset? I know that 2Q equity earnings, they were a bit lower than we expected, maybe some more muted drilling activity on that asset, but any update there?

Mark A. Borer

Cathleen, this is Mark again. We've had the lingering impact of the moratorium there, impacting us somewhat from a condo and such. But we do have a couple of blocks coming on in '13. And then, we have a very bright outlook for it for -- based on what we're seeing in the Keathley Canyon expansion, which will be completed in mid-'14. So I'd say we're probably pretty stable as we kind of look in between -- it's not going to change a lot between now and '14. But as we get into '14 and then just the type of areas that -- and the opportunities that we see along with Keathley Canyon, both the existing commitments, as well as future commitments that we anticipate, we have -- actually have a pretty bright outlook there.

Operator

Our next question comes from Brett Riley from Credit Suisse.

Brett Reilly - Crédit Suisse AG, Research Division

So as it pertains to distribution growth moving forward into 2013, 2014, any ability to maybe narrow that range now that we're moving into the end of 2012? And your co-investment activity has been a little bit higher than previously thought, is there any way to narrow that range for us? Or is the outlook for NGL is really, I guess, keeping you guys on hold for now?

Mark A. Borer

Brett, this is Mark again. I would say, I mean, clearly, we're going to be in the 6%-plus range this year as we lay out, or as Bill and Rose lay out the 2013 and '14 plan. We may be able to refine that sum, but we feel comfortable with that range. And with respect to the timing of the organic growth projects and such, we think it's a reasonable range, and it's possible that we would tighten it up as we go forward and lay out our 2013 business plan.

Brett Reilly - Crédit Suisse AG, Research Division

Okay, and then as it relates to the hedges for the rest of the business, 2013 hedges or percent hedge comes down a little bit, have you guys added any to the outer years or are you guys looking to do any additional hedging as we move into the end of the year?

Rose M. Robeson

Brett, this is Rose. As we indicated on the Alamo -- or the, excuse me, the Eagle Ford transaction, we did -- that transaction did come with 3-year hedges. So we will be updating our hedged percentages when we have our year-end call and we'll update those percentages. But certainly, with that transaction, that will move our hedge percentages up a bit.

Brett Reilly - Crédit Suisse AG, Research Division

Okay, and then is there any way to break out how much the Mont Belvieu fractionators contributed in the quarter?

Rose M. Robeson

Yes. The acquisition of Mont Belvieu, the growth, it was around $5 million of incremental EBITDA for the quarter.

Operator

Our next question comes from Helen Ryoo from Barclays.

Heejung Ryoo - Barclays Capital, Research Division

On your Eagle Ford drop-down, I guess, you mentioned that you expect to exit 2012 with about $300 million in that volume, so does that imply about 40% utilization on the 760 total capacity?

Mark A. Borer

So, Helen, this is Mark. We also have legacy gas there, I would say, from the -- from our extensive systems in South Texas. So today in round numbers, that legacy gas probably makes up around 55% to 65% of the volumes. So we're actually running at a utilization rate that -- the utilization rate is ramped up, so I want to make sure I -- you capture that point. But the -- we're probably running at a utilization rate around 90% at this point in time. And we continue to sign new contracts, as well as see the Eagle Ford volumes ramp up. So that mix of the Eagle Ford will increase over time.

Heejung Ryoo - Barclays Capital, Research Division

So is it 90% on the 760 million cubic feet per day of new capacity that you're getting on this drop-down?

Mark A. Borer

Roughly in the 85%, 90% range for that 760. Of course, we own 1/3 of the venture but those are the A-days number, or the 100% numbers, so to speak.

Heejung Ryoo - Barclays Capital, Research Division

Right. Okay. What about the fractionation utilization? Is that full or how does it look like there?

Mark A. Borer

Generally, the fractionators are running at a pretty high rate as well. We have good access that those provide us to some of the local markets with the large petrochemicals, as well as the Corpus Christi market as well. So they're running at a pretty high utilization rate as well.

Heejung Ryoo - Barclays Capital, Research Division

Okay, and then you mentioned that you plan to approve another project. Could you maybe talk about the size and the timing?

Mark A. Borer

Yes. We have another project that we actually are going to call the Goliad projects, in Goliad County. So we had to look pretty far for that name. But the Goliad project -- we are in a advanced stage of development, from a scoping and engineering, as well as the commercial agreements supporting that. We would anticipate in the next couple of months that we would bring that project forth to the boards. We are contemplating a 200 million cubic feet a day size on that and we'll be looking at approving that, hopefully, as things come together.

Heejung Ryoo - Barclays Capital, Research Division

And is that for 2013 in service?

Mark A. Borer

You said 2013, I'm sorry?

Heejung Ryoo - Barclays Capital, Research Division

Yes, yes. So in terms of service time, do you expect that to come online during 2013?

Mark A. Borer

No, what we've -- we actually discussed it briefly on Investor Day and we would anticipate coming on early in 2014.

Heejung Ryoo - Barclays Capital, Research Division

Okay. Great. And then just a clarification on the DCP hedges related to the asset drop-down, so I guess, essentially, for the next 3 years, this asset would work as a fee-based asset, given all of your commodity exposure is hedged directly with DCP?

Mark A. Borer

Yes. It will really be driven by the volume and operating performance of the asset, but we do have a hedge that will manage the partnership's commodity exposure for the joint venture. But it will be at the partnership's level.

Heejung Ryoo - Barclays Capital, Research Division

Okay, great. And then just a question on your net cash segment. Your -- obviously, your NGL to crude ratio being down to 42% versus 67% last year must have had some negative impact on your -- on the crude hedges that you have in place. So is there anyway to quantify what kind of impact you get from NGL to crude ratio getting this low?

Rose M. Robeson

Yes, Helen, this is Rose. Yes. If you look at our quarter-over-quarter numbers, the commodity price impact using our sensitivities that we've provided, is roughly $8 million on a quarter-over-quarter basis. So that's largely reflective of the NGL to crude relationship being softer.

Heejung Ryoo - Barclays Capital, Research Division

Okay. And when you do your crude hedges, when you put in the crude hedges in place, roughly, what kind of NGL to crude ratio do you assume to make the hedges perfect? Is it more like a 60% NGL to crude?

Rose M. Robeson

Yes, somewhere in the 50% range.

Heejung Ryoo - Barclays Capital, Research Division

Okay. Great. And then just last question, any impact from Hurricane Sandy on your Wholesale Propane business? I know that's more in the northeast, but could you comment?

William S. Waldheim

Helen, this is Bill Waldheim. No. Actually, we were very fortunate with assets that were along the eastern seaboard. We've experienced very little impact whatsoever and, actually, the assets were back up in operation within a day or 2 of the storm. So we are very fortunate in that regard.

Operator

Our next question comes from Elvira Scotto from RBC Capital Markets.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

The Goliad project that you mentioned, is that being contemplated on the DPM level or the DCP parent level?

Mark A. Borer

The joint venture that we have formed with Midstream or DCP Midstream will execute on that project. So the partnership -- assuming that it's approved by the board, the partnership would have a 1/3 interest in the development of that project.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

And would that have a similar hedge then attached to it as well?

Mark A. Borer

Yes, it's anticipated that it would have a hedge along with it as well.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Okay. Great. So in 2012, so far, you've exceeded the co-investment target. Now, is that -- so have you just brought forward your co-investments or are we going to see that co-investment number grow versus the original target? And then, especially since now, the drop-down of Sand Hills and Southern Hills is really only of 1/3 interest versus a full interest before, so how do we think about the total co-investments?

Mark A. Borer

You are correct in that we've exceeded the co-investment target for 2012. We're $300 million ahead of plan. As you well know, growth can be somewhat lumpy. And I guess the way we would look at it at this point in time, is that we're well on our way to meeting our 3-year forecast of having $3 billion of overall growth including the co-investment capital that we've previously outlined.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Okay. And then just going forward then, since now you're only investing in a 1/3 interest in Sand Hills and Southern Hills, how should we think about the percent of the business that's going to be fee-based looking forward?

Mark A. Borer

The way we -- as you know, we've previously provided a range of 65% to 80% as an outlook for 2015. Since we provided that outlook, we've closed on the Mont Belvieu fractionators, we've added East Texas, Crossroads transaction which is predominantly fee-based. We've invested in Texas Express, which is fee based. We'll have the Eagle Plant coming up. The Keathley Canyon expansion is very fee-based. So when you take all that into account and then you add it into that the current transaction in the Eagle Ford, we're still comfortable with that range. That's something that we'll continue to refine over time, as we outline kind of our annual business plan. So we will provide an update of our outlook for 2013 during our call early next year. But at this point, we're comfortable with that range and we'll adjust accordingly if it's necessary.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Okay. So then just a clarification on this drop-down announced today. I mean should we think of it as fee-based or as hedged?

Mark A. Borer

Well, from a margin driver view point, we do have commodity link underpinning that. And so the fact that we have a direct commodity hedge, obviously, makes it more fee-like. But just to be clear, when we talk about fee-based margins and such, and when we have a direct commodity hedge, we don't put that in fee-based margins. Obviously, from the viewpoint of the investor and such, there's a lot of security around having that commodity hedge that provides very stable cash flows.

Operator

Our next question comes from Michael Blum from Wells Fargo.

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

My questions have been addressed.

Operator

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

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

On Goliad, is that already permitted?

Mark A. Borer

Yes. We have -- we are substantially permitted. We have all the major permits there. So we've been very well out in front of that, Becca.

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

Great. And then can you go back and in time, historically, when you've dropped down assets and the hedge has been taken over at the DCP-LLC level so that you guys are effectively fee-based on these commodity-sensitive assets, what happens at the end of that 3-year period where you have the contract to where you -- where they offset your position?

Mark A. Borer

So the hedges will have a defined specific period as outlined in the transaction. And then what we do is we assimilate that hedge into our portfolio at the partnership. And then we will, opportunistically, layer on hedges periodically to continue to extend that portfolio out. We've had a pretty good history of doing that in the past, Becca.

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

So after the 3-year period, then you take on the commodity sensitivity but then you hedged it out at your level?

Mark A. Borer

That's correct and we may add hedges. As an example, we may be 18 months out, and we may begin adding hedges for 18 months beyond that, as an example.

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

And then the last question is on the Eagle Ford JV, is the intent to consider dropping down the remaining 2/3 over time? Or is the intent for it to continue to be a JV?

Mark A. Borer

We have no commitment from Midstream that we would drop down additional interest. Obviously, we have a pretty advanced co-investment strategy with them so there's not a commitment within the transaction. Clearly, we've had a history of joint ventures with Midstream, where we've continued to acquire additional interest over time. We've done that with East Texas, initially starting out with 25%, now we have 100% ownership. And we started out in Southeast Texas with, I guess, we were 1/3 ownership and we now own 100% of it as well. So we do have a track record of moving down the road further on this joint ventures, from an acquisition viewpoint and drop-down.

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

This is a mature enough asset, where it's not as if there's a huge amount of growth capital that it would need to incur. So it would make it more amenable to a sooner drop-down, is that fair?

Mark A. Borer

It is an asset that's immediately accretive. We do believe it has some very attractive organic growth, but it's not one which is -- there are assets out there from time to time, that have no cash flows because they're in the development stage. This is clearly an asset that has attractive cash flows.

Operator

Our next question comes from Selman Akyol from Stifel, Nicolaus.

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

All my questions have been answered.

Operator

Our next question comes from Lin Shen from HITE.

Matt Niblack

This is actually Matt Niblack from HITE. Just given the willingness of your general partner to take equity back in these transactions, do you expect a need to come to the public markets for equity at any time in the balance of the year or even in the future in general, given this new model?

Rose M. Robeson

Matt, this is Rose. Certainly, we can't discuss the timing of our capital market plans. But what I can say is, first of all, we are committed to our investment grade metrics. And second of all, we have demonstrated ability to access both the debt in the equity capital markets.

Matt Niblack

Okay. So the -- you would say that in general, the willingness of the general partner to take equity to at least finance these transactions does not eliminate the need for, call it, more routine access of the public equity markets?

Rose M. Robeson

Yes. Historically, on these drop-downs, LLC has taken back roughly 20% of equity in these drop-down transactions. And so certainly, as we continue to grow the partnership, we would look at our capital needs in terms of keeping our investment grade metrics and again, we have certainly seen good access to the debt in the equity capital markets.

Operator

We have no further questions at this time. Do you have any closing remarks?

Mark A. Borer

Yes, this is Mark. I'd like to thank you all again for your interest in DPM. If you have follow-up questions over the coming days, please feel free to contact Jonni, and we can make ourselves available to visit. Thanks, and have a good day.

Operator

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

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