Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Q3 2019, DCP Midstream earnings Conference call.
At this time, all participants are in listen only mode.
The speakers presentation, there will be a question and answer session.
Last question during the session, we need to press Star one Warner telephone.
Please be advised to today's conference is being recorded.
Required any further assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today sure Sandberg Senior director of Investor Relations. Thank you. Please go ahead man.
Thanks, Greg Good morning, and welcome to the DCP Midstreams third quarter 2019 earnings call today's call is being webcast and I encourage those listening on the phone to view the supporting slides, which are available on our website at DCP midstream dotcom.
Before I begin I'd like to point out that our discussion today includes forward looking statement actual results may differ due to certain risk factors that affect our business. Please review the second flooding the deck that describes our use of forward looking statements and for a complete listing of the risk factors. Please refer to the partnership latest FCC filing we will also.
He is various non-GAAP measures, which are reconciled to the nearest GAAP measure and scheduled in the appendix section of the slot.
Daughter, Van Kempen, CEO , and Sean O'brien, CFO will be our speakers today and after their remarks, we'll take your questions with that I'll turn the call over to dollar like you saw a good morning, everyone. Appreciate you joining us for gold today, and we have a lot a great news to discuss.
So on today's call. We're excited you sure I'll, we continue to enhance unit holder value through consistent progress towards our financial targets for the execution of our predominantly fee based capital projects on the elimination of variety ours, but before we jump into details on the corner, let's start with our IDR elimination on slide four yeah.
Yesterday, we were very very happy to announce the closing of a transaction the permanently eliminates our general partners economic interests, including RDR in exchange for 65 million DCP common units.
This transaction was valued at approximately $1.53 billion based on the 20 day volume weighted average price 23 doors and 62 cents that's off the market's close on November 5th.
The deal represents a nine times multiple current total general partner distribution, an unbroken Phillips 66 maintain equal ownership and ammonia economic interest of the GP, which now owns 57% well DCP is outstanding common units.
Let's move to slide five.
In the past when we discuss the potential IDR elimination, we continued to reiterate two key themes first.
A deal would be for two all stakeholders and secondly, we would transact from a position of strength.
Absolutely delivered from both of those commitments.
We highlight a few born from his slides dry at home, but first theme.
This transaction unsure complete economic parity between our common unitholders and bridge and Phillips 66.
The elimination of variety are lower or future cost of capital positioning DCP for continued long term success and continued ability to grow.
This agreement represents one of the lowest multiples compared to similar IDR elimination transactions and one that we believe it's very fair to all unitholders. It has minimal impact when a financial metrics with only a 0.05 in back to coverage on a de minimus effect or less.
Average and with this deal we solidify our track record of maintaining or growing to distribution through out the history of our company due to our strong financial position.
I also want to highlight our commitment to transacting from a position of strength.
The timing of the deal is very strategic.
Our financial flexibility remain solid with great year to date distribution coverage ample liquidity a continued commitment to no need for common equity and line of sight to increasing cash flow, which brings me to our capital allocation strategy.
Today, 50% of our EBITDA comes from on logistics and marketing segment, representing a substantial increase from just <unk> percent of EBITDA in 2011.
Looking to EUR 2019, and 2020 girls portfolio, we are continuing to expand our fee based margin profile.
From DJ basin gathering and processing to NGL and gas takeaway pipelines and the sweeny Frac. These projects further integrate and expand their value chain, while continuing to balance our portfolio and mitigate against potential overbuilt.
90% to these projects our fee based adding approximately $270 million incremental adjusted EBITDA on an annualized basis.
A couple this strategic growth with our fourth financials and the time, what's right for us to eliminate our IDR for my position strength.
In summary, this transaction further enhances DCP is value proposition as a premier fully integrated midstream service provider and we believe this is a great result for the LP unitholders afford a future of our company and before I turn to the corridor.
Once again emphasize did we are very very pleased with a tremendously excited by this outcome. We wanted to get this right.
I strongly believe that we did.
Now looking to our Q3 highlights on slide seven the elimination of variety ours comes on the back of another strong quarter, demonstrating the competitive advantage of a diversified portfolio and fully integrated value chain year to date, our adjusted EBITDA totaled $904 million and our DCF is 500.
$87 million, bringing our distribution coverage to 1.27 times 40 year.
In addition to sort out comes from both segments, which offset lower commodity prices. We continue to to successfully execute our disciplined growth strategy with a focus on increasing capital efficiency and mitigating against overbuild risk we remain in lock step with our customers needs in the DJ basin our active.
We expanded GMP residue gas and NGL takeaway capacity Yokota to plant. This in service and is currently averaging about 130 million cubic foot per day of natural gas Throughputs. Our marketing team has done a great job executing on incremental interim take away solutions in the DJ allowing us to act.
Our initial volume expectations at the plant.
Following FERC approval for to Shine connector in September we exercised an increased ownership option or 50% on the pipeline. The 600 million cubic feet per day residue gas pipeline is expected to be in surface, but in the first half of 2020 and will fully alleviate all constraints in the DJ basin unless.
Okay, the full potential of our customers production.
In the Permian the Gulf Coast Express pipeline was placed in service in September slightly ahead of expectations and adding approximately two bcf per day of needed gas take away from the Delaware Basin.
No our team continues to deliver on our operational financial on structural commitments to driver company forward, an increase unitholder value now I'll turn over to Sean to discuss our financial results. Thanks powder and good morning, I'm excited to walk through another terrific quarter for DCP driven by solid results from both of our cell.
Slide eight highlights our strong execution in Q3, delivering DCF of $190 million, resulting in a distribution coverage of 1.23 times, our logistics and marketing segment continues to perform perform extremely well driven by new volumes and earnings from our Gcs investment increased cash generation from our NGL and.
Yes, marketing team and sustained strong margins on sandals. These results were partially dampened by lower Guadalupe earnings impacted by narrow basis spreads between won Katie.
And our GNP segment, we had a solid quarter with continued record volumes in the DJ increasing volumes out of the Eagle Ford and Permian and a onetime settlement on our discovery JV driving improved margins over last quarter, we continue to see adverse impacts due to lower commodity prices. However, these have been more than offset with new project cash flow.
Those and solid base business earnings driving our Q3 results to be up 10% versus Q2, despite $11 million of price headwinds over the same period of time.
In Q3, we saw lower costs from a nonrecurring Q2 charge as a result with the voluntary separation program, which we expect to drive full year cost efficiencies in 2020 and forward.
As guided on our last call we saw a slight sequential increase of $2 million, an overall costs as we bring new assets all non accelerate our transformation.
Looking to the remainder of 2019, we anticipate sustained commodity headwinds in Q4, partially offset by full quarter earnings from GE CX strong DJ basin results, driven by increasing processing volumes that O'connor too and incremental cash flows from the DJ Southern Hills extension.
We're now guiding our 2019 growth capital to modestly exceed the high end of our range of $800 million and settle somewhere around $850 million Theres. Two key drivers for this adjustment first the capital efficient late them offload agreement does significantly reduce our overall end 2020 growth capital program. However, it.
Pushed more capital into 2019 versus the original big weren't project expectations and this project therefore moved us to the top end of our capital range Secondly, the economic decision to increase our ownership in the fee based Cheyenne connector project from one 3rd% to 50% push the 2019 program up to the approach.
It's about $850 million range.
On slide nine I want to highlight our solid financial position as we move into the last quarter of the year.
Our year to date coverage is 1.27 times this coupled with around $155 million of proceeds from year to date noncore dispositions allows us to self fund a portion of our group, we have ample liquidity and financial flexibility with $1.2 billion available on our bank facility.
On the risk management side of the equation with the addition of some recent Q4 hedges. Our 2019 margin is now 78% fee based or hedged.
Looking to 2020 with all of our new fate fee based cash flows coming online the fee portion of our margin is now expected to grow to 70%. Additionally, we've already hedged 12% of our 2020 open commodity position with recent crude gas and NGL hedges together. This takes our 2020 fee in hedge.
As a percentage to 74 present.
Positioning us with more fee in hedge margin than we had at this time going into 2000 2019.
Our strong financials are growing fee based portfolio position the company well to eliminate the IDR maintain and grow the distribution in the future and thrive into 2020 and beyond.
And in that vein, while we will give full 2020 guidance in early February I wanted to provide you some color on expected trends and outlooks on slide 10.
We're anticipating the industry's long super cycle of growth to slow as companies focus on operating within cash flows. Additionally, we're planning for a sustained relatively low commodity price environment. Our DCP 2020, and DCP 2.0 strategy has set us up to performed well in this environment and our disciplined capital approach wed 200.
$70 million of new predominantly fee based cash flows from 2019, and 2020 projects, which are all highlighted on the left side of slide 10.
Complementing our disciplined capital allocation approach is our DCP 2.0, digital transformation, which is built to drive margin uplift through operational optimization and increased cost efficiencies through lean manufacturing approach. These efforts are driving increased margins around our base business, helping the company lower overall cost.
While offsetting inflation and expenses correlated to asset growth.
We've executed well on our strategy and continue to successfully navigate a very dynamic industry environment and with that I'll turn it back over to better. Thank you, Sean Let me wrap it up on slide 11.
As a result of our dedicated strategic approach, we have achieved strong year to date results that enable us to not only improve our financial flexibility, but also to ensure we were able to eliminate IDR from a position of strength.
Hi, good ideas out of the way, we're excited about the future and our ability to drive increased value for our company for investors and for everyone on the DCP team.
Our results and outlook are underpinned by our DCP 2020, and DCP 2.0 strategies that we began executing years ago in anticipation of slowing industry growth.
We now have a well balanced portfolio being optimized in real time by cutting edge technology, coupled with a lineup of strategic growth projects built to meet the needs of our customers increased margins year over year, when further integrate our value chain.
We have grown cash flow by $40 million or by 8% year to date, despite $70 million of commodity price headwinds and I know our strategy will continue to drive value as we move into 2020.
Combine our financial performance and upcoming capital projects Winter IDR elimination and stakeholder alignment and we have line of sight to a very bright future for DCP and our unitholders moving forward to taking your questions Im Chris Please kick us off acuity.
Thank you.
And as a reminder to ask a question you need to press star one on your telephone.
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Please stand by what we compared to Q and a roster.
And our first question comes on line of Jeremy tonnage.
JP Morgan your line is now open.
Hi, Good morning, just wanted to start off with the IDR tier and with the elimination in the rear view at this point, if you could maybe expand a bit more as far as what your strategy is or what new opportunities could you guys. Undertake now now that the idea is are there or any other change in strategy now that.
This structure has been simplifies.
Well Jeremys Walter I.
I don't think this is a change in structure. This change in structure is.
Giving you a change in strategy I think our strategy has been as being very clear above what we want to do we want to grow our business and we want to predominately grow and integrate our business.
And make sure that we are a fully integrated midstream service provider. We continue to do that we continue to be very.
Disciplined about the growth that we're putting in there is we've spoken many times and I've spoken many times to all of you around the fact that you don't want to owned allows gas processing plant you don't want to own the last.
Last pipeline and so you want to have very high utilization if that means you got all flow into new someone else's capacity you probably should do that that's a smart thing to do so we continue to do that.
And so from that point of view I think our strategy is no different at the same time of the continued to do is built a what I call lean manufacturing kind of system within DCB below cost operate or use technology to take cost out to be more efficient to be more reliable to be safer. We will continue to do all of that and so and.
Eliminating the IDR doesn't really change that I think what eliminating the IDR does do is it takes uncertainty away for people and I think that is important the other thing that it does it give you an opportunity to overtime think about raising the distributions on raising the distributions in a way that every.
He has kind of an equal part of the buy and everybody equally participates in that distribution raised versus a agb owner, an IDR owner getting significantly more than the LP units Hall. Our so that's how I would look at this overall and the strategy I think that lever that they've worked on is a good.
Strategy, our leverage continues to stay in check we are continuing to build coverage well above where we where where we.
Expected to probably be 234 years ago. Her many of you expected us to be two three or four years ago, and we do not in a commodity environment that is relatively low commodity environment. So I feel I feel tremendously good things are lining up for us right now.
Got it.
Maybe just a quick question on Southern Hills here it seems like Theres. Some some other competitors coming online arbuckle too.
The our Boyd narrow there or has been narrow just wondering any other.
Thoughts you can provide as far as.
The outlook there.
Going forward.
I can generate Sean I can tell by the volumes a little bit and also includes sand hills, so and get some of the drivers out there, but on southern Hills, specifically, we saw you did see some increase in rejection the gas gas prices strength into little bit ethane prices weakened. So you saw about a doubling of rig rejection between.
Q1 in Q3, Thats, all economic, though obviously, when we're modeling that and when the producers of modeling that their modeling it where we make more money ultimately, but that did reduce some volumes on southern hills by the way that was due to the driver I know many people, we're thinking about sand hills as well.
The other thing that we saw is we did see on southern Hills in particular, we lost some volumes from third party volumes to other pipelines, but we have TNT is on those volume. So the margin side of the equation remains intact. You did have some volumes come offline. We also had some shorter term volumes on southern hills and that was intended that rolled off.
That was intended to bridge our GAAP when we up until we knew white cliffs was coming online you've got a lot of new volumes out of the DJ that are going to come in through that white cliffs connection and we're pretty excited about that I can tell you we feel very comfortable very strong about our sand hills margins and our southern hills margins, which by the way you.
Year over year year to date are up about 25%. So we continue to grow those margins around those assets.
That's all for me Thanks for taking my question.
Thanks.
Thank you and our next question comes from the line of Spyros Donis with Credit Suisse. Your line is now open.
Hey, good morning, everyone.
Let's start off with some some comments yesterday from one of your sponsors have some pretty complementary. Thanks to say about you just with respect to your ability to turn the company. We're out of the last few years.
And but I think the kind of mentioned in which the strong desire to see distribution growth going forward that you mentioned that some of your comments, but again, specifically they pointed out to two this range, 3% to 5% distributable cash flow growth going forward. So just curious what your view is on that growth target, maybe how you plan on achieving it.
Yes so.
Yes viral obviously.
Our job is to return cash to shareholders in all shareholders on the good thing about this deal that we did yesterday all shareholders are going to be treated equally now.
And when we can can can start raising the distribution so for us.
We haven't given any guidance specifically on on 2020, but hey, we are tremendously comfortable around to $3.12. There's been people and that fits and have put things out around a maybe to distribution is at risk I think the one thing that you take away from this transaction the distribution is absolutely.
Not at risk not now not tomorrow enough for a long time to come when we think about this transaction. We obviously don't just look at.
What is happening on November 16 November 7th we look at what our 2020 look like 2021 looked like and thinks alike. So we're very comfortable around that distribution and then for US we we have to continue.
To not only maintain that distribution and maintain a record of never.
Lowering the distribution it is about how do we grow to distribution.
We spoke about the fact that we have 270 million of EBITDA coming online here over over the next kind of year or so of additional growth projects that are great growth project.
I don't think anybody is looking at those projects as as as risky I don't think anybody says hey, do gcs is probably not going to be full youre DJ plants are not going to be for Cheyenne connector is not going to be full.
No. The Sweeney fracs are not going to be full so I think we have tremendously good projects that are coming online and take all that to get our take that with I think some really good cost controls that we have in this company better reliability better safety utilization of technology, when you get yourself into a place where hopefully we can start growing.
The distribution in a in a reasonable manner and in a way every unit holder is going to be treated equally and Spiro. This is Sean I'm only going to add two things to what that are said.
If you think about a transaction like this obviously.
There's a lot of analysis and we're going to give 2020 guidance. Nick early next year, but there's a lot analysis around the where the company is going to go where.
The health of the company over the long term. So this ought to be a good sign when you look it's a transaction like this and moving forward that the owners you mentioned some of their comments and the parties and Bops. We've had a lot of confidence around where this company is going to go the other thing I mentioned.
And obviously, we don't talk about a lot we did take the rating agencies up with the treasurer and myself through these this transaction all three of them very positive outlook and remember. They also are looking at 234 years down the road so that ought to give you. Some comfort that people saw looked at this transaction beyond just today beyond just the next.
Last year and said this really sets the company up well going forward.
Yes.
Thats really helpful color appreciate that and then second question just on the hedge book.
It was encouraging to see the fee based amount step up next year, but looks like you thought maybe some some hesitancy around the edges. Just wondering if you just walk us through its strategy is there to the to the kind of pay to wait to hedge at this point and is your target still tickets about 80% fixed or hedged for 2020.
Yes. So the answer is yes, no doubt we are I'm very excited I did throw that out there that 70%.
Remember the company was 10, 15% not that long ago. We got the 65 last year. We were 60 the year before that we're going to grow to 70 next year at least I am excited with some of the movements I wish you get into the winter months and there was a little bit of volatility earlier, we were able to get crude gas propane C plus hedges on.
On so we're already 12% hedged.
And hopefully that wasn't lost on people were going into 2020, when you will get the growth in the fee and that 12% of of our book already hedged we have more fee in hedge going into 2020 than we had at this time last year going into 2019, 80% is absolutely a target for us but.
I think the other thing to think about and we by the way we take a multiyear approach, we try and hedge out the curve as far as we can as you know that's going to defer you can go a little bit further out on gas in crude than you can on NGL, but we're looking our marketing team is com constantly looking for those opportunities to layer hedges on at coverage ratios that are very complimentary to our.
Our long term strategy. So we're excited about that 74% were out already but I think the key the inbound or mentioned it earlier that people should think about year over year prices down significantly I saw some reports and said hey, Q3, they're down a little bit versus Q3, we had 87 cents NGL last.
During Q3, we had almost $70 crude we had almost $3 gas and we're still making more money as a company even with 50% declines in some of those commodities year over year, that's pretty impressive and not just speaks to the move to fee that speaks to the new capital that's coming online it's fee based and it really speaks to.
Where this company can go commodity is becoming less and less of a driver we're really even in low commodity environments driving pretty strong cash flows.
Yes, Thats very helpful color. Thank you gentlemen.
Thank you. Thank you.
Thank you and our next question comes from the line of Sun Youre Gershon.
Yes.
Yes. Your line is open.
Good morning, everyone.
Wanted to first started off with on a.
Post simplification environment.
Committed to talk about or I guess your largest shareholders at point right now.
Is there tax basis negative that would prevent them from selling any units.
Then.
Because the relationship change at all or does it improve your ability to potentially partner, let's say with Philips on some potential growth projects.
Yes, so Sean I can handle the tax I'll, let battered talk about the future opportunities shinier.
The simplest way I can tell you is this transaction.
Had no impact on the tax basis, and I think enbridge and over the years Specter is talked about a negative or very low tax basis, which makes it would just speaks to the value in the cash flow that this this.
Company is sent back to its main biggest owner so no change if there were hindrances before around low tax basis on a sale, but company, obviously eating up the gains those are still there and in terms of.
Going forward selling the company one or the other nothing's really changed on that front. So any time, just because you shifted from an IDR in GP interest LP. It's still makes the issue of a gain a problem I don't want to speak for the owners, but I think all the math that was there before.
Around selling Doesnt change and the woke tax basis doesn't change, but I'll and I'll, let that better to about additional opportunities issues. There I think you got to take exists.
It's pretty simple the only thing that has changed with isn't that with this transaction that is why don't we increased our distribution everybody gets an equal part of the buy and not someone gets 50% more than someone else that is the only thing that changed.
With this but this transaction when it comes to strategic projects again, nothing has changed from that point of view either we have done multiple.
Transactions, which with one or more of our ownership.
Moreover, its phillips 66, because the way kind of some of our business opportunities dovetails, a little bit better together.
And we will continue to look at that so I do think about things like the sweeny fractionator is I think that has a great project. It's a great projects for us to participate in that them to commit barrels to that.
So overall that that really doesnt change I think the relationships. There have been really good continues to be very good man, we will look at doing smart projects together when we when we can do with him when it makes sense.
Perfect.
Just moving on as we sort of think about 2020 and I realize you can give you guidance, but you gave some trends and so forth but.
When I look at slide nine you talk about 65% fee base. In 2019, you also mentioned 70% in 2020.
And then I look at Slide 11, you talk about 90%.
Of the $270 million of new EBITDA.
It's going to be fee base as well too so when I sort of think about.
Your fee based earnings generation for 2020 or are you effectively saying that you're going from a little bit below 800 million guided for this year to well over $1 billion next year.
Once again I'm not too.
I can you give guidance there's other moving parts I think what we want people to understand is.
We went out a little bit ahead of obviously, giving a pure DCF number in terms of guns for 2020 should near but I think we want people understand that the.
The annuity type revenue streams and margin trends at this company has continues to grow and we still have some commodity exposure I guess I talked about it in my written remarks that Doesnt fully go away next year right that we're still not 100% fee, but the core of this company delivers very strong cash flows we've shown that.
This year in a big way with commodity coming off massively and still we're producing very good cash flow numbers and I think what we were just trying to show on that slide is that we feel we have a great platform, our great Foundation going into 2020.
There were still going to be other yeah. We give you a couple of color obviously commodity we're not planning on a big rebound it's on that slide.
I do think of slowing in the in the industry batters been talking about it for a long time the supercycle slowdown we think we'll continue again in some ways. That's a good thing managing within cash flows, but the key of that size not to say, hey, we're going to exponentially increase.
Going into next year I need the keys to say, we continue to have more and more of this company's cash flow fee based annuity based you can count on it we're proven that this year.
And quite frankly of commodity comes back stronger you have more upside.
Okay and one final question if I may.
When we sort of think about Capex for 2020.
Is it fair to say that you expect capex to be meaningfully lower than than it was this year and that the focus is really on optimizing your capital as it stands which you've done a good job on this year and in kind of a focus on the DCP 2.0 strategy that too.
Fruits over the last two years.
Yes, I think the short answer is absolutely, yes, I think what we've always talked a lot of I mean, we've had some capital projects. These are phenomenal projects.
$270 million of kind of mostly 90% fee based cash flow are tied to these projects.
And they are delivering very well, we do anticipate.
Again, I'm, not giving guidance, yet, but we do anticipate capital levels to come down in 20, and maybe even more so as you think out out the curve even in future years.
But the focus and I think the point you made which is the strongest point, which I know we've been talking about for long time. The focus is getting as much out of the base assets and the new assets as we can and I think thats why the company has been on this massive transformation 2.0 digitization.
Transformation for now about two or three years, because I think if you can that's going to be the that what differentiates people getting more out of what they have we still have some capital coming online you heard about or talk about sweeny and then obviously we've got.
Hi Inn connector and some other small things coming on next year, but I think everything you said is accurate just given you a little more color.
Alright, perfect. Thank you very much appreciate the color and hope you into your valley.
Thank you mentioned here.
Thank you and as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone.
Our next question comes from the line of Gabe Moreen with Mizuho. Your line is now open.
Hi, Good morning, I was wondering if we stay on 2000 per GAAP guidance, North we stay on 2020 and given DCP 2.0.
And how we ought to maybe calibrate thinking about some of the cost saving measures you've taken this year on the personnel gionee side versus viewing them from bringing on all these new assets can help us maybe think about.
Directionally, where gionee and May shake out next year.
I can start on on some of that gave.
I think I've been I've tried to be pretty clear, we believe costs are going to be lower this year than they were last year were trending along those lines by the way that's not a small feet right. You have you've got inflation, you've got merit, you've got new assets coming online you we've got additional growth.
And were not only offsetting that we are reducing costs and a large chunk of that is coming from efficiencies from these 2.0 efforts digitization automation, we're seeing some pretty good progress I think a fair.
Wait to think about it going into 2020 that that we expect that to continue.
So I do anticipate and will again, we'll give you more guidance in February that as those things build I referenced the voluntary separation program in my comments will get more benefits in 2020 around that than we did in 19, that's around continuing to drive Digitization inefficiencies I think that trend continues into 2000.
20, so if you think about the cost of the company. Our goal next year is still to bring that trajectory down while absorbing a full year of o'connor to while absorbing new assets coming online there is cost with those and of course merit. We're in a very strong employment environment right here and we have to pay people more money every year, but.
Our goal is to continue to drive those efficiencies to bring our cost trends down more color on that in February but that is the key.
Thanks, Sean and then maybe if I can also turned to with Gtx haven't come online here has anything changed in terms of your position in terms of your equity volumes coming out of the Permian whether its capacity that you may hold on Gtx.
Is it true that just Guadalupe still open and we should think about that relationship as we've always thought about it or is something changed with three six coming online.
I don't think I know the anything's changed from a volume perspective with Gtx coming online in other words stuff moving off of Gulf Coast. The GC ex the way to think about want.
And it's still a very strong so gtx or is earning phenomenal, earning as we continue to get a full year benefit from that next year, it's going to be very significant water loop a prior to gtx the spreads on our open position there that we manage got very very extreme we've taken.
Any as you think forward on Guadalupe, we've hedged and done some long term contracts to lock in what we think are pretty attractive rates on Guadalupe and I'll give you some percentages that asset going into next you into Q4 is about 70% locked via hedges and long term contracts roughly in going into next year about 60 per.
And we think Thats and that's smart we've taken something that had some volatility and yes. We benefited from that this year when those spreads just blue and we were able to capture longer term annuities at very attractive rates. So maybe not the blow out rates that you saw on the spot, but they are long term rates that are much higher than what we would have earned in the past.
So glob kind of Levelize is as you think about Q4 and the remainder and next year at a level, we're very comfortable with and then of course TCX.
This is performing quite well very full in terms of volumes and giving us a lot of opportunity there to.
Obviously earn the return on that one last point.
I could say just from a car perspective, a lot of people thought that the spreads on Guan would diminish quite a bit when gtx came online. Although we saw some tightening I referenced that nowhere near what people thought there was another project that's that was delayed into 2021.
In the Permian that probably kept the spreads a little bit wider so on the open position I mentioned to you we have about 30 or 40% depending on the period still open we're seeing stronger spreads than we thought we would at some point you would think that that that spread narrows, even more when that new pipeline comes online in 2020.
One, but we'll have to wait and see.
Thanks, John that was helpful. And then just two housekeeping ones for me one as maybe what's the impairments were four in the quarter and if you can quantify the onetime benefit from the discovery settlement.
Yes, so we'll do the easy ones that three and half million on the onetime settlement on discovery, so not huge but I knew people would want to model. It so about three to 5 million.
Good to get some some money back from the discovery on the impairments. We look at companies look at goodwill every year, we always do it in Q3. So we had some goodwill on the books tied to.
A very noncore asset up in the north called Marysville, and we just took that noncash hit on that goodwill that's been there for a long time and then we also did the remaining impairments were tied to some areas, where we're seeing some lower volumes, obviously western mid continent, and portions of the Permian that does not to.
Growth areas of the Permian, but again noncash write downs, we look at our assets every quarter no no impact to ongoing cash flow whatsoever.
But we do look at those every quarter and we took the goodwill in the in a little bit of noncash asset in Q3.
Thanks.
Thank you and our next question comes on line of Chris signal fee with Jefferies. Your line is now.
Hey, good morning, guys.
Thanks for the time today.
I was just wondering.
If you could.
Maybe touch on just how the IDR elimination came together you've discussed it for years.
Movement in the timing of your release and call seemed to indicate it might have coalesced.
We recently leased the final terms.
And.
You are also approaching the end of the IDR waiver.
Period Thats started in 2017, so I guess, what I'm wondering is was it the recent performance the business that led you in the sponsors to conclude.
It could absorb a five and 10% increase and the cash outlays was it the termination of the IDR window.
Or was it something else that sort of finally broke this this multiyear longchamp.
Hey.
Let's take a couple of those Chris so.
The IDR waiver period really doesn't have anything to do with his remember when we.
On January Onest, 2017 announced the transaction, where we put everything into the publicly traded entity that wasn't IDR waiver. If you would be below one all coverage.
We are every quarter. Since then we have been very well.
Bob that cover it showed that that waiver was in London insurance kind of protection animals, a floor and we never had to goal in the insurance, which is a great thing and I think shows you how Bob how we have executed as a company and you're sitting here at 1.27 coverage today with actually a commodity deck.
Inefficiently lower than what we looked at on January Onest 2017. So that's why I'm really those are those are completely not not related in any way shape or form. We obviously had a lot of discussions with people.
With that Phillips with Ambridge amongst ourselves one is the right time to do days and.
The things that I find interesting. Some people have said Hey, you should do is when commodities hi, guys. My thereabouts. Our bodies you do this in in Q1, when commodity was high and I think gives us tremendously narrow way of looking at things because commodities in the aren't there are random walk and they really if we would have done these days.
In a high commodity Barry its goal of Q1 of 19, I still would have to deal with today's commodity prices. So commodity is the wrong way of looking at this the right way of looking at this is what are the different projects. How is the underlying business performing so for US It was always looking at.
The O'connor to plant is it coming online is it filling up quickly Gulf Coast Express do we get the FERC to approve it do we take the ownership percentage and do we execute on that front range in Texas Express is that coming online the southern Hills extension into the DJ Basin is that coming online gcs massive project.
Is that coming online home time is filling up the sweeny fractionator, how is that moving forward and if you take all that together and I mentioned that in my prepared remarks, its $270 million ongoing EBITDA that is what we were looking at every second and say hey wants that hits, we are very comfortable.
Cleaned up and so we have great comfort and all of those projects that have come online how they've come on line, how theyve executed on a got enough.
Good day to day basis, I'm kind of fought the go forward things are and how they came online. So thats really how we have been looking at this together between kind of the management team here between the owners of the IDR Phillips 66 on branch and a special committee of the boards at the end this together with their advisors.
Is looking at this and say Hey, does this make sense and you take all of that to get our Chris I'm tremendously pleased with the outcome on Mike. This is one of the lowest multiples of any IDR transaction I think it's a very fair due to reasonable deal you have complete economic alignment between the LP and GP is.
Distribution is protected people can take the sthree doors, and 12 cents to to bank and that has always been tremendously important for all of us. So very low multiple to my next multiple if you take than last 10, 11 12 deals together. They averaged 18 acts the premium is 19% you take the last 10 plus deals.
Together the average premium was says 61% you look at the coverage impact it is 4% coverage and back on what we have few take this $30 million roughly in premium when you divide that over our DCF Wolf 750, the midpoint of our guidance for this year that is 4.2% there's no.
Leverage and back there's minimal dilution will DCF per unit. It kills once again strong ownership Ownerships fourth is great for any LP.
Gets an extra on an have billion plus on the equity, which I think is helpful and it removes uncertainty. So it has I think a great win win for everyone here and you know what's the best thing is Chris we can focus I'm talking about the business and how we execute on the business instead of talking about IDR deals and.
And things like and surprise us or no surprises, let's focus on the business how our team at DCP is executing how we're smart about being putting projects online. How we're utilizing technology to continue to have cost savings increase reliability and be the safest midstream company in the industry and that is.
And I'm Super excited about.
Okay, I appreciate that and got around I guess loss I have us how the deal terms relative to a lot of other IDR eliminations space.
Obviously, much more favorable than what we've seen out of others.
I think at some point of future assemblies and haptics find me why any premium is warranted in these types of deals but.
That's probably for another day.
I did I did have a question Sean you had mentioned.
The fee based in hedge metric.
Offered that view for a while now you've offered a view that 74%.
For next year, but.
I don't think it's a metric that you report and so I'm. Just curious do you have a sense of where the business was in Threeq, you or a year to date 19 on that metric.
Yes, so we've been running.
We don't really up to it so we gave that guidance coming into the year at 65% fee and then I think we've hedged the hedge portion would put us at 78%. This year. So on an equivalent basis. As you think about 19, I think we're going to be really close to that 80%.
Target that we were looking at.
The points I've, just been making Chris is that coming into them, we've always put hedges on through the year, we even put some Q4 hedges on.
During some of that turmoil over in Saudi or whatever a month ago, so coming into the year at 74 versus being roughly 78 right now for 2019.
I feel very very good I guarantee you will have opportunities to get more hedges on throughout the year will and by the way we will when we give the guidance will solidify our budgets are getting approved with the board's over the next couple of weeks will solidify that 70, but it continues to grow when it had we pro forma that.
Half half a decade ago. It would have been half of that or less very very very small position. So I make a big deal about it because I think thats why I think some folks are expecting more volatility in our earnings and when you continue to increase the the base Foundation of you earnings through either.
Fee based projects or hedging or even moving some of our GNP business more to fee.
You are starting to see obviously, some pretty good continuity out of our cash flow.
Connect cash just one follow up question on that section two part Acentia on the one is.
Can you just weren't quite a loop.
To the extent that there was an outsize opportunity with with margin differential there or with that spread differential there does that get captured in your allocation of fee and then second if I look at slide 18.
Theres no.
Price point on the NGL hedges for 2000, and you have a footnote there that you talked you do give us what the butane and propane hedge prices aren't right and just curious that composition is that mostly propane and butane or did you do not give us a total number because it would is skewed in some way no. It's all propane and butane are the only.
Yes.
In our discussions on reject ethane has been relatively low so we've not seen those products get to the levels that they would need to be so we can give the ends up you are right Chris the hedging if you're looking at the dollars that we're able to hedge yet in 2020, we were we were able to hedge at higher levels in terms of pricing.
At 29 team, but I think the way to think about it is we target coverage ratios right as a company. We're trying to solidify coverage ratios in that one two were better range and we have a hedge and it's a tiered hedge program that goes over multiple years as we're putting those hedges on those are intended to help us get to those coverage ratios. So even if.
Pricing levels are going down on our hedges going into 2020.
We're still able to attain those coverage ratios and the reason that is is because we're growing the fee based business more and more and more so you said, you're relying less and less on the pricing.
Right, Okay, and then on the on the Guadalupe inside.
On the Guadalupe side.
That is a pipeline we typically it is fee I mentioned, we have about 60, 70% of Guadalupe locked in.
And it's still it's obviously a basis spread between 100, Katie it's been pretty consistent.
But it is a fee fee based portion of our portfolio because we continue to lock in those margins and continue to lock in through either long term contracts or just hedging as well.
Great. Thanks, very much for the time this morning, guys appreciate it.
All right. Thanks, Chris.
Thank you. Our next question comes on line of David Amoss with high Ken I can your line is nope.
Hey, guys.
I just wanted to dig in a second on the.
On the Capex number for this year.
Yes, thinking about the increased interest in Cheyenne, it's pretty simple it looks like 30 $536 million additional and just wanted to ask more on the late than side.
The lithium offload is that primarily that that is going faster you're spending faster than you expected. When you came out with two Q.
Or is there something else going on there.
Now what were.
The majority of the downwards as we've solidified are going to be spent this year. So it is a timing laid them still great project theres not been overruns, it's not that anything is going up as we solidified our capital program.
Over the last month or so weve big corn originally when we gave our guidance early in the year. We the high end of the range would've assumed some big worn but the majority of the big worn capital expenditures were going to be in 2020. Obviously those are now mitigated. The late them is a much more capital efficient project. So it's.
Just timing you're spending more 19 on that project, you'll spend significantly less than 2020 on that and then the Cheyenne you said you understood. Obviously is just the upsizing.
Great appreciate the color and really do like thanks.
Thank you Dennis.
Thank you in our next question comes from the line of Elvira Scotto with RBC capital markets. Your line is now.
Hey.
Good morning, everyone. So just on the fee based can you remind us of that fee based.
How much of that is.
Contracted under either NBC or take or pay commitments.
The mud, we do we have some nvcs antibodies.
Obviously on the pipelines there are some nvcs I think Elvira we've talked about recently in the DJ around some of the new plants that we put in the minimum volume minimum margin.
The rest of it is going to be.
Plant commitments essentially right into the pipelines.
Those volumes are our our plant dedications, that's how we're filling up the pipelines, but a lot of that is under our control and obviously, we feel very comfortable with volume growth, but I can't remember the exact percentages I can give that 40, Elvira, but it's it's not going to be the burden. The majority are going to be under nvcs opportunities.
Got it and then.
Looking at your fee based.
For 2020, you're saying, it's 70% and as I look at Slide 10, Scion connector comes in in the first half of 2020 Sweeny Frac is kind of in Q4, so if I look at that 2021.
Im assuming say a flat commodity price environment I mean can do you see that fee based.
Getting closer to 70, 580%.
Yes.
Yes.
Okay, Great and then.
When you think about.
We kind of talked about the outlook for 2020, our producers are living within cash flows.
And you still seeing a challenging commodity environment.
And you're talking about meaning meaningfully lower cap ex.
How do you think about it I know you kind of talked about distribution growth and you're not guiding to distribution growth, but when you think about distribution. Good how do you think about that in terms of what did what are the metrics you need to see that can take their distribution grid is it a certain.
Rich ratio is it.
Now a certain coverage ratio given.
How much here.
Businesses fee base do you look at yes.
Just give us some some sort of.
Thoughts on how to think about what can trigger at this distribution growth.
Well I'll viral let me take that one first of all.
I'm tremendously happy that that's what we're talking about.
So I'm happy to do you agree with me to $3 in 12 census.
Is very firm and help protect us and we talk about.
When we're going to grow to distribution for us.
But it really is a.
It's a bit of that dynamic model. We're obviously looking every single day.
Very good from a coverage point of view, where are you from a leverage point of view how are your assets running where are we in a commodity cycle on things alike.
And we will take all of those together and combine that with.
When do we get to free cash flow and completely self funded empathy.
And Thats, how we hardly how we look at that but when we look at our models.
I feel I feel pretty pretty optimistic about 20 2021 and beyond.
The potential for us to start growing to distribution.
When when when you look at all of the assets that are coming online how we've set things up how we're not overbuilding, how we're managing capacity. So I can give you the perfect Hey, plugged isn't the model on this has got about will roll out because it is dynamic which I know you under I know you understand but the good thing about it is now.
You can really start thinking about this because you can think about it in a way everybody is treated equal and everybody gets the same type of benefit.
No that makes sense, but how you evaluate.
Share repurchase or unit repurchase figure into the equation at all I mean, you look at where your stock is trading.
You know a distribution growth right. When you said a distribution you clearly want to be able to maintain it.
You know share repurchase can.
And bring down your share count that actually would help you on.
DCF.
Coverage. So how do you think about share repurchase versus throwing the distribution.
Given the short run obviously this year, we're coming off.
The capital program, and yes were have a downward trajectory Elvira but.
As batter mentioned you need I think you kind of need to get to that free where you're totally covering all your capital and you're sitting on cash and then it makes maybe makes a lot of sense, but when some of our models. We've looked at some of that but I think it's a little ways out for us.
With some really solid projects coming online.
This year and then obviously with Sweeny Frac units as a relatively large project. The comes on online next year. It's in some of the equations. We run I just don't think it's something in the immediate term. It we're going to do I think one of the are things I got it I got to tell on let's say in Iowa.
We always talk about $3.12 being secure and today that you know as a 13% yield. So I don't think the $3 in 12 census perfectly value today. So.
You got to get to place or that is being valued before you start thinking about increasing it but I think from a pure financial power of the company. We are we're feeling very very comfortable but how things are set up.
Okay great.
Just a follow up on that but if you if if if you're if you haven't 13% yields on what Youre seeing is the secured $3.12 distribution in what's the incentive to raise the distribution.
Would it just make more sense to buyback your shares I mean, if you're not going to get rewarded for distribution. Thank you already maintain.
Thank you are not hurting saying that the Thats. That's why at this moment you are not sitting in say by would increase the distribution I think at this moment, what's more important is too and I'll continue to grow to coverage to continue to make sure that the excess coverage that we have fully utilized that too.
To to bring new good projects online and 2020 like.
What we're doing with Sweeny fractionator is for instance, or Cheyenne connector and then after that we see how things will play out.
So I think you and I are in the Insync there.
Okay, great. Thanks.
Thanks of our.
Thank you in your last question comes in line of James Carreker with US capital Advisors. Your line is now open.
Hey, guys. Thanks for the question.
Congratulations again on the IDR deal I know, we and others have been pestering on EUV.
For several years on that.
So I apologize in advance for my next question, but I.
I think some investors would say that you've eliminated an overhang, but there is still somewhat of an overhang and that you have.
Cause I private.
GP, that's still controls the non economic general partner.
And so I guess my question is is there any discussions.
With TSX or Enbridge or is there any desire on your part.
To become a fully autonomous organization, whether that's done through a spin by your respective parents or some other mechanism is that anything that you guys have talked about thought about have any interest in thanks.
Hey, James valves are here first off you know everybody's economically trade at exactly the same way and I think and there is no different ways to anybody can be treated so there's no gimmick things are things that can happen everybody will be economically treated exactly the same way I think thats. The most important thing.
Ill talking about.
It enjoyed a mom would for a day or so and and James I'm just going at one thing I reiterated earlier about my convert.
<unk> with the rating agencies around this transaction obviously favorably.
<unk>, but the one thing I'm glad to your point is and N.S. and P. has been pretty clear about it and I think Moody's look they see value right of having to economically.
<unk> investors and owners the size of those two companies that we have some strategic interfaces with about or talked earlier, they see massive value in that so they see that as an as as actually a benefit as a differentiator for D.C.P. that you've got to very large companies in some cases that we can do some pretty.
Strategic stuff was sitting on the top so I just thought I'd throw that in there.
No I understand appreciate the color that's how I had thanks. Thanks.
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Thank you and this includes today's question and answer session I wouldn't I like to tend to call back to Sarah Sandberg for any further on March.
Great. Thanks for joining us today, if you have any follow up question. Please don't hesitate to give me a calm have a day.
Ladies and gentlemen. This includes today's conference call thinking for participating you may now disconnect Oh.