DCP Midstream, LP
Q3 2016 Earnings Call Transcript

Published: 4 Nov 2016

[Operator:]

Good day, ladies and gentlemen and welcome to DCP Midstream Partners Q3 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 at that time. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Andrea Attel, Director of Investor Relations. Please go ahead.

[Andrea Attel:]

Thank you, Candice. Good morning and welcome to the DCP Midstream Partners third 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 on 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'll turn the call over to Wouter.

[Wouter van Kempen:]

Thanks, Andrea. Good morning everyone and thanks for joining us for your interest in the Partnership. Quarter after quarter since this cycle unfolded, the DCP Enterprise has outperformed itself in resetting our business to be sustainable in any environment. We've accomplished this through unwavering focus and execution of our DCP 2020 strategy. It's been our steadfast playbook guiding all over 2,700 employees who are delivering every day on safety, reliability and operational excellence. And although commodity markets are still volatile, we believe the overall environment is shifting to be a bit more positive. There is a cadence to these cycles, and we're confident in our playbook and our strong and tremendously focused execution. With that let's move on to reviewing this quarter highlights and providing an update on volumes, and then Sean will discuss the financial results and I'll come back and close with some summary thoughts. Starting with the financial highlights, during the second quarter of 2016 DPM generated adjusted EBITDA of $132 million and DCF of $124 million. Our distribution remains flat at $3.12 per unit annualized, and we generated distribution coverage of 1.02 times for the quarter and 1.16 times for the trailing 12 months. Our sole coverage coupled with low leverage of 3.3 times provides us with excellent run rate. Our third quarter financial results were down primarily due to the roll-off of expired hedges. However, on this slide you can clearly see the significant contribution of our DCP 2020 strategy, evidenced by significant operating and maintenance cost saving, improved reliability, and an increase in fee-based growth which has more than offset volumes declines. As we discussed in our last call, we closed on the sale for North Louisiana assets from July 1 and used $160 million of proceeds to pay down debt and strengthen our balance sheet. Also during the third quarter the Panola pipeline expansion went into service, substantially completing our announced 2016 growth program which included the completion of Grand Parkway and the addition of pump stations to expand Sand Hills. And lastly, we have increased our DCF forecast for the full year which Sean will give some more details on later on. Now let's move on to our natural gas services volume update on Slide 4. First, I want to highlight that for comparative purposes on this slide we've removed the volumes that were associated with our North Louisiana system from the prior periods. So excluding these North LA volumes we were down about 12% from the third quarter of last year and 3% sequentially from last quarter, driven by declines in Eagle Ford in East Texas and partially offset by higher margin DJ Basin volumes. As expected volumes in the third quarter on both our Eagle Ford and East Texas systems continue to show declines and are tracking with our 2015 to 2016 exit rates forecast of about 20%. However, our strong focus, massive optimization is clearly visible through cost savings associated with idling plants in these areas. We watch rig count actively, am very close -- rig count very closely, and we believe we are nearing the bottom in the Eagle Ford and East Texas. So we are optimistic that with improved commodity prices drilling will return to these areas that are advantaged with our close proximity to the Mont Belvieu market center. Now looking at the DJ basement, the discovery systems; growth in these assets combined with higher margins for MCF, have offset declines in the Eagle Ford and East Texas demonstrating strength and the diversity of our asset portfolio. The DJ Basin continues to be a great story for the DCP Enterprise. Now let me put that in perspective for you. In October we posted our third highest throughput this year averaging above our total $800 million a day's capacity. DPM's DJ Basin volumes are up year-over-year due to strong production in the field, the startup of DPM's Lucerne II plant and the Grand Parkway project that was placed into service in January. And our discovery utilization increased 10% during the third quarter with volumes averaging right at $240 million a day capacity. And with an improving commodity outlook for 2017 we and our producers are looking ahead with cautions optimism around the potential for growth. Given the longer lead times for us to build processing capacity we continue to have very targeted and in-depth discussions around the timing of producers drilling and capacity needs in both the DJ and the Permian Basins. Now let's move on to Slide 5. Our NGL logistics segment continues to perform well with total NGL pipeline throughput up 9% from the third quarter of last year. Our Sand Hills pipeline volumes remained strong with the recently expanded 280,000 barrel per day of capacity, already 90% utilized during this third quarter. The increase from last year was due to the recent capacity expansions, laterals that came online in 2015, higher NGL production from strong Permian and Delaware Basin activity and from DCP Midstream [ph] that went into service in the fourth quarter of 2015. We're currently evaluating the timing of additional capacity needs related to new third-party plans. And we remain optimistic around upside opportunities for methane recovery as we look out to the crackers that are expected to come online in 2017 and 2018. Southern Hill volumes were also up compared to the third quarter of last year due to increased NGL production from DCP Midstream's National Helium Plant which restarted in the fourth quarter of 2015. Utilization and throughput remained flat for the third quarter despite lower NGL production associated with plant turn in September. In summary, our NGL pipeline add to the strength and the diversity of our portfolio with fee-based based growth from this segment helping to offset the clients in our natural gas services segment. Now let me turn over to Sean to cover our financial results.

[Sean O'Brien:]

Thanks, Wouter, thanks everyone for joining us this morning. As Wouter previously mentioned, we revised our 2016 forecast ranges for adjusted EBITDA, DCF and maintenance. As shown on Slide 6 we tightened our adjusted EBITDA range to between $575 million and $585 million, now reflecting the impact of the sale of North Louisiana. As we stated last quarter, although this is a reduction in EBITDA, this divestiture was DCF neutral. And as we increased the midpoint of our DCF range by $40 million with revised range of $515 million to $525 million, primarily due to strong performance from our Sand Hills pipeline and lower than expected maintenance spend. Additionally, we have previously said that we would be at the lower end of our growth capital range of $75 million to $150 million, and we continue to evaluate potential growth projects around our DJ and NGL pipeline assets. We are expecting higher 2016 distributions from our Sand Hills NGL pipeline due to higher volumes driven by Permian region growth resulting in the Sand Hills pipeline nearing its already expanded capacity. We've lowered our maintenance capital forecast to between $10 million to $15 million for the year end to reflect our recently divested North Louisiana assets, lower well connects from reduced drilling and well connect activity being funded by producers and lower expected maintenance spend from the idling of plants in the Eagle Ford and East Texas. Now moving to Slide 7, I'll hit the quarterly financial highlights. In our natural gas services segment, third quarter adjusted EBITDA was $100 million as shown in the waterfall, the decline from the third quarter of last year was primarily due to the roll off from expired hedges. However, we have highlighted growth from our Lucerne II plant and Grand Parkway projects in the DJ coupled with costs savings have more than offset the sale of North Louisiana and volume declines in our Eagle Ford and East Texas systems. Our combined NGL logistics in wholesale propane segments were essentially flat compared to the third quarter of last year. NGL Logistics adjusted EBITDA increased $2 million to $50 driven predominantly by higher throughput volumes of Sand Hills, Southern Hills and the recently expanded Panola pipeline; and our wholesale propane results were relatively immaterial due to normal seasonality. Now moving to Slide 8, I'll provide an update on our hedge position and margin portfolio. Our focused execution on our DCP 2020 strategy has continue to deliver strong results evidenced by our growth in fee-based earnings and efficiencies tied to our cost saving initiatives. Looking outward to 2017, we estimate DPM's fee-based margin decline to 80% or more, leaving only 20% of the portfolio exposed to commodity prices. With our focus on managing risk, we continue to proactively manage commodity exposure though our hedging program. And with the recent improvement in commodity prices, we executed additional 2017 NGL gas and crude hedges now taking our 2017 hedge percentage to 35%, up from 10% just last quarter. So that brings DPM's 2017 fee-based and hedged margin upto approximately 85%. Next on Slide 9 I'll cover DPM's strong credit metrics, leverage and distribution coverage ratios underscoring our stable balance sheet. Our leverage ratio at the end of the quarter was 3.3 times on the low end of target range. And our coverage ratio was 1.02 times for third quarter and a solid 1.16 times for the trailing 12 months. As of September 30, DPM had $179 million of borrowings outstanding, down 43% from the $316 million balance at the end of the second quarter. We have ample liquidity with $1.1 billion available under our $1.25 billion credit facility, and at September 30, DPM had $2.25 billion of principle than outstanding including credit facility borrowings with an average cost of debt of 3.7%. And with that, I'll hand it back over to Wouter to wrap things up.

[Wouter van Kempen:]

Thanks, Sean. We're now two years into our DCP 2020 strategy execution. I'm very proud to say that our teams have performed very, very well on everything that we set out to do in 2014. And this strategy has had a phenomenon impact to the DCP Enterprises bottom-line. We've already made a steep change in how the DCP Enterprise operates and we are well on our way to become the most reliable safe, low cost midstream service provider, sustainable in any environment. To put this in perspective for you, DCP Midstream has driven down its NGL per gallon breakeven price to $0.31, well below our $0.35 2016 goal. With our focus on asset utilization, we'll continue to optimize and rationalize our systems consolidating or idling less efficient plants, compressors and pipe. We have realized our contracts and added fee-based earnings and hedges significantly reset our operating cost base and we've reduced our maintenance spend while operating better and more reliably. And our DCP 2020 strategy continues to benefit DPF as evidenced by a 17% reduction in DPM's operating costs, lower maintenance spent and its 2017 margin already 85% fee-based and hedged. This strong growth in fee-based earnings combined with cost saving has offset DPM's volume declines in the natural gas segment. I'm really excited that our assets are running the best they ever have during my tenure with the company, and we continue to be an industry leader in safety, that's a win-win for both, our producer customers and us. So I couldn't be more proud of all of our employees for their commitment. I want to thank them for their strong DCP 2020 execution and our continued safety leadership. As I said in my opening remarks, this quarter has started to feel a bit more positive. We are having very meaningful and in-depth discussions with our producer customers as they are evaluating their plant drilling activity in areas around the footprint such as the DJ and the Permian which will benefit both our GMP and our NGL business. In summary, looking forward to 2017 we will continue to evolve the DCP Enterprise to add value for unit holders, our customers and our employees. With that, I'd like to thank you for your interest in the partnership. And now Candice, we're ready to take some questions.

[Operator:]

[Operator Instructions] Our first question comes from Robert [ph] of FBR. Your line is now open.

[Unidentified Analyst:]

Good morning. I was wondering if you could give a little color on the activity with producers you mentioned, well connects being funded by those producers, bringing down maintenance CapEx; can you elaborate on that dynamic and how we should think about that moving forward?

[Sean O'Brien:]

This is Sean. In this environment obviously, well connects are down as a whole due to the reduction in drilling but we've been able to -- as we have spent money on well connects in some of the areas that still are showing some growth, been able to push those costs back to the producers, and obviously lowering our capital costs, that may not be something we can hold forever as we've indicated, as the environment gets improved and we start to see more growth. But it's definitely been a cash positive for us this year.

[Unidentified Analyst:]

Great. And let's see -- the O&M expense in natural gas services was flat -- do you expect any impact there from the sales of North Louisiana assets?

[Sean O'Brien:]

Yes, we do expect some impact there, obviously we've kept some timing in our costs. Our costs are down as whole; we've talked about a lot of the solid executions on our DCB 2020 strategy that's definitely driving costs down. We've also obviously divested some assets and we've also consolidated some assets. But there is some timing in there but we do expect those reductions to be permanent as we move to '17, high to the sale of North LA and the consolidation of some assets in Eagle Ford and East Texas.

[Unidentified Analyst:]

Great. And then just real quick, last question on -- on your hedges I saw you increase the coverage; can you disclose the type of hedges? And then roughly these were swaps or there is a significant cost associated with them?

[Sean O'Brien:]

There is no significant cost, we use a clearing -- we used ice to clear these hedges. These were direct commodity hedges, so we mentioned we hedged crude NGL, we hedged gas, and that's actually a significant improvement over many years ago, you can actually get out now and hedge the direct NGL products, we like that. We like the prices we got on these hedges and obviously it's taken our fee and hedge percentage now up to 85%. I would even indicate a post putting the materials together, we've added some additional hedges so you'll see that percentage go up a little bit as we go forward.

[Unidentified Analyst:]

Great, thanks for the color. That's it for me.

[Operator:]

Thank you. And our next question comes from Jeremy Tonet of JP Morgan. Your line is now open.

[Jeremy Tonet:]

Good morning. I was just wondering if you could refresh us on Q2 rejection levels this quarters -- how compared to last quarter? And how you kind of see that trending so far this quarter?

[Wouter Van Kempen:]

Good morning, Jeremy its Wouter. If you take a look at where we are I would think for the year June was probably the lowest ethane rejection that we've seen at that time. We definitely had a little bit of extra I think -- I mean on our system from the incentive stirrers [ph] that we've put in, it works for us and works for third-party customers as well. We've trended up probably a tiny little bit since June. Overall, if you look the second quarter of '16 versus the third quarter of '16, we are actually down a little bit, I would say we're in the mid to high 60s off rejection on the DCP system as a whole. We're starting to kind of take a look at what does it mean for the next couple of quarters and into '17; we're still optimistic these crackers that are going to come online -- they will come online, there is going to be tremendously significant ethane demand coming out of the Gulf Coast. The DCP Enterprise as a whole I think is tremendously well positioned to benefit from that, we've spoken with you about the opportunity that would give for us $75 million to $100 million for the enterprise as a whole. I think it's a little bit of timing, I think markets are volatile, you've seen it unlike last week, unlike versus where we are sitting this week as it pertains to thinks like crude gas and somewhat products. I think we're going to be in kind of a voluble bend here for the next number of months and quarters, but at the long run I do believe that we're going to see a good upper trend that will benefit us significantly.

[Jeremy Tonet:]

Great, thanks. And then when you're talking about the hedging there; I'm just wondering is the percentage hedge -- does that correspond with your composite barrel or is it more related towards the heavies or anything you can share with us there?

[Sean O'Brien:]

Yes, we use the industry barrel when we are showing that.

[Jeremy Tonet:]

Got you, so it's hedged across. Okay, got you.

[Sean O'Brien:]

I'd just add to that but we are hedging our particular position; when we look at our equity position obviously we're looking at our length by commodity.

[Jeremy Tonet:]

Got you. I just didn't know if there was more C4/C5 hedging relative to C2/C3.

[Sean O'Brien:]

Yes, because of our equity length we are a little bit heavier than the standard industry barrel, yes.

[Jeremy Tonet:]

Okay. And then I was just curious with regards when 2017 guidance might come out -- given what's happening in the whole family structure; do you have any thoughts on when that might be provided and any preliminary thoughts of direction of EBITDA versus where you are now?

[Sean O'Brien:]

We're going to give guidance always in February, and we continue to expect that when we do our Q4 earnings in February, that's probably at the time that you will see our 2017 guidance. So we'll continue to kind of stay without the provisions we've done in the last number of years.

[Jeremy Tonet:]

Okay, great, thanks. Then just last one, going back to the maintenance CapEx; was the big driver there coming down by more than half is really just being able to push back on the producers, as far well connect to keep kind of your -- offset normal depletion there? And was that kind of one-time in nature and we've expect maintenance CapEx to kind of bounce back next year to what the original guidance was for '16?

[Wouter Van Kempen:]

No, I wouldn't say it was the main driver, I think as you think about it -- obviously some of the divestiture, some of the asset consolidation are -- had some significant maintenance capital tied to them so that obviously we will not spend and as you think about going forward those are more permanent unless we see some growth and bring assets back in. I think the other thing in general too is there is -- perhaps been a decline in the amount of well connects if we would normally spend, if you look historically; and then you add on the fact that we are getting more of reimbursements from the producers, so I wouldn't say it's the main driver.

[Sean O'Brien:]

Jeremy, Wouter and I add some things to it because obviously there always is a focus on maintenance CapEx and it makes sense. I think what you've got to look at is the things that we're talking with you about what is the focus of the company; how we're executing our strategy; I made comments about -- in the six plus years that I've been with this company; we are running better than we ever have and we're spending less money doing it. There is a tremendous focus by Brian Fredrick and his team focusing on how we are running these assets and run them smart. We're seeing that in variety of different way, a reliability is up, our -- what we call our loss-profit opportunity, that's basically when we make a mistake and engines goes down or a plant goes down, how much does that cost us, that has gone down very, very significant. If you take a look at engine failures, those are going down very significantly. So -- yes, we are driving maintenance CapEx down significantly but we are doing this while running the SS better and our customers are telling us; hey, you're running these assets a lot better. So a lot if this -- yes, there is well connect and we hope to see that maintenance is going to go up from well connects, no doubt about it but we are continuing to focus on making sure that what we drive which is related to reliability as we continue to optimize that in a great way and I think the results show it.

[Jeremy Tonet:]

Okay, great, thanks for the color. And then maybe just one last one if I could, as far as things improve across the enterprise -- just wondering, how things are looking upstairs with the FEMA relationship; could there be a dropdowns again at some point in the future? Any updated thoughts on all that will be helpful.

[Sean O'Brien:]

Our FEMA relationship has always been good continues to be great. So in other way I would talk about looking at this is its optionality and we talk always about -- we have the best inventory of assets siting at LLC, it has a phenomenon set of assets sitting at LLC. We are reducing our costs, our NGL breakeven is down significantly, LLC is in very good shape and strengthening and I think you've heard that at the [indiscernible], Philips and Spectra did earlier this week and last week. We are making the assets more MLP friendly, like we're doing some hedging; our contract realignment initiative that we started two years ago has had great success at LLC. So what does it give us? It gives us tremendous optionality to have assets and the right assets come down if we decide we want to do so.

[Jeremy Tonet:]

That's it for me, thank you very much.

[Operator:]

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

[Selman Akyol:]

Thank you, good morning, couple of quick ones for me. You talked about having optimism seeing potentially bottoming in the Eagle Ford and East Texas; and I was wondering if you could expand on those comments exactly, kind of what you're basing that on?

[Wouter Van Kempen:]

Selman, Wouter here. We're re-basing it on the activity that is happening on the ground, we are looking at rig count very, very closely; talking to our producer customers every single day. So the Eagle Ford to me is an interesting area, unlike obviously we have gone from darling to dog, pretty quickly; at the same time the Eagle Ford continues to be a great area to do business, it's close to the market center, if you think about ethane recovery, it's the easiest way to get ethane from the Mount Belvieu, it's close Mount Belvieu, it has tremendous infrastructure and the gas takeaway, NGL takeaway, crude takeaway, gas processing. So I'm cautiously optimistic and when things start to bottom out here and from a rig count point of view, it feels like things start to bottom out; potential the Eagle Ford has some upside when things start to stabilize or commodities go up.

[Selman Akyol:]

Got you. And then as I'm just going to take a look at your utilization on your pipeline there; any thoughts in terms of is -- easy lookout in the 2017, what you expect sort of from Southern Hills or Front Range in terms of those pipes filling up and driving more cash flow to you guys?

[Wouter Van Kempen:]

No, absolutely. You talk about Southern Hills, Front Range, I think both of those pipes have some upside but I think Sand Hill is the one there continues to be a great upside for us. We increased the capacity to 280,000 barrels here over the last couple of months, we're kind of getting close to 90% utilization there. If we take a look at all the third-party plans that we have connected, all the activity that is taking place in the Southern Delaware Basin where we have a tremendous number of gas processing plans, third-party plans connected -- I'm pretty optimistic there is opportunities for us to continue to expand that pipe and as you know, unlike NGL pipeline expansions are probably, economically the most advantageous things that you can do. You spent $20 million, $30 million, $40 million, $50 million including a couple of pump stations in and it gives you tremendous additional throughput capacity. So yes, very actively looking at that and I think that is something that definitely could come our way in 2017.

[Selman Akyol:]

Thanks for the additional color, I appreciate it.

[Operator:]

Thank you. And our next question comes from Helen Ryoo of Barclays. Your line is now open.

[Helen Ryoo:]

Thank you, good morning. I appreciate the color on the maintenance CapEx, just curious though whether the amount of improvement, the magnitude of improvement you've seen at the partnership level is consistent with what you've seen at the LLC level; if you could comment on maybe how the maintenance CapEx is trending upstairs?

[Sean O'Brien:]

Those comments -- Helen, this is Sean. The comments about are made are really enterprise wise; we've seen massive improvement as he talks about improvements and reliability, as he talks about lower loss profit opportunity; he was really referencing the full enterprise. So we've seen those improvements at the top as just as much if not more so as we've seen at the DPM level. Some of that is because if you think about the composite of the assets, we have a lot more NGL Logistics assets at the DPM, those are less maintenance intensive; we also have a lot of newer assets sitting at DPM. So a lot of the opportunity -- although we've seen a bunch of improvement at DPM, we've seen significant improvement at LLC through his comments earlier about the owners making very strong references around the quarter that we had up there, again reliability one on the drivers there.

[Wouter Van Kempen:]

I think Helen -- I do want to remind you and our thinking nowadays that -- we are running this entity -- these two entities as one company, as one entity. So people that are working in the fields, they down know, is this a DPM asset or is this an LLC asset. So everything that we do around our DCP 2020 strategy, the initiatives that were focusing -- people on, the expectation step we as it pertains to reliability, operating performance, safety all of those are the same throughout the system. So I think you can draw definitely the parallels there to everything that you see happening at DPM, you're seeing the same happening at LLC.

[Helen Ryoo:]

Got it, very helpful. And then -- your Page 8 shows the mix of deep sea cash flow versus commodity exposed cash flow at DPM. What is that look like at the enterprise level if you could provide some color? And then -- if you need to hedge the enterprise level commodity exposure given the depth of that commodity -- the derivative market, how much of the exposure do you expect to be able to hedge?

[Sean O'Brien:]

Helen, I'm very glad you've given the opportunity to talk about something that is pretty exciting at the company. We -- obviously Page 8 we focus on DPM as you think about the LLC and the consolidated company, similar to Wouter's comments he just made, same thing happening for the first time since I've been here; we have hedged -- we put a program in place to start hedging the position at the top and as we sit here today, we're about 19%, 20% of LLC open positioned has actually now has crude gas and NGL hedges, so we are excited about that -- that's a huge change in stabilizing the cash flow at the top. The other thing that as you think about -- what does it look like at LLC; remember with the owner contribution of one-third of Sand in Southern Hill those are fee-based assets that sit up at LLC now, those have moved our fee-based percentage up significantly, up at the top. I would tell you at the top we're seeing numbers just to give you some estimates of the fee-based portion of the margin at LLC to being around 60% that's a huge increase from where you go back five years, what was closer to 20% and now with the hedges in place, you're seeing about -- of that open 40% about 8% to 10% of that now hedged. So long answer but at the end of the day we are about 70% hedged at the top.

[Wouter Van Kempen:]

I think the other thing Helen that I would like to add to it is -- John [ph] and the commercial team have been working for two years on our contract realignment initiative that has thrown a tremendous amount of dollars through the bottom-line and that's where we -- where people focus on a lot but the other piece of what that exercise was is taking some of our commodity length out and converting some of the open echo commodity position into more fee-based. So if you take the hedges that Sean spoke about it, if you think the additional one-third of Sand and Southern Hills, and you then take the contract realignment initiative together it has really had a very significant impact.

[Helen Ryoo:]

Is the contract realignment initiative still going on that -- 70% or 60% pre-hedged fee-based mix; could that ultimately go up to a meaningful higher number given what you're trying to do right now or is it that…

[Wouter Van Kempen:]

I think we're two years into this and this was a three-year kind of program once we looked at; and our goal was to get $200 million at -- after three years. If you're thinking where we're sitting here today after two years, it's about $160 million that we've realized. So from a financial point of view it is fairly significantly -- there are some opportunities left but I think the big pieces we have done, and we have other contract that either they will come due overtime and maybe we can go after them at that time. And there is a number of contracts that we are really happy with and we would like to keep in place. For instance, the contract portfolio that we have in the DJ Basin, those are POPs or set of proceeds contract, they are like lease contract and we're very, very happy with those contracts and we would never convert those contracts.

[Helen Ryoo:]

Got it. And then lastly, Wouter you mentioned you are having targeted discussion with the producers and it seems like there is more opportunity in DJ and Permian. Number one, in terms of timing I guess if you need to put in more plans given the lead times with you, commission of project, would it be like a 2018 in service place if you end up doing that? And then secondly -- DPM doesn't have presence in Permian yet but if you were to build a plant out there could it be a DPM level project even though the rest of the assets are at the…

[Wouter Van Kempen:]

So those are quite a couple of questions there. So let me try to hit them all and if I forget one, please let's come back on it. Let me start with kind of your timing on plant in a DJ or so; yes, you're probably looking at 2018 from that point of view if you need to get permits, your construction cycle. But I think it's very important though is you got to not only focus on plants and I know that everybody wants to focus on what is the new plant -- but think about all the optimization opportunities that we've done in the last year and that we are thinking we can continue to do in 2017; the things that will continue to add capacity. Think about the Grand Parkway, we get the first fees, we have other opportunities with Phase 2 and Phase 3 of the Grand Parkway. We have bypasses where you can create $20 million, $30 million, $40 million of capacity at a plant, fairly cost efficient and fairly quickly. You can do optimization in the field. So we've done all of those kind of things and we have another bunch of opportunities to do those in 2017 in the DJ, getting you very low cost high return capacity in place. I think that is very attractive about what you can do there. Now let's switch over to the Permian, when we built GS2 [ph], we set it up in a way that we could potentially built other plans next to that. So there is an opportunity there; could those be DPM plants, absolutely. I think if you look at what we've done historical over the last kind of year or two or so -- most of the growth that we've done, we've done it at the DPM level; so there is definitely an opportunity. What I think is really important though, again talking about the Permian Basin, is people tend to focus what is your next plant that you're building? I would like to focus you on our NGL business in the Permian. We're the largest NGL producer in the country, we're the third largest NGL pipeline operator. If you take a look what we've done with Sand Hills, in the Permian Basin, a lot of people are building new plants, third-party plants; we are connecting a very significant number of those plants; that's is very low cost, very high margin product that we are bringing in. So we are playing the Delaware Basin not only by gathering into processing side of the house but we are doing it also very significantly by the NGL side of the house. That benefits DPM because one-third of Sand Hills are sitting in DPM, it benefits LLC because one-third of Sand Hill is sitting in LLC.

[Helen Ryoo:]

Got it. And then Sand Hill, is that being expanded to 350 next year?

[Wouter Van Kempen:]

We have not announced if and when we would be expanding it, we're at 280,000 today; we believe we can expand it to probably full capacity; let's call it 360,000 barrels a day. And we definitely think there are some opportunities to grow that well, and grow that well in a reasonably expedite matter.

[Helen Ryoo:]

Got it, all right, thank you very much.

[Operator:]

Thank you. And our next question comes from Chris Sighinolfi of Jefferies. Your line is now open.

[Christopher Sighinolfi:]

Good morning. Just a couple of questions for me; I guess to start -- this is more of a follow-up question to clarify something Jeremy was asking about. Sean, just as the 2017 NGL hedges at $0.75 a gallon which were added last quarter; I believe you said to Jeremy that was where to a net to your barrel composition. So just curious; A) did I hear that right? And then B) is it possible you tell us what or disclose what the barrel composition is because that's pretty well above what the Belvieu price was last quarter. So I'm assuming it's a heavy weighted barrel; I just don't remember off-hand if you've given that what it is.

[Sean O'Brien:]

I don't know that we've given the full composite before, we are heavier, that is true and that is correct. When we are hedging our position obviously we're hedging our direct position, that was the benefit I was referencing Chris, about the ability of the liquidity of the market how to get in and actually hedge the component. So as we are hedging our direct component since we have a heavier barrel, you will see sort of a little bit of a higher price. I will say that we also -- we are advantageous as we put those hedges on, pick some very good timing as well which drove obviously higher prices across the board, that wasn't just on the NGL; but we are usually -- we're definitely heavier at propane -- we are more weighted that way and then obviously a heavier C5 plus percentage as well.

[Wouter Van Kempen:]

So I think Chris, if you kind of look it on average and like we said to right now hedge the propane, the butane, and the natural gasoline; that's really where most of the hedging programs is sitting today. So that's why things are skewed a little bit on the heavier side.

[Christopher Sighinolfi:]

Okay, perfect. That was my suspicion, so I just wanted to make sure I was marking it consistent with that. Thanks for that. I guess the second thing about it is, the slides are very helpful; obviously you've had some changes in the slide presentation over the course of the year. I just wanted to ask you had a focus on -- you've been focused, the teams been focused on the cost discipline across the family. If I look at last quarter slides, you had indicated that there was about a $6 million improvement year-on-year in cost, 2Q versus 2Q, we see on today's slides there is about a $10 million improvement year-on-year 3Q to 3Q; I'm just wondering obviously positive trajectory there -- I'm wondering any color from you as to things that maybe still weren't fully represented in 3Q -- kind of where do you think that that cost improvement might take us in 4Q and in 2017?

[Wouter Van Kempen:]

I appreciate those comments Chris, and let me maybe kind of give you a little bit of history and kind of talk about what we've done. Now I'll talk about the enterprise as a whole; if you take a look at NGL breakeven, we were in 2014 -- we were sitting at $0.60; then we went from 2014 to 2015, we went to $0.42, that's a 30% improvement. That our goal for '16 must go to $0.35, and we thought that was a pretty sporty goal, that's another $0.17 improvement. As of today we're sitting at $0.31, so think about that. going from $0.42 to $0.35 is pretty stealth improvement and the team has actually outperformed itself very significantly and we're sitting at $0.31 year-to-date. What does that mean, it basically means that flywheel continues to go a bit faster and that you hope to get more run rate into your numbers here in the third quarter to fourth quarter; and then in 2017, hopefully you continue to see that run rate. Our goal really is to make sure how can you keep all of these because taking cost out of the organization; A) you got to make sure that you continue to run well; and I think we've proven that to everybody that our assets actually are running better while we are spending less money. Then the question is if the industry goes into some type of recovery, can you hang on to those costs savings? And that's is something we're very, very focused on; making sure we can hang on to those cost savings that are not temporarily but that it really gives you a tremendous amount of leverage coming out of this cycle and then into '17 and '18.

[Christopher Sighinolfi:]

And is that done primarily through the contracting side you were talking -- like in terms of retention of that cost extraction; is there a particular thing within how you're operating that you see as sort of the mechanism to preserve that for DPM, is it the contract side or is it something else?

[Wouter Van Kempen:]

No, I think it's really what you're talking about; how do you work unlike -- work process, you've got to change work processes, just getting less people into your organization that may give you kind of a temporary glitch but if you don't change how you work, try to work that you do; you're not going to be able to capture your cost savings. So that's part of when we talk about DCP 2020 and our strategy of operational excellence, focusing people on reliability and things like that. It really kind of changes how we do the work. So what we're trying to do is lasting work process changes, working smarter, not just working harder and that is what we want to make sure that we can keep into 2017.

[Christopher Sighinolfi:]

Okay, thanks so much. Final question; Sean, there is -- I think the next debt maturity is about 13 months from now -- just curious, obviously you guys have made it a lot of headway to keeping the leverage low, the asset sales have helped clear out a lot of the revolver borrowing capacity. Just wondering what we should expect to see from you as to how and when you might address the next maturity? Thanks.

[Sean O'Brien:]

Chris, I think you're bringing up great points, we're down quite a bit on our revolver where generation is up significantly; so in a really good spot. Then we also have quite a bit of capacity on the revolvers. So what I would tell you is in terms of the maturity in December 17 -- we've got a lot of flexibly, we've got a little bit of time, we've got room on the revolver; so at the end of day whether we take that out or whether we just reduce it, we've got -- the good news is we have a lot of optionality on how we want to handle that.

[Christopher Sighinolfi:]

Okay, great. Thank so much for your time.

[Operator:]

Thank you. And the next question comes from Jerren Holder of Goldman Sachs. Your line is now open.

[Jerren Holder:]

Thanks, good morning. It's earlier to see where you guys had a great slide on [indiscernible]. I was just wondering if you guys had updated thoughts there.

[Wouter Van Kempen:]

Well, thank you for the comment, we do. We agree, I think that was a good way to lay things on, especially the confusion that there was probably in the marketplace over the last number of quarters. We continue to be positive around that, I think there is no real update to it other than -- hey, we're getting closer to these trackers coming online. It's still -- call it mid-late 2017 event going into 2018. I still believe that if you take a look at all of the numbers, look at the DCP Enterprise footprint that we are tremendously well positioned, about that I think coming to market and how we can work that and play that on our gathering and processing side of the house between having areas that are located close to the market center, as well as all our NGL pipeline side of the house. So we didn't give the update this time because we thought we -- I have spent a good amount of time with all of you, around kind of the education process; where is the ethane going to come from? What ethane is going to find itself to [indiscernible] first? But overall, we're still very confident about this will happen, this is not a matter of -- if it will happen, it's a matter of when it will happen. And that significantly upside for the enterprise, and I guess I said earlier, it's probably $70 million to $100 million of upside for us.

[Jerren Holder:]

Great. And to degree that perhaps Conway to Belvieu spreads may widen as a result as Belvieu price gets risen, perhaps Conway does not as much -- is there Southern Hills pipeline -- is there potential benefit there; whether its increased third-party volumes or -- I don't know, you guys are using equity volumes in capturing that margin; how do you guys think about that?

[Wouter Van Kempen:]

I think that's probably some opportunity around that, our team are always focusing on what are kind of some inefficiencies in the market and making sure that we can react to those fairly quickly. So between our Conway position, Belvieu position, we definitely can benefit if there are temporary imbalances in anyway shape or form.

[Jerren Holder:]

And last question for me, obviously a lot of excitement about the STACK and it's SCOOP; I mean how do you think of -- once again, your Southern Hills pipeline being competitive with one -- and other guys would pipe assets in that region as production grows?

[Wouter Van Kempen:]

No, I think our pipe is very competitive but I wouldn't focus on just the pipe unlike we got and we did talk a lot about the STACK and SCOOP; per say here in this call, all the assets that are sitting in the second SCOOP and in the Mid-continent are sitting in LLC and the private entity; we are the largest gas processor in the Mid-continent, we have a very strong position in the STACK and the SCOOP; we have -- we are pretty much full in the eastern Mid-continent where the STACK and SCOOP is sitting. Do you sort of Western Mid-continent, we have some processing capacity available; we have five available for NGL take away, so our team is really focusing how can we make sure that we take some of that steel that's is in the ground, in the western Mid-continent, can we utilize that to take additional volumes out of the STACK and the SCOOP. So I think it presents some pretty good opportunities for us as well.

[Jerren Holder:]

And I guess lastly, I mean you've seen some pretty high multiples in terms of transactions around STACK assets and to your point -- you have lost of assets available be there; any thoughts on maybe taking advantage -- maybe selling some non-core assets or anything along those lines whether it's at DCP/LLC level? How do you think about that balance?

[Wouter Van Kempen:]

We think of it little broader about selling as a whole -- you've talked about high multiples, I want to remind you that we believe is quite high multiple on the North L.A. assets that we sold. So we are definitely opportunistic around areas that we believe are non-core to the portfolio and getting some fairly significant multiples and proceeds for those. If you take a look around that Mid-continent area and the STACK and SCOOP area and what we have -- unlike we really look at that as a core area for us where we can continue to have very significant growth; unlike never say never on any type of acquisition or disposition buts it's not something that we are looking at and saying; hey, we need to sell some of those assets. We like those assets, they can make great money for us, they are integrated assets from a G&P and NGL point of view. So great competitive opportunity for us there.

[Jerren Holder:]

Okay, I appreciate the comments. Thank you.

[Wouter Van Kempen:]

Thank you.

[Operator:]

Thank you. And I'm showing no further questions. At this time I'd like to turn the conference back over to Andrea Attel for closing remarks.

[Andrea Attel:]

Thanks, Candice. And thank you everyone for joining us today. If you have any follow-up questions, please feel free to give me a call. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a great day everyone.