DCP Midstream, LP
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Good day, ladies and gentlemen. And welcome to the Q1 2018 DCP Midstream LP Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Irene Lofland, VP of Investor Relations. You may begin.

[Irene Lofland:]

Thank you. Good morning. And welcome to DCP Midstream first quarter 2018 earnings call. Today's call is being webcast and the supporting slides can be accessed under the Investors Section of our Web site at dcpmidstream.com. Before we begin, I'd like to point out that our discussion today includes 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 for a complete listing of Risk Factors, please refer to the Partnership's latest SEC filings. We will also use various non-GAAP measures, which are reconciled to the nearest GAAP measures and scheduled in the Appendix section of the slide. Wouter van Kempen, CEO and Sean O'Brien, CFO, will be our speakers today. And after their remarks, we will take your questions. With that, I'll turn the call over to Wouter.

[Wouter van Kempen:]

Thank you, Irene, and thanks, everyone for joining us. We’re off to a great start to 2018, and we delivered strong Q1 results that demonstrate the success of our diverse portfolio and our team’s dedicated focus on innovation, operational excellence and growth. During the quarter, we generated distributable cash flow of $171 million, driven by outstanding logistics and marketing results and continued cost efficiencies. Sand Hills had record throughput volumes and is ramping quickly with expansion is coming online. We continue to strengthen our balance sheet with leverage of 3.8 times and our distribution coverage was 1.1 times. Our integrated asset portfolio provides us with significant opportunity to grow and extend our value chain as we remain focused on our DCP 2020 strategy to become the most reliable, safe, low cost Midstream service provider. On top of the strong financial results, our team continues to perform with remarkable safety outcomes. Delving on our record setting safety performance in 2017, the GPA Midstream Association, recently own our DCP with the Chairman’s award for safety improvement and the second play safety award for large companies. We are incredibly proud of our employee’s consistent commitment to safety, and we thank them for their diligent effort. Today, we’re extremely excited to discuss our substantial multi-year expansion in two of the most prolific basins in the country. Let me give you a snapshot into the things we’ll be discussing on today's call. Within our already extensive footprint in the DJ Basin, we are further establishing our leading position well into the next decade by announcing a comprehensive integrated strategy. This plan includes up to 1.5 bcf per day of capacity, inclusive of our new Plant 12 and accelerations of both the Mewbourn 3 and O'Connor 2 plants. On top of that we're expanding NGL takeaway capacity up to 220,000 barrels per day through the Southern Hills extension via White Cliffs and the Front Range and Texas Express expansions. Lastly, we are an anchor shipper on the Cheyenne Connector, a 600 million cubic feet per day gas takeaway pipeline that is in development. Now, let’s switch to the Permian where we are also executing on strategic growth opportunities. We recently completed an expansion of our Sand Hills pipeline to 365,000 barrels per day of NGL takeaway. And I am proud to announce that we've already increased capacity to approximately 400,000 barrels per day solely through applied technology and innovation. The next Sand Hills expansion is well on pace and is now expected to increase capacity to 485,000 barrels per day by the end of 2018. Additionally, the Gulf Coast Express gas pipeline is very close to being fully subscribed. This pipeline will transport approximately 2 bcf per day of natural gas, and is expected to be in service in the fourth quarter of 2019. We are continuing to execute on our laser focused capital allocation strategy that provide long-term solutions for our customers and significantly elevates our competitive advantage. Turning to the next slide. I want to drive home just how substantially we are expanding every segment of our value chain as a fully integrated midstream provider. We are ceasing tremendous opportunities for organic growth that highlight DCP’s dedication to capital efficiency, portfolio optimization and disciplined diversification. All planned greenfield capital projects are focused on strong returns and fall well within our target multiple range of 5 times to 7 times or better. Notably, expansion projects that have even better returns, and our upcoming NGL expansion projects are no exception as you can see on the slide. We continue to leverage our GMP footprint to grow our logistics and marketing business, providing greater stability and financial returns within our value chain. Let me put into perspective how we have changed DCP over the years. Seven years ago, 90% of our cash flow was driven by our GMP business. With a consistent, multi-year strategic approach to transforming our asset base, today, we are a much more balanced company with our marketing and logistics business responsible for almost half of our cash flow. On this next slide, I'm excited to take a deep dive into our DJ strategy. Our customers have had great success, producing incredible resources from some of the best rock in any basin, right under our feet here in Colorado. We’re excited to announce that we’re in lockstep with this prolific production as we’re building the necessary capacity and infrastructure to unlock the basin’s full potential. On the gathering and processing site, we are adding up to 1.5 bcf of capacity with half of bcf coming online in the next year. We are accelerating to target in-service date of Mewbourn 3, our 200 million a day plant to August, 2018. This is out second acceleration of this facility as we continue to exceed our timelines to ensure we provide our customers with needed capacity. As a benefit of our producer significant agility and therefore remarkable production following the downturn, we expect this plant to ramp up very quickly. In response to these anticipated volumes not only are we also accelerating O'Connor 2 in-service date to Q2 2019, we expanding its capacity by 50% to 300 million a day with up to a 100 day by bypass. Additionally, today, we're announcing a new plant in the DJ. We have secured land and filed permits for Plant 12 to further meet the projected needs of our customers. Plant 12 will have up to 1 bcf a day of capacity, including bypass and is expected to begin initial phases of operation in 2020. To remind you, let me quickly explain what a bypass does? Adding a bypass to a plant is very capital efficient way to increase overall capacity without actually processing the gas. At the tailgate of the plant, we blend unprocessed gas from the bypass with a processed gas from the plant, while still meeting residue pipeline specs. Overall, we are pleased to announce that these strategic growth projects in the DJ will almost triple our capacity in the basin, and this program will clearly establish DCP as the very largest, fully integrated midstream service provider in the DJ for years and years to come. But that’s not all. In tandem with advancing our upstream processing growth, we are increasing our downstream footprint with a multi-pronged approach to ensure our customers can rely on DCP to deliver throughout the full value chain. NGL takeaway capacity in the basin will increase by up to 220,000 barrels a day via an expansion of the Front Range and Texas Express pipeline, and an exciting new opportunity we announced yesterday with Southern Hills via White Cliffs. We finalized a long term 50,000 barrel a day capacity lease in the White Cliffs pipeline. This crude pipeline will be converted to 90,000 barrel a day NGL pipe with the ability to expand to 120,000 barrels a day. Let me put this in perspective for you. This is a huge win-win. All volumes from the new White Cliffs NGL pipe are dedicated to flowing to and through Southern Hills, giving us the opportunity to not only fill up all available capacity on Southern Hills, but also to potentially expand the pipe in future. This is a highly, highly attractive capital efficient opportunity to add new volumes and increase utilization on Southern Hills. And as a result, our Southern Hills pipeline will basically expand from the DJ Basin all the way to the Gulf Coast Market Centers of Mont Belvieu, Sweeney and beyond. And this project is expected to be in-service in Q4 of 2019. Additionally, the Front Range and Texas Express pipelines will be expanded by Q2 of 2019, adding another 100,000 barrels and take away capacity to the DJ. Finally, DCP has secured half of the capacity of 600 million a day Cheyenne connector, adding 300 million per day of gas Takeaway to our portfolio. The Cheyenne connector is another important set up in expanding market access to serve our customers, and we maintain the option to acquire 33% equity ownership stake in this project. All-in-all, we are talking about a massive, massive game changer in the basin as we continue to provide comprehensive solutions to fully support our customers’ continued success and record production. From the well head to the end-use markets, DCP will be a reliable long-term partner to our producer customers, securing continued production growth for years and years to come. The DJ isn’t the only basin where we have exciting developments, transition to Sand Hills on the next line. Just two short years ago, Sand Hills capacity was 280,000 barrels per day. We recently completed our expansion to 365,000 barrels per day. And I'm incredibly excited to share that we have now further increased that capacity to 400,000 barrels per day through operational optimization requiring no incremental capital. Putting that into perspective, this is a real outcome of our DCP 2.0 innovation efforts. Our effective application of new technology resulted in 35,000 additional barrels per day, which translates to tens of millions of new margin opportunities with strong recurrence and no incremental capital. On top of that with the Q1 utilization rate of 95%, we are making excellent progress on our next 85,000 barrel per day expansion to capitalize and continue to increase volumes. In Q3 of this year, we will again expense Sand Hills by approximately 25,000 barrels per day, reaching an increased capacity of about 485,000 barrels per day by the end of 2018. This is 35,000 barrels per day above our previously reported size to ensure DCP continues to be ahead of the growing demand for NGL takeaway in the Permian. These capacity increases will continue to drive fee-based earnings well into the future, and we’re proud to see the real tangible quarter of our DCP 2.0 efforts come into fruition early in the year. Our strategic growth opportunities in both the DJ and Permian underscore our competitive advantage among our midstream peers. We continue to prioritize projects in Permian basins that are low risk, provide strong returns and continue to diversify our portfolio. With that, I’ll turn it over to Sean to take you through our financial results.

[Sean O'Brien:]

Thanks, Wouter and good morning. Today I'm excited to share the details of DCP’s strong first quarter driven by our diversified portfolio. Turning to Slide 8. We delivered strong financial metrics with $171 million of distributable cash flow, resulting in a distribution coverage ratio of 1.1 times for the quarter. Our logistics and marketing segments performed very well, driven by higher revenue from our NGL pipelines, as well as strong cash generation from our gas storage and Guadalupe gas pipeline. We set record volumes on our Sand Hills in the first quarter, and have started to see some modest benefits due to increased ethane recovery, partially contributing to our increased pipeline volumes. In our GMP segment, we’ve a solid quarter with continued record volumes and strong cash flows in the DJ, coupled with increasing volumes out of Eagle Ford. In fact, in March the Eagle Ford reached the highest volume level in almost two year. We continue to stay focused on driving cost efficiencies as we optimize our base business and corporate functions. And all of this strong execution around our diversified portfolio, more than offset the adverse impact of our discovery investment and higher maintenance capital. Finally, no IDR giveback was needed in the first quarter, or is anticipated for the entire year. Looking ahead, in Q2 similar to our historical trends, we will see higher levels of planned maintenance on our assets driving seasonal increases in our maintenance capital and operating costs. Giving considerations of this seasonality, we expect to shape up Q2 to be similar to last year as a result of the aforementioned planned maintenance, as well as higher product replacement capital, driven by volume growth in key basins. If you look out to the second half of the year, we are forecasting it to be higher than the first half as Mewbourn 3 and the additional Sand Hills expansions come online. Also, we expect to see volume growth in the Permian, Eagle Ford and the SCOOP regions of our GMP portfolio. These growth projects and increased volumes will drive associated earnings, and we're confident that we’re on track to meet our 2018 guidance. Now on Slide 9, I’ll touch on our liquidity and financial flexibility. DCP continues to successfully execute its financial plan, ending the quarter with the strong bank leverage ratio of 3.8 times and distribution coverage of 1.1 times. We’ve prefunded our 2018 capital program via our $500 million preferred equity raise we executed in November last year. And we have ample liquidity with approximately $1.3 billion available on our bank facility. We continue to demonstrate capital discipline with our growth focused on strong return capital efficient projects like the recently announced White Cliffs and Front Range, Texas Express investments that significantly grow our diversified portfolio and add fee-based cash flows. Additionally, DCP has substantial financial flexibility available to us via multiple financing alternatives to fund our growth, including our bank facility, debt capital markets, preferred equity, our $750 million ATM program and continued portfolio optimization. Now, I want to briefly touch on the FERC policy revision. On March 15th, FERC provides its policy indicating that MLPs will no longer be able to recover an income tax allowance in their cost-of-service pipeline rates. As we’ve mentioned in our prior press release, we expect the associated impact to be de minimis with only about $15 million of revenue, which could potentially be impacted. Let me walk you through the math. If you take our 2017 transportation revenue of approximately $430 million and then reduce that amount by revenues that are not impacted by the FERC policy revision, you get only $15 million of revenue, which could be impacted. Then consider that a rate reduction would only be a small portion of that $15 million. This is why we are confident that any potential impact would certainly be de minimis. Now moving to Slide 10, let me provide you an update on our hedging program. We've been active in layering on incremental crude, propane and butane hedges as we work to further reduce our commodity exposure. Our 2018 estimated gross margin is now up to 78% fee-based and hedged. Weak gas prices have kept us from hedging the gas portion of our position. However, as I mentioned earlier, we are starting to see increased ethane recoveries reducing our gas equity line. Finally, we've also taken advantage of the stronger crude and NGL outlook, and have started to layer on 2019 crude and NGL hedges. With that, I'll hand it back to Wouter to provide an update on DCP 2.0.

[Wouter van Kempen:]

Thanks, Sean. On the next slide, I will update you on how our digital transformation, DCP 2.0, is differentiating our company. We continue to not only see financial results but our customer gave us remarkable feedback that what we're doing is ahead of the curve. All around us within almost every industry, the technological advancements of the fourth industrial revolution are totally and completely transforming the ways companies operate and how they make money. DCP is no longer allowing that wave of innovation to pass by the midstream industry. We are utilizing real-time decision-making with powerful and big data, allowing us to optimize assets and cease market opportunities. And in the first quarter, we saw tangible benefits from DCP 2.0. Earlier, we noted the outstanding example of the capacity increases in Sand Hills. DCP 2.0 optimization efforts drove the capacity from 365,000 to 400,000 barrels per day, resulting in tens and millions of potential margin opportunity. So how do we do that? Leveraging the innovative technology of dynamic set points, we are able to safely maximize our volume capability by knowing real-time conditions rather than operating under a set of static and assumed condition. As a result, our smart control systems continuously implement needed changes automatically to maximize flow. And the beauty of these efforts is that it did not require a single penny of incremental capital. As we revealed last quarter, our integrated collaboration center, known as the ICC, is executing the operations of the future. This is an industry that continues to rely heavily on SCADA, but we put that strategy in our rearview mirror as it has a very limited approach. In our ICC, in top of SCADA, we incorporate comprehensive and real-time data from DCS, from engineering simulations, from operating KPIs, from our over 8,000 different contracts, our financial assessment and current real-time market prices. In Q1, we began adding even greater functionality within these plant optimization models, which allows our plant operators to drive increased profitability and better reliability. Ultimately, the ICC gives us the ability to make impactful optimization decisions in real-time rather than daily, weekly or monthly, resulting in immediate improvement in our operations, not to mention the impact of the incredible arsenal of data that we’re building as a foundation for predictive analytics. Beyond our plans, our scope has now advanced to include our field operations as we work to enhance our entire system -- as we work to entire system. DCP operates a vast network of pipelines and maintains the largest fleet of compressors in the industry. As part of our commitment to continually improve our reliability and competitive edge, we plan to incorporate all major field assets into our 24/7 remote monitoring system by early next year. Importantly, we’re also driving innovation across every corporate and commercial function. Digitization and robotics process automation are being utilized to streamline our organization and add value. We have tremendous pride in how our people are stepping up to improve our internal processes, and how we apply technology as we transition to the workforce of the future. Our outcome of Sand Hills and those across our entire system and organization are exactly why we're investing in this dramatic transformation and working so diligently to build our culture of innovation. So let me sum it all up for you in our final slide. Our portfolio delivered strong Q1 results. DCP has ample liquidity and strong coverage. We are taking a comprehensive and strategic approach to expanding our integrated value chain throughout every segment of our business. Our tremendous multi-year growth program in the DJ basin will dramatically increase our existing capacity by adding up to 1.5 bcf per day. We're accelerating our Mewbourn 3 and O'Connor 2 plants, and adding Plant 12 to base. Additionally, DCP is playing a critical role in adding up to 220,000 barrels per day of NGL takeaway and 600 million cubic feet per day of gas takeaway to the basin. In the Permian, we have accelerated Sand Hills’ growth through operational optimization and continued to increase capacity as we move to expand to 485,000 barrels per day by the end of this year. The Gulf Coast Express pipeline is almost fully subscribed, which adds additional gas takeaway within our Permian Logistics business. And underpinning all of our operations, we're continuing to differentiate DCP in the midstream space through our DCP 2.0 transformation and our culture of innovation. To close, I'm confident in our track record on executing and delivering on our commitment as we continue to add value for our customers and investors. With that Gigi, please open the lines for questions.

[Operator:]

[Operator Instructions] And our first question is from Shneur Gershuni from UBS. Your line is now open.

[Shneur Gershuni:]

Maybe we can start off with the White Cliffs conversion for NGL takeaway capacity. I was wondering if you can talk about the economics from DCP's perspective. Does it make sense to redirect some of the volumes from your other takeaway options towards the White Cliffs option? Do you received better economics or said differently, is that going to be the cheapest route to get from the DJ to Mont Belvieu versus the existing options?

[Wouter van Kempen:]

I think the White Cliff is a true win-win project. We've been talking with many of you that we’re looking at basically four of five different opportunities and options to take our NGLs out of the DJ Basin into different areas. And I spoke with you all that we were going to -- most likely, we were going to do two of those, Front Range in Texas Express, and other was White Cliffs. As you know, Southern Hills has open capacity. We have about 60,000, 65,000 barrels a day of open capacity. For us, it was really important to what the other solutions was going to be is that Southern Hills was going to be part of that solution. So our base case initially was we were going to expand Southern Hills from basically Kansas into the D.J. Basin. That was probably about 350 mile lay that we have to do so could make that $350 million to $400 million in cost. We were also talking with White Cliffs about, with some group about repurposing their line. And I think this is one of those industry -- where industry comes together and is doing the right thing. If you think about this what is happening is we are building about 25 miles or so of pipe in Colorado to connect into the White Cliffs system. The other site on the Cushing side, what we're doing is we're expanding Southern Hills from Cushing to Panova. There actually is already pipe in the ground that we have and that’s about 45 miles. So for us it is a massively, massively capital efficient way to do this. Unlike you’re really talking about pennies on the dollars compared to the alternative of expanding Southern Hills. So it's a great outcome for White Cliffs because they will and some group and their partners, because they are going to be to fully utilize their part. For us, it is a tremendously good solution, because it's very low capital. We are going to utilize and fill up that extra 60,000, 65,000 capacity that we have on Southern Hills. Now this gives us an opportunity to potentially also expense Southern Hills into the future point. And from an economics point of view, Front Range and Texas Express continues to be a great project, and we’re flowing lot of barrels in that. From a Southern Hills point of view, we obviously own a lot more as a percentage base from Southern Hills. So economically for us and the DCP unit holder, filling up Southern Hills is something that is very attractive to the DCP unit holders. So I think this is how you should look at that. We will continue to flow things -- barrels on Front Range and Texas Express. But I think you can feel pretty comfortable that 90,000 barrels of capacity on White Cliffs that can be expanded to 120,000 barrels of capacity, all of that is going into Southern Hills. And routes that will be priced between White Cliffs and Southern Hills, is going to be the same as the route on Front Range and Texas Express. For our producer customers, Southern Hills and Sand Hills of all our pipelines have great flexibility, and I’ve spoken about that many times. The Sand and Southern Hills systems have truly open excess pipeline, which means that you can flow your barrels to any market that you want. If you want to flow to Sweeney, if you want to flow to Mont Belvieu, if you want to flow to any other market, we can take care of that. You have your choice of fractionators that you can use. So I think for the producers, this is also a very attractive project, so a truly win-win project.

[Shneur Gershuni:]

And just to summarize or maybe paraphrase a little bit. So effectively, economically, it makes more sense for you to put the incremental gallons or barrels on to White Cliffs and then Southern Hills, because you own a larger percentage of that. And from a producer's perspective, they should really be in different from the net back perspective, and they have increased optimality.

[Wouter van Kempen:]

I think it’s a great way of saying it, Shneur.

[Shneur Gershuni:]

And then secondly, and this maybe -- we didn’t get our numbers totally squared away. But O&M seem to have come in lower than expected and so did maintenance. I was just curious if a lot of that was related to the DCP 2.0 project?

[Sean O'Brien:]

Definitely 2.0, it continues to drive efficiencies. We spent some time with your team showing how reducing man hours, we’re reducing overtime miles driven. We talked today -- Wouter gave some additional color on the corporate function, the use of robotics in our PAs and bots and those things. So we’re definitely seeing efficiencies continue to be driven across the company. I'll remind you that in our guidance for the third or fourth year in a row, we continue to guide to lower cost in 2018 than we had 17. So I wasn't surprised by the reduced cost. And they defiantly were quite reduced from Q4. I think our Q4 we had a little seasonality. As I mentioned in my remarks, Q2 if you’re thinking about shape, you ought to think about Q2 being little bit higher similar to last year, because we’re going to do more maintenance and we’ve got some things coming online. But by enlarge a very good story for the company. I think our innovation efforts are helping drive that and we’ll continue to do that through the remainder of the year.

[Shneur Gershuni:]

And in your experience over the last couple of years, I mean, maintenance has consistently come in less than people have expected. Are you still finding incremental opportunities where you're replacing certain parts earlier other parts later? And are you having less downtime as a result? I mean, I was wondering if you can talk about the mechanics of it at all.

[Sean O'Brien:]

We definitely -- maintenance is important to us. Couple of things to think through over the trend for the company. Obviously, we're extending this company more into the logistics side of the equation, the maintenance on that side of the equation and those are newer assets tends to be lower. We have had a massive focus internally on improving the reliability, a big portion of that is improving our maintenance programs. I think we've been pretty good at doing that. That's very efficient, of course, in the long run. I will tell you that I think our guidance on maintenance was 100 and 120 this year, that's a little bit higher than last year. A trend to think about and I mentioned it a little bit is we are seeing additional product replacement in some key areas, the north -- for instance areas like the SCOOP and the Northern Delaware. So that is one area you may see some increases. But again, that's driven by volume growth, we like that. So we are driving efficiencies, yes. We are moving to more logistics assets. Those tend to be newer and less maintenance intensive. And then on the increase side, I think you will see a little bit as we move in and see volumes increase.

[Wouter van Kempen:]

And so maybe add to that. And we continue to obviously also add new assets, not only are we absorbing those we’re still taking on the overall cost down as well. So that’s a pretty remarkable effort by the team. And obviously, the fruit gets higher and higher up the tree, but that’s why you also got to continue to change what you're doing. That's why DCP took where no one and what’s we’re doing around technology and innovation is so important for the overall picture.

[Shneur Gershuni:]

Just to maybe to paraphrase again. I definitely understand that newer assets, obviously, have an impact on maintenance. It trends in general. But when I think about it from an apples-to-apples basis, if I think about legacy assets, let's say or older assets. Is it fair to say that you're effectively spending less on maintenance yet you're seeing less downtime?

[Sean O'Brien:]

Yes, I think we are spending our money more wisely. We put a huge effort in place over the last couple of years, focused on maintenance at the company as part of our innovation efforts, but also just as part of running the company better. So I think what you are seeing -- I think the short answer is, yes. We are spending our money more wisely. We're trying to get better run times out of the assets that make us the most money. And then obviously plug that into the ICC it is where the technology comes in play.

[Shneur Gershuni:]

Let me maybe give you an example, Shneur. We have the largest compressor fleet in the industry. And historically what would happen, when you go through a downturn, like 2015 or 2016, people start pushing maintenance out, spending a little less. And that was really not a smart decision. During ’15 and ’16, we actually started spending much more money on preventative maintenance. And what that resulted into is that major failures on our compressors have gone down by over 70% over the last three years. So actually spending a little bit more upfront and then not running into major failures that cost you much, much more down the line is one example of how we continue to take our cost down.

[Operator:]

Thank you. Our next question is from Michael Bloom from Wells Fargo. Your line is now.

[Michael Bloom:]

I just wanted to think through the White Cliffs Southern Hills project. So I guess my first question is, you’re responsible for building the 25 miles into White Cliffs and then the 45 miles from Cushing. And so what's the cost of that and the timing of that spend? And I guess that’s my first question.

[Wouter van Kempen:]

We haven't really led out yet what the cost is. We’re going to probably give all of you a little bit better insight in the different capital expenditures for the variety of projects that we announced over 2019, 2020, and beyond. In the end I think if you take some round numbers million, million bucks a mile, call it $25 million in the DJ basin. On the other side, I told you that we -- from Panova where we interconnect with Southern Hills to Cushing, we already have large diameter pipe in the ground. So we are in the process of making sure that the pipe actually works, that it’s tested, that it works for this type of service. That’s going to take us another month or two to figure it up on exactly out, worse case we have to lay 45 miles of pipe there. If you use the same rough numbers, you can get to a ballpark. And that five is done two-thirds by DCP and one-third by Phillips 66, around one-third in the pipe. So roughly how you should look at the capital outlay then Sun Group and their partners are converting and paying for the capital to connect into Southern Hills and to convert the pipeline.

[Sean O'Brien:]

I will just give a holistic view. We gave the range on our growth capital this year, 650 to 750 clearly with some of the accelerations we’re talking about. And the new projects you know, I would guide you more towards the higher end of the range. Having been said that, if you listen to what Wouter said lot of this capital is fairly de minimis in ’18. There is there is some capital in ’19 for some of these projects. And then even as you think about like Plant 12, which we announced and talked about today, that's really ’19, ’20. So the good news is, yes, we’re going toward the higher end of our range in ’18, but we’re starting to fill that pipeline in ’19 and ’20. And these are very accretive projects.

[Michael Bloom:]

And then the other piece I just want to think through is and you touched on it before. But assuming White Cliffs fill the 90 and even the 120. Does that all basically now have to flow into Southern Hills? And if so then clearly that suggest you need to expand that pipeline? Just want to see if I’m thinking about that correctly.

[Wouter van Kempen:]

You're absolutely correct. So White Cliffs flows into -- the only connection point from white cliffs is into Southern Hills. So when we go out together, we will go out with a route that is an open season from White Cliffs and Southern Hills combined. That is the beauty of this project. You're absolutely right. We have today 65,000 miles or 65,000 barrels of so of capacity into Southern Hills. So if we continue to fill this up and all the -- the whole 90,000 or 120,000 are going to flow into Southern Hills, we obviously have to expand Southern Hills. To me, that goes into the category of luxury problems. I would love to deal with that. I think that would be terrific to have that. We have ample time to take a look at that, because this is not coming into service until Q4, '19. So by the time, we would get in a position where it truly fills up, you're probably looking at 2020 or a little bit later. So we have plenty of time to take a look at that and anticipate all those volumes and expense Southern Hills.

[Michael Bloom:]

And then my last question, turning to the Sand Hills. Effectively just wanted to get a sense for how full the pipeline is today like where it's flowing today. And what do you think the cadence is to fill up to get to the full 45 of capacity that you're expanding to? Thanks.

[Wouter van Kempen:]

So we're roughly 95% full today, that's where we were in Q1 '18. So at the end of the quarter, we're probably roughly the same data here today if you look real time. And it's a great thing with what we're doing there. And I spoke about that in the prepared remarks is how the team files another 35,000 of additional barrels without spending a penny. And Michael you do the math on this, so take gallons times rate, times 42, times 365, which gets you to margin opportunity on 35,000 additional barrels a day, unlike tens and tens of millions a year of additional capacity that we can put in. So that is great. So we're running at -- we have the 400,000 barrels today. And then we're working on the expansion that now gets us to 485,000 versus the 450,000. The great thing about that expansion is not going to come all-in as onetime. 25,000 of that is going to come in somewhere in the third quarter. So that's get you from 400,000 to 425,000 of capacity in the third quarter. And then we're ramping to 425,000 to 485,000, and a step change throughout the quarters when we set additional pump stations and those pump stations come online. So we feel very good about it, continues to fill up really, really nicely, and it’s pretty exciting.

[Operator:]

Thank you. Our next question is from Jeremy Tonet from JPMorgan. Your line is now open.

[Unidentified Analyst:]

This is Rahul on for Jeremy. Just touching up on interim recoveries here, you talked about $30 million to $40 million upside potential before. And I think Sean mentioned in his comments earlier about recovery materializing some amount in first quarter. I’m just curious if you're still expect to see a large amount of it coming out in second half of '18 and also in context with your hedges around heavies, worth [stake] gas or ethane?

[Sean O'Brien:]

So regarding the ethane uplift that we gave you, the good news is we are starting to see some. To give you round numbers, we were rejecting on our system about 60 to 65 a day last year as we came out of '17. We're down to 35 to 40, a lot of that happens towards the backend of the first quarter. That was worth about $3 million $3.5 million to DCP in Q1. We do anticipate that to continue. We're seeing very strong recovery signals, and that is continued into Q2. So you could probably take that and assume that at that level that it's going to continue for the remainder of the year, that's our current assumption. What's driving that, the economics that are driving that obviously gas prices have come off a bunch ethane is hung in there and hasn’t increased the bunch. But that is really what's driving the push now to put more barrels into the pipeline and to pull more ethane out as the weakening of gas. I think your last question was fundamentals on the heavy side of the equation. Obviously, C5 has a very strong correlation with crude. Crude is moving pretty strongly and hanging in there. So we have seen the C5 portion of the NGL barrel correlate and stay relatively strong this year.

[Unidentified Analyst:]

And just shifting focus a bit here, I mean 1Q was slightly down unlike the forecast for the rest of the year is flat but slightly up. Keeping that in context, one of your competitors -- so that the fact that JV partners talked about potential second pipe out of Permian. Just curious thinking through the equity options you guys have. Would it be something which you’ll be interested in or just any thoughts there you can provide?

[Wouter van Kempen:]

I think there’s -- we continue to control a lot of gas in the Permian basin. So there is a significant number of inbounds that come to our commercial teams around, do we want to continue to or do we think there is an interest from our side to subscribe into a second pipe. We continue to look at all options and see what makes sense. I think we’re pretty excited about Gulf Coast Express, and that’s going to be a great project, and project that needs to come online, the market needs that desperately. And I am very excited that we teamed up with Kinder Morgan really early to make the project work. So we’ll continue to look at opportunities.

[Operator:]

Thank you. Our next question is from Jerren Holder from Goldman Sachs. Your line is now open.

[Jerren Holder:]

What is the capacity in Guadalupe and do you have any ability to expand that pipeline, just given price differentials in the Permian?

[Sean O'Brien:]

The capacity, Jarren, is 200 a day. I mentioned a little bit in our comments that we did with the [indiscernible] spread widening and having that physical asset that definitely helped our L&M business. In terms of ability to expand it, I’m not aware of any project that we have on deck to expand it. So I’m not sure if we can get much bigger, but it is that 200 a day and its proving to be quite a good asset so far this year.

[Jerren Holder:]

And then maybe switching to the 50,000 barrels per day volume commitment on White Cliffs. Should we think of that as primarily based on the Mewbourn 3 and O'Connor 2 plants? And then as Plant 12 comes online and you do have capacity on White Cliffs and Southern Hills that that's most likely where those incremental volumes will flow to.

[Wouter van Kempen:]

Yes, you got it, Jarren that’s absolutely -- Mewbourn 3 and O’Connor 2 will create well north of 40,000 barrels a day. So that basically -- they are uncommitted barrels into Southern Hills and to the Gulf Coast. And then anything on top of that when we do Plant 12 or did we do others that obviously has the opportunity to going into White Cliffs Southern Hills as well. And then what we’re doing in open season so we very well may see third parties come into the pipe as well and that would bring additional volumes into Southern Hills as well. I said it earlier I think when Shneur asked the question, it’s truly a win-win. It’s a great project for Sun Group and their partners, and it's a great project for DCP and for our unit holders.

[Jerren Holder:]

And then lastly, it seems like you guys are pretty confident that Front Range would also be expanded. I think that's an open season right now. And so nothing confirm that that’s been expanded yet. So where the volumes are going to come from just given that like all of your new plants are effectively sending volumes to White Cliffs?

[Wouter van Kempen:]

Remember that the parties that announced the expansion are also the owners of the pipeline. So I think you should feel highly confident that that pipeline will get expanded. We would not enter into an open season if we wouldn’t know that this pipeline would get expanded. So between ourselves, between Western and Anadarko between Enterprise, we’re very confident -- and Enbridge, very confident that Front Range is going to expand and the Texas Express will get done. There are -- we are putting a lot of barrels into that system. Western is putting a lot of barrels into that system as well, so highly confident that both these projects are going to get done.

[Jerren Holder:]

And maybe one more on the bypass capacity. How should we think about CapEx and returns on that, because obviously you're not necessarily providing the same services that you would for processing. So how should we think about that?

[Wouter van Kempen:]

So bypass is really -- it's a very capital efficient way to increase capacity without actually processing the gas. And just to make sure that people understand. So what we're doing is at the plant fill gate, we blend to process a gas and unprocessed gas. And then we obviously got to optimize that so that we can meet pipeline specs. It is very capital efficient. I think the way you should think about this is O'Connor 2 plant goes from 200 million a day to 300 million a day, and it probably cost us 10% of the original capacity of O'Connor or the CapEx of O'Connor 2 to expand our duplicate bypass in. And we have an arrangement with our producer customers, how we get paid on that, and it’s another win-win. It’s great for the producers. They will get to get their crude flowing. They will have more capacity. And for us we get paid on the capital that we put in and it provides us with very solid returns as well.

[Operator:]

Thank you. Our next question is from Chris Elliott from Barclays. Your line is now open.

[Chris Elliott:]

I was just wondering if we could for a second dig into the increase in frac volumes year-over-year, you had a pretty nice uptick there. Just wondering if -- I guess which assets in particular saw that increase and if that’s at all related to some of the growing Sand Hills volumes that you guys have reported?

[Sean O'Brien:]

That increase was predominantly related to investments that we have in Mont Belvieu and the Gulf Coast on those fracs. We have ownership percentage interests in those assets. I think if you’re trending from last year, there was some downtime and some maintenance that occurred last year that lowered our volumes in Q4. So you saw that rebounding back, it wasn’t a huge -- I mean we obviously like to see the volumes go up. It wasn’t a huge driver of our earnings, but more back on par and back online. In terms of the Sand Hills driving, I think the overall industry and the increased demand for the NGL is driving it and the increase for export.

[Operator:]

Thank you. Our next question is from Jeremy Tonet from JPMorgan. Your line is now open.

[Jeremy Tonet:]

But just want to check if there was anything out there that prevented you from directing volumes to Front Range and Texas Express, your equity volumes versus the new White Cliffs, Southern Hills JV that you're talking about here. Can you -- given that you own all of Southern Hills. Is there any reason you can't just push as many volumes as you want to that line?

[Wouter van Kempen:]

So we have commitments that we have on Front Range and Texas Express and obviously, we will continue to honor those commitments. But yes, there is a very significant number of barrels that we have under our control that where we have optionality. And that’s why we’re looking at, what is the best way to do this, should we expand Southern Hills and just do it all the way ourselves into the DJ Basin, very attractive opportunity but obviously, significantly more capital intense than what we’re currently going to do where we’re spending pennies on the dollars from a capital point of view, but still continue to get the same transportation dollars and all the barrels that are now coming out of the convert of White Cliffs system. So yes, you're absolutely right. There is a reason why we took out 50,000 of capacity, and we can potentially take out even more if we want to, because we’re very comfortable around the barrels that we’re going to direct into that system.

[Jeremy Tonet:]

And just a quick follow-up there. Are you able to share any flavor as part of the duration of those commitments to Texas Express and Front Range if that’s just near term things that could roll or is it really later get the contracts there?

[Wouter van Kempen:]

No, Front Range in fact is express commitments. And like they go, they go well into the next decade they were long-term commitments when we put one of the anchor shippers on that pipe. And we continue to love that pipe and I think it’s great, it’s great to have that outlet. It’s great to have this new outlet. In the end, I think the way you got to think through to some of it, what is really important and what we’re trying to do here is you want to make sure that you don’t get into a place with the DJ Basin where the basically the Permian is today. Whether a shorter shelf of all kind of capacity, you can’t take your gas up. People will think about do we need to start flaring, producers thinking about flaring or having to shut in. You may see the same on the NGL side over time. So you have all these problems and bottlenecks that are created. What we are doing in the DJ Basin is to alleviate all of those in one big full swoop deep into the next decade. It’s the Cheyenne Connector that we’ve been working on. We knew that additional gas takeaway capacity was absolutely needed out of the DJ Basin, talking to our producers. We knew that we were going to do something like Plant 12, That’s why we work together with our partners on the Cheyenne Connector, adding 600 million a day of gas residue capacity that's expandable up to one BCF. That's why we worked with our partners on expanding Front Range and Texas express. You want to have multiple outlets, and that’s why we came to the solution of basically the fact of extending Southern Hills all the way into the DJ Basin in a very capital efficient manner. And then on top of that, massive processing capacity that we’re announcing by once again taking Mewbourn and accelerating that, by increasing and accelerating O'Connor, while filing permits, having all the land available and getting a building -- having the opportunity to build the plant that is up to one BCF. So we can give our producer customers a very integrated one stop shop solution to continuing to grow the DJ Basin, which is an unbelievably attractive basin. So that's really I think how you should take a look at this from a much more broader strategic point of view.

[Operator:]

Thank you. At this time, I’m showing no further question. I would like to turn the call back over to Irene Lofland, VP of Investor Relations, for closing remarks.

[Irene Lofland:]

Thanks Gigi. Thanks everyone for joining us today. If you have any follow up questions, please give me a call. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.