DCP Midstream, LP
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2017 DCP Midstream, LP Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Irene Lofland, VP of Investor Relations. Ma'am, you may begin.

[Irene Lofland:]

Thank you, Amanda. Good morning, and welcome to the DCP Midstream third quarter 2017 earnings call. Today's call is being webcast, and the supporting slides can be accessed under the Investors Section of our website 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 the 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. On our call today, we'll address our quarterly results, our response to Hurricane Harvey, provide an update on our growth projects and talk to you about the strength of our integrated business model. I'll start with highlights. We had outstanding Q3 DCF of $187 million, which puts us at $467 million of DCF year-to-date. This translates to a distribution coverage ratio of 1.21 times for the third quarter and 1.01 times year-to-date with no IDR giveback. We're delivering on our commitment to delever the company, with our leverage ratio improving to 4.3 times as of the end of the quarter, and our Q3 adjusted EBITDA was $276 million and $737 million year-to-date. Turning to Hurricane Harvey; I could not be more proud of the above and beyond response by our employees. I believe companies show their true character in times of crisis. And in reflecting on our team's response, we were very proactive in taking care of our people, our customers, and our assets and quickly returning operations to service. We did a controlled shutdown in the Eagle Ford, which allowed us to come back up quickly with minimal interruptions and no surprises to our customers. Given our integrated logistics portfolio, and it's one of the largest marketers of NGLs in this country, we were able to divert NGLs and redirect product into available markets and storage, which allowed us to minimize Hurricane Harvey's impact, demonstrating our premier position and strong execution. Shifting to our project portfolio; let me first talk about our strategic logistics growth projects in the Permian. Our 2017 Sand Hills expansion to 365,000 barrels per day is making excellent progress with two pump stations that went into service in Q3. We're well on our way to completing this expansion and expect to be at the full capacity by late fourth quarter 2017 or early first quarter 2018. Volumes are running at record levels in Santos, and we expect them to continue to ramp, as the additional capacity goes into service. Our 2018 expansion will further increase capacity to 450,000 barrels per day by the third quarter of next year and all of this is a really exciting story for DCP. We've also had an active quarter of furthering momentum on the Gulf Coast Express project where we recently announced a collaboration with strong industry players that draws upon our combined capabilities to provide a competitive solution for needed gas takeaway out of the Permian. The 1.92 BCF per day Gulf Coast Express Pipeline is a fee-based project and is currently in advanced stages of contracting firm transport agreement with core shippers. Gulf Coast Express is an important step-out for our logistics business, adding residue gas takeaway to our integrated value chain. On the GMP side of the house, we are advancing our Mewbourn 3 and our O'Connor 2 processing flights in the DJ Basin. We continue to set volume records in the DJ with Q3 as our highest volume quarter ever. Specifically, our 200 million a day Mewbourn 3 Plant and Grand Parkway gathering expansion are moving forward and scheduled to be in service in the fourth quarter of 2018. We are doing everything in our power to accelerate this timeline to enable continued production growth by our customers in the basin. The next expansion in our fleet is our 200 million a day O'Connor 2 Plant scheduled to be in service by the middle of 2019. And both of these projects are underpinned by life-and-lease contracts with minimum volume and margin commitments. We have clear line of sight to earnings growth across our project portfolio. We continue to be focused on capital discipline with strong returns and on accretive projects that do not rely on higher commodity prices. I want to step back and remind you of the DCP 2020 strategy we've began sharing a few years ago. We focused on taking cost out of the business, we recontracted, we exercised diligent capital discipline, we have been strategically transforming DCP's operating model and have evolved from a gathering and processing-only company to an integrated powerhouse with a significant logistics business that now makes up 40% of our adjusted EBITDA and continues to grow. Our outstanding Q3 results in our response to Hurricane Harvey are a testament to the operating leverage in our business model. I'm extremely proud of our team for what they have accomplished this quarter and for the journey that they've been on to become the most reliable, safe, low-cost midstream service provider. And with that, I'll turn over to Sean to provide a financial update.

[Sean O'Brien:]

Thanks, Wouter, and good morning, everyone. I'm very excited to take you through our outstanding third quarter results. We delivered very strong Q3 DCF of $187 million. Based on the strength of the quarter, we are very comfortable with the guidance ranges we provided for the year despite the lower commodity environment. Q3 included strong execution from both of our segments driving positive trends and momentum to close out 2017 and pivot towards 2018. This quarter also included some unique drivers that I will cover in a minute. On our last earnings call, we said that we expected the second half of this year would outperform the first half. Costs would be lower, and volumes would increase in key areas, resulting in higher margins; I'm proud to say that we are delivering on these commitments. Our assets are performing well and improved reliability, strong volumes in key areas and continued execution on efficiencies and optimization. Additionally, we saw stronger commodity prices as we continue to see the environment stabilize and become more constructive. We are uniquely positioned, as demonstrated by our Q3 results. As mentioned earlier, I want to highlight several unique Q3 drivers that impacted our strong results. You heard Wouter discuss the team's incredible response to Hurricane Harvey. DCP had minimal financial impact related to GMP downtime and property damage. These were offset by favorable pricing, marketing results and deferred maintenance, as we managed diligently through this challenging event. We are proud of how quickly we were able to return to service in the affected areas with a focus on minimizing customer interruptions, rerouting our product flows and benefiting from strong pricing as we took product out of storage post Harvey. In our base business drivers, our costs were $13 million lower than second quarter as we continue our laser focused on cost management. We expect Q4 costs to be in-line with the third quarter. Let's move to the next slide where I will provide further details on volumes and other drivers by segment. The GMP segment is up significantly in the third quarter, reflecting the strong performance of our assets where we saw improved recoveries, strong reliability and lower cost. In addition to the DJ and Eagle Ford strong margins, we saw the Mid-Continent perform well this quarter with improved reliability, efficiency and recoveries. The recount uptick continues, significantly increasing in all the areas we operate in. We continue to see volume growth in the DJ Basin where we have records in July, August and September. And in the Permian, Q3 volumes would've been flat to Q2 levels, if you net out the impacts from Hurricane Harvey and a significant scheduled turnaround that occurred during the quarter. In the south, adjusting for Harvey impact, Q3 volumes would've been slightly above Q2, showing continued production growth in the Eagle Ford. Last quarter, we mentioned that we expect our Discovery investment to be negatively impacted by about $10 million in the second half of this year. This has come to bear in Q3 results which reflected reduced Discovery equity earnings and distributions due to lower production volumes from wells in the Keathley Canyon gathering system. We expect our Discovery investment continue to experience headwinds in 2018. Our latest estimate is the negative impact of $30 million to $40 million to equity earnings and distributions as compared to 2017. This is primarily due to continued production and operational challenges from two large producing wells that flow into the Discovery system. We will continue to monitor this situation closely with our Discovery joint venture partner. Regardless, we feel we will be able to more than offset this negative impact with the solid outlook on base volumes, strong cost management and earnings growth from projects that will be coming online next year. Turning to our logistics and marketing segment; Santos is setting record throughput volumes and continues to ramp up, filling capacity as it gets added. Our marketing business also had an outstanding quarter, as I previously mentioned. To recap, the third quarter reflected outstanding asset margin performance and continuing this trajectory, we're looking forward to closing out the year strong. Moving to the next slide, I want to underscore that we have ample liquidity and financial flexibility. We are focused on delevering and have made good progress with our bank leverage ratio improving to 4.3 times as of September 30. The end of the third quarter, we had significant cash-on-hand of $312 million and a fully undrawn $1.4 billion bank facility. Additionally, there are multiple financing alternatives that we continually evaluate, and we're confident in our ability to manage and fund growth. All in all, we have a lot of flexibility, and we continue to focus on strengthening our balance sheet and building coverage. Touching on hedging on Slide 6; we are actively reducing our commodity exposure via our hedging program. We reached about 75% fee in hedge for the full year 2017 and are about 78% in the fourth quarter. We're turning our sights to 2018 which is currently about 70% fee in hedged. We will look to market opportunities to layer on additional hedges with a target of getting to 80%. The 2018 percentage of fee versus commodity margin will be updated when we rollout our 2018 guidance and commodity sensitivities. We are encouraged by the strengthening of the NGL accrued relationship, driven by increased demand from petchem facilities and the development of the export market. And with that, I'll turn it over to Wouter to discuss our growth projects and summarize key takeaways.

[Wouter van Kempen:]

Thanks, Sean. On Slide 8, I want to spend some time reviewing our capital growth strategy. We have a terrific integrated and diversified footprint which provides great choices on where we get to allocate our capital. It allows us to select the best project, which are lower risk and higher return. The Permian DJ Basin are two areas where we have a tremendous opportunity to continue to grow and where we're providing offerings across the energy value chain. Our G&P position in the Permian is very strong and very important to us and is foundational to provide connectivity to our downstream logistics business. Leveraging our gathering and processing position, we see the greatest opportunity to allocate capital on the Permian to our integrated logistics business. And we're doing that both on the NGL side, with Sand Hills, as well as via Gulf Coast Express, our first major residue gas pipeline strategic step-up, which further integrates our value chain. As I mentioned last quarter, our Sand Hills expansions are underpinned by existing contracts with strong dedications from plants that are built or under construction, supporting growing NGL volumes well into the next decade. And this does not take into account any growth from ethane recovery which would be upside over and above what we already have. Moving to the DJ Basin; I'm excited to talk about the DJ as this region provides some of the strongest returns and lowest breakeven's in the country for producers. We have an integrated system with approximately 850 million a day of processing and bypass capacity. With continued growing supply we are on-track to increase this total capacity by approximately 50% to about 1.2 Bcf a day over the next two years. These new plans are supported by very strong producer partnership and commitments and underscore the strength of our footprint and our focus on capital discipline. It provides strong returns with 5 to 7 times multiples, have life and lease acreage, full value chain economics, and are supported by minimum volume commitments. In summary, first, we generated very strong results in Q3 which lays the foundation for the rest of this year in 2018. We delivered strong 1.21 times coverage and lowered leverage to 4.3 times during the third quarter. We will remain disciplined with our financial priorities, including strengthening our balance sheet, reducing leverage to 3 to 4 times and targeting distribution coverage of 1.2 times or better. And as this quarter demonstrate, our strategy has been successful in accretively growing earnings while increasing reliability and operational efficiencies in our base business. The second key point; we have clear line of sight to lower risk, high return and predominantly fee-based growth opportunities that further extends our value chain and integrate our gathering and processing and logistics businesses. We're differentiated by our ability to choose the best project in the best areas and leverage our integrated portfolio. And finally, we are seeing great momentum from our multi-year DCP 2020 strategy in transforming DCP Midstream. We expect to close this year strong and as we shift towards 2018, we see positive sign-post for a more constructive environment. Our goal has never wavered to be sustainable in any market environment, not found at [ph] optimistic commodity prices, but instead, on flawless execution of our strategy. And with that, I'd like to thank you for your interest in DCP. And now, Amanda, we're ready to take some questions.

[Operator:]

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

[Shneur Gershuni:]

Good morning. I guess I wanted to start off on funding. Kind of wondering how you're thinking about funding, going forward; hopefully, Gulf Coast Express gets across the finish line, which would mean that you would have to fund your portion as well too in addition to Sand Hills and the two new plans. Lately, the market has been rewarding no-equity pledges by management teams, and at the time of you restructuring earlier this year, instead of lowering the distribution -- the GP put in place, the coverage waiver trigger for $100 million; you've had strong results, you haven't triggered it, and you probably won't because results continue to improve. But at the same time, you do have a sizeable CapEx spend next year, I would imagine. Has the GP considered formally waiving the $100 million, even though you don't need it from a coverage perspective but because of your CapEx? Do you look at potentially deferring the $100 million and accrued its liability until the plants come online? Just kind of wondering, how you, sort of, just manage the bulge of the CapEx spend next year, cash flowing and trying not to issue equity while maintaining the distribution?

[Wouter van Kempen:]

Shneur, it's Wouter. Sean and I will tag team that question. Let me go and start with the IVR waivers and like -- at this moment, I'm like, there is no discussions about do we permanently waive that or not. I think you made a couple of interesting comments around; there is some good growth, there is very strong execution that you're seeing on our side. Like many others, we did not lower our distribution; we strongly believe a promise made is a promise kept. And we continue to run our business more on our strategy in a way where we deliver on our promises. We believe there is very significant flexibility that we continue to have in the business model, also around funding growth. As you know, we haven't gone into the equity markets. I think the last time we went into the equity markets was in 2015. People came in this year, thinking about okay, is there significant equity issue, and that's needed to be done for 2017. And you know, we found many different other ways to fund our growth and not issue equity. So we believe there is a tremendous amount of flexibility that we continue to have within the portfolio, within the structure that we have and within the various capital markets that we see. So we're very comfortable with continuing to execute the way we've executed here in 2016 and 2017.

[Sean O'Brien:]

Shneur, this is Sean. The only thing I'd add, we're sitting on over $300 million of cash, we've got nothing drawn on the $1.4 billion facility; so we've got a lot of liquidity. Obviously, as you know, we've divested some assets through the year and raised cash that way. You mentioned it, our cash flows from our core businesses are performing quite well; so we have a lot of flexibility. As Wouter said, the other thing I'd point out is, since we are growing organically in a very disciplined way, that gives us a nice line of sight of the timing of the capital, it doesn't come on in one big full swoop. We have great line of sight, we know when it's going to come online. So again, that's tying into the flexibility theme. So we feel really good about our ability to fund the growth, going forward.

[Shneur Gershuni:]

So just to paraphrase; outside of some crazy event that's really unanticipated, you don't see yourself issuing equity at all this year or through '18?

[Wouter van Kempen:]

You know, I don't -- well, we're not talking about -- you're sitting through '18, so that's obviously, you just made time period very lengthy. Unlike, we're not commenting on 2018 because we haven't given a guidance around 2018. But we've said this before, and we don't believe that we will issue common equity in 2017.

[Shneur Gershuni:]

Okay, great. Just two more follow-ups; rigs have been down in the DJ, some of the MPs have attributed to Midstream bottlenecks. Your plants don't come online until later next year, which would obviously, help alleviate some of the bottlenecks, I'm not attributing it all to DCP at all. But is there any concern that the step-down in rigs, and therefore, we're not building an inventory of ducks, that you run into a scenario where there isn't enough activity to bring the plant on full when you actually bring it online? Could there potentially be a timing type of issue, or do you feel there is enough activity to make sure that the plants come online in fall?

[Wouter van Kempen:]

Shneur, there's many things that keep me up at night; this definitely would not make the list. We are very comfortable around what we're seeing in the DJ Basin. Yes, we're at a place today where we wish there was processing capacity available and that we could bring it online and that we spoke at the last earnings call about this but there was a mismatch between our timing and the producers' timing. And when the producers weren't ready to sign-up for new processing capacity in 2015 and 2016 and it takes a long time for us to get permits and builds things. But at the same time, we've done tremendous activity between ourselves and the producers to optimize the system, to bring kind of new bypass capacity, small outer chunks of capacity online, we continue to work that, and probably bring some little pieces of capacity online until the Mewbourn 3 Plant comes in. I'm really am not worried at all about what the rig activity is and my rig activity used to be a really good way of looking at things, obviously, the efficiencies that producers have, they can get so much more volumes with last rigs. I think this plant is going to fill up really quickly, the Mewbourn 3 Plants; I mentioned in my prepared remarks that we're doing anything and everything in our power to get this plant online faster and make sure that we can fill it up. I think this plant is going to fill up really quickly and that's why we are also working on the O'Connor 2 Plant for 2019 and trying to get that plant online as quickly as possible. The DJ Basin, it doesn't get that much attention compared to some of the other areas in this country but you talked to the producers, it is one of the best producing regions in this country, very low breakeven's. Between ourselves and the producers, I think we have tremendous partnership on making sure that we continue to develop that area. And I'm very confident that we're fulfilling up Mewbourn 3 tremendously quickly.

[Shneur Gershuni:]

Great. Final question; when I looked at your midpoint of NGL guidance for 2017, you sort of gave us a sensitivity out; if I remember the time you were in the mid to high 50s, NGLs are over $0.70 now. At the time, you said, $5 million per $0.01 change; has that sensitivity change given -- I think, you just said 70% hedge for next year? If I do my math correctly, depending on what number you use, it can be anywhere from $65 million to $80 million as a step-up in 2018 versus 2017. Does that sound, right? Is that accurate? Has there been any changes in the sensitivity, or is there more of a sensitivity? I was wondering if you can talk more about it a little bit given the strength of NGLs.

[Sean O'Brien:]

You're right, the midpoint was about $0.58, Shneur, and we're already $0.60 year-to-date and to your point, in the spot, we're a bit higher. In terms of sensitivities, we'll give you the '18 -- you're kind of -- '17 sensitivities, we think are still very reasonable to utilize that you're trying to model the rest of the year. I think we had $5 million on NGL. As you think about '18, as a positive, we are set, we gave you the 70% already for your hedged and with the constructed environment, I would hope to see that continue to climb. But we'll give you that guidance here when we roll out '18. I'll give you the sensitivity guidance there as well. I can tell you that overtime, our sensitivities around, really, all commodities but NGL in particular, has gone down and that's partially because of the growth in our fee-based business and obviously, the more aggressive hedging program that we've put into place. So I don't think your logic is out of place. I can't give you exact numbers for '18 yet, we'll roll that out here in a little bit it. But very good signs that we're 70% fewer hedged going into the year already. And obviously, as we mentioned, pretty constructive commodity environment going into '18.

[Shneur Gershuni:]

Great, thank you very much.

[Operator:]

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

[Jeremy Tonet:]

Good morning. I wanted to pick up on the Mewbourn Plant here. Just wondering, how much sooner could you possibly have it online, and when we get a clear picture on that, what are the gating items here?

[Wouter van Kempen:]

Jeremy, it's Wouter. I'm not going to talk about how much sooner we can get them online. I mean, these are very complex machines, they're a couple of hundred million dollars, it's -- they're not easy, obviously, to build. But I can tell you that we are doing anything and everything in our power from adding additional manpower, trying to accelerate things, to get this plant on as quickly as we can. There is a couple of things that are outside of what we can control; unlike, very going into a winter here in Colorado, if we're seeing a lot of snow, a lot of bad weather in Wells County, that obviously has an impact. If we see a little bit of a warmer winter here in Wells County, that means people can have less wetter days, less snow days, and they continue to make progress. But I can tell you, we're talking to the producers here in the basin every day, and we're all very aligned on trying to get this plant up as quickly as possible.

[Jeremy Tonet:]

That make sense, thanks. In the release, you talked about increased gas marketing settlements contributing to the quarter, I was wondering if you could provide -- if you could quantify that a bit and give us some insight as far as how marketing compared, kind of, quarter-over-quarter?

[Sean O'Brien:]

Yes. So quarter-over-quarter marketing was up, ground number is about $20 million downwards. I will point out, that didn't just come -- when we talk about our M&L business, remember that includes the pipeline, they were up a couple of million dollars quarter-over-quarter, that includes our storage business, gas and NGL storage, those were both up for the quarter. Propane was also included in this segment, it was not huge number on an absolute basis but from a Q3 to Q2 perspective, it was up a couple of million dollars. So you're thinking about that $20 million, you have drivers in our pipeline business; you have drivers in our storage business. I'll mention that cost were down, you know, we had a very good laser focus on cost, getting the company back online; some of that was reflected a couple of million dollars in our NGL business. Now we talk about the marketing business itself; it clearly had a very good quarter. It's not a huge portion of our overall M&L business. If you think about it, it's makes up only about 5% to 10% depending on the year but they had a phenomenal quarter, some of the drivers were -- the movement and basis, this is a business that optimizes our product flow, and it was up considerably; I think it was about $10 million. So about half of that increase you can attribute to that business, the other half you can attribute to the other things that I mentioned. But as you think about modeling our business long-term, it is not a huge portion. Again, great quarter for the business, Q3 versus Q2, but not a big driver long-term, our pipeline business is going to be a much bigger driver.

[Wouter van Kempen:]

And as you think about, Jeremy, about our trading business; it's -- probably the bookends [ph] in that business is $20 million, $25 million in a bad year, $50 million in an unbelievably good year, and normal year is probably sitting around $30 million or so. The trading business is obviously a bit opportunistic and you note, as things in the market are available, that's when people are getting -- are going to be able to make their margin there. And here in the third quarter, I'll give you a good example about what the team was able to do, it's diverting in our marketing business. After Hurricane Harvey, obviously, Bellevue was not good, and prices were not there, you couldn't direct your product to Bellevue. But we were able to put all of our project -- a lot of our project into [indiscernible] with very, very strong prices and optimized, really, our business model and there is very few people in the country who have that capability and that connectivity and that integrated value chain that can do that. We are one of those, and that's why you saw a pretty nice offset out of this business where we made some significant dollars offsetting what we saw on the gathering and processing side at house.

[Jeremy Tonet:]

That's helpful, thanks. So for modeling purposes, are there are other things like besides the Conway/Bellevue spreads that we could monitor to kind of determine how marketing makes money, or any other examples you can share there?

[Wouter van Kempen:]

Yes, go ahead, Sean.

[Sean O'Brien:]

I mean, it's opportunistic. The other thing I think we mentioned in our written remarks or spoken remarks was that we were able to take some product into stores, this is related to the hurricane. Obviously, with some of the downstream bottlenecks, we were able to pull that product out of storage at -- and prices had moved up. So that's another indicator. I mean, obviously, you don't always see that, that was related one specific incident but that also benefited the marketing business.

[Wouter van Kempen:]

I think the key takeaway point there Jeremy is, that the trading business, it's not a huge business, okay? I gave you the bookends [ph] of what does it look in a bad year and what does it look in a stellar year and, kind of, what look -- does it look like on a normalized basis, and the normalized basis is probably what you want to model. And, like, in the end, if you're talking about $30 million on a normalized basis, it is less than 5% of our overall DCF; so it's really not that material.

[Jeremy Tonet:]

Got you, thanks for that. And Sean, I was wondering if you can provide an update and where leverage stood on the agency business at the end of the quarter? And kind of, how you think about next year as far as trying to balance everything as far as 1

[Sean O'Brien:]

Yes. So Jeremy, leverages -- you think about the list and our focus, it's at the top of the list for this company obviously. And you mentioned, there is a lot of way we're going to improve leverage, we have continued to improved leverage. The 4

[Wouter van Kempen:]

And Jeremy, maybe to add to that; we have multiple arrows in the quiver and we've shown that I think over the last couple of years, and like, we've done non-core asset sales close to $0.5 billion; those were very small assets that we sold at mid-teens type of multiples, and then you take that money to invest in 2X to 3X Sand Hills expansions or 5X to 6X or 7X plans in the DJ Basin. And I get obviously, that equations works really, really well, and I think we have continued opportunities to optimize this portfolio. So I think we have a lot of different ways that we can go at this, the team has made unbelievable progress on delivering this company and I can tell you we'll continue to have that front and center; that is the number one thing that we're focused on in the company.

[Sean O'Brien:]

Last thing, Jeremy, because this is so important to us, and it's something that Wouter and I are very proud of for the quarter. If you really think about the results, and we saw a lot of price out [ph] to help these guys a bunch. And yes, the price environment got more constructive in Q3 but when you really look at the improvements in our M&L business, you look at the improvements in our G&P business, the majority -- 70% of the improvement in the G&P business was non-price related, that's just -- us being laser focused on our cost, us continuing to drive reliability and see growth in volumes. So those -- as I think about our leverage metrics, when you're not deploying any capital and you're adding earnings and margin and DCF through just running our assets better and continuing to drive better efficiencies, that can be pretty powerful and you saw that in Q3.

[Jeremy Tonet:]

That's helpful. Thanks for taking my questions.

[Operator:]

Thank you. Our next question comes from the line of Michael Bluhm of Wells Fargo. Your line is open.

[Michael Blum:]

Thank you. I just wanted to stay on the topic of the returns. So on your Slide 8, when you talk about the 5 to 7 times multiples on projects, so understand the NGL expansions are at far better multiples than that but in terms of all the other projects on this page and just generally, is that, kind of, what you expect to earn on each of these discrete project, or is that more of a blended number for the total portfolio?

[Wouter van Kempen:]

No, I think that it is -- Michael, Wouter here. Unlike the bump expansions that we currently do; so the 2017 Sand Hills expansion, that is kind of a 2X multiple but I wish we could do those all day but those are -- unfortunately, other ones are a little bit higher than that. So I think that one is massively good project, it is out at about a 2X multiple but you look at the 2018 Sand Hills expansion, that is somewhere in that 5X to 7X range, the plans are into 5X to 7X range. So really, all of the projects that we're targeting throughout the portfolio are in that 5X to 7x range. Sand Hills 2017 expansion is significantly lower because it's just bumped stations which is relevantly low capital, and you get very significant volume.

[Michael Blum:]

Would that also be true of the gas pipeline projects?

[Wouter van Kempen:]

Yes, it also would be true of the gas pipeline projects, both the projects in the Permian Gulf Coast Express as well as the Cheyenne Connector that we have an option on in the DJ Basin.

[Michael Blum:]

Okay. And then just one follow-up to that; in terms of processing contracts and the returns, you mentioned that on your new processing plants you have some level of MVC or take-or-pay type contract. But I assume these are basically acreage dedications; and I guess the question is, does the MVC get you that return or do you need a certain amount of volume up and above and beyond that to hit those multiple numbers?

[Wouter van Kempen:]

So on the new plants that we're talking about, Mewbourn 3 and O'Connor 2, yes, we do have life-of-lease acreage dedication but on top of that, we have minimum volume commitments, and on top of that, we have minimum margin commitments. So there is multiple layers of protection for us to ensure that we're going to get our returns between the minimum margins, the minimum volumes that we have, and the time periods that we have, we are very comfortable on getting the returns that we need to.

[Michael Blum:]

Great. Thank you very much.

[Operator:]

Thank you. Our next question is from the line of Faisel Khan of Citigroup. Your line is open.

[Faisel Khan:]

Thanks, good morning. Just on the cost structure that you guys -- on the cost that you guys reported in the quarter, you did talk about I think differing some maintenance because I think in the previous call, you guys talked about, sort of, going through a decent maintenance cycle in 3Q. It looks like that got deferred because of the hurricane. So have you just, kind of, just -- so I understand what's going on here. Is this the cost structure introduced going forward into the fourth quarter or is there something else that I need to take into account?

[Sean O'Brien:]

Yes. So Faisel, I think what we're thinking through is, Q1 was relatively light with our maintenance capital. Our Q2 is much stronger, and we thought between Q2 and Q3 is when we're doing a lot of our turnarounds, a lot of our NGL overhauls and things of that nature, which affect maintenance capital. Harvey did delay that a little bit, it wasn't huge but it was couple of million dollars, but Harvey did have some impact, that's why we felt we wanted to mention that we had to defer some stuff into Q4. But I would see Q4 similar to Q3 levels, maybe slightly higher, but somewhere in that range, as we catch up and just get on a normal cycle. So I think we spent $20 million in Q3, $29 million in Q2.

[Faisel Khan:]

Okay. Got it, makes sense. And just going back to the capital spends on the expansion, on the processing plants at $395 million and $350 million, I just want to make sure that I have that right. So, is it right to say that half the plant is basically the processing and half the plant is the gathering facilities? Is that the right way to look at it?

[Wouter van Kempen:]

Yes, that's a good rule of thumb. Yes, it's not that we're spending $395 million just to put a $200 million a day [indiscernible]. We have very significant infrastructure that we're putting into the fields like extensions in the Grand Parkway systems, very large turbine systems in the field and things alike [ph]. So yes, about 50-50 is a good way of looking at it.

[Faisel Khan:]

Okay. And then just looking at the volumes coming in across the different regions for the quarter, throughout the well had volumes. So in the Permian, it looks like, volumes have been sort of trending down since the -- for a year now. So when -- at what point, does this volume sort of turn around? So I know that none of guys are growing because it's clear where the spend is going. And then we're confident and it looks like volumes are stabilized and are you still seeing decline in the south, I guess, it's unclear if that's a function of the hurricane or not? So just trying to understand, where we see these volumes, sort of, hit bottom.

[Sean O'Brien:]

So to hit a couple of your direct; you know, when we normalized, and I think that's part of the equation here, Faisel. When we normalized the Permian, the Permian did see, because of the downstream, some of the constraints around the hurricane we had to obviously limit some of the volumes out of the Permian in particular, and we did; it temporary, it wasn't -- it didn't have huge impacts but it did affect the volumes. So when we normalized for that, it was pretty flat overall to Q2. So not down, the Permian was relatively flat. And in the areas where we are -- where we have invested money, you see strong volumes. There are still some areas outside of the Delaware that are declining but as a whole, we're relatively flat in the Permian and hopefully, we'll see that trend continue up, as we move into the next year. On the Eagle Ford, we said a few things around normalizing for Harvey, which Eagle Ford did get impacted quite a bit, obviously being right there. But we would have been up actually Q3 versus Q2. From the lows, if you think about the Eagle Ford as a whole, we're up over 100 a day when you think about the low that we hit in that area versus where we're trending right now, we're over 100 a day higher; that's pretty impressive. We see that holding and continuing as we close out the year and move on. So a little bit of noise from the hurricane in Q3, but we actually like the trends we're seeing in the Permian and definitely, the Eagle Ford.

[Wouter van Kempen:]

And Faisel, let me add to that, it's probably one of the very large volume driver is our NGL business, unlike our marketing and logistics business; Sand Hills volumes are significantly. And I want to make sure that I've remind people, this is not a gathering and processing company only, this is a highly integrated its full value chain company that we have really transformed this company over the last couple of years. 40% of the margins and the earnings out of this company are coming out of that marketing and logistics business. So the volumes there continue to be very strong and continue to grow significantly.

[Faisel Khan:]

Sure, I definitely understand. I'm just trying to understand if the trend is, sort of -- where we see the trends in these volumes. It sounds like the trend is up; so that's all I'm trying to get at.

[Wouter van Kempen:]

Yes. And I think that's a good way of saying it. I think trend is up and there is very strong operating leverage in this portfolio, and that's a good thing.

[Faisel Khan:]

Thanks.

[Operator:]

Thank you. [Operator Instructions] Our next question is from the line of Chris Sighinolfi of Jefferies. Your line is open.

[Christopher Sighinolfi:]

Good morning. Thanks for taking my questions. I guess, if I could begin with those; I was hoping to refine my understanding of the G&P segment disclosure on Page 5 or Slide 5. You quantified around $21 million of benefit from 2Q due to margin and volume benefits; if I look at the volume numbers put on Slide 11, they look like they are basically flat quarter-on-quarter. So I'm assuming most of this is driven by the composition of those volumes into higher margin areas? Is that right interpretation or did you also have an advancement in the fee portion? I know that's been our focus in the past quarters raising the fee [ph].

[Wouter van Kempen:]

Let me give you a couple because there is a number of importance here. And I want to take you back to what we have been trying to work on around our DCP 2020 strategy for multiple years. It was about re-contracting, so you're seeing that benefit in here. It was about some volumes, you're seeing that benefit in here. Obviously, it was about continue to reduce our costs for the company, so you're seeing that benefit in here. You're talking about reliability, there is a lot of questions about maintenance CapEx over the last couple of years, so you guys have gotten a lot lower on maintenance CapEx. While it was deliberate, why? Because we're trying to kind of be much smarter about where we do our maintenance, how we do our maintenance, and where it has resulted in which I think is a great thing. Over the last couple of years we've significantly reduced our overall maintenance spending, but our reliability is actually up very significantly. So that's kind of -- you get a 2X benefit because you don't spend the money and you're getting better reliability, better recoveries and that fall straight to the bottom line. So that's all about the operating leverage that we've been talking about quite a lot and you really saw that come here into the third quarter.

[Sean O'Brien:]

And Chris, maybe just to give you a little color, we've talked about regions that drove that increase on that Slide on the volumes and margin. But a lot of [indiscernible], so you talked about higher price, that was an element of it, we saw volume increases in a very high -- a solid margin area. But we also mentioned the Midcontinent, and to Wouter's point, all those things Wouter just mentioned around better efficiencies, better reliability, better recoveries, which are not par volume issues, there are more dollar per MCF issues; that was a lot of benefit we saw from a lot of things that we're working on in areas like the Midcontinent. And then of course, you had the south with just improving volumes in the Eagle Ford that were driving that as well.

[Christopher Sighinolfi:]

Okay, that's very helpful. I guess, maybe a sub-question to that. Wouter, you had mentioned the presence of minimum margin, minimum volume protections in your earlier dialogue with Mike Bluhm. I'm just wondering, if there was any influence of those mechanisms on the margin we see in G&P in the quarter? I guess what I'm trying to hear out is, if I see volume growth here, are there sort of ceilings that you need to be pierced on any of those before we see incremental margin channel?

[Wouter van Kempen:]

No, Chris. Unlike, and those minimum margins and minimum volumes really come to bear on the next $400 million of capacity that we're putting in place with Mewbourn 3 and O'Connor 2. So those are downside protections on those projects, but the upside is wide open.

[Christopher Sighinolfi:]

Okay. Switching gears, if I -- just two more questions, if I could, they are both related to the hedging disclosure. I saw -- I guess first, I saw that the estimate of percentage hedge by products was removed from prior presentations. I'm just wondering if that's something you're willing to provide or if it's in the queue, I can hunt for it there? Just trying to calibrate to -- from the aggregate percentage number you offered Sean down to on a product.

[Sean O'Brien:]

Yes. So Chris, we took them off but the numbers that I think we gave them in Q2, those numbers didn't change that much for '17, and we'll be back with you on '18. I think what we want to do obviously, what -- as you can tell, we're putting -- we put the 70% number out there for '18. We continue -- the environment is pretty strong, so we didn't want to get a preliminary number out yet for '18 until we give our guidance a year later. So '17 numbers, we did take them off but you can use the numbers from Q2, they are materially right in-line. And then more to come on those hedging percentages in '18 as we roll out guidance.

[Christopher Sighinolfi:]

Okay. And then, I guess one follow-up question, on the 2018 hedge step-up, it looks like about 5,000 barrels a day, pricing came down just about $0.01 it looks like. So I'm wondering, is that mostly ethane hedges you put there or was it earlier in the quarter? Was it steepened [ph] going to next year; any help in just to seeing what was added there would be helpful.

[Sean O'Brien:]

What we predominantly have been able to add in '18 is actually -- and around that slide has been that butane and propane, and a little bit of crude. Crude -- the NGL curves are unfortunately still quite a bit backward dated; I'd love to be able to get the prices next year that we're seeing in the spots. Our GAAP is backward dated, crude is relatively -- we're seeing some benefits in crude, it was relatively flat maybe and given at some opportunities as that has moved up. But it's really, ethane -- we haven't seen that much, it's quite a [indiscernible] Chris, and we haven't seen a lot of opportunities to get a lot of ethane on, that's something we'll look real hard at the rest of the year. And obviously, continuing to put on additional butane and propane.

[Christopher Sighinolfi:]

Okay. Thanks a lot for taking my questions. I appreciate it.

[Operator:]

Thank you. And our next question is from the line of Selman Akyol of Stifel. Your line is open.

[Selman Akyol:]

Thank you, two quick ones. In terms of Shining Connector [ph], and your option there; can you talk about when you will decide and how long you have etcetera?

[Wouter van Kempen:]

Yes. Selman, on the Shining Connector [ph], basically what we need to do is we need to go through ferc approval, that's probably going to take 12-plus months. And basically, our option to decide, if we want to be an equity owner in the project is kind of commensurate with when we get the ferc approval. So we have time for that.

[Selman Akyol:]

Got you. And then, can you just remind us in terms of just ethane recovery scenario, how much that could impact you?

[Sean O'Brien:]

With ethane, I think we've given previously, and I'll point out that we don't have anything baked in, obviously, to our forecast. But we have, in the past, we talked about $75 million to $100 million of uplift, that includes, obviously a big uplift on transporting the barrels on things like Sand Hills and Southern Hills, and so forth. We still have ethane uplift, you're still -- you're seeing slight movements, meaning decreasing a little more with less rejection, that's in our numbers, it's not substantial at this point; so we're getting those barrels today. I think on a positive side, that analysis and those discussions happened very early in the year. We've been able to -- threw a lot of the growth projects that we've had outside of rejection, increased the volumes on Sand and Southern Hills, obviously just via growth. I think if I had to put a number out there for next year or for going forward on what's the potential upside; I think we've been using around $40 million. And that's not because it's diminished, that's because we're getting more, we're filling up our pipelines via other methods. So there is still definitely upside, Wouter always talked about the concentric circles, we think our pipelines and our assets are much closer to the market centers that gives us a big advantage if and when we go back into recovery. But we've been able to maximize some of that value just through volume growth in areas like the Permian. So if I had to give a number, I'd say somewhere in that $40 million range based on what we know today. The additional value that we gave could still be there but it would require us to invest some capital to expand Sand and Southern Hills more.

[Selman Akyol:]

All right, thank you very much.

[Operator:]

Thank you. And that does conclude our Q&A session for today. I'd like to turn the conference back over to Wouter van Kempen for closing remarks.

[Wouter van Kempen:]

Thank you, Amanda. And first, I want to thank every employee at DCP Midstream for really, really great quarter, great performance, safe performance and thanks for that. For everyone on the phone today, I want to thank you for joining us. If you have any follow-up question, obviously, between myself, Sean, Irene and Andrea, are available for any discussions. So have a terrific day. Thanks.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.