DCP Midstream, LP
Q4 2017 Earnings Call Transcript

Published: 14 Feb 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 DCP Midstream Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] And as a reminder, today's program is being recorded. I would now like to introduce your host for today's conference, Irene Lofland, Vice President of Investor Relations. Please go ahead.

[Irene Lofland:]

Thank you, Jonathan. Good morning, and welcome to DCP Midstream's fourth 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 this morning. We said 2017 would be successful if we delivered on our financial targets, advanced our growth program and continue to transform DCP. With that, we demonstrated strong execution on all of our commitments and advanced the DCP 2020 strategy, which is evident in our fourth quarter and full year results. We delivered 2017 DCF above the midpoint of our guidance range, driven by continued cost efficiencies, improvements in our base business, actual reliability and on top of that, the best safety performance in DCP's history. We strengthened our balance sheet de-levering by almost a full turn, putting us well within our debt-to-EBITDA target range of three to four times and ending the year with distribution coverage above one times. And while we have continued protection, with an idea of get back, we didn't need a penny of it. We also advanced our growth program with a strategic and disciplined focus on evolving our integrated value chain in our key regions. In the Permian, our Sand Hills expansion just 365,000 barrels per days complete and the next phase is proceeding on time. And we've expanded our logistics value chain and made the final investment decision to proceed with the Gulf Coast Express residue natural gas pipeline in the Permian. I am excited that we've accelerated our Mewbourn 3 plant through the third quarter of 2018 and we continue to do everything we can to get it running even sooner. We've also ordered loan lead equipment and are working on permits for our O'Connor 2 plant, which is on track for the middle of 2019. These projects give solid line of sight to growing margins in the second half of this year. Here we spend greater and enjoyed DCP 2020 journey and we're well ahead of schedule in transforming our culture, our operations and our financial strategy. Towards the end of this presentation, I'm excited to share with you what we've been working on over the past year, to what be call DCP 2.0, which is all about transforming our people, processes and technology and differentiating DCP competitively in our industry and it has already contributed to our 2017 bottom line results. In summary, if you put all of our 2017 results together, this is what promises made, promises kept looks like. Now Sean will cover our fourth quarter highlights and 2018 guidance.

[Sean O'Brien:]

Thanks, Wouter and good morning. I'm very excited that we delivered another impressive quarter, finishing the year very strong, above the midpoint of our DCF guidance range and I look forward this morning to sharing our 2018 guidance. First, for the fourth quarter and full year of 2017, we delivered $176 million and $643 million respectively of distributable cash flow, resulting in distribution and coverage ratio of 1.14 times for the fourth quarter and 1.04 times for the year and as Wouter just stated, we did not require any IDR giveback. We more than offset the impact of lower production volumes from our discovery joint venture with improved performance in our base business, record volumes in the DJ and on our Sand Hills pipeline. Stronger commodity prices and investment in our DCP 2.0 digital transformation, which is driving higher margins, lower cost and improved reliability. In addition, to our cost trending down, we reduced spend on maintenance capital to slightly below our guidance range and we did this while achieving our highest performance in environmental health and safety results ever and running our plants better and more reliably, something that the entire DCP team is very proud of. On the next slide, I'll turn to how we've executed on our financial priorities. Our first financial priority is to strengthen our balance sheet. In the fourth quarter, we achieved a bank leverage ratio of 3.7 times, down almost a full turn and well within our target range of three to four times. This was driven by our strong results and successful execution of our financing plan. Our distributable cash flow trended higher through the year resulting in coverage above one times without any IDR giveback and while maintaining our $3.12 per unit distribution. I'll remind you that in our 12-year history, we've never cut our distribution. That's an incredible track record. We had ample liquidity of about $1.6 billion, which includes over $150 million of cash on hand at the end of the year and for the fourth year in a row, we're not forecasting the need for common equity in 2018. Our business model transformation, which is maximizing operating leverage and improving our underline business, supports our long-term operational and financial targets, putting us on the pathway back to investment grade. Slide 8 outlines of 2018 guidance and underlying assumptions, highlighting how continued execution of our strategy is driving results. Our adjusted EBITDA ranges $1.045 billion to $1.135 billion and our DCF ranges $600 million to $670 million resulting in distribution coverage of one times or greater and we are targeting leverage below four times. Our maintenance capital range is $100 million to $120 million and our growth capital range is $650 million to $750 million. This outlook assumes the following; higher NGL volumes on Sand Hills and higher GMP volumes in our key regions such as the DJ, Eagle Ford, the SCOOP and the Northern Delaware. In a continued trend of lower cost down for the fourth year in a row, while absorbing growth and inflation, coupled with stronger asset performance driven by our DCP 2.0 digital transformation investment and again no common equity issuances. And we do not assume any benefit from ethane recovery, which will provide upside to our forecast. Also included in our guidance are lower discovery earnings and distributions compared to 2017, which I'll expand upon in a moment. Our 2018 gross margin is 75% fee-based and hedged approaching our goal of 80%. We've also provided our commodity sensitivities on this slide, which for the fifth year in a row continue to trend lower as we invest in fee-based growth and hedges. Our philosophy is constant. We're controlling what we can control and establishing goals independent of commodity prices. We keep our promises, deliver on our commitments and have a proven track record of exceeding expectations. With that said, on the next slide, I'll provide some additional drivers that could take us to the high end or exceed our range. Slide 9 provide a few key drivers, which take us from our 2017 results to our 2018 DCF guidance midpoint and to the right are potential upside contributions, which have not been included in our forecast. First, I'd like to provide more color around our discovery joint venture. We expect a $60 million to $70 million lower impact to our 2018 earnings and distributions as compared to 2017. You may recall last quarter, we discussed the expectation of a $30 million to $40 million decrease associated with significant buying declines from two offshore wells. We were disappointed that recently in Discovery earnings and distributions may be further impacted by up to $30 million from demand charges related to these wells that are being disputed by certain producers. Discovery is actively working on a resolution to this matter. However, we felt it was prudent to adjust our forecasts to reflect the total potential impact. We and our joint venture partner will continue to work opportunities to increase discovery volumes and margins. We're also forecasting higher 2018 financing costs associated with our 7.38% preferred equity issuance, which paid down lower interest debt. We are offsetting these declines with more growth coming online in the second half of the year, continued optimization and improvements in our base business and benefits from our DCP 2.0 digital transformation. To provide a little context into the shape of our 2018 guidance, the second half is forecasted to be stronger than the first half with new growth coming online and the first half is forecasted to be lower due to higher maintenance and operating costs from planned reliability spend in the early summer months. Now let's talk about a few items that have significant upside potential, which could point us to the high end or above our guidance range. Starting with commodities, if you take early 2018 spot prices and apply our sensitivities to the midpoint of our DCF guidance range, that would equate to approximately $50 million of incremental DCF, putting you at around $685 million, well above our range. We have provided our commodity price sensitivities, so you can apply them to your own outlook and while 75% of our margin is fee-based and hedged, we still have the potential for significant upside from commodity prices. There is also potential for another $30 million to $40 million from ethane recovery. We could add fee-based volumes to our available NGL pipeline capacity with little capital required. In addition, our results could benefit from higher overall GMP volumes and further improved operational efficiency versus our forecast and as Wouter will talk more about, we plan to accelerate our DCP 2.0 transformation, which is already driving higher margins and lower costs. Taking off to 2018 together, while we are disappointed in the recent Discovery news, we will absorb these impacts and are confident in our range with significant upside potential. Now I want to hand it back over to Wouter.

[Wouter van Kempen:]

Thanks Sean. On Slide 10, I'll quickly touch on our strategic growth outlook for our in-flight projects and our pipeline of future opportunities. We remain focused on our disciplined approach to prioritizing our growth capital to further extend our integrated value chain with a view to projects that are lower risk with strong returns and line of sight to fast volume ramp up. Within our logistic segment, our Sand Hills expansion to 365,000 barrels per day is complete and is ramping quickly and on its heals is to further expansion to 450,000 barrels per day in the second half of this year and we're further expanding our integrated value chain with the 1.98 BCF per day Gulf Coast Express residue gas Takeaway pipeline in the Permian, which was upsized due to strong market demand. We reached a final investment decision in December to proceed with the project and last week we announced the binding open season for the remaining available 220 million a day of capacity. Construction activities are expected to commence this quarter and we're forecasting approximately one third of the capital to be spend in 2018 and the remainder in 2019. In our GMP segment, I'm pleased to share up these accelerated timeline of our Mewbourn 3 plant in the DJ through the third quarter. We're doing everything we can to further expedite the in-service date in response to producer demand for more capacity and we're confident that expected production will fill the plant quickly. On a parallel course, we're also working to advance our 2019 O'Connor 2 plant. Time and time again, quarter-after-quarter, I have shared that the DJ is a basin with tremendous ongoing potential and it had some, if not the best economics in this country and DCP has an unparalleled position in the DJ and it will remain one of our cornerstones. Looking outward, we have a very significant portfolio of growth opportunities to add to our integrated value chain, including further expansion of Sand Hills, NGL and gas takeaway in the DJ Basin and anticipated additional processing capacity in key regions. On Slide 11, you can see the outcome of our disciplined capital strategy of expanding and growing our value chain, making DCP a fully integrated company. Looking back, you can see that our logistics and marketing segment has grown from 10% in 2011 to close to half of adjusted EBITDA in 2018. That's an incredible evolution in a short time. The other benefit to this and as Sean mentioned earlier, is a significant shift in our fee-based earnings profile. Now it's 60%. We've made tremendous strides in resetting our cost base through our DCP 2020 strategic focus on operational excellence. We're often asked, how can we continue to take out cost and drive more efficiencies, even beyond what we've already been able to deliver. So, let's go to the next slide for that answer. A few years ago, we embarked on a significant growth program. We built Sand in Sand Hills, partner in full range and Texas Express and we build several new plants in the Permian and the DJ. In aggregate, our assets grew by 60% since 2011. We became a fully integrated logistics company creating the platform for us to further extend our value chain. The energy downturn in 2014 was a wakeup call for the industry and we responded with our DCP 2020 strategic focus on operational excellence. Our asset base at that time had reached $12 billion and our cost were $1.1 billion. And I think you know the story pretty well. It's been one that we've been sharing for over two years. With our DCP 2020 cultural framework, we reduced cost by about 20% while now running a $13 billion asset portfolio, all while operating more reliably and safely, reducing our maintenance capital spend and delivering higher margins. That's what our incredible focus on incremental improvement has delivered and I'm very proud of our entire team. Hasn’t always been easy and it speaks volumes about the commitment of our people. So, the next logical question is, where do we take this now? How can we continue on this path? The simple answer is, we have to put our strategy into an even higher gear and that's what our DCP 2.0 focus is all about. So, let' s move to Slide 14, earlier I shared one of our priorities, DCP 2.0, which is all about transforming people, processes and technology, and differentiating DCP competitively in our industry. We've shown already how it has contributed to our 2017 bottom line results and to our expectations in our 2018 guidance. This is a story that we've been eager to tell and that we believe will truly be a game changer. Early in our DCP 2020 journey, we focused on incremental improvements to cost out the business, renegotiated contracts, focus on operational excellence, and that's created a sound foundation for us to undertake our next chapter; transformational change to digitize our operations and corporate functions, to deliver rapid solutions resulting in higher margins, lower cost and greater reliability. Make no mistake of viewing this as merely implementing sleek apps and putting plans screens up in a control room. This is all about disrupting the industry to change how we deliver Midstream services more competitively and reliably. And to do that, we started by looking outside the Midstream space. The gathering and processing industry has remained relatively unchanged in over decades. So, we turned to other industries that have already been disrupted and have reinvented themselves. Financial services, high-tech, tourism, transportation. We’ve learned from that experiences and are converting those learnings to actions and results. From concept to present, in less than 18 months, we evolved an idea into a function already delivering payback equal to its investment in one year. Now let's turn to what DCP 2.0 looks like in action. I just mentioned, we stood up an entire function in just over one year and this is not an average corporate IT shop. It may come to mind when you think about technology, and that's because the transformation that we are undertaking is much boarder. It’s about people, process and technology. And while complex, you can make an argument that technology is actually the easy part of this. So, let's start with people. We hired 50 plus innovators in our DCP 2.0 organization that's come from all walks of life beyond the cubicle walls of the traditional energy industry. Silicon Valley veterans, design thinkers, app developers, scrum masters, a cadre of diverse talents and skills that are challenging us to think differently about our business to drive rapid innovation and adoption. First out of the gate, we stood up and integrated collaboration center, which we call the ICC, in less than seven months and this is no standard control room, simply monitoring operational data. Instead, our ICC acts like a nucleus of several data sources, find together data from SCADA, from engineering, over 8,000 different contracts, financial systems, all of our real time prices from gas, crude and NGLs. And inside the ICC, experience plant operators monitor and advise our plants on key performance indicators and daily theoretical margins to optimize our integrated plant system driving greater profitability and better reliability. And several time zones and continents away, we are supported by PHDs in Mumbai, helping us tweak plant operations to get optimal recoveries from the gas stream and make more money. Think about it, if we can get $2500 more each day out of each of our 60 plants, than its about $50 million of annual earnings. And already we have 30 plants connected with the remaining coming on by the end of 2018. That's the definition of asset optimization and with the operations of the future looks like in the making. Yet there's more behind DCP 2.0 that is driving innovation across the value chain of operations, commercial and corporate functions. We stood up a group called Energy Lab, which creates digital solutions such as apps and customer dashboards. It applies design thinking and agile methodology to streamline and automate work, eliminating wasteful pain points identified by our employees and customers. And just one example, we delivered an app solution for our operations employees that reduced multiple hours of manual work down to seconds, resulting in about 10,000 hours of time savings annually. Extrapolate that result to all the many other digital solutions that have been deployed to our operations team, and you can appreciate that thousands of hours of cost savings, streamlined compliance and improved safety and operational performance. Similarly, our commercial and back office functions are developing automation, artificial intelligence and other digital tools that can optimize our work processes, eliminating lower valued work and improving job satisfaction. Our DCP 2.0 investment has been an absolute game changer for us. We've been on a fast track of transformation, a productive one, disruptive one and a very exciting one, and we still see a lot of opportunities ahead that will continue to transform our company and deliver value. On Slide 16, I will draw directly for you how this translates to the bottom line. In 2017, we invested about $20 million to $25 million in DCP 2.0 and we saw a benefit of the same amount from lower cost and higher margins. That is a one-year payback from a very significant investment, that is fairly unheard of. In 2018, we're forecasting another $20 million of investment with an expected benefit of about $40 million associated with lower cost and higher margins from running our business more reliably and smarter, that is $20 million of incremental EBITDA this year with anticipated future upside as we continue to scale this platform throughout the business. We look forward to sharing more as we accelerate this business transformation and continue to deliver results. We'll keep you posted on our progress and we'll be providing more details on our website soon. So, let me sum it all up for you on the next slide. We delivered on our commitments in 2017 with strong results, lower bank leverage and distribution coverage above one times. I'm proud of our strong operational, safety, reliability track record. Our assets are performing well and we saw record volumes in key areas. We solidified our growth program with strong projects in the DJ and Permian basins that expand our integrated value chain. And you can see our excitement about how accelerating our DCP 2.0 transformation can drive additional value and is transforming and differentiating DCP in the midstream space. Lastly, I'm confident in our track record and executing and delivering on our commitments and our 2018 guidance, a significant upside potential. With that, Jonathan please open the line for questions.

[Operator:]

[Operator Instruction] Our first question comes from the line of Jeremy Tonet from JPMorgan. Your question please.

[Jeremy Tonet:]

Good morning. I want to touch base a little bit on -- more on DCP 2.0 here and just this cost savings. It seems like G&A stepped up a little bit during this quarter. Was that related to this initiative? Can we expect that to come back down to where it was in prior levels?

[Sean O'Brien:]

G&A did step up, G&A is typically high Jeremey in Q4. If you look at Q4 versus Q4, we're down quite a bit around $40 million 2016 to 2017 and sum up the whole company there. It was not driven by this investment. This has been a pretty -- it was an early investment in technology that we did early, but it's more linear now as we go forward. So, 2.0 not driving that spike. You just in the corporate functions at the end of the year, you tend to have some of your accruals and some timing there. That's been consistent over the years, but I would point you to the fact that costs are down for the third year in a row. We are projecting costs to be down yet again in '18 and Q4 was down considerably year-over-year. So not driven by 2.0.

[Jeremy Tonet:]

Got you. That's helpful. Just turning to ethane real quick, I was just wondering what you -- if you could share with us your thoughts as far as if you could quantify that type of upside a bit more, as far as what that means for your systems be it direct price exposure or if this is more volume is going through your systems and how you think that could materialize over the course of the year?

[Sean O'Brien:]

So, bottom line, I can start and Wouter can add on around outlook. But we continue not to put that in there, obviously which we highlighted as potential upside -- significant potential upside. Really where most of that translates through is incremental, you look at that, it's like assets like Southern Hills, even ramping Sand Hills up quicker and then if we were to continue to see improvements, we could even move to more expansion. So, the primary benefits in terms of the dollars are coming from pipeline revenues. Obviously, there's more frac revenues and some marketing at the bottom end, but the majority of the earnings that you're seeing there would come through the fact that we are now running more volumes through our major pipelines.

[Jeremy Tonet:]

Got you. Thanks for that. And then just going to Discovery, I was wondering if you could expand a bit more there as far as the longer-term outlook. How long would it take to get back to levels that we've seen in 2016 or before or anything else that you can, any additional color you can provide on this dispute? I guess.

[Sean O'Brien:]

Not a lot. I can reiterate what we said obviously on the Q3 call last year, we talked about the volume impacts. Now if you think about the volume impacts obviously they came off very quickly. That was the $30 million to $40 million we referenced. We are looking, so that's something as you look into the future. We with our partner are looking at ways. It's a very good area. So, I do think the volume outlook in the long run can improve. But the reality is, it takes time to grow and to get those investments in there to grow those volumes. So, as you think in the future, we're doing everything we can. I think we alluded to that to continue to bring the volumes back. Regarding the dispute, I can't say much other than obviously the demand payment that was the new news that we were very disappointed in that happened this year that came across to us. But that is, legal proceeding can't say much there. I would tell you that as you went further in the future in terms of those revenue streams they diminished. Just to give you an idea. So, the impact in '18 wasn't going to be the same impact we would have seen in the future. That's good news that those demand payments were coming down in the future.

[Jeremy Tonet:]

Great. I'll stop there. Thanks for taking my question.

[Sean O'Brien:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Shneur Gershuni from UBS. Your question please.

[Shneur Gershuni:]

Hi, good morning guys. Just wanted to actually follow up on that Discovery comments for a second. So, without getting into the whole legal aspect, the $30 million that you're revising the expectation down by, does that basically mean you're expecting zero demand charges - demand payments from them this year or could that technically be revised lower at some point? I'm just trying to gauge where we're at relatively speaking?

[Sean O'Brien:]

Shneur, it's Sean. We said earlier we felt it prudent to bake that in. We baked in pretty much down to zero demand payment. So, as you're thinking about, is there another shoe to fall in 2018, we've taken out, between the volume declines, which were pretty significant tied to the couple wells we mentioned and the demand payment going away, I think we have baked in pretty much the downside.

[Wouter van Kempen:]

I think the way to look at it Shneur is the $30 million going through the legal proceedings right now and depending on how quickly the court system works and what direction we're going to end up, some or all of it could come back our way, but I believe and I think we believe it is prudent to say what that is not going to happen in 2018 and therefore think it will all up.

[Shneur Gershuni:]

Okay. That's just what I wanted to clarify. So, no further shoe to drop and if anything that gets resolved earlier in theory it could actually improve?

[Wouter van Kempen:]

You're correct. That is derived by stating it.

[Shneur Gershuni:]

Okay. Perfect. Secondly, before getting to DCP 2.0, just wanted to talk about NGL takeaway volumes in the DJ in particular, it feels to me like you're holding a lot of cards and a lot of people are trying to do a lot of stuff, whether there's a white cliff conversion, whether it's 1 Oak's announcements and so forth, front range, trying to understand where you're at and what you're doing to ensure that DCP not only finds an evacuation path, but also where shareholders in DCP benefit as well to and which direction seems most possible to you?

[Wouter van Kempen:]

Yeah, I think Shneur, I think they're saying it really well. Not only do we hold a lot of cards, I think we actually hold a lot of aces. So, the way you should look at this is there is about five different alternatives in the marketplace. We are a part owner and front range in Texas Express. Front range in Texas Express can be easily expanded. Think about like Sand Hills expansion that we just put in service, very low multiples. So very attractive to do. So, I would say that's pretty likely that something like that is going to happen. Then there is four other alternatives I think that you have in the market. You mentioned a couple of them, there is two conversion alternatives in the market. There is one new pipeline that's being announced in the market and then we can decide that hey, maybe we can completely control our own destiny and we expand Southern Hills from the national helium plant in Kansas and expand that kind of a short way into Colorado. So, four different alternatives, five different alternatives, one range in Texas Express which is very low multiple expansion to do that. And then the other four alternatives all go to Southern Hills and I think that is really important. Southern Hills has about 60,000 a day of capacity on it and we really would like to fill that up between Mewbourn 3, let's call it 20,000 barrels a day O'Connor 2 that's 20,000 plus barrels a day that got to come online in the next 12 to 15 months. That's 40,000 barrels a day that are dedicated. If we can find those in Southern Health and pay ourselves that obviously would be very attractive. So, I think you're right. There's a lot of great cards that we're holding and lot of opportunities for us. What's really important ample NGL takeaway for our producer customers in the DJ Basin and I can guarantee that, that will happen because most likely multiple things will happen for NGL Takeaway. That's important for our producers in the DJ Basin. There will be an ample NGL takeaway. Also think about other things that we're doing in the DJ Basin other than building processing capacity, we're also working on the Cheyenne Connector, which will give us ample residue gas takeaway. So, I think things are looking tremendously good in the DJ Basin. We have a very strong position there. We have life of lease contracts; great strategic position and I think we're doing great there.

[Shneur Gershuni:]

Okay. Great. And just the turn over to DCP 2.0, I understand that you're bringing technology to an old-world process. I guess first off just wanted to understand how you got there? Did you bring in some consultant that told you to do it or is it something that was sort of developed organically and then you went out and found the talent? And then secondly, you sort of talked about the -- you gave the example of $2500 a day per plant and half are on and it seems like you have -- you get the incremental benefit this year. Are there other processes that you haven't even scratched the surface yet that this could be a multi-year type of benefit? And should we see the benefit on not necessarily G&A, but really kind of on productivity or on OpEx and does it also help explain why maintenance has been lower or are you doing things differently and so forth? You seem to be under trend on maintenance. Wondering if you can address that? I know there is like seven different questions…

[Wouter van Kempen:]

Yeah Shneur, that's a lot of different questions. I am going to try to hit all of them in some way, shape or form. To your first question, how did we come to this? As you know and I know there is probably now, I haven't been in this industry for decades. I've worked in other industries. I have seen others industries change and adapt to new technology much, much quicker than the gathering and processing industry, which is predominantly an industry where I think there is unbelievable opportunity to modernize, to digitize, to get better processes and to get rid of manual labor. So, it really started a couple of years ago with me and the rest of my team sitting and thinking through and say hey why can't we be like all of these other industries out to completely utilize technology to disrupt what we're doing and how we're doing it. With that said, then what we did is say, we hired a lot of different people. I told you that we have people on the payroll model, I did not even notice those job existed and very, very different people all out of different parts of the industry, logistics people, retail people, how to think how other industries do this. We hired a consultant to help us out with this. So, it was really a multitude of different people, but internally thinking about what can we take from other businesses in the industries and apply it to Midstream space to make us more competitive, to make us faster, more agile. And I think if you think about your question about so where are we? I think we're still pretty early on. There is a tremendous amount of opportunity that is left. This is like safety one of those journeys where you probably never get to the end, but we're working on trying to get a big cultural change, thinking agile, thinking in people's DNA. In the end how should you look at what we're trying to get at. Efficiencies, that is one of them. We're going to be for the fourth year in a row, we're going to have lower cost even though we're now operating at $5 billion higher asset base and I don't think 2018 is going to be the last year. Higher margins and that is really important. People tend to go quickly to productivity, efficiency, cost. Higher margins, there is a lot and lot of money to be made here. I spoke our integrated collaboration center. It's all about plant optimization. 24/7 kind of how do you get the last penny out of this and this is a convergence and integration of all data sources that we have, which millions and millions of data points. Its planned data. It's engineering data. Its financial data. It's 8,000 different contracts. It's all the pieces of the NGL barrel. It's gas, its crude, taking all of those together, combine that with PHD's that we have set in Mumbai who are looking and say how can you tweak and get just another basis point of productivity out of your plant? You take that all together and I made the example, $2500 per plant and 60 processing plant, that's $50 million to the bottom line. If we think about investing at 7X, that's $350 million of capital that you wouldn't have to spend and you throw it straight to the bottom line. So, there is unbelievable opportunity around this. This is about speed. This is about agility. This is about getting better reliability, better safety, better satisfaction for our customers. So, it is truly, truly exciting and I think there is a lot of upside still left. But it is important and I mentioned this in my remarks. Lot of people think about technology great. Let me go higher and throw out a system or something else. That is not what this is about. This is about people first, it's about process and then it's about technology. And as I mentioned earlier, the technology base is probably the easiest piece of this. The people piece and the process piece is tremendously difficult.

[Shneur Gershuni:]

And then finally on the maintenance, is that something that you've been trending lower on is it DCP 2.0 is part of the reason why maintenance has been lower for the last couple of years?

[Wouter van Kempen:]

I think it's, sorry I forgot, I had six out of seven. That's also one what I forgot. Again, people, process, technology. We have changed so much in a way in our process of how we go about maintaining or asset using big data to figure out when do we need to do things. Historically, people are like hey, we should do certain stuff every year, every two years, every three years. Now we have big data telling us hey, when we need to do that? When this corrosion chemicals need to go into a pipeline? When do I truly need to overhaul things? So, it's another combination of great work by our operations team really focused and reducing that maintenance capital. And what's important here is that, we obviously are doing certain things right. We're not just pushing stuff back and not spending money because our reliability is better than it's ever been and our safety, emissions and our performance is better than it's ever been. So, I think things work hand and glove. It's a combination of what our people are doing? What we're asking them, the processes that we're changing and the technology that we put on top.

[Sean O'Brien:]

And Shneur, I just want to add one more thing on maintenance, obviously we're adding a lot of new assets to the equation right, they're less maintenance intensive. I want to give, I think Wouter was alluding to it, we got to give the operations teams a lot of credit. The prioritization I've seen in the last few years, the focus on what they maintain, the reduction in engine failures, those types of thing, the preventative maintenance programs that we've been able to put in place have helped us a lot. And you're also expanding the company more towards a logistics-based space company, Wouter alluded to almost half of the company. Those assets tend to be less maintenance intensive as things like the G&P side of the equation. So, just want to make sure you're aware of those things as well.

[Shneur Gershuni:]

Perfect. Really appreciate the color guys. Thank you very much.

[Wouter van Kempen:]

Thanks, Shneur.

[Operator:]

Thank you. Our next question comes from the line of Michael Bloom from Wells Fargo. Your question please.

[Michael Bloom:]

Hi. Good morning, everybody. Just two quick questions really. One, just curious a little more if you could talk about with me the guidance slide you talked about, you're expecting to see an uptick in Eagle Ford volumes. Can you just talk about what you're seeing in the Eagle ford right now?

[Sean O'Brien:]

Yeah. So, we saw, Michael we saw a great uptick as you think about we hit the low sometime in late Q2, I believe last year and we're up well over 100 a day maybe approaching a 200 a day of Eagle Ford volumes since we hit that low. So, when we talk about an uptick we exited much stronger than that low last year and we anticipate to stay at that rate maybe even grow a little bit. The Eagle Ford is definitely helping obviously offset some of the volume issues that we're seeing in discovery. I think there is even potential additional upside there. The rig count activity looks pretty good there. I think our market intelligence with our commercial side and with our producers there looks potentially optimistic. But as we forecast going into this year, I feel pretty comfortable with the volume forecast we have in there that built off of a pretty strong exit rate. And I think that will continue and hopefully grow a little bit as we get into the rest of 2018. And that's what really -- no, these are great returns because we've had the capital in place. The assets are there. So, it's really strong return type projects and volumes that we get out of the Eagle Ford.

[Michael Bloom:]

Got it. Okay. And then just I guess on the theme of efficiency, I just wanted to ask are you done with asset sales or are there any other non-core assets as you call through the portfolio that you think are still out there?

[Wouter van Kempen:]

Michael, it's Wouter if you look back over the last couple of years, we've probably divested about $0.5 billion in assets or so, all non-core assets where we had small positions in places that they were -- that we didn't have a lot of growth and a lot of DCF. And we've divested those, mid-teens types of multiples and then take the proceeds and apply them back into like the DJ or Gulf Coast or Express or Sand Hills 5, 6, 7X multiples, obviously very accretive. I can tell you there is no active list of things that we have, or active processes that are going on. But there's always could be an opportunity. There may still be a couple assets in the portfolio smaller ones, $100 million here or there that someone else thinks they can do miracles with. And if they can and are willing to give us double digit type of multiples, once again then we'll probably listen and think about it and take that money and apply it to areas where we see much more growth and much more attractive investment profile.

[Michael Bloom:]

Great. Thank you.

[Wouter van Kempen:]

Thanks, Michael.

[Operator:]

Thank you. Our next question comes on the line of Dennis Coleman from Bank of America. Your question please.

[Dennis Coleman:]

Yes. Good morning everyone. Thanks for taking the call. If I can start with the DCP 2.0 just a little bit more. And know a lot of you've said out here but are just trying to gauge the financial impact and understand a little bit about what you have on slide 16, where you have this one year pay back, and then in 2018 you're telling us, it's sort of roughly the size. And I am wondering should we think about that as, that's the benefit from 2017 and now sort of a similar one-year payback for the investment in 2018. And so, going forward it should be $40 million plus whatever you invest in 2019?

[Sean O'Brien:]

Yeah, I think that I think that makes sense. If you think about ’17, first of all the one-year payback's very impressive right. I mean, when I look at projects even as impressive as the Sand Hills expansion was when we were writing compression stations, we did not see these types of returns. So that's a great start. But I think what you're thinking about Dennis is, we have projects coming online. This is not something that is binary it comes online throughout the year. We mentioned 30 plants being given example operated by the ICC. Those were not all up being operated on January 1st. So, you're now going to get a full year value in 2018 from all the things we brought online throughout ’17. And then that should continue as you think about going into the future. The stuff we're going to bring online this year, you'll start to get a full year benefit. And I think as matter alluded we think there's more out there, I think back to the first question or one a few years questions, there is more things outside of just you optimizing our plants. Obviously, those are high value opportunities that we're very focused on. So, this thing I think should ultimately become part of what we do every day and it should grow as we move into you know beyond 2018. So, I think you're thinking about it the right way.

[Dennis Coleman:]

Okay. And I know this is sort of asking a little bit different way. But is there, is there another $20 million to invest in this in say 2019 or is there 20 million per year for five years?

[Sean O'Brien:]

I am not a 100% sure, I can give you all the details on that at this stage. But I think you are going to be sitting here at some time with a base group of people that will continue to work on digital solutions for our workforce, bolts that to help us do things faster in our back office, artificial intelligence things like that. And we'll continue to kind of work that. But I think you're going to see some type of flywheel effect here, where we continue to get great efficiencies not only you know on the cost side but also continues on the margin side and the reliability side at the house.

[Wouter van Kempen:]

And the only thing I would add Dennis, something that really excites me, but it's going to make it all lumpy. You think about the way we are running the plants and optimizing the plants there wasn’t initial investment in some technology, a system to be able to do a lot of that. But then what I see, and this is what really intrigues me and it gets me excited is a lot of these ideas are not capital intensive. And so, you're getting a lot of value. And again, when I compare them to -- you go out build Mewbourn 3. I love the Mewbourn 3 project. But from inception to building it, it’s a couple years. It's over $300 million of commitment. Some of these ideas are very capital light and they happen very fast and that I think there'll be others that come in that we may have to do some investments in technology just like the one I mentioned on the ICC. But I think by and large, I'm seeing a lot of great ideas that are not capital-intensive right.

[Dennis Coleman:]

Great. That's actually a good segue way to my next question which is about the ethane upside that you talked about I think 30 million to 40 million with little capital spend, is that - would that sort of take you to full capacity. And what you can do with ethane and from there any additional upside would be, would require some spend is that how should we think about that?

[Wouter van Kempen:]

Yeah, I think Dennis that’s the right way of looking at it. So, my sense is we've been so successful on continuing to add new plants and new customers and new producers to the pipe. So, you know we have you know we're obviously filling things quickly here, with current capacity working on the second tranche of capacity. And then if you get to somehow into full ethane recovery, I think that would put as a great a great path to say, okay we're going to do next tranche of expansion.

[Dennis Coleman:]

Perfect. That's what I was thinking, but just want to confirm. So, and then just one more for me, if I could, in terms of the give back and the fourth quarter or the $40 million pay-out which you were able to do and continue to be over one times coverage under distribution's. It sounds like you’re guiding us to the full year that we should not expect any give back or use to get back that that would be fully covered. But might there be additional usage of it, say in the first half as you sort of indicated a ramp in the second half?

[Wouter van Kempen:]

Well no, and I think you hit it great. In ’17, it is and then and now we were above1.0 coverage without the give back. I'll remind everyone you know it's great downside protection. No other companies have it. But the good news is with the improvements, all the things we've talked about on the call today, we’re generate cash flow above well above 1.0. So, as you go to 2018 and I think you've picked up on it well, we believe our guidance obviously is above the 1.0, 1.0 or better. I think we have upside potential. So, it's nice to have $100 million for there, that downside protection. But we don't speak for about a year as we sit here, I think we feel pretty confident in hitting our range and that even though we believe there's a fair amount of upside potential.

[Sean O'Brien:]

Look at it like an insurance policy on your car. Hey, you have great insurance, you hope to never use it.

[Dennis Coleman:]

Perfect. Well thanks very much for the answers.

[Wouter van Kempen:]

Thanks Dennis.

[Operator:]

Thank you. Our next question comes from the line of Chris Sighinolfi from Jefferies. Your question please.

[Chris Sighinolfi:]

Hey, good morning. Wouter, it's the second year in a row we’re speaking on Valentine's Day.

[Wouter van Kempen:]

My wife may get jealous.

[Chris Sighinolfi:]

Sean, I just wanted to follow up on some of the financing plans for the year, you had mentioned no common equity plan and looking at the interest expense guidance of $300 million, looks like it's up about $20 million or so from way the 4Q run rate was. So, I don't see any maturity this year, I'm assuming you've just budgeted with that rate at some point in the calendar. But I just want to check that and then see if you have any more color on sort of what you're planning this year on the financing front?

[Sean O'Brien:]

No, I think you've got it right Chris. I'll go back just a quarter obviously we did the preferred, we de-levered, we took out the variant, it was wonderfully low tech in maturity last year. We took that out with the preferred, we've covered that you get equity treatment from Moody's and obviously on the bank facility. As you go into this year, as we stated our goal was to stay out of the common equity markets. We are generating above 1.0. We had obviously if you read guidance we have more growth, I think most people saw that coming in 2018, I think that's a great thing and that cash flow starts to start to hit our balance sheet later in the year. So yeah know I think a good way to think about it and don't forget and I highlighted this with a lot of liquidity, 1.06 billion nothing drawn on that facility and we did come into the year with some cash. So, I think you're thinking about the right way, you know obviously some debt. But I still think when we guided to it that we can keep our leverage ratio. Our ranges three to four, we got there to be honest earlier than I think a lot of people thought we'd get there at the 3

[Chris Sighinolfi:]

Okay. Yeah, I am looking at your maturities next spring, carrying a pretty high weighted average coupon. So, I just didn't know based on the availability on the revolver kind of with rates moving higher what we might see. So, it's helpful just to just to touch on that. Also, with regard to your hedging practices and current positions, I think last quarter we discussed that the NGL positions were skewed toward propane. Any color on sort of what portions of the barrel are locked in this point? And then second to that challenges natural gas is that was there a view you guys were taking around not hedging the gas exposure on the first quarter or is that just some catch up or we could see as we move forward?

[Wouter van Kempen:]

Yes, I wouldn’t say, it was a view you know obviously we have the multi-year hedging program. We're glad that we have, we would go commodity by commodity. Most of the NGL is hedged to get us to that 80% percent except as you alluded to ethane. Ethane gave us a little bit of an opportunity Chris, maybe late last year we thought, but propane definitely ran. Crude ran significantly, and then obviously it's given us the ability to get our crude position. Gas, the only opportunity we had, there was there was a pretty good move and you can see it I think in the Appendix by quarter. Q1 gas ran up quite a bit. Obviously traditionally a backward dated curve, but boy we sure, we were able to get out there and get some Q1 gas. In terms of our strategy, our strategy is simple right, we're hedging at levels that guarantee coverage ratios above 1, 1 or above. So that's our goal right, is to make sure we're able to hedge at price levels that are guaranteeing the type of coverage we want. When we see those prices, we're able to go out and get them. I think your question on gas was, what was our strategy? We were not seeing the prices in the back end of the year with the backwardation that would have gotten us to the levels we wanted. We're hopeful that we'll continue to see some opportunities to finish up that ethane as well. Those are the two commodities that we still got some work to do. Finish the ethane and get the remainder of the gas.

[Chris Sighinolfi:]

Okay. That's really helpful. SPEAKER

[Wouter van Kempen:]

No, I’d like to be really wouldn’t pull, there's no reason to pull out -- to pull maintenance forward and spend money just for the sake of spending money. So, you know I think if you look at our portfolio overall, it's a relatively balanced maintenance schedule. So, you see it gone from year to year pretty balance. So, I don't think there's anything there Chris.

[Chris Sighinolfi:]

Okay. Thanks a lot for the time, this morning guys.

[Wouter van Kempen:]

Thank you, Chris.

[Operator:]

Our next question comes from the line of Elvira Scotto from RBC Capital Markets. Your question please.

[Elvira Scotto:]

Good morning. Just to follow up on the NGL kind of takeaway expansions out of the DJ basin what do you think the timeline for incremental capacity would be? And then, with respect to your potential low-cost expansions, I mean what would be the timeline from when you FID to get those up and running?

[Wouter van Kempen:]

So, Elvira it's Wouter. The timeline, we will be -- we will have all of this in place prior to O'Connor 2 coming online. And like, if you look at the capacity that's available today Mewbourn 3 coming online. No problem, we've plenty capacity and then we'll make sure that between the various alternatives that we have and most likely we’ll execute on two out of the five different alternatives that those are in place before or as the time that O'Connor is coming online.

[Elvira Scotto:]

Great. That's very helpful. And then just in general as more of these expansion opportunities present themselves, how do you envision financing in a longer term. Is the goal to have higher distribution coverage so that you can internally finance more of these projects going forward?

[Sean O'Brien:]

Yeah that's definitely one of the elements. Elvira you know I think we've not had the issue public common equity for quite some time. We're generating incremental cash flows. We have a lot of growth coming online this year. These are big projects; the Sand Hills expansion to 450, the Newborn 3 plants remind you, we have a full year this year of the previous expansion we did on Sand Hills so that cash flow was not showing up. So clearly, we're focused on coverage. I think that's where we started off the conversation leverage -- coverage very important to us. And I think at some point, I think as people look at the company we would hope that the people - the yield would improve. We saw some yield improvement coming into this year. But our strategy is to continue to generate cash help build coverage reduce our leverage. And these are some pretty phenomenal growth projects. And I think the last thing I would point out, and that's why we spent so much time on 2.0 today. I mentioned before a lot of those returns were not capital intensive that has some pretty amazing impacts on our metrics and our ability to fund new growth.

[Elvira Scotto:]

Thank you. And then just a last quick one just to follow up on ethane recovery, why aren't you including the incremental ethane recovery in your 2018 guidance? Is it just -- is it just conservatism?

[Wouter van Kempen:]

I would tell you what we're trying to do and what our history has been, is to give you a balanced view of what we can achieve. What that leaves you with is significant upside and limited downside. And I know there were many people who believed we were going to go into full ethane recovery in 2017. We didn't think that was the case. And in the end, we didn’t. So, we've been talking about ethane recovery for five plus years now. This used to be an industry that could kind of reset itself within a month. We're now I think in year four or year five of ethane recovery. So, what we want to do is, hey promises made is a promise kept. Give you a balanced view of what we can achieve. And in the end, you know what I am cautiously optimistic. Pretty optimistic around what is happening, the crackers that are coming online. The ethane that kind of needs to go there to feed those. At the same time, I think as an industry we've gotten this from roam for many years in a row. So why not have a balanced view and give you the upside versus on the way around.

[Elvira Scotto:]

Yeah. Makes sense. Thanks a lot.

[Wouter van Kempen:]

Thanks Elvira.

[Operator:]

Thank you. Our next question comes from the line of Chris Elliott from Barclays. Your question please.

[Chris Elliott:]

Hey guys, sorry. My questions have been asked. Thanks.

[Wouter van Kempen:]

Okay. Thanks Chris.

[Operator:]

Thank you. Our next question comes from the line of Harry Mateer from Barclays. Your question please.

[Harry Mateer:]

Hey good morning. Just one follow up on the funding question. Does the preferred market fit anywhere in your funding plans, it sounds like our senior secured debt is the way to go? But I just want to maybe put a finer point on it whether or not you think the preferred market could be something I'd like to revisit this year?

[Wouter van Kempen:]

Harry, I think it's absolutely something that would be in the mix. You know we looked it, as you know we I mentioned it earlier we did the $500 million deal last year. I think that deal went fairly well in terms of the execution. I will reiterate again, Moody's gives you equity treatment, S&P gives you equity treatment, the banks give us equity treatment. So, I thought that was a great transaction. The markets you know I think everybody still kind of looking at the markets, they were - they came and went pretty quickly. But it's definitely something that I know my Treasurer's got more or looks at pretty regularly the banks advisors, so I would not take the preferred off the table great.

[Harry Mateer:]

Thanks very much.

[Operator:]

Thank you. And our final question comes from the line Jerren Holder from Goldman Sachs. Your question please.

[Jerren Holder:]

Thanks. Good morning. Just wanted to start with the volume outlook in the Permian specifically, seen that you guys are forecasting slight growth there. I know in the past we've talked about the increase in competition and pressure in return. So just wanted to get a sense whether that's from existing areas acreage dedications or if you guys are doing new acquisitions down there?

[Sean O'Brien:]

We definitely - it's a mixed bag. So, if you think about the Permian, Jerren you know areas like the Delaware we are seeing growth. So, make no bones about that. We we're seeing some growth. We do have some capacity. There are some areas outside of the key investment focus points that are that are declining. But all in all, we do see some slight growth. We're tied to some solid producers there that I think have good economics. As you think about the Delaware basin and portion that's where we're expecting to see some growth, I think the last thing I would point out to you is it's definitely an area where we are focused. Wouter mentions a lot about how are we creating value without deploying significant capital. We have some capacity there. I know our commercial team is focused on going out and aggressively trying to win some new contract filling up some capacity. Those are pretty high return type scenarios because we would not have to invest an awful lot of new capital. Still a great area, still a lot of NGL as we talked earlier coming out of that area. We still are playing it obviously through our Sand Hills expansions, but I could see some GNP growth that maybe one area I alluded to earlier of some potential upside in volumes. This is one, we'll keep an eye on this year and hopefully we'll get a little bit of upside there.

[Jerren Holder:]

Thanks. And then on ethane rejection you know is it fair to assume that on your systems at least that you don't have much rejection and call it Eagle Ford Permian and it's largely midcontinent and these are based in other areas where the 60,000 to 70000 barrels per day, potential upside is going to come from?

[Wouter van Kempen:]

No, I think there is you know we probably reject 50,000, 60000 barrels on our system as well. So, if you look at where prices are sitting and like there was, in the third quarter there was less rejection all around the industry and our system and then we went into some higher rejections again in Q4. I think overall, we're a fairly balanced of what the rest of the producer community or midstream community in seeing from a rejection point of view. DCP 2.0 the ICC, the Integrated Collaboration Center helps us optimize all of this on an hourly daily basis as well where we can, but I think it is a pretty broad-based rejection that you're seeing. I do think and we've spoken about this a lot is the areas that are closest to the Market Center, Long Bellevue, Sweeney, those are the areas that will go into recovery quickest because the TNF and the transportation to get the NGLs to the market center is obviously lowest for those and from that point of view, we're in tremendously good shape.

[Jerren Holder:]

Thanks, and then lastly on gas takeaway obviously we have Gulf Coast Express and it looks like Cheyenne Connector take care of Permian and DJ Basin. What's the outlook for I guess the midcontinent just given the Stack SCOOP growth that we're seeing there, do you foresee any new pipeline capacity needed in the next few years?

[Wouter van Kempen:]

I think you mentioned two area that are critically important to us, the Permian and Gulf Coast Express you saw there is last small tranche of open season go out and very, very positive about that and that we will fill that up completely. Cheyenne Connector is grade protecting the DJ Basin, make sure we have ample takeaway there as well. The Midcontinent we're looking at a lot of people are doing. I'm not sure that you will see us jump on the bandwagon of bringing a solution to market, but if needed, we will be part of the solution.

[Jerren Holder:]

Okay. Thank you.

[Wouter van Kempen:]

Thank you, Jerren.

[Operator:]

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Irene Lofland for any further remarks.

[Irene Lofland:]

Thanks Jonathan. And thank you all for joining us today. If you have any follow-up questions, please feel free to give myself or Andrea a call. Have a great day.

[Operator:]

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.