DCP Midstream, LP
Q4 2013 Earnings Call Transcript

Published: 28 Feb 2014

[Operator:]

Welcome to the DCP Midstream Partners Fourth Quarter 2013 Earnings Call. My name is Christine, and I will be the operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Andrea Attel. You may begin.

[Andrea Attel:]

Thanks, Christine. Good morning, everyone, and welcome to the DCP Midstream Partners' fourth quarter 2013 earnings call. As always, we want to thank you for your interest in DPM. This call is being webcast, and the slides used for today's call are available on our website at dcppartners.com. I want to remind you that in the course of our discussion today and in the Q&A session, we may be making forward-looking statements. Please review the second slide in the deck noting that our business is subject to a variety of risks and uncertainties that may impact our actual results. For a complete listing of these and other risk factors, please review the partnerships' most recently filed 10-K. Also during our discussion, we will use various non-GAAP measures, which are reconciled to the nearest GAAP measure in the schedule to the appendix of the earnings slides. Yesterday, we announced the launch of a public equity offering. We will not be commenting on the offering, and we will not be answering any questions regarding the offering. With that, I will turn the call over to DPM's Chairman and CEO, Wouter van Kempen.

[Wouter T. van Kempen:]

Thanks, Andrea, and good morning, everyone. I'm really pleased to be able to lend some introductory thoughts on our fourth quarter and year-end results, results that we're very proud of and share our excitement on how well we're executing on our strategy. You've seen us evolve to a one company, one strategy view over the past few years, and our management structure has transitioned with that, which is very typical of sponsored MLPs. So today, we have Sean O'Brien joining us for the first time, and Sean is DPM's new CFO. Sean is also the CFO for DCP Midstream, our general partner. I'm pretty sure that Rose Robeson, our former CFO, is listening in on the call, cheering us on. And I want to express my appreciation for her contributions to the partnership. And Rose, we all wish you the very, very best. Before I hand over to Bill Waldheim, our President, I wanted to highlight a few things that we will be talking about in today's call. First, we just announced the largest dropdown in the partnerships' history, a $1.15 billion transaction that includes the 1/3 interest in Sand Hills and Southern Hills pipelines and the remaining 20% of our Eagle Ford business and the Lucerne 1 plant in the DJ Basin. This immediately accretive transaction expands the scope of DPM's fee-based business and with Sand and Southern Hills, we have now further diversified DPM's footprint into the rapidly expanding Permian Basin and the Granite Wash and SCOOP areas of the Midcontinent. Secondly, we announced the new Lucerne 2 plans, a $250 million organic growth project in the prolific DJ Basin. And lastly, we announced record results for the partnership for both the fourth quarter and 2013 as a whole. So as you can see, we're out of the gates last year in 2014 and executing on our growth-for-growth strategy to grow the partnership and to help fund the ongoing capital needs for the DCP Enterprise. And this is a strategy that has served DPM very well, doubling our size over the past few years and delivering long-term sustainable value to our unitholders. So with that, I'm really excited to hand it over to Bill and Sean. They will take you through our 2013 results and add some more detail on our just announced transactions. So with that, let me turn it over to Bill.

[William S. Waldheim:]

Thanks, Wouter, and thanks, everyone, for listening in today. We've got a lot of ground to cover with good news on many fronts, so let's get started. Last night, we reported record results in both adjusted EBITDA and DCF for 2013, with DCF coming in at $296 million or 64% above our 2012 DCF. We finished 2013 strong and it's carrying over into 2014. Our distribution now stands at $2.93 per unit annualized, after making our 13th consecutive distribution increase. While our record financial performance is great news on its own, the announcement of our latest transaction, the $1.15 billion immediately accretive dropdown and an exciting $250 million organic growth project underscores how we are continuing to bring quality assets into DPM. And as a sponsored MLP, DCP Midstream will take approximately 20% of the dropdown value in DPM units, further highlighting the strong support from our general partner. I'd also like to highlight that in 2013, we dropped over $1 billion of assets into the partnership, and during 2013 through February of this year, we placed approximately $1 billion of growth projects into service. All these projects are now generating earnings and contributing to our 2014 guidance. So before we dig into the transaction, let me touch on our 2014 guidance. For starters, as we've shared at Spectra's Investor Day, we are accelerating our dropdowns to DPM in 2014, above our original $1 billion guidance. We are now targeting approximately $1.5 billion of dropdowns from DCP Midstream. We are also forecasting about $500 million of organic growth projects to be executed on during the year, for a total drop and growth forecast of about $2 billion. Our 2014 distributable cash flow forecast is between $400 million and $420 million, all of these supports sustainable distribution growth. And with our recent distribution increase, we are targeting approximately 7% distribution growth in 2014, which is above last year's growth rate. As in past years, we have good line of sight in delivering on our plan, so we are confident we'll continue to achieve our goals. With that, let's talk about our announced transaction. First, the dropdown. At $1.15 billion, this dropdown, which is expected to close by the end of March, includes

[Sean O'brien:]

Thanks, Bill, and thanks to everyone for joining us today. I want to start off by saying that I'm very excited to share the strong performance we have delivered at DPM in 2013 and our compelling outlook for 2014 and beyond. Looking back on 2013, it was a record year, and we exited with strong momentum. As a quick reminder, for GAAP accounting purposes, we show our prior year results as if we own the full 80% interest in Eagle Ford during the fourth quarter of 2012, even though we only owned 33% in November and December. I'll be referring to the quarter-over-quarter variances for the assets actually owned by the partnership, as shown in the shaded box on this and the next slide. Year-over-year, our fourth quarter adjusted EBITDA was up almost $18 million. And looking at our DCF, we had a record $79 million in the fourth quarter of 2013, up 16% from 2012; and a record year overall at $296 million, up 64% from 2012, exceeding the high end of our 2013 DCF target range by $16 million. Including the dropdown we just announced, we expect 2014 maintenance capital to come in at around $35 million to $45 million. And lastly, our cash distribution coverage for the full year was approximately 1.1x. So as you can see, DPM delivered strong results in 2013. On Slide 11, I'll quickly highlight the key earnings drivers from each of our business segments. Natural Gas Services segment adjusted EBITDA increased $39 million compared to the prior year. These results reflect growth in the Eagle Ford dropdown, as well as the operation of our fee-based O'Connor Plant that started up at the end of October 2013. Our throughput volume increased about 7%, and our NGL production increased 21%. We are seeing very strong volume growth in the Eagle Ford. We are also seeing a nice ramp-up in NGL production in the Eagle Ford and other areas due to our higher volumes and improving recoveries from what we saw just a year ago. These improvements are offsetting volume declines in certain of our lower-margin areas. And as a reminder, our hedging program continues to provide earnings stability with very little exposure to commodity prices for this segment, and I'll cover more details around our hedges in a minute. Our NGL Logistics segment adjusted EBITDA for the fourth quarter 2013 of $19 million was relatively flat compared to the prior year, with higher results from the Mont Belvieu plants being offset by the write-off of a discontinued project. Overall, volumes are up in this segment with the start-up of Texas Express. And as Bill mentioned, looking forward, we expect to see strong growth in this segment with the announced dropdown of Sand and Southern Hills pipelines, the start-up of the Front Range Pipeline and ramp-up of Texas Express. Adjusted EBITDA in our Wholesale Propane segment was lower by $17 million for the quarter, primarily as a result of strong results in the fourth quarter of last year, which reflected a significant recovery of a noncash lower of cost or market adjustment that was recorded earlier in 2012, and also higher unit margins that were realized due to favorable hedges on 2012 higher inventory levels. Absent those factors, our Q4 2013 results were in line with previous years, and we expect to end the winter heating season at or above our plan. On Slide 12, we show our 2014 sensitivities. With the recent fee-based assets coming into service and with the announced dropdown of the Sand and Southern Hills pipeline, our 2014 fee-based market has increased to 55% from 50% in 2013. We have a multi-year hedging program where we manage our commodity sensitivities on a portfolio basis. So in 2014, the remaining 45% commodity sensitive margins is about 90% hedged, with substantially all of the commodity exposures being hedged with direct commodity products. So our 2014 total margin continues to be about 95% fee-based or hedged. For 2014, we are neutral to changes in natural gas and crude prices, and our sensitivity to NGL prices is about $700,000 impact or a $0.01 per gallon change. So we have very limited exposure to commodity prices in 2014. These exposures and sensitivities are inclusive of our drop down announcement. Slide 13 shows our capital market execution during the year and our financial position at the end of the quarter. We continue to maintain a strong capital structure and a competitive cost of capital. Our average cost of debt was 3.4%, and we have approximately $665 million of capacity available under our revolver at the end of the year. We also launched a very successful commercial paper program for DPM in the fourth quarter, which has lowered our short-term borrowing cost. Our debt-to-EBITDA at the end of the quarter was 3.9x. This is within our target range of 3x to 4x, and we continue to target 1.1x to 1.2x coverage. So we have strong investment-grade credit metrics and are well positioned to serve as a significant source of funding for growth capital for the DCP Enterprise. With that, I'll turn it back to Bill for some summary remarks.

[William S. Waldheim:]

Thanks, Sean. I would like to close this morning by leaving you with the following. 2013 was a fantastic year. We reported record Q4 and 2013 DCF and EBITDA. We completed $1.5 billion of dropdowns and organic growth and placed $1 billion of projects into service. And we delivered on our DCF, our distribution forecast and announced our 13th consecutive quarterly distribution increase, now at $2.93 annualized. And although 2014 is still young, we've already placed our Goliad Plant and Front Range Pipeline into service during this quarter. Our 50 million cubic feet a day O'Connor Plant expansion is in start-up mode. And in 2014, we expect to deploy $500 million on high-return organic growth projects. With the just announced $1.15 billion dropdown, we are 80% of the way to our 2014 $1.5 billion dropdown forecast. We've more than doubled the size of DPM over the past several years. And with the potential for $3 billion to $5 billion of dropdowns coming at DPM between 2014 and 2016, along with our strong slate of organic projects, we could double it again. And finally, we are targeting $400 million to $420 million of DCF and sustainable distribution growth, with a target -- 2014 target of approximately 7%. So we are confident that we'll continue to deliver on our promises and provide long-term value to our investors. So again, I'd like to thank you for your interest in DPM. Wouter, Sean and I are now available to take your questions. And with that, I'll turn it back to Christine, our operator.

[Operator:]

[Operator Instructions] Our first question comes from Stephen Maresca from Morgan Stanley.

[Stephen J. Maresca:]

First question on that, is that 7x to 9x multiple forward, the acquisition economics, does that assume Sand and Southern are running at that full initial capacity? And then what causes the low or high end of that multiple to happen? And when do you expect to get to that multiple?

[William S. Waldheim:]

Yes, appreciate the question, Stephen. The package of assets will come in at 12x like we mentioned. The guidance that we'd steer you towards on the Sand and Southern Hills systems are -- we like to talk about it more on a DCF basis. And so in 2014, our 1/3 interest might be around $50 million of DCF; in 2015, around $90 million; and 2016, about $100 million. So there is a ramp associated with those pipelines. And so between the ramp that you see there, the Goliad Plant continuing to ramp up, as well as the Keathley Canyon project coming online later in the year, that's where we get the ramp-up over time. And again, very good organic growth projects, which generally we like to target in the mid-teen type returns.

[Stephen J. Maresca:]

Okay. So 7 -- and would you expect that to be more like a 2016 multiple on that, getting to that 7x, 9x that you mentioned in the opening remarks?

[William S. Waldheim:]

I'd just say over the first several years, we would drive it down to that level.

[Stephen J. Maresca:]

Okay. And then what -- is there any cost -- or what is the cost, I should say, to expand Sand Hills in the future to 350,000 barrels a day from 200,000 barrels a day should you need to?

[William S. Waldheim:]

Yes, it's relatively inexpensive. The pump stations that we have in place can take the existing pipeline to 200,000 barrels a day. Each station, whether we add a pump to an existing site or create a new pump site depending on hydraulics, might cost you about $15 million-plus or minus. So it's very inexpensive and excellent return bolt-on type projects. And we've seen a lot of activity in the Permian. The growth that we mentioned, a couple hundred million dollars of these types of bolt-on projects, we really do expect to be able to add capacity to the system and handle the volumes that we're looking at.

[Stephen J. Maresca:]

Okay. And then on the financing side, I want to make sure I understand this. You're doing a 12.5 million offering now. But then DCP Mid LLC, the parent, is taking an additional -- or is taking 20% consideration. So we're talking, adding those up, roughly $850 million of equity funding coming from these 2 right now, so they're in addition to each other?

[Sean O'brien:]

Stephen, as Andrea mentioned at the beginning of the call, on this particular call we won't be commenting on the current financing.

[Stephen J. Maresca:]

Okay. But are they separate issues? Like, you're doing an offering. I understand you can't comment on that. But is DCP taking 20% consideration for this dropdown? Am I...

[Sean O'brien:]

Yes, we noted in our script, the GP, DCP is taking 20% at about $225 million in this particular transaction, once again showing GP's support.

[Stephen J. Maresca:]

Got it. Okay. I just wanted to make sure I understood that. Okay.

[Operator:]

Our next question comes from Harry Mateer from Barclays.

[Harry Mateer:]

Two for me. I guess first, can you just maybe give some additional color and talk about how the Wholesale Propane business has been navigating the recent volatility in the propane market we've seen quarter-to-date? And then just on the financing but a different angle to it, can you just give us a sense of your debt financing expectations this year?

[William S. Waldheim:]

Sure. Why don't I take the first question, and I'll let Sean follow up with the financing question. Certainly, the Wholesale Propane business, this year, it's been a very robust season obviously with the cold weather. We've been importing ships to really handle the supply needs of our customers. The one thing I'd say is as we are above our base contract, a lot of the spot sales that are being made are being made at margins that are probably less than our base contracts. So overall, we're handling the needs of our customers. We're probably looking at a reasonably good year, but I would just say that the year will come in at or above our target plan at this point.

[Sean O'brien:]

And Harry, to follow up on your second question, as you know, DPM has got full investment-grade ratings across the board. We target a 3x to 4x debt to EBITDA range, and we are consistently -- we've talked about our 45/55 composite, and we would anticipate to hold that composite around the long term and the rest of the year as well.

[Operator:]

Our next question comes from Ross Payne from Wells Fargo.

[Stanley Ross Payne:]

You guys have obviously been dropping a lot of fee-based assets into DPM or getting long-term contracts with DCP Midstream, LLC. Is that something we can continue in the future? Can we see the fee-based component continue to build on the 55%? Or as you guys get bigger, are you going to be willing to take more commodity risk?

[William S. Waldheim:]

Ross, I'll take that question. Certainly, as we look at the partnership and the fact that we're getting into a lot more of the downstream logistics-type assets, they are all fee-based and have, as you mentioned, long-term contracts associated with them. So I think overall, we see the trend in our fees continuing to increase. Even the new Lucerne plant had been structured contractually to be a fee asset. Going forward, we've shown that will -- the private company will write the hedges. They've shown that they'll structure commodity sensitive assets at fee. As we go forward, the entities are much bigger entity and probably can withstand some further commodity sensitivity as we get larger. But overall, I'd say at this point, it's unclear as to how we would look at that until the time actually arrived for further assets from Midstream. [indiscernible]

[Wouter T. van Kempen:]

Ross, let me add to that for my parents [ph]. At DCP Midstream, there continues to be a tremendous amount of assets. If you look at the various assets, there are areas where we see continued growth in fee-based, and like the Midcontinent area, it's a great example of an area to see more and more fee-based assets. So I think there continues to be a great slate of opportunities of assets that could come into the partnership.

[Operator:]

Our next question comes from Michael Blum from Wells Fargo.

[Michael J. Blum:]

Just first question, you talked about $200 million, I believe I heard this correctly, $200 million of potential capital to spend on new connections into Sand Hills and Southern Hills. I mean, I just was curious if you could expand upon that a little bit in terms of, number one, just the timing for that. And is that just net to your 1/3 interest? And then if you were to tie these in, does that require expansion of the current capacity of those pipelines?

[William S. Waldheim:]

Ross, I'll say that's a great question, and I'm glad we could clarify that. Certainly, the $200 million is on an eight eighths basis, and we would be connecting in not only DCP growth opportunities in the Permian but other third parties. And so if we look out in time, I think there is the need for additional capacity beyond the 200,000 barrels a day. And we would certainly have the capital already in our econs to expand the pipeline if needed.

[Michael J. Blum:]

Okay. Great. And then I'm curious just to your -- I think if I go back maybe 6 months, you had talked about a 2014 growth rate target of, I think, a range of 6% to 10% and now you've kind of narrowed that down to 7%. So I'm just kind of curious for the thought process there in doing that. And then do you envision any upside to that 7%, and if so, what would be the drivers of that?

[William S. Waldheim:]

Michael, recently, as you know, we did increase our distribution growth rate, and so we're ahead of last year. When you look at these assets that are coming in the partnership, we are very excited about them. But they do have a growth profile over time and a ramp to them and the example is the Southern Hills -- Sand Hills Pipeline ramp is a perfect example of that. We also have organic growth projects, in particular the Keathley Canyon project and now the Lucerne 2 project that are really coming into service later in 2014 and 2015. And certainly, we generally don't comment on the timing of our dropdowns. So it's hard to say what any future drops, the contribution to 2014, what that might be. So at the end of the day, our goal is to have sustainable distribution growth. Our current progression is currently a tad under the 7% range. That's not to say that we couldn't end up over the 7% target depending on asset performance and drops. So we want to -- at the end of the day, we want to fund our organic growth projects because that's where we're going to get the sustainable growth that we are talking about, and we also want to keep our metrics in line for leverage and coverage as well. So at the end of the day, we want to provide you as much transparency as possible, and we want you to be able to take our guidance to the bank. So I think right now the 7% is a good target, plus or minus, and we'll see how these assets perform as they come into the partnership.

[Michael J. Blum:]

Okay. Great. And then just two more quick ones for me, if I may. One, just wanted to clarify at the Chesapeake terminal, it seems you indicated in the press release that you have some propane exports in the first quarter of 2013. Can you just talk about, are you currently exporting propane out of that facility? And is the debottlenecking for butanes, or is that also for propane?

[William S. Waldheim:]

Just to clarify, and you're absolutely right, we did export propane out of that terminal about 1.5 years ago, I think it was. That was only a function of the fact that we already had propane that had been imported. And so it was of export quality, if you will. But going forward, it appears to us that we are moving towards a butane export facility. We've got -- we're very far along in the process of getting that contracted. And I think that's just the start because I think there's even additional interest once we get the base contract in place of additional butane exports coming out of that facility. So we do see that as the future of that facility at this time will be a butane export facility.

[Michael J. Blum:]

Okay. And then last for me, in the NGL Logistics segment, you had a write-off for a discontinued project. Can you just talk about what that was?

[Sean O'brien:]

It was a relatively small project in our Northeast business where we have to spend some dollars on some potential projects that we took a small write-off on, Mike.

[Operator:]

Our next question comes from Elvira Scotto from RBC Capital Markets.

[Elvira Scotto:]

I just had a couple of questions of clarification. So when you provide the DCF of $400 million to $420 million, that's just including this announced dropdown, even though you're expecting $1.5 billion of dropdowns?

[William S. Waldheim:]

That's correct.

[Elvira Scotto:]

Okay. Great. And then just going back to Sand Hills and Southern Hills. When you talked about the ramp-up in the DCF, $50 million in 2014, $90 million in '15 and $100 million in 2016, is that on take-or-pay, fully committed? Is there any volumetric exposure there? Is that based on the minimum commitments?

[William S. Waldheim:]

Elvira, I'm glad you asked that. The guidance that we're giving around the pipeline is really, again, we're calling it our base case. We've got some pretty conservative assumptions in there for ethane recovery and those types of things. And so to our 1/3 interest, that is the base case growth profile. And it really does not include any of these other opportunities that we're talking about that we were -- just mentioned earlier on a previous question. There are some plants that will be built and coming into service throughout late 2014, 2015 time frame that we're working with the third parties to connect their facilities. And so that's all kind of upside to the numbers you're looking at. But the base case, our 1/3 interest, that's what we're guiding to as far as DCF is concerned.

[Elvira Scotto:]

Okay. Great. And then just my last question on the Lucerne plants. The long-term minimum throughput fee-based contracts, are those minimum throughputs? What are they? And are they on the total capacity upon start up, or do they ramp up to a certain amount?

[William S. Waldheim:]

I think we've said that the minimum throughput commitments are about 75% of capacity, and that's just the way to make sure we derisk the project. We do get a fee on the entire throughput of the plant. So for instance, O'Connor had a minimum throughput of 75% of 110 MMcf a day. But obviously, we filled up the plant. So we're getting fee on the entire 110 MMcf a day, but the minimum would be 75% thereof. That will be the same kind of arrangement with Lucerne 1 and Lucerne 2. When both plants are in operation, that will be 235 MMcf a day of capacity, but 75% of that is minimum throughput. But again, as long as we ramp up over that minimum, we certainly collect our fees and the partnership will be excited to see these plants in service and ramping up and hopefully full in the near future.

[Operator:]

Our next question comes from Jeff Birnbaum from UBS.

[Jeffrey Birnbaum:]

So I actually had just 2 follow-up questions to Michael's questions and just a quick housekeeping question. So first, on sort of the distribution growth strategy, it does seem that it's been a couple of years in a row now that the growth guidance has been narrowed and come in at the lower end. And I know that if the business continues to be very well, the drop downs are accelerating, and DCP Midstream continues to spend CapEx itself. But as we think about it, how should we be thinking about it, I guess, as those drops require funding and often there is volumetric ramps? I mean, am I hearing you right, Bill, in that perhaps to get to a bit of an accelerated growth rate from here, it's fair to say that we're going to need to see some more lower multiple organic projects that are going to be really the catalyst for that?

[William S. Waldheim:]

Well, we certainly have a nice plate of organic growth projects, and we're seeing those projects' returns in very good mid-teens range. The only thing I'd say is we're conservative in nature. We want to be able to deliver on what we say we're going to do. We don't want to walk you backwards. We have a very nice ramp and growth profile looking out into the future. And so I think as you saw this last quarter, we raised our distribution growth rate. We want to see how these assets come in to the partnership, how they perform. And as we get good line of sight, there's always that possibility that whether the 7% guidance today we end up slightly over. I think we just want to keep looking at the sustainable distribution growth, and that's really the goal and the strategy of this organization.

[Jeffrey Birnbaum:]

And then in terms of the Memorandum of Understanding for shipping butane out of Chesapeake, is that likely to take up the full capacity of that facility? And if not, I mean, do you expect -- it sounds like you're expecting it to be predominantly butane. But -- so is that MoU for all of it or not?

[William S. Waldheim:]

The way we're working it right now is the Memorandum of Understanding is for one customer, and they will take one tank. As you know, it's a 2-tank facility, and so there is the opportunity for further expansion. And we're just working through the logistics of keeping product quality intact. And we hope there is an upside opportunity there. But again, our whole focus has been getting the first kind of deal under our belt. We're almost there. Again, it's not a done deal. So I think we're just giving you enough information at this point that we're hopefully 90% of the way there and we're going to be successful and continue to grow the export capability.

[Jeffrey Birnbaum:]

Okay. Great. And then a quick question just on hedging, the 2015 hedges, does that include re-contracting of the 3-year hedges of the Eagle Ford assets that are expiring first quarter or so next year?

[Sean O'brien:]

No, no. We obviously, our hedge profile, we take a portfolio approach at the end of the day. So our 2015 hedge percentages are predicated on the total portfolio and the total length that we have there.

[Operator:]

Our next question comes from Selman Akyol from Stifel.

[Selman Akyol:]

Related to the Eagle Ford system, you made some comments that you're currently at 75% to 80% capacity. And I'm wondering, longer term, how do you view that in terms of expansion potential? And then since you own 100% of it now, would it be done at the partnership level? Or is there any potential for Midstream to be doing it and then dropping it in?

[William S. Waldheim:]

I'll take that question in reverse. The first question -- or the second question is now that the asset is 100% in the partnership, if there is growth opportunities around this asset, those growth opportunities would remain at the partnership. And to the first part of your question, we already have actually a permit on file for another plant in the area. I think we're looking at the overall build out of the area and want to be careful that -- I think industry-wide, there might be a perception that it might be getting a little overbuilt. But certainly, we want to make sure we fill our assets. We've got a great strategy of -- we call it a super system strategy where we interconnect everything. So no matter where the drill bit goes, we've been able to fill our plants. They're filling nicely, and we'll just assess in the future whether or not it makes sense to deploy more capital, or possibly use excess capacity at some of the other facilities that seemed to be out there.

[Wouter T. van Kempen:]

And Selman, this is Wouter. Just to add to that, the 75% to 80% was with the new Goliad Plant coming online. So our system was pretty much full before we put the new Goliad Plant online. And as Bill mentioned in his prepared remarks, as soon as we put that new Goliad Plant online, then 50 million a day kind of coming into the system. And we feel very good about how we're ramping up in the capacity, utilizing our capacity in the Eagle Ford.

[Selman Akyol:]

All right. And then just one other quick question. On Chesapeake, clearly butane exports. But just longer term, is there any thoughts on ethane exports?

[William S. Waldheim:]

No. That's probably an easy one. The tanks aren't rated for ethane.

[Operator:]

Our next question comes from Helen Ryoo from Barclays.

[Heejung Ryoo:]

Just a quick follow-up. So starting with the Southern Hills, Sand Hills dropdown, your 2016 DCF number, what kind of capacity utilization or excess capacity would you have at that point when you talk about the $100 million DCF contribution? Is that pretty much -- are those pipes pretty much full at that point? Is there some excess capacity to putting in or move more volumes if you're able to tie in other third-party plants?

[William S. Waldheim:]

Yes, Helen, I know -- I think at the Spectra conference, there was a comment that the exit rate on Southern and Sand Hills will be around 230,000 barrels a day. Again, I only encourage you -- I mean, that's the base case, and we really aren't talking too much about what the volume growth is down the road because as we tie in these plants, we also have to then factor in the ramp profile of these plants in the Permian because they certainly have a ramp feature to them, whether it's a DCP plant or a third-party plant. But I would only say that as you get further out in time, those revenues -- or those DCF numbers are certainly driven by volume and tariff, and the tariff is a published rate on our website. So...

[Wouter T. van Kempen:]

So needless to say, and like if you're sitting at that type of exit rate that Bill mentioned and like the total capacity, if we put additional pump stations in you can ramp probably up to 350,000 barrels give or take. So there is a significant amount of upside from where we're kind of looking at in 2016 from a volume point of view.

[Heejung Ryoo:]

Got it. And then just another follow-up to, I guess, previous discussion on the fee-based assets or contracts at the LLC level. As the LLC contracts out new processing plant capacity, are you guys doing or able to get fee-based contracts on it? Or is it the case that you do it more on a portfolio approach and pretty much the producers take the additional capacity in line with sort of the legacy contract being mostly the POP-type contracts?

[Wouter T. van Kempen:]

No, I think, Helen, and like -- contracting is very dynamic and different throughout the different regions that we do business. And like here up in the north region, you see a lot of life of lease, deep in the money POPs. You see an area like the Midcontinent go more fee-based. So the good thing about where we are as an enterprise, strong balance sheets that we have both at Midstream as a partnership, investment-grade ratings everywhere, we look at what makes the most sense and that can be fee-based, that can be POPs. We work together with producers we like to be aligned with the producers. And we are very dynamic around what we think makes the most sense and what creates the most long-term shareholder value.

[Heejung Ryoo:]

Okay. So you have some fee-based contracts at the parent level processing plants?

[Wouter T. van Kempen:]

Yes, absolutely. If you sit -- and like there is a good amount of fee-based assets in various assets that are still sitting at the Midstream's private entity.

[Heejung Ryoo:]

Got it. All right. And then just lastly, just a clarification, when you talk about the drop down, $3 billion to $5 billion drop downs between 2014 and 2016, does that include what was just dropped down, or is that incremental?

[Wouter T. van Kempen:]

Yes, no, Helen, that does include what was just dropped down. So like the way we look at it going out of the gate pretty fast here in 2014 guiding to $1.5 billion. And then we look at what the growth is, what the need is for the enterprise as a whole, but we continue to see very good growth opportunities and strong growth opportunities throughout our footprint at DCP Midstream. And as you know, the partnership is a funding vehicle for the enterprise, so I think it bodes pretty well.

[Operator:]

Our next question comes from Jerren Holder from Goldman Sachs.

[Jerren Holder:]

Just wanted to touch, I guess, on the remaining $3 billion to $5 billion in drop downs. Is essentially that's going to come from new spending that DCP Midstream is doing? Or should we expect some of it to come from the legacy Permian and Midcontinent assets that you have currently?

[Wouter T. van Kempen:]

Well, if you look at it, and like the Eagle Ford right now is completely into the partnership, we have about 50% of the processing capacity here in the north will be sitting in the partnership. There continues to be even in the north a lot of other assets and infrastructure. I think as we have always said, we're looking very -- throughout our portfolio and say what makes the most sense for the partnership, what makes the most sense for Midstream. But the pipes -- we're taking these pipes in. That's the first entrance for the partnership into the Permian Basin, into the Granite Wash and SCOOP area, and I think there's continued opportunities here in the future.

[Operator:]

Our next question comes from Abhishek Sinha from Wunderlich Securities.

[Abhishek Sinha:]

Most of my questions have already been answered. Just a quick one on the organic growth. If you could provide some color on how the multiple ramps up or even in terms of EBITDA, how do we see how much of it is coming from 2014 versus '15 and '16 or any outer years?

[William S. Waldheim:]

Right now I would just say that the organic growth is -- and the bigger organic growth projects are more towards the end of this year and into 2015. So I think that's where you'll see the ramp-up -- significant ramp-up occur. And so those multiples can be achieved in a fairly short period of time. We do think the ramp on some of these plants is going to be significant. So I would just take that more towards the latter half of this year and in the next.

[Abhishek Sinha:]

And I assume that all that organic projects will be all like 100% fee-based. Is there any minimum volume commitment that you can highlight too?

[William S. Waldheim:]

Well, I know the Keathley Canyon project's 90% fee and certainly, Lucerne is all fee. So right now all the ramp-up would be fee-based.

[Operator:]

Our next question comes from John Edwards from Crédit Suisse.

[John Edwards:]

Just a quick follow-up. So on your drop down pacing that you're expecting, you've got -- you're targeting $1.5 billion this year. I mean, is it safe to assume you'll be about $1.5 billion for each of '15 and '16? Or are you expecting skewing toward the front or toward the back in any way?

[Wouter T. van Kempen:]

It's Wouter. Yes, as we mentioned, it's a $3.5 -- $3 billion to $5 billion. You layer the $1.5 billion in. And like our strategy is being a growth for growth strategy. So when we grow $1 at DCP Midstream, we grow $1 at DCP Midstream Partners. So as I said earlier, we continue to see a lot of growth opportunities around the footprint at Midstream and in the end, that will bode very well for the partnership.

[John Edwards:]

Okay. So does that mean you're thinking of layering it in on a relatively average basis or...

[Wouter T. van Kempen:]

And like, it's the $3 billion to $5 billion as we told you.

[John Edwards:]

All right. Fair enough. Okay. And then just one other query, what kind of volume ramp-up are you expecting on Lucerne, the Lucerne 2, the new one?

[William S. Waldheim:]

Lucerne 2, again, it's a mid-2015 start. If we look at the DJ Basin, it's been a very good growth area. The capital spend continues to be strong. All I can say is we expect it to ramp quickly. I don't think we have -- are probably not going to give exact guidance as to what we believe because we do need to see how the drilling and the performance of some of the E&P producers, you know how that continues in this area. But they're in drilling up the area, and so we have every expectation that it will fill relatively quickly.

[Operator:]

I will now turn the call back over to the presenters for closing comments.

[William S. Waldheim:]

No, I just want to thank everybody for their interest in the partnership. These are exciting times at DCP Partners, and with the drop downs just occurring, it's a great asset to come into the partnership. So we appreciate your support and your time today.

[Operator:]

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.