DCP Midstream, LP
Q2 2016 Earnings Call Transcript

Published: 4 Aug 2016

[Operator:]

Good day, ladies and gentlemen and welcome to DCP Midstream Partners second quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Andrea Attel. Ma'am you may begin.

[Andrea Attel:]

Thanks Sayeed. Good morning everyone and welcome to the DCP Midstream Partners second quarter 2016 earnings call. Our speakers today are Wouter van Kempen, Chairman, CEO and President of DCP Midstream and the Partnership and Sean O'Brien, CFO of both companies. Today's call is being webcast and the slides are available on our website at dcppartners.com. 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 most recently filed 10-K and 10-Q. We will also use various non-GAAP measures including distributable cash flow, adjusted EBITDA and adjusted segment EBITDA which are reconciled to the nearest GAAP measure in the schedules in the appendix section of the earnings slides. Now I will turn the call over to Wouter van Kempen.

[Wouter van Kempen:]

Thanks Andrea. Good morning everyone and thanks for joining us and for your interest in the Partnership. This quarter, once again underscores how the execution of our DCP 2020 strategy continues to contribute to our performance and how the theme is resetting the business to be sustainable in any environment. I will begin with reviewing the quarterly highlights, including an update on volumes and then Sean will discuss financial results and I will come back and close for summary thoughts. Starting with financial highlights. DPM generated adjusted EBITDA of $138 million and DCF of $128 million during the second quarter of 2016. While our Q2 results are lower than last year, given the difficult business and commodity price environment, you can clearly see the significant contribution of our DCP 2020 strategy evidenced by substantial gross savings, improved reliability and our increase in fee based growth. Together, these contributions offset the rolloff of the hedges that expired at the end of the first quarter. We have been very proactive in getting out in front of the hedge rolloffs. Our distribution stands flat at $3.12 per unit annualized and we generated strong distribution coverage of 1.06 times for the quarter and 1.21 times for the trailing 12 months. Our coverage coupled with our low leverage of 3.4 times provides us with runway as we prepare to pivot for recovery. In the second quarter, we also executed on the sale of our North Louisiana assets and we idled underutilized plants, contributing to reduced operating and maintenance cost and increase asset utilization. Let me give you some details. Beginning with the sale of our North Louisiana system, these assets included the Ada and Minden plants and associated gathering system and the Pelico gas transmission pipeline. The transaction closed on July 1 and we used the $160 million of proceeds to pay down debt. Two points here. First, the North Louisiana assets were nonstrategic to the DPM as this was an area where the DCP enterprise was not targeting to invest capital, while others were much more focused in this area. Second, we are pleased with the strong multiple levers that the transaction is DCF neutral. So all-in-all, a very sound divestiture. In our Eagle Ford and East Texas systems, two areas where we have see volume declines, we acted to optimize and improve our overall plant utilization by idling approximately 320 million-a-day of underutilized plant capacity, also resulting in significant operating and maintenance cost savings. Let's move on to natural gas service segment update on slide four. During the second quarter, our volumes were essentially flat compared to the second quarter of last year and down moderately from the first quarter of 2016, driven by declines in certain lower margin areas that are being offset by growth in higher margin areas, demonstrating the strength and the diversity of our asset portfolio. Our DJ Basin assets set record volumes nearly every month this year and DPM system volumes more than doubled from last year, largely due to strong production in the field and DPM's Lucerne II plant and Grand Parkway projects being placed into service. On utilization, DPM BJ Basin system was up from the first quarter and exceeded its 395 million-a-day nameplate capacity during the second quarter. The DJ continues to be a great story. As part of a settlement between DCP Midstream and a producer earlier this year, we agreed to utilize each other's plant capacity in the DJ Basin to offload excess volumes. And via this agreement, we have offloaded significant volumes over the past few months, balancing producer's supply with our processing capacity in a very efficient manner. The net result is an extremely capital efficient way to bridge us to an additional capital if needed in the DJ Basin. Let's switch the discovery. Utilization remained strong at 90% during the second quarter with volumes averaging a little below full capacity primarily due to producer downtime associated with asset improvements that are expected to be completed later in the year. Capacity utilization during the second quarter increased to 85% on our Eagle Ford system and 65% on our East Texas system. Utilization on both systems increased due to our proactive response to idle approximately 320 million-a-day of underutilized capacity. These plants are part of an integrated system, allowing us to reroute gas to more efficient plants in these areas, which illustrates the flexibility to make fixed cost variable. And as expected, volumes in the second quarter on both our Eagle Ford and East Texas systems started to show declines both sequentially and quarter-over-quarter, reflecting steeper production declines and the overall reduction of drilling driven. We have previously given guidance of 15% to 20% exit rate decline and at this time we expect to be at the higher of that range for these areas. Our strong focus on asset optimization is materializing through improved asset utilization and cost savings. So we will continue to proactively manage our capacity utilization and be ready to pivot in areas such as the DJ where there may be additional capacity needs, again highlighting the strength and the diversity of our asset portfolio. Now moving on to the NGL logistics segment on slide five, where we continue to have a strong story. Pipeline throughput in this segment increased both quarter-over-quarter and sequentially from last quarter. Sand Hills volumes are up from both periods, primarily due to the laterals that came online in May 2015 and higher NGL production from new third-party plant connections and from DCP Midstream's Zia II plant that went into service in the fourth quarter of 2015. With this growth, Sand Hills reached its 250,000 barrels per day capacity right as we put another 30,000 barrels per day of capacity online in May through the addition of our Three Rivers pump station. This is underscores our strong focus on capital efficiency and the new expanded 280,000 a day capacity is already 90% utilized. Southern Hills volumes were also up compared to the second quarter of last year due to increased NGL production from DCP Midstream's National Helium plant which restarted in the fourth quarter of 2015. The utilization and throughput remained flat compared to the first quarter but that doesn't tell the full story. Q2 volumes were up from the first quarter due to our assaying semester that was effective May 1 which incentivized plants connected to Southern Hills to recover ethane. In June we experienced some brief operational issues which required us to reroute some volumes off of Southern Hills and the net result between these two shows flat volumes sequentially. Front Range saw growth primarily due to an increase in NGL production from Lucerne 2 being in service at the end of Q2 2015 and overall growth in the DJ Basin. In summary, our NGL pipeline adds to strengthen and diversity of our portfolio with growth from this segment offsetting declines in our natural gas services segment. As we look out to the crackers coming online in late 2017 and 2018, we are optimistic that we will see upside potential from ethane recovery. Now I will turn it over to Sean to cover our financial results and a capital update.

[Sean O'Brien:]

Thanks Wouter and I appreciate everyone taking the time to join us this morning. On slide six, we are highlighting DPM's continued solid execution shown through our Q2 results, delivering growth from fee-based products and strong cost savings. In our natural gas services segment, second quarter adjusted EBITDA was $102 million. The waterfall demonstrates the growth primarily from our Lucerne 2 plant and Grand Parkway projects, coupled with cost savings substantially offset the rolloff from hedges that expired at the end of the first quarter. Results also reflect lower commodity prices and gas throughput volumes on our Eagle Ford and East Texas system, compared to the second quarter of last year. Focusing on our NGL logistics and wholesale propane segment, NGL logistics adjusted EBITDA increased $10 million to $53 million and our wholesale propane adjusted EBITDA was up $1 million to $5 million. The increase in our NGL logistics segment was driven predominantly by higher throughput volumes on our Sand Hills, Southern Hills and Front Range pipelines and higher volumes on the Mont Belvieu fractionators. And in line with the rest of the company, both statements benefited from lower cost compared to the second quarter of last year. Now moving to slide seven, I will provide an update on our capital and then our hedging and financial position. First I will cover growth capital. We are executing well on prioritizing our capital spending and with crude once again retracting we will continue to watch this very closely taking into consideration the commodity outlook, timing and business needs. We substantially executed on our 2016 growth program, which included the completion of Grand Parkway, the addition of pump stations to expand Sand Hills and the Panola pipeline expansion that is expected to go into service in the third quarter. And with Sand Hills nearing 90% of its 180,000 a day expanded capacity, we are looking at timing of additional capacity needs related to new third-party plants and ethane recovery opportunities. In our ongoing targeted discussions with producers, we are beginning to hear a change in tenor to cautious optimism around the potential for growth opportunities, foremost in the DJ and Permian Basins. During this cycle, it continues to be important to have an in-depth discussion around timing of producers drilling and capacity needs, given the long lead times for us to build processing capacity. Consistent with our track record of not being a build it and they will come company, it's essential that we and our producers see sustained higher commodity prices before we expect to pivot towards growth. Now let me spend some time on our maintenance capital trend. When we talk about maintenance, let me be clear that safety remains our top priority. We are proud of our safety record and remain committed to maintaining our industry leadership position. Similar to other costs, we are proactively managing our maintenance capital, completing routine and required maintenance and we are incredibly proud to tell you that our assets are running the best they have in my seven years with the company and our reliability continues to improve through our prioritized and targeted investment strategy. Our 2016 plan includes $30 million to $45 million of maintenance. However, you can see that we are trending lower and have spent approximately $3 million year-to-date. Our typical maintenance capital includes spending on well connects to keep volumes flat, system integrity, compliance and safety improvements. Our original plan had up to $10 million of well connects included in our forecast. However, as we manage risk in the current environment, producers have been funding the majority of the well connect activity. And historically we have invested a lot of maintenance capital in Eagle Ford and East Texas systems. So with our targeted asset rationalization program, the idling of plants in these areas has also contributed to lower maintenance spending. And then lastly, another reduction would include maintenance associated with the recently divested North Louisiana assets. Now moving to slide eight, I will quickly hit the highlights regarding our margin and hedging portfolios. Our estimated 2016 annualized margin is 90% fee-based or hedged with fee-based margin estimated at 75%. That's noticeably up from 60% in 2015 and the remaining 25% margin is currently 55% hedged for the full year. Also to reiterate, the waterfall on the slide demonstrates our focused execution on our DCP 2020 strategy with overall growth in fee-based earnings and cost savings initiatives offsetting hedges that roll off at the end of the first quarter. Looking outward to 2017, we estimate our fee-based margin decline to 80% or more, which is up significantly from 50% just a few short years ago and this is due to the strategy to grow our fee-based asset portfolio. It's important to call out that the commodity exposed margin in 2017 represents only 20% of the portfolio, lowering the volatility of DPM's cash flow. And additionally, we will remain proactive in managing our commodity exposure through the addition of fee-based projects and hedges. However, given the depressed commodity environment, we have not added any new hedges recently. Our risk management team is closely monitoring commodity prices and will look to execute additional hedges as opportunities present themselves. Slide nine highlights DPM's strong credit metrics, leverage and distribution coverage ratios underscoring our stable balance sheet. The Partnership had $933 million available under its $1.25 billion credit facility as of June 30. And as a reminder, on June 1, we received $160 million of proceeds that were used to repay outstanding borrowings, reducing DPM's short term to $125 million at the end of July and raising liquidity levels to over $1.1 billion. DPM also had $2.37 billion of long-term debt outstanding with an average cost of debt of 3.6% and our next debt maturity is not until December 2017. So we have ample liquidity. Our leverage and coverage metrics remain strong, with leverage ending at 3.4 times on the low-end of our target range and our coverage ratio was a solid 1.06 times for the second quarter and 1.21 times for the trailing 12 months. So with that, I am going to hand it back to Wouter to wrap things up.

[Wouter van Kempen:]

Thanks Sean. We are very excited with how our DCP 2020 strategy has progressed in its execution, since we began these efforts in 2014. I want to say thank you to all of our employees again for their strong commitment to our DCP 2020 execution and their continued safety leadership. We are making step changes to become the most reliable, safe, low-cost midstream service provider, sustainable in any environment. As the DCP enterprise operates better and more reliable, reduces costs and optimizes its system, those strategies also benefit the Partnership as evidenced through earnings growth from fee-based project execution and cost savings initiatives. And through this execution, we have already exceeded our 2016 goal of driving down our NGL breakeven price to below $0.35 per gallon. We run the DCP enterprise as one company. So the execution of our DCP 2020 strategy is inclusive of both DCP Midstream and the Partnership. The DCP enterprise has significantly reset its cost base, which directly benefits the Partnership, as evidenced in this quarter's results. In addition, strong project execution has added fee-based earnings and combined with these cost savings initiatives, we have offset the rolloff from hedges that expired at the end of the first quarter. We will remain diligent in managing our capital program, again never at the cost of safety. Our operational excellence focus is paying off as we continue to operate more efficiently and reliably, a win-win for both our customers and us. Through our recent discussions with producers, we have seen a cautious optimism in their tone to pivot to growth. But first, we will need a sustained improvement in commodity prices. And as always, we will match pace with our producers and target projects with strong returns. And we see the potential for upside with ethane demand forecasted in late 2017 and 2018. With our focus on utilization, we will continue to optimize and rationalize our systems consolidating or idling less efficient plants and compressors and potentially selling non-strategic assets. In summary, our proactive and deliberate response to the industry downturn has materialized in resetting the DCP enterprise to be sustainable in any environment. And we are accomplishing this by being grounded on our foundational DCP 2020 strategy, one tat guides all of our employees. With that, I would like to thank you for your interest in the Partnership and now we are ready to take question. Sayeed?

[Operator:]

[Operator Instructions]. Your first question comes from Gabe Moreen from Bank of America Merrill Lynch. Your line is open. Please go ahead.

[Gabe Moreen:]

Good morning everyone. A question on the Louisiana sale. Just wondering if that was sort of a reverse inquiry? Did that go to a producer in the area or private equity? And then also, positioning the balance sheet post that sale, you are already taking a fairly undelevered balance sheet and making it more so. Just wondering if it positions you to play some offense and specifically talking about maybe acquiring the additional stakes in Southern Hills and Sand Hills from LLC?

[Wouter van Kempen:]

It's Wouter, Gabe. Thanks. On North Louisiana, as I mentioned in my prepared remarks, it really was an area that we didn't think was long-term strategic for us. So we engaged in a process where we basically marketed those assets to a number of different parties and in the end those assets were sold to Energy Transfer, as is publicly disclosed. Looking at this, I think it is a way of what we are continuing to do. We sold some assets last year as well. They were smaller assets but they are parts of the portfolio that are not strategic to us and we will continue to look at certain items like that. In the end, it does help our balance sheet and creating a little bit of dry powder or creating a good balance sheet is good as it pertains to opportunities that may come up here in the future.

[Gabe Moreen:]

Okay. But not just typically drop down, per se, but I guess you are better positioned. Okay. And then just in terms of maintenance CapEx, is it possible that you can spend $6 million for the year? I know that you talked about the well connects. Should we expect second half of the year to trend up? And then on the well connects, can you just talk about how returns and economics, if you don't spend that capital for well connects? In other words, are your returns at all better or worse for now doing that?

[Sean O'Brien:]

Hi. Gabe, this is Sean. Good morning. Yes, returns are better obviously if the producers are helping fund the majority of the capital. In terms of how we will spend it, I will say this one thing I didn't have in my comments earlier, obviously volumes are down and producers, to your point, are funding a lot of that well connect activity that still is there. Remember, we did idle some plants, a big are of concentration for the capital spend for us was East Texas and the Eagle Ford. We are idling plants there. So that's lowering that area. North LA, you started the conversation with that. Obviously we have some maintenance capital there that we didn't have to spend this year. Now to your original question, we are more back end loaded this year on the timing of our maintenance capital. So I do think you will see a trend where we will spend a little more in the back half of the year. But again, to your earlier question, yes, returns on those projects and that's a good thing in this environment, are stronger obviously if the producers are funding a lot of the capital.

[Gabe Moreen:]

Okay. Thanks Sean. And then just last one for me. Wouter, you mentioned offloading or sharing volumes in the DJ between LLC and the MLP. Can you just talk about how the economics work on that in terms of, I guess, is one decompensating the other fro that, just in terms of, I guess, acreage dedication and volumes dedicated one versus the other entity?

[Wouter van Kempen:]

Gabe, it's actually not between LLC and DPM. So as I mentioned, we had a large producer settlement in the first quarter of this year and part of that producer settlement was not just economics and cash and things like that, but it was also us strategically looking at how do we optimize overall plant capacity in the basin. So what we are actually doing is in that settlement, we both decided, both parties, so that it is the DCP enterprise plus a third-party producers and our affiliates to share each other's plant capacity as needed and when needed. So we have economic ways to basically offload between each other and in the end for us, what it does is it's very capital efficient because we are obviously not putting a new plant in and it's also attractive for the other party because they do have additional plant capacity available. So that's how that works, net net for us. From a return point of view, for the enterprise as a whole, it's a very strong return because we don't spend any capital to building overall plant capacity.

[Gabe Moreen:]

Understood. Thanks for the clarification, Wouter.

[Wouter van Kempen:]

Thanks Gabe.

[Sean O'Brien:]

Thanks Gabe.

[Operator:]

Thank you. Our next question comes from Elvira Scotto from RBC Capital Markets. Your line is open. Please go ahead.

[Elvira Scotto:]

Hi. Good morning. So it looks like, if I look at your slide deck and I go through the guidance that you laid out on slide 21, you haven't really changed your guidance. Can you just help me think about the impact of the asset rationalization plus the sale. The assets sales to EBITDA and then versus kind of, I think you said, there is going to be some offsets on the DCF line. So just is it possible that that EBITDA number could come in below your guidance, but DCF still be in line?

[Sean O'Brien:]

I think a couple of things, Elvira, good morning. I think that regarding both adjusted EBITDA and DCF guidance, we are still staying with our ranges. We are not changing our guidance. I think we indicated that North LA sale is DCF neutral. And you are referring to, obviously there is an EBITDA equation to that, but we are still holding in line with our guidance. We are not updating our guidance around that particular sale. I think the important thing to take from that sale and as Wouter highlighted, that was done at a very high multiple not an area that we concentrate and focus on and in the interim we will take high multiple cash flow and reduce the balance sheet. So guidance stands still. We are more than halfway through the year. We will give you more updates along the way. But right now, we are still holding the line.

[Elvira Scotto:]

Got it. And you are still staying $30 million to $45 million of maintenance CapEx in your guidance, but the comments that you made on the call would suggest a lower number.

[Sean O'Brien:]

I think the same thing. I think last quarter, Elvira, we are still guiding towards the low-end. Obviously, the spend has been limited so far through Q2 or year-to-date June. I gave the reasons of why. There's a great reason and Gabe mentioned the returns, which is a benefit. I do think we are going to be a little more back-end loaded. And again I think on the Q3 call, we will solidify a little more on our outlook for the year on that. But obviously, we are trending well below those levels at the moment. I think it's important to point out though the we started around maintenance, the company is very focused on our safety and on our reliability and things have been running very well. We are not investing in those types of things. We are still investing in those types of things. So more to come, I think, in Q3 we will talk through where we are.

[Elvira Scotto:]

Okay. Great. And then can you provide some additional details around Southern Hills? I think you mentioned in your prepared remarks that you had an incentive as maintenance and tariff that was driving more volumes, but then an operational issue moved the volumes off. Has that issue been resolved?

[Wouter van Kempen:]

Yes. Elvira, this is Wouter. That issue has absolutely been resolved. It was a multi-day issue where basically we had a pig that was stuck in the pipelines. So we had to reroute volumes. Net net, we have spoken about the ethane incentive tariff, if you do the math and say okay, you have a couple of days of rerouting volumes, you have the ethane incentive tariff, you take those two together, the volumes kind of stayed flat. But that issue has absolutely been resolved and no issues whatsoever.

[Elvira Scotto:]

So if volumes continue with the incentive tariff then utilization should trend higher?

[Wouter van Kempen:]

Yes. It should absolutely trend higher, but at the same time, Elvira, you have got to take a look at where frac spreads are sitting. And like this is a pure way to garner, incentivize people to recover more ethane and that, in the end, is all a matter of where are the frac spreads and is it more the other people will to continue to recover additional ethane. During June, things were pretty good, in May things were pretty good. NGL prices, gas price, crude prices, all went up and over the last couple of weeks, we have obviously retracted fairly significantly, which has an impact on frac spreads, which will have an impact if it is economically the right thing for people to do to continue to extract that ethane.

[Elvira Scotto:]

Great. Thanks for that. And then just one for me. You talked about the potential to do some more non-core asset sales or idling of underutilized plants. Is there any way to quantify how much you can do? And I think at one point DCP was targeting an eventual $0.30 a gallon NGL breakeven. Do you think you can still get there? Do you think you can actually go below that?

[Wouter van Kempen:]

Well, let me take those separately. When it comes to idling plants, asset sales, it is not something that we guide people to and say, hey, here is a number of different items that we have in a plant. But we continue to look at it. Brian Frederick and his team continue to look at how can we optimize the system. So it maybe certain plants that are being idolized, at the same time, there are things that are going on around gathering systems, compressors and other things that probably won't reach the headline that you guys are looking for, but we will continue to make our system more efficient, more reliable and gives us a lower cost to operate, which then leads us to that $0.35 NGL breakeven price. Just to put things in perspective, pre October, November of 2014, we were roughly at $0.60 NGL breakeven. We brought that down to roughly $0.40 or so in 2015. Our goal for 2016 was $0.35 NGL breakeven. And as I mentioned in my remarks, we have rates that we gone through to us and then internally we set a goal for ourselves to maybe even reach $0.30 for 2016. As I am sitting here today, I feel pretty good that by the end of the year, we can be at a, call it, $0.30 run rate. So unbelievable performance by everybody on the team, contract realignment, asset optimization, running our assets better and really, really good performance and we continue to work to on that.

[Elvira Scotto:]

Excellent. Thank you so much.

[Wouter van Kempen:]

Thanks Elvira.

[Operator:]

Thank you. Our next question comes from Jeff Birnbaum from Wunderlich. Your line is open. Please go ahead.

[Jeff Birnbaum:]

Thanks. Morning everyone. I had a few questions for me. So just wondering, given the cautious optimism you have expressed that you are hearing from producers, certainly the improvements that you have begun to make to the balance sheet, it was already in pretty good shape and certainly there is not a lot of CapEx budgeted for the rest of the year, is it fair to think that by the time we get closer to 2017, maybe you see the split off between offloading volumes and adding capacity start to shift and maybe you look to add whether it's more processing or even NGL storage capacity as we head into next year?

[Wouter van Kempen:]

Yes. Jeff, this is Wouter. We absolutely are having discussions with producers along those lines. I used the word cautious optimism for a reason. Yes, we are all having discussions but at the same time where we are sitting here today with these commodity prices, overall the oil and gas business is not sustainable. So we continue to look at talk with producers and say you need to have prices that are probably on the crude lines, somewhere in the mid to high 50s and low 60s depending on where you are to really have a sustainable long-term kind of approach from producers where they are willing to commit to new capacity. And that holds true for us as well. So we are looking at in the DJ Basin at a variety of things. Yes, we are looking at new processing capacity. And that is one way to add capacity. There is another couple of things that we can do in the DJ to get overall capacity up and get more things for the producers. Those could be bypasses, it could be things like an additional phase in the Grand Parkway. So we are looking at a variety of options in our discussions with the producers. And again I think cautious optimism, at the same time we need to see commodity prices and predominantly crude prices that are a little higher than where we are sitting her today.

[Jeff Birnbaum:]

Okay. That's fair. And as you think about, I guess particularly with the DJ, how much lead time do you think you would need before you could add another plant, to the extent you did go that route?

[Wouter van Kempen:]

And that's where the discussion with the producers comes in play. Our lead time is obviously much longer than a producer putting a rig and then say, okay, we are going go drill right now. So that's kind of the things we are trying to balance with the producers. How do we take our longer lead times and balance them with what the producers are looking at? The good thing is, we have a lot of the long lead time equipment available. We have permits in hand. So I think we can pivot relatively quickly, if needed and when needed.

[Jeff Birnbaum:]

Okay. Great. And if I could ask a quick question about LLC, but it certainly ties into the go forward outlook at DPM. I am just thinking, kind of the same thing, I am thinking about some of the capital efficiency the LP has been engaging in. I am just wondering, are similar looking? Or are you partnering of sorts on the LLC level with other midstream players in areas where production may also be struggling a bit like Mississippi Lime, for example, to help the balance sheet up?

[Wouter van Kempen:]

There's definitely opportunities like that available. It's not always easy to do that. But what are doing, the partnering that we are talking about in the DJ Basin, there is a combination of LLC and DPM partnering with that other third party. So where we can throughout the system, we will try to be efficient with our capacity and as opportunities arise, we will go after them.

[Jeff Birnbaum:]

Okay. Thanks. And just one point of clarification from me. Wouter, in your prepared remarks, did I hear you say you were looking closer to a 20% year end 2016 exit rate on declines in East Texas as well? Or was that just the Eagle Ford?

[Wouter van Kempen:]

No. That's a combination of Eagle Ford and East Texas combined. So we guided to the 15% to 20%. As we are sitting here today and volumes are difficult to predict, especially when you look at it on a month-by-month, quarter-by-quarter basis, but we said 15% to 20%. We are probably thinking it's hovering around the 20%.

[Jeff Birnbaum:]

Got it. Okay. Thanks a lot.

[Operator:]

Thank you. Our next question comes from Selman Akyol from Stifel. Your line is open. Please go ahead.

[Selman Akyol:]

Good morning. Just following up on that last question in terms of the exit rate on the Eagle Ford. I guess, number one, do you see any possibility that it comes in beyond 20%? And then number two, do you have any contingency plans for more idling of capacity in the Eagle Ford in order to keep utilization rates high?

[Wouter van Kempen:]

At this stage, Selman, the 15% to 20% that we are seeing is good. As I said earlier, we think it's probably roughly around 20%. I don't have any reason at this stage to say that it's going to be much different. At the same time and like these are very dynamic environments and if something somehow happens where we see massive pull backs on the commodity line, then obviously it could have worse result. At the same time, you can have better results if somehow the environment starts improving faster than we expect. As it pertains to your contingency plans, I think we are very proactive in what we are doing. Like we are not sitting waiting until stuff comes down. Shutting down a plant and rerouting gas is not something that you do in a week or a month. Like you have got to think about that fairly well ahead of time. And we, I think, have proven that we do that, that we think ahead of time. That's why we utilized the East Texas plant and the Eagle Ford plants down. And if there's other opportunities where we can do it in the system, we will absolutely go after them.

[Selman Akyol:]

Okay. And then just more of a big picture question just in terms of ethane recovery. I think previously you said it's on the horizon. I am wondering if you are have seen anything over the last quarter? And I know you referenced producers, a little more optimism, you saw prices run up in the quarter, prices come back down. So anything to change the timing on that horizon that you were referencing previously?

[Wouter van Kempen:]

No. I think we have always said second half 2017 and 2018 and that feels pretty good. And in the end, here is I think the real important things. It's not a question if it will come, it's a question when it will come. Obviously, the projects that are being built in the Gulf Coast, crackers that are being built by the various companies, those are tremendously difficult and large projects and figuring out the timing of those is not easy but those projects are coming online, there is no question about it. Those crackers will need ethane, there is no question about that. And I think that in the end will be a good thing for the DCP enterprise and for DPM, given we are the largest NGL producer in the country and we have a very significant network of NGL pipelines that will benefit from this as well. So it is really a question, it's not a question when it will come. If you look more tactically at the past quarter, our overall ethane rejection probably went down a little bit for us as a company, a couple of thousand barrels. But that was the opportunity that we have had at the time. Right now, we are probably going a little bit the other direction, given that frac spread have come in again.

[Selman Akyol:]

All right. Thank you very much.

[Operator:]

Thank you. Our next question comes from Richard Verdi from Ladenburg. Your line is open. Please go ahead.

[Richard Verdi:]

Hi. Good morning and thank you for taking my call here. I was some connection issues in joining the call and I am actually still having some connection issues. So my apologies if this was addressed. I just have one question. It pertains to that 320 million cubic per day idle at the Eagle Ford and East Texas systems. Is that expected to remain offline as part of the 2020 cost saving plan? Or is that more of a function of volumes you are seeing at the time? And should we expect to see volumes there coming soon?

[Wouter van Kempen:]

Richard, no. That is really how we just work on optimizing our systems in short, medium and long-term. We have always had a strategy in all the basins that we play where we have systems that are very well interconnected, which means that if certain plants go offline for maintenance or other things, we can offload to other plants. It gives a great opportunity for your customer to have more reliability. It also gives you an opportunity during down cycles like we are in today to make fixed cost that our client and all the people that are running that plant, which really fairly fixed cost to make it variable and say, we are going to take this plant offline. What we do when we do those things, we put the plant on what we call nitrogen blanket, which basically preserves the plant and all the systems and when volumes come up, we can fairly quickly put that plant back online and start processing volumes through that plant and that system. So it is very much a short, midterm way to address capacity and to make sure that we are saving cost and addressing our cost base. Our goal is to have those plants back up. I want our teams come to us and say guys, you know what, the commodity environment is in a better place, producer are drilling again and we need that capacity, let's bring it back up.

[Richard Verdi:]

That's great. Thank you very much for that color. I appreciate the time. Thank you.

[Wouter van Kempen:]

Thanks Richard.

[Operator:]

Thank you. Our next question comes from Chris Sighinolfi from Jefferies.

[Chris Steward:]

Good morning. This is actually Chris Steward, on for Sighinolfi. How are you?

[Wouter van Kempen:]

Good morning.

[Sean O'Brien:]

Good morning.

[Chris Steward:]

I just wanted to follow-up on some of the questions on the incentive programs that have been asked earlier. In particular, I was wondering if you might be able to quantify the impact of that incentive program on Q2 results? And then longer-term, I am just curious to know how that program is factored into the roughly $75 million to $100 million EBITDA uplift guidance you guys have provided previously?

[Sean O'Brien:]

Yes. Let me do, two things on it. I think the way and I will let you do some of the math. We are probably saw an uplift. I saw between to the higher end up to 5,000 to 10,000 barrels a day for the second quarter and then all the tariffs and things are filed publicly. So you can take a look at what it is. You are probably getting to a couple of million dollars. And remember what the incentive program is. It's really a program to bridge people from prices that are where we are currently to full prices. So our goal is that that incentive program over time goes away and people start to pay their normal full tariff rates, because you get into a place where the frac spread is such that we are going to grow ethane recovery. So that's I think how you should look at that between this it what we are doing today, it is temporary bridging out into a longer-term late 2017, 2018, full recovery scenario to feed those crackers in the Gulf Coast.

[Chris Steward:]

Okay. Understood. That was it for me. Thank you.

[Sean O'Brien:]

Thanks Chris.

[Operator:]

Thank you. I am showing no further questions at this time. I would like to hand the conference back over to Andrea Attel.

[Andrea Attel:]

Thanks. Thanks everybody again for joining us today. If you any follow up questions, please give me a call. We look forward to seeing many of you in September at Barclays CEO conference. Have a great day.

[Operator:]

Ladies and gentlemen, thanks for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.